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

7, B] 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.

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