(Figures in millions of gross tons)
Tonnage, 1914War lossesTonnage, 1920
United Kingdom21.0 7.820.6
United States[2] 5.4 0.416.0
France 2.3 0.9 3.2
Japan 1.7 0.1 3.0
Italy 1.7 0.8 2.2
Norway 2.5 1.2 2.2
Total of these items34.611.247.2
Total for world49.113.057.3

720. Influence of the war on the issue of paper money.—War is itself abnormal. Naturally, the World War gave a peculiar cast to the commerce of the period and left behind it commercial conditions very different from those that had prevailed in the earlier period of peace. These results of the war involve reference to questions of currency and foreign exchange which can be treated only superficially in a book on the history of commerce, but which were of such practical importance that they cannot be omitted altogether.

The governments involved in the war had, of course, to strain every resource to get the funds for their necessary expenditures. An expedient which they all adopted was the issue of paper money. Let us consider, to illustrate the matter, the case of a country which had been doing business with a gold currency of say 100, using that figure to express the number of million francs, marks, dollars or other unit. If the government now printed 10 of paper money and used these to meet its extraordinary expenses, there would be a total of 110 in circulation. Price would rise roughly to correspond; that is, the unit would buy less than before. The gold unit would, however, be worth roughly as much in other countries as it was before, and would be sent abroad to make purchases, instead of being used at home where its purchasing power was diluted, as it were, by the issue of the paper units. After a period of readjustment 10 of gold would have gone out; the currency would have returned to its former level. The government has made a net gain of 10, for the paper money cost practically nothing to print. Has anybody lost? No; not if the paper money circulates readily at home, and does the work which an equal amount of gold money had formerly done. The country has simply “realized” part of its gold stock, using a cheap substitute for money purposes, and selling the dear gold to other people who were glad to exchange products for it.

721. Effect upon the flow of gold.—From the very beginning of the war the governments of the European states practised this expedient, paying out paper money and getting in return for it the goods and services which they needed for military operations. Gold went out of circulation and was replaced by paper. The government did not choose, however, to let private individuals profit by the exchange of this gold with people abroad. By an appeal to patriotism and by the threat of penalties each government sought to bring into its own treasury[3] the gold which had been in the pockets and in the cash-boxes of its people. It opened the way for the circulation of its paper as well by locking up gold in its vaults as by sending it abroad. It cherished the gold as a precious asset: a sign of solvency and a ready resource in time of need. The gold reserves of some of the belligerents increased considerably in the course of the war.

Gold Reserves of European Belligerents
(Figures in millions of dollars)
19131918
United Kingdom170528
France679664
Italy288244
Germany279539
Austria-Hungary251 53

These gold reserves, as the name implies, were not in active circulation. Gold passed entirely out of circulation. It flowed into the treasury, and part of it was retained there. The larger part flowed through the treasury, and was employed by the government in purchase of war material abroad. Some part of this outflow from the belligerent states remained in Europe; Spain and the Netherlands showed in the course of the war a notable increase in their gold holdings. By far the greater part of the gold left Europe altogether, most of it going to the United States, very considerable amounts going to the Far East and to South America.

722. Over-issue of paper money; worldwide inflation.—Let us return now to a consideration of the case which was assumed to illustrate the working of paper money. If we suppose the government issues 10 units, 20 units, and so on up to 100 units we may assume in each case that a corresponding amount of gold is driven out of circulation, to be impounded in the treasury or sent abroad; in either event the number of units in circulation and the price level remain the same as before. Suppose the issue of an additional 100. The paper money has no value abroad. The government will not keep it in the treasury. The government would not have issued it except as a means of purchasing services or supplies, and must reissue it when it comes back to the treasury in the payment of taxes, else it would renounce all its advantages in the collection of the tax. There would be left then double the number of units in circulation; prices would double; the unit would buy only half as much as before. Depreciation would follow inflation. The government would gain still by the issue of paper money, but it would have to issue twice as many units as before to get a given purchasing power; the dose would need to be constantly increased to produce a given effect. Furthermore, the government from now on would get its gain only at the expense of its people. Its gain would be offset all along the line by the losses of individuals who would receive for their services and products perhaps a greater number of monetary units but certainly a smaller actual purchasing power.

Not even the neutral countries could escape the effects of the issue of paper money by the belligerents. Even when they remained on a gold basis they had now so many more units, driven out from the belligerent countries, that the gold unit itself depreciated. The dilution of currency spread over the world and resulted in a world-wide inflation.

723. Statistics of currency inflation and of prices.—I have described conditions, in preceding sections, in an artificially simple form, and have neglected many elements that would have to be included if there were space for a more precise and complete treatment. The general tendencies and results were in rough accordance with the description given, as may be seen from the figures of the table below. In both columns the year 1913 is taken as the basis of comparison; the increase of currency of all kinds, and of wholesale prices, may be measured by comparing the figures given for 1919 with par, 100, in 1913.

Units of
currency		Average of
wholesale prices
United Kingdom244257
France365330
United States173206