EFFECTS OF THE WAR ON CREDIT, CURRENCY, AND FINANCF, 259 
In our first Report, which was drafted during the summer of 1915, and 
presented to the Association at its Manchester meeting in September, we quoted 
a sentence from the memorandum of our late colleague, Sir R. H. Inglis 
Palgrave, as expressing the views which are taken by. most economists. Sir 
Robert wrote: ‘The effect of an increase in the paper currency on prices, if 
sufficiently large, is invariably to raise prices, in the same way as any other 
increase of the circulating medium when this is not called for by an increase 
in the business done.’ In our interim report last year, which was not printed, 
we said: ‘As the War went on there was a fairly constant increase of the note 
issue, while the gold reserve, after an early period, remained stationary at 
28,500,0007. If the money which the Government obtained by its war loans 
had been subscribed entirely out of real savings the loan policy would have 
had no effect on prices; but from an early period the banks were encouraged 
to take up war loans and to make advances to their customers for the same 
purpose, thereby causing an inflation of credit. This inflation of credit was 
made possible by the increase of the currency, and was itself a cause tending 
to currency expansion.’ 
Mr. Gibson holds that 60-70 per cent. of the rise in prices up to December 31, 
1919, was due to monetary influences (increase in legal tender, bank deposits, 
 &c.). Some allowance, too, must be made for increased velocity of circulation. 
He reckons that up to December 31, 1919, 80 per cent. of the rise due to 
monetary influences was caused by expansion of bank credit and 20 per cent. 
to the fiduciary part of the currency note issue (these being the relative pro- 
portions between the increases of bank credit and the fiduciary part of the 
currency note issue). 
QUESTION 2.—/s the expansion of credit the cause or the effect of the expan- 
sion of the currency? 
The answer to our second question may almost be inferred from the answer 
to the first. As Mr. Robertson and Mr. Lavington put it, the expansion of 
credit was, in the main, the cause or the antecedent of the expansion of the 
currency. But, as they say, ‘a readiness to expand the currency was a necessary 
condition. of the expansion of credit, if the banking system was not to be 
allowed to go to smash.’ Sir Edward Brabrook thinks that ‘it is both a cause 
and an effect.’ 
Mr. Ellinger thinks that the expansion of currency came first; ‘had it not 
come the expansion of credit could hardly have followed’; moreover, the 
subsequent expansion of credit would not have taken place ‘unless manufac- 
turers of credit had known that further expansion of currency would automati- 
cally follow.’ 
Mr. Hirst and Mr. Pethick Lawrence hold that the two things are inter- 
connected. Commander Hilton Young holds that the expansion of currency is 
a consequence of the expansion of credit; Mr. D. M. Mason and Mr. Alfred 
Hoare say it is the cause. 
Prof. Cannan declares that ‘There has been no expansion of credit when 
you measure credit in an undepreciated standard.’ 
Dr. Hugh Dalton argues that the increase of credit could not have taken 
place without the increase of currency ‘in this, the most fundamental, sense, 
- inerease of credit is an effect and not a cause of increase of currency, for if,’ 
he says, ‘the British Government, determining to deflate the currency, were 
to withdraw a number of currency notes from circulation and destroy them, 
it is evident that bank loans would have to be reduced in roughly the same 
proportion.’ 
Dr. Dalton goes on to say: ‘ This reduction would be brought about by a 
rise in the bank rate and market rate.’ 
Mr. Sykes objects to this statement and contends that ‘banks might refuse 
to lend without increasing rates.’ Dr. Dalton had gone on to argue that ‘if the 
Government is unwilling to see the volume of credit restricted by high rates of 
interest, it is possible to maintain this volume above what it would otherwise 
‘be, and the banks’ rate of interest below what it would otherwise be, by an 
increase in the volume of the currency. ‘his is the policy which the British 
and other Governments have, in fact, pursued during recent years. In this sense 
the increase of currency has been the effect, not of an increase of credit, but of 
