Knowledge that Transforms

Originally published in 1947, this book is divided into three parts. Part I discusses the historical background, the internal organization and the business of the clearing banks. Part II consists of four chapters with two appendixes on the floating debt and the London gold and silver markets. Part III deals with institutions prior to 1914, the war of 1914 and its consequences, and the world crisis and after. There is also a statistical index.

M OST of the discussion of the process of inflation has been based on the proposition that rise because there is too much money chasing too few goods. According to this approach, prices (on the average) must continue to rise as long as the total amount which people wish to spend on goods and services exceeds the value of the available goods and services at current prices. The prices are conceived of as rising by some sort of automatic process, so that no discussion of the business decisions which produce the price increase is necessary. Of course, it is at once apparent that if everyone maximizes his profits instantaneously, excess demand cannot exist more than momentarily. Any business firm which can sell more than its current output at existing prices ought either to raise its price and so increase its profit or bid for more resources to increase its output, or both. If it were obvious that every firm does maximize its profits instantaneously, it would not be necessary to discuss the details of the price-increasing process. However, it is far from obvious that all firms try to maximize their profits in the short run. Indeed, in several important cases, it is obvious that short-run profits are not being maximized. These are the cases in which gray markets have appeared, e.g., automobiles and steel. In these cases, any firm in the industry could increase its current profits by selling its output at the highest price it would bring. If these firms do, not follow a policy of short-run maximization, it is at least questionable whether the others do either. But as soon as we admit that excess demand may not force prices up, what becomes of the axiom that prices must always rise when too much money chases too few goods? Is there an alternative hypothesis which can explain the facts of inflation as well as, or better than, the excess demand theory? I should like to suggest that the phenomena of the past three years can be fairly well ex-