¹ Haig, R. M., The Public Finances of Post-War France (New York, 1929)Google Scholar; also Rogers, J. H., The Process of Inflation in France, 1914-1927 (New York, 1929).Google Scholar

² There is also the problem of prices rising to a higher level than can be maintained, after the removal of price ceilings, thereby precipitating a deflation. In December, 1946 and January, 1947, retailers' markdowns became prominent in Canada and the United States; but January sales are a seasonal phase of normal business.

³ Indications that some prices had already reached precarious levels especially in the United States, were found in the decline of raw cotton and raw rubber prices and in lower prices on certain types of real estate and farm produce late in 1946, also in lower quotations for a number of consumers' luxuries since last Christmas. Since the New Year the upward movement of prices has reappeared. A slight decline in wholesale and even in retail prices in the next year or so need not invalidate the argument of this paper.

Graham, F. D., Exchange, Prices and Production in Hyper-Inflation Germany (Princeton, N.J., 1930), pp. 11–12.Google Scholar

⁵ Angell, J. W., Recovery of Germany (New Haven, Conn., 1932), p. 31.Google Scholar

⁶ Ibid., p. 33.

⁷ The prices to which this discussion refers would be represented statistically by a weighted average of retail (or equivalent) prices of final goods and services made available for consumption in Canada, whether of domestic or foreign origin, including finished durable goods of all kinds. It is evident that other comprehensive index numbers, relating to prices at an earlier stage in the production process (e.g., wholesale or manufacturers' prices) or relating to somewhat different groupings of goods, would rise almost proportionately; the same might be said of an index of rates of compensation to factors of production, and (with further qualifications) of an index of rates of remuneration of wage labour. That the last of these may depart considerably from the general trend of prices is suggested (but not established, owing to the limited coverage of the figures) by the movement of wages indexes from 1915 to 1925 (cf. appendix, Part VIII).

⁸ Two estimates sufficiently up-to-date and comprehensive for the present purpose are available for 1939. The arrangements most appropriate for comparison with total taxation are “national income” of $4,860 million, as defined in the official series now discontinued ( Canada Year Book, 1945, p. 909 Google Scholar) plus interest and dividends received from abroad of $52 million, or $4,912 million in all; and in the new scheme of income statistics ( National Accounts, Income and Expenditure, 1938-1945, Ottawa, 1946 Google Scholar), “personal income payments” of $4,171 million plus investment income not paid to individuals (most of which is subject to taxation; Ibid., p. 29) of $344 million, and interest and dividends paid abroad of $230 million ( Canada Year Book, 1942, p. 514 Google Scholar), or in all, $4,745 million, which is 2.3 per cent less than the previous total of $4,912 million.

⁹ The reader may wish to introduce considerations other than fiscal ones at this point, and it must be admitted that an excessive ratio of wages and salaries to national income would have more serious effects; so important is the wage-income ratio that it probably takes care of itself, though continuous unemployment raises doubts. Other dislocations, indicated by changes in barter terms of trade, cannot be dealt with here. Once a manageable budgetary position is attained, the community possesses the means of dealing with all manner of particular problems requiring financial aid or control, and for this reason I have concentrated on the tax-income ratio.

¹⁰ Department of Reconstruction and Supply, Manpower and Material Requirements for a Housing Program in Canada (Ottawa, 1946), pp. 11, 32, 34.Google Scholar

¹¹ Bank of Canada, Statistical Summary, 10-Nov., 1945, p. 82.Google Scholar

¹² Federal Reserve Bulletin, June, July, Aug., Sept., Nov., 1946.

¹³ Various circumstances point to a further increase in money supply. First, several aspects of the federal budgetary position are likely to prevent the appearance of an overall surplus: (i) further loans to Canada's overseas customers, in view of the relatively small assistance likely to be extended to them by the International Monetary Fund and the International Bank for Reconstruction; (ii) reduced revenues consequent on lower tax rates since January, 1947, and lower receipts in future from sale of war assets; (iii) continued high expenditure on current account owing to the large proportion of fixed and statutory expenditure, large outlays for defence, higher costs of materials and labour, and reappearance of railway deficits. Secondly, further purchases on the part of the banks of bonds offered for sale by the public, with a view to maintaining the present low level of interest rates, no appreciable offsetting reduction of bank credit in the form of loans appearing feasible.

On the other hand, there are at least two circumstances tending to restrict the growth of money supply, namely (a) federal revenues larger than anticipated owing to the continued high level of national income, which level is in turn a reflection of the high and rising level of prices and costs, and (b) repayment to the federal treasury of loans extended to the Foreign Exchange Control Board, with the Canadian dollar proceeds from the net reduction of the Board's holdings of United States dollar balances.

Circumstance (a) suggests the way in which the rise of prices might automatically bring itself to an end through purely domestic tendencies, provided tax revenues rose more rapidly than price levels, an outcome which is now less likely in view of reductions in taxation, especially of excess profits. Circumstance (b) draws attention to a way in which a negative balance of payments sets up a monetary (rather than an exchange rate) corrective under paper currencies whose exchange rate remains fixed owing to a government monopoly.

^13a The effects of production in checking inflation, discussed in Sections II and III, require fuller theoretical treatment than this paper permits. It is necessary to distinguish between two cases: (a) the increase in production required to satisfy effective demand after a higher price has been established, when this higher price is however less than that which would equate effective demand with the existing flow of goods, and (b) the increase in production required to depress price beneath a given point. These two cases, though at first glance very similar, may lead to different conclusions with respect to production. The argument developed in the text relates to (b).

With respect to (a), in cases where the demand schedule has an elasticity greater than unity, the increase in production required to take care of the unsatisfied margin of effective demand may be quite small because of the large reduction in that demand consequent on the postulated rise of price. However, goods having a demand schedule with elasticity greater than unity usually have at the same time a high income elasticity, especially as compared with the war years when spending up to one's income was discouraged by Victory Loan advertising and heavier taxation. It follows that the increase of production necessary to meet the unsatisfied margin of effective demand may be relatively large in this case despite the apparent tendency of the goods to be quickly “priced out of the market” as prices rise.

¹⁴ I.e., where the marginal revenue curve and the marginal cost curve are both negatively inclined over a range of output on either side of their point of intersection, a situation which was probably common in Canada in the nineteen-thirties but unlikely today.

¹⁵ In restricting the discussion to currently produced final products, the influence of the existing supply of exchangeable durables, including all forms of real property and negotiable securities, is neglected in the interests of simplifying an already complex argument. We here enter the much debated question of whether stock market speculation diverts funds from the purchase of goods.

¹⁶ Graham, , Exchange, Prices and Production, p. 306.Google Scholar

¹⁷ Ibid., p. 313.

¹⁸ Cf. Professor Dennis Robertson's delightful address to the Lombard Association, in the City of London, last October, printed in The Banker for November, 1946.

¹⁹ Cf. Angell, J. W., Behaviour of Money (New York, 1936), p. 159.Google Scholar

²⁰ Committee for Economic Development (New York, 285 Madison Avenue, Sept., 1946).

²¹ Cf. Keynes, J. M., Treatise on Money (London, 1930), chap, xxx, sec. 8Google Scholar; Silberling, Norman, The Dynamics of Business (New York, 1943), pp. 379–85.Google Scholar Schumpeter's treatment (Business Cycles, chap, XII) relates to cyclical rather than long-term movements. Later controversy (as between Angell and Keynes) centres on another aspect, namely the relation between interest rates and money stocks over short periods.

²² Facts in the Case (Toronto, 1944), p. 12.Google Scholar