CHAPTER V
WHY PRICES CONTINUE HIGH
Beginning in 1915 the prices for commodities started sharply upward. In 1916 the general average in the United States was about 125 in comparison with that for 1913 taken as 100, or the base. Contemporaneously we thought that advance an economic enormity, but after 1916 the rise became even steeper and more rapid. Wages rose like commodities, lagging behind them at first, but then outrunning them. What caused all this?
The common answer is inflation, meaning the blowing up of government credit by the issuance of paper currency and by broad borrowing; and the extension of commercial credit. Obviously this would not have been done without a good reason. It should be equally obvious that the reason in 1916–18 was a sudden demand for goods and labor that was far in excess of the immediate supply, a demand moreover that was reckless and not to be checked by high prices as normally. Therefore both prices and wages rose to extraordinary heights and credits were necessarily expanded in order to carry on business. Inflation of credit and currency was an effect, not a cause.
The extraordinary demand for goods and labor did not cease with the end of the war in 1918 but continued into 1920, wherefore the rise in prices and wages kept on. Of course the post-war demand was to
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