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niSCOVHRY 



in credit circulation made by bankers), when things come 

 to be readjusted it will be found that there was, in fact, 

 no great increased demand for goods, and that they 

 cannot be sold. The adjustment used to come when the 

 bankers began to realise that they were lending too 

 ^reat a proportion of the customers' balances in their 

 hands. There was then a movement (initiated in prac- 

 tice by the Bank of England) to cut down the loans — 

 by increasing the rate of interest payable on them. 

 By definitely discouraging production and making it 

 more expensive to trade on borrowed capital, a general 

 •endeavour to liquidate stocks and restrict business 

 would be encouraged. The effort to liquidate stocks 

 would tend to cause a fall in prices, and producers 

 would hold their hands. While prices are falhng the 

 holding of stocks involves a loss, and in such times 

 only the efficient can make profits and continue to 

 trade and avoid bankruptcy. 



When stocks have been consumed and demand 

 again makes itself felt, business optimism will gradually 

 •develop and prices again tend to rise and the " cycle of 

 trade " will commence and go through the same 

 phases as before. Owing to the fact that it is possible, 

 by aliering monetary conditions, to cause prices to rise, 

 and to make producers think that an increased demand 

 for their product is showing itself, they are misled and 

 at first increase their output and then later have to 

 restrict it. Such continual alteration causes much 

 unnecessary strain to the financial organisation — which 

 sometimes gives way in a crisis. It also causes irregu- 

 larity of employment. Workers are able to do well in the 

 prosperous years, but suffer unemployment at times of 

 ■depression . They are now demanding that some remedy 

 shall be found for this unsatisfactory state of affairs. 



The effects of rising and falling prices upon the indi- 

 vidual are now familiar to all. Unless wages are in- 

 creased at the same time and to the same extent as the 

 purchasing power of money falls, the workers suffer. 

 As there is always a considerable " lag " in this respect, 

 much discontent is caused among workers. Those who 

 engage in long contracts expressed in money are also 

 at the mercy of any alterations in its purchasing power. 

 If a man takes up a policy of assurance payable at the 

 age when he estimates that he will be unable to work 

 and for such an amount as will keep him, if prices 

 remain at approximately the same level, then, if the 

 purchasing power of money falls seriously — as it did 

 between I9i4and 1920— he may find that, although he 

 fulfilled his part of the contract and paid his pren^iums 

 in money of a high purchasing power — yet, when the 

 policy is paid, the amount is insufficient to keep him. 

 The other side of the problem is seen when we con- 

 sider that, if the purchasing power of money could be 

 increased to its pre-war level, the present national debt 

 would become a burden impossible to bear. 



In the period before the war, as the banking system 

 always operated to keep a fairly constant relation be- 

 tween the amount of credit created and the available 

 gold, the general price level was harnessed (but not 

 quite rigidly) to the value of gold. The knowledge of 

 this fact enables us to explain many of the changes in 

 the level of prices during the last century to which we 

 have referred above. At times when fresh supplies of 

 gold became available, the value of gold often fell (as 

 would be expected) and prices rose as a result. \\'hen 

 a new demand for gold for currency purposes was made 

 — as when silver was demonetised by a number of 

 countries — the value of gold rose and prices in gold- 

 using countries fell. 



During the war unprecedented alterations in the 

 purchasing power of money have occurred, and all the 

 evils of a variable standard of value have appeared to 

 a degree which makes them unmistakable. The rise of 

 prices has been accompanied by a great increase in the 

 volume of the currency. The amount of gold in this 

 country did not increase, but the ratio maintained 

 before the war between the gold and the credit portion 

 of the currency was very greatly decreased. The 

 increased volume of the currency showed itself partly 

 in the amount of paper money (currency notes) and 

 partly in the increase in the amount of the loans by 

 banks (especially the Bank of England). The effects of 

 these changes have been very serious in both their 

 social and their economic effects. 



The real trouble lies in the fact that when gold was 

 adopted as currency it was chosen on account of its 

 suitability as a medium of exchange, as was mentioned 

 at the beginning of this article. It has since, however, 

 been required to act also as a standard of value. The 

 rapidly increasing complications of the productive 

 machine and the making of contracts, expressed in 

 money, and covering a period of time, have rendered 

 gold unsuitable to fulfil its function as a standard 

 of value. The evils of the variations in prices conse- 

 quent upon its continued use have been indicated above. 



Professor Irving Fisher points out that we have now 

 defined with the greatest possible minuteness our 

 standards of weight and length and other similar units, 

 but we have left the monetary standard in a most 

 unsatisfactory state of " primitive crudity." The 

 currency unit always represents the same quantitj' of 

 gold, but it represents a varj'ing quantity of every other 

 commodity. As a measure of purchasing power it 

 reflects all the changes affecting gold, but no other 

 commodity. It is suggested that this should be 

 remedied and that the unit of purchasing power should 

 also be defined, and defined in relation, as far as it is 

 easilj' possible, to all commodities that are purchased. 



The scheme proposed by Professor Irving Eisher 

 depends upon the index number to which we have 



