MONETARY AND FISCAL CONTROLS IN WARTIME
THE present European War necessarily alters, in greater or less degree, the economic situation in the United States. We have been trying, in one way or another, for ten years to stimulate economic activity and restore our income and employment to a reasonably full level. Monetary policy has been utilized extensively to bring about an advance in commodity prices. And, while the general commodity price index was lifted from a low of 60 to a high of 88 between 1933 and 1937, we are confronted with the fact that the price level in the fourth quarter of 1940 stood at 80 compared with 100 in 1926. A 40 per cent reduction in the gold content of the dollar and billions of excess bank reserves were not able to prevent the apparent long-run downward price trend from 1920 to 1940.
This experience, to be sure, has added powerful empirical support to the theoretical analysis which has more and more come to the fore during the last forty years and which has tended to push into the background purely monetary explanations of price movements. Nevertheless, the general public has become increasingly educated to a crude quantity theory, and even among many professional economists there is the belief that an increase in the monetary gold stock inevitably spells a price inflation. That the inflation has, in fact, not come is explained away on various grounds, but the thesis is still firmly maintained that the inflation bonfire has been laid, that the inflammatory material has been gathered