164

WAR  BORROWING

in  the  mass  of  commodities  or  in  the  frequency  of
transfers  or  any  reduction  in  the  velocity  of  circulation, ­
  an  increase  in  the  volume  of  money  or  checkable ­
  deposits  over  a  theretofore  normal  supply  will
be  followed  by  a  rise  in  general  prices. 7
This  increase  in  the  circulating  medium  has  been
called  inflation,  and  the  inquiry  has  been  phrased  as
“  Do  government  loans  cause  inflation?  ”  If,  however, ­
  the  term  inflation  be  given  —  wisely  or  unwisely ­
  —  an  altered  signification,  the  result  is  not  to
change  the  quest  but  merely  its  title.  Instead  of
seeking  to  determine  whether  war  borrowing  causes
inflation,  we  should  undertake  to  ascertain  whether
such  operations  bring  about  a  rise  in  general  prices
—  it  being  understood  that  this  increase  is  the  consequence, ­
  other  things  being  equal,  of  an  increase  in
the  volume  of  money  and  credit.
The  monthly  index  numbers  of  wholesale  commodity ­
  prices  and  of  retail  food  prices  in  the  United
States  in  the  calendar  years  1915,  1916,  1917  and
1918  as  compiled  by  the  U.  S.  Bureau  of  Labor  have
been  as  follows:
7  Thus  the  Federal  Reserve  Board  has  lately  defined  inflation ­
  as  “  the  increase  of  current  purchasing  power,  whether
in  the  form  of  actual  currency  or  in  the  form  of  credit  —  faster
than  the  volume  of  available  goods  ”  (Federal  Reserve  Bulletin, ­
  November,  1918,  p.  1048).  With  this  compare  Professor
Kemmerer’s  succinct  statement:  “  Inflation  means  a  redundancy ­
  of  money  or  circulating  credit  or  both  that  results  in
rising  prices.  It  occurs  when,  at  a  given  price  level,  a  country’s ­
  circulating  media  —  money  and  credit  instruments  of  exchange— ­
  increase  relatively  to  trade  needs.”  (“Inflation  and
the  Government  Fisc,”  prepared  for  Committee  on  War  Finance ­
  of  American  Economic  Association;  see  also  “  Inflation ­
  ”  in  American  Economic  Review,  June,  1918.)