HIGH PRICES DUE TO MONETARY CAUSES
The truth is that the chief causes of the rise of prices in war time are monetary causes.
It is almost invariably true that the great price movements of history are chiefly monetary. This is shown, in the first place by the fact that countries of like monetary standards have like price movements. Thus—to consider gold-standard countries—there has usually been a remarkable family resemblance between the curves representing the rise and fall of the index numbers of the United States, Canada, England, France, Belgium, Holland, Scandinavia, Germany, Austria and Italy. Again, the price movements in silver countries show a strong likeness, as in India and China between 1873 and 1893.
On the other hand, we find a great contrast between gold and silver countries or between any countries which have different monetary standards. In the World War the data are still too meager to enable us to express all the relations in exact figures, but we may arrange the different countries in the approximate order in which their prices have risen. The order of the nations corresponds, in general, with the order in which the currency in those nations has been inflated by paper as well as with the order in which their monetary units have depreciated in the foreign exchange markets.
This order—of ascending prices and of inflated currency—is as follows, beginning with the least rise and inflation: India, Australia, New Zealand, United States, Canada, Japan, Sweden, Switzerland, Denmark, Italy, Holland, England, Norway, France, Germany, Austria and Russia.
Figure 3. - Money and the Price Level
Showing a correspondence between the quantity of money and the level of prices. Since the middle of 1915, when the quantity of money in the United States began to be greatly affected by the war, the correspondence has been close, changes in the price level seeming usually to follow changes in the quantity of money one to three months later.
The ups and downs of prices correspond with the ups and downs of the money supply. Throughout all history this has been so. For this general statement there is sufficient evidence even where we lack the index numbers by which to make accurate measurements. Whenever there have been new discoveries of gold and rapid outpourings from mines, prices have gone up with corresponding rapidity. This was observed in the 16th century, after great quantities of the precious metals had been brought to Europe from the Americas; and again in the 19th century, after the Californian and Australian gold finds of the fifties; and still again, in the same century after the South African, Alaskan and Cripple Creek mining of the nineties.
Likewise when other causes than mining, such as paper money issues, produce violent changes in the quantity or quality of money, violent changes in the price level usually follow.