In short, stabilization and inflation are mutually incompatible. If stabilization is to be retained during a war emergency, inflation must be sacrificed as a method of war finance. Or, if inflation is to be resorted to, stabilization must be sacrificed. When the emergency comes choice between the two must be made.
In all ordinary wars there is no need of inflation and the stabilization process could go on unmolested. But if we were to have another world war and if the fiscal need were so great that there was, or seemed to be, no way to secure all the needed funds without resort to inflation, then, it is quite true, the stabilization machinery, if left to work, would break down. It would be better under such circumstances not to leave it to work but to suspend it temporarily just as the Bank Act for the Bank of England is temporarily suspended at critical times.
In practice, an intermediate course between a stabilization left helpless to break down, and its suspension would probably be the result. The brassage limitation would prevent perfect stabilization when the tendency of prices to rise was greater than the brassage, and yet the rise could be mitigated and sufficient revenue from taxes could be secured to keep the system thus working at half speed, so to speak. This is illustrated by Figure 12.
A friend insists that a stabilization system must be devised which will withstand any war. One might as well say that an automobile should be built to withstand any collision.
Furthermore, it should be emphasized that the present system not only contains the danger of monetary depreciation in war time among warring nations but involves neutrals as well. In fact the war inflation in the United States was almost wholly suffered while we were neutral and before we entered the war. It was a secondary effect from European inflation and the upset of international trade through which we were inundated by gold imports. From such a catastrophe
