Chapter V: Introduction: By PROFESSOR IRVING FISHER (3)

"On the financial side our record is by no means so
satisfactory. We have, it is true, poured out money like water,
but much of it has been raised by faulty methods, and the
amount of it that has been wasted is appalling to consider. In
the matter of borrowing, our methods have lately been greatly
improved; and the recommendation of the Committee on National
Expenditure, that the system of raising money by bank credits
should be checked as far as possible, is being brought within
the bounds of practical politics by the great success of the
War Savings Committee's energetic and ingenious campaign for
prompting the sale of National War Bonds. Perhaps also we may
claim some small share in that success through the adoption of
the principle so long advocated in these columns of a lower
rate for money at home combined with special terms for money
left here by foreigners. But successful borrowing, direct from
the investor, instead of in the shape of money manufactured by
banks, is a welcome, but not sufficient, improvement. We have
to raise much more money by taxation. We have also to do much
more than has yet been done to reduce the wicked waste of
public money and support the efforts of the Committee on
National Expenditure to husband the resources of the nation. A
correspondent in a provincial town in which a Tank has lately
been busy asks: 'Is it not pathetic to see widows and children
scraping together their shillings and pennies to help the
Government, while we have tens of thousands of pounds being
squandered by a profligate Ministry of Munitions!'"

A Woman Doing Road Construction Work

Of the 7,500,000 men serving in the British Army, 4,530,000 were contributed by Great Britain. Yet production was speeded up by recruiting and training the labor of women.]

EQUALIZING LOANS AND TAXATION

A thorny problem of all war finance is how to equalize as far as possible the amount of money furnished by taxation with the amounts borrowed. The proportion indicated in the last English war budget of 1918 was that between £842,000,000 raised by taxes and 2,000,000,000 sterling by fresh borrowing. Besides, war experience shows that the parliamentary estimates in each year were always far below the amount spent. In 1917 in Great Britain the shortage was upwards of £400,000,000. According to the London _Economist_, no effective steps were taken to stop the profligate extravagance by which public money was poured out through the sieves of the war spending departments into the pockets of innumerable manufacturers, middlemen and traders, not to mention the ever growing sums allocated to the privy purses of countless new bodies of officials. Each year, it says, there is a new debt charge of some £120,000,000 and each year there is a constant rise of prices in wages that enhances the cost of governmental goods and services.

The amount raised by taxation, £842,000,000, seems enormously large, but as the London _Nation_ states:

"The enormous rise of prices only makes it represent half that
amount in actual purchasing power. Before the war our
expenditure was 200 millions. If money had kept the same value,
the taxation and other public income for this year would only
have been 420 millions, a little more than twice the pre-war
level. Would that have seemed so heroic an effort for a
patriotic nation? No. It can never be repeated too often that a
really rigorous taxation, begun in 1914 and carried on till
now, would have left us in a far sounder condition both for
conducting the war and for facing the peace finance. The money
and the goods are there. We get them. But we get them by
crooked and expensive methods of borrowing which inflate
prices, oppress the poorer purchasers, put huge war loot into
the pockets of contractors and financiers, and fail to restrain
expenditure in luxuries."

GERMANY'S ECONOMIC PREPARATION FOR WAR

There is much evidence to show that long before the war began financial preparations were made in Germany for the great struggle. For a considerable period prior to 1914, Germany and Russia had been engaged in a contest to accumulate a gold supply. Russia, it is known, had begun to withdraw the large balances which she kept in German, French and English banks. In Germany the story was circulated that in 1913 the Kaiser inquired of the governor of the Imperial Bank if the German banks were equipped for war. Being told that they were not ready he is said to have replied: "When I ask that question again I want a different answer." The Imperial Bank of Germany became an active bidder at the London gold auctions for the gold which arrived weekly from South Africa, and its activity along these lines was shown by the increasing of the German gold reserve in the bank vaults from $184,000,000 on December 31, 1912, to $336,000,000, the amount it stood at a month before the war began. In addition, the Imperial Bank collected for the Government a sum of about thirty million dollars to be added to the same amount said to be stored in the vaults of the Julius Thurm at Spandau, and to be used as a war chest. Other European countries were increasing their gold supplies, so it was not surprising that the New York markets were called upon to export eighty-four million dollars of gold for six months before the outbreak of the war. The entire gold production of the world during the eighteen months ending on June 30, 1914, was approximately $705,000,000. Of this amount, about two million dollars was required for the arts, and one hundred and fifty million dollars went to British India. This left about $350,000,000 to be applied to monetary uses and the whole of this amount was absorbed by the four great central banks of Germany, France, Russia and Austria-Hungary.

In order to resist raids on the German gold reserve a policy of note issuing was adopted. The situation, as forecast by Mr. C. A. Conant in September, 1914, in the New York _Times_, can be gathered from the following extract:

"With the general suspension of gold payments at the central
banks of Europe, except at the Bank of England, the banks are
in a position to resist raids upon their gold and to lend their
resources, as far as sound banking policy permits, to the
struggle of their Governments to maintain national
independence. In England, while the bank is still paying gold
for notes, the policy of keeping gold in circulation has been
abandoned, and the old limit of note issue, which was £5
($24.40), has been lowered to 10 shillings ($2.44) and £1
($4.88).

"It is not the purpose of any of the European Powers, however,
to carry on the war by issues of paper money. The suspension of
gold payments at the banks and the issue of notes for small
denominations, which are legal tender in domestic transactions,
is for the purpose of husbanding the gold stock against
needless runs and keeping it as a guaranty fund of national
solvency. It is the course which was adopted by France at the
time of the Franco-German War in 1870, but so prudently were
the affairs of the Bank of France conducted that the paper
never fell more than 2½ per cent. below its value in gold.

"A similar policy of reserve will probably be pursued by the
banks of France, Germany, and Russia in the present contest.
The Government of France has raised the maximum limit of the
note circulation of the bank by nearly $1,000,000,000, but the
increase will not be used except as additional currency may be
required, owing to the restriction in other forms of credit and
the special demand for notes in the districts where the armies
are gathered.

"The suspension of specie payments does not convey to the
banking community quite the same doleful warning of the
unlimited issue of paper and its steady depreciation in gold
which were conveyed by specie suspension in the United States
in 1861 or by Austria-Hungary and Russia in the desperate
contest of the Napoleonic wars. Monetary science is better
understood at the present time than in those days."

GERMAN WAR FINANCE

Among all the belligerent powers Germany occupied the unique position of using the war as an excuse for not publishing national accounts. The sole guide to her expenditure must be looked for in the credit votes passed by the Reichstag. Using this method, it is estimated that Germany spent about $30,000,000 a day. To cover this expenditure there was a regular plan of national loan--in March and September. This was the method followed in all the four years of the war. During the intervening six months there was an issue of Treasury bills. The German people were, apparently, schooled to these regular demands with commendable promptness, but the Imperial Government adopted a policy of inflation in the hope that a speedy victory would bring fruits in the shape of an indemnity, and so the German people would avoid being called upon to bear war burdens. Taxation was introduced only reluctantly and at a later period, and merely for the purpose of meeting so-called normal civil expenditure and interest on war debt. The plan followed was to spare the middle classes as far as possible from additional taxation charges.

THE LOAN BUREAU SCHEME

The war loans have been, on paper, most successful. For example, the seventh loan of September, 1917, yielded $3,000,000,000; the eighth loan nearly $4,000,000,000. There was a large amount of ready money in the country and besides this all stocks of raw material have been realized. Large as the loans have been they have not been able to keep pace with the increase of expenditure. Out of the total amount of $30,000,000,000 about $20,000,000,000 have been covered by long-term loans. Of course, owing to the peculiar situation of Germany in relation to her allies, which were dependent upon her financial support, these loans have been raised by the German people themselves. The German Loan Bureaus were criticized at the beginning of the war, and German figures show that only about ten percent. of the national loans were involved in the Loan Bureau scheme. These Loan Bureaus, it was announced, would continue after the declaration of peace. According to the London _Economist_, Germany followed an easy and sure policy of war finance, although the same authority does not hesitate to use the terms "complete financial ruin" in connection with German post-war finance.

The whole subject of German inflation is difficult to analyze. The _Economist_ works out a post-war expenditure of $5,000,000,000 a year against a revenue of a billion and a half. Its estimate of German inflation is contained in the following passage:

"To take note circulation alone is obviously misleading,
particularly in view of the violent efforts that have been
made, especially during the last year, to extend the use of the
check, and in other ways to limit as far as possible the use
of notes. For what these figures are worth, it may be said that
the total note circulation of the country at the end of June
(1918), including Reichsbank notes, State Bank notes, Treasury
notes, and loan notes, stood at £1,030,000,000, as compared
with £109,300,000 on July 23, 1914. Reichsbank deposits, again,
stood on June 30, at £459,100,000, as compared with £47,600,000
on July 23, 1914, while the deposits of the eight 'great'
banks, even at the end of 1917, stood at £800,000,000, as
compared with £250,000,000 at the end of 1914, £362,000,000 at
the end of 1915, and £500,000,000 at the end of 1916."

In this connection it is interesting to give a summary of Germany's war expenses as reported in the London _Economist_:

"In his comparison of German war finance with ours, the
Chancellor, in his Budget speech, made the following points:
First, that German war expenditure is now £6,250,000--almost
the same as ours--though our expenditure includes items (such
as separation allowances) which are not included in the German
figures. Second, that the whole amount of the German Votes of
Credit (£6,200 millions) has been added to their war debt,
'because their taxation has not covered their peace expenditure
in addition to their debt charge.' Third, the total amount of
new taxation levied by them since the beginning of the war
comes to £365 millions, against our £1,044 millions. Fourth, in
a year's time they will have a deficit, comparing the revenue
with the expenditure, of £385 millions at least. 'If that were
our position,' the Chancellor added, 'I should certainly think
that bankruptcy was not far from the British Government.'
Fifth, with the exception of the war increment tax, 'scarcely
any of the additional revenue has been obtained from the
wealthier classes in Germany'."

GERMAN WAR PROFITS

An extraordinary list of the gigantic war profits collected by Germany was drawn up by A. Cheraband, the well known French critic. He estimated that in three years Germany had spent $322.50 per head, France $444.00, Great Britain $559.75. He presents a list of war profits made by Germany. The "booty" he divided into movable and immovable property. In the former category he includes the 212,000 square miles of territory that had fallen into German clutches, and this he values at $32,000,000,000, which, he says, is a conservative estimate. Turning to the movable booty, he classifies it as follows:

"_(a) Capture of 'Human Material.'_--This consists of the
46,000,000 Allied subjects from whom the Germans obtain free
labor.

"_(b) Capture of War Material._--Guns, rifles, munitions,
vehicles, locomotives, railway trucks, and thousands of miles
of railway. The Belgian railway system alone is worth nearly
$600,000,000.

"_(c) Capture of Foodstuffs._--Everywhere the Germans have
stolen horses, cattle, corn, potatoes, sugar, alcohol,
foodstuffs of every kind, and crops grown by the forced labor
drawn from the 46,000,000 Allied subjects whom they have
enslaved.

"_(d) Theft of Raw Materials._--Throughout the occupied
territories the Germans have appropriated coal, petroleum,
iron, copper, bronze, zinc, lead, etc., either in the mines or
from private individuals; textile materials, such as woolen and
cotton. In the towns of northern France alone the Germans stole
$110,000,000 worth of wool.

"_(e) Theft of Industrial Plant._--On a methodical plan
throughout the occupied territories, the motors, engines,
machine-tools, steam and electric hammers, steel-rolling mills,
looms, models, and industrial plant of all kinds have been
carried off to Germany.

"_(f) Thefts of Furniture._--The way in which furniture and
household goods were stolen and carried off is confessed by
implication in the following advertisement published in the
_Kölnische Zeitung_ at the beginning of April, 1917:

"'Furniture moved from the zones of military operations in all
directions by Rettenmayer at Wiesbaden.'

"It is impossible to estimate the money value of the goods thus
removed.

"_(g) Seizure of Works of Art._--The works of art collected for
centuries in museums, churches, and by private individuals in
Poland, Italy, Belgium, and France have been carried off by the
Germans.

"_(h) War Levies._--Scores of millions in money have been
secured by the Germans in the form of requisitions, fines, war
levies, war taxes, and forced loans.

"_(i) Thefts of Coin, Jewels, and Securities._--In the occupied
regions, and especially wherever they have been obliged to
evacuate those regions, as, for instance, at Noyon, the Germans
have emptied, by order, the safes and strong boxes of private
persons and of banks and have carried off securities, jewels,
and silver. In September and October, 1917, they seized at one
stroke the deposits of Allied subjects in the Belgian banks
amounting to $120,000,000.

"In view of the high prices of foodstuffs, coal, metals,
petroleum, war materials and machines, it is clear that the
booty thus secured by the Germans during the last three years
in the occupied territories is certainly worth several billion
dollars."

Photo by James M. Beck

"Since the war broke out," said M. Barriol, a French celebrated actuary, "no less than 1,500,000 women have been added to the ranks of wage earners in England, an increase of fully 25 per cent."]

GERMAN MONEY INDEMNITY

It became commonplace after Germany's defeat was evident that her war cost must include the cost of the destruction she had caused her enemies. To estimate this was no easy matter. The attitude of the Germans on the subject was indicated by their constantly expressed hope that trade would recommence as usual and that they would be able to start economic relations in a favorable position. So we find the Cologne Chamber of Commerce beginning to prepare for peace by adopting a resolution expressing the hope that the destruction of French and Belgian industries would allow the rapid recovery of German power.

The _Wall Street Journal_ used this statement as a guide to the Allied Powers for measuring the kind of indemnity that would be imposed upon Germany.

"One of the departments of the Government at Washington has in
its files a report of a German commission on industry after the
war. Reading this, one can understand the motive for what at
one time looked like pure vandalism. Vandalism it was, by
descendants of the Vandals, but it was a deliberate destruction
of international competitors, killing the workmen--and
workwomen--and destroying plants and machinery for the one
purpose of removing competition. A physical injury to a child
helped to weaken future competition in the world's trade; and
it was upon the power gained thereby that Germany hoped to
launch another war for world domination....

"A peace that gives the cold-blooded perpetrators of these
crimes an advantage over their victims would not be equitable.
If any must suffer, let it be those who are guilty, but don't
give them a start ahead of their victims.

"In substance, that point should declare that Germany shall not
profit through the wrecking of any Allied industry. Except to
admit necessary foodstuffs, the blockade should not be lifted
until every Allied country from England to Serbia has been
industrially rebuilt. One object of the wholesale murder of
civilians was to weaken industrially the enemy countries. The
greater proportionate loss of man-power in the Allied countries
should be met by restrictions on the entry of raw materials
into Germany. Every piece of stolen machinery should be
returned before her own industries are allowed to resume."

The soft plan of dealing with Germany's war cost was championed by Secretary Daniels. The Springfield _Republican_ and the _New Republic_ seemed to agree with the Manchester _Guardian_ that Germany ought to be helped rather than punished, that the main thing was to set her on her feet again.

"Representative papers like the New York _Times_, Syracuse
_Post-Standard_, Buffalo _Express_, and Sacramento _Bee_ all
insist that while we might or perhaps should claim no
war-expenses from Germany, 'we must exact payment,' in the
words of the Syracuse daily, 'to the last penny for losses
suffered through illegal warfare.' Germany's submarine campaign
cost us, according to this paper's figures, 375,000 tons of
shipping and 775 civilian lives. If we take the burden of
payment for this property and these lives from the guilty
shoulders of Germany it would only be to 'pass it on to the
innocent shoulders of the American taxpayer,' which, the New
York _Times_ declares, would be 'rank injustice'."

FORECASTING THE TOTAL COST OF WAR

It is interesting also to note an attempt made by one of the expert statisticians attached to the Guaranty Trust Company of New York to estimate the total cost of the war at the close of the four-year period. The five main Allies possessed, before the war, $406,000,000,000 for national work, a sum nearly four times as great as the national wealth of the two Central Powers. In four years the seven leading belligerents had spent $134,000,000,000. The only way to grasp the meaning of this enormous sum is to contrast the cost of the World War with all former wars. The total cost of wars that had taken place since the American Revolution was $23,000,000,000; the World War costs therefore, are six times greater. In these figures, staggering as they are, it was comparatively easy to figure out the costs, debts and interests of actual war expenditures. Much more complicated is the problem of estimating the property value destroyed through military operations on land and sea:

LOSS FROM DESTRUCTION OF PROPERTY

"The total area of the war zone is 174,000 square miles, of
which the Western theater of the war, in France and Belgium,
stretches over an area of 19,500 square miles, and it contains
over 3,000 cities, villages, and hamlets, great manufacturing
and agricultural districts, of which some have been totally
annihilated and some heavily affected. The estimate by the
National Foreign Trade Council of the war losses, which
unfortunately does not go beyond 1916, is as follows:

"'Destruction of buildings and industrial machinery in Belgium,
$1,000,000,000, and in France $700,000,000. The destruction of
agricultural buildings and implements, of raw materials, of
crops and live stock, has been estimated at a sum of
$780,000,000 in Belgium and $680,000,000 in France. Roads were
destroyed frequently by the retreating troops and have been
seriously damaged by heavy gun fire and excessive use. The
losses from destruction of railway bridges, etc., have been
estimated in Belgium at $275,000,000 and in France at
$300,000,000.

"'In the Eastern theater of the War Germany has been invaded
only in eastern Prussia, where the agricultural population has
been seriously impaired. Heavy damage was inflicted upon
bridges, roads, and governmental property, including railroads.
The direct cost to Germany through the loss of agricultural
products, of manufacturing products, as well as in interest on
investments abroad, of earnings from shipping and banking
houses, and profits of insurance and mercantile houses engaged
in business abroad has been enormous'."

ECONOMIC LOSS OF MAN-POWER

The same expert goes on to figure out the economic value of the loss of human life:

"Mr. M. Barriol, the celebrated actuary, gives the following
figures as the capital value of man: in the United States,
$4,100; in Great Britain, $4,140; in Germany, $3,380; in
France, $2,900; in Russia, $2,020; in Austria-Hungary, $2,020
or an average capital value for the five foreign nations of
$2,892.

"The number of men already lost is 8,509,000 killed and
7,175,000 permanently wounded, or a total of 15,684,000. Thus
society has been impoverished through the death and permanent
disability of a part of its productive man-power to the extent
of $45,000,000,000.

"The loss of men, measured in terms of the capital value of the
workers withdrawn from industry, is offset in some degree by
the enhancement of the capital value of the remaining
producers.... This loss of man-power is also partly offset by
the large contingents of women drawn into industries. In
England, out of a female population of 23,000,000, about
6,000,000 were engaged before the outbreak of the war in
gainful occupations. Since the war broke out no less than
1,500,000 women have been added to the ranks of wage-earners,
an increase of fully 25 per cent. Moreover, about 400,000 women
have shifted from non-essential occupations to men's work. In
the United States, approximately 1,266,000 women are now
engaged in industrial work, either directly or indirectly
necessary to carry on the war.

EFFECTS ON POPULATION

"The physical and moral effects of the war, the moral strain to
which the nations have been subjected, the 'shell-shock' which
has reacted upon the population at home as well as upon the
soldiers on the battlefield, the undernourishment and
starvation of children as well as adults, all have resulted in
a lowered vitality, the ill effects of which, especially in the
countries of the Central Powers, are already seen in an
increase of the death rate, in a spread of epidemics and
diseases that have taxed the medical resources of all
countries.

The lowered vitality of the race, which is still further
aggravated by the millions of incapacitated soldiers and the
premature and excessive employment of children and women in the
industries, will eventually make for a lower standard of
efficiency in all human activities, or a retardation of human
progress. Authoritative statements are to the effect that in
Belgium in the earlier period of the war, the deaths of women
and children far outnumbered those of men. Annual deaths among
the German civilian population have increased by a million
above the normal.

"Besides the loss in actual population there is a loss of
potential population. Carefully compiled figures show that by
1919 the population of Germany will be 7,500,000 less than it
would have been under ordinary circumstances. The people in
Austria in 1919 will be 8 per cent. less in numbers than in the
year before the war. Hungary will be still worse off; it will
have a population of 9 per cent. lower than in pre-war days."

CARNEGIE ENDOWMENT'S ESTIMATES

The Carnegie Endowment for International Peace made public in November, 1919, an elaborate report on the cost of the World War in human life and in property and the consequent economic losses. The chief conclusions derived from this intensive study of all the conditions may be summarized as follows:

All the wars of the nineteenth century from the Napoleonic down
to the Balkan wars of 1912--1913, show a loss of life of
4,449,300, according to the report, while the known and
presumed dead of the World War reached 9,998,771. (See Vol.
III, pp. 403-5.) The monetary value of the individuals lost to
each country is estimated, the highest value on human life
being given to the United States, where each individual's
economic worth is placed at $4,720, with England next at
$4,140; Germany third, at $3,380; France and Belgium, each
$2,900; Austria-Hungary at $2,720, and Russia, Italy, Serbia,
Greece, and the other countries at $2,020.

With a loss of more than 4,000,000 the estimate puts Russia in
the lead in human economic loss, the total being more than
$8,000,000,000; Germany is next with $6,750,000,000; France,
$4,800,000,000; England, $3,500,000,000; Austria-Hungary,
$3,000,000,000; Italy, $2,384,000,000; Serbia, $1,500,000,000;
Turkey, almost $1,000,000,000; Rumania, $800,000,000; Belgium,
almost $800,000,000; the United States slightly more than
$500,000,000; Bulgaria, a little more than $200,000,000;
Greece, $75,000,000; Portugal, $8,300,000, and Japan, $600,000.
On this basis the total in human life lost cost the world
$33,551,276,280, and the loss to the world in civilian
population is placed at an equal figure.

The attempt to determine property losses is the least
satisfactory, as it is the most difficult. The destruction and
devastation in the invaded areas of Belgium, France, Russian
Poland, Serbia, Italy and parts of Austria are probably
incapable of exact determination, and it may well be doubted if
the exact losses will ever be known.

The total property loss on land is put at $29,960,000,000,
one-third of which was suffered by France alone, its loss being
given as $10,000,000,000, with Belgium next at $7,000,000,000,
and the other countries following as follows:

Italy, $2,710,000,000; Serbia, Albania, and Montenegro,
$2,000,000,000; The British Empire and Germany, each,
$1,750,000,000; Poland, $1,500,000,000; Russia, $1,250,000,000;
Rumania, $1,000,000,000, and East Prussia, Austria, and Ukraine
together, the same amount.

Launching the Quistconck at Hog Island

According to the report of the Carnegie Endowment the cargo loss at sea was $3,800,000,000, the total tonnage and cargo loss being $6,800,000,000. To offset the Allied loss in shipping, ship-building in the United States was rushed at topmost speed.]

In the property losses on sea, that is, to shipping and cargo,
the report estimates that "the construction cost of the tonnage
loss can scarcely be estimated at less than $200 a ton, and the
monetary loss involved in the sinking of this 15,398,392 gross
tons may, therefore, be placed at about $3,000,000,000." To
this is added loss of cargo, which is estimated at $250 a ton,
giving a cargo loss of $3,800,000,000, and a total tonnage and
cargo loss of $6,800,000,000.

Among the indirect costs of the war, loss of production is
placed at $45,000,000,000. In arriving at this figure an
average of 20,000,000 men are counted as having been withdrawn
from production during the whole period of the war, and their
average yearly productive capacity is placed at $500. War
relief is another indirect cost which totalled up to
$1,000,000,000; and the loss to the neutral nations is given as
$1,750,000,000.

With the total direct costs of the war amounting to
$186,336,637,097 and the indirect costs to $151,612,542,560,
the stupendous total of $337,946,179,657 is reached. Finally,
the report says:

"The figures presented in this summary are both
incomprehensible and appalling, yet even these do not take into
account the effect of the war on life, human vitality,
economic well-being, ethics, morality, or other phases of human
relationships and activities which have been disorganized and
injured. It is evident from the present disturbances in Europe
that the real costs of the war cannot be measured by the direct
money outlays of the belligerents during the five years of its
duration, but that the very breakdown of modern economic
society might be the price exacted."

THE WAR AS A PRODUCT OF HIGH PRICES

All of the great wars in European history have been followed by periods of increased production and economic expansion. Experts are convinced that the World War will prove no exception to the world's previous experience. Wars have been the principal influence that have determined the course of commodities and prices. In the Napoleonic Wars the index number rose seventy-two points in twenty years, but during the four years between 1914 and 1918 there was a rise of one hundred and eight points in four and a half years, a movement which Edgar Crammond, widely known British expert in economic and financial affairs, declared to be a movement to which there was no precedent in point of rapidity or magnitude. In an address outlined in the New York _Journal of Commerce_ this authority estimated the direct cost of the war to the Allies as being roughly $145,000,000,000. The Central Powers had spent about $60,000,000,000. The total cost in dollars he estimated at $260,000,000,000. The upheaval caused by the war was manifested, according to the same authority, in the rise of the cost of living and in the universal increase of wages. Other economic consequences will be more gradually unfolded. Prospects of fall in the price of commodities and wages as the result of peace, he thinks, will be arrested for two reasons: First, the vast increase in the amount of paper money; second, the huge amount of public debts to the belligerents. He saw an additional psychological cause in the attitude of the laboring classes to maintain wages at a higher level than before the war and to improve the standard of living.

Reduced production is sufficient to account for all the economic disturbances that were produced during the war, according to the London _Statist_, which says:

"It is enough to say that production is reduced almost to a
minimum, while consumption is going on at a most extravagant
rate. Those who wish to pose as economists without competent
knowledge are telling the public that all the evil is due to
this, that, and the other thing--such, for example, as
inflation, the rise in prices, the enormous loans raised, and
several other fads. It is pure moonshine. The world is
impoverished, firstly, because so much of the world's manhood
is withdrawn from production to consumption; and, secondly,
because reduction in production is so serious that very little
has been saved either by the belligerents or the neutral
countries of Europe, at all events. International trade is
really carried on by barter. It is true that money is
frequently paid. At the present time money has in some markets
to be paid because credit has been injured, and those who
possess wealth are not as willing as they used to be to trust
to mere credit."

QUESTIONS OF INFLATION

The enormous advance of prices in England was synchronous with the issue of currency notes to an excess of £700,000,000 beyond the gold reserve. High officials in British administration ascribed this rise to the increased consuming capacity. According to the British Board of Trade a sovereign could purchase no more during the war time than eleven shillings would just before the war started. A writer in the _Fortnightly Review_, Mr. W. F. Ford, quotes Jevons' remark in his classical book on money in explanation of the phenomenon. "A number of bankers all trying to issue additional notes resemble a number of merchants offering to sell corn for future delivery, and the value of gold will be affected as the price of corn certainly is. We are too much inclined to look upon the value of gold as a fixed datum line in commerce, but in reality it is a very variable thing." Substitute today the word Government for bankers and one can see the reason for the upward rise in prices. This rise would take place apart from any questions of war waste, profiteering, difficulties of transport by sea or land or shortage of labor. All the countries involved have followed the same policy of inflation. The operation is depicted in the following passage:

"The inevitable result of extensive note issues by a number of
Governments was that prices were irresistibly impelled upwards
in all belligerent countries--apart from any questions of war
waste, profiteering, difficulties of transport by sea or land,
or shortage of labor. Belligerent countries became
extraordinarily good markets in which to sell goods; and a
golden harvest was temptingly displayed to neutral nations, in
whose favor enormous trade balances rapidly grew up. In large
part these balances were met by payment in gold.... But just as
gold substitutes in the shape of paper money swelled the
currencies and increased prices in the belligerent countries,
so also the large quantities of gold coin sent to neutral
States in payment for goods supplied to the warring nations
swelled the currencies and increased prices in the neutral
states themselves. The withdrawal of gold set up a natural
tendency for prices to fall in the countries from which it had
been exported; but not only was this tendency overcome, but the
upward movement of prices was continued by the action of the
several Governments in placing still further issues of
inconvertible paper money on their respective markets. The net
results have been that currencies have been inflated and prices
forced up all over the world, that inconvertible paper money is
tending more and more to drive out gold from the currencies of
the states that issue it, and that the gold so driven out is
being absorbed into the currencies of the neutral nations.
Between August, 1914, and the date of her own declaration of
war, America increased the amount of her gold currency by
approximately £200,000,000 sterling. No real benefit has
accrued.

"The currencies of the whole world have been artificially
inflated to the extent that, under the most favorable
circumstances existing in any part of the world, £5 are now
needed to do the work in circulation that before the war was
accomplished by £3. The loss to people with fixed incomes, the
disturbance of trade, the potential labor difficulties are
stupendous. And as a result of purchasing war material at
excessively high prices, the dead weight of debt incurred by
all the countries at war is very much greater than it need have
been had currencies been kept within reasonable bounds."

CURRENCY EXPANSION IN GREAT BRITAIN

In Great Britain £200,000,000 worth of new paper currency was placed in circulation and there was a considerable expansion in the use of banknotes, silver and copper coinage. Proposals were made that the famous English Bank Act should be repealed and that excess issues of banknotes should be made legal on the payment of a tax. But apart from these theories of involving the banking system there was a good deal of adverse criticism.

"Mr. Herbert Samuel made a masterly attack upon the vicious
system of War Finance, by which no less a sum than £196,170,000
is added to the expenditure by bonuses and increases of wages,
which, in their turn, only force prices still higher and raise
the cost of living. Lives have been conscripted; incomes have
been conscripted; the only thing which has not been conscripted
is labor. If the Government had at an early stage of the war
had the courage to fix wages, instead of prices, the cost of
living would then have been regulated by supply and demand. By
fixing prices of commodities, after they had risen to almost
famine figures, we have the maximum of loss and inconvenience,
high wages, dear food, and a war bill that increases day by
day. Despite Mr. Bonar Law's assurance that the bill of the
year would not be so high as he expected, we have the fact that
we are spending over seven millions a day. The satire of 'the
cheap loaf' consists in its cost to the nation at large of
£45,000,000 a year. Bonuses to munition workers amount to
£40,000,000, bonuses to miners come to £20,000,000, to railway
workers £10,000,000, to potato growers £5,000,000. Is this
anything else but a system of gigantic corruption? In order
that artisans and agriculturists may be kept in good humor with
the war, they are bribed with bonuses and allowed to buy food
at prices which are partially paid by the rest of the
community. If ever there was a case of robbing Peter to pay
Paul it is here."

AMERICA'S EXPERIENCE WITH INFLATION

Protests against war inflation were not confined to British specialists in finance. What is inflation? As used by the more careful writers on the subject today, it is taken to signify the increase of bank credits not represented by any immediate addition to current wealth. For example, if the Government borrows by an issue of bonds, such bonds taken by the banks, and payment for them made in the form of bank credit which is at once transferred to individuals who have furnished labor or supplies, it is evident that there has been a net addition to the purchasing power of the community not represented by any corresponding addition to wealth whether of a saleable or available form. Mr. Delano, a member of the Federal Reserve Board, said that the war had produced a world inflation the like of which had never occurred before--"The usual symptoms of such methods of inflation are the disappearance of metallic money and the general advance in the prices of commodities." He gives the following illustration of what has taken place in this process of inflation:

"Prior to our entry into the war, when the European nations
were buying heavily in the United States, they paid largely in
gold for what they bought, and as a result about a billion
dollars in gold coin came to this country in the period of two
and one-half years. The reason the European nations were able
to send us their gold was that they printed paper money for
their own use, releasing gold for us. But that gold inflation
in this country is one explanation of the general advance in
prices of all commodities, although undoubtedly it is not the
only explanation; for it must be freely admitted that prices
have been affected, first, by scarcity, occasioned by increased
demand from Europe for many articles produced by us; second, by
reason of the fact that increases in taxes and wages of labor
have entered into the cost of production and sale of all
articles and account for a share of the increased prices of
commodities."

CIVIL WAR INFLATION.

The United States had large experience with inflation during the Civil War. Some $500,000,000 were in this way added to the cost of the war which might have been avoided. A plain statement of the real incidents of inflation is given by Mr. A. C. Miller of the Federal Reserve Board in his _Financial Mobilization for War_, in the following passage:

"For let it not for a moment be overlooked that inflation, in
its effects, amounts to conscriptive taxation of the masses. It
is, indeed, one of the worst and the most unequal forms of
taxation, because it taxes men, not upon what they have or
earn, but upon what they need or consume. The only difference
for the masses between this kind of disguised and concealed
taxation and taxes which are levied and collected openly is
that in the case of the latter the government gets the revenue,
while in the former case it borrows it, and those to whom it is
eventually repaid are not those, for the most part, who have
been mulcted for it. Inflation therefore produces a situation
akin to double taxation in that the great mass of the consuming
public is hard hit by the rise of prices induced by the
degenerated borrowing policy and later has to be taxed in order
to produce the revenue requisite to sustain the interest charge
on the debt contracted and to repay the principal. The active
business and speculative classes can usually take care of
themselves in the midst of the confusion produced by inflation
and recoup themselves for their increasing outlays. Indeed
inflation frequently makes for an artificial condition of
business prosperity. That is why war times are frequently
spoken of in terms of enthusiasm by the class of business
adventurers. But it is a prosperity that is dear-bought and at
the expense of the great body of plain living people. It would
be a monstrous wrong if in financing our present war we should
pursue methods that would land us in a sea of inflation in
which the great body of the American people, who are called
upon to contribute the blood of their sons to the war, were
made the victims of a careless or iniquitous financial policy."

INFLATION ILLUSTRATED.

One of the ways in which inflation was caused in the United States during the war period was the plan adopted by the banks of financing the loan directly by means of bank credits to the buyers. According to Mr. Carl Snyder the banking officials roughly agree that on the first Liberty Loan for $2,000,000,000 the banks may have loaned somewhere near half the total and on the second loan even more. Of course, this means a heavy expansion of bank credit. Economists are generally agreed that the flooding of the country with paper money brings about an enormous rise in prices. They differ chiefly in regard to the degree of inflation. The most accepted statement of inflation is that prices vary directly as the volume of the actual currency employed and its rate of turn over or velocity, and inversely with the volume of trade. The effect of bank credits is exactly that of an excessive issue of notes; that is, if they are expanded more rapidly than the actual volume of business there is a rise in prices, that is to say there is inflation.

The situation of the country during the war in regard to business was put plainly by Mr. Snyder in the following words: "Railroads cannot haul any more goods. The government is already stepping in to shut down on shipments on certain lines of industry. We can not get any more coal unless labor is drafted from other industries, and as a whole we cannot get any more labor as is evident from the fantastic wages that are now being paid. In a word, production and therefore the actual volume of exchange is practically at the limit and has been for a year or more. No expansion of bank credits can put this production any higher. It follows, therefore, as a practical fact that _any expansion of bank loans now means inflation_--to all practical intents dollar for dollar." Because of the introduction of a billion dollars worth of gold into the country, prices have risen nearly one hundred percent. The expansion of bank credits increases the cost of living and the cost of the war will be doubled.

Some bankers estimated that if the war lasted the expansion of bank loans might reach $50,000,000,000. The progress of these loans was encouraged by the cutting of the required metallic reserve under the new Federal Reserve system and the system of book credits with the Federal Reserve banks allowed to the banks that are members of the system. The following is Mr. Snyder's description of the way the inflation was encouraged.

"Every dollar of gold may become three dollars of Federal Bank
credits and each dollar of this may in turn become the basis of
eight dollars of credits for the Central Reserve cities, ten
dollars for the smaller cities and fifteen dollars for the
country banks, which works out to a practical average of ten
dollars for all the banks in the Federal Reserve system."

He then went on to speak of the possibilities of this inflation and uttered a warning of the danger, because the only obstacle in the way was the good sense and conservatism of the American banks. Some authorities hold that a war cannot be fought without inflation. Mr. Snyder thought that the United States with large ante-war income could and should have tried the experiment. People want easy money and flush times. If credit were contracted there would be tight money and a high interest rate. Mr. McAdoo and the Administration at Washington feel highly elated when they roll up five billion of statistics, half of which are merely bank rolls. It seems not to matter that all this may add two or three billion to the already swollen credit currency and that the millions of poor people, small investors and life insurance holders who cannot expand their income in any adequate way must pay the piper. These are the millions who rarely have any voice in national affairs, and all the more so because they are for the most part ignorant. It seems an idle consequence that we may spend perhaps ten long weary years of hard times, of falling prices, declining business and sharp distress, paying for the orgy of inflated prices, waste and extravagance in which we are now indulging.

Ship-building at Camden, N. J.

One of the financial effects of the war was the transformation of the United States from a debtor to a creditor nation. Immense private fortunes were made. In no industry was there a greater boom than in ship-building.]

CREDIT EXPANSION

The wide expansion of credit can be studied by making a comparison of the gold holdings of the leading nations. For example, in 1914 just before the outbreak of the war, the amount of cash held by all the banks of the United States was estimated at about $1,639,000,000. Of this amount about $913,000,000 was in the form of gold or gold certificates. Upon this basis there rested a structure of credit amounting to $21,351,000,000. In other words the gold basis of the country's deposit credits amounted to 4.27 percent.

In 1916 the cash held was $1,911,000,000; about $1,140,000,000 was in gold; and on this basis there rested a credit structure of $28,250,000,000.

UNITED STATES A CREDITOR NATION

One of the financial effects of the war was the transformation of the United States from a debtor to a creditor nation. The reconstruction period in finance is certain to bring about a situation described by a writer in the _Wall Street Journal_ as one of the most interesting developments known in financial history. Financial waste in emergency measures was a superficial side of America's part in the World War. But this writer considers that what happened during the war was not altogether financial waste:

"A great upheaval took place in the world of finance. Credit
resources were brought to the fore and nations established on a
financial basis of far-reaching importance, but of a kind that
had only a secondary place before.

"The war has turned the United States from a debtor to a
creditor nation. Formerly we owed abroad something like
$4,000,000,000, about three-quarters of which sum we have
bought back. Moreover, Europe now owes us about
$9,000,000,000--on private account; about $2,000,000,000 in
securities; in United States Government obligations over
$7,000,000,000. The world is under obligations to us in
interest alone of between $400,000,000 and $500,000,000 a
year."

After the United States took an active part in the war large credits and loans were made in behalf of other countries as the following excerpt shows:

"A total appropriation of $7,000,000,000 has been made,
$3,000,000,000 by the Act of April 24, 1917, and $4,000,000,000
by the Act of September 24, 1917. Under these authorizations
credits have been established in favor of the governments of
Great Britain, France, Italy, Russia, Belgium, and Serbia.
These loans, up to January 17, 1918, are given in the following
table:

Loans and Balances
Country Credits Agreed Loans Under-Established
Upon Made Credits

Great Britain $2,045,000,000 $1,985,000,000 $60,000,000 France 1,285,000,000 1,225,000,000 60,000,000 Italy 500,000,000 450,000,000 50,000,000 Russia 325,000,000 187,729,750 137,270,250 Belgium 77,400,000 75,400,000 2,000,000 Serbia 6,000,000 4,200,000 1,800,000

Totals $4,238,400,000 $3,927,329,750 $311,070,250

"On the basis of the requests being made on the Treasury, it is
estimated that credits aggregating approximately $500,000,000
per month will be required to meet the urgent war needs of the
foreign governments receiving advances from the United States.
At this rate approximately the entire appropriation authorized
by Congress will be accredited to our Allies by the close of
the present fiscal year (June 30, 1918).

"A significant feature of the loans floated in this country in
the last three and a half years has been the fact that many
states and municipalities which formerly went to London to sell
their securities have recently been financed through the United
States. About $150,000,000 of the Canadian loans went to
provinces and municipalities, and many of the South American
obligations were contracted for municipal improvements. The
neutral nations of Europe have also sought accommodation in the
American money market. Loans have been made to the city of
Dublin, Ireland, the London Water Board, and the French cities
of Paris, Bordeaux, Lyons, and Marseilles."

DISAPPEARANCE OF GOLD CURRENCY

During the war gold almost ceased to be currency in all the Allied countries. The Central Powers at the end of the struggle had comparatively little. Of the total gold production the United States produced about twenty-five percent., while the British Empire produced nearly sixty-four. A writer in the _Edinburgh Review_ proposed to take the opportunity of creating a standard price for gold. For example, if the standard price of gold were reduced to half, the prices of all commodities would come down in sympathy. We must take advantage of the fact that we are working with a paper currency, and all authorities agree that financial stability is only secured by the backing of as much gold as possible against paper securities and emergencies.

The plan involved an increase of the standard price. The success of the scheme depends upon the concordant will of the United States and Great Britain to adopt it as the following article suggests:

"Obviously if Great Britain or any other country _alone_
attempted to alter the standard price of gold, and therefore
the value of the present sovereign (or its equivalent), the
currency would be debased, instead of being enhanced. It would
also in effect amount to a partial repudiation of national
debt. A standard ceases to be a standard if _one_ nation can
arbitrarily alter it, but surely there can be no argument
against the creation of a new standard sanctioned by the whole
civilized world for their mutual advantage. If Great Britain
and the United States were to proclaim their desire to adopt my
scheme it is hardly likely that any country other than the
Central Powers would fail to welcome it. Spain, for instance,
has increased her gold reserve to about £80,000,000 and greatly
enhanced the value of her currency thereby. Would she fail to
grasp the happy chance of making this £120,000,000, and would
any country continue to part with its gold at £4 per ounce when
it could get £6 or £8?"

WAR'S EFFECT ON SILVER

Along with all other commodities, that cinderella of finance--silver--had a share in the general rise in prices. One of the reasons is the enormous falling off of silver production in Mexico, where one-third of the total world supply is produced; another is the great demand for silver. Prior to the war, the use of silver plate by the wealthy classes had largely fallen off; but the war, because of the rise in wages, brought about a largely increased demand for silver to be used in ornaments:

"The war has brought into the market a vast number of new
buyers for ornaments, whose demand in the aggregate is
estimated to more than compensate for the falling off in the
purchases by the wealthy classes of silver plate. Wages
everywhere, not merely in England, but practically all over the
world, have advanced, and particularly in Western Europe;
moreover, immense numbers of women, and even children, are
being employed who were not employed before, and those who were
employed before have a larger income, particularly amongst the
wage earning classes, than has been the case in this country
for many years past."

The use of silver in coinage, too, was notably increased. Gold disappeared in countries where gold coins were used; paper money and silver token money took its place. Another reason for the advance in silver is connected with the demand for the metal in eastern countries. According to the _London Statist_: