The volume of money in circulation and that of bank deposit curren cy, as well as the velocity of both of these, can be statistically determined with a fair degree of Professor Irving Fisher publishes annually the data for his "equation of ex change." Professor Kemmerer recently published' the following indexes bearing upon war inflation: Undoubtedly the velocity of the circulation of money and that of deposits also increased during this period. Combining the factors of purchasing power, it is very evident that they in creased faster than trade and explain the decided inflation of prices.
Inequalities of Inflation Increases of money and bank credit, if used, tend to price inflation, but they do not inflate all prices equally because there is not an equal demand for all kinds of things or services. The infla tion comes not simply from an increase in the quantity of pur chasing power, but from the increasing competitive efforts to exchange the money or credit for things and services; if no at tempt were made to use the enlarged purchasing facilities there would be no effect upon prices.
An abnormal demand for munitions, for instance, and the use of almost unlimited supplies of money and credit in competitive bidding during the years 1914-1919, caused a great increase in their price. But the price of real estate did not rise because little, if any, of the new credit was used for purchasing real estate. The high profit in the manufacture of munitions tended to cause the transfer of capital from the development of real estate to the manufacture of munitions. This drift of capital was accompanied by a drift of laborers eager to earn the higher wages paid in munition factories. Employers in other lines of business then found that they had to give their employees higher wages to hold them; they had to bid for capital in like manner. The demand for many products was increased by the higher purchasing power of the munition workers and manufacturers. In consequence there followed an equalization of wages and prices in the various lines; that is, the inflation became quite general.
It has been previously stated that in 1914-1918 real estate prices did not rise with the inflation because capital funds were devoted largely to other uses. Nor did wages and salaries respond with such uniform rapidity as the price level of goods. This un responsiveness was due to the same fact, viz., that, relatively
speaking, less was spent upon these items than upon goods. The wage-earner lacks the ability to foresee the depreciation in the purchasing power of his earnings as the prices of his budget rise; and even when he does foresee it, his timidity often prevents him from wresting a just advance from his employer. The simulta neous advances of wages and prices is prevented by lack of fore sight, or by custom, or contract, or union wage bargain. Salaries respond still more slowly. In times of rising prices the employer of labor is therefore at an advantage and the employee finds his real earning power declining poi passu with the rise.
Interest Rate and Inflation Nor does the interest rate rise in proportion to the inflation. The loaning class is less shrewd and apt in sensing conditions and is usually content for a time to loan at, say, 3 per cent to bor rowers who would be willing, if necessary, to pay 5 per cent. The enterprisers enjoy, therefore, the further advantage of borrowing money at the former low rates. This encourages borrowing, and thereby the creation of more deposits; and these in turn swell prices still higher and make borrowing still more advantageous.
Periods of rising prices are therefore boom times for the manu facturer; he buys material at today's prices, and by the time they are manufactured he finds their prices have risen with the general price level. He hires labor at former or slightly advanced rates and he borrows capital at former or lethargically rising rates. The market for his product is steady and waiting, at good prices, and profits are high.
Meantime the wage-earner is victimized by a progressive de preciation of his earning power. The salaried man suffers like wise, as does anyone whose money income is a fixed sum. The bondholder, for example, finds that his interest will buy less and less and that the purchasing power of his principal when repaid has decreased. The real value of fixed rentals likewise declines. The thrifty saver finds his life's accumulations shrinking in worth to him. The income from endowments of educational and charit able institutions decrease in purchasing power, making it impos sible to continue the former scale of operations. On the other hand, the debtor class are enabled to extricate themselves from debt by the repayment of a sum much less in its purchasing power than the sum borrowed.