118 MODERN MONETARY SYSTEMS 
fact has little bargaining power; if a rise occurs and he 
is faced by the proposition ‘take it or leave it,” he can 
only show passive resistance and withhold his purchase; 
again, he is not really in so strong a position as is commonly 
supposed to stimulate rise in prices which, moreover, is 
against his interests ; for the money with which he is left 
after a fall in prices will be saved by him, and will only 
come back into circulation after many deviations, and not 
without having itself contributed, as we shall see presently, 
to an increase in production. 
In any case, events have themselves clearly falsified the 
forecasts which were made by Mr. Fisher in 1920. For, 
as we have seen above, the fall in prices occurred more or 
less all over the world before currency contraction took 
place and it went much further. 
It is quite impossible to understand the effect of infla- 
tion and deflation by making a crude comparison with 
the interplay of supply and demand oz a closed market ; 
the process is more complicated. 
The first effect of an increase in the circulations 
artificially produced on a grand scale when a State has 
recourse to excessive issue of paper money is to swell 
the working capital of certain heads of industry who 
have State contracts ; it then progressively increases their 
earnings and the earnings of those who work for them.! 
It is easy to understand how, especially in war-time when 
this increased economic activity will not result in an increase 
of the volume of consumable goods, the increase in earnings 
will stimulate expenditure and so a rise in prices. But 
the mechanism of deflation is different. The State borrows 
in order to reimburse the bank and the capital which it 
uses in order to replace the notes which it has obtained 
and cancelled is withdrawn from other uses. Thus cur- 
rency contraction has as its first effect a consraction of 
1 The demand arising from these issues is added to the demand due to the 
previous available resources of purchasers; and so there occurs an increase 
in turnover, and of income, due either to an increase in the volume of goods 
sold or to an increase in their price. Thus an increase in volume of money 
put into circulation coincides with an increase in money incomes.