lation and of prices, that the influence of the currency was of little importance compared with demand and supply. Tooke's general argument was weakened by the fact that he laid the chief stress on commodities which were largely affected by the course of the seasons. The modern view from Jevons onwards is that the general rise in prices was in part due to the issues of the inconvertible notes. A reference to the figures shows (Hawtrey, p. 269) that there is no exact connexion between the specific depreciation of the paper and its general depreciation as measured by general prices. Two questions arose in this period on which there was a prolonged controversy which has been revived mutatis mutandis by the World War. It was maintained by some that there was no specific depreciation of notes but only an appreciation of gold owing to the exceptional demands for it in connexion with the war. Now, it is argued, there is depreciation of gold. The other allied question was whether the specific depreciation of the notes was the exact measure of the fall in their purchasing power (or general depre- ciation). Another point of interest in this period was the influ- ence of economic opinion on economic action. The celebrated Report of the Bullion Committee in England (1810)' put the case for the resumption of specie payments and a return to con- vertibility in the strongest way. The principles of the report were due to the influence of Ricardo, although he was not a member of the committee. Later economists have in general approved of the report, both as explaining the facts and as sug- gesting the only adequate remedy. But the resolutions founded on the report were not only rejected by the House of Commons at the time (1811), but in opposition to them resolutions were carried by Vansittart which it is now agreed were " abundantly foolish." The answers given by the governor and directors of the Bank of England before the committee were described by Bagehot as " almost classical by the nonsense." By some recent economists, however, the policy of the report has been condemned, notably by Prof. Foxwell, in the introduction to the History of the Bank of England by Prof. Andreades. It is also now generally admitted that the questions involved in the report are more complex than the framers of the report consid- ered. It is noteworthy that the principles of the report were eventually adopted and became the foundation of the Bank Act of 1844. It is remarkable that Lord Cunliffe's Committee on Currency and Foreign Exchanges, in their " first interim " report (1918), strongly approved of the practical return to the principles of 1844.
The third great historical example of inflation of inconverti- ble paper is furnished by the American Civil War. The period (1862-79) used to be called by American economists " the infla- tionist period." In about a year, owing to the stress of the war, 450,000,000 dollars of "greenbacks" were issued, and in the next two years other 200,000,000 dollars of interest-bearing, legal-tender notes were added. In the last year of the Civil War the paper had suffered a specific depreciation as compared with gold of 50%, and there had also been a great rise in prices, partly at least due to the inflation of the currency. In this case the inflation was primarily an inflation of currency and not of credit. At the close of the war steps were taken to reduce the paper money, and the interest-bearing notes were cancelled. The reduction of the greenbacks, however, was made gradual a monthly maximum of withdrawals being enforced in 1866. From this time onwards to the final restoration of specie pay- ments in. 1879 there was a contest between the inflationists and the supporters of " hard " money. The main argument of the inflationists rested on the hardships that follow on a contraction of the currency and consequent fall in prices. For a time the inflationists were successful, and in 1874 a bill was passed through both Houses of Congress actually increasing the paper issues by about 400,000,000 dollars. This bill was vetoed by President Grant and prepared the way for the Resumption Act of 1875, which provided for the resumption of specie payments in 1879. After this year the advocates of what was called " soft " money turned their attention to the coinage of silver.
1 Reprint, edited by Prof. Cannan, The Paper Pound (1919).
The American experience after the Civil War is of specia interest as applied to the case of the United Kingdom after t World War. The same arguments were advanced in 1920-1 regards the hardships and the dangers of any deflation and th relative advantages of rising or at least stable prices. The less extreme supporters of inflation, like their American predecessors, thought that there should be no actual contraction, and that trade and production should be allowed to overtake the extra supplies of money and in that way bring about a gradual res- toration to the normal. In the United States, after the Civil War, the actual resumption of specie payments was delayed for 14 years. Although the American inflation at that time was, to begin with, specially an inflation (or abnormal increase) of inconvertible paper, after the Civil War credit influences not only in the United States but in other countries had considera- ble influence on the extent of the depreciation of the paper. In the first months of the peace the gold value of 100 paper dollars was 70. But although the paper was reduced in three years by over 15% the effect on the specific depreciation was insignificant, 100 paper dollars being worth only 71-6 in gold. After 1869 for three years there was a great rise in the gold value of the paper to 89-5 in 1871, in spite of an absence of contraction. After 1871 there was another reaction followed by another and more marked revival. This want of conformity between con- traction and appreciation of the paper (in terms of gold) is explained by Mr. Hawtrey (op. cit., p. 309) as due to the varia- tions in the value of gold consequent on credit movements in Europe. In 1866 there was the Overend and Gurney banking crisis in England. In 1871-3 there was the boom in trade fol- lowing on the Franco-German War. This boom was accom- panied in the United States by an excess of imports, due to the advance of European capital for railway construction.
Enough has been said to show that the relation of the quantity of paper money, even when inconvertible, to changes in specific or general depreciation is by no means simple. Nor is such a result opposed to the " quantity theory " of money in its ex- tended modern form. The value of paper money in terms of gold depends partly on causes affecting the paper (not only its quantity but its credit or discredit), and partly on causes affect- ing the gold itself not only the supply available for monetary purposes but the various elements of demand both for monetary and non-monetary purposes. The premium on gold is accounted for by various causes, and it is not the exact measure of the fall in purchasing power of the paper as regards commodities.
This brief survey of the three notable cases of inflation before 1914 shows very clearly that the inflation of the World War period was due to similar causes acting with varying force. The precise effect of the increase in the quantity of the incon- vertible paper cannot be isolated. The main point is the abandonment of the effective working of convertibility through which the gold standard makes operative the principle of limita- tion. But even when convertibility is maintained apparently and by law in the most effective manner, as for example under the Bank Act of 1844, it is quite possible that for the time being de facto convertibility may be restrained, and there may be an inflation of paper money and of the credit that rests on paper money for cash payments. The old question as to the possibili- ty of the over-issue of convertible notes has been answered in the affirmative by the practical legislators of every country. In other words every country has imposed special restrictions on the issues of notes. But in the course of monetary progress the over-issue of convertible notes has become of relatively small importance as compared with the over-expansion of credit, at all events in highly developed countries. The connexion of credit with the gold standard is not only through the note issues. In the United Kingdom the cheque has for long been the most important form of currency or means of payment. It is possi- ble that even wages might be paid by means of cheques (a beginning has been made by Messrs. Lever), though still forms of legal tender would be necessary for other kinds of cash payments.
Once, however, convertibility has been definitely abandoned as regards the notes, then one of the great restraints on the
