Stabilizing the Dollar

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A PLAN TO STABILIZE THE GENERAL PRICE LEVEL WITHOUT FIXING INDIVIDUAL PRICES

BY

IRVING FISHER

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STABILIZING THE DOLLAR

THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO • DALLAS ATLANTA • SAN FRANCISCO MACMILLAN & CO., Limited LONDON • BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO

General Summary

GENERAL SUMMARY

The war has wrought havoc with monetary systems throughout the world. War finance has given us inflation of various kinds—paper money inflation and bank-credit inflation among belligerents and gold inflation among neutrals—with the result that everywhere prices have risen, i.e. the purchasing power of money has fallen, even where there has been no scarcity of goods.

The war has thus greatly aggravated the evil of a rising cost of living of which there had already been a growing and world-wide complaint. This pre-war high cost of living was, likewise, largely due to monetary inflation.

Prior to 1896 there was equal dissatisfaction over falling prices attributable, in part, to the fact that the volume of gold and other currency did not keep pace with the requirements of business.

These two experiences in a single generation have set a larger number of persons thinking on the instability of monetary units than ever before in history.

The cumulative effect is a rapidly spreading consciousness that the price level, on which business is conducted, is now largely at the mercy of monetary and credit conditions. To-day the general public is willing to acknowledge, as before the war it was not, that the tide of prices will rise with a flood of gold or paper money or bank credit. As a consequence there is coming, slowly but surely, a revolution in economic thought similar to the revolution in astronomic thought begun by Copernicus.

Just as we then learned that the sun and moon and stars do not really rise and set—though they move somewhat—but that what so appears is really the revolution of the earth on its axis, so we are now learning that commodities as a whole do not really rise and fall much but that what so appears is really the gyrations of the dollar.

The truth is, that the purchasing power of money has always been unstable. The fundamental reason is that a unit of money, as at present determined, is not, as it should be, a unit of purchasing power, but a unit of weight. It is the only unstable or inconstant unit we have left in civilization—a survival of barbarism. Other units, the yard, pound, bushel, etc., were once as unstable and crude as the dollar still is, but, one after another, they have all been stabilized or standardized.

There was, until recently, ample excuse for an unstable dollar. Up to the present generation no instrument for measuring its aberrations had been devised. In the same way, until the weighing scales were devised, weights could not be standardized, and until instruments for measuring electrical magnitudes were invented, electrical units could not be standardized. But for many years we have now possessed in the "index number" of prices the necessary instrument for measuring the value of the dollar in terms of its power to purchase goods.

One of the most suggestive signs of the times is that this instrument for measuring changes in the purchasing power of money has recently been utilized in adjusting wages and salaries to the high cost of living, i.e. to the depreciated dollar. A number of commercial concerns and banks, and some official agencies have amended wages by use of an index number of the cost of living.

I believe it is manifest destiny that this principle will be utilized more generally to safeguard agreements made at one date to pay money at another date. With our present unstable dollar, the just intent of such agreements is constantly being balked by a change in prices. Gradually such corrections of the dollar will break down the popular superstition that "a dollar is a dollar"; for every time we correct the dollar we convict it of needing correction. Ultimately the correction will surely be applied not, as at present, as a patch on the dollar from the outside, but by incorporating it in the dollar itself.

Various methods for accomplishing this have been proposed. The one elaborated in this book is to vary the weight of the gold dollar so as to keep its purchasing power invariable. We now have a gold dollar of constant weight and varying purchasing power; we need a dollar of constant purchasing power and, therefore, of varying weight.

In this way we can control the price level. The more gold in the dollar the greater its buying power and the lower the price level. If Mexico should adopt our dollar (instead of its present dollar of half the weight of gold), the price level in Mexico would be cut in two. Or, if we should adopt the Mexican dollar instead of ours, our price level would be doubled. So if prices tend to rise or fall, we can correct this tendency by loading or unloading the gold in our dollar, employing an index number of prices as the guide for such adjustments.

The process for doing this is as simple as clock-shifting for daylight-saving and would produce its effects as unobtrusively. Whether this or some other method be the particular one finally adopted for reaching the desired end, it is of the utmost importance, in the interests of justice to creditor and debtor, stockholder and bondholder, employer, employee, insurance beneficiary, savings bank depositor, trust foundations, public utilities, etc., that some method of stabilizing our monetary units shall be adopted as one of the fundamental measures of reconstruction, relating to the currency.

Otherwise we shall perpetuate a chief source of social injustice, discontent, violence, and Bolshevism. Only one real obstacle stands in our way—conservatism.

But to-day, as a result of the war, there is a new willingness to entertain new ideas. That is, the war has loosened the fetters of tradition. It was the French Revolution which led to the metric system. It would not be surprising if, as is being suggested, this war should give Great Britain a decimal system of money, revise the monetary units of the nations so that they shall be even multiples of the franc, give us an international money and stable pars of exchange and, as the greatest reform of all, as well as the simplest, give us a monetary system in which the units are actually units of value in exchange, as they ought, and were intended, to be.

Summary by Sections

SUMMARY BY SECTIONS

Chapter I. The Facts

1. Index Numbers. An index number of prices shows the average percentage change of prices. Thus, taking 1913 as a basis for comparison and calling its price level 100%, the index number representing the price level of 1917 was 176%, and of 1918, 196%. There are many different methods of computing index numbers, but their results usually agree approximately (Figures 1 and 2.)

2. Medieval Price Levels. Prices have usually risen. In France, before the war, prices were five or ten times those of a thousand years before. Prices have often risen much more than this, especially after paper money inflation, as in the French Revolution, in the American Revolution, and in the present war, especially in Russia.

3. A Century and a Quarter of Price Movements before the Great War. (Figure 3.) Between 1789 and 1809 prices doubled in England; between 1809 and 1849 they fell all the way back, and more; between 1849 and 1873 they rose 50%. Between 1873 and 1896, in gold standard countries prices fell, while in silver standard countries prices rose. Between 1896 and 1914 prices in the United States and Canada rose 50%, and in the United Kingdom, 35%.

4. Price Movements during the Great War. During the war prices in the United States rose seven or eight times as rapidly as in the last-named period. In Europe the rise was even faster,—fastest of all in Russia. Prices doubled in the United States and England, trebled in western Europe, and increased ten- or twentyfold in Russia. The purchasing power of a dollar to-day in the United States is about that of 35 cents in 1896.

Chapter II. The Causes

1. False Scents. Of forty-one causes alleged for the high cost of living, some are important factors in raising particular prices, but none of them, except the war, has been an important factor in raising the general level of prices, and that factor, of course, only recently. Prices have risen where there were and where there were not trusts, trade unions, tariffs, luxury, advertising, militarism, sanitation, the individual package, etc.

2. Profiteers, Speculators, and Middlemen. Speculation regulates but seldom successfully manipulates price movements. Middlemen's profits have declined while prices were rising. (Figure 4.)

3. Circular Reasoning. High prices of labor may tend to raise prices of commodities and vice versa. But these and other influences between two classes of prices do not explain the general rise of all classes of prices. Prices cannot lift themselves by their own bootstraps.

4. The Error of Selecting Special Cases. No one commodity is important enough to influence greatly the price level. Wheat must rise 20% to raise the price level 1%, other things equal.

People unconsciously pick out special exceptional cases of commodities, the supply of which has decreased or the demand for which has increased, without realizing that they are exceptional. The more exceptional they are the more publicity is given to them, and the public is given a wrong perspective.

5. The Argument from Probability. Most would-be explanations make one fatal mistake of looking only at the goods side and not at the money side. When 216 out of 243 commodities rise in price between 1896 and 1913, the remarkable coincidence can be most simply explained by assuming a common cause, the cheapening of the dollar. Such a simple explanation is more likely to be correct than the concurrence of separate explanations for the many commodities.

6. The Argument from Statistics. Figures for crops and trade and estimates of national income show in general no progressive scarcity of goods between 1896 and the World War to explain rising prices but, on the contrary, a general progressive abundance. Even during the war the volume of trade in the United States increased somewhat. Mr. O.P. Austin has shown that during the war there has been a rise in the prices of goods not used in war, such as Manila hemp in the Philippines, sisal grass in Yucatan, and diamonds in South Africa, even in the countries producing these goods and far removed from the seat of war. Lord D'Abernon has shown that old books, prints, and coins, having no cost of labor and materials, have risen.

7. Price Movements Vary with Monetary Systems. Countries of like money have like price movements and countries of unlike money have unlike price move . Thus the price movements of gold standard countries are very similar (Figure 5), and the price movements of silver standard countries are similar; but the price movements of gold standard countries differ from those of silver standard countries as the ratio of gold to silver changes. Countries of exceptional standards have exceptional price movements. (Figures 6, 7, and 8.) During the World War the prices rose differently in different countries according to their different degrees of inflation.

8. Price Movements Vary with the Money Supply. The price level fluctuates largely with the fluctuation in the quantity of money. (Figure 9.) Great increases in the production of the money metals as in the sixteenth century and in the '50s and again in the '90s of the last century, are followed by great price upheavals. During the Great War the price level in various countries was found to vary with the quantity of money.

9. Kinds of Inflation. Besides the inflation from great issues of paper money, there is gold inflation, such as the United States experienced in 1915-1917; and credit inflation, such as all belligerents experienced.

10. Extent of War Inflation. Outside of Russia this is about threefold, money having increased from 15 to 45 billions and deposits from 27 to 75 billions. Prices have risen accordingly.

11. Money Illusions. Money always seems scarce even when superabundant. The individual always wants more than he has and is apt to think that a whole country would be benefited by more money. He doesn't realize that the more money there is the less it will buy. He keeps thinking of a dollar as fixed.

Some allege that gold is stable because its price is constant. But gold is worth about $20 an ounce merely because an ounce of gold is about twenty dollars. Gold is fixed only in terms of gold, not in terms of the other things it purchases. A cheapening of gold cannot express itself in a lower price of gold but only in a higher level of prices of other things.

12. The Instability of the Gold Standard as Compared with an Egg Standard and Others is as great, and greater than that of a carpet standard. (Figures 10, 11, and 12.)

13. Seeing Ourselves as Others See Us. When prices in gold countries were going down and those in silver countries were going up, the Londoner would say that Indian prices rise because silver is depreciating and the Hindu would say that English prices fall because gold is appreciating. Each sees the other's change but finds it hard to realize his own, just as we find it hard to realize that the earth revolves.

14. A Visit of Santa Claus is supposed to double the money in every pocket, till, and bank. The next day the average man has twice the money he needs to carry. He spends the surplus and this extra demand for goods raises prices. But since this surplus money is still in circulation, so it is spent again and again, raising prices until they double, when it ceases to be a surplus; for at these prices twice the pocket money, till money, and bank money used before are needed.

Something like this happens when gold miners bring gold to the mint. They can't carry the new gold in their pockets. They spend most of it and so bid up prices in the mining camp. Then the holders of this gold spend it outside of the camp where they can buy cheaper. This raises the prices outside. Thus the new gold pursues low prices throughout the world and raises them.

15. Tracing the Invisible Source of the Tide. The rise of prices from inflation seems mysterious because, in any individual case, such as the rise of butter at a grocery store, the only visible reason is the rise of some other price, such as the wholesale price of butter. The effect of the abundance of money among the grocer's customers is too small and gradual to be observed. But this small, unobserved element was also present as a part explanation of the rise of the wholesale price and of every anterior price which helps explain that price. This element, apparently so small in any one market, turns cut to be the large element when all markets are considered.

16. Other Causes than Money include bank deposits, the velocity of circulation of money and of deposits, and the volume of trade. Usually the chief factor is money.

Chapter III. The Evils

1. The Evil of High Prices Is Not General Impoverishment. If all prices and incomes rose equally, no harm would be done to any one. But the rise is not equal. Many lose and some gain.

2. Contracts Upset. When prices rise, the creditor loses; when they fall, the debtor loses.

3. Salaries and Wages Slow to Be Adjusted. They rise or fall more slowly than prices. The purchasing power of wages just before the United States entered the war averaged only two thirds of what it was ten years earlier and after the war it was still less.

4. Rates Fixed by Law or Custom Also Slow. Trolley fares, for instance, remained the traditional five cents through two decades of rising prices.

5. Periods before and after 1896 Contrasted. Before 1896 the "bloated bondholder" was gaining. Money lenders like Russell Sage rolled up wealth. They could not have done so after 1896. Even had they saved every penny of interest and compounded it, they would have had less actual purchasing power now than when they started. The newly rich to-day are not bondholders but stockholders.

6. The Fault Is Not Personal but Social, so that we ought not to blame the lucky winners in the lottery but abolish the lottery.

7. Two Illustrative Cases. A working girl who in 1896 put a hundred dollars in the savings bank and let it accumulate at 3% would now have nominally twice what she put in, but prices are more than two and a half times what they were in 1896. Likewise the bondholder has had no real interest. He has cut his coupons and cashed them, but his principal, nominally intact, is, in actual purchasing power, less than half what it was. He has been, in effect, eating up his capital.

8. The Extent of Social Injustice. Probably a hundred billions of dollars' worth of purchasing power have actually, though not nominally, changed hands since 1896 through the depreciation of the dollar.

9. Uncertainty. Such losses would be largely forestalled if they could be foreseen. But few except speculators even try to foresee price movements. The chief evil of an unstable dollar is its uncertainty.

10. Trade Cycles. When prices rise, great profits lead to overextension of business and credits and some to a crisis, after which contraction leads to a fall of prices and depression of trade. The unstable dollar is a fundamental element in these cycles.

11. Resentment and Violence. The fact that the evil effects of an unstable dollar are usually not attributed to their true cause results in suspicion, class hatred, and violence.

12. Falling as Well as Rising Prices Cause Discontent. E.g. before 1896 the western farmer hated the eastern capitalist whose mortgages he found increasing in weight owing, he thought, to some manipulation of the market of money or produce or both.

13. War Prices Cause Discontent. Before the war the rising cost of living was making Socialists, and the fear of class war within Germany was one reason for precipitating a war with other nations. Likewise the rise of prices during the war is a chief cause of the popular unrest we now find.

14. Adjustments Most Needed, the Most Unpopular. E.g. railways and landlords have long suffered from the rise of prices, but the public has all the more strenuously opposed a corresponding rise of their rates or rents. Even the employer who has gained by rising prices often opposes a corresponding rise of wages. Everybody opposes the rise of anybody else's charges, because they have their minds set on a general reduction. As a general reduction is impossible it is better to level up the few prices which are too low relatively to the rest.

15. Bad Remedies. The public fails to understand the cause of price movements, but it sees who has made money out of them at the expense of others and seeks a remedy against these winners. Every remedy offered gets a hearing. Some of these are bad. Such was "free silver" proposed in 1896 and such is much of the reckless radicalism of to-day.

16. The Loss Is General. Few gain permanently either from rising or falling prices, for the envious losers contrive in some way to balk them, e.g. by sabotage. Again when prices fall foreclosures are forced which throw the management of industry into hands often ill fitted for the task. In short, in the end, almost every one loses from an unstable dollar.

17. Conclusion. An unstable dollar is the unsuspected cause of many of the greatest events, including the greatest evils and injustices, which history records.

Chapter IV. A Remedy

1. Remedies Which Have Been Proposed. The 43 remedies proposed almost ignore the money side of the problem. They aim at economy and efficiency, and concern the problem of our incomes rather than that of the purchasing power of the dollar.

2. The Dollar the Only Unit as Yet Unstandardized. The dollar is now a unit of weight, not a unit of power to purchase goods, which is what we need. We have gradually stabilized or standardized every other unit used in commerce, including the yard, pound, bushel, horsepower, volt. Formerly these were as roughly defined as the dollar is now. The yard was once the girth of the chief.

3. An Imaginary Goods-Dollar. Two commodities like gold and silver make a better standard than one and many make a better standard than two. The dollar standard should be worth a specified bill of goods such as one board foot of lumber, fifteen pounds of coal, half a pound of sugar, half an ounce of butter, a quarter of an ounce of leather, a quarter of a pound of steel, etc. Such an aggregate of goods, selected on the basis of their relative importance in trade, may be called a goods-dollar or a market-basket dollar.

4. The Gold Standard Not to Be Abandoned. Such a goods-dollar would be a good standard of value but a poor medium of exchange, being too heavy, bulky, perishable. It is proposed therefore to retain gold as a medium of exchange but to correct the gold dollar so as to make its value equal to that of the imaginary goods-dollar.

5. Merely the Weight of the Gold Bullion Dollar to Be Varied. The gold dollar is to be thus corrected by changing its weight. A Mexican dollar is only half as heavy as ours and so buys only half as much as it would if it were of the same weight.

6. No Gold Coins to Be Used. We have already changed the weight of our gold dollar twice. It would be easy to change it every month or so, and especially easy if we give up having coined gold. To-day gold circulates mostly by proxy—through paper certificates. It could do so entirely. The certificates are redeemable in gold bullion bars. The proposal is simply to change the rate at which these bars are exchangeable for certificates from the present fixed rate of 23.22 grains of pure gold for each dollar of certificates to a higher or lower rate from time to time.

7. The Essentials of a Gold Standard are a lake of gold with inflowing and outflowing streams. The inflow is from miners and importers who put their gold not directly into circulation but in the custody of the government, receiving certificates which serve in circulation as the gold's proxies. The outflow is to jewelers and exporters who redeem certificates and withdraw the gold. These essentials would remain unchanged, but the terms for depositing and withdrawing gold would be changed.

8. Periodical Variations of Weight Based on Index Numbers. The changes in the dollar's weight would not be left to discretion but would obey the index number of prices. Every two months, say, this index number would be calculated representing what the imaginary basket of goods, called the goods-dollar, actually costs. If this basket costs 1%, or 1 cent, more than a dollar, 1% more gold is added to the dollar. If it costs 1% less than a dollar, the dollar is lightened 1%.

9. How the Adjustment Rule Would Work. It is not assumed that such corrections would necessarily be complete or final. But, if not, the next calculation of the index number would tell the tale and further correction would then occur. There would always be some deviation from par, but it would always be in process of correction, just as an automobile never remains in the exact direction desired but its deviation from the true path is being corrected as fast as it is made evident. Thus the gold dollar would keep close to the goods-dollar; every other dollar (the paper dollar and the deposit dollar) being redeemable, directly or indirectly, in the gold dollar, would be equivalent thereto.

10. Proviso against Speculation at Expense of the Government. The government would charge say 1% "brassage" for deposit of gold and no one change in the dollar's weight would exceed that brassage. This would prevent speculation in gold embarrassing to the Government. This proviso and other technical details are elaborated in Appendix I, § 1.

11. Comparison with Other Plans. Attempts to increase production are commendable, but neither these nor price fixing can greatly affect the price level. They require repressive force, while stabilizing the dollar would be effortless.

Chapter V. Conclusion

1. Summary of the Plan. Abolish gold coin, redeeming certificates in bullion only; establish an index number; adjust the dollar's weight by the deviation of this index number from par; charge a "brassage" fee and never at any one time alter the dollar's weight more than that; keep the gold standard system of unrestricted deposit and redemption and keep a sound banking system.

2. The Crux of the Plan is to keep the dollar from shrinking in value by making it grow in weight, or vice versa.

3. Artificiality of a Fixed-Weight Dollar. At present the weight of the dollar, and so the price of gold, is fixed. We cannot mark the price of gold up or down when its value goes up or down. The result is that the prices of other things rise when the price of gold ought to fall and vice versa.

4. Transition Would Cause No Shock. If the price level chosen as the par is near the level existing when the system starts, the ordinary man would never notice the change. The few, like miners and jewelers, who handle gold bullion would simply notice that the price of gold was no longer fixed.

5. Contract-Keeping Would Cease to Be Virtual Pocket-Picking, and the discontent, jealousy, and suspicion resulting therefrom would also cease; crises and depressions would be abated.

6. Not a Cure-All. It would not be a substitute for economy and efficiency nor would it insure a just distribution of wealth, but it would free these problems from their present entanglement and confusion with the problem of a stable dollar. It would accomplish more than any other single reform and more simply.

7. No Claim to Theoretical Perfection. It aims simply at a practical improvement of the dollar like the improvements already made in all other units.

8. Why Has So Simple a Remedy Been Overlooked. Among other reasons, because until recently the index number had not been devised. No unit can be standardized until it can be measured.

9. What Is to Hinder. Conservatism, indifference, ignorance.

10. Precedents. Contracts have been made in terms of other standards than current money.

11. What Might Have Been. If we had stabilized the dollar forty years ago, we should have escaped, during the first half of that period, the billions of loss with the bankruptcies of farmers and business men and ill-chosen changes of control, the crises of 1884 and 1893, much unemployment, populism, sectional ill-feeling, and the free silver agitation; while in the second half, we would have escaped the rising cost of living, the robbing through depreciation of savings, bonds, salaries, and wages, the food riots before the war and some of them since, some of the speculation and muckraking, much "profiteering," most of the I. W. W., many strikes, the injustice to railways and street railways.

12. What Is in Store. That depends on which way the dollar moves, which, in turn, depends on govern finance not only here but abroad. We may feel sure the dollar will not stop fluctuating unless we stop it and thereby settle in advance what, if neglected or long delayed, may prove to be a bitter controversy.

13. Our After-War Opportunity is to take the leadership in settling price levels disturbed by the war. If we do, the world will probably follow.

14. If We Miss the Opportunity to effect a scientific remedy for our unstable dollar, we pave the way for an unscientific remedy, for charlatanism, and a great selfish class struggle.

Appendix I. Technical Details

1. The Reserve against Certificates. To increase or decrease the weight of the gold dollar decreases or increases in the inverse ratio the number of dollars in a given physical gold reserve and would therefore disturb, in one direction or the other, the present 100% ratio of gold reserve to gold certificates. The ratio may be kept at 100% or any other fixed figure by canceling or issuing certificates for that purpose.

These operations would help stabilization, i.e. would require less change in the dollar's weight than would otherwise be necessary.

They also put an item of loss or gain on the Government's books which would otherwise belong to private individuals.

Another way to treat the reserve is merely to let the ratio of reserve to certificates alone unless or until the reserve should sink to a set minimum limit of safety, say 50%, after which it could be safeguarded in the manner above described.

Still another way is to apply such a limit at the out , the Government then appropriating the surplus above this legal reserve as initial profit and afterward maintaining the fixed ratio in the manner described.

As long as the reserve is left to drift, the operation of the stabilization system would consist chiefly in affecting the export or import of gold. When the additional feature of withdrawing or issuing certificates is added, the operation of the system would consist chiefly in affecting the volume of these certificates within the country.

If the country or countries employing the system were a small part of the world, the changes required in the dollar's weight would not be appreciably different whether or not the feature of special withdrawal and issue of certificates to keep the reserve ratio definite is introduced or not. But if the countries employing the system included most of the world, the first, or indefinite reserve system, would require much more change in the dollar's weight to effect stabilization than would the second, or definite, reserve system.