Assuming that prices in 1930 will be as given in the above table, the index number for 1920 would be 400 and for 1930, 297; or, reducing each to an arithmetic mean, the index number for 1920 would be 100 and for 1930, 59.09.

The best-known index numbers for the United States are those of the United States Bureau of Labor, which are based upon the wholesale prices of 240 commodities. The rise of prices from 1914 to 1920 is indicated by the following table:

It should not be assumed that increase in prices has been wholly due to inflation of the currency. Other factors such as inefficiency of labor, profiteering, and the increase in taxation have also had their influence.

The Stabilized Dollar.-Professor Irving Fisher, the eminent economist of Yale University, has proposed a plan for “stabilizing the dollar" by abandoning the present standard gold dollar and substituting for it a paper dollar redeemable in gold but in a varying quantity of gold, the amount being so regulated as to keep the purchasing power of the dollar as nearly constant as possible. When prices rise, as indicated by index numbers, the dollar would be redeemable in a greater quantity of gold, thus bringing prices down; when prices fall the gold in exchange for the paper dollar would be decreased so as to raise prices.

Economists differ in regard to the probable efficiency of

Professor Fisher's proposal. The general impression seems to be that it would work well in normal times, but would prove an injury in times of panic or war. The plan could hardly be put into effect by one nation, as it would seriously disturb foreign exchanges in times of financial stress and, as explained by Doctor B. M. Anderson,* even if the plan were adopted by an international agreement, the index number might, in times of rapid changes in prices, have so different a relation to the scale of prices in one country as compared to another as to cause confusion in exchanges and general dissatisfaction. To adopt such a plan when prices are abnormally high would be, in Doctor Anderson's opinion, "to perpetuate all the suffering of people on fixed incomes."

Summary. Other things being equal, prices will rise and fall with an increase or decrease in the amount of money in circulation. An increase in the amount of money sufficient to raise prices very much is called inflation of the currency. A material decrease in the volume of money is deflation, or contraction. Multiple standards and index numbers are methods whereby changes in the purchasing value of money may be measured. Professor Fisher has proposed a "stabilized dollar," or a dollar redeemable in different quantities of gold, the amount depending upon the purchasing power of gold at the time of redemption. TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS I. How do increases in the amount of money affect salaries? Have salaries of teachers risen as rapidly as has the cost of living?

*The Fallacy of the Stabilized Dollar. Published by the Chase National Bank of New York.

2.

What class of persons benefited from the rise in prices during the war? What class of persons were injured?

3. What causes other than changes in the volume of currency affect prices? What is the tendency of prices now? Why? 4. Make an investigation of index numbers. References: Ely, Outlines of Economics, pp. 337-343; Fisher, Elementary Principles of Economics, pp. 247-257; Taussig, Principles of Economics, vol. I, pp. 291-293, 441.

5. Get the opinion of a banker or business man on Professor Fisher's plan for a stabilized dollar.

CHAPTER XIX

BANKING AND CREDIT

The Banking Functions.-There are three major services performed by banks:

Many minor functions are incidental to the banking business, such as the collection of checks, notes, bills of exchange and drafts, the buying and selling of securities, the renting of safe-deposit boxes and vaults, and the performing of many services of a fiduciary or commercial nature. The incidental functions of banks, many of which produce no revenue for the banks, are matters which cause the most expense in time and labor.

"Interest upon loans and investments is the bank's chief source of income, although the clerical work involved in the making of loans and discounts is in very small proportion compared with the tremendous outlay of time, labor, and overhead expense met with in providing services which will attract depositors. Thus it happens that the bank, viewed as a workshop or counting-house, may present a figure of extreme industry not in any way related to the earning power of the bank's resources. Between 75 per cent and 90 per cent of the accounting work of a commercial bank grows out of the services which the bank renders *See Chapter XVIII, pp. 193-197.

its depositors, the bank rarely receiving any fee by way of payment, but looking to the income derived from the deposits for reimbursements and profit.'

Not all banks perform all the possible banking functions. The function of issue, described in a previous chapter, is confined in the United States to banks associated in the Federal Reserve banking system and such incidental functions as the safe-keeping of valuables and acting as trustee for estates, etc., are not performed by many banks.

The Deposit Function.-The deposit function needs little explanation. It is obviously of advantage to one who has more money than he immediately needs to deposit it in a bank for safe-keeping, even should the bank pay no interest. It is also advantageous to society that this be done, as deposits concentrated in a bank can be put to work, while if scattered among thousands of small holders employment for them is not so easy and the chance of loss is vastly greater.

Loans and Discounts.-The deposits in a bank at one time may amount to $400,000 and at another time may fall to $340,000, but the experience of the bank may show that the deposits never fall below $340,000. It is clear that the bank may loan a large part of its deposits to its customers, only being sure that its depositors may receive their money on demand. In addition to the deposits, the bank may lend its own funds or credit. A person coming to a bank to borrow may secure funds or credit, on his own note, usually indorsed by a second person, payable at some specified future time, usually not over three months. Funds may be secured without the in

* Wolfe, Practical Banking, p. 22.