WE now come on to the last and most interesting section of the whole subject-to the considera-tion, namely, of the sixth factor which causes exchange fluctuations, i.e. the depreciation of currency by the issue oi paper money. · Of all the disastrous effects of the war on finance and the foreign exchanges, that of the over-issue of paper money is-the most fundamental. This over-issue is bound up with what is known as "inflation," and it is necessary to be clear as to what is meant by that term. There are two things which may be inflated, credit and currency. Inflation of currency means an increase in the volume of currency without an equivalent increase in its gold backing or in the volume of other commodities represented by it. Inflation of credit means an increase in the volume of credit without any equivalent increase in either the gold basis or in the volume of commodities available. The relations between the inflation of currency and the inflation of credit have been the subject of a great deal of technical discussion by specialists. In actual fact, the two have always during the war period appeared together, like the high temperature and the congestion of the lungs in Spanish

influenza ; and the effect of the combination has been the depreciation of the currencies affected, i.e. their diminution in value in terms of gold and in terms of other currencies not so affected.