Page:Stabilizing the dollar, Fisher, 1920.djvu/223

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Sec. 7, B]
TECHNICAL DETAILS
169

ways at once and if the conflict were continued long enough inflation would, in the end, exhaust and defeat stabilization. The inflation, tending to raise prices, would necessitate an increase in the dollar's weight which would involve a proportionate decrease in the number of dollars in the reserve. The reserve would also be depleted by the increased tendency to redeem certificates in the heavier dollars, the certificates displacing the gold and driving it abroad.[1]

All would go well and the price level and purchasing power of the dollar be approximately maintained, so long as redemption could also be maintained. But if the inflation were persisted in far enough, the constant increase in the credit superstructure and decrease in the gold base (i.e. in the number of dollars in it) would ultimately break down redemption. Thereafter the gold dollar would cease to exist as a factor in our monetary system, leaving only irredeemable paper and deposit dollars in actual use. After this breakdown the paper and deposit dollars would depreciate.

B. The Effect of War on Bank Credit. During the Great War, as in other great crises, the exigencies of Government finance caused, in almost all countries, an expansion of paper and credit almost regardless of the effect on prices or on redemption. At such times the pressure for inflation is almost, or quite, irresistible. The paramount object is then financing the war rather than

  1. This assumes the existence of the "indefinite" reserve system (see Appendix I, § 1, G).
    If the "definite" reserve system (see Appendix I, § 1, B and F) is maintained, inflation of certificates would be impossible; for as fast as the issue of certificates went on, their redundancy and backflow would require their cancellation. Other forms of inflation, such as deposit inflation, would, however, still be possible. These would have the effect (through raising prices and weighting the dollar) of decreasing both the gold reserve and the certificates in unison. The result would be not to weaken the Government gold reserve as against certificates, but to weaken all other, e.g. bank, reserves held in these certificates. The ultimate disaster, which would still overtake continued inflation, would then consist in a cleavage, not between gold and certificates, but between these two and the other forms of money and credit based on them.