§ 7. The gold embargo in the United States. Moved by mistaken fear, the Federal Reserve Board imposed an embargo on the export of gold (made its export illegal). This policy of gold-fetichism, which remained in force from September, 1917, to June, 1919, involved a deplorable lapse from. sound monetary principles. The gold embargo had the evil effect of introducing into conditions already bad, a new and artificial element of inflation. However, trade conditions were such that the general world balance of gold payments would, on the whole, have been little away from America, otherwise the embargo would have been still more difficult to enforce. As far as it was enforceable (which it was probably, for the time, in large part), the embargo could have only the evil effects of disrupting the exchange rates (as it did) with countries to which we had international balances, notably Argentine, Spain, and Japan. Indeed, in principle, it is • suspension of specie payments in international trade, and this is an abandonment of the international gold standard. Our exchanges with a few foreign countries that were selling us largely were thrown into disorder. In the twenty-month period of the embargo, our net loss of gold was only $5,000,000. Just as the embargo was removed these conditions were already changing. In the next ten months (June 1, 1919, to April 1, 1920) our net exports of gold were more than $400,000,000, which served to restore the value of the dollar in those countries where it had depreciated. Then, again, after a few months of fluctuating balances, began, in September, 1920, a new flood of gold to the United States, which by the end of May, 1921, amounted to more than $480,000,000. The exports of gold from the United States between November, ; 1918, and August, 1920, have gone largely to Japan, China, British India, Hongkong, Spain, Argentine, and Mexico. Imports since September, 1920, however, have been largely sent by England, France, Sweden, and Canada, not merely to pay their trade balances, but because the United States has become the most important free gold market in the world, and "dollar exchange," the best international currency, is eagerly desired by producers and owners of gold everywhere.

FIG. 5. Movement Of Gold By Years

§ 8. Gold depreciation and gold production. In explanation of the changes in price levels in the various countries, a distinction should he made between gold depreciation and paper depreciation—or, otherwise expressed, between gold inflation and paper-money inflation. The one expression refers to the value of gold in terms of goods, the other to paper prices expressed in gold. In the United States (except during the embargo, to a slight degree) and several other countries gold has continued to be the standard money in international trade, and the rising index number has reflected a real fall in the purchasing power of gold. The main reasons for this are: (1) the transfer of large amounts of gold from the countries where for the time being it has been in fact demonetized, to the countries still maintaining the gold standard; our own gold stock in two years increased by the amount of the world's total production for three years; (2) the increased use of banking credit under the Federal Reserve system has enabled an equal amount of gold to perform more monetary services; and (3) the world's production of gold, which reached its highest peak in 1915, continued, relative to the narrowed field of its monetary uses, to be larger until 1920 than it had ever before been in history. This is shown in Figure 6, chapter 6.

Higher prices in terms of gold mean higher wages, higher costs for machinery and supplies, in short, higher costs of every kind in gold-mining. Many mines formerly profitable must be abandoned, one after the other, until the costs of mining on the marginal mines are brought into accord with the value of the gold produced. The folly, at such a time, of proposals for governmental subsidies and bonuses to gold-mining to keep up the quantity of gold ought to be apparent to any one with the most elemetary understanding of monetary principles. Yet such a proposal was presented in a bill in Congress, and strongly supported, as it was said, "to aid us to maintain the gold standard."

Fig. 6. Gold Production at the Peak

The increase of index numbers in countries with paper currencies is in every case greater than that in gold-standard countries. The difference measures, pretty exactly, reciprocally the depreciation of the paper in terms of gold, and the abnormal rise of foreign exchange rates.

§ 9. The high cost of living, 1919-1920. The curve of general wholesale prices that began to rise in the United States about July, 1915, reached its peak in May, 1920, at a point 172 per cent above the level maintained from 1913 to June, 1915. Retail prices (estimated as "cost of living" on a standard family budget) followed on the up-swing, but, as usual, lagged behind, reaching a maximum in the middle of 1920, a little more than 100 per cent above the 1913-15 level. A very large part of this increase both of wholesale and of retail prices occurred in the post-war period of great speculation between March, 1919, and May, 1920. This movement was world-wide, as the result partly of great increases of paper money and bank credits, in the European countries, necessary because of the desperate state of their finances, and needlessly assisted in America by those having ultimate authority in the Federal Reserve system. Prices ran the usual course as a financial crisis approached, goods being bought and contracts made with borrowed funds in the hope of a further rise of prices. It was for many a veritable financial joy-ride.

Such a rapid rise affected different classes of persons in business and different classes of goods very unequally. Cases of extravagant expenditures (relative to former standards) were conspicuous in working class circles, where wages rose faster than the cost of living, and among the newly-rich employers who had "profiteered" in the war and the post-war period of speculation. Less conspicuously, great numbers of wage-earners and salaried and professional workers felt keenly and suffered greatly from the higher cost of living (popularly denominated the H. C. L.). The different elements in the cost of living moved at various rates, as is shown in Figure 8, chapter 6.

Among the industries that profiteered most for the time were those engaged in producing clothing, furniture, and food, including nearly all agricultural products. Among those that were losers in the purchasing power of their incomes were many active enterprisers whose products rose in price more slowly than the average (or than their wage bills and other costs) and all public utilities fixed by charter or controlled by price-fixing commissions. Many railroads, trolley lines, gas and electric companies were brought to the verge of bankruptcy or beyond.