The characteristics of each phase emerge clearly. The tables show, first of all, how quickly, during the period of collapse, the rate of the depreciation of the value of the money outstrips the rate of the inflation of its volume. During the collapse of the German mark beginning with December 1920, the rate of depreciation proceeded for some time roughly twice as fast as that of the inflation, and eventually by June 1923, when the volume of the note-issue had increased 200-fold compared with December 1920, the value of a paper mark had fallen 2500-fold. The figures given above for Austria begin at a rather later stage of the débâcle. But if we equate Austria in June 1920 to Germany in December 1920, the progress of events between that date and September 1922 is roughly comparable to that in Germany between December 1920 and May 1923. The figures for Russia between January 1919 and the early part of 1923 also exhibit the same general features.
These tables all commence after a considerable depreciation had already occurred and the gold-value of the aggregate note-issue had fallen considerably below the normal.[12] Nevertheless their earliest entries still belong to the period when an eventual recovery was still widely anticipated and the general public had not at all appreciated what they were in for. They indicate that as the situation develops from this point onwards and the use of money is discarded except for retail transactions, the aggregate value of the note-issue falls by about four-fifths. As the result of extreme panic or depression a further fall may occur for a time; but, unless the money is discarded altogether, a minimum is reached eventually from which the least favourable circumstance will cause a sharp recovery.
[12] The pre-war currency of Germany was estimated at about 6 milliard gold marks (£300,000,000), or nearly £5 per head.
The temporary recovery in Germany after the collapse of February 1923 exhibited how a point may come when, if the money is to continue in use at all, a bottom is reached and a technical position is created in which some recovery is possible. When the gold value of the currency has fallen to a very low figure, it is easy for the Government, if it has any external resources at all, to give sufficient support to prevent the exchange from falling further for the time being. And since by that time the public will have carried their attempts to economise the use of money to a pitch of inconvenience which it is impracticable to continue, even a moderate weakening in the degree of their distrust of the future value of the money will lead to some increase in their use of it; with the result that the aggregate value of the note issue will tend to recover. By February 1923 these conditions existed in Germany in a high degree. The German Government was able within two months, in the face of most adverse political conditions, to double the exchange-value of the mark whilst simultaneously more than doubling the note circulation. Even so the gold value of the note issue was only brought back to what it had been six months earlier; and if even a moderate degree of confidence had been restored, it might have been possible to bring the value of the note circulation of Germany up to (say) 2 milliard gold marks (£100,000,000) at least, which is probably about the lowest figure at which it can stand permanently, unless every one is to put himself to intolerable inconvenience in his efforts to hold as little money as possible. Incidentally the Government is able during the period of recovery to obtain, once more, through the issue of notes the command over a considerable amount of real resources.
In Austria, where, at the date of writing, the exchange has been stabilised for a year, the same phenomenon has been apparent with the growth of confidence, the gold value of the note issue having been raised to nearly two and a half times the low point reached in September 1922. The fact of stabilisation, with foreign aid, has, by increasing confidence, permitted this increase of the note issue without imperilling the stabilisation, and will probably permit in course of time a substantial further increase.
Even in Russia a sort of equilibrium seems to have been reached. There the last phase had appeared by the middle of 1922, when a tenfold inflation in six months[13] had brought the aggregate value of the note issue below £4,000,000, which clearly could not be adequate for the transaction of the business of Russia even in its present condition. A point had been reached when the use of paper roubles was being dispensed with altogether. At about that date I had the opportunity of discussion at Genoa with some of the Soviet financiers. They have always been more self-conscious and deliberate than others in their monetary policy. They maintained at that time that, with the help of legal compulsion to employ paper roubles for certain types of transaction, these roubles could always be maintained in circulation up to a certain minimum real value, however certain the public might be as to their ultimate worthlessness. According to this calculation, it would always be possible to raise (say) £3,000,000 to £4,000,000 per annum by this method, even though the paper rouble regularly fell in value at the rate of a tenfold or a hundredfold a year (one or more noughts being struck off the monetary unit annually for convenience of calculation). During the year following they did, in fact, decidedly better than this, and, by reducing the rate of inflation to a figure not much in excess of 100 per cent per three months, were able to raise the aggregate value of the note issue to more than double the lowest point reached. The equivalent of something like £15,000,000 seems to have been raised during the year (April 1922–April 1923) by this means towards the expenses of government, at the cost of having to strike only one nought off the monetary unit for the whole year![14] At the same time, in order to furnish a reliable store of value and a basis for foreign trade, the Soviet Government introduced in December 1922 a new currency unit (the chervonetz, or gold ducat), freely convertible on sterling-exchange standard principles, alongside the paper rouble, which was still indispensable as an instrument of taxation. So far this new bank note has kept respectable. By August 1923 its circulation had risen to nearly 16,000,000 having a value of about £16,000,000, and its exchange value had kept steady, the State Bank undertaking to convert the chervonetz on a parity with the £ sterling.[15] Thus by the middle of 1923 the aggregate value of the Russian note issues, good and bad money together, had risen to the substantial figure of £25,000,000, as compared with barely £4,000,000 at the date of the Genoa Conference in May 1922, thus indicating the return of confidence and the re-inauguration of a monetary régime. Russia provides an instructive example (at least for the moment) of a sound money for substantial transactions alongside small change for daily life, the progressive depreciation on which merely represents a quite supportable rate of turn-over tax.
[13] Recent experience everywhere seems to show that it is possible to inflate 100 per cent every three months without entirely killing the use of money in retail transactions, but that a greater rate of inflation than this can only be indulged in at the peril of total collapse.
[14] The Soviet Government have always regarded monetary inflation quite frankly as an instrument of taxation, and have themselves calculated that the purchasing power secured to the State by this means has amounted in the past to the following sums:
| 1918 | 525 | million gold roubles |
| 1919 | 380 | „ „ „ |
| 1920 | 186 | „ „ „ |
| 1921 | 143 | „ „ „ |
| 1922 (Jan. to March) | 58 | „ „ „ |
or (say) £130,000,000 altogether.