Chapter III: Introduction: By PROFESSOR IRVING FISHER (1)

Department of Political Economy, Yale University

In various ways, as this volume shows, the war has profoundly affected our economic and political life. War has ever been a disturber and innovator, always leaving after it a different world from that which existed previous to it. On account of our tremendously complex economic organization--the specialization of industry among nations, and the network of commerce--war today causes more profound changes than ever before. There can not be a human being in the world today whose life is not altered by the war through which we have just passed.

In trying, now that the war is over, to _stop drifting_, and to think our way out of the bent (or broken) remains of the _ante bellum_ life, the world is confronted by a maze of problems and a still greater maze of proffered solutions.

Many of these proposals are, unfortunately, of the nature of treatment directed not at fundamental conditions, but merely at _symptoms_. We should be past the stage, in our social science, as we are in medicine, where we treat symptoms without a thorough diagnosis of the fundamental causes.

And yet it is just this thorough diagnosis that we lack.

What, then, are the changes brought about by the war which most deeply affect "the body politic," and by meeting which the most far reaching improvements can be made?

HIGH COST OF LIVING A VITAL QUESTION

I can not take up, or even touch on, all of them; but to one of them I wish to call especial attention--the High Cost of Living or, more generally, the high level of prices, which is the most striking economic effect of the war throughout the world. It is, as I see it, hard to over-emphasize the need for attacking this problem of the price level as a preliminary to attacking the other economic problems which the war has left us.

We need only glance at a newspaper today, or step into a corner grocery, or fall into conversation with our neighbor in the train to have this topic come out as foremost in interest. It is, I believe, responsible for much more of our present uncertainty and confusion than is usually realized. In its ramifications it is chiefly this phase of the war's effects which, as I suggested above, touches every one of us at every point of our lives. A member of the Federal Reserve Board has called the price level problem _the_ central economic problem of reconstruction.

Professor William Graham Sumner, who has inspired so many to the scientific study of social conditions, used to say: "In taking up the study of any social situation, divide your study into four questions--(1) What is it? (2) Why is it? (3) What of it? (4) What are you going to do about it?"

Let us follow this outline, and look first at the facts of the case; secondly at their causes; thirdly at the evils involved; and lastly at the remedies.

MEASURING CHANGES IN PRICES

We now possess a device for measuring the average change in prices. This is what is known as an "index number."

Thus, if one commodity has risen 4 per cent. since last month and another, 10 per cent., the average rise of the two is midway between the sum of 4 per cent., and 10 per cent., or 7 per cent. It is

4 + 10
------ = 7
2

If we call the price level of the two articles last month 100 per cent., then 107 per cent. is the "index number" for the prices of the two articles this month. The same principle, of course, applies to any number of commodities.

The index number of the United States Bureau of Labor Statistics, the best index number we have, shows an average price level in 1918 of 196 for wholesale prices and 168 for retail prices of food on the basis of 100 per cent. for 1913, the year before the war; showing that wholesale prices, on the average, almost exactly doubled. The latest index number for wholesale prices (May, 1919) is 206, and for retail (July, 1919), 190.

A look at the history of prices shows the interesting fact that, while prices have sometimes fallen, they have generally risen. The high cost of living has been for centuries a source of complaint. In the 16th century, people objected to the price of wheat, which was three to ten times what it cost during the preceding 300 years.

WORTHLESS PAPER MONEY

Where, through ignorance of monetary science, irredeemable paper money was used, prices have sometimes gone up quite "out of sight." This was the case with the famous assignats of the French Revolution, and the "Continental" paper money of our own Revolution. After the Revolution a barber in Philadelphia is said to have covered the walls of his shop with continental paper money, calling it the cheapest wallpaper he could get! Jokes were also heard of a housewife taking a market-basket full of this "money" to the butcher's shop and bringing home the meat in her purse! This money became a hissing and a byword; and, even to this day, one of the favorite expressions for worthlessness is "not worth a Continental." We see the same situation repeated again today with Russian paper money.

But our first scientific measurement of price movements began with 1782, the beginning of Jevons' index number of wholesale prices in England.

COMMENTS ON FIGURE 1

Figure 1 shows the course of prices in England from that date, and also, for comparison, that in the U.S.

Price Movements of the United States and England from the Earliest Index Numbers Through the First Years of the World War

Showing, in general, a close similarity. England was on a paper basis, 1801--1820; and the United States, 1862--78. The dotted lines for these periods show the prices as translated back into gold.]

The conspicuous feature of these curves is their great irregularity. Practically never are they for any length of time at all horizontal. Sometimes, even in time of peace, a variation of over 10 per cent. is shown in one year. The curve for the U. S. shows, at the time of the Civil War, a very considerable rise (especially as measured in terms of paper), followed by a decline beginning in 1873 and continuing to 1896. The fall in the first part of this period was accentuated by the return from a paper to a gold standard. From an index number of 100 in 1873, the index number dropped to 51 in 1896. This decline resulted politically in the famous Bryan "Free Silver" campaign.

Trend of Prices Before and After the Great Wars of History]

Since that time, however, the course of prices has been steadily upward. Between 1896 and the outbreak of the war, the index number of the U. S. rose about 50 per cent. Substantially the same increase took place in Canada, while in the United Kingdom there was a rise of 35 per cent. This rise before the war amounted, in the United States, to about one-fifth of one per cent. per month. During the war, however, the rise amounted in this country to 1½ per cent. per month, and abroad to much more--in Germany and Austria to 3 per cent. per month, and in Russia, apparently, to 4 or 5 per cent. per month. In the light of the excitement caused up to 1914 by the comparatively moderate increase in this country, we can better understand the Russian economic unrest when a far steeper ascent of prices got under way.

The total effect can be summed up as follows: between 1914, before the war, and November, 1918, the price level in this country (as indicated by the United States Bureau of Labor Statistics retail food index number) rose 79 per cent.; that in England (according to the _Statist_ index number), 133 per cent.; that in France, approximately 140 per cent.; that in western Europe probably at least three-fold; and in Russia perhaps ten or twenty-fold.

The price level of the United States today is over three-fold that of 1896. Expressing the same fact in terms of the purchasing power of money, our dollar of today is worth only 30 cents of the money in 1896, so that as contrasted with the dollar of 1896 our dollar literally "looks like thirty cents."

COMMENTS ON FIGURE 2

Now it is a common belief, and one which seems to be borne out by the present situation, that war raises prices whereas peace lowers them. The matter is, however, not so simple. Each case must be considered on its own merits. Figure 2 shows price curves for the various wars.

In general prices have risen during wars. But there has not been any such uniformity of movement after wars. Moreover in most cases the price disturbances both during and after the wars had scarcely anything to do with the coming and going of the war. In only four of the cases on the chart is the rise of prices during the war really and clearly due to the war. In the Napoleonic Wars, the war of 1812, the Civil War, and the World War the rise of prices during the war was largely due to war inflation.

As to the after effects on prices there are likewise only four clear cases. The fall of paper prices relatively to gold after the Napoleonic Wars, and the Civil War was, in each case, clearly due to resumption of specie payments. The fall of prices in the United States after the War of 1812 was doubtless due in large measure to the resumption of foreign trade. In one case there was a rise of prices as an aftermath; the war of 1871, which gave Germany a billion dollars of indemnity, created inflation in Germany and prices rose there between 1871 and 1873 faster than in any other country. This doubtless accentuated the crash in the crisis of 1873.

In the other cases in the diagram the many instances of rise of prices after the wars were due primarily at least, to other causes, although the cessation of war and the undue optimism and spirit of speculation which often follow may, in several instances, have contributed to the boom period and the crisis which so often came a few years later, viz., that of 1857 after the Crimean War, that of 1866 after the Civil War, as well as that of 1873 just mentioned.

The only safe generalizations seem to be the following two: The first is that in so far as a war has been costly, _i. e._, has strained the economic resources of the belligerents, there has been recourse to inflation in some form and prices have risen. Besides the examples in the chart are those of the French Revolution, the American Colonial wars, the American Revolution and many others. The second generalization is that after a costly war the price level is affected up or down by the fiscal policy of the governments concerned.

HIGH PRICES NOT DUE TO SCARCITY

Most cherish the belief that high war prices today represent war scarcity. In the case of some countries like Belgium and some commodities like paper this is true and in such cases scarcity serves as a partial explanation of high prices. But in the case of most countries and most commodities there has been no general scarcity. The almost universal rise of prices cannot be ascribed to scarcity. Prices have risen of many goods not affected by the war or in countries remotest from the war.

William McAdoo

Secretary of the Treasury during the World War, and Director-General of the Railroads.]

As Mr. O. P. Austin, statistician of the National City Bank, has said:

"Raw silk, for example, for which the war made no special
demand and which was produced on the side of the globe opposite
that in which the hostilities were occurring, advanced from
$3.00 per pound in the country of production in 1913 to $4.50
per pound in 1917, and over $6.00 per pound in the closing
months of the war. Manila hemp, also produced on the opposite
side of the globe and not a war requirement, advanced in the
country of production from $180 per ton in 1915 to $437 per ton
in 1918. Goat skins, from China, India, Mexico and South
America, advanced from 25 cents per pound in 1914 to over 50
cents per pound in 1918; and yet goat skins were in no sense a
special requirement of the war. Sisal grass produced in Yucatan
advanced from $100 per ton in 1914 at the place of production
to nearly $400 per ton in 1918; and Egyptian cotton, a
high-priced product and thus not used for war purposes, jumped
from 14 cents per pound in Egypt in 1914 to 35 cents per pound
in 1918. Even the product of the diamond mines of South Africa
advanced from 60 to 100 per cent. in price per karat when
compared with prices existing in the opening months of the war.

"The prices are in all cases those _in the markets of the
country in which the articles were produced_ and in most cases
at points on the globe far distant from that in which the war
was being waged. They are the product of countries having
plentiful supply of cheap labor and upon which there has been
no demand for men for service in the war. The advance in the
prices quoted is in no sense due to the high cost of ocean
transportation since they are those demanded and obtained in
the markets of the country of production.

"Why is it that the product of the labor of women and children
who care for silk worms in China and Japan, of the Filipino
laborer who produces the Manila hemp, the Egyptian fellah who
grows the high grade cotton, the native workman in the diamond
mines of South Africa, the Mexican peon in the sisal field of
Yucatan, the Chinese coolie in the tin mines of Malay, or the
goatherd on the plains of China, India, Mexico or South America
has doubled in price during the war period?"

Mr. Austin goes on to show that the scarcity or "increased demand" for war goods has been greatly exaggerated. It is true that some 40 million men were at one time fighting in the war. But this is less than 2½ per cent. of the world's population and it must not be forgotten that these 40 million were also consumers before the war. Their withdrawal from industry did not really create a vacuum of even 1 per cent. of the world's productive power; as women, boys and old men took their places and others worked harder than in peace time.

In addition to the 40 million soldiers, some 150 million people have been required to work on "war work" at home but they have simply been "switched" from other forms of production which have been correspondingly reduced. War supplies were demanded but these also largely "switched" the demand from former and industrial uses. Lord D'Abernon found that in England those objects of luxury "which would seem to be influenced not at all or only very remotely and to a very small degree by increased cost of labor and materials," such as old books, prints and coins, had, nevertheless, advanced, roughly speaking 50 per cent., during the war. Thus "scarcity" and especial "war demands" do not go far toward explaining the high price level even in Europe and not at all, I believe, in this country.

In the United States while certain things have become scarce, including certain foods, the general mass of goods has been actually increased as a consequence of war.

The raw materials used in the United States in 1918 were 16 per cent. more than in 1913 and 2 per cent. more than in 1917. The physical volume of trade is estimated variously to be in 1918 from 22 per cent. to 41 per cent. above that in 1913 and 8 per cent. above that in 1917.

President Wilson, in his address to Congress, August 8, 1919, on the high cost of living, gave other impressive examples as to foods, especially eggs, frozen fowls, creamery butter, salt beef, and canned corn, showing that scarcity is not the cause of high prices.

HIGH PRICES DUE TO MONETARY CAUSES

The truth is that the chief causes of the rise of prices in war time are monetary causes.

It is almost invariably true that the great price movements of history are chiefly monetary. This is shown, in the first place by the fact that countries of like monetary standards have like price movements. Thus--to consider gold-standard countries--there has usually been a remarkable family resemblance between the curves representing the rise and fall of the index numbers of the United States, Canada, England, France, Belgium, Holland, Scandinavia, Germany, Austria and Italy. Again, the price movements in silver countries show a strong likeness, as in India and China between 1873 and 1893.

On the other hand, we find a great contrast between gold and silver countries or between any countries which have different monetary standards. In the World War the data are still too meager to enable us to express all the relations in exact figures, but we may arrange the different countries in the approximate order in which their prices have risen. The order of the nations corresponds, in general, with the order in which the currency in those nations has been inflated by paper as well as with the order in which their monetary units have depreciated in the foreign exchange markets.

This order--of ascending prices and of inflated currency--is as follows, beginning with the least rise and inflation: India, Australia, New Zealand, United States, Canada, Japan, Sweden, Switzerland, Denmark, Italy, Holland, England, Norway, France, Germany, Austria and Russia.

Money and the Price Level

Showing a correspondence between the quantity of money and the level of prices. Since the middle of 1915, when the quantity of money in the United States began to be greatly affected by the war, the correspondence has been close, changes in the price level seeming usually to follow changes in the quantity of money one to three months later.]

The ups and downs of prices correspond with the ups and downs of the money supply. Throughout all history this has been so. For this general statement there is sufficient evidence even where we lack the index numbers by which to make accurate measurements. Whenever there have been new discoveries of gold and rapid outpourings from mines, prices have gone up with corresponding rapidity. This was observed in the 16th century, after great quantities of the precious metals had been brought to Europe from the Americas; and again in the 19th century, after the Californian and Australian gold finds of the fifties; and still again, in the same century after the South African, Alaskan and Cripple Creek mining of the nineties.

Likewise when other causes than mining, such as paper money issues, produce violent changes in the quantity or quality of money, violent changes in the price level usually follow.

COMMENTS ON FIGURE 3

The World War furnishes important examples of this. In the United States the curve for the quantity of money in circulation and the curve for the index number of prices run continuously parallel, the price curve following the money curve after a lag of one to three months. It was in August, 1915, that the quantity of money in the United States began its rapid increase. One month later prices began to shoot upward, keeping almost exact pace with the quantity of money. In February, 1916, money suddenly stopped increasing, and two or three months later prices stopped likewise. As figure 3 shows, similar striking correspondences have continued to occur with an average lag between the money cause and the price effect of apparently about one and three-quarters months.

On the whole, the money in circulation in the United States rose from three and one-third billions in 1913 to five and a half billions in 1918, and bank deposits from thirteen to twenty-five billions, both approximately corresponding to the rise in prices.

Taking a world-wide view, the money in circulation in the world outside of Russia has increased during the war from fifteen billions to forty-five billions and the bank deposits in fifteen principal countries from twenty-seven billions to seventy-five billions. That is both money and deposits have trebled; and prices, on the average have perhaps trebled also.

The Bolsheviki are a law unto themselves. They have issued eighty billion dollars of paper money, or more than in all the rest of the world put together. Consequently prices in Russia have doubtless reached the sky, though no exact measure of them, since the Bolshevist régime, is at hand.

The increase of over thirty billions in the money of the world (outside of Russia) is as Austin says "more, _in its face value_, than all the gold and all the silver turned out by all the mines of all the world in 427 years since the discovery of America."

The conclusion toward which the foregoing and other arguments lead is that, in this war as in general in the past, the great outstanding disturber of the price level has always been money. If this is the case, how fruitless, except as treatments of symptoms, are price-fixing, or campaigns aimed at profiteers! The cry of profiteering may hinder a real solution of the difficulty by diverting attention from the real issue and fanning and giving up an object to the spirit of revolt. Money is so much an accepted convenience in practice that it has become a great stumbling block in theory. Since we talk always in terms of money and live in a money atmosphere, as it were, we become as unconscious of it as we do of the air we breathe.

ASSOCIATE EVILS OF HIGH PRICES

We have now considered the cost of living situation under the two questions "What is it?" and "Why is it?"

The third question, "What of it?"--_i. e._, what are the evils connected with it--is more easily answered today, when it comes home to all of us, that it might have been 10 years ago.

If, for each one of us, the rise of income were to keep up exactly with the rise in cost of living, then the high cost of living would have no terrors; it would be merely on paper. But no such perfect adjustment ever occurs or can occur. Outstanding contracts and understandings in terms of money make this out of the question. The salaried men and the wage earners suffer--that is, the cost is borne by those with relatively "fixed" incomes.

The truth is, the war was largely paid for, not by taxes or loans but by the High Cost of Living. The result is that the effort to avoid discontent of tax payers has created or rather aggravated the discontent over high prices. Every rise in the cost of living brings new recruits to the labor malcontents who feel victimized by society and have come to hate society. They cite, in their indictment, the high price of necessities and the high profits of certain great corporations both of which they attribute, not to the aberrations of our monetary yardstick but to deliberate plundering by "profiteers" or a social system of "exploitation." They grow continually more suspicious and nurse an imaginary grudge against the world. We are being threatened by more quack remedies--revolutionary socialism, syndicalism, and Bolshevism. Radicalism rides on the wave of high prices.

As a matter of fact, the real wages in 1918, that is, their purchasing power, were only 80 per cent. of the real wages of 1913. That is, while the retail prices of food advanced 68 per cent., wages in money advanced only 30 per cent. The real wages of 1913 were in turn less than in earlier years.

Lord D'Abernon, in a recent speech in the House of Lords said: "I am convinced and cannot state too strongly my belief that 80 per cent. of our present industrial troubles and our Bolshevism which is so great a menace to Europe are due to this enormous displacement in the value of money." In fact, before the war, rising costs of living were manufacturing socialists all over the world, including Germany, and the German Government may have weighed, as one of the expected dynastic advantages of war, the suppression of the growing internal class struggle which this high cost of living was bringing on apace.

MANY SUGGESTED REMEDIES INADEQUATE

We are now ready for the question, "What can be done about it?" So far as the past is concerned, comparatively little. Bygones must largely be bygones. So far as wages and salaries are concerned, the remedy must be to raise them rather than to lower the high cost of living. While some kinds of work have had excessive wages during the war, this has not been true in general, public opinion to the contrary notwithstanding. I quite agree with Mr. Gompers that the wage level should not be lowered even if it could be. On the contrary it should be raised to catch up with prices, just as was done after the Civil War. But in regard to contracts little relief for past injuries can be expected. We would best use the past as a lesson for the future. That is what I understand by "reconstruction."

The banking house of Morgan was closely identified with international finance throughout the World War.]

Many impracticable plans have been proposed. Secretary Redfield undertook to stabilize prices by arbitrarily fixing them. He failed, necessarily. We might as well try to fix the sea level by pressing on the ocean. The same, as I stated above, is true of a campaign against profiteers though proposed by so high an authority as President Wilson.

PROPOSED REMEDY

The plan I shall here outline has received the approval of a large number of leading economists, business men, and organizations, including President Hadley of Yale; a committee of economists appointed to consider the purchasing power of money in relation to the war; Frank A. Vanderlip, president of the National City Bank of New York; George Foster Peabody, Federal Reserve banker of New York; John Perrin, Federal Reserve Agent of San Francisco; Henry L. Higginson, the veteran banker of Boston; Roger W. Babson, statistician; John Hays Hammond, mining engineer; John V. Farwell, of Chicago; Leo S. Rowe, Assistant Secretary of the Treasury: United States Senator, Robert L. Owen, one of the authors of the Federal Reserve Act; Ex-Senator Shafroth; the late Senator Newlands; Sir David Barbour, one of the originators of the Indian gold exchange standard; the Society of Polish Engineers; the New England Purchasing Agents' Association; and a few Chambers of Commerce.

WANTED--A STANDARDIZED DOLLAR

Our dollar is now simply a fixed weight of gold--a unit of weight, masquerading as a unit of value. It is almost as absurd to define a unit of value, or general purchasing power, in terms of weight as to define a unit of length in terms of weight. What good does it do us to be assured that our dollar weighs just as much as ever? We want a dollar which will always buy the same aggregate quantity of bread, butter, beef, bacon, beans, sugar, clothing, fuel, and the other essential things that we spend it for. What is needed is to stabilize or standardize the dollar just as we have already standardized the yardstick, the pound weight, the bushel basket, the pint cup, the horsepower, the volt, and, indeed, all the units of commerce except the dollar.

Money today has two great functions. It is a medium of exchange and it is a standard of value. Gold was chosen because it was a good medium, not because it was a good standard. And so, because our ancestors found a good medium of exchange, we now find ourselves saddled with a bad standard of value!

The problem before us is to retain gold as a good medium and yet to make it into a good standard; not to abandon the gold standard but to rectify it; not to rid ourselves of the gold dollar but to make it conform in purchasing power to the composite or goods-dollar. The method of rectifying the gold standard consists in suitably varying the weight of the gold dollar. The gold dollar is now fixed in weight and therefore variable in purchasing power. What we need is a gold dollar fixed in purchasing power and therefore variable in weight. I do not think that any sane man, whether or not he accepts the theory of money which I accept, will deny that the weight of gold in a dollar has a great deal to do with its purchasing power. More gold will buy more goods. Therefore more gold than 25.8 grains will, barring counteracting causes, buy more goods than 25.8 grains itself will buy. If today the dollar, instead of being 25.8 grains or about one-twentieth of an ounce of gold, were an ounce or a pound or a ton of gold it would surely buy more than it does now, which is the same thing as saying that the price level would be lower than it is now.

A Mexican gold dollar weighs about half as much as ours and has less purchasing power. If Mexico should adopt the same dollar that we have and that Canada has, no one could doubt that its purchasing power would rise--that is, the price level in Mexico would fall. Since, then, the heavier or the lighter the gold dollar is the more or the less is its purchasing power, it follows that, if we add new grains of gold to the dollar just fast enough to compensate for the loss in the purchasing power of each grain, or vice versa take away gold to compensate for a gain, we shall have a fully "compensated dollar," a stationary instead of fluctuating dollar, when judged by its purchasing power.

But how, it will be asked, is it possible, in practice, to change the weight of the gold dollar? The feat is certainly not impossible, for it has often been accomplished. We ourselves have changed the weight of our gold dollar twice--once in 1834, when the gold in the dollar was reduced 7 per cent., and again in 1837, when it was increased one-tenth of 1 per cent. If we can change it once or twice a century, we can change it once or twice a month!

HOW GOLD CIRCULATES

In actual fact, gold now circulates almost entirely through "yellowbacks," or gold certificates. The gold itself, often not in the form of coins at all but of "bar gold," lies in the government vaults. The abolition of gold coin would make no material change in the present situation.

If gold thus circulated only in the form of paper representatives it would evidently be possible to vary at will the weight of the gold dollar without any such annoyance or complication as would arise from the existence of coins. The government would simply vary the quantity of gold bullion which it would exchange for a paper dollar--the quantity it would give or take at a given time. As readily as a grocer can vary the amount of sugar he will give for a dollar, the government could vary the amount of gold it would give for a dollar.

CRITERION OF STANDARDIZATION

But, it will now be asked, what criterion is to guide the government in making these changes in the dollar's weight? Am I proposing that some government official should be authorized to mark the dollar up or down according to his own caprice? Most certainly not. A definite and simple criterion for the required adjustments is at hand--the now familiar "index number" of prices.

If, for instance, the index number is found to be 1 per cent. above the ideal par, this fact will indicate that the purchasing power of the dollar has gone down; and this fact will be the signal and authorization for an increase of 1 per cent. in the weight of the gold dollar. What is thereby added to the purchasing power of the gold dollar will be automatically registered in the purchasing power of its circulating certificate. If the correction is not enough, or if it is too much, the index number next month will tell the story.

Absolutely perfect correction is impossible, but any imperfection will continue to reappear and so cannot escape ultimate correction. Suppose, for instance, that next month the index number is found to remain unchanged at 101. Then the dollar is at once loaded an additional 1 per cent. And if, next month, the index number is, let us say, 100½ (that is, one half of 1 per cent above par) this one-half of 1 per cent. will call for a third addition to the dollar's weight, this time of one-half of one per cent. And so, as long as the index number persists in staying even a little above par, the dollar will continue to be loaded each month, until, if necessary, it weighs an ounce--or a ton, for that matter. But, of course, long before it can become so heavy, the additional weight will become sufficient; so that the index number will be pushed back to par--that is, the circulating certificate will have its purchasing power restored. Or suppose the index number falls below par, say 1 per cent. below. This fact will indicate that the purchasing power of the dollar has gone up. Accordingly, the gold dollar will be reduced in weight 1 per cent., and each month that the index number remains below par the now too heavy dollar will be unloaded and the purchasing power of the certificate brought down to par.

Thus by ballast thrown overboard or taken on, our dollar is kept from drifting far from the proper level. The result is that the price level would oscillate only slightly. Instead of there being any great price convulsions, such as we find throughout history, the index number would run, say 101, 100½, 101, 100, 102, 101½, 100, 98, 99, 99, 99½, 100, etc., seldom getting off the line more than 1 or 2 per cent.

A PROBLEM CALLING FOR URGENT ACTION

With the question now before us, it is evident that the problem of our monetary standards has much more than theoretical significance. It is a practical problem, and, I submit, the most pressing which the war has left us. I do not offer the solution described above as the only answer to the problem. It is, however, a working basis, a starting point, from which we may be able to work out a better plan. _Some_ scientifically sound plan is essential, or we shall be the victims of quack remedies.

Finally, _now_ is the time to take up the matter. Public interest is now focused on the cost of living and is very largely educated to the fact that the high prices have a monetary basis. Furthermore, the world is looking to us, as never before, for leadership. It is our golden opportunity to set _world_ standards. If we adopt a stable standard of value, it seems certain that other nations, as fast as they can straighten out their affairs, resume specie payments, and secure again stable pars of exchange, will follow our example.

Let us, then, who realize the situation, act upon our knowledge; and secure a boon for all future generations, a true standard for contracts, a stabilized dollar.

President Wilson and Rear Admiral Grayson Passing the Palace of the King in Brussels]

The Great Results of the War

The Great Results of the War

_PART I_

I--ECONOMIC RESULTS OF THE WAR

Striking Changes Made by the European Conflict Upon the Economic Life of the Great Nations

The paramount position of War Finance was brought vividly and continuously before the whole people of the United States by the Liberty Loan campaigns. This lesson was an old one though it was enforced by all the improved methods of modern publicity. To Napoleon Bonaparte is attributed the statement that three things are necessary to wage a successful war: money, more money, and still more money.

FINDING THE MONEY FOR WAR

It has been well said that:

"Perhaps the greatest surprise of the war to most people, even
to those who had studied political economy, has been the
enormous expenditure of money which a nation can incur, and the
length of time which it can go on fighting without complete
exhaustion. This should not have been in reality a surprise to
anyone who had studied past history, for all experience shows
that lack of money itself has never prevented a nation from
continuing to fight, if it were determined to fight. The
financial condition of Revolutionary France at the commencement
of Napoleon's career was wretched in the extreme, yet France
went on fighting for nearly twenty years after that. The Balkan
States can hardly be said ever to have had great financial
resources, and yet they fought, one after the other, two severe
wars, and are now fighting a third still more severe and
prolonged. The Boers in South Africa found no difficulty in
fighting the British Empire for three years with practically no
financial resources. The Mexicans recently managed to fight one
another for a good many years in the same way. Lastly, the
Southern states in our own Civil War fought for years a
desperate and losing fight and were ultimately beaten to the
ground, not so much by a lack of money, as by an actual lack of
things to live on and fight with. In fact, all history proves,
and this war proves over again, that if what the Germans call
'the will to fight' exists lack of money will never stop a
nation's fighting, provided it possesses or can obtain its
absolutely minimum requirements of food, clothing, and
munitions of war. It was Bismarck who said: 'If you will give
me a printing press, I will find you the money.' In finding the
money required for an exhausting war a nation is driven to all
sorts of desperate financial expedients which may very
seriously affect its economic life, but if a nation wants to
continue fighting and can produce, or be induced to produce,
the things that are absolutely necessary for life and warfare,
the government will get hold of those things somehow. If it
cannot get them in any other way, ultimately it will take
them."

STRONG POSITION OF UNITED STATES

When the war opened England was in the strongest position of any of the Allies. She was the greatest creditor nation in the world. That is, she was able to purchase goods from foreign countries on easier terms than her associates. Russia and Italy were debtor nations and had to borrow even before the war in order to balance their foreign accounts. So these members of the Entente had to be assisted in making purchases abroad. England was able for a long time to keep up her exchange rate in New York. This was done by the shipment of gold and by inducing the holders of American securities in England to sell or lend such securities to their government.

England was forced to act as the agent of other Powers who were fighting with her. Until the United States came in, it was the greatest industrial arsenal among the Allies. Large imports were naturally a feature of this policy. The United States soon began to feel the result of the changes in international credit. Exports almost doubled between 1912 and 1917, the figures being in millions, $2,399,000,000 and $6,231,000,000, respectively.

Another side of the United States trade account to the world is indicated by the following classified list of loans to January, 1917:

"Between August 1, 1914, and December 31, 1916, the loans
raised in the United States by foreign countries were estimated
to reach $2,325,900,000, of which $175,000,000 had been repaid.
The net indebtedness on January 1, 1917, was therefore
$2,150,900,000. The loans may be classified geographically as
follows:

Europe $1,893,400,000
Canada 270,500,000
Latin America 157,000,000
China 5,000,000
--------------
Total foreign loans $2,325,900,000
Less amount paid, estimated 175,000,000
--------------
Net foreign indebtedness $2,150,900,000

"The loans of the belligerent countries which were floated in
the United States up to the close of 1916 are divided as
follows:

Great Britain $908,400,000
France 695,000,000
Russia 160,000,000
Germany 45,000,000[1]
Canada 270,500,000
--------------
Total $2,078,900,000[2]

[1] Estimated.

[2] Nearly $1,900,000,000 of this constituted war loans.

NEW PACE IN WAR FINANCE

A new pace in war finance was set by the United States when it became a belligerent. It had to provide for an increase of taxation ascending from the point of $3,000,000,000 in 1917 to over $8,000,000,000 in 1918. The largest source of estimated revenue was from taxes on excess profits, including war profits of $3,100,000,000, and the next was from taxes on incomes, $1,482,186,000 from individuals, and $828,000,000 from corporations. The New York _Journal of Commerce_ shows by the following table the difference between the old and the new system of taxation. Exemptions under the new law were the same as under the old: $1,000 for single persons and $2,000 for married, $200 additional allowed for each dependent child under eighteen years of age:

Incomes Tax Under
Old New
Law Law
$2,500 $10 $30
3,000 20 60
3,500 30 90
4,000 40 120
4,500 60 150
5,000 80 180
5,500 105 220
6,000 130 260
6,500 155 330
7,000 180 400
7,500 205 470
8,000 235 545
8,500 265 620
9,000 295 695
9,500 325 770
10,000 355 845
12,500 530 1,320
15,000 730 1,795
20,000 1,180 2,895
25,000 1,780 4,240
30,000 2,380 5,595
35,000 2,980 7,195
40,000 3,580 8,795
45,000 4,380 10,645
50,000 5,180 12,495
55,000 5,980 14,695
60,000 6,780 16,895
70,000 8,880 21,895
80,000 10,980 27,295
100,000 16,180 39,095
150,000 31,680 70,095
200,000 49,180 101,095
300,000 92,680 165,095
500,000 192,680 207,095
1,000,000 475,180 647,095
5,000,000 3,140,180 3,527,095

The following estimated yield from other sources is given by the same authority:

"Transportation--Freight, $75,000,000; express, $20,000,000;
passenger fares, $60,000,000; seats and berths, $5,000,000; oil
by pipe lines, $4,550,000.

"Beverages (liquors and soft drinks), $1,137,600,000; stamp
taxes, $32,000,000; tobacco cigars, $61,364,000; cigarettes,
$165,240,000; tobacco, 104,000,000; snuff, $9,100,000; papers
and tubes, $1,500,000.

"Special Taxes.--Capital stock, $70,000,000; brokers,
$1,765,000; theaters, etc., $2,143,000; mail order sales,
$5,000,000; bowling alleys, billiard and pool tables,
$2,200,000; shooting galleries, $400,000; riding academies,
$50,000; business license tax, $10,000,000; manufacturers of
tobacco, $69,000; manufacturers of cigars, $850,000;
manufacturers of cigarettes, $240,000; use of automobiles and
motor cycles, $72,920,000.

"Telegraph and telephone messages, $15,000,000; insurance,
$12,000,000; admissions (theaters, circuses, etc.),
$100,000,000; club dues, $9,000,000.

"Excise Taxes.--Automobiles, etc., $123,750,000; jewelry,
sporting goods, etc., $80,000,000; other taxes on luxuries at
10 percent., $88,760,000; other taxes on luxuries (apparel,
etc., above certain prescribed prices), at 20 percent.,
$181,095,000.

"Gasoline, $40,000,000; yachts and pleasure boats, $1,000,000."

"The income tax law levies on all citizens or residents of the
United States a normal tax of 12 percent. upon the amount of
income in excess of exemptions, except that on the first $4,000
of the taxable amount the rate shall be 6 percent. The law also
increases the surtaxes all along the line. The advances by
grades compared with the percentage under the old law are:
$5,000 to $7,500 incomes, increased from 1 to 2 percent.;
$7,500 to $10,000, from 2 to 3 percent.; $10,000 to $12,500,
from 3 to 7 percent.; $12,500 to $15,000, from 4 to 7 percent.;
$15,000 to $20,000, from 5 to 10 percent.; $20,000 to $30,000,
from 8 to 15 percent.; $30,000 to $40,000, from 8 to 20
percent.; $40,000 to $50,000, from 12 to 25 percent.; $50,000
to $60,000, from 12 to 32 percent.; $60,000 to $70,000, from 17
to 38 percent.; $70,000 to $80,000, from 17 to 42 percent.;
$80,000 to $90,000, from 22 to 46 percent.; $90,000 to
$100,000, from 22 to 46 percent.; $100,000 to $150,000, from
27 to 50 percent.; $150,000 to $200,000, from 31 to 50
percent.; $200,000 to $250,000, from 37 to 52 percent.;
$250,000 to $300,000, from 42 to 55 percent. The rate continues
to increase, but on incomes of over $5,000,000 the increase is
only from 63 percent., under former law to 65 percent."

Women Munition Workers in the International Fuse and Arms Works

Before entering the war, the United States was the great arsenal of the Allies. After our entry, production of munitions increased, while the man power in the industry diminished through enlistments and the draft. Women took up the work and showed surprising ability.]

MEANING OF NEW TAXATION

According to a calculation published in the New York _World_ the war revenue bill imposed a war tax of $80 on every man, woman and child in the United States, or approximately $400 for each family. The amount expected to be derived from each item is given in the following table:

Individual income tax $1,482,186,000
Corporation income tax 894,000,000
Excess and war profits 3,200,000,000
Estate tax 110,000,000
Transportation 164,550,000
Telegraph and telephone 16,000,000
Insurance 12,000,000
Admissions 100,000,000
Club dues 9,000,000
Excise, luxury, and semi-luxury 518,305,000
Beverages 1,137,600,000
Stamp taxes--chiefly documentary 32,000,000
Tobacco and products 341,204,000
Special business and
automobile-user's Taxes 165,607,000
--------------
Total $8,182,452,000

With the operation of this tax the people of the United States found it no longer possible to speak in terms of opprobrium of the tax-ridden people of Europe. The American income tax has a higher rate on large incomes than that provided for under the English system. A man in the United States with an income of $5,000,000 is taxed nearly 50 percent., more than in England. The New York _Tribune_ published tables printed below comparing the income tax rates of the United States with those existing in France and in Great Britain.

INCOME TAX COMPARISON

A compilation made for the _Wall Street Journal_ shows that the United States income tax even with the increases made in 1918 was still far lower than the English income tax:

"The great bulk, numerically, of incomes taxed in 1917 was in
the field reached by the lowering of the exemption in the 1917
law.... It is a fact, however, that no one of these new
taxpayers was called on to contribute more than $40 to the
government, as the rate was only 2 percent., while all other
incomes paid a basic normal tax of 4 percent. The lowest rate
for normal tax in Great Britain is 2 shillings and 3 pence on
the pound, or 11¼ percent., and the exemption is only $600. The
basic normal tax under the new English law is 6 shillings on
the pound, or 30 percent., on all incomes over $25,000.

_United States
Old Law New Law United Kingdom France
Income Rate Rate Rate (%) Rate
Am't (%) Am't (%) Unearned Earned (%)_
$ 2,500 $10 .40 $30 1.20 11.25 8.44 1.25
3,000 20 .67 60 2.00 14.84 11.87 1.67
3,500 30 .86 90 2.57 16.24 12.96 2.07
4,000 46 1.00 120 3.00 18.16 14.53 2.44
4,500 60 1.33 150 3.33 18.75 15.00 2.86
5,000 80 1.60 180 3.60 18.75 15.00 3.20
5,500 105 1.91 220 4.00 22.50 18.75 3.48
6,000 130 2.16 260 4.33 22.50 18.75 3.71
6,500 155 2.38 330 5.08 22.50 18.75 3.90
7,000 180 2.57 400 5.71 22.50 18.75 4.07
7,500 205 2.73 470 6.27 22.50 18.75 4.21
8,000 235 2.93 545 6.81 26.25 22.50 4.34
8,500 265 3.12 620 7.29 26.25 22.50 4.53
9,000 295 3.28 695 7.72 26.25 22.50 4.69
9,500 325 3.42 770 8.11 26.25 22.50 4.84
10,000 355 3.55 845 8.45 26.25 22.50 4.98
12,500 530 4.24 1,320 10.56 30.00 26.25 5.53
15,000 730 4.87 1,795 11.97 32.08 32.08 6.07
20,000 1,180 5.90 2,895 14.48 34.06 34.06 6.99
25,000 1,780 7.12 4,245 16.98 35.75 35.75 7.84
30,000 2,380 7.93 5,595 18.65 37.29 37.29 8.41
35,000 2,980 8.51 7,195 20.56 38.75 38.75 8.99
40,000 3,580 8.95 8,795 21.99 39.84 39.84 9.43
45,000 4,380 9.73 10,645 23.66 40.97 40.97 9.77
50,000 5,180 10.36 12,495 24.99 41.88 41.88 10.05
55,000 5,980 10.87 14,695 26.72 42.84 42.84 10.27
60,000 6,780 11.30 16,895 28.16 43.65 43.65 10.45
70,000 8,880 12.69 21,895 31.26 44.91 44.91 10.75
80,000 10,980 13.72 27,295 34.12 45.86 45.86 10.96
100,000 16,180 16.18 39,095 39.10 47.19 47.19 11.27
150,000 31,680 21.12 70,095 46.73 48.96 48.96 11.68
200,000 49,180 24.59 101,095 50.55 49.84 49.84 11.89
300,000 92,680 30.89 165,095 55.03 50.73 50.73 12.09
500,000 192,680 38.54 297,095 59.42 51.44 51.44 12.25
1,000,000 475,180 47.52 647,095 64.71 51.97 51.97 12.38
5,000,000 3,140,000 62.80 3,527,095 70.54 52.39 52.39 12.48

"Actual rate, allowing for deductions, normal tax, and surtaxes, based on taxes on incomes of heads of families. Persons with no dependents pay more; those with more than one pay less. $2,000 is exempted for heads of families, $1,000 for bachelors. Below $4,000, 6 per cent. is the normal tax; above, 12 per cent. Surtaxes begin at $5,000."

"If the new normal tax in the United States were made uniformly
12 percent.--wiping out the 2 percent. discrimination of the
1917 law--a single man in this country with a salary of $1,500
a year would be called on to pay $60 in income tax, as against
an English tax of $101.25. Assuming that the normal tax were
raised to 12 percent. and the surtax and excess tax were left
as at present, an unmarried American with a salary of $10,000
would pay $1,430.20, while the unmarried Englishman would pay
$2,250. If the Englishman derived his $10,000 income from
rentals, his tax would be increased to $2,625, while the
American tax would be reduced to $1,165--an Irish dividend on
effort.

"According to a level where the British surtax becomes
effective, take a salary of $20,000. The English normal tax on
this would be $6,000 and the surtax $812.50 (figuring $5 to the
pound), a total of $6,812.50. At the suggested rate of 12
percent., the American's normal tax would be $2,145.60 (rate
applying to $20,000, less $1,000 exemption and $1,120 excess
tax); the surtax would be $444 and the excess tax $1,120; a
total of $3,709.60. If the American cut non-tax-free coupons
for his income instead of working for it, his tax would be
reduced to $2,780, making it more than $600, less than one-half
the English tax. This, be it remembered, is figuring the
American normal tax at the supposititious rate of 12 percent.

"Going abruptly to an income of $1,000,000, the American normal
tax at 12 percent., would be $119,880, against an English normal
tax of $300,000. The increase in the American normal tax would
be $79,960 over present rates. The American surtax at present
rates would be $435,300, as against a British surtax of
$217,915; total American, $555,180, English, $519,687.50. No
account is taken in this computation of any excess tax on the
American income. With an income of $3,000,000. the American
normal tax at 12 percent. would be $359,880, an increase of
$239,960 over present rates. The surtax at present rates would
be $1,680,300, a total of $2,040,180, or nearly 70 percent.,
the rate on the last $1,000,000 being at 75 percent. The
corresponding British tax is, normal, $900,000, and surtax
$669,685; total, $1,569,685, or nearly 52 percent., the actual
maximum rate being 52½ percent. on all excess over $50,000.

"Expressed in tabular form, comparative results from a normal
tax of 12 percent., combined with present surtax rates and
assuming all income up to $50,000 to be earned income for a
single man, would be as follows:

U.S. Per British Per
Income Tax Cent. Tax Cent.

$1,500 $60.00 4.00 $101.25 6.75
3,000 240.00 8.00 375.00 12.50
5,000 480.00 9.60 750.00 15.00
7,500 789.40 10.52 1,406.25 18.75
10,000 1,430.20 14.30 2,250.00 22.50
15,000 2,534.80 16.90 4,812.50 32.08
20,000 3,709.60 18.55 6,812.50 34.06
30,000 6,336.00 21.12 11,187.50 37.29
40,000 8,956.00 22.39 15,937.50 39.84
50,000 11,855.20 23.71 20,937.50 40.18
75,000 18,605.20 24.81 34,062.50 45.42
100,000 26,855.20 26.80 47,187.50 47.19
150,000 46,355.20 30.90 73,437.50 48.96
250,000 92,355.20 36.94 125,937.50 50.37
500,000 235,355.20 47.07 257,187.50 51.44
700,000 359,355.20 51.33 362,187.50 51.74
750,000 390,355.20 52.05 388,437.50 51.79
1,000,000 557,855.20 55.78 519,687.50 51.97
3,000,000 2,042,855.20 68.09 1,569,687.50 52.32
10,000,000 7,292,855.20 72.93 5,244,687.50 52.45

"With additional exemption of $1,000 for heads of families and
$200 each for dependent children, the United States figures in
the table would be reduced by $120 for the $1,000 exemption and
$24 for each child. There are similar deductions to be made in
the English figures. Furthermore, for incomes above $50,000,
deduction for the excess tax has not been figured exactly in
order to avoid long computations. This would slightly reduce
the figure on the large incomes. But for demonstrative
purposes, the table gives a fairly accurate general comparison
of the range of taxes under the proposed English law and a
tentative 12 percent. normal rate under our law.

"It will be noticed that the rates would come together just
below $750,000. It is in the range between $5,000 and $500,000
incomes that greatest divergence in rates occurs. The British
tax takes its largest jump between $10,000 and $15,000, where
the surtax begins to operate. The United States gradations are
erratic and irregular, showing the haphazard manner in which
the steps of the surtax were applied."

ATTITUDE TOWARD WAR TAX BILL