According to the quantity theory of money, most exactly stated in Professor Fisher's " equation of exchange," an increase in money and bank credit beyond the needs of trade at a given price level tends to raise that price level. Such is the common conception of inflation. The equal and simultaneous movements of total purchasing power and trade would result in a stable price level. Total purchasing power has been shown to be the sum of two products, namely, the quantity of money in circulation multiplied by its efficiency (or velocity of circulation) and the quantity of bank deposits multiplied by their efficiency. If this total purchasing power remains the same but the quantity of trade declines, there will be inflation. If the quantity of trade remains the same, then inflation may be caused by increases in the quantity of money or of bank credit, or in their efficiencies. There can be gold inflation as well as paper money inflation or bank credit inflation.

It is quite impossible to determine the actual volume of goods that enter into trade during a certain period in a complex country like ours. The relative increase or decrease may, however, be approximated from certain indexes. The best barometers of trade, measured in physical units and not in dollars of value, are the production of the basic materials, such as coal, iron, petroleum, copper, silver, the production of agricultural commodities, the tonnage of the railroads, the tonnage of vessels entered and cleared at lake ports and seaports, the number of building permits, and the number of shares traded on the stock exchanges.

The volume of money in circulation and that of bank deposit currency, as well as the velocity of both of these, can be statistically determined with a fair degree of exactne s. Professor Irving Fisher publishes annually the data for his "equation of exchange." Professor Kemmerer recently published1 the following indexes bearing upon war inflation:

1 American Economic Review, June 1918.

Indexes Bearing On 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 increased faster than trade and explain the decided inflation of prices.