price level, stabilization works almost perfectly,[1] keeping the index number within 2% of the original par during two thirds of the time, within 3% of par six sevenths of the time, and within 4% all of the time.[2] During this same period, on the other hand, the unstabilized index number wandered from the starting point 30%.
Beginning with the fall of 1915, however, the upward tendency becomes too strong and, in spite of the stabilization mechanism, the stabilized price level rises in the diagram 86% above par. This, of course, is a small rise as compared with the rise which actually occurred, as the index number rose 200% above the original starting point.
The deviation from par of the stabilized index number would be slightly less if the brassage were 2% and less still if it were 3%, etc. Yet I doubt whether the brassage should be increased much, if any, above 1%, (1) because presumably we do not now need to provide against a contingency so remote as a repetition of such a situation as that caused by the Great War, and (2) because, if another such situation should develop, a partial stabilization is the most we could expect. The fiscal necessity of the Government is then so paramount a necessity that inflation is probably unavoidable. If the Government itself succeeds in avoiding direct inflation, the people, in subscribing to bonds by borrowed money, will bring about an indirect inflation.
- ↑ It should be remembered that this stabilization of wholesale prices would carry with it the stabilization of retail prices as explained in Appendix I, § 3. In fact, as retail prices change sluggishly, their index number would doubtless keep even closer to par than that of wholesale prices.
- ↑ This close conformity to par is maintained in spite of the fact that, as already noted, the "lag" assumed is much greater than we may reasonably believe is the truth. In fact the conformity would be close even if the lag were much longer. Assuming that the influence of each adjustment came even a full year later, the index number would (up to the close of 1915 when the great influence from the war began) keep within 3% of par half of the time, within 5% two thirds of the time, and within 10% nineteen twentieths of the time.
