her ships are idle. The imports of Russian flax, hemp, and raw materials, and exports to Russia of her manufactured goods, stopped. The foreign markets for her subsidized beet-sugar were largely closed, except through Sweden, Denmark, Holland, and Switzerland; and the same was true of her dyestuffs,1 drugs, chemicals, potash, and coal. The production of copper at home was about 50,000 tons against a normal consumption of 250,000 tons, the difference coming chiefly from the United States. To a great extent she was cut off from copper, nickel, petrol, wool, cotton, rubber, and jute. The silk, steel, woollen, and jute industries inevitably fell off in production. In that way the basis of much credit was removed. The general stock of other than war goods being lessened, there was less to be consumed. As the labor, capital, and materials were shortened, so must the volume of goods have declined. On the other hand, there were large profits in war industries, such as those turning out machinery, foundry work, leather, fats and oils, clothing, textiles, and foodstuffs. But not only was there in general a material subtraction of basic goods on which credit rested, but the inability to meet their engagements has inevitably injured the estimate of German credit in the markets of the world. § 9. A phenomenon common to both belligerent and neutral countries during this war has been a rise of prices. At once the causal connection between money and credit, on the one hand, and the level of prices, on the other, is suggested. Certainly the documents of each country will 1 The color-plants and the potash-mines were turning out not over 20 per cent of their normal product late in 1914, largely because of a shortage of labor and coal. The Newcastle coal had been, of course, cut off, and the Westphalian coal was less desirable. Official data as to prices absent. furnish much material taken from the years of war to test the theories of price. However that may be, it is entirely clear that for Germany at least we have no very useful data as yet for a final discussion on this pivotal problem of credit and prices. There is not much more than hearsay evidence. We know, of course, that German prices have risen; unofficially, prices in general are said to have risen 75 or 100 per cent in the early part of 1916. In the autumn of 1914, according to the German press,1 copper had risen 76 per cent; aluminum, 212; antimony, 366; nickel, 85. Potatoes, wheat, meat, fats, and all foodstuffs have admittedly risen to high levels. The same is true of horses bought in Scandinavia and Denmark at double former prices. Unimpeachable evidence comes in of a merciless increase in the cost of living, which has laid a heavy burden on the poorer classes, causing suffering, a demand for higher wages, and serious discontent and occasional rioting.2 Cotton, rubber, wool, and jute, together with petrol, nitrates, and materials for war goods, have, of course, risen markedly. Nevertheless, Germany offers no field for a normal study of prices, and for an obvious reason. The very first upward movements of prices were the signals for a drastic regulation of maximum prices by a paternalistic and autocratic government. There was, and still is, an elabo1 Frankfurter Zeitung, November 12, 1914. 1 2 "Investigations conducted by Vorwärts in September, 1915, showed that the price of food had increased 85 per cent in Berlin since the beginning of the war. The prices of 52 common articles of food were taken from the pricelists of the large co-operative stores and the aggregate cost of one pound of each article was found to have been 35 marks in August, 1914, but to have increased to 65 marks in August, 1915. The official index number for food prices in Berlin also shows an increase of 82 per cent between July, 1914, and December, 1915." M. Chase Going, loc. cit., p. 545. Also, the ration provided for a German marine per week, which had been 25 m., 12 pfg., in July, 1914, was 39 m., 13 pfg., in August, 1915, showing an increase of 56 per cent. Government regulation of prices vitiates usual rate system for controlling the prices of all necessary articles of food. The extent to which this interference with price-fixing has gone on has probably never before been equalled. Moreover, as time has passed, ordinary property rights have disappeared before the necessities of war, until military exigencies have come to create a conception of inferences. a national communism in which the state may requisition whatever it needs, even if all the economic surplus should be taken. Additional taxation being little used, goods are obtained, if not by loans, bordering on forced subscriptions from municipalities and others, then by commandeering. Prices, under such conditions, have little meaning to the economist. Inflation not a sufficient cause. And yet the man-who-knows-everything-absolutely is willing to say that the admitted rise of prices is due to inflation. It is not the place to discuss here the theory that prices must rise with an inflation of the currency; or, if prices have risen-assuming the rightness of the theory-that there must have been an inflation of the currency. There is only space to say here that no substantial body of facts has ever been collected which prove this theory; while so many other factors, which affect prices even more than the quantity of money possibly could, are entirely overlooked.1 The facts as to the increase of money and credit in Germany have already been given and discussed.2 The additional paper circulation put out-as a symbol of expanded credit—since the war began has been about $2,800,000,000 (bank-notes, loan-bureau notes, and imperial treasury notes). Not more than about $300,000,000 of the stock of gold known to be in the 1 Cf. the author's Principles of Money (1903). Cf. supra, pp. 66–68, 116-118, 2 1 Cf. supra, § 5. 182. country before the war is supposed to be still hoarded. Certainly, some $2,500,000,000 may be regarded as a fair approximation to the addition made to the money of Germany since July, 1914. The inflation of German money and credit is unmistakable; but it is not necessary to assume it as the cause of the admitted rise of prices. That the paper mark has depreciated wherever a direct comparison is Depreciation of notes one cause. made between it and gold in neutral markets, such as Amsterdam and Copenhagen, there is no doubt whatever. The suspension of gold redemption and the unrestricted increase in the circulation are sufficient reasons for the depreciation, as already presented.1 If there is a depreciation of the money, of course, prices registered in it will rise accordingly. Were everything else, for example, to remain the same, and a country were suddenly by law to drop from a gold to a silver standard at one-half the market value of gold, prices would inevitably be doubled. In short, whatever the cause of the depreciation of the common money of account, the paper mark, the general level of prices must be affected by it, were no other causes at work. But there were other causes at work on prices. It is one-sided to discuss changes of price by considering only the money or credit by which goods are exchanged. Other more important causes of high prices. Obviously, the expenses of producing goods affect their prices. Higher wages have been always regarded as a reason for raising prices; and the same is true of a serious increase in the costs of materials, and a rise in freight transportation for materials as well as for finished goods. All these causes were actively at work in Germany. Moreover, many necessary materials, like wool, cotton, and 1 See §§ 6, 7. copper, had a scarcity value. The high prices of German textiles are fully accounted for by the scarcity prices of raw cotton and wool and the increased price of labor. In addition, a sudden and imperative war demand for petrol, cloth, nitrate, steel, and similar products needed for munitions must have had an inevitable effect on their prices. Therefore, while it is unnecessary to claim that the ease with which credit was obtained in Germany had no influence on the prices of goods which the borrower wished to purchase, it is evident that it was only one, and not the most important one, of the factors working together to raise prices. If price is a ratio of exchange between goods and some standard money, then it is as important to consider the forces working on the goods side of the ratio (such as wages and materials) as it is those on the money side (such as the quantity in circulation, its redemption, etc.). § 10. Between countries bills of exchange perform the same essential service as that of checks between persons in domestic trade. On the shipment of goods the bill is drawn as a claim on the buyer in the land to which the goods are moving, and when accepted it becomes the best of short-term commercial paper discounted by international banks. Like other forms of legitimate credit, it springs from and is based on the movement of goods or securities. When international trade ceases, as is largely the case with Germany, the basis of this credit disappears. The foreign exchange problem of Germany, therefore, was not only made very important, but it is interesting by its contrast to that of England.1 The rise in the number of marks which had to be paid in Germany for claims on money in other countries, or, 1 |