contracting the circulation. The annual average index num bers in all the leading countries were nearly the same in 1914 as in 1913.
In the warring countries, however, wholesale prices began at once in August to rise rapidly, attaining in the last quarter of 1914 the figure of 107 in France and 108 in Great Britain. Retail price changes in every country lagged behind the whole sale, not infrequently being retarded a year or more. This rise of prices continued, with hardly an interruption, in all countries, reaching the maximum about the middle of 1920.
In the United States prices fell quickly to 98 in the last quarter of 1914, as gold was clamorously (and foolishly) de manded by European bankers, and a brief financial panic occurred. But the average of prices continued in the United States almost stationary until the last quarter of 1915 (that is, about one year after the war began in Europe), when they began to rise sharply, for reasons that will be indicated in the next section. The changes are shown graphically in Figures 3 and 4, Chapter 6.
§ 3. Causes of European inflation. Changes in index numbers reflect changes in the relation of the quantity of goods to be exchanged, expressed in their prices, and the quantity of money used in exchanging them. Therefore the explanation of any particular rise in the price level may be found in the factor of goods, (a) in a reduction of their amount or (b) a lessened need to exchange them by means of money ; or may be found in the factor of money, (x) in an increase in the amount of money or (y) in an increased use of substitutes for money, such as banking credit. At the outbreak of the war the popular explanation of rising prices is the lack of goods—that is, (a). Attention is drawn dramatically to the number of men taken out of industry to go into war service, at the front or behind the lines. But these comprise only a small percentage of the total population; their places are in large part taken by women and by older men, inspired by patriotic motives, and the exercise of war-time economies largely reduces the demand for many kinds of goods.
Factor (b) doubtless has some validity: withdrawing men from ordinary industry, where they receive wages in money and spend it in retail purchases, and putting them into the army, where their food, clothing, and other wants, are sup plied by the government, reduces the monetary demand of the community. At the same time, the use by the govern ment, factor (y), of the facilities of the banks in its war purchases reduces the field within which money is required in war-time as compared with ordinary peace-time business.
. Much the larger part of the explanation sought is to be found in (x). Immediately on the outbreak of war all the warring countries began to issue paper money, usually through the agency of their central state banks. They con tinued to issue it in larger and larger amounts not only until the armistice in November, 1918, but, under the pressure of financial need, after the armistice. Even England and France, whose prices were already up to 235 and 330, respec tively, at the armistice (on the basis of 1913 prices), each increased their note issues about 130 per cent. between the armistice and the middle of 1920. The effect is seen in the mounting price curves. Though it is impossible to estimate exactly the amount of paper money issued, because of differ ent agencies, governmental and banking, through which it was done, the rise in prices probably fell short of the paper money inflation ; but it must be considered that this was in part offset by the complete withdrawal of gold and silver from circulation.
§ 4. Gold stocks of belligerents. The depreciation of the paper currency was not due to the absence of gold in these countries. They all alike made strenuous efforts to impound in their central treasuries all the gold that was in the countries. A strong patriotic appeal was made to all citizens. Some gold that had been in circulation was exchanged for paper issued by the banks; in many eases old coins that had been hoarded for generations (as is not uncommon in Europe), and therefore having no more effect on prices than so much gold in the earth, were brought out of hiding and into the banks. Family plate, ornaments, and jewelry were brought to the mints, were melted and assayed, the owners not only being paid in bank-notes, but receiving certificates of patriotic service, and often, besides, some valued privilege, such as that of driving a nail into the Hindenburg wooden statue in Berlin. This process of getting gold has been called "min ing it out of the pockets of the people." The total gold held by all European banks and state treas uries between 1914 and 1919 increased every year (excepting in 1916). Most of this increase took place in the neutral countries, notably Spain, Holland, and the Scandinavian countries, to which it was shipped to pay for war supplies. But France and Italy nearly held their own, and England and Germany each largely increased their gold stocks. Russia and Austria, however, lost a large part of their gold stocks, Russia by export to buy goods under the Bolshevik regime, and Austria by forced deposit with Germany as a con dition of financial assistance.