DISCOVERY 



289 



is more or less limited. If currency or credit instru- 

 ments are multiplied beyond requirements, then gold 

 from the currency will be exported, hoarded, or utilised 

 for industrial purposes, and the total amount of 

 currency and credit instruments available for making 

 payments will thus be automatically reduced. Once 

 all the gold has been drained out of the currency, or 

 once the real convertibility of the paper money has 

 been abolished, then the automatic check on the con- 

 tinued existence of excessive supplies of cm-rency 

 and credit instruments disappears, as paper money 

 which is not immediately convertible into gold is not 

 readily acceptable abroad in large quantities, except 

 possibly for speculative purposes. Additions to the 

 currency tend to remain in the country of issue, 

 together with the credit instruments which can be 

 based on the additional issues. The supply of currency 

 and credit instruments available for financing busi- 

 ness becomes much larger than would have been 

 the case had the currency still been based on a 

 genuine gold standard. As a consequence, the ex- 

 changing power of each unit of currency tends to fall, 

 or, in other words, the price of commodities tends to 

 rise. 



An increase in the general level of prices leads to 

 a demand for more currency to enable trade to be 

 financed at the new price levels. If additional 

 currency is issued, it tends to cause prices to rise still 

 further, thus leading to renewed demands for more 

 currency. Unless a very determined effort is made to 

 break the vicious circle, the rise in prices and the 

 increase in the amount of currency tend to grow at 

 ever accelerating rates. 



Under normal conditions, when the general level of 

 prices in a particular country rises, whilst prices in 

 the rest of the world remain more or less constant, 

 imports into the countrj' with rising prices tend to 

 increase, and producers in that country find it more 

 difficult to sell goods both at home and abroad. 

 When, however, prices in a particular country rise on 

 account of currency inflation, the consequences are 

 quite different ; sales of that country's produce both 

 abroad and at home are greatly encouraged, and imports 

 are discouraged. Foreigners are keen to buy, because 

 they find that they can thus secure goods more 

 cheaply than at home. This is due to the fact that 

 when a country adopts a policy of inflation, the prices 

 of commodities tend to rise more slowly than the 

 prices of foreign currencies. E.g., in Germany £i may 

 rise in price 300 times from 20 marks to 6,000 marks, 

 whilst the price of a particular commodity rises only 

 150 times from 20 marks to 3,000 marks. In England 

 the price of the commodity remains imchanged at 

 20S. Then an Englishman with £3 to spend can either 

 buy three articles at 20s. at home, or can exchange 



his £3 for 18,000 marks and with that can buy six 

 articles at 3,000 marks. Inflation, although it leads to 

 a rise in prices in terms of home currency, makes goods 

 cheaper in terms of foreign currencies, and thus 

 encourages exports. 



Inflation also encourages sales at home, but for a 

 different reason. Residents in a country with a rapidly 

 depreciating currency are anxious to buy commodities 

 of all sorts — so far as their means will permit — in order 

 either to spend the money on present enjoyments 

 whilst it still has the same purchasing power, or to 

 secure durable commodities which do not immediately 

 deteriorate in value if they are kept for a time. To keep 

 one's surplus resources lying on deposit at a bank in 

 countries like present-day Germany or Austria is 

 analogous to keeping beer in a barrel that leaks : the 

 deposit, so far as its purchasing power is concerned, 

 steadily diminishes. Owing to rapid depreciation, 

 home currency ceases to be a satisfactory store of value . 

 and there is consequently a very strong inducement to 

 spend it promptly, which is likely to stimulate home 

 trade for the time being. It does not necessarily 

 follow, however, that the bulk of the currency spent 

 is devoted to the purchase of goods ; stock exchange 

 securities may prove the attraction, especially ordinary 

 shares in industrial undertakings. Indirectly these 

 purchases help industry by facilitating the raising of 

 additional capital. On the other hand, the holders 

 of depreciating currency, instead of buying goods or 

 securities, may buy foreign currencies, which does not 

 benefit industry. This tends to occur more frequently 

 in the later, than in the earlier, stages of inflation, 

 and will be referred to again below. 



During the early stages of inflation producers find 

 ready markets for their goods both at home and abroad, 

 trade flourishes and unemployment falls to a low- 

 point. There is, however, another side to the picture 

 which is a good deal less pleasant ; the trade prosperity 

 is artificial and is secured only at a heavy price. It 

 is this price which we must now examine. 



The constantly rising prices associated with inflation 

 affect various sections of the community differently, 

 according to the source from which the income is 

 derived. 



(i) In the worst position is the rentier, more 

 particularly the person who derives his income from 

 fixed-interest bearing securities ; the purchasing 

 power of his fixed income is constanth' diminishing. 

 Thus many people in Germany and Austria who 

 possessed a modest competence before the war are 

 now virtually paupers. Very similar in practice is 

 the position of a person who derives his income from 

 the rent of land and buildings, though in theory he 

 should be much better off, as rents should tend to 

 increase with the rise in the general level of prices. 



