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Hou Pobl suo with the conferents ar putemail suzano Úwers on cle. ne 1510 STABILIZING THE DOLLAR NETHERAGOSTOSACHICAS PARA 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 STABILIZING THE DOLLAR A PLAN TO STABILIZE THE GENERAL PRICE LEVEL WITHOUT FIXING INDIVIDUAL PRICES BY IRVING FISHER PROFESSOR OF POLITICAL ECONOMY IN YALE UNIVERSITY EX -PRESIDENT OF THE AMERICAN ECONOMIC ASSOCIATION New York THE MACMILLAN COMPANY 1920 All rights reserved VARD UNIVES JUN ahi 1942 F ORADUATE SCHOOL h u UNE AOMINISTRATIONS COPYRIGHT , 1920 . BY THE MACMILLAN COMPANY . Set up and electrotyped . Published January, 1920. Norwood Press J. 8. Cushing Co. - Berwick & Smith Co . Norwood, Mass., U .S .A . to JOHN ROOKE SIMON NEWCOMB ALFRED RUSSEL WALLACE AND ALL OTHERS WHO HAVE ANTICIPATED ME IN PROPOSING PLANS FOR STABILIZING MONETARY UNITS PREFACE The fundamental fact on which the proposal of this book is based is that the purchasing power of the dollar is uncertain and variable , that is , that the price level is unstable . The war has caused the greatest upheaval of prices the world has ever seen . Inseparably connected with this upheaval is grave and world -wide industrial dis content. Because of this and because of the perplexity of business men as to future movement of prices, there has been much discussion going on of the question whether the level of war prices will drop or whether it can be stabilized . To show that permanent stability can be secured is the chief aim of this book ; and a specific and de tailed plan for this purpose is presented . The first sketch of this plan was published in 1911 (in my Purchasing Power of Money ) . It was later presented before the International Congress of Cham bers of Commerce at Boston , September, 1912 , and again before the American Economic Association , December, 1912. The plan was elaborated in the Quarterly Journal of Economics, February , 1913. In October, 1917, I gave the Hitchcock lectures at the University of California , using much of the ma terial published now , for the first time, in this book . In the spring of 1918 a Committee of the American Economic Association , on the Purchasing Power of vii PREFACE viii Money in relation to the War, indorsed the principle of stabilization and commended the subject to the earnest attention of statesmen and economists. By this time academic economists had been largely won over to the idea, it having run the gantlet of their criticism for several years. The general support of economists marks the first milestone in the progress of the idea . Latterly a beginning has also been made toward arresting the attention of the business and industrial world , the interests of which are most at stake. Their general approval, if obtained, will mark the second milestone. Until recently it has seemed premature to ask men in political life to press for the actual adoption of the plan . Their action , if taken , will mark the third and finalmilestone. Appendix IV , § 3, gives the names and comments of prominent leaders in all three fields — economics , business , politics — who have approved the idea . When I first propounded the plan for stabilizing the dollar I supposed that I was the first to do so . It soon appeared, however , that the same thought had occurred independently to a number of others. The bibliography in Appendix VI gives references to the published writings in which substantially the very plan here presented has been outlined by others . There are a few anticipators who have never pub lished their views but have kindly sent me copies of manuscripts or letters describing them . The following is a complete list in chronological order of anticipators , so far as known to me: John Rooke, 1824 ; the late Simon Newcomb, astronomer and economist, 1879 ; ix PREFACE Professor Alfred Marshall, Cambridge, 1887 ; Aneurin Williams, M . P ., 1892 ; Professor J. Allen Smith , now Dean , University of Washington , 1896 ; D . J . Tinnes, Hunter, North Dakota, 1896 ; William C . Foster, Boston, Mass ., 1909 ; Professor Harry G . Brown , University of Missouri, 1911 ; Henry Heaton , Atlantic , Iowa, 1911. This list could be lengthened considerably if the authors of plans radically different, but having the same purpose in view , were to be included . Among these authors is the late Alfred Russel Wallace , the naturalist . The only essential feature of the plan in which , apparently , I have not been anticipated is the pro vision (mentioned at the end of Chapter IV and de scribed, in detail, in Appendix I, § 2 ) regarding specula tion in gold . The fact that the plan has been worked out inde pendently in so many cases and by men so able and clear-headed is, I venture to think, strong evidence of the soundness of the proposal. It also affords me the opportunity to promote the plan the more impersonally and , I hope, with more chance of success than if it were merely one man 's idea. My thanks are due to the large number of persons who,through many years,by criticismsand suggestions, have helped me gradually develop the present formu lation of the plan . I wish especially to express my thanks to Prof. Wm . H . Taft and Mr. Morison R . Waite, who supplied important legal data bearing on the problems of Appendix I , § 6 ; to Dr. Royal Meeker, Prof. Wesley Clair Mitchell, Dr. B . M . An derson , Jr., and Prof. Percy W . Bidwell, who supplied PREFACE valuable criticism of portions of the appendix ; to Mr. Philip P . Wells, formerly legal counsel of the National Conservation Association , who has helped frame the tentative draft of an act to stabilize the dollar given in Appendix I, § 9 ; to my brother Herbert W . Fisher, whose criticisms have assisted me in improving the form of presentation ; and to Miss Clara Eliot, for merly instructor in sociology in Mills College, who has helped at every stage of the work . Every objection or difficulty which has been raised has been, I believe, frankly faced and discussed. Such discussion has been relegated to the appendix , in order that the text might be confined to stating the plan which , as will be seen , is so simple that any one can readily grasp it . It has been my ambition to reach and convince every available reader. If the particular plan here proposed is not the best to accomplish its purpose, I hope a better one will be proposed . It is also my hope that readers will spread the idea of stabilization by whatever methods seem to them most effective for promoting legislative action , na tional or international. I should be glad to be kept informed of such activities as well as to receive sug gestions and criticisms. As a movement for stabilization, in some form , seems inevitable in the immediate future, I shall be glad to make the best use I can of the return postal card inserted here for the convenience of the reader, should be desire to stamp, sign , and mail it. IRVING FISHER . NOVEMBER, 1919. SUGGESTIONS TO READERS 1 . The general reader will be chiefly interested in the five chapters of the text, of which Chapter IV is the chief. 2 . Those who find any difficulty in accepting the argument in the text are referred to Appendix II, of which § 1 and § 3 will probably be found of most general use. 3 . The General Summary is designed for those who think they have not time to read the book . 4 . The Summary by Sections will supply the start ing point for reading any special part of the text de sired . 5 . The analytical table of contents, the index, and the running page headings have been constructed to facilitate the use of the book as one of reference. 6 . Chapter II may help those who do not yet believe that the so -called “ high cost of living ” is, at bottom , a shrunken dollar. 7 . Chapter III is commended especially to those who imagine that there is little wrong with our present monetary system . 8 . Appendix IV , § 3 , is for those craving good company in espousing new ideas. 9 . Appendices I and III and Appendix II, § 2, are intended chiefly for technical economists . 10 . Appendix VI gives references for further study and verification . SHORT TABLE OF CONTENTS CHAPTER I. THE Facts . . . . . . . . APPENDIX I. TECHNICAL DETAILS . . . . . . 214 . . . . 252 . . 263 . 279 . . 286 . CHAPTER II. THE CAUSES CHAPTER III. THE Evils . CHAPTER IV . A REMEDY . . CHAPTER . V. CONCLUSION APPENDIX II. DISAPPROVAL OF THE PLAN APPENDIX III. ALTERNATIVE PLANS . PUBLIC INTEREST APPENDIX V. PRECEDENTS . APPENDIX IV. . . . . . . APPENDIX VI. BIBLIOGRAPHY . . iii ANALYTICAL TABLE OF CONTENTS PAGE GENERAL SUMMARY . SUMMARY BY SECTIONS . . . . . . XXV . xxix . . . . XXV . CHAPTER I THE FACTS . . . . . . . 1 2. MEDIEVAL PRICE LEVELS . . . . . . 5 1. INDEX NUMBERS . 3 . A CENTURY AND A QUARTER OF PRICE MOVEMENTS BEFORE THE GREAT WAR . . . . . . 6 . . 8 . . . 10 . . 4. PRICE MOVEMENTS DURING THE GREAT WAR CHAPTER II THE CAUSES 1. FALSE SCENTS . . . . . 2. PROFITEERS, SPECULATORS, AND MIDDLEMEN . . . . 14 THE ERROR OF SELECTING SPECIAL CASES . THE ARGUMENT FROM PROBABILITY . . . THE ARGUMENT FROM STATISTICS . . PRICE MOVEMENTS VARY WITH MONETARY SYSTEMS . 4. 5. 6. 7. . 3. CIRCULAR REASONING . 8. PRICE MOVEMENTS VARY WITH THE MONEY SUPPLY . 9. KINDS OF INFLATION . . . . . . . 10. EXTENT OF WAR INFLATION . . . . . . 11. MONEY ILLUSIONS . . . 12. THE INSTABILITY OF THE GOLD STANDARD AS COMPARED WITH AN EGG STANDARD AND OTHERS XV . . 39 xvi ANALYTICAL TABLE OF CONTENTS PAGE 13 . SEEING OURSELVES AS OTHERS SEE US . . . 41 15 . TRACING THE INVISIBLE SOURCE OF THE TIDE 16 . OTHER CAUSES THAN MONEY . . . . . . 49 . 51 14 . A VISIT OF SANTA CLAUS . . CHAPTER III THE EVILS 1. The Evil of High PRICES Is Not GENERAL IMPOVERISH MENT · · · · · · · · · 2. CONTRACTS UPSET . . . . . . . . · . 3. SALARIES AND WAGES SLOW TO BE ADJUSTED 4. Rates FIXED BY LAW OR Custom Also Slow . 5 . PERIODS BEFORE AND AFTER 1896 CONTRASTED . . 7. Two ILLUSTRATIVE CASES . . 8. THE EXTENT OF SOCIAL INJUSTICE . . . . 9. UNCERTAINTY . . . . . . 6 . The Fault Is Not PERSONAL BUT Social . . . . . . . . 10. TRADE CYCLES 11. RESENTMENT AND VIOLENCE . . 12. FALLING AS WELL AS RISING PRICES CAUSE DISCONTENT 13. War Prices CAUSE DISCONTENT . . 14. ADJUSTMENTS Most NEEDED, THE Most UNPOPULAR . . . . . . 16. THE Loss Is GENERAL . . . . . . 17. CONCLUSION . . . . . . 1. REMEDIES WHICH HAVE BEEN PROPOSED . . 15 . BAD REMEDIES . . . CHAPTER IV A REMEDY . 79 2. THE DOLLAR THE ONLY UNIT AS YET UNSTANDARDIZED 81 ANALYTICAL TABLE OF CONTENTS xvii PAGE 3. AN IMAGINARY GOODS-DOLLAR . . . . . 84 4. THE GOLD STANDARD Not to BE ABANDONED . . 5 . MERELY THE WEIGHT OF THE GOLD BULLION DOLLAR TO BE VARIED . . . 6. No GOLD COINS TO BE USED . . . . 7. THE ESSENTIALS OF A GOLD STANDARD . . . . . .. . . . 8 . PERIODICAL VARIATIONS OF WEIGHT BASED ON INDEX NUMBERS . . . . . . . 9. HOW THE ADJUSTMENT RULE WOULD WORK . . . . 97 95 10 . PROVISO AGAINST SPECULATION AT EXPENSE OF THE GOVERNMENT · 100 11. COMPARISON WITH OTHER PLANS . . . . 101 . . . 104 CHAPTER V CONCLUSION 1. SUMMARY OF THE PLAN . . . 2. The Crux OF THE PLAN . . . . 3. ARTIFICIALITY OF A FIXED-WEIGHT DOLLAR . 4. TRANSITION WOULD CAUSE No Shock . . . . . . 105 . 106 . 107 5 . CONTRACT-KEEPING WOULD CEASE TO BE VIRTUAL POCKET-PICKING . . . . . . . . 6 . Not A CURE-ALL . . . . . . . . 110 7. No Claim TO THEORETICAL PERFECTION · · . 112 108 · 8. Why Has So SIMPLE A REMEDY BEEN OVERLOOKED . 113 9. What Is to HINDER . . 114 10 . PRECEDENTS . . . . .. 12. WHAT IS IN STORE . . . 13. OUR AFTER -WAR OPPORTUNITY 14. IF WE MISS THE OPPORTUNITY . . . . . 116 · · · · · 11. What Might HAVE BEEN 121 122 xviii ANALYTICAL TABLE OF CONTENTS PAGE APPENDIX I TECHNICAL DETAILS 1. THE RESERVE AGAINST CERTIFICATES . . . . 125 A . Stabilizing the Dollar Would Destabilize the Present 100 % Reserve . · · · . B . Restabilizing the 100 % Reserve Thereby · . · . · 125 . 126 · . . C . The Reactions Involved Thereby D. The Definite and the Indefinite-Reserve System Contrasted . 128 129 . E . Stabilization in Small and Large Nations Compared . 131 F. A 50 % Minimum Reserve . . 132 G . How Soon Might the " Indefinite " System Reach Its Limit . . . . . . . . . 32 1. Putting the Surplus to Work . . . . 134 K . The Interest on Surplus Would Save Taxes L. The Future . . M . Summary . . . . .. . . 2. SPECULATION IN GOLD . . . . . A . Preventing “ Overnight” Speculation . . . . 137 137 . 138 139 . . . . . . 134 . . . . J. Reactions Therefrom . . H . A Constant 50 % Reserve and a Variable Surplus B. Speculation beyond One Adjustment Period 139 142 146 C . Unofficial Prices of Gold . . . D . Conclusion . . . . . . 3. SELECTION OF THE INDEX NUMBER . . . . . 147 4. SELECTION OF THE PAR . . . . . 154 . . . . . 147 5. What SHALL BE DONE WITH EXISTING GOLD COINS 161 6. What SHALL BE DONE CONCERNING THE "GOLD . . D . The Rôle of Bank Discount . 8. INTERNATIONAL ASPECTS OF THE PLAN . A . The Mint Price . . . . . 163 . . . . 168 · 168 . 169 . . . . . . . C. Maintenance of Redemption . . . . . B . The Effect of War on Bank Credit . . CLAUSE " IN EXISTING CONTRACTS 7. BANK CREDIT AND THE PLAN . . . A . Misconceptions . . . . . . 170 170 . 172 . 172 xix ANALYTICAL TABLE OF CONTENTS PAGE B . Gold Reserves and Price Levels as Internationally Related . . 175 . . . . . . . C . Exports and Imports . . . . . . . 177 D . Spreading the Gold Points . . . . . . 179 E. The Adoption of the Plan Would Spread . . . 180 9. NUMERICAL ILLUSTRATIONS UNDER VARIOUS ASSUMPTIONS 183 . 183 A . The Standard Hypothetical Case . 188 B . Changing the Assumption as to the “ Lag” . ( a ) Assumptions same as in standard case except : lag changed from 1 to 2 adjustment intervals . 188 (6) Assumptions same as in standard case except : lag changed to 3 adjustment intervals . (c) Conclusion as to lag . . . . . . . 189 . 189 C. Changing the Assumption as to the “ Tendency ” . 190 (a ) Assumptions same as in standard case except : tendency increased from 1 % to 2 % per ad justment interval . . . .. .. .. (6) Conclusion as to tendency . . . . . 191 D. Changing the Assumption as to the “ Brassage" . . 191 190 (a) Assumptions same as in standard case except : brassage changed from 1 % to 2 % . 191 (6 ) Assumptions same as in standard case except : brassage changed from 1 % to 2 % and also : tendency, first upward and later downward , changed from 1 % to 2 % . . . . . 192 (c) Assumptions same as in standard case except : brassage changed from 1 % to 2 % and also : lag changed from 1 to 3 adjustment intervals 192 (d ) Conclusion as to brassage . . . . . 192 E . Changing the Assumption as to the " Adjustment” 192 (a ) Assumptions same as in standard case except : adjustment changed from 1% to 2 % (per 1 % deviation ) . . . . . . . 192 . (6 ) Assumptions same as in standard case except : adjustment changed from 1 % to 2 % and also : brassage changed from 1 % to 2 % or above 193 (c) Assumptions sameas in standard case except : ad justment changed from 1% to 1 % . . . 193 ANALYTICAL TABLE OF CONTENTS PAGE . . . 193 F . Changing the Assumption as to the “ Influence” 194 (d ) Conclusion as to adjustment . . (a ) Assumptions same as in standard case except : influence decreased from 1 % to 1 % (per 1 % of adjustment) . . . . . . . 194 (6 ) Assumptions same as in standard case except : influence changed from 1 % to 1 % and also : brassage changed from 1 % to 2 % or more · 194 (c) Assumptions same as in standard case except : influence changed from 1 % to 2 % · · · 195 195 (d ) Conclusions as to influence . . G . General Conclusions on Variations from the Assump 196 tions of the Standard Case . . H . The Stabilization Process Applied to the Actual Course of Prices . . . . . . . 199 (a) The assumptions suitable for practical conditions 199 (6) Calculation of stabilized index number . . 201 10 . A TENTATIVE DRAFT OF AN ACT TO STABILIZE THE DOLLAR · · · · · · · · · 205 APPENDIX II DISAPPROVAL OF THE PLAN 1. MISUNDERSTANDINGS . A . Introduction . . . . . . . . 214 . . . . . . 214 B. “ The Plan Only Corrects Those Deviations in the Purchasing Power of the Dollar Which Are Due to Gold Causes” . . . . . . . 215 C . " It Assumes 'the Gold Theory ' – That High Prices . . 215 D . “ It Assumes the Quantity Theory ofMoney ” . Are Due to the Abundance of Gold ” . . 215 E . “ It Contradicts the Quantity Theory” . 216 . . F . " It Aims to Fix All Prices ” . . . . G . “ It Would Interfere with Supply and Demand ” H . “ It is a Plan to Control the Value of Gold ” . . 1. " It Works Only through the flow of Gold ” . . 220 J . “ It Would Shift to the Government the Losses Now Borne by Private Contracting Parties ” . . . 221 xxi ANALYTICAL TABLE OF CONTENTS PAGE K . “ It Would Make a Pretext for Raising Prices" . . 222 L . “ It Would ' Tamper' with the Standard of Value” . 222 M . “ Changes in the Weight of the Dollar Cannot Affect Its Value because Only Government Fiat Can Fix the Value ofMoney " N . “ It Is a Fiat Money System ” 223 . . .. . . . . . . “ It Would Be Destroyed by War" . “ It Could Not Check Rapid Changes" “ It Is Too Inelastic " . . . . “ The Correction Comes Too Late " . . . C. D. E. F. G . Conclusion on Alleged Defects , . 3 . THE OBSTACLE OF CONSERVATISM . . . . . B . “ The Tide May Turn ” . C . “ It Requires Governmental Interference " . D . “ We Could Not Interest Other Countries” . . . . . . . D . Speculators . . . · 233 . . . . . 240 . 248 . 251 . . 252 . . · C . Devotees of Panaceas . · 233 . . · . 236 . . . . .. . . · · · · B . Gold Producers . · 231 231 · 4. THE OBSTACLE OF SPECIAL INTERESTS . A . Debtor and Creditor . 229 230 · · · · . · . 228 229 · E . “ The Evils Are Unreal” . F . Conclusion . 226 . . . A . “ It Has Never Been Tried ” 224 224 · · · · · · · . A . “ A Goods-Dollar Is Not Ideal” . B. “ People Could 'Contract Out' " · · · · · . . . . 2. ALLEGED DEFECTS . . · · · FIX who . . 250 APPENDIX III ALTERNATIVE PLANS 1. A SOUND ALTERNATIVE . . . . . A. Introduction E . Summary . . . . . . . . . . . B . Redemption Warrants C . Unrestricted Redemption via Warrants D . Unrestricted Deposit of Goods- Dollars 253 254 255 . . 256 2 . THE SAME SYSTEM MODIFIED BY THE OMISSION OF “ FREE COINAGE" · · · · · 257 xxii ANALYTICAL TABLE OF CONTENTS PAGE 3. THE SAME SYSTEM MODIFIED BY THE OMISSION OF REDEMPTION . . . . 4. A MONEY BASED ON LABOR . . . . . 5 . GOVERNMENTAL CONTROL OF GOLD PRODUCTION . . 258 . 259 •. 260 STANDARD .. 6 . THE TABULAARR STANDARD . 260 . . . . . . . . APPENDIX IV PUBLIC INTEREST 1. EITHER AN UPHEAVAL OR A COLLAPSE OF PRICES WEAKENS CONFIDENCE IN MONEY . . . . . . 263 2. THE PRESENT PLAN GREW OUT OF THE PRICE Move MENT BEGINNING IN 1896 . . . . . . 272 3. APPROVAL OF THE PLAN FOR STABILIZING THE DOLLAR . 274 APPENDIX V PRECEDENTS 1. CONTRACTS IN TERMS OF A COMMODITY . . . . 279 2. THE TABULAR STANDARD . . . . . 280 3. CORRECTING THE MONEY UNIT ITSELF . 4 . CONCLUSION . . . . . . . . . . . 284 . 285 . . APPENDIX VI BIBLIOGRAPHY 1 . SOME OF THE CHIEF INDEX NUMBERS CURRENT . . 286 2 . SOME OF THE CHIEF WRITINGS ON THE PRINCIPLES OF INDEX NUMBERS . . . . . . . . 288 3 . REMOTE ANTICIPATIONS OF THE PLAN TO STABILIZE THE DOLLAR . A . Bimetallism . . . . . . B . Gold Exchange Standard C. Irredeemable Paper Money D . The Tabular Standard . . . . . . . . . . 288 . 288 289 290 . . . 4 . DIRECT ANTICIPATIONS . . 5 . RECENT WRITINGS ON STABILIZING THE DOLLAR . . 291 293 . 294 LIST OF DIAGRAMS (In all cases the diagrams are plotted on the " ratio chart" in which the vertical scale is so arranged that the same slope always represents the same percentage rise . For a full description of the advantages of this method the reader is referred to “ The Ratio Chart," Irving Fisher, Quarterly Publications of the American Statis tical Association, June, 1917.) FIG . PAGE 1. PRICE MOVEMENTS AS CALCULATED BY DIFFERENT METHODS . . . . . . . . . 3 2. PRICE MOVEMENTS AS CALCULATED BY USING DIFFER ENT NUMBERS OF COMMODITIES . . . . 4 3. PRICE MOVEMENTS OF THE UNITED STATES AND ENG LAND FROM THE EARLIEST INDEX NUMBERS THROUGH THE FIRST YEARS OF THE GREAT WAR . 4. MOVEMENTS OF RETAIL AND WHOLESALE PRICES : 14 5 . PRICE MOVEMENTS IN FIVE GOLD-STANDARD COUNTRIES 6 . PRICE MOVEMENTS IN THE UNITED STATES UNDER THE “ GREENBACK ” STANDARD AND IN THE UNITED KING 24 DOM UNDER THE GOLD STANDARD . . . . 25 7 . PRICE MOVEMENTS IN ENGLAND AND INDIA UNDER DIF FERENT MONETARY STANDARDS . . . . . 8. THE Ratio OF THE AMERICAN TO THE ENGLISH PRICE LEVEL COMPARED WITH THE RATIO OF AMERICAN TO ENGLISH MONEY . . . . . . . 9. MONEY AND THE PRICE LEVEL . . . . . 10 . THE LEVEL OF PRICES OF COMMODITIES IN TERMS OF 31 GOLD CONTRASTED WITH ITS RECIPROCAL ( THE PUR CHASING POWER OF THE DOLLAR IN TERMS OF Com MODITIES) AND WITH THE PRICE OF GOLD xxiii . . 40 LIST OF DIAGRAMS xxiv PAGE FIG . 11. THE RELATIVE STABILITY OF CERTAIN COMMODITIES, EACH MEASURED IN TERMS OF COMMODITIES IN GEN ERAL . . . . . . . . . . 42 12. THE INDEX NUMBER WITH AND WITHOUT STABILIZATION 204 13. THE PRICE OF WHEAT IN TERMS OFGOLD AND IN TERMS OF COMMODITIES . . . . . . . . 218 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 thatevery where 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 ofmonetary units than ever before in history . The cumulative effect is a rapidly spreading con sciousness 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 XXV xxvi GENERAL SUMMARY 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 learn ing that commodities as a whole do not really rise and fall much but that what so appears is really the gyra tions 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 bar barism . 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 un stable dollar. Up to the present generation no instru ment 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 meas uring the value of the dollar in terms of its power to purchase goods. One of themost suggestive signs of the times is that this instrument for measuring changes in the purchasing GENERAL SUMMARY xxvii 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 cor rection will surely be applied not , as at present, as a patch on the dollar from the outside, but by incor porating 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 pur chasing power invariable. Wenow 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 xxviii GENERAL SUMMARY 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 reach ing the desired end, it is of the utmost importance, in the interests of justice to creditor and debtor, stock holder 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 — conserv atism . 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 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 % . xxix XXX SUMMARY BY SECTIONS 4 . Price Movements during the Great War. Dur ing 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 pack age, etc. 2 . Profiteers, Speculators, and Middlemen . Spec ulation 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. SUMMARY BY SECTIONS xxxi 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 dur ing 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 xxxii SUMMARY BY SECTIONS ments . Thus the price movements of gold standard countries are very similar (Figure 5 ), and the price niovements 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 excep tional 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 ofmoney. (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 coun tries was found to vary with the quantity ofmoney . 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 ho more than he nuant. The india weven 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 SUMMARY BY SECTIONS xxxiii 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 Com pared 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 depreciat ing 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 , rais ing 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 xxxiv SUMMARY BY SECTIONS 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 seemsmysterious 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 de posits, 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 Impover ishment. 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 SUMMARY BY SECTIONS XXXV fares, for instance, remained the traditional five cents through two decades of rising prices. 5. Periods before and after 1896 Contrasted. Be fore 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 fore stalled 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 xxxvi SUMMARY BY SECTIONS times 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 at tributed to their true cause results in suspicion , class hatred, and violence. 12 . Falling as well as Rising Prices Cause Dis content. E .g . before 1896 the western farmer hated the eastern capitalist whose mortgages he found in creasing in weight owing , he thought, to somemanipu lation 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 Unpop ular. E .g. railways and landlords have long suf fered 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 any body 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 SUMMARY BY SECTIONS Xxxvii 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 unsus pected 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, XXXVüi SUMMARY BY SECTIONS 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 redeem able 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 SUMMARY BY SECTIONS in circulation as the gold 's proxies . xxxix 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 with drawing 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 correctionswould necessarily be complete or final. But, if not, the next calculation of the index number would tell the tale and further correc tion 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 de tails are elaborated in Appendix I, § 1. SUMMARY BY SECTIONS II. 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 , re deeming 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 -WeightDollar. 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 sus picion resulting therefrom would also cease ; crises and depressions would be abated . SUMMARY BY SECTIONS xli 6 . Not a Cure-All. It would not be a substitute for economy and efficiency nor would it insure a just dis tribution 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 Over looked : 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, sal aries , and wages, the food riots before the war and some of them since, some of the speculation and muck raking, 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 xlii Y SUMMAR S BY SECTION mental 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 leader ship 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 can celing 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 Govern ment'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 SUMMARY BY SECTIONS xliii set , 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 affect ing 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 dif ferent 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 . 2 . Speculation in Gold . At present the Govern ment, unlike a merchant, buys and sells gold at one and the same price. If this practice were continued after the stabilization system was adopted , the Govern ment might be embarrassed whenever a prospective change in the price of gold became known by specu lators. They might buy gold of the Government to-day at one price and sell it back to the Government to -morrow at a higher price or sell it to -day and buy it back to -morrow at a lower price. These operations can be avoided by inserting a Government commission fee , as it were (“ brassage ' ) of say 1 % between the prices at which the Government buys and sells and xliv SUMMARY BY SECTIONS never , at any one time, shifting this pair of prices up ward or downward by more than that fee. Other forms of speculation would not do harm . 3 . Selection of the Index Number. A weighted arithmetical index number for wholesale prices of com modities should be used. Wholesale prices are more prompt to indicate what change in the dollar's weight is needed than retail prices. The frequency of calcu lation should probably be about once every two months to afford full time for the lag between the previous adjustment and its effect. 4 . Selection of the Par. This should be left to a judicial commission . Probably we should start off the system at a price level near that existing at the time. 5 . What Shall Be Done with Existing Gold Coins. One answer is (while stopping any further coinage) to allow existing coins to continue in circulation unless or until their owners choose to exchange them for certificates or melt them into bullion (if gold should appreciate enough to render such melting profit able). 6 . What Shall Be Done Concerning the “ Gold Clause " in Existing Contracts . The best way to carry out its real purpose, which was stabilization, is to abrogate it. This the Federal Government has the constitutional power to do. 7 . Bank Credit and the Plan . Bank reserves would be kept in gold bullion dollar certificates, the paper representatives of gold . The banks' own notes and deposits should , of course, be kept in some reasonable relation to their reserve. One means of accomplishing this is the adjustment of the rate of discount. This is the means used by the Bank of England . SUMMARY BY SECTIONS xlv 8 . International Aspects of the Plan . The plan does not require concerted action of nations, though concerted action would be desirable (to avoid the in conveniences of fluctuating ratios of exchange). The nations employing the plan would no longer have their monetary standards at the mercy of foreign politics or wars. International trade would not be greatly affected whether one or many nations adopted the plan . The great advantages, especially as to inter nal trade, enjoyed by any nation first adopting the plan would probably lead soon to its universal adoption . 9. Numerical Illustrations under Various Assump tions. Actual calculations show that it makes sur prisingly little difference to the resulting stabilized index number what brassage charge, what frequency of adjustment, and what adjustment of the dollar's weight for each 1 % deviation from par of the index number are decided on so long as these are kept within reasonable limits. Nor, with the same proviso, does it make much difference what may be the amount and promptness of the influence which a given adjustment is assumed to exert , nor what may be the tendency of the index number which the stabilization device is designed to overcome. Thus, if stabilization had been started in 1900 with an adjustment every other month of 1 % of the dollar's weight for every 1 % of deviation from par of the in dex number and with a brassage charge of 1 % , and if we assume that the influence on the index number is 1 % for each 1 % of adjustment, and that two thirds of this influence occurs before the next adjustment and the other third before the next following one — xlvi SUMMARY BY SECTIONS conditions constituting a very severe test — we find that, up to the fall of 1915, when the European war first greatly affected our price level, the stabilization machinery , working as above assumed , would have kept the index number within 2 % of par two thirds of the time, within 3 % of par six sevenths of the time, and within 4 % of par all of the time. 10. A Tentative Draft of an Act to Stabilize the Dollar. A dollar is defined as a variable quantity of standard gold bullion of approximately constant computed purchasing power. A Computing Bureau is to compute every second month a weighted index number of wholesale prices of about 100 important commodities. The result of this computation is to be transmitted to the Bureau of the Mint, which thereupon increases or decreases the dollar' s weight in the ratio which the index number bears to par (but not by more than 1 % , the brassage fee) . The Mint is to redeem gold bullion dollar certificates ad libitum , dollar for dollar, in gold bullion and like wise issue them for gold bullion deposited, dollar for dollar, but charging in addition 1 % brassage. The Secretary of the Treasury is to maintain the gold reserve against certificates at 50 % . Any surplus above this 50 % reserve requires an issue of certificates and any deficiency requires a cancellation of certifi cates. APPENDIX II. DISAPPROVAL OF THE PLAN 1. Misunderstandings are natural and numerous. They make up most of the supposed objections to the plan . ( Figure 13.) SUMMARY BY SECTIONS xlvii 2 . Alleged Defects. It is a weak objection that the plan is not perfect ; we know our present system is much further from perfection . 3 . The Obstacle of Conservatism is the only for midable one and it underlies most other objections alleged . 4 . The Obstacle of Special Interests seems prac tically non -existent. APPEND . III. ALTERNATIVE PLANS I. A Sound Alternative is to dispense with gold as an intermediary and to provide virtually for the free deposit and withdrawal of composite goods-dollars in exchange for the issue and redemption of certificates. These operations are made possible by means of a system of goods-warrants for each special kind of goods. 2 . The Same System Modified by the Omission 'of “ Free Coinage " (i.e. free deposit ) could theoretically be worked. 3 . The Same System Modified by the Omission of Redemption would be exposed to the risk of inflation. 4 . A Money Based on Labor is conceivable but not desirable . 5 . Governmental Control of Gold Production would help . 6 . The Tabular Standard is practicable only in a limited way . APPENDIX IV . PUBLIC INTEREST I. Either an Upheavalor a Collapse of Prices Weakens Confidence in Money and arouses public curiosity as to the “ reason why ." Great wars usually xlviii SUMMARY BY SECTIONS cause great price upheavals through inflation and so lead to discussion as to causes and cures. The tendency, at such times , to suspect the stability of money encounters, however, the ingrained faith in that stability ; so that after the price movement slows down the public soon relapses into its old childlike confidence that “ a dollar is a dollar.” It is at the end of a long swing of prices that the public interest and openmindedness is at a maximum . This was true in 1896 after a prolonged fall of prices and it is probably about to be true to -day after a pro longed rise of prices. 2 . The Present Plan Grew Out of the Price Move ment Beginning in 1896 . It was not till prices had been rising five or ten years after 1896 that the move ment attracted attention . Then articles, books, and official reports on the High Cost of Living came in quick succession and increasing numbers. A project to hold an international conference on the subject was in progress when the Great War broke out. One of the special objects of this proposed conference was to study the rôle of money in the High Cost of Living . 3 . Approval of the Plan for Stabilizing the Dollar has been expressed by economists, bankers, business men , and men in public life . Resolutions favoring it have been passed by chambers of commerce and other commercial bodies. Its actual adoption is now being considered in some countries. APPENDIX V . PRECEDENTS I. Contracts in Terms of a Commodity , such as wheat or steel, in preference to current money, have sometimes been drawn. 2 . The Tabular Standard. Contracts in terms of a SUMMARY BY SECTIONS xlix composite or index number of goods have been drawn, notably in the colony of Massachusetts, to safeguard the pay of soldiers and, in the present war, to safe guard wages. 3 . Correcting the Money Unit Itself, as in the “ gold exchange standard ,” has been adopted to prevent fluctuations in international exchange. During the Great War prohibition of gold imports or exports was sometimes adopted , the purpose being , in part at least , to prevent undue inflation or contraction . 4 . Conclusion . There is, thus, precedent for each of the elements of the proposal. The only innovation is combining these previously tested elements into one complete whole . APPENDIX VI. BIBLIOGRAPHY 1. Some of the Chief Index Numbers Current include six for the United States, two for Canada, four for Great Britain , one for France. 2 . Some of the Chief Writings on the Principles of Index Numbers include those of Jevons, Edgeworth , Walsh , Knibbs, Fisher, and Mitchell. 3 . Remote Anticipations of the Plan to Stabilize the Dollar include bimetallism , symmetallism , the gold exchange standard, paper money régimes, and the tabular standard . 4 . Direct Anticipations, being substantially plans identical in concept with that of this book, have been made as early as 1824 by John Rooke, and during the last era of falling prices by Simon Newcomb, Alfred Marshall, Aneurin Williams, J. Allen Smith , and D . J. Tinnes as well as by several others mentioned in the Preface, who have not published their views. 5 . RecentWritings on Stabilizing the Dollar are cited . STABILIZING THE DOLLAR CHAPTER I THE FACTS I. Index Numbers This book aims to show how prices in general can be controlled . A great teacher once said to his students : “ Divide the study of any social situation into four questions : What is it ? Why is it ? you going to do about it ? ” What, of it ? What are Accordingly I shall take up, in successive chapters, ( 1) the actual facts to be explained ; ( 2 ) the chief causes which explain them ; (3 ) the resultant evils which make a remedy desirable ; and (4 ) the remedy. The present chapter is devoted to the first of these four topics — the facts, as shown by the recorded price movements of history. The prices of various articles do not usually move together but scatter or disperse like the fragments of a bursting shell. Yet there is always a definite average movement just as there is a definite path of the center of gravity of the shell-fragments. In order to depict the average movement of prices we must first have someway to measure it. A very simple measure has been devised, called the “ Index Number." 1 The reader who wishes fuller details is referred to the bibliog raphies given in Appendix VI. 2 STABILIZING THE DOLLAR (Chap. I An index number is a number showing the average rise or fall of prices. Thus, if wheat has risen 4 % since lastmonth while beef has risen 10 % , the average rise of wheat and beef is midway between 4 % and 4 + 10 10 % , or 7 % (i.e. = 7). 2 Then 107 % is the “ index number ” for the prices of the two articles this month, on the basis of last month's prices taken as 100 % . Or : Last MONTH CALLED wheat . . . . . beef average . . . . . 100 % Tuis MONTH 104 % 100 % 110 % 100 % 107 % The same method applies, of course, to more than two prices. Thus, if three such prices rise respectively 4 % , 4 % and 10 % , their average rise isis =4 + 43 + 10 6 % and the “ index number " is 106 as compared with the original price level of 100, taken as a base of com parison . Such a calculation treats the commodities as equally important. If one commodity is more important than another, and we wish to be very particular, we may treat the more important commodity as the equivalent of two or three other commodities. Thus, suppose that wheat is twice as important as beef. If wheat rises 4 % and beef 10 % the average rise of the two together, instead of being + + 10 = 7, as it would be if 4 + 4 + 10 = 6 the commoditieswere regarded as equal, is just as though there were three commodities, thus making the index number 106 instead of 107. This 3 THE FACTS SEC. 1] is known as a " weighted ” average. If, reversely, beef is “ weighted ” twice as much aswheat, the average rise is 4 + 10 + 10P 3 = 8 and the index number is 108. It will be noted that there is remarkably little difference between the “ weighted ” averages on the one hand ( 106 and 108), and the “ unweighted ” average (107) on the other. Such is usually the case. Figure 1 illus trates this important fact. Nor does it generally make 100. ted weigh 904 M unwevante IT7120 Fig. 1. Price Movements as Calculated by DifferentMethods (after Wesley Clair Mitchell) Showing how very closely the " weighted " and " unweighted " methods of averaging agree with each other. That is , the percentage by which the level of wholesale prices in the United States has changed between any two dates is found to be about the same whether that percentage is calculated “ unweighted ," i.e. as a simple average of the percentages by which the various commodities have changed in price, all of them being treated alike , or " weighted ," i.e. with careful regard to the relative importance of each commodity. Thus, between 1896 and 1914 the " weighted " index number rose from 67 to 100, and the “ unweighted " from 90 to 133. The two rises are almost identical, 100 being almost the same as you ( The curves in this, and the other,diagrams in this book are plotted on the " ratio chart " in which the vertical scale is so arranged that the same slope always represents the same percentage rise.) much difference whether very many or only a moderate number of commodities are included . Figure 2 illus trates this fact. On the whole , the best form of index number is that expressing the price of a given bill of goods. If a defi STABILIZING THE DOLLAR (Chap. I nite assortment of goods cost $ 1.00 at one date and $ 1. 10 at another date, these figures may be regarded as index 130 d 242 - 267 compare A 15 6 LA 730 110 ommod But ccon T 140 -120 7. 90 · Fig . 2 . Price Movements as Calculated by Using Different Num bers of Commodities (after Wesley Clair Mitchell) Showing that the percentage rise or fall of the level of wholesale prices in the United States is very much the same whether many or few commodities , are included in the calculations. numbers. Thus the price from time to time of an im aginary market basket containing a representative col lection of goods, e.g. one pound ofmeat, one pound of sugar, one pint of milk , etc., may be considered the index number and is so considered in Chapter IV . Various systems of index numbers are now before the public , — such as those of Bradstreet, Dun, Gibson, the Annalist, the United States Bureau of Labor Sta tistics , the Canadian Department of Labour, the Lon don Economist, the London Statist, and the British Board of Trade. The present index number of the United States Bureau of Labor Statistics, as perfected by the present Chief of the Bureau, Dr. Royal Meeker, is made up from the wholesale prices of 300 commodities. It gives more weight to the more important commodities, as measured by the amounts marketed in the last census year. It expresses the price level of 1914 by the index Sec. 2] THE FACTS number 100 as compared with the price level of 1913 taken as 100. In other words it shows that, as between 1913 and 1914 , prices averaged the same. The index number for 1917 was 176, and that for 1918, 196 . That is, the prices in 1917 were, on the average, 76 % higher than those of 1913, and in 1918 , 96 % higher, and conse quently the prices of 1918 were , on the average, higher than those of 1917 in the ratio of 196 to 176 . Index numbers are a comparatively modern inven tion . Not many good ones have been calculated back of 1890 , and still fewer back of 1860. Jevons, the Eng lish economist , who, more than any other man, was responsible for introducing the idea , computed an index number for England back to 1782. A few very rough index numbers have been computed back to the thir teenth century , and one, with some breaks, back even to the eighth century . 2 . Medieval Price Levels It is an interesting fact that, throughout the ages, while prices have sometimes fallen , they have generally risen . In France prices just before the war were four to six times as high as five hundred years ago and five to ten times as high as a thousand years ago. Wemoderns are not the only ones to complain of the “ high cost of living." In the sixteenth century people were complaining that wheat cost from three to ten times what it cost during the three preceding centu ries. We are told that in 1447 £5 bought as much as £28 or £30 would buy in 1707. These fluctuations of prices are expressed in terms of metallic money. Where irredeemable paper money has been used , the STABILIZING THE DOLLAR (Chap. I fluctuations have been far greater, as, for instance, in the case of the famous assignats of the French Revolution, and the “ Continental ” paper money of our own Revolution and the present paper money of Russia . After the American Revolution a barber in Philadelphia is said to have covered the walls of his shop with Continental paper money, calling it the cheapest wall paper he could get ! Jokes were also heard of a housewife taking a market basket full of this “ money ” to the butcher's shop and bring ing home the meat in her purse ! This money be came a hissing and a byword ; and, even to this day , one of the favorite expressions for worthlessness is “ not worth a Continental.” 3 . A Century and a Quarter of Price Move ments before the Great War But we have no really good measure of price move ments before 1782, the date from which Jevons begins his system of index numbers for wholesale prices in England . Between 1789 and 1809 Jevons' index number rose from 85 to 161. That is, in twenty years, according to Jevons, English prices practically doubled. Between 1809 and 1849 Jevons' index number fell from 161 to 64 . That is , in these forty years, accord ing to Jevons' number, English prices were reduced by more than one half. Between 1849 and 1873, English prices, as measured by Sauerbeck 's index number, rose (with two interrup tions) from 74 to 111. Figure 3 exhibits these movements as well as those 2040 for the United States. We note the great va Movements Numbers England Earliest through United States Index Price from and the the Fig of.3 THE FACTS similarity England Showing general United States paper basis 1862 close 1801 was The and the on 78 20in.-,;a Sec. 3] riability of the curves. Very seldom do they run horizontally . Occasion there is a variation of over 10 % within a year. Between 1873 and 1896 , in countries using the gold standard , prices using the silver standard , Great Years First War the of fell ; while in countries translated periods dotted prices these show lines back into gold the for as. ally, even in peace times , ht they rose . In the United States the fall was aggra vated by the necessity of getting back from the Civil War to the gold standard . Prices fell from an index number of 100 in 1873 to 51 in 1896 , when the cumulative downward movement re sulted , politically , in the famous Bryan campaign . But, by the irony of fate, scarcely had the country become excited over falling prices when themovement turned up ward again ; and, with few exceptions, it has Ingtapat paper standard of the STABILIZING THE DOLLAR (Chap. I been upward until to-day. Between 1896 and 1914 be fore the outbreak of war, the index number of the United States Bureau of Labor Statistics shows a rise of about 50 % . Substantially the same rise occurred in Canada ; while in the United Kingdom there was a rise of 35 % . 4 . Price Movements during the Great War In the still further and more recent rise of prices the Great War has been the dominant factor. Its first effect was a speculative rise. Sudden and arbitrary speculative “ mark -ups ” of prices usually accompany war, and the mark -up in 1914, like most others, was temporary . It reached its maximum in the United States in September, 1914 . As soon as it became clear that market conditions would not justify it (and this became clear after about a month ) speculators were forced to reduce prices again and , until near the close of 1915 , no great rise in prices occurred in the United States . From the close of 1915 , however, the rise has been farmore rapid than before. The rise of wholesale prices before the war, between 1896 and 1914 , great as it was, amounted , in the aggregate , in the United States to only } of 1 % per month, and in England , to still less ; whereas , during the war , the rise amounted to 13 % per month in the United States, and to much more in many other countries — in Germany and Austria , to 3 % per month , and in Russia , apparently, to 4 % or 5 % per month. To these German and Russian rates there is no par allel among the records of index numbers which have been computed. onde more he becam If before the war we could become SEC. 4 ) THE FACTS excited over a continued average up-grade of } of 1 % per month , we may partially understand some of the Russian economic unrest with an uphillmovementmore than twenty times as steep and probably still steeper under Bolshevism . As yet the evidence is not all in , but the index number of wholesale prices of our Bureau of Labor rose 106 % between 1914 before the war and November, 1918 ,the month of the armistice, while the index number of the London Statist rose 122 % . Retail prices of food rose in the United States in the same period 79 % , in England 133 % , in France approx imately 140 % , etc . It is fair to say that the war doubled prices in the United States and Canada and more than trebled them in western Europe, while in Russia it multiplied them by ten or twenty or more. The result is that the problem of the price level is , throughout the world , perhaps the greatest economic problem which the war has left. The general level of prices in the United States is now almost threefold the level of 1896 . Expressing the same fact in terms of the purchasing power of . money , our dollar of to -day is worth only thirty -five cents of the money of 1896 . In modern slang we may say almost literally , that, as compared with the biggest dollar we ever had , that of 1896 , our present dollar “ looks like thirty cents .” 1 From the fragmentary data available for Germany, it would seem that the official retail prices of food rose about two and one half fold during the war and unofficial, i.e. illicit or " unter der Hand," prices rose about tenfold . CHAPTER II THE CAUSES 1. False Scents We have answered the first of the four questions and have seen that the price level is always changing , that is, that the dollar is not a constant unit of pur chasing power or value in exchange. We are now ready for the second of the questions, i.e. “ Why is it not constant ? ” . In recent popular discussions a great variety of reasons have been assigned for the “ high cost of living,” e.g ., " profiteering " ; speculation ; hoarding ; the middleman ; foreign demand ; the war ; labor unions ; short hours of labor and limitation of output ; trusts ; patent monopolies ; the tariff ; cold storage ; longer hauls on railroads; marketing by telephone ; the free delivery system ; the individual package ; the enforcement of sanitary laws ; the tuberculin testing of cattle ; the destruction of tainted meat ; sanitary milk ; the elimination of renovated butter and of “ rots ” and “ spots " in eggs ; food adulteration ; advertising ; un scientific management ; extravagance ; higher standards of living ; the increasing cost of government ; the in creasing cost of old -age pensions, and of better pauper institutions, hospitals, insane asylums, reformatories , jails and other public institutions ; the increasing cost of insurance against accident and disease ; the increas 10 Sec. 1 ] THE CAUSES 11 ing burden of unemployment and crime; investments in public undertakings, such as railways, public works, etc. ; the growing cost of military establishments, both before and during the Great War ; the destruction of wealth by war ; the withdrawal of labor to war ; the concentration of population in cities ; the high price of land ; private ownership of land and other natural re sources ; impoverishment of the soil ; the displace ment of the near-by farmer as the chief source of food supply ; the fact that farmers ' wives no longer com pete with large establishments in butter making or poultry raising ; drought ; hoarding by housewives ; daily purchases by housewives and their abandon ment of home storage in attic , smokeroom , and cold cellar. I shall not discuss in detail this list of alleged ex planations. While some of them are important factors in raising particular prices, none of them except the war has been important in raising the general scale of prices, and the war, of course, only recently. If other causes seem to the reader to deserve special dis cussion beyond the brief summary which follows, I would refer him to my previous writings and to the writings of others. That none of the ingenious explanations enumerated go far to account for so general, or universal, a change of prices is fairly clear when we consider that the rise , before the war, applied to producers' prices as well as to consumers', to wholesalers' prices as well as to re tailers', to prices of competitive goods as well as to 1 See, in particular, Why is the Dollar Shrinking ? Macmillan , 1914 ; and The New Price Revolution, Department of Labor, In formation and Education Service, March, 1919. 12 STABILIZING THE DOLLAR those of trust-controlled (CHAP. II and patented goods, to prices in free- trade countries as well as to those in countries having a protective tariff, to prices in coun tries without labor unions as well as to those in coun tries with them , to prices of necessities as well as to those of luxuries , to prices of unadvertised goods as well as to those of advertised goods, to prices in non militaristic nations as well as to those in militaristic na tions, to prices in the country as well as to those in the city, to prices where sanitary laws were absent as well as to those where they were present, to prices of bulk goods as well as to those of package goods. I do not mean that the above suggested causes had no influence on prices. The prices in free-trade coun tries seem to rise (or fall) — or did before the war — somewhat less than in other countries ; prices of pro prietary breakfast cereals are far above the prices of the materials of which they are made ; trade unions have added to costs in many industries ; middlemen have sometimes combined to depress the prices of truck to farmers, while increasing the prices to con sumers ; trusts have sometimes raised prices above competitive levels, although they have sometimes re duced them and made their monopoly -profits by still further reducing costs through the economies of trust organization ? ; and war-time prices rose more in coun tries near the seat of war than in those remote. But interesting and important as are these facts, they do not go far in helping us understand the cause of high prices. 1 Prof. Meade (in Journal of Political Economy, April, 1912), shows by index numbers that trust-made products have been more stable and , on the whole, have been less inclined to rise than competitive products. SEC. 2 ] THE CAUSES 2 . Profiteers , Speculators, and Middlemen Much is said to -day of profiteering and of specu lation in general. Speculation is always stimulated when prices are changing. It feeds on price move ments. Thus when prices are expected to rise in the future, speculators buy goods and raise their prices in the present ; and when , in the future, they sell their holdings, prices are kept below what they would other wise have been . The normal effect of such , as of most, speculation is to reduce or “ even -up ” price fluctuations. Occasionally speculation causes or aggravates fluc tuations; but, in such cases, speculators usually come to grief as a consequence. This was true of the specu lative rise in prices that occurred immediately at the outbreak of the war, in August, 1914, and was promptly followed by a fall. Speculators who thus try artifi cially to mark up prices when other causes are not about to produce a rise are like the comedian who said he could " command $ 1000 every night ” but added , “ the only trouble is it won't come! ” Similarly cold storage is a stabilizer of prices and, on the whole, has probably mitigated the rise of prices in stead of aggravating it. Equally far from the truth is the popular idea that the rise of prices is due to “ the middleman .” It is true that the processes of distribu tion are often wasteful, but probably they have, on thewhole , been growing less wasteful rather than more wasteful. Index numbers show that the average mar gins between wholesale and retail prices have, on the whole, actually diminished during most of the rise in See Fabian Franklin , Cost of Living, p. 97. 14 STABILIZING THE DOLLAR (Chap. II prices since 1896 , while they tended to increase when prices were falling before 1896 . In other words, whole easa sale prices move faster, in either direction, than re tail prices. Figure 4 illustrates this fact, and more ssa - 100 wha Fig . 4 . Movements of Retail and Wholesale Prices (after Wesley Clair Mitchell) Showing : (1) that the two roughly correspond ; (2 ) that, in general, whole sale prices have moved faster (whether down or up) than retail prices ; and therefore (3) that “ middlemen's profits " will not explain the rise from 1896 to 1907 . recent figures of the U . S. Bureau of Labor Statistics confirm it. The common idea that “ profiteers ” are responsible for rising prices is, as will be more clearly seen in Chapter III , a reversal of the truth . Rising prices are responsible for profiteering. 3 . Circular Reasoning Obviously no explanation of a general rise of prices is sufficient which merely explains one price in terms of another price. To say that the cause of rising “ prices ” is rising “ wages " is merely to say that the prices of commodities have risen because the price of labor has risen ; and we might as well turn it aboutand say that the price of labor has risen because the prices of commodities have risen and so driven workmen to SEC. 3 ] THE CAUSES 15 strike for higher wages. It is equally futile to say that finished products have risen because the raw materials have risen ; or that the raw materials have risen because finished products have risen . Such explanations are as unsatisfactory as the an swer of the gardener who, when asked , “ Where is the hoe ? ” replied , “ It' s with the rake,” and when asked , “ Where is the rake? ” replied , “ It's with the hoe .” Such alleged explanations were shrewdly caricatured by the cartoon showing many persons standing in a circle, each accusing his neighbor : the consumer blaming the retailer ; the retailer, the wholesaler ; the wholesaler , themiddleman ; the middleman , themanu facturer ; the manufacturer, the workman ; the work man, the trust ; while (to complete the circle ) the trust blames the extravagant consumer . It is true that individual prices do react on one an other in thousands of ways. But the several pushes and pulls among individual prices are not what raises them as a group. Such forces within the group could not move the group itself any more than a man can raise himself from the ground by tugging at his boot straps. We cannot explain the rise or fall of a raft on the ocean by observing how one log in the raft is linked to the others and is pulled up or down by them . It is true that some prices rise more promptly than others and give the proximate reason for raising the others. The whole raft of prices is bound together and its parts creak and groan to make the needed adjust ments . But such readjustments between prices do not explain why the whole raft of prices has risen . 1 For further discussion of this point, see § 15 below and Chapter III, $8 13 and 14 . 16 STABILIZI NG THE DOLLAR (Chap. II 4 . The Error of Selecting Special Cases Nor will special causes working on selected com modities prove to be general enough to explain the concerted behavior of commodities. While “ scarcity," for instance , will go far toward explaining the rise of certain selected prices , it will not help explain changes in the general scale or level of prices, — at least not before the Great War. Thus, even if, for reasons of scarcity, wheat should rise, let us say, 20 % , nevertheless, so unimportant is wheat relatively to the great mass of commodities in commerce, that the index number for 300 commodities, computed by the United States Bureau of Labor Statistics, would be affected only 1 % . So also potatoes would have to rise 100 % to raise the index number by 1 % . And even these negligible figures exaggerate the effect on the general price level, – for several reasons, which need not be discussed here. The truth is, most explanations of the general rise in prices are mere graspings at the first straw in sight that seems to offer any explanation . People uncon sciously pick out some particular cases with which they happen to be familiar and drag them before the public. A middleman or a trust raises prices, a firm announces a rise because of the demands of labor unions, a crop failure raises the price of a cereal, — and immediately some one hails the event as a representative cause of the high cost of living . The newspapers, with impres sive headlines, feature the stories about such cases ; and the more unusual and unrepresentative the cases are, the more glaringly they are featured . Only a gencral survey is of any real value, and such THE CAUSES SEC. 5] 17 a general survey , as we shall see, fails to confirm many, if any, of the numerous popular impressions which have gone abroad . 5. The Argument from Probability All those who have offered such explanations make one fatal mistake. They look at the wrong side of the market. They seek the causes wholly in the goods, the prices of which have changed , and not at all in the gold dollar, in terms of which those prices are expressed . Which of these — goods in general, or the dollar in particular — is the more likely to vary ? Is it credible that commodities should rise and fall so concertedly without some simple common cause ? Is it not more probable that the dollar, which , as such a common cause , affects all the commodities it buys, should fall in value than that hundreds of individual changes in the values of other commodities should all happen to occur in concert ? Are not the coincidences involved a little too remarkable ? It is one of the accepted maxims of logic that a complicated multiple explanation is not to be presumed if a simple single explanation can be assumed . Mere chance almost never plays onesidedly. If we throw nine coins in the air, it will not surprise us if four or five of them come up heads, but it will surprise us greatly if all come up heads. The chance of such a coincidence is exactly 1 in 512. The chance that eight would come up heads is less than 1 in 50 (exactly 10 in 512) . Now , of the nine groups of commodities included in the index number of the United States Bureau of Labor 18 STABILIZ ING THE DOLLAR (CHAP. II Statistics, only one group (house - furnishings) fell in price between 1896 and 1913, the year before the war. Assume that the nine groups, like the nine coins, are independent of one another, — for instance that “ clothes and clothing," when they rise, do not pre vent “ drugs and chemicals ” from falling ; assume further that, for any one group among the nine, the chances of rise or fall are even ; then the chances that eight out of the nine would rise coincidently would (as in the case of the coins) be exactly 10 in 512. In actual fact the chances are less ; for the assump tion that a rise is as likely as a fall is not true of any ordinary commodity . A fall is really what we would , in most cases , expect because of improvements in methods of production . Taking this fact into consid eration the chances that eight groups would rise coin cidently are therefore less than 10 in 512 — doubtless less than 1 in 100 . Of the 243 commodities recorded under the nine groups only 27 fell in price. It is true, of course, that not all of the 243 commodities are independent. Many commodities like bread and flour, or pig iron and iron products, move necessarily in sympathy with one another ; but, even so , wemay, Ibelieve, safely put the chance of such an accidental rise simultaneously in 216 commodities out of 243 at less than one in a thousand. This all corresponds with common sense. We sel dom have world -feasts or world - famines. If the corn crop is short in some places, it is usually abundant in other places. If it is short in all places, the crop of wheat or barley or some other staple food is practically certain to be at least normal. If there is 19 THE CAUSES Sec. 6 ) war in Japan, it is not likely that there will also be war in India . A world -war or even anything as near to a world -war as the recent conflict is a most — the most – unprecedented event in all history. Our conclusion is that, so far as the argument from probability can help us, it is not likely that the simulta neous rises and falls of hundreds of commodities hap pen merely by coincidence . It is much more likely that there is one common cause or, at most, a very few common causes. We find two such common causes at hand, monetary depreciation and ( since 1914 ) the war, which , as we shall see, has affected prices chiefly through monetary depreciation also . If these are not the common causes, what are they ? The same question arose concerning the general fall of prices between 1873 and 1896 . Then there was an other explanation besides the monetary one — the in creased or cheaper production through invention . while in the period from But 1873 to 1896 this cause, cheaper production , worked with the trend , a down ward price movement, from 1896 to 1913 it has worked against the trend. No common cause for the upward trend of prices between 1896 and 1913 — except money — has ever been suggested or seems likely to be. 6 . The Argument from Statistics So much for the mere probabilities of the case. But we have several other lines of evidence. First there is the evidence of direct statistics, which evidence points to the same conclusion . These statistics show that, up to the outbreak of the war in 1914 , there was no pro STABILIZING THE DOLLAR 20 (Chap . II gressive scarcity of goods in general but rather an in creased abundance and that this increased abundance probably continued in the United States even during the war. Professor W . I. King , in his Wealth and Income of the People of the United States, shows that “ real in come” (that is, income in terms of commodities in stead of dollars) has risen every census year since 1850 (excepting only 1870, following the Civil War, when there was a slight diminution ) ! 1 The volume of gen eral trade in the United States has increased , on the average, faster than population . According to the statement of Nat. C . Murray of the Bureau of Statistics of the Department of Agriculture, the per capita pro duction of the ten leading crops in the United States has increased during the last twenty years. Professor E . W . Kemmerer 3 and the present writer 4 find that the volume of trade has increased greatly and continu ously during that time. This was true even during the war. Professor Wesley Clair Mitchell has made a study, under the War Trade Board , on the production of raw materials which indicates that the raw materials used in the 1 King 's figures in terms of the average purchasing power of the dollar in the years 1890 - 99 ) for the successive census years from 1850 to 1910 are 69, 79, 82, 111, 169, 232, 262 (p . 129) . 2 Monthly Crop Reports, U . S . Department of Agriculture, November, 1917 . 3 " Inflation," American Economic Review , Vol. VIII, No. 2 , June, 1918 . 4 “ Will the Present Upward Trend of World Prices Continue ?" American Economic Review , Sept., 1912 ; “ Equation of Exchange," American Economic Review , June, 1919 ; “ The New Price Revolu tion ,” Department of Labor, Information and Education Service, March, 1919. THE CAUSES SEC. 6 ] 21 United States in 1918 were 16 % more than in 1913 and 2 % more than in 1917. The physical volume of trade in 1918 is estimated variously by my own fragmen tary studies, published and unpublished , and by the studies of others to be from 22 % to 41 % above that in 1913 and 8 % above that in 1917.1 President Wilson, in his address to Congress,August 8, 1919, on the High Cost of Living gave other im pressive examples as to foods, especially eggs, frozen fowls , creamery butter, salt beef, and canned corn , showing that there is no scarcity to account for high prices. Aside from this argument as to the abundance of goods in belligerent countries, there is the additional 1 The mistake has sometimes been made of thinking that the stream of goods absorbed by the war should be deducted from the total volume of trade and that only the remainder, used for civil consumption , should be considered for comparison with pre-war times. They say that this volume of goods was greatly reduced and so naturally bears a scarcity price. But, granted that the scarcity of goods for civil consumption enhanced these goods, as estimated subjectively , it must not be overlooked that it tended just as much to enhance money , as estimated subjectively . price. There is no need therefore of any change in Thus, suppose that, for whatever reason, the same price level were kept in the war as before it, but that the people were suffering from lack of food and clothing . These starving people might subjectively esteem bread and clothes ten times as highly as before, but, if they did , they would certainly esteem the money to buy these with also ten times as highly as before. Professor J. S . Nicholson in his War Finance writes : " The late Robertson Smith used to say that in the East great famines were often accompanied by no particular rise in prices. The people died of hunger , but their demand was not effective. They had no more money than usual." Prices do express the intensity of wants for goods, but only relatively not absolutely . 22 STABILIZING THE DOLLAR (Chap. II evidence of high prices in areas not directly affected by the war. Mr. 0 . P. Austin , Statistician of the National City Bank , says : “ Raw silk , for example , for which the war made no special demand and which was produced on the side of the globe opposite that in which the hostilities were occurring, advanced from $ 3.00 per pound in the country of production in 1913 to $ 4 .50 per pound in 1917 , and over $6 .00 per pound in the closing months of the war. Manila hemp, also produced on the opposite side of the globe and not a war requirement, advanced in the country of production from $ 180 per ton in 1915 to $ 437 per ton in 1918 . Goat-skins from China , India , Mexico and South America advanced from 25 cents per pound in 1914 to over 50 cents per pound in 1918, and yet goat- skins were in no sense a special requirement of the war. Sisal grass produced in Yucatan advanced from $ 100 per ton in 1914 at the place of production to nearly $ 400 per ton in 1918, and Egyp tian cotton, a high -priced product and thusnot used forwar purposes, jumped from 14 cents per pound in Egypt in 1914 to 35 cents per pound in 1918 . Even the product of the diamond mines of South Africa advanced from 60 to 100 per cent in price per karat when compared with prices existing in the opening months of the war. “ The prices are in all cases those in the markets of the country in which the articles were produced and in most cases at points on the globe far distant from that in which the war was being waged . They are the product of countries having a plentiful supply of cheap labor and upon which there has been no demand for men for service in the war. The advance in the prices quoted is in no sense due to the high cost of ocean transportation , since they are those demanded and obtained in the markets of the country of production . “ Why is it that the product of the labor of women and children who care for silkworms in China and Japan , of the Filipino laborer who produces the Manila hemp, the Egyptian fellah who grows the high -grade cotton , the native workman in the diamond mines of South Africa, the Mexican peon in the sisal field of Yucatan , the Chinese coolie in the tin mines of Malaya, or the goat-herd on the SEC. 7] THE CAUSES 23 plains of China, India, Mexico or South America has doubled in price during the war period ?” I Lord D ’Abernon found that in England those ob jects of luxury “ which would seem to be influenced not at all or only very remotely and to a very small degree by increased cost of labor and materials ,” such as old books, prints and coins, had , nevertheless, advanced , roughly speaking, fifty per cent during the war. There seems little doubt that the rise in prices dur ing the war, even in Russia where scarcity of goods played a part, was, nevertheless, chiefly due to paper money depreciation ; while in the United States, prices rose before America entered the war, not because of any general scarcity here , but because of gold depreciation broughtaboutby huge imports of gold (a billion dollars) from Europe, in other words, gold “ inflation .” After we entered the war there has been added credit inflation . 7 . Price Movements Vary with Monetary Systems Thus far our argument has been one of elimination . We have excluded the probability of the commodity explanation for rising prices ( except, to some extent, in war-time) and find ourselves almost forced to a mone tary explanation . But we have still more positive evidence of the great and constant influence of money and money substi tutes on prices. We find , in the first place , that countries having like monetary standards have like price movements . Thus 1 " Prices, Yesterday, Today, and Tomorrow ," address delivered before the Editorial Conference of the New York Business Pub lishers Association , April 11, 1919. STABILIZING THE DOLLAR (Chap. II - to consider gold -standard countries — there is a re markable family resemblance between the curves in Fig ure 3, tracing the index numbers of the United States and England . As long as the two countries were on or near a common gold basis, that is , in the entire period except when one or the other country was on a paper basis (because of the Napoleonic wars or the Civil War), English and American price movements have been strikingly parallel. 100 United States. a Carreedat. G in Britb . France Germany Fig . 5. Price Movements in Five Gold -Standard Countries Showing how similar the ups and downs of prices have been . This simi larity exists in spite of differences in methods of calculating the five index numbers. For most other gold- standard countries the available statistics begin with 1890 ; and from that year until the outbreak of the war in 1914 there is a remarkable similarity among the price movements of these coun tries, namely, the United States, Canada, England, France, Germany, Austria , Italy , Switzerland , Russia , Sweden , Denmark , Holland, Belgium , and even , though less strikingly , far-away Australia , New Zealand, Japan , and India. SEC. 7] THE CAUSES 25 The chief of these statistics are given in Figure 5 . It is surprising how little any one gold -standard coun try departs from the average of all." 220 210 . 200 190 180 / 70 150 - 140 110 100 Fig . 6 . Price Movements in the United States under the “ Green back " Standard and in the United Kingdom under the Gold Standard Affording an instance of differing price movements under differing mone tary standards. Again, countries which have the silver standard in common also have price movements in unison as, for instance, India and China from 1873 to 1893. We find, in the second place, that countries of unlike monetary standards have unlike price movements. Thus we find a great contrast between the gold and silver countries as soon as gold and silver themselves separated . Speaking roughly, we may say that, be 1 A still greater agreement would be found if the statistics in the different countries were constructed by the same methods. Pro fessor Wesley Clair Mitchell has shown this by reconstructing the statistics, in this way, in certain selected cases. 26 STABILIZING THE DOLLAR (Chap. II tween 1873 when gold and silver broke apart, and 1896 , the price level in gold countries fell 25 % and in silver countries rose 30 % . Again countries with exceptional monetary stand ards show exceptional price movements . When , during a paper money régime such as during the Civil War in the United States or the Napoleonic wars in England , the curve tracing an index number in terms of paper is compared with that in terms of gold , the former looks like a great blister upon the latter. Figure 6 illustrates this fact. So also when a country shifts over from a gold to a silver standard and from a silver to a gold standard , as did India , its price movements shift likewise. Figure 7 illustrates this . In the third place, not only do the price levels of various countries having different monetary standards differ from one another, but the degrees of difference cor respond to the degrees of difference in their standards, that is, the variations in prices of goods correspond with the variations in the values of the two metals as measured each in terms of the other. For instance, the divergence between prices of goods in gold countries and in silver countries corresponds roughly to the divergence between the prices of gold and silver. Thus, between 1873 and 1893 the price of silver in London fell 40 % , while the price level of commodities in gold countries relatively to prices in silver countries fell about 40 % . Similarly , prices in the United States in the green back days of the '60s and '70s, as compared with prices in gold countries, such as England and Ger many, shifted , in a general way , with the premium ŠS Standards Monetary Different England under India and Movements Price Figi.7n exchange standard gold English through pound tiedto).( the again was noted similarity between English Indian periods three there these that first last and the of will be Itisin, some and similarity there little middle period that but theinis,. movements price years period 1876 early 1874 and the middle early are the of exceptions statements above to)(chief The period dissimilarity third similarity instead former curves 1899 show 1894 the two the Inin).-( of usual dissimilarity similarity instead usual middle period curves latter show two and third the ofiin.; interesting explainable exceptions observe former largely both that fact the are bi by Itis,— to although were laws ratio abandoned metallic change greatly until years three between silver 1873 and gold the diditon, five not exchange although standard Indian legally fixing rupee gold the the latter later that fact and 16d by in(.,; at money nevertheless English because adopted existing hoards coined silver coin 1893 was and the ofin(,) continued silver bimetallism standard together through extent Indian some were theto(,-);2 tied during there 1874 1893 which between tie was no standards monetary England during which rupee India 1912 1894 and the of,-(3); Indian and standard English which gold the periods during 1861 1873 compared distinct should three for be,-:(1) curves The THE CAUSES exchange years until later five controlling actually Indian potentates succeed not did etciti.),n age by Sec. 7 ] Š segDog Ssette t SS ZING STABILI 28 THE DOLLAR [CHAP. 11 on gold in terms of greenbacks, and with the New York rate of exchange on London . This is shown in Figure 8. For the period of the recent war the data are so meager that it is impossible to express the exact re 200 190 100 160 U. S. U. K . 10 120 110 curre ncy golgt Fig . 8. The Ratio of the American to the English Price Level Compared with the Ratio of American to English Money Showing a fairly close similarity and throwing light on the contrasts of Fig ure 6. Thus, when , during 1861-1864, the currency , or greenbacks, which would buy a unitof gold rose rapidly (as shown by the lower curve), Ameri can prices in greenbacks also rose rapidly relatively to English prices in gold (as shown by the upper curve) ; and when , during 1864- 1878 , the former ratio fell, the latter ratio fell also . lations in figures, but we can arrange the different countries in the approximate order in which their prices rose. As a result, we find that the order of the na tions corresponds in general with the order in which the currency in these nations has been inflated by paper as well as with the order in which their mone tary units have depreciated in the foreign exchange markets . This order - of ascending prices and roughly of expanding currency during the war — is: Australia , India, New Zealand, United States, Canada , Denmark , Sec. 8] 29 THE CAUSES Holland, England, Switzerland, Italy , France, Norway, Sweden , Germany, Austria , Russia . 8 . Price Movements Vary with the Money Supply The ups and downs of prices roughly correspond with the ups and downs of the money supply. out all history this has been so. Through For this general broad fact the evidence is sufficient even where we lack the index numbers by which to make accurate measurements. Whenever there have been rapid outpourings from mines, following discoveries of the precious metals used for money, prices have risen with corresponding rapidity. This was observed in the sixteenth century, after great quantities of the precious metals had been brought to Europe from the New World ; and again in the nineteenth century, after the Californian and Australian gold mining of the fifties ; and, still again , in the same century after the South African , Alaskan , and Cripple Creek min ing of the nineties . Likewise when other causes than mining, such as paper money issues, produce violent changes in the quantity or quality of money, violent changes in the price level usually follow . The war has furnished important examples of these points. In the United States the curve for the quantity of money in circulation , and the curve for the index number of prices run roughly parallel, the price-curve seeming to follow the money -curve after a lag of one to three months. It was in August, 1915 , that the quantity of money in the United States began its rapid war-made increase . One month later , prices began to shoot upward . In February , 1916 , money 30 STABILIZING THE DOLLAR (Chap. II suddenly stopped increasing , and about two months later prices stopped likewise. Similar striking corre spondences have continued to occur. Figure 9 shows these . The same sort of correspondence (with a probable three months' lag) has been found by Nicholson 1 for England and (by inference, at least ) by Cassell 2 for Russia . 9 . Kinds of Inflation It is well known that a great increase , i.e., “ infla tion ," of paper money raises prices. But there are two other forms of inflation which do so also, gold inflation and credit inflation. War finance is the prolific source of inflation . The war has exemplified this in all three forms. Russia indulged in the simple crass inflation of paying Gov ernment bills by printing irredeemable paper. Before the Bolshevist régime the Russian Government print ing presses turned out, according to reports, a million roubles an hour, day in and day out, for over a year at a stretch . Under Bolshevism the output has been even greater, a total of eighty billion dollars in nominal value having been issued , which is more than themoney of all the rest of the world put together. It is reported also, on apparently good authority, that, under the Bolshevist régime, the Russian Bureau of Printing and Engraving has issued counterfeit Spanish paper money and used it in Spain for Bolshevist propaganda. The Bolshevist Government, in this case , swindles 1 J . Shield Nicholson , War Finance, p . 100. Gustav Cassel, “ Present Situation of the Foreign Exchange," Economic Journal, March and September, 1916 . 31 THE CAUSES SEC. 9 ] INDLY NUMBER 2207 2001 180 + IN NUDMEBX E R ROFssco n CIVOEMMO DITE 2101 BILLIONS O DOLLARS 170 1500 1602 + 480 460 150 140 tio n dle a 400 Ad ys 70 le par Barr ) is 41 MOV I M E 100 + 3.40 1 1914 1915 1916 1917 1918 1919 Fig. 9. Money and the Price Level Showing a correspondence between the quantity of money and the level of prices. Since the middle of 1915 , when the quantity ofmoney in the United States began to be greatly affected by the war, the correspondence has been close, changes in the price level seeming usually to follow changes in the quantity of money one to three months later. ( The apparent discrepancy between the upper and lower figures at the right is due to a change in the official method of computation adopted by the Federal Reserve Board.) 32 STABILIZING THE DOLLAR (Chap. II the Spanish people and , through the high cost of liv ing, makes them pay for Bolshevist propaganda ! This is a specially interesting case and illustrates the close similarity between counterfeiting and inflation, either of which mulcts the public. Germany allowed the people, when a new loan was asked , to deposit the bonds of the previous loans at certain banks which were authorized to issue paper money to the depositor who then lent this paper money to the Government. In the United States also , Liberty Bonds were to some extent used as collateral at banks which , in turn , deposited them with Federal Reserve Banks and received their notes. During the war the neutral countries were flooded with gold . This gold did not add to real wealth . When, directly or indirectly, it found its way into the hands of an American munition maker, food producer, or other seller of goods, it acted simply as a requisition for goods by one American on another American . It was merely a yellow token , like a brass check , redeem able in our own goods. Such an increase in the num ber of such tokens, or counters, could only cause them to depreciate. War finance brought us still another, themost mod ern , kind of inflation , due not to the increase of money proper but to the increased volume of bank deposits subject to check . Banks sometimes subscribed to Liberty Loans simply by writing deposits on their books to the credit of the Government, and individuals often lent to the Government by borrowing of the banks, the sums so borrowed being likewise created by the banks as deposits on their books. Deposits subject to check have increased greatly , and until the SEC. 9] THE CAUSES 33 loanswhich gave them birth are paid off, these deposits stay in circulation like money, being transferred by check from the original bank customer to the Govern ment (as his subscription to bonds) ; then from the Government to munition makers, etc. ; then from them to steel producers , and so on , indefinitely . Even gold inflation became transformed into credit inflation because the gold was used as bank reserves, the basis of bank deposits. During the war the people of all gold -using belligerents were asked to turn over their gold to the banks to become bank reserves. Thus gold was “ mined out of the people 's pockets " and intrusted to the banks where it had a multiplied effect ; for every dollar of reserve can support several dollars of deposits. It was failure of individuals to save the funds loaned to the Government which chiefly inflated deposits ; they lent by borrowing . A Committee of the Ameri can Economic Association appointed to study the problem of the purchasing power of money in war time reported : “ The public should understand that lending by borrowing, though much better than noth ing, is still a very unsatisfactory way to help the Gov ernment. By raising prices , such a procedure tends to shift the cost of the war to the poor who pay it in a higher cost of living." In England it was found (as might have been ex pected) that the introduction of “ continuous bor rowing," advocated by Mr. Drummond Fraser,' which absorbed savings as rapidly as they could be made, and before they had a chance to be dissipated in per 1 See Professor H . S . Foxwell, Papers on Current Finance , Lon don (Macmillan ), 1919, pp . 241- 244. 34 STABILIZING THE DOLLAR (Chap. II sonal gratification , immediately reduced deposits or credit inflation . In all cases where the amount subscribed is not saved , the Government creates or secures purchas ing power without creating any equivalent goods to purchase. It either creates the purchasing power out of whole cloth , as in Russia , or authorizes banks to create it out of whole cloth , as in Germany, Eng land , and, to a less extent, the United States. All of these methods ofwar finance, like the greenback method in the Civil War and the Continental paper money method of the Revolution , may be defended on the plea of military necessity, but they are inflation none the maintained , and they therefore tend to add to the cost of living. As Dr. A . C . Miller of the Federal Reserve Board has said , “ Inflation is no less inflation when gilded with gold .” 10. Extent of War Inflation On the whole, themoney in circulation in the United States rose from three and one third billions in 1913 to five and a half billions in 1918, and bank deposits from thirteen to twenty- five billions, both approxi mately corresponding to the rise in prices. Taking a world -wide view , the money in circula tion in the world outside of Russia increased during the war from fifteen billions to forty - five billions and the bank deposits in fifteen principal countries from twenty -seven billions to seventy -five billions. That is, both money and deposits have trebled ; and prices, on the average, have perhaps trebled also . 1 See Appendix IV , § 1. Sec. 11] THE CAUSES The increase of over thirty billions in the money of the world (outside of Russia ) is, as Austin says, “ more in its face value, than all the gold and all the silver turned out by all the mines of all the world in 427 years since the discovery of America.” It is a common impression that wars always raise prices. But a study of index numbers in the bellig erent countries, during the Napoleonic wars, War of 1812, Mexican , Crimean , Civil, Franco-Prussian , Spanish -American , Boer, Russo- Japanese wars and the World War indicates that war seldom raises prices except when , and to the extent that, the costliness of the war forces recourse to inflation as a fiscal ex pedient of governments or their people . The conclusion toward which the foregoing argu ments (and others which might be added ) lead is that, in the past, the chief disturber of the peace, so far as the purchasing power of money is concerned , has invariably , or at any rate almost invariably , been money itself, not the goods which money purchases. II. Money Illusions The attraction which inflation policies have for so many people grows, in part at least, out of what may be called the money illusions. The general public finds it hard to admit that there can be too much money . Money, however abundant, always seems scarce . Each individual wants all the 1 Cf. Bullock 's Monetary History of the United States, N . Y . (Macmillan ), 1900, p . 38 ; see also Irving Fisher , “ The 'Scarcity ' of Gold ,” Cotton and Finance, New York City , February 15 , 1913. The recent attempts of the gold -mining interests in England and the United States to secure a Government subsidy utilized this illusion , 36 STABILIZING THE DOLLAR (Chap. II money he can get and naturally reasons that a country , like an individual, cannot have too much . If the reasoning were sound, it would justify counterfeiting . Counterfeiting does enrich the counterfeiter — but at the expense, of course, of others, even if the counter feit is never detected . Inflation might almost be called legal counterfeiting. After a rapid inflation once starts , the clamor for more money often grows louder and louder, just as when a dipsomaniac once gets under the influence of liquor he calls for more and more of that deceptive agent. Of all the illusions which cluster about money, the one which most interests us here is the illusion that money is always fixed in value, that “ a dollar is a dollar.” If this were really true, the present book would not have been written . That so many people assume it to be true is the reason there is so little de mand for a change. For why try to stabilize what is already supposed to be stable ? Money is so much an accepted convenience in prac tice that it has become a great stumbling block in theory . Since we talk always in terms of money and live in a money atmosphere, as it were, we become as unconscious of it as we do of the air we breathe. To shake ourselves free of these illusions it would help greatly if, for the phrase “ a general rise in prices,” we should substitute the phrase , “ a fall in the pur chasing power of the dollar." Our attention would then be focused on the money, which is the chief con troller and disturber of prices. Even many well informed people bolster up the illusion that the dollar is a stable standard of value Sec. 11] THE CAUSES 37 by reference to the fact that “ the price of gold ” never changes. Only recently a former Government officer asserted that the value of gold is evidently constant because its price is fixed ! I once asked a dentist if the “ high cost of living " had affected the price of his materials . “ Yes , of course," he replied. : “ Of the gold you buy for fillings ? ” I ventured jokingly, expecting him to know that this could not be. To my surprise , he answered, “ I suppose so ," and sent his assistant to look the matter up. She returned presently and solemnly informed us that the price he was paying for his gold was sub stantially the same as it always had been . “ Isn 't that surprising ! ” he exclaimed , “ gold must be a very stable commodity .” “ It's just as surprising," I replied , “ as that the price of a quart of milk is always two pints ofmilk ." “ I don 't see the point.” “ Well, what is a dollar ? ” I asked . “ I don't know , — what is it ? ” . That question is vital. The almost universal igno rance of the answer is chiefly responsible for the almost universal misunderstanding of the high cost of living and the ups and downs of the dollar's worth ! A dollar is defined by statute as 25.8 grains of “ stand ard ” gold (that is, of gold of which 900 parts out of 1000 are pure gold ). Consequently theactual pure gold in a dollar is io of 25.8 grains or 23.22 grains. Since an ounce is 480 grains, the number of dollars in an OV ounce ofpure gold is 480, or 2007 dollars. In other words, any lump of gold containing one hundred 38 STABILIZING THE DOLLAR (CHAP. II ounces, taken by a gold miner to the Mint, can be cut up and coined into 2067 dollars and handed back to him . Thus, fixing the pure gold in the dollar at 23.22 grains necessarily fixes the price of pure gold at $ 20.67 an ounce . Naturally, then , the miner gets $ 20 .67 an ounce and this " price " can never vary so long as the weight of the dollar does not vary . In short we may say, omitting fractions, that gold is always worth twenty dollars an ounce simply because a dollar is a twentieth of an ounce of gold , just as a quart of milk is always worth two pints of milk because a pint is half a quart. Gold is thus stable merely in terms of itself. But, of course, the fixity of the dollar's weight (and therefore of the price of gold in terms of gold itself) does not fix its value in exchange for other commodities . It does not exempt gold from the ef fects of supply and demand. The value of the dollar , in the sense of its general purchasing power, is not stable but fluctuates with supply and demand as does the value in exchange, or purchasing power, of any thing else . There is only this difference : since a de scending value of gold cannot lower the price of gold it must raise the prices of other things in termsof gold ; and since an ascending value of gold cannot raise the price of gold , it lowers the prices of other things in terms of gold . Thus the supply and demand of gold (and of its paper and credit substitutes which also affect its value) cannot be thwarted . Since we deny to such supply and demand the normal outlet of raising or lowering the price of gold, they take their revenge, so to speak , by lowering or raising the prices of other things. Sec. 12) THE CAUSES 39 If, instead of gold , we were to make milk the stand ard , or eggs, – that is, if we used these to purchase all other things, — they would acquire the same fixity of price — that is, price in terms of milk or eggs ; and we would then fall victims to the same illusion of in herent fixity. If a dollar, instead of being 23.22 grains of gold , were, let us say, a dozen eggs, obviously the price of eggs would always be a dollar a dozen simply because a dollar is a dozen eggs. If the hens did not lay, the price of eggs would not rise (or vary at all) but, instead , the prices of other commodities in terms of eggs would fall ; while , if eggs were a drug on the market, their price would not fall (or vary at all) but the prices of other commodities , in terms of eggs, would rise — and the mystified public would then be inquiring gravely “ why this high cost of living ? ” The world 's prices would then be at the mercy of hens just as now they are at the mercy of mines , as well as of banks and of governmental and private financiering. In colonial days, in Virginia , tobacco was money . In those days a high price of wheat might have been attributed to scarcity of wheat when really due to abundance of tobacco , just as to-day we attribute the high prices of most things to a supposed scarcity of these things when it is really due to abundance of money. 12. The Instability of the Gold Standard as Compared with an Egg Standard and Others In order to see what the purchasing power of a dollar is from time to time we need merely to invert the index number showing the general level of prices ; 40 STABILIZING THE DOLLAR [CHAP. II for if this level doubles, the purchasing power of the dollar is halved , and vice versa . Figure 10 shows both. The upper curve shows the variations in the price level and the lower curve ties n o i g con /modi gold in gold comm gold in odit ies Mes Fig . 10. The Level of Prices of Commodities in Terms of Gold (Upper Curve) Contrasted with Its Reciprocal, the Purchasing Power of the Dollar in Terms of Commodities (Lower Curve) and with the Price of Gold (Middle Horizontal Line) Since many commodities constitute a better standard of value than one commodity , the apparent fall and rise of commodities (upper curve) really means a rise and fall in gold (lower curve), while the mere constancy of the price of gold in terms of itself is shown by the middle (horizontal) line. The lower curve is the important one and , with others , is shown in the next diagram , Fig . 11. shows the opposite variations in the purchasing power of the dollar. That is, the upper curve shows the changes of commodities expressed in terms of gold dollars and the lower curve shows the changes in the gold dollar expressed in terms of commodities ; while the middle and horizontal line shows the constancy of the price of gold in terms of gold . er Ccurve in Figure 10 shows, the purchas As the lower ing power of the dollar over other things in general has fluctuated widely. If the war period were added , THE CAUSES Sec. 13] the fluctuations would be even more violent (as may be seen from Figure 3). If we compare this lower curve of Figure 10 with similar curves calculated for other commodities, we may see whether gold is really any better standard than any one of these other commodities. Figure 11 gives this comparison . In it I have plotted not only the purchasing power of gold , but also the purchasing power 1 of pig iron , pig lead , cotton , silver, eggs, wheat, carpets, and brick . We see that, in terms of general purchasing power, gold is no more stable than eggs and considerably less stable than carpets ! It will also be of interest to see the relative sta bility of gold and the other articles combined. To paraphrase an old adage we may say that “ in union there is stability .” The curve representing the com bined eight articles , pig iron , pig lead , copper , silver, eggs, wheat, carpets, and brick (which were originally selected at random , i.e. as representative articles and without thought of being combined ), is also shown in Figure 11. 13. Seeing Ourselves as Others See Us It will help emancipate us from the money illusions if we look at a foreign country instead of at our own. When , between 1871 and 1896 , the price of silver in London went down , we readily ascribed the resultant rise of prices in India — a silver-standard country to the “ depreciation of silver.” But the Indian 1 The figures for these curves were easily found by dividing the index number for any commodity, pig iron , for instance, by the index number for commodities in general. 42 STABI LIZIN G THE DOLL AR (CHAP . II Pig lead Imedy abpre commodities combined TITATEI Fig . 11. The Relative Stability of Certain Commodities Each Measured in Terms of Commodities in General The curve for gold is the same as the lower curve of Fig. 10. It shows the rise and fall of a unit of gold as measured by its purchasing power over com modities in general. The curve for silver shows likewise the changes in the purchasing power of a unit of silver. The other curves show the pur chasing power of pig iron, pig lead , copper, eggs, wheat, Brussels carpets, and brick . It will be observed that gold , as a standard of general purchasing power, has been more stable than silver but less stable than eggs or carpets , which last proves to be the most stable standard of purchasing power during this period. As to wheat, its power to purchase commodities has fluctuated widely but has shown a general horizontal trend. SEC. 13] THE CAUSES 43 merchant, from his point of view , saw only a rise in the price of gold, and readily ascribed the fall of Ameri can prices to the “ appreciation of gold .” Sir David Barbour 1 tells the following illuminating incident : “ The late General Keatings, V . C ., informed me that when he was Commissioner in Assam he had an interview with an Indian merchant and mentioned to him how serious the fall in the value of the rupee was. The merchant was surprised and said he heard from his agents in Calcutta every week and none of them had said anything about the fall in the value of the rupee. After a pause he added : ' But they mentioned the rise in the price of gold , and perhaps that may be what you are thinking of.' ” . Both the Englishman and the Hindu assumed his own money fixed , as a matter of course. Each could see the aberration of the other 's money but was blind to that of his own. The Hindu thought gold had gone up because he measured gold by silver, and the Englishman thought silver had gone down because he measured silver by gold . Each was nearer right about the other's country than about his own ! Yet neither was as nearly right as he would have been if he had gauged the values of gold and silver alike in terms of other commodities. It is reasonable to assume that the general mass of commodities is stabler than the single commodity , silver, or the single com modity , gold. This illusion , that our own money is immovable while everything else moves, is like the illusion we often experience when the railway train in which we are sitting passes another train standing on a switch , 1 The Standard of Value, London (Macmillan), 1912 , p. 20 , n . STABILIZING THE DOLLAR (Chap. II or like the illusion that the sun rises and sets instead of the earth revolving. Thus we have been deceived by appearances in commerce just as we have been deceived by appear ances in astronomy. The earth seems to be fixed and all the other heavenly bodies seem to move. It is true, of course, that these bodies do move ; yet most of the motion which we are tempted to attribute to them is not theirs but the earth 's. So money seems to be fixed and all the other commodities seem to move. And it is true that these commodities do move ; yet most of the motion we are tempted to attribute to them is not of them but of money . It took a long time to overcome the apparent evi dence of our senses in regard to the actual rising and setting of the sun , moon , and stars. In fact, the first astronomers did not doubt this popular view but ac cepted it and succeeded , by numerous special and com plicated assumptions (of “ cycles ” and “ epicycles '') , in explaining all observed movements, even those of the planets. This was the system of Ptolemy ; and one of the greatest revolutionsin human thought was the adop tion of the later astronomical system of Copernicus. This revolution of thought in astronomy was based chiefly on the presumption that a simple explanation is more likely to be correct than a complicated one. Sooner or later a similar revolution will be wrought in popular economics and we shall come to see that the course of prices is due chiefly to the movement of money and not to coincident movements of all or almost all other commodities at once. We now think only of the gold - value of goods; we shall then think also of the goods-value of gold . Sec. 14] THE CAUSES 45 14 . A Visit of Santa Claus Many people , after being forced to admit that an abundance or scarcity of money does , in some way, raise or lower the prices of other things, still remain somewhat mystified because they cannot trace the intermediate process by which money operates on the price of a given article . “ How ," they ask , “ does the import of gold (or the issue of paper money or the creation of bank deposits) really affect the price my grocer charges me for butter ? He has probably never even heard of this new gold (or paper or bank credit) , much less seen it.” The answer is that more money in tills and pockets means more lavish spending, i.e. a greater demand for goods, without any greater supply . To make the picture vivid , let us imagine a finan cial Santa Claus. Let us suppose that, before his visit, the average per capita amount of money in actual “ circulation ” in the United States, that is , all money except that of the United States Treasury , is about $40. On Christmas Day Santa Claus doubles this amount. Each individual person , firm , and bank suddenly has on hand twice as much as before. Now , while the amount carried by any one individual necessarily fluctuates because of his expenditures and receipts, in a large group of people the average amount carried usually fluctuates but little. If, then , an addi tion to the total circulation is suddenly made so large as to put forty extra dollars per capita in the pockets of the people, the first thought of most people will be how to expend this extra sum instead of merely keeping it idle in their pockets. If they should be 46 STABILIZING THE DOLLAR (Chap. II inclined to hoard it in stockings or safes or bury it in the earth or drop it into the sea, it would have no tendency to raise prices. Instead , however, they will seek to make some use of it either by expending it for goods or by depositing it in banks. In one or both of these two ways the surprised recipient of Santa Claus' bounty will, in most cases, have disposed of his surplus a few days after the supposed visit of Santa Claus. Let us assume that half is disposed of by ex pending and half by depositing. The part expended will evidently tend to raise prices ; for the sudden expenditure of $ 20 per capita will mean a spectacular rush upon the shops. Suppose, as is probably about the truth, that the average in dividual expended or turned over his per capita $40 in about two weeks. This is about three dollars a day, or $ 300,000,000 a day for the entire country . If within five days from his Christmas present the average person should expend half of the additional $ 40, i.e. $ 20, the result would be $ 4 additional per day per capita, or $400,000,000 per day for the nation , or more than the entire original daily expenditure of money . Such 'a sudden briskness in trade would astonish the shopkeepers and lead them promptly to raise their prices ; otherwise, in many cases, their stocks of goods would be entirely depleted in a few days . At first sight, it might seem that it would , accord ing to this supposition , only require five days for every one to get rid of his extra money , so that the flurry in prices would be only temporary . Such reasoning is , however, fallacious, for the only way in which the individual can get rid of his money is by handing it Sec. 14 ] THE CAUSES over to somebody else . 47 Society as a whole is not rid of it. If the shopkeepers , who, under our Santa Claus hypothesis, have already had their till-money multi plied by two, receive, in addition, the surplus cash of their customers, they will be doubly embarrassed with a surplus fund on hand and will, in turn , seek to make some use of it, either by investing it in goods for their business or by depositing it in banks. That is, the expending by each person of his surplus merely results in pushing it along from person to person . The average person still has more money to buy with ; but nobody has more goods to sell. The effect on prices will be upward , and this effect will go on until prices have reached a sufficiently high level to stop the process . i Nor can this conclusion be avoided by supposing that most of the money is not expended, but de posited in banks. The bankers whose deposits are thus suddenly swollen will now be the ones with the surplus. Bankers do not wish to have idle reserves, and they will make the increase in the reserves the basis for an increase of business . Moreover, those who deposited the surplus money will draw checks against it in the effort to expend it rather than keep it idle , and these checks will likewise raise prices . And , as the prices rise , the banks' customers will have to keep pace with the rise by enlarging the scale of their operations, loans, and deposits. For instance, a merchant, in order to buy a certain stock in trade with money borrowed at the bank , will have to borrow more because the prices of the commodities he needs have gone up . In the end , the doubling of society's money will mean 48 ZING STABILI THE DOLLAR (CHAP. II an increase ( 1) of the money in actual circulation , ( 2) of the money in banks, ( 3) of the loans and de posits based on this money , and (4 ) of prices. Ap proximately all these will be doubled . For , as long as prices fail to double, the surpluses and the tendency to spend them will continue to exist. Individuals, tradesmen , and bankers will all be trying to make use of their surplus, and their efforts to do so must tend to raise prices. Only when prices have reached about double their original level will the large stock of ready money cease to be regarded by its possessors as a surplus. At that time, since $ 80 will buy only what $ 40 bought before, the additional $ 40 will no longer seem superfluous. People will find their wages or incomes doubled likewise . Thus, if formerly the average individual was accustomed to expend $ 1000 a year and to carry an average balance of $ 40, he will now expend $2000 and carry an average balance of $80, the $ 80 being exactly the same relatively to $ 2000 as the former $ 40 was relatively to $ 1000. Needless to say, the imaginary case just described is highly theoretical. Many qualifications need to be made in practice, especially those due to the exist ence of debts . As will be emphasized in the next chapter, debts are fixed in terms of dollars and , un like prices, could not change. The supposed prank of Santa Claus would therefore upset debts as well as disturb somewhat the exactly proportional changes just supposed . The essential fact that an increase of money tends to increase prices would , however , remain unaltered . The imaginary example we have given represents roughly what happens when new gold is discovered . SEC. 15 ) THE CAUSES 49 The mine owners convert their product into money, getting coin or “ yellowbacks ” (gold certificates) from the mint. They then find themselves in pos session of money far beyond what is needed for pocket money . Suppose one of these men gets from the mint a thousand gold dollars while, for pocket money, $50 is sufficient; he is almost sure to get speedily rid of at least $950 by spending it for enjoyables, investing it in durables, or depositing it in the bank . In any case he and the hundreds of others in the same situation tend to raise prices in the community where they are expending their money, or where they and others draw checks on the banks in which it is de posited . It was thus that prices rose in the mining camps of California a half dozen decades ago and in Colorado and the Klondike one or two decades ago. This local rise of prices soon communicated itself to other places ; for the price level in one locality cannot greatly exceed that in a neighboring locality without causing an export of money from the former to the latter as a cheaper market to buy in . Thus, new money gradually finds its way into circulation throughout the world , raising prices as it flows from place to place ,the process consisting , in all cases, of the effort on the part of somebody to make use of an otherwise idle surplus, — a surplus which cannot be dissipated by transferring it from hand to hand , but only by a rise of prices. 15. Tracing the Invisible Source of the Tide This operation, by which an increase ofmoney causes a rising tide of prices, is so subtle and pervasive that it seems to come from nowhere in particular and every 50 STABILIZING THE DOLLAR (Chap. II where in general. The price of butter at the corner grocery is lifted on this tide without our being able to observe the connection of the rise with inflation , just as a fisherman 's boat is lifted by the tides of the sea without his being able to connect the rise with the action of the moon . To answer categorically, therefore,the question, How does inflation raise the price of butter at the corner gro cer's, we may say : ( 1) partly because his customers have more money to spend , and ( 2 ) chiefly because the prices he pays to the wholesaler have been raised ; and the wholesaler's prices have been raised for the same two reasons, i.e . ( 1) partly because his customers have more money (and purchasing power generally ) to spend , and ( 2 ) chiefly because the prices he has to pay have been raised ; and so on indefinitely . In this explana tion at each stage the chief factor is the second — the rise of some other prices. But as we proceed to trace it back through other stages this second , apparently chief, factor is, at each stage, resolved partly into the first — the abundance of money . What is not thus resolved at the early stages of this tracing back becomes so in the end . When, therefore , all stages are considered , the second factor melts away, and the first factor which at any one stage was the lesser turns out to be “ thewhole thing." In the literature on the high cost of living we some times find partial glimpses of the series of readjustments above described . Some newspapers have said that higher wages, by increasing costs, require higher prices of the goods produced and that, in turn , high prices in the form of the high cost of living require high wages, and so on in “ a vicious circle.” Others have called THE CAUSES Sec. 16 ] 51 the raising of prices a game of ring -a -round -a -rosy and everybody following hisneighbor. A book , “ Keep ing up with Lizzie , ” hasbeen patterned on this idea . This notion that in the price-raising process prices in fluence each other in endless chains or circles is quite correct, but the notion that the initial step is arbitrary and that there is really no beginning or end of the pro cess is incorrect. Prices do not lift themselves by their own bootstraps. In short, the process by which inflation raises prices is misunderstood because, at any stage, it is almost in visible . The only big reason the grocer can give for rais ing his prices is that the wholesaler has raised his . The only big reason any expert on a particular price can give is that other prices have risen . But when one price thus boosts another it simply transmits the boosting power of the underlying inflation . 16 . Other Causes than Money The price level is affected not simply by the quantity 1 of money in the strict sense but by a number of other factors. The price level may rise not only because of an increase of money (whether primary money like gold or secondary money like paper), but also because of an increase of deposit currency , “ money I have in the bank ,” which is paid out in checks, or because of an increase in the rapidities of circulation of the money or deposits, or because of a decrease in the volume of 1 There are still a few students of money who do not accept any form of the “ quantity theory" of money. Fortunately, however, the proposal of this book, described in Chapter IV , is not bound up with this theory, even in the form stated in my Purchasing Power of Money. See below , Appendix II, § 1, D , E . 52 STABILIZING THE DOLLAR (Chap. II trade. And back of these causes (gold money, paper currency, deposit currency, their respective velocities, and trade) lie innumerable other causes acting through one or more of them . The relative importance of the several causes in affect ing price levels varies with circumstances. Thus, in 1914 at the first shock of war, there were very compli cated changes 1 including a slowing -down of trade and of the velocities ofmoney and of the deposit or check circu lation and a temporary shift from credit to cash. But in almost all great and prolonged price movements the chief factor is the quantity of money . Seldom has the volumeof trade been the chief factor ; for statistics show a great steadiness in the growth of the volume of trade. We may conclude, on the basis of all the evidence, that to monetary causes in general (money, deposits , and their velocities ) we should ascribe the great bulk of almost all changes in the price level . In short the chief causes of the variations in the purchasing power of the dollar are to be found in the dollar itself. 1 Irving Fisher, “ Equation of Exchange for 1914 , and the War," American Economic Review , June, 1915 ; see also same journal, author, and subject, June, 1919 . CHAPTER III THE EVILS 1. The Evil of High Prices is Not General Impoverishment Pricemovements, then, are usually , and for themost part, of monetary origin . We must not be deceived by appearances . Just as he who would picture the as tronomicalmovements as they really are must conceive a mental image not of a sun and stars concertedly rising and setting around a fixed earth, but of a sun and stars, substantially fixed , shining on a whirling globe, so he who would picture economic movements as they really are must likewise conceive not of the concerted dancing of numberless commodities relatively to a fixed dollar, but of the dance of the dollar relatively to a nearly fixed mass of commodities. But here the reader may be tempted to conclude that the high cost of living is merely nominal ! If prices have doubled not because goods have become scarce but only because the dollars in which they are ex pressed have been cut in two, what of it ? If we use twice as many dollars because we have twice as many to use, where is the harm ? We are thusbrought to the third question , “ What of it ? " Now it is quite true that our high cost of living is not so great an evil as some people think it to be ; it is not so bad as though the cost of living had risen while in 53 54 STABILIZING THE DOLLAR comes had not risen . (Chap. III That would mean that, for the average human being, economic effort was produc ing less and less. But the fact is that, in general, throughout theworld — certainly before the war - goods had not been growing scarce. Incomes were rising all over the world and, in general, they were rising faster than the cost of living. Recurring to the figures of Professor W . I. King, we find that the estimated per capita income in the United States increased between 1900 and 1910 by 41 % , whereas the price level rose only 25 % . This average improvement, however, does not settle the matter. The evil is not one of average well-being but one of its distribution , and the question remains : Who has got the benefit of this increased production ? Some incomes change less than others change at all. It is in this inequality in the change of individual incomes evil of general price movements is to and some do not — an inequality — that the chief be found . If, for each of us, the rise of income were to keep up with the rise in the cost of living, then the high cost of living would have no real meaning. The rise would be merely on paper. 2. Contracts Upset But no such perfect adjustment between rise in in come and rise in cost of living ever occurs or can occur. Agreements made at various times to pay specific sums of money at later times make this impossible. Consider the debtor and creditor relationship. If Congress should suddenly decree that the present fifty cent piece should henceforth be known as a “ dollar," it is clear that, in practice, the change would not be 55 THE EVILS Sec. 3] merely nominal ; for while current prices would quickly be doubled the terms of contracts already made would not be adjusted . Therefore every creditor, every bond holder, every bank depositor, would clearly be cheated out of half his due. If, on the other hand, Congress should decree that what has hitherto been a " dollar " should henceforth be fifty cents, every debtor would be suddenly saddled with a weight of debt twice as heavy as that which he had originally assumed . In either case incalculable injustice would be wrought. One of the parties to every contract would be swindled for the benefit of the other ; and the swindle would affect the fortunes for good or ill of almost every family in the land . Now this same principle of hardship applies to any change in the purchasing power of the dollar. It does not in the least matter whether the change is intentional. Moreover, it cannot properly be said that, for an unintentional change, there is no human respon sibility. We, the people , neglect the problem , and there fore Congress which , under the Constitution , has the power to regulate the value of money , neglects it also. Consequently , with each change in the purchasing power of money (in other words, with each change in the price level), some people lose what properly belongs to them and others gain what does not properly belong to them . 3 . Salaries and Wages Slow to be Adjusted Nor does the injustice stop with actual outstanding contracts enforcible by legal process . There are many charges which remain fixed from mere custom or 56 STABILIZIN G THE DOLLAR (CAAP . III inertia and are only sluggishly adjusted to a change in the purchasing power of money . This is true of the salaries of clerks, teachers , and public officials, and of many professional fees. It is also true, to a consider able degree, of wages. In recent years salaried men and wage earners have been losing ; for, while salaries and wages have risen , they have not kept pace with the rise in prices. Some wages have remained unchanged for months or years after the cost of living has risen, and then they have only been forced up by strikes. According to the fig ures of the United States Bureau of Labor Statistics, real wages, i.e . their buying power, in 1917 when we entered the war were only a little over two thirds of what they were ten years before. Furthermore, contrary to a common impression , the average workman (though not every type of workman ) has lost ground during the war. The real wages in 1918 were only 80 % of those of 1913 . “ Minimum wage " laws lose their meaning under these circumstances ; for a minimum wage which is at one time sufficient to maintain the standard of life is later, although sanctioned by the law , quite insufficient. 4 . Rates Fixed by Law or Custom also Slow Then, too, there are the numerous prices and rates fixed by law or custom , payable to public utilities and to the government. These include, for instance, licenses and fines, and transportation fares on rail roads and trolleys. Before thewar, railroads, under their legally restricted rates, found difficulty in doing business, because, while Sec. 4] THE EVILS 57 the prices they charged were fixed , their costs of opera tion had gone up with the rise of the general price level. Street railways have likewise suffered because their fares were fixed by law , or charter, or custom , at five cents. Only after two decades, ending in bankruptcy or near-bankruptcy, have they secured , in some cases, a rise of fare to six , seven , eight, and sometimes ten , cents. In fact the plight of street railway companies is one of the facts most eloquently proclaiming the de preciation of money. Mr. Roger Babson has calcu lated that the street railways of the country have lost a billion dollars from this cause . When street railways or water power rights are leased for fifty or a hundred years with the right of “ recap ture ” by the Government, it makes a vast deal of dif ference what the dollar will be at the end of that time. The Wisconsin Supreme Court has had some interesting cases along this line. Bengal is assessed for taxation on a permanent settle ment fixed in rupees when they were worth 21 shillings each . They are now worth only 1 } shillings each in gold , and gold itself has depreciated rapidly ! AsMajor W . E . McKechnie , who calls my attention to this fact, well says, “ Those who made the permanent settle ment could have had no idea that money fluctuated in purchasing power ." Similar absurdities could be cited in reference to Chinese customs, and legal settlements in England and other countries. 1 Under an existing treaty signed by eighteen powers, China cannot increase her import duties beyond a 5 % ad valorem tax based on an average of the prices of 1897, 1898, and 1899. This amounts to only about 21 % ad valorem , based on the prices of to-day. STABILIZING THE DOLLAR (Chap. III 5 . Periods before and after 1896 Contrasted The evils both of rising and of falling prices are well illustrated by two recent sharply contrasted periods : that from 1873 to 1896 and that from 1896 to the close of the Great War. Prices were falling during the first of these two periods. People who had things to sell — the farmer and the active business man — complained that their profits were being cut down or entirely wiped out ; for the prices of their products kept falling while many of the charges they had to meet — interest, rent, etc. — remained fixed . On the other hand , people who had money to lend — the “ bloated bondholder " and the “ dead hand ” (estates, foundations, hospitals , endowed churches and universities, for instance) — were coming to “ own the earth .” Their money incomes were fixed , but each dollar would buy more and more every year. For the samereason salaried clerkswerewaxing fat and comfortable . But from 1896 to the present, with prices rising in stead of falling, the luck changed . The creditor, in his various guises of bondholder, savings-bank deposi tor, lessor, salaried man , and wage earner, became the victim ; while the stockholder, the farmer, the busi ness “ enterpriser," and the bull speculator were the winners in the lottery . In a word, good luck befell the man who took what was left after paying a nearly fixed number of dollars (each with a diminished pur chasing power) for his operating expenses, — his inter est, rent, salaries, wages, etc. Before the war , the loss to the creditor was proceed ing at the rate of nearly three per cent per annum . THE EVILS Sec. 6] 59 During the war, it proceeded at about eight times that rate . It was during falling prices that such money -lenders as Hetty Green and Russell Sage made their fortunes . After 1896 and up to the present, this would have been impossible. For even had they saved every penny of interest and compounded it, they would have had only their labor for their pains and less actual purchasing power in the end than when they began ! Because of our shrinking dollar no one could have accumulated fortunes by simple saving and investment at interest since 1896 . Hence it is that a new class of rich now inhabit the palaces on Fifth Avenue. The “ bloated bondholders " could not keep up the old magnificence under the grow ing strain ofhigh prices. They have given place to the “ profiteers.” In these two phrases the great untutored public shows a curious intuitive sense for the truth which it cannot quite comprehend. It knows at least “ who got the money." Shakespeare stated an economic truth when he said “ there is a tide in the affairs ofmen which , taken at the flood, leads on to fortune.” This tide between 1873 and 1896 carried the bondholders on to fortune and made them “ bloated ," while between 1896 and to -day it carried the stockholders on to fortune and made them “ profiteers.” 6 . The Fault Is Not Personal but Social It will do no good , of course, to rail at the lucky win na ners in the lottery . The public was greatly mistaken in attributing low prices to the “ strangle-hold ” of wicked bondholders and is equally mistaken to-day in 60 STABILIZING THE DOLLAR (Chap. III attributing high prices to the personal turpitude of profiteers. The fault is not theirs. While they have, in a sense, won their neighbors' stakes or picked their neighbors' pockets , they did so without intent to de fraud. They have simply played the game. We should stop the game, not blame those who play it . How can we blame a business man (especially one who , as officer of a corporation , acts in the interests of others whose capital he is managing) for getting the best prices he can ? We cannot expect him to sell be low the market. In fact, if market conditions cause profits to fall into his lap, he would be recreant in duty to throw them away. What we should aim to do is to make such abnormalmarket conditions impossible . 7 . Two Illustrative Cases Consider a working girl who in 1896 put a hundred dollars in the savings bank. To-day if she has allowed it to accumulate at 3 % interest, she has two hundred dollars. But things now cost about three times what they did in 1896 , and when she sets out to spend her two hundred dollars she finds she cannot get as much for it as she could have got at the beginning for her original one hundred dollars. After a score of years of self-denial, where is her reward, her interest ? She has (without the intention of anybody) been cheated out of it all, and more too , merely through the depreciation of the “ dollars ” in terms ofwhich her savings account has been kept. Her interest accrued not even fast enough to offset the depreciation in her principal. Like Alice Through the Looking-Glass, she had to run as fast as she could in order to stay in the same place ! THE EVILS Sec. 8] The bondholder is in the same plight. Perhaps nominally he has been “ living on his interest ” ; but meanwhile the purchasing power of his principal has been decreasing, so that really , although without know ing it , he has been living on his capital. For, to keep the value of his capital unimpaired, he would have had to reinvest all his interest and more ! Meanwhile the stockholder has made what the bondholder has been losing . Dr. J. Pease Norton , referring to the first part of this period , has said : “ The investor in bonds by saving all his interest payments and reinvesting would have been able to maintain his principal in purchasing power , but had he done this he would have had no income. Measured in purchasing power, the investment in stocks shows 6 % per annum better than the investment in bonds." 8 . The Extent of Social Injustice The total financial interests thus affected by changes in the price level are colossal.2 Shortly before the war, Alfred Neymarck estimated the total securities then circulating in the world at 175 to 200 billions of dollars. And to-day the volume of securities is greater, and the war-bonds have increased the total by probably more than 50 % . 1 “ Stocks asan Investment When Prices Are Rising," Securities Review , Scranton , Pa., Sept. 1912. Several other writers (e.g. Charles Rist in Revue Economique Internationale, Brussels, March, 1913) have shown clearly that dividends rise greatly during rising prices and fall greatly during falling prices. 2 For the enormity, in more senses than one, of the evils of paper money inflation , see Sumner 's History of American Currency, N . Y . (Holt), 1884 ; Bullock 's Monetary History of the United States, N . Y . (Macmillan ), 1900 (especially pp. 40 and 74). 62 STABILIZING THE DOLLAR (Chap. III Besides negotiable or circulating securities there are many private debts which never circulate. There are savings-bank deposits and deposits in ordinary banks, running up into scores of billions and held by over a score of million of depositors. There are scores of bil lions of dollars in insurance contracts of various kinds, many of them running for long terms, such as the span of human lives. The widow whose husband twenty years ago insured his life for her benefit gets to -day only a little over one third of the purchasing power con templated in the policy. Between the fall of 1915 and the armistice the dollar suffered a loss sof purchasing power of about 25 % per e q u ently bondholders not only lost all annum . Consequently but 2200%% orper the s of of their interest (of, say, 55 %% )) but s, inannum their principal besides ! The stockholders , in the same period , have had enormous earnings. Professor Friday has shown that the dividends of corporations in the United States in 1915– 1917 were eleven billions as against seven and a half billions in 1911 - 1913. This increase of itself would scarcely keep pace with the rising prices and increase in number of corpora tions. But there is to be added the fact that the corporate reinvestment in “ surplus ” account was thirteen billions in 1915 – 1917 as against four billions in 1911 – 1913 ! Now , at the end of the war,' millions of people in the United States own Liberty Bonds ; millions hold war savings certificates ; millions are financially interested in the soldiers' insurance, which totals about forty bil lion dollars. And all these are in addition to the 1 For a brief discussion of the grave problem ahead of us relative to war debts and price levels, see Appendix I, § 4 . Sec. 9 ] THE EVILS 63 millions who already held savings in banks or owned mortgages or bonds. In Europe, of course , the shift between contracting parties was even more rapid, because the depreciation of their moneys went on more swiftly . The German bondholder must have been essentially ruined and the reported repudiation of the Russian debt only com pleted openly a process that had , under the cover of in flation , already gone far. The total unjust shift of income and principal (as suming the present high price level to continue) from shrinkage of dollars, pounds, francs, and other monetary yardsticks, since 1896 , doubtless exceeds a hundred billion dollars, half or more being during the war. Almost every year untold billions of dollars' worth of social injustice is endured . One ultimate result (except so far as a reverse move ment may affect thematter ) will have been, in effect, to extort the major cost of the war from widows and orphans, colleges, and hospitals , savings-bank deposi tors, salaried men , and wage earners . These are those with relatively “ fixed incomes.” 9 . Uncertainty “ Fixed incomes " ! What a mockery inflation and the consequent depreciation of the dollar in its purchas ing power make of that phrase ! We who, through our laws, guarantee the inviolability of contracts and com pel trustees to protect their wards by investing trust funds in such securities as bonds, permit, in fact some times cause by legislation , the loss, it may be, of half of these “ inviolable " funds. 64 STABILIZING THE DOLLAR [CHAP. III Of course, if its victims could clearly foresee a rise or fall of the price level, they would forestall it or off set it more or less successfully . And this is actually done to a slight extent. When prices are rising the rate of interest usually rises a little to compensate par tially for the depreciated principal. People then real ize that bonds are a poor investment and so the price of bonds goes down, that is, the rate of interest realized rises, while the opposite happens when prices are falling .1 But experience shows that this compensation is seldom or never complete . Most people pay no attention to what has happened , much less attempt to forecast the future and to be guided by their forecast. Indeed , not many can escape even when they see the breakers ahead ; for they are already tied up by long -time contracts. And the few who do bother their heads over price movements are mostly professional speculators . One of the consequences of a shifting price level is speculation . The speculator, if he guesses right, makes money and lets the other fellow pocket much of the loss . And the other fellow includes the general public. Themore the price level shifts and the more difficult it is to foretell it , the more active will be the speculator. So it was that, after the Civil War, with our fluctuating green back dollar, speculation was rampant. Already , after theWorld War, speculation has become rampant again and for the same reason . Unless we stabilize the gold dollar, it will continue. No one really knows now which way prices will move. The general expectation is , or has been until recently, of a fall, but 1 See The Rate of Interest, Irving Fisher, (Macmillan), 1907, Chapter 14 . SEC. 10] THE EVILS 65 greatborrowing, slowness of liquidation and of contrac tion of war currencies, economies of gold use and in crease of deposit banking will tend to prevent it. The chief indictment, then, of our present dollar is that it is uncertain . As long as it is used as a measur ing stick , every contract is necessarily a lottery ; and every contracting party is compelled to be a gambler in gold without his own consent. Business is always injured by uncertainty. Un certainty paralyzes effort . And uncertainty in the purchasing power of the dollar is the worst of all business uncertainties. To mention but one specific instance , uncertainty as to the price level makes it dan gerous to loan on mortgage. The banker fears that a great shrinkage of farm values may wipe out themargin which protects his mortgage and so requires a large margin . A stabler dollar would make a smaller margin sufficient, thus permitting the farmer to mortgage up to a large fraction of his farm value and so helping him and the banker as well. One of the chief marks of a high civilization is the reduction of risks and the lessening of the many perils of life and property to which human beings are exposed . Judged by this criterion our unstable dollar is a relic of barbarism . 10. Trade Cycles One of the results of such uncertainty is that price fluctuations cause alternate fluctuations in business ; that is, booms and crises , followed by contractions and depressions. An upward price movement is apt to end 1 See Irving Fisher, The New Price Revolution , Information and Education Service, U . S . Department of Labor, March, 1919. STABILIZING THE DOLLAR 66 (CHAP. III in a business crash , after which there is a long fall caus ing an industrial depression, followed by another climb to the next crash . Yet the rank and file of busi ness men do not realize the close connection between these cycles of trade and the instability of the dollar. Briefly , the process is this : when prices rise, great profits are madebecause , as we have seen , the “ profit eer " or stockholder wins without effort from the bond holder and from the employees on salary or wages. His easy profits lead him to “ extend himself ” until, when interest charges, rents, salaries, and wages do catch up , his prosperity ceases, he gets caught in debt, becomes a bankrupt, and involves others in a chain of bankrupt cies. A general crisis or even panic may ensue. In fact, a crisis is defined by Juglar as the culmination of an up ward price movement, — that is, of a downward move ment in the purchasing power of the dollar. Such crises have followed the exaggerated prosperity which often comes shortly after a war — for instance, after the Na poleonic Wars (in 1818) , the Crimean War (in 1857), the Civil War (in 1866), and the Franco -Prussian War (in 1873). Then when prices fall the “ fixed charges " are felt as a most serious drag on business and a depression of trade follows. Yet it seldom occurs to business men that business thus staggers about because the dollar staggers. 11. Resentment and Violence There may be persons who, at this point, are in clined to make the smug observation that what we don 't know we suffer we don 't really suffer. But we cannot take so easy -going a mind cure. On the con Sec. 11 ] THE EVILS 67 trary , not only are the evils of the redistribution of wealth and of the fluctuations, booms, crises, recessions, and depressions, which have been described, very real, but the fact that people do not understand them is itself an evil. For when people are hurt but do not know what hurts them , they become suspicious of al most everything and everybody . This suspicion some years ago led to what has been known as “ muckraking.” Though many big criminals were thus exposed , their machinations were scarcely enough to explain a fraction of one per cent of the evil which our shifting dollar has done, and probably are not more than could have been uncovered at almost any time in our history if the same detective work were undertaken . This muckraking , itself bred of discontent and sus picion , has intensified that suspicion and discontent ; for it has exhibited in the limelight of the public press the enormous profits made by big business and high finance, in contrast with the pitiful pay of common labor. As the late Dean Carleton Parker of the Univ versity of Washington has said , this sort of public muckraking has created a fixed idea of grievance in the minds of observant and reflecting workingmen , and has much to do with the growth and bitterness of the “ I. W . W .” Every rise in the cost of living brings new recruits to these malcontents who feel victimized by society and have come to hate society. They cite, in their indict ment, the high prices of necessities and the high profits of certain great corporations, both of which they attrib ute to deliberate plundering by “ profiteers ” or a social system of “ exploitation .” ING STABILIZ 68 THE DOLLAR (Chap . III It never occurs to them that an impersonal cause could injure them and help others, and the idea of too much money they would hail as a grim joke. To resentment and class hatred are also to be attrib uted , in part, overt acts of violence and sabotage in which sometimes the employer' s factory is destroyed ; and food riots in which sometimes the retailer' s shop is wrecked . 12. Falling as well as Rising Prices Cause Discontent Resentment and suspicion are equally rife in periods of falling prices . Some of us have not forgotten the resentment of the western farmers against Wall Street in the nineties, and the suspicion that the farmers 'woes and the woes of poor debtors, as well as the depression of trade, unemployment, and even the panic of 1893, were due to the machinat ons of Wall Street. Bryan 's famous speech before the Democratic convention of 1896 , which made him the Democratic presidential nominee, was based on the idea that the laborer and the farmer were being crucified on a “ Cross of gold ,” supposedly due to sinister influences. The political campaign of that yearwas full of allusions to the alleged “ Crime of '73," meaning the demonetization of silver. Populism at that time took its cue from the intolerable burden of interest , just as socialism to-day takes its cue from the intolerable burden of the high cost of living . Recently a visitor in Kansas could find no populist. The reason given was that “ there is too much money now for populism ." This is an unconscious recogni tion of the fact that the farmers' interests now , instead of being injured as they once were by falling prices and THE EVILS SEC. 13 ] 69 increasing burden of mortgages, are improving under rising prices and lightened mortgages. And just as populism stopped a few years after the fall of prices stopped , so will I. W . W .ism be arrested a few years after the arrest of the rise of prices. 13. War Prices Cause Discontent When the history of the war is written, it may well be that we shall find that the growing popular unrest caused by the high cost of living, and the atmosphere of suspicion engendered , had something to do in giving a pretext for, if not causing, the Great War. In fact, before the war, rising costs of living were fast making socialists all over the world , including Germany, and the German government must have weighed , as one of the expected dynastic advantages of war, the suppression of the growing internal class struggle which this high cost of living was bringing on apace . And , when all the evidence is in , it may well be found that the desire of the Bolsheviki to withdraw from the war was greatly stimulated by the soaring prices from Russian paper money inflation , as well as from scarcity of commodities. Even in Germany, formerly so well disciplined , there was rioting during the war because of high prices, a part of which was certainly due to inflation . More recently a keen observer, an American officer at Coblenz, reports that the most plausible theory of the sudden collapse of German morale was that the German people were indignant over high prices, profiteering, and grafting . The labor troubles in France and England are attributed to the same cause. Lord D ’Abernon says, according 70 STABILIZI NG THE DOLLAR (CHAP. III to newspaper reports, that in his opinion 80 % of the labor discontent of Europe is due to this cause. The labor discontent following the war is worldwide because the rise of prices is worldwide. This discontent is not confined to the countries which were actually engaged in the war, but is found in out-of-the-way places like Portugal and even in far-away New Zealand, once called “ the land without strikes " but now afflicted with strikes because strikes seemed necessary to enable wages to overtake the high cost of living." If I am not greatly mistaken , further trouble is now brewing over high prices. While the war lasted it served , and properly, as an excuse and explanation . But now that the war is over , the high prices seem , to many , inexcusable . If, as I anticipate, prices remain at high levels and the public fails to see why, they will wish to wreak vengeance, some on one luckless object of their wrath, some on others - profiteers, landlords,employers, speculators, middlemen , retailers , trusts, railways, labor unions, etc. If the price level stays high , prof iteering will increase - as an effect not a cause . One result which will probably occur will both sur prise and anger the public. This is a further great increase of earnings of industrial companies and a great increase in the value of their common stocks. For, if prices are to stay double what they were before the war, gross earnings will tend to double and , after deducting the “ fixed " interest, rent, and dividends on preferred stock , the net earnings accruing to common stock will 1 Intelligent business men in New Zealand understand that the basic cause of this reappearance of labor troubles is the depreciation of money, and , as a consequence, the New Zealand Board of Trade is now seriously considering the introduction of the plan for stabili zation of money here proposed . SEC. 14 ] THE EVILS 71 tend to more than double . The I. W . W . and other radicals will put their own interpretation on such pros perity of “ Wall Street,” the figures of which they are always watching . They will be right in thinking that the high profits represent social injustice. What they do not realize is that the injustice is chiefly against the bondholders, and that the transfer between these two classes of investors is an effect ofraised prices, not their cause . 14. Adjustments Most Needed , the Most Unpopular One of the most interesting and curious by-products of the maladjustments we have seen and of the misun derstandings of the nature of the process is that the public is most angry at those latest to seek relief by higher prices , the very ones who need relief most. It was this mental attitude on the part of the public which so long prevented a rise in railway rates. The Interstate Commerce Commission , consciously or un consciously , reflected public opinion when , prior to the war, it refused repeated requests for relief through a rise of rates. The public, instead of seeing in the general rise of prices a depreciation of the dollar and the consequent need of a prompt and corresponding rise in such prices as had remained unadjusted to the cheaper dollar, demanded indignantly , “ Haven 't we suffered enough already from the high cost of living ? While we are protesting against the other conspirators who are raising prices and while we are trying to force them to reduce prices, we certainly won't permit this further addition to the high cost of living.” In thus thinking of their own grievances they overlooked the 72 STABILIZING THE DOLLAR (CAAP. III fact that the railways had been more long -suffering than themselves. Until Mr. McAdoo, as director-general of railways in the war, raised the rates in 1918, they had been prac tically unchanged since 1896 . Even including the ad vances of 1918, freight and passenger rates are but 12 and 20 % higher, respectively , than they were in 1896 while the price level has risen 200 % ! The same strong public feeling long prevented a rise in the fares of electric railway companies above the traditional five cents. If a five-cent fare was just in 1896 and if the other factors in the case, wages, material, equipment, etc., have, on the average, risen proportionally with the gen eral rise in prices, that is, are three times what they were in 1896 , then the “ fair fare ” for the companies to -day should be fifteen cents ! Or, if to -day a five- cent fare is just and expenses in 1896 were lower than now in proportion to prices in general, the just fare in 1896 should have been about two cents ! In the same way tenants have deeply resented the rise of rents, long belated though it was. Rents did not respond to the rise in general prices for many years, in fact were, in some cases in Europe, temporarily re mitted on the principle of the moratorium . When finally they did respond , they went up suddenly and , to the tenant already long injured by the high cost of living, the rent raising seemed “ the most unkindest cut of all.” As this book is being written the “ rent profiteer " in Europe is being lampooned , insulted, and even stoned . 1 See Theodore H . Price, " The Index Number Wage," Commerce and Finance, May 7, 1919. Sec. 14 ) THE EVILS 73 Even more curious is the fact that the beneficiaries of high prices are themselves indignant over the high prices charged by others. Employers who are getting high prices and high profits often object strenuously to raising wages and salaries. Farmers who are getting high prices protest vigorously against paying high prices. There is a true story which illustrates this. A farmer inquired from the manufacturer the present price of a certain type of buggy such as he had bought once before . The price quoted seemed to him outrageously high and he accused the manufacturer of “ profiteering,” remind ing him of what the former price of this buggy had been . The manufacturer, after looking up the record of the transaction , and discovering that the farmer had pre viously paid for such a buggy by a shipment of wheat, reckoned at the low prices then prevailing, replied : “ If you will ship to me for the new buggy the sameamount of wheat you shipped for your old one, I will gladly ship the buggy and in addition will ship you a piece of household furniture and a good kitchen stove ! ” In short, everybody is eager to take advantage of rising prices, but feels aggrieved if anybody else snatches the advantage away. Thus the high cost of living becomes a veritable “ apple of discord .” If high prices have come to stay, of course the sooner all the adjustments are made the better. Wages espe cially need to be raised , as do salaries, rents, and the rates of public service corporations. It will probably be less disturbing, on the whole , to levelup the few such things than to level down the many other things. STABILIZING THE DOLLAR 74 (Chap. III 15 . Bad Remedies In short, either a rising or a falling price level wrongs great classes of society and brings discontent, suspicion , and violence. The public fails to discern the great cause lying back of all the trouble ; but it detects , almost unerringly , “ who's got the money ” and, though less unerringly , at whose expense. It demands a remedy without first knowing the correct diagnosis. Thus any price disturbance gives a hearing to all manner of reform movements , whether apropos or irrel evant and whether good, bad, or indifferent. For instance, Henry George's single -tax propaganda was aided both by falling and rising prices. During the falling prices there was the spectacle of the tenant op pressed by an increasing burden of rent and the inde pendent farmer oppressed by an increasing burden of interest. These evils thrust the “ land problem ” for ward , especially in Ireland and Kansas, and any pro posal to solve the land problem got a ready hearing. When , later, prices rose it was natural to attribute this rise to pressure of population for subsistence on the margin of cultivation , especially as by the time this theory was urged the belated rise of rents and of land values began. The high cost of living seemed explain able by high real estate values and raised land rents, and indignation against the system of private ownership of land was readily aroused , especially as numerous in stances were at hand of great fortunes made from the unearned increment and of land frauds, land grabs, and exploitation by great corporations of natural resources. Not all the reforms which thus get factitious help from price movements are genuine reforins. Sec. 15 ) THE EVILS The fact is that among the worst consequences of price convulsions are the vicious remedies proposed . Like the remedies of primitive medicine, they are often not only futile, but harmful. Yet the patient will always demand medicine. The let-alone policy will not do for him . He knows that the present condition of things is bad and needs changing. His attitude of mind is a frantic “ I don 't know exactly what's the matter or what needs to be done, but for Heaven 's sake let's do something." It is clear, then , that unless a scientific remedy is found and applied there is always great danger of quack remedies. In the nineties, after a prolonged fall of prices, which had begun in the seventies, when so much was said of the so -called “ Crime of '73,” several unscientific reme dies were on the market. A book that went by the name of “ Coin 's Financial School ” proposed the coin ing ofall silver broughtto themint into silverdollars ,each sixteen times asheavy as the gold dollar,although at that time a gold dollar would buy in the market not sixteen times, but about thirty -two times, its weight in silver. This book had a phenomenal circulation and influence ; and the “ 16 to 1 ” remedy, which would have been worse than the disease , camevery near being adopted . The movement for it was based on a consciousness of the true cause of the falling prices — inadequate gold ; but, instead of regarding this impersonally and seeking merely to prevent further fluctuation , the “ free silver ” advocates put the blame on the “ gold bugs of Wall Street ” and sought to “ get even ” by a sudden debase ment of the dollar equal to fifty per cent. Since then , of course, we have witnessed, in gold it self, more than this amount of depreciation , - a gold 76 STABILIZING THE DOLLAR (Chap. III dollar to -day being worth scarcely a third of what the gold dollar of 1896 was worth . Yet who thinks of that depreciation as atoning for the “ Crime of '73 " ! On the contrary , we regard that depreciation (as shown in the rising price level) as but another evil. We now wish to find a remedy for it as well ; and so to -day we are being threatened with other unscientific reme dies, such as revolutionary socialism , syndicalism , and Bolshevism . Reckless radicalism rides in on the wave of high prices. 16 . The Loss Is General Wehave seen that the primary evil of these aberra tions is social injustice, a sort of subtle pocket picking. At first glance it might seem that such a transfer is not a general evil ; for what some lose others seem to gain , and they do — at first. But the secondary evils are very general, namely , the evils from specula tion , uncertainty, crises, depression , resentment, vio lence, ill-considered “ remedies.” Moreover , curiously enough , as with ordinary gambling, even the ill-gotten gains of the winners are largely swept away in the end . Thus, as during the present rise of prices, strikes, riots , violence, and the other secondary effects of rising prices destroy the profits of the winners by blocking thewheels of industry and even destroying its tools. If we are going to have discontented workmen smash our win dows and run the wooden shoe through our machinery, it is not so much a question of who is going to get the profits as a question of whether there are to be any profits. If we want workmen to be contented , we must let them have a fair share of prosperity and not let a shrinking dollar defraud them . Sec. 16 ] THE EVILS Furthermore , the crisis which follows the “ boom ” period is of itself a day of reckoning, atwhich theprofit taker pays dearly for his prosperity . Similarly , during a period of falling prices, when the vampire is not the profit -taker but the creditor, the winner is also apt to lose his winnings when , as was shown in § 10 above, the stipulated interest he exacts grows into an intolerable burden and bankrupts the debtor. A special injury to business comes when the creditor forecloses his mortgage on industry and under takes to run it himself. The creditor — especially the ordinary bondholder — is, usually and normally, the simple investor of capital, the “ silent partner ” in business . He lacks the temperament and training to be a captain of industry. Nevertheless , after years of falling prices during which he has been draining, unob served , the life blood of the enterprise whose bonds he holds, until there is no profit left for the captain of industry who has been managing it, the mortgage is foreclosed and the captain , held responsible for the shipwreck, is forced out, discredited , and humiliated, and wholly unable to articulate or even to understand that it was not wholly his fault, if at all, but the fault of his instrument of reckoning, the dollar. Thereupon the bondholder is forced to take control. Thus the management drifts into wrong hands, turns into mis management, and the bondholder is hoist with his own petard . Like Shylock , though unconsciously, he has been exacting his pound of flesh until he has over reached himself. As David Harum wisely said , “ It ain ' t a bad idee to be willin ' to let the other feller make a dollar once 'n a while .” The wage earner also is involved in the catastrophe. 78 STABILIZING THE DOLLAR (CHAP. III Primarily a gainer when prices are falling , because his wages fall more slowly than prices, he nevertheless suffers more unemployment during this lowered cost of living than during rising prices, and in the misman agement, at the end, he suffers with the rest. g ains long or gains ne gains In short, almost no one falling pricepemuch et either from rising prices or from falling prices.at nTo society as a whole, there is , in either case, a great net economic loss as well as great injury to social justice and good will. 17. Conclusion Thus this seemingly simple little matter of shorten ing or lengthening themonetary yardstick , so far from being a merely nominal and unimportant change, is really more or less responsible for some of the greatest events in history. It causes mighty convulsions of prices and these , directly or indirectly , rock the social structure to its foundation. 1 Besides the effects of price movements above cited, which are specifically evil, history is full of other great effects, — some even beneficent. Price movements, like wars, inevitably arouse, irritate, stimulate . Falling prices stimulated the great Irish land agitation and the Home-rule movement because of the pitiable condition of the Irish peasant debtors. Falling prices stimulated the idea of Protective tariffs. Rising prices stimulated the idea of Free Trade. England abolished the corn laws when the cost of living was rising , and under the samewhip the United States adopted the Underwood low tariff and , earlier, the low tariff of 1857 . It was as an antidote for the falling prices of the '20s and the ' 90s that the doctrine of protection scored its greatest successes in the United States. Not only economic history but political and social history would have been totally different had it not been for the aberrations ofmonetary units . CHAPTER IV A REMEDY I. Remedies Which Have Been Proposed We are now ready for the practical question for which this book was written , “ What are we going to do about it ? " The following is a list of the measures to stabilize prices which I have seen in the last ten years , a few of which have, in some places, been adopted : parcel post ; farm loan facilities ; workmen 's compensation ; other forms of social insurance ; Government owner ship of public utilities ; socialism , of every variety ; re duction of human disease and disability ; prohibition ; “ the simple life,” including abandonment of social obligations and “ emigration ” to a different part of town (as in the book , “ One Way Out ” ) ; house keepers' market clubs; municipal slaughter houses ; state bakeries and butcher shops ; trolley freight serv ice ; coöperative selling by farmers ; utilization of empty city lots ; municipalmarkets ; scientific management ; reduction of middlemen ; coöperation ; profit-sharing ; publicity as to prices and profits ; the single tax ; lower tariffs (in the United States and Germany) ; higher tariffs (in England ) ; better supervision of weights and measures ; use of bulk goods instead of package goods ; use of " cash and carry ” system , instead of " telephone and deliver ” ; repeal of tax on 79 80 STABILIZING THE DOLLAR (Chap. IV oleomargarine and other taxes on consumption ; re duction of railway rates (in France), namely , on vege tables and fresh fish , with increase of rates on fodder for export (the idea being to keep fodder at home and make meat cheaper), and certain encouragements to importation of cattle from Algeria , Tunis , and else where ; encouragement in Switzerland ) of import of frozen meats from Uruguay ; municipal selling of potatoes, fish , and certain other foods at cost ; laws against speculation and monopoly ; price fixing ; regu lation of cold storage plants in the United States) ; granting of subsidies to cold storage plants (in France) ; general food control by theGovernment ; publicity as to prices and profits ; trade unionism ; the destruction of trade unions ; inflation ; elastic currency ; bimetal lism ; sliding scale of wages based on cost of living ; disarmament. Much as I should like to , I shall not take space to discuss these proposals in detail. Some of them have already been mentioned as evils rather than remedies. Others, though most excellent in themselves, are irrelevant to the problem of this book ; that is, they would not tend in the least to stabilize the price level and the purchasing power of money. They would help us to endure the high cost of living but would not reduce or prevent it. Some of them may even be more important to the sum of human happiness than the remedy about to be proposed. That remedy is not in the least in conflict with such measures but supple mentary to them . The above list of proposals is given , therefore, not for indiscriminate condemnation , but as showing in what direction people tend to think when the problem Sec. 2] 81 A REMEDY of the high cost of living is mentioned. The fact that such proposals are mostly concerned with economy and efficiency in the production , distribution , and con sumption of goods shows that little thought is ordi narily given to the other side of the market, i.e. to the monetary aspect of the question . There are really two problems included under “ the high cost of living ” : (1 ) the problem of the size of our incomes ; and ( 2 ) the problem of how much each dollar of our incomes will buy. The first of these is more properly “ the problem of income" ; the second alone is strictly the problem of “ the high cost of living." One trouble with most of the proposals above men tioned is that, though they are concerned with the first problem rather than the second, they are expected to solve the second problem too. Disappointment fol lows their application , and unless a genuine solution of this second problem , i.e. an effective means of stabiliz ing the price level, is found , a bewildered and infuri ated public is apt to keep on trying every sort of alleged remedy, good, bad, and indifferent, often with disastrous results. The plan which I shall propose has reference solely to the solution of this second problem , — the problem of the purchasing power of the dollar. 2 . The Dollar the Only Unit as Yet Unstandardized The real culprit being the dollar, the real remedy is to fix the purchasing power of the dollar. Our dollar is now simply a fixed weight of gold — a unit of weight, masquerading as a unit of value. A twentieth of an ounce of gold 1 is no more truly a unit of 1 To be exact, the fine gold in a dollar is one of an ounce . 82 STABILIZING THE DOLLAR (CHAP. IV value or general purchasing power than is a pound of sugar or a dozen eggs. It is almost as absurd to define a unit of value, or general purchasing power, in termsof weight, as to define a unit of length in terms of weight, to define a yardstick as, let us say, any stick which weighs an ounce . What good does it do us to be assured that our dollar weighs just as much as ever ? Does this fact help us in the least to bear the high cost of living ? What we really want to know is whether the dollar buys as much as ever . We want a dollar which will always buy the same aggregate quantity of bread , butter, beef, bacon , beans, sugar, clothing, fuel, and the other essential things for which we spend it. There used to be a song about a shopkeeper who, being asked the price of a box of socks, replied , “ One dollar a box.” “ I'll take the box,” said the customer, handing over his dollar ; whereupon the shopkeeper took out the socks and handed over the box . “ I sold you the box, not the socks,” said he ! Our dollar is somewhat like that box. It keeps its form , but loses its content. The removal, in this case, is not intentional or committed by one of the parties to the contract, but so much the worse ! — for the in jured party has no recourse. It is as though the buyer of the box of socks were forced to agree in advance to let a bystander remove or insert socks ad libitum . What is needed is to stabilize, or standardize, the dollar just as we have already standardized the yard stick , the pound weight, the bushel basket , the pint cup , the horsepower, the volt , and indeed all the units of commerce except the dollar. All these units of SEC. 2 ] A REMEDY 83 commerce have passed through the evolution from the rough -and -ready units of primitive times to the accurate ones of to-day, when modern science puts the finest possible point on measurements of all kinds. Once the yard was defined , in a rough -and-ready way, as the girth of the chieftain of the tribe and was called a gird. Later it was the length of thearm of Henry the First and , still later, the length of a bar of iron in the Tower of London. To-day we have at Washington a Bureau of Standards where the modern yardstick is determined by a bar of metal alloy kept in a room of constant temperature, under a glass case, and not ap proached by the observer, lest the warmth of his body should cause it to vary, but sighted by a telescope across the room ! Except the dollar, none of the old rough -and -ready units are any longer considered good enough for mod ern business. The dollar is the only survival of those primitive crudities. Imagine the modern American business man tolerating a yard defined as the girth of the President of the United States ! Suppose contracts in yards of cloth to be now fulfilled which had been made in Mr. Taft's administration ! And yet the shrinkage in such a yardstick would be no greater than the shrinkage we have suffered in the far more important yardstick of commerce, the dollar ; and this yardstick is used in all the contracts in which the yardstick of length is named and in all others besides ! Consequently the evils our unstabilized dollar works — evils of confusion, uncertainty, social injustice, dis content, and disorder — are as vast as would be the evils experienced if all the other units of commerce — STABILIZING THE DOLLAR (Chap. IV the yardstick , the bushel basket, the hour of work , etc . — should vary concertedly to the same extent. We tolerate our erratic dollar only because the havoc it plays is attributed to other agencies. If its victims knew the truth about the dollar, it would be stabilized at the very next session of Congress . We tenaciously cling to the blissful assumption that our dollar never varies. We seem to like not only , as Barnum said , to be humbugged , but even to humbug ourselves. 3 . An Imaginary Goods-Dollar A true standard of value (general purchasing power over commodities ) such as we would like our mone tary standard to be should not be dependent on one commodity merely, whether that commodity be gold or silver or wheat or any other single sort of goods. Two commodities would be better than one, just as two tipsy men walk more steadily arm in arm than separately . Whenever they tend to lurch in opposite directions they neutralize each other. This is the argument which used to be urged for bimetallism , symmetallism , and other plans for uniting gold and silver. And the argument applies whenever gold and silver move in opposite directions, as from 1873 to 1896 . If, for instance, a generation ago, we had adopted a dollar of an alloy 1 consisting of half of the former gold dollar and half of the former silver dollar, our price level would not have suffered the rapid fall it did prior 1 A bill for this purpose was actually proposed in 1879 by Con gressman Stephens (Hepburn, History of Currency in the United States, p . 288) . Sec. 3 ] A REMEDY 85 to 1896 in common with the price levels of other gold standard countries, nor would it have suffered the rapid rise which the units of silver -standard countries experi enced . It would have kept intermediate between the diverging price movements of gold countries ,on the one hand, and silver countries, on the other . But such an alloy of only two commodities, while in many cases it would be steadier than either one alone, and in all cases steadier than the less steady of the two, would not really be very steady. A composite of gold , silver, copper , platinum , and all the other metals would be somewhat more stable than an alloy of two , just as a number of tipsy men can walk more steadily arm in arm than two only, it being wholly unlikely that all men in the line will lurch in the same direction at the same instant. The lurching of some in one direction can almost always be depended on to offset materially the lurching of others in the other direction. We can usually trust to chance if there are enough chances to trust to ! But why use metals exclusively ? The index num bers of the United States Bureau of Labor Statistics show that the group of “ metals and metal products,” taken as a whole, is the most erratic of all the groups 1 of commodities. In order to secure a dollar constant in its purchasing power over goods in general, it should represent a com posite of those very goods in general. We should there fore make our gold dollar correspond in value to an imaginary composite goods-dollar consisting, say , of : 1 The groups are nine, namely : farm products ; food , etc .; cloths and clothing ; fuel and lighting ; metals and metal products ; lumber and building materials ; drugs and chemicals ; house fur nishing goods ; and miscellaneous . 86 STABILIZI NG THE DOLLAR (CHAP . IV 1 board foot of lumber (made up of various kinds as would be the case with other com modities ) to of a bushel of wheat 1 of a pound of steers of a pound of meat 15 pounds of coal zoo of a barrel of wheat flour of a pound of sugar of a pound of hogs šof a pound of cotton of a gallon of petroleum of an egg 1 of a pint of milk 1 of an ounce of butter do of a bushel of corn by of a bushel of potatoes do of a pair of shoes of a pound of hay of an ounce of steers' hides 1 of an ounce of tobacco at the farm 1 of an ounce of manufactured tobacco of an ounce of lard of an ounce of leather Is of an ounce of wool 1 of a pound of steel of an ounce of copper to of an ounce of rubber 1 of 1 % of a gallon of drug alcohol 1 ounce of soap etc., etc. These happen to be roughly the relative quantities of some of the commodities used by the United States Sec. 4 ] A REMEDY Bureau of Labor Statistics in making up its index num ber of prices. The entire list, of which the articles specified are the more important, is actually worth about one dollar to -day. If we could , in someway ,make our gold dollar equiva lent to such a market-basket dollar, i.e. a composite dollar consisting of a big basket or package containing those bits of goods, that composite basketful of com modities — or “ goods-dollar,” let us call it — would evidently have to be worth a dollar at all times ; and the cost of living — at least the cost of the repre sentative assortment in that basket — could not rise or fall. That assortment would always cost a dollar simply because a dollar was the equivalent of that assortment. In short, it would be just as simple then to keep the price of the composite basketful of com modities invariable (however widely its constituents might vary among themselves) as it is now to keep the price of gold invariable . The price of that compos ite would always be a dollar , just as to-day the price of gold is always $ 20.67 an ounce, and just as, under an egg standard, the price of a dozen eggs would always be a dollar, and just as, with an alloy of gold and silver, the price of that alloy would be constant, however much its constituents might vary relatively to one another. And this composite goods-dollar is not altogether a joke. I am going to suggest its adoption — indirectly , at least ! 4 . The Gold Standard Not to Be Abandoned Some literal-minded reader is now eager to point out how inconvenient, not to say grotesque, such a market basket dollar would be if it were in circulation or were G 88 LIZIN STABI AR THE DOLL (Chap. IV used for export or import ! With its 15 lb . of coal, it is far too heavy to carry ; with its wood and hay, it is far too bulky ; its half egg would spoil ; while to divide a pair of shoes into two hundred parts would annihilate their value. Gold is to be preferred because it is im perishable, easily divisible, easily portable, and easily salable. ion eributes which llectthese are ld ; andthe led to of goprecisely matattributes which led toAnd to the selection of gold ; and not, as some people mis takenly assume, any attribute of stability . By all means, then, let us keep the metal gold for the good attributes it has — portability , durability, divisi bility, salability — but let us correct its instability , so that one dollar of it will at all times buy approximately that composite basketful of goods. Under the plan proposed only the gold dollar, duly corrected , is to be actually handled. The goods-dollar is merely a fiction in terms of which we may statistically test and correct the gold dollar. Money to -day has two great functions. It is a medium of exchange and it is a standard of value. Gold was chosen because it was a good medium , not because it was a good standard . The contention that gold became money because it was thought to be a good standard of value is an un founded myth . Indeed, when it came into use as money, there were no index numbers and there was therefore no way of testing its stability or instability ; and finally at that time there was not much need and not much thought of a standard of value, for the good and sufficient reason that there were few , if any, time contracts, such as promissory notes, mortgages , and bonds. Almost all bargains were struck and settled on Sec. 4] A REMEDY 89 the spot. When a man was about to make a cash pur chase it was immaterial to him what themonetary unit was. But to-day if a man buys an article and promises to pay for it in three months, the case is different. When the time for payment arrives it is very important for him to know whether the “ dollar " is the same as was contemplated when the agreement was made. With our modern contracts , running months, years , generations, or even centuries , including hundreds of billions of dollars' worth of agreements to pay money, – promissory notes, mortgages, debentures, railway bonds, Government bonds, leases, insurance contracts , etc ., — the function of a standard of value, that is, a standard of deferred payments,has grown to be perhaps themore important of the two functions of money. Yet because our ancestors found a good medium of exchange we now find ourselves saddled with a bad standard of value. What weneed to do, therefore, is to retain gold as a good medium and yet to make it into a good standard ; not to abandon the gold standard but to correct it ; not to rid ourselves of the gold dollar,but to make it conform in purchasing power to the composite or goods-dollar. Under the plan about to be presented , gold is retained ; and there is essentially the same mechanism by which it freely enters or leaves the circulation. But under this plan the gold dollar becomes a standard of value instead of a standard of weight. We now have a gold standard with the “ standard ” left out! When I am asked with a horrified air ,whether this proposal is not really one to “ abandon the gold standard ” I like to answer : “ No ! it is to putthe stand 90 STABILIZING THE DOLLAR ard into the gold standard ! ” (Chap. IV But abandon the present gold standard , so called , it certainly does, by converting or rectifying it into conformity with the composite standard . 5. Merely the Weight of the Gold Bullion Dollar to Be Varied But how can we rectify the gold standard ? That is the question which we set out in this chapter to answer. In brief the answer is : by varying, suitably , the weight of the gold dollar. The gold dollar is now fixed in weight and therefore variable in purchasing power. What we need is a gold dollar fixed in purchasing power and therefore variable in weight. I do not think that any sane man , whether or not he accepts the theory of money which I accept, will deny that the weight of gold in a dollar has a great deal to do with its purchasing power. More gold will buy more goods. Therefore, more gold than 23. 22 grains will,barring counteracting causes , buy more goods than 23 .22 grains will buy. Therefore if the dollar, instead of being 23.22 grains, or about one twentieth of an ounce of gold , were an ounce or a pound or a ton of gold , it would , other things equal, surely buy more than it. does now , which is the same thing as saying that the price level would be lower than it is now . A Mexican gold dollar weighs about half as much as ours and therefore has less purchasing power. If Mex ico should adopt the same dollar thatwe have, no one 1 Thus B . M . Anderson , Jr., probably the ablest writer among the few who still dissent from the " quantity theory " in any form , nevertheless approves of the proposal to stabilize the value of a . dollar by adjusting its weight. SEC. 6 ] A REMEDY 91 could doubt that its purchasing power would rise about twofold , that is, the price level in Mexico would fall about half. Likewise, if we should adopt the Mexican dollar, our prices would about double. Let it be granted , then, that according as the gold dollar is heavier or lighter , themore or the less will be its purchasing power . It follows at once that, by adding new grains of gold to the dollar just fast enough to com pensate for a loss in the purchasing power of each grain (and , of course, reversely , taking away gold to compen sate for a gain ) , we can secure a stationary instead of a fluctuating dollar, in terms of purchasing power . 6 . No Gold Coins to Be Used Before the reader can accept the statement justmade that the problem of stabilizing the dollar is soluble by varying the dollar's weight he will want to have three questions answered : Is it practicable to vary the gold dollar's weight periodically ? By what criterion is the variation to be made ? Will that variation actually stabilize the dollar ? First , as to the first question : How is it possible , in practice , to change the weight of the gold dollar or other monetary unit ? The feat is certainly not impossible ; for it hasoften been accomplished . European history affords numer ous examples. The Philippine peso was changed only a few years ago. We ourselves have changed the weight of our gold dollar twice ; once in 1834, when the gold in the dollar was reduced 7 % , and again in 1837, when it was increased one tenth of one per cent. If we can change the weight of a monetary unit once or twice a century, we can change it once or twice a month ! 92 G STABILIZIN THE DOLLAR (Chap. IV And if we circulate gold only through paper repre sentatives redeemable only in gold bullion and dis continue gold coins, these periodical changes in the weight of the gold dollar can be made even more easily than the occasional changes which history records. In actual fact gold now circulates almost entirely through paper “ yellowbacks," or gold certificates. The gold itself (often not in the form of coins at all but of “ bar gold ” ) lies in the Government vaults. A bar of gold bullion, nine tenths fine, weighing 25,800 grains, is just as properly to be called one thou sand dollars of 25 . 8 grains each , as if that bar were cut up into a hundred separate pieces and each were stamped into a ten -dollar gold piece. The thousand gold dollars already exist embedded or welded together in that gold bar, while the right of ownership in them circulates in the form of paper “ yellowbacks.” Since, then , even to -day, most of our gold dollars do their circulating in the form of paper, there would be no inconvenience if the only circulation of gold were in the form of paper. Most of the people in Eng land who , before the war, carried gold in their pockets by preference , have already been weaned from the habit; and most of the few Americans (in California , Oregon , and Washington ) who still do so are being weaned from it in the sameway . It would , therefore, be little more than expressing in law an existing custom if gold coins were abolished alto gether. For simplicity , let us assume that this is to be done. When , therefore, I speak of changing , from time to time, the weight of the gold dollar, the reader need not conjure up visions of repeated recoinages, or gold 1 As noted in Appendix VI, 83, B , this was proposed by Ricardo. SEC. 6 ] A REMEDY 93 eagles of various weights jangling together in confusion in the market place. Let him rather banish gold coins entirely from his mind and think of a dollar as simply a certain number of grains of gold bullion in the vaults of the United States Treasury — that quantity chang ing from time to time but always definite and specific at any particular time; and let him remember that, in actual circulation , this gold bullion is represented by paper yellowbacks. By thus assuming no actual gold coin to circulate but all gold to circulate only in the form of paper represent atives,it would be possible to vary at will the weight of the gold dollar without any such annoyance or compli cation as would arise from the existence of coins. The Government would simply vary the quantity of gold bullion which it would exchange for a paper dollar, — the quantity it would give or take at a given time. As readily as a grocer can vary the amount of sugar which he will give for a dollar the Government could vary the amount of gold it would give or take for a dollar. If to -day the Government were giving 25.8 grains of gold bullion to the jeweler or exporter for each dollar of certificates 1 he pays in , next month it might give 26 grains or only 24 grains, the increases or decreases being made, of course, for the purpose of compensating 1 The wording on the certificates would , of course, need to be slightly changed . They could no longer be properly called ware house receipts, nor would they, on the other hand, be exactly analogous to Government notes ; they would be intermediate be tween the two. They might be described as “ gold bullion dollar certificates.” They would be redeemable at any time in the then official weight of the gold dollar — a variable weight but constant worth , instead of a constant weight but variable worth , as at present. For the proposed wording of the new certificate, see Appendix I, § 10 . 94 STABILIZING THE DOLLAR (CHAP. IV for the decreases or increases in the purchasing power of the dollar. 7. The Essentials of a Gold Standard Before proceeding to the second question of $ 6, we may pause here to point out that the abolition of gold coin would make no material change in the processes by which gold flows into and out of circulation. Gold would , just as at present, be brought by the gold miner to the Mint or the Assay Office or other Government depository, and he would , just as at present, receive paper tokens, or yellowbacks, in return . The only difference would be that he would not always deposit the same amount of gold to get a dollar of yellowbacks. This sale of gold to the Government for yellowbacks, i.e. this unrestricted deposit, is the essence of unrestricted coinage or , as it is usually called , " free coinage." It is thus that gold gets into circulation through its repre sentative, the yellowback . Moreover, to turn from inflow to outflow , gold would, just as at present, be taken out of the Government vaults by jewelers or gold exporters and they would , just as at present, surrender yellowbacks for that gold . The only difference would be that they would not al ways get the samequantity ofgold for a dollar in yellow backs ; the same certificate would be worth different amounts of gold at different times. Every dollar of gold whose corresponding yellowback was thus taken out of circulation , just as at present, would disappear into the arts or foreign circulation . The process would therefore be virtually a flow of gold dollars from the cir culation into the arts or abroad . Such exchange is the unrestricted “ redemption " of the certificates. SEC. 8 A REMEDY 95 Thus unrestricted deposit and unrestricted redemp tion would go on substantially as at present, the one tending to increase and the other to decrease the volume of bullion certificates, that is, the virtual gold in circu lation. In short our gold -standard system may be pictured as a lake of gold , physically in storage but circulat ing through yellowbacks, a lake fed by miners and importers and drained by jewelers and exporters. This system , the lake and its inflow and outflow , would continue unchanged. Only the terms on which gold would be deposited and withdrawn would be changed . 8 . Periodical Variations of Weight Based on Index Numbers We find , then , in answer to the first of our three questions that a periodical variation of the dollar's weight can be made at will, and that , too , without changing, in the least , the nature of the mechanism by which the gold standard now operates. We are now ready for the second question : What criterion is to guide the Government in making these changes in the dollar's weight ? Am I proposing that someGovernment official should be authorized to mark the dollar up or down according to his own caprice ? Most certainly not. A definite and simple criterion for the required adjustments is at hand — the now famil iar “ index number ” of prices. The Bureau of Labor Statistics , which publishes our best present index num ber , or the Bureau of Standards or other suitable Gov ernment office , would be required to publish this num ber at certain stated intervals, say bimonthly . 96 STABILIZING THE DOLLAR (Chap . IV To be specific, every two months (or whatever the adjustment period chosen might be) the Bureau would calculate from currentmarket prices how much our com posite basketful of goods costs . This figure (the index number of prices) it would publish ; and this figure would then afford the needed official sanction to the Director of the Mint to change the weight of the gold dollar — that is, to change the amount of gold which the Government would give or take for a gold certificate, and thus increase or diminish the purchasing power of that certificate. The certificate would always be equal in value to the gold dollar ; and the gold dollar would be kept equal in value to the goods-dollar which is the ulti mate standard. If, for instance, the index number representing the current price of our composite basketful of goods is found to be $ 1 .01, i.e. one per cent above the ideal par (i.e. above the one dollar price), this fact would indicate that the purchasing power of the dollar was too low , for it requires one cent more than a dollar to buy the ideal basket. This fact would be the signal and authorization for an increase of one per cent in the weight of the gold dollar. If, on the other hand, the index number when com puted is found to be one per cent below par, the pur chasing power of the dollar is too high and a one per cent reduction of the dollar's weight is called for. In short, then , our rule or criterion of adjustment is simply this : for every one per cent of deviation of the index number above or below par found at any adjustment date, we then increase or decrease the dol lar' s weightby one per cent. Sec. 9] 97 A REMEDY 9. How the Adjustment Rule Would Work And now we approach the last of the three questions formulated in 86 : Will the above rule for varying the dollar's weight really stabilize the dollar ? How can we know that if the index number is one per cent above par, a one per cent increase in the weight of the gold dollar will be just sufficient to drive the index number back to par ? The answer is we do not know , any more than we know , when the steering wheel of an auto mobile is turned , that it will prove to have been turned just enough and not too much . Many things may in terfere in the period elapsing between adjustments. But if the correction is not enough or if it is too much , the index number , when next computed , will tell the story . Absolutely perfect correction is impossible but any imperfection will continue to reappear and cannot escape ultimate correction . Suppose, for instance, that next month , or adjust ment period , the index number is found to remain un changed at 101 % , that is, that the basketful of goods still costs $ 1 .01. Then the dollar is at once loaded an additional one per cent. And if, nextmonth , the index number is, let us say, 1001, i.e. į of one per cent above par, that į of one per cent will call for a third addition to the dollar's weight — this time of one per cent. And so , as long as the index number persists in staying even a little above par, the dollar will continue to be loaded at each adjustment period , until, if necessary, it weighs an ounce — or a ton , for that matter. But, of course , long before it can grow very heavy , the additional weight will become sufficient, so that the index number will be pushed back to par ; that is, 98 STABILIZING THE DOLLAR (CHAP. IV the circulating certificate will have its purchasing power restored . Or, reversely, suppose that the index number falls below par, say one per cent below — the basket costing $ 0 .99. This fact will indicate that the purchasing power of the dollar has gone up. Accordingly , the gold dollar will be reduced in weight one per cent and, at each adjustment period during which the index num ber remains below par, the now too heavy dollar will be unloaded and its purchasing power brought back to par. Thus by ballast thrown overboard or taken on , our dollar is kept from ascending or descending far from the proper level — that is, from the equivalent of our composite basket of goods. In short, the adjustment, like all human adjustments, takes place “ by trial and error.” There is always a slight deviation, but this is always in process of being corrected. The steering wheel keeps the monetary automobile not exactly in the straight linemarked out, but always near it on one side or the other, so that its deviations will always afford the criterion needed for steering it back . The answer to the third question , therefore, is that the stabilization machinery , while it cannot absolutely prevent slight aberrations from par, will persistently tend to reduce toward zero every deviation which comes along . It does not matter in the least what the cause or causes of deviation may be. They may be connected with gold or bank credit or anything else. The devi ation , no matter how caused , would bring a counter balancing change in the gold dollar's weight and the Sec. 9] A REMEDY 99 change in that weight will continue to be made at every adjustment period as long as the deviation in the index number continues. The result is that the price level would oscillate only slightly. Instead of great price convulsions, such as we find throughout history, the index number would run close to par, say, 101, 1001, 101, 100, 102, 1013, 100, 98 , 99, 99, 99 , 100, etc., seldom getting off the line more than one or two per cent. The process of correcting the dollar has just been likened to steering an automobile . It might better be compared to the automatic regulation of the “ gov ernor ” on a steam engine or to the method of securing a “ compensated ” pendulum . Every aberration brings its own correction . And so we conform our gold dollar, approximately, to the imaginary “ goods-dollar.” All other dollars being interconvertible with the gold dollar would keep equal to this par. No change in our banking system would be required except that the gold reserve of banks, instead of consisting partly of gold certificates and partly of physical gold, would consist exclusively of certificates. The Government would hold the physical gold . Whoever chose to redeem the gold dollar certifi cates in actual gold would do so usually to secure gold for jewelry and other arts or for export. Should a bank do so, the gold it so bought would , like so much silver, be liable to fluctuations in value . To summarize, each dollar of bank notes and other fiduciary money would , as now , be redeemable in a dol lar of yellowbacks (to be called gold bullion dollar cer tificates) and therefore such paper money would , exactly as now , keep at parity with these yellowbacks. Each 100 STABILIZING THE DOLLAR (Chap. IV dollar of these yellowbacks, or gold dollar certificates , would , in turn , be redeemable at the Government offices in a gold bullion dollar and would , therefore, always be of equal value therewith . And finally , each dollar of gold bullion would , by periodical adjustment of its weight through an index number, be kept very nearly equivalent to the imaginary basket of goods, the goods dollar. In short, every actual dollar, a dollar of bullion , a dollar of yellowbacks, a dollar of bank notes or any other money, and a dollar of bank deposits would be abso lutely equivalent to one another as well as approximately equivalent to the imaginary composite or goods-dollar. We would then be substantially rid of a fluctuating price level with its long train of bad consequences . In other words, themonetary yardstick would be stand ardized . 10 . Proviso against Speculation at Expense of the Government To avoid speculation in gold at the expense of the Government, a small fee, corresponding to what used to be called “ brassage,” should be charged to de positors of gold and no single change in the dollar's weight should exceed that fee. This is a technical detail and, with other technical points, such as the status of the reserve behind the gold bullion dollar certificates, the initial par of the index number, the selection and revision of the itemsmaking up the composite dollar, the possible retention of gold coins and coinage, the control of deposit currency , etc., need not here be entered upon . These are elaborated in Appendix I. What has been said in this chapter is 101 A REMEDY Sec. 11] meant to show that we have the power, if we will but use it, to stabilize the purchasing power of the dollar. II. Comparison with Other Plans As we have seen , most other proposals for reme dying the “ high cost of living ” would operate through economy and efficiency. Nothing could be more laudable and nothing needs to be preached more per sistently, in season and out of season . An increase in production and the cessation of industrial warfare between labor and capital should, now and always, be striven for. To whatever extent these objects are gained , the world will be better off, whether prices are high or low . But he who expects, from such measures, any ap preciable reduction in the index number of prices is doomed to disappointment. The general expectation of such a reduction is based, first, on a false conception of the problem , due to overlooking its monetary side, and , secondly , to a greatly exaggerated idea of the economy and efficiency which are attainable. Thus, the worst of our great strikes reduces the national production only about as much as declaring a single holiday , and most of the wastes of industry, though great, are inevitable and can only be reduced slightly and gradually through education . We may rail at the workmen and accuse them of slacking and ninety -nine per cent of them will plod along without even attending to what we say. We may legislate in the hope of forcing economy and efficiency on a wastrel world and shall be lucky if we succeed in doing a trifle more good than harm . I doubt 102 STABILIZING THE DOLLAR (Chap. IV if all the combined effort of all the statesmen and moral ists of the world could possibly , in a whole year, in crease production by two or three per cent beyond what it would otherwise be. . Another sort of remedy , and the most popular one at the present time, is price control. During the war legal price control had its maximum effect which , while great on a few commodities , probably did not, as sta tistics can be adduced to show , affect the general price level as much as five per cent. That now in times of peace the effect could be half that much is almost unthinkable . The job is too big for any man or any government. If our Government tries to fix retail prices to protect the customer it must then go further and fix wholesale prices to protect the retailer and then , likewise, fix the prices of jobber, manufacturer , and producer of raw materials. Thousands and millions of dealers will have to be watched , controlled , penalized , by a mighty host of government officials, sure to be circumvented as soon as their backs are turned . I do not hesitate to predict that the present attempt to fix individual prices will end like all previous at tempts, even those of autocratic Germany, in disap pointment. Is it not a little ludicrous to use so much force with out much effect when the desired effect without any force at all could be secured through stabilizing the dollar ? If we had tried to secure “ daylight saving ” by force, compelling each factory , store, school, church , to begin an hour earlier and each individual to eat his breakfast an hour earlier than before, the Attorney General would certainly have had his hands full ! Sec. 11) A REMEDY 103 Instead of thus employing an army of policemen , exerting repressive force at thousands and millions of separate points, we simply regulated our instrument of measuring time, the clock , and lo , automatically the factory , store, school, and church began an hour earlier and individuals ate their breakfast an hour earlier of their own free will. So with the price level, while the strong -arm method is not only costly and vexatious but futile , the simple regulation of our instrument for measuring prices, the dollar, will accomplish the same result not only without cost and effort but, what is more to the point, with success . It is very hard to control any individual price in the face of the economic forces of supply and demand , but it is very easy to control the general scale of prices ; for the general scale of prices depends, among other things, on the weight of the gold dollar and the weight of the gold dollar is whatever we choose to make it . However great may be the disturbing effect of some other cause on the scale of prices , that effect can always be neutralized by a suitable change in theweight of the gold dollar, provided, of course , that all other dollars are kept redeemable in gold dollars . The gold dollar, being the basic unit, is the key to the situation . CHAPTER V CONCLUSION 1. Summary of the Plan The plan, as set forth in the last chapter, is in brief : ( 1) To abolish gold coins and to convert our present gold certificates into “ gold bullion dollar certificates ” entitling the holder, on any date, to dollars of gold bul lion of such weight as may be officially declared to con stitute a dollar for that date. ( 2 ) To retain the “ free coinage,” i.e . to be more exact , the unrestricted deposit, of gold , and to retain also the unrestricted redemption of gold bullion dollar certificates. ( 3) To designate an ideal composite or “ goods-dol lar,” consisting of a representative assortment of com modities , worth , at the outset, a gold dollar of the present weight, and to establish an “ index number " for recording, at stated times, themarket price of this ideal goods-dollar in termsof the gold bullion dollar. (4 ) To adjust the weight of the dollar (i.e. the gold bullion dollar) at stated intervals , each adjustment to be proportioned to the recorded deviation of the index number from par. (5 ) To impose a small “ brassage ” fee for the de posit of gold bullion and provide that no one change in the bullion dollar's weight shall exceed that fee. 104 Sec. 2] CONCLUSION 105 In addition to these features of the plan itself should be mentioned the tacit assumption that we retain a sound banking system . Without such , the effective ness of the stabilization plan would be quite lost." 2 . The Crux of the Plan The crux of the plan lies in (4 ) — the provision for adjusting the weight of the gold bullion dollar. This is the adjustment rule by which the index number regu lates the dollar's weight. Its significance is that : To keep the dollar from shrinking in value wemake it grow in weight, thus recognizing that a depreciated dollar is a short-weight dollar ; and , reversely, to keep the dollar from growing in value we make it shrink in weight, thus recognizing that an appreciated dollar is an overweight dollar. Or, in alternative terms, since a heavier or lighter dollar simply means a lowered or raised price of gold , we may say that : To keep the price level of other things from rising or falling wemake the price of gold fall or rise.2 1 For details, see Appendix I , $ 7 . ? These two statements and paragraph (4 ) of the above summary are really three different formulations of the same adjustment rule . There is a fourth : we prevent a loss or gain in the purchasing power of the dollar by lowering or raising the price of gold . All four modes of statementmay be united as follows: rise or fall of the price level We restrain" laa fall or rise of the purchasing power w W of the dollar increasing or decreasing the weight of the dollar decreasing or increasing the price of gold . Formost people I think the original formulation (the 4th paragraph of the summary above ) is the most convenient, namely , the one in terms of the price level and dollar 's weight rather than in terms of the purchasing power of the dollar or the price of gold , or both . STABILIZING THE DOLLAR 106 (CAAP. V 3 . Artificiality of a Fixed -Weight Dollar At present, with a dollar always containing 23.22 grains of gold , the price of gold is always $ 20 .67 an ounce. However far gold may really depreciate, our artificially defined dollar creates an artificially fixed price for gold . It does not allow gold depreciation to show itself in a lowered price of gold . Consequently it shows itself abnormally , — in the raised prices of other things. It is both wrong and absurd thus to force these other things to register the fluctuations in the value of gold . When gold depreciates, its price should be reduced . Furthermore , when we see the price of anything else , say corn , rising, we ought to be able , as we are not now , to be reasonably sure that all of this rise represents a rise in that corn and not some of it a fall in gold . Reversely, when gold appreciates, its price should be raised ; and when the price of anything else falls it should represent wholly a fall in that partic ular commodity, not partly a rise in gold . At present the Government is not authorized by law to mark gold down when it goes down, nor up when it goes up . The grocer can mark his goods up or down. He can increase or decrease the number of pounds of sugar he will give for a dollar. But the Government is helpless . When a flood of gold pours in from Cripple Creek or the Rand , or from war-ridden Europe, the Government is not permitted to increase the weight of a dollar's worth of gold above 23.22 grains or to decrease the price of gold below $ 20.67 an ounce. Instead, therefore, there is a redundant currency and a “ high cost of living." CONCLUSION SEC. 4 ] 107 When, on the other hand , our exporters demand gold our Government is equally helpless to charge more for it — that is, to reduce the weight of a dollar's worth of gold below 23 .22 grains. The law compels it to go on selling its diminishing store at the same old price of $ 20 .67 an ounce ; and so a violent contraction of the currency may follow . In either case we leave our precious standard at the mercy of foreign conditions, ofmetallurgical inventions, the luck of gold prospectors, the fashions in jewelry , the changes in banking systems, and the policy of Gov ernment financiers. The proposal here made is to authorize a raising or lowering of the sluice gates by which gold flows in or out, so as to keep our money lake at a uniform level. By increasing or decreasing the dollar's weight, we would thus be providing against either a flood or a drain . 4 . Transition Would Cause No Shock The plan should , of course, start off with a price level close to that actually existing immediately before its adoption . There should , I believe, be no attempt to put prices back where they were many years ago. There would , therefore, be no shock . Business would simply be set free from future shocks. There would be less shock than when we adopted standard time and changed our watches accordingly . Just as the time engagements of the whole world have been modified and improved by the shift of watches from local to standard time, and more recently by the 1 This point is amplified in Appendix I, $ 4. 108 STABILIZING THE DOLLAR (Chap. V “ daylight- saving " shifts, so the money engagements of commerce would all be put on a true standard with out jar or confusion . Substantially the same kinds of money would be passed from hand to hand as before the system was adopted ; and the ordinary man would be quite unaware of any change in system , - as unconscious, in fact, of the operation of the new system as he is now uncon scious of the operation of the present system , or as were the inhabitants of India when the “ gold ex change ” standard went into force a quarter of a cen tury ago. The only classes of people who would notice the change would be those who sell and buy gold bullion . The gold miners and importers of gold bringing gold to the Government for deposit, on the one hand, and the goldsmithsand exporters of gold , on the other hand , taking gold away, would find that the price they could get or would have to give respectively would not always be $20.67 per ounce . 5 . Contract-Keeping Would Cease to Be Virtual Pocket-Picking The plan would put a stop , once for all, to a terrible evil which for centuries has vexed the world , the evil of upsetting monetary contracts and understandings. All contracts, at present, though nominally carried out, are really tampered with as truly as though false weights and measures were used for delivering coal or grain . As noted in a previous chapter , our National Consti tution forbids the state to impair the obligation of contracts and the Government itself is supposed to SEC. 5] CONCLUSION conform to the principle of this prohibition. 109 Butwith our variable yardstick of commerce, observance of the constitutional provision , at best, conforms only to the letter, not the spirit, because the letter of the contract, through the law , fixes the obligation in gold by weight, whereas the contracting parties are not properly con cerned with what a gold dollar weighs; usually , in fact, they do not even know that a dollar is a weight-unit. The meeting of their minds is essentially on the basis of what a dollar is worth — that is , of what it will do for them in commerce ; and they can make little or no allowance for any change in that worth . Thus, under the very protection of the constitutional provision mentioned , one of the parties to the contract always does rob the other to some extent. This social pocket-picking, unconscious but real, would cease , if our monetary yardstick were regulated ; and with it would cease also discontent, jealousy, and suspicion , in so far asthese grow out of thatspecies ofsocial injustice. Crises and depressions of tradewould be reduced in in tensity , if not rendered impossible, and the fundamental reason for much unsound speculation would be taken away . Business , now periodically disturbed by the pranks of our mischievous dollar, would be put on a founda tion more secure than ever before because the greatest and most universal uncertainty or gamble , all the more disastrous because unseen — the gamble in gold — would be removed. 1 With certain exceptions, such as bankruptcy laws for extraor dinary cases. In this connection , see Appendix I, § 6 . 110 STABILIZING THE DOLLAR (CHAP. V 6 . Not a Cure-All It is not pretended that to stabilize the purchasing power of the dollar would banish all complaint in the financial, business, and industrialworld ,much less serve as a substitute for progressive economies. A stable monetary unit would be no more a substitute for the fertility of the soil than a stable bushel basket. Yet a reliable bushel will indirectly help even the tilling of the soil ; and a reliable dollar would remove a heavy handicap now put on our productive energy and so in directly help all production . Dependable weights, measures, and standards eliminate those enormous wastes which come from uncertainty, and, of all the possible wastes from uncertain units used in commerce, those from an uncertain dollar are by far the greatest and the gravest. Nor do I mean to imply that a stable dollar will insure a just distribution of wealth . It will, however, help toward that end not only by preventing a species of subtle pocket -picking (described in Chapter III), but also by clarifying the whole distribution situation. It will make sun -clear that the goods that come out of the annual wealth production of the nation are really growing or shrinking , and notmerely being tossed about on the stream ofmoney . It will give each man a sound basis for an opinion whether, when his fortunes change, they change relatively with the fortunes of others. It will go far to rid us of the conflict of opinion and asser tion which now holds us back from effective action and uses up our energies in discussions and investigations of the most elementary facts. Current economic discus sion is underlaid by conflicting assertions, — that the Sec. 6 ] CONCLUSION 111 laborer's real wages (i.e. the goods he can buy with his money wages) are increasing ; that they are decreasing ; that the hardships of wage earners are due to their own wasteful expenditures ; that they are due to the greed of employing capitalists who seize an increasing share of the product ; that they are due to neither of these things but to the absorption of an ever increasing share of the annual production by the do-nothing landlord or the private owner of natural resources, who expends neither labor nor capital on the development of these resources but merely leases them to men who do, and exacts tribute from the laborer and capitalist for the privilege ; that the demands of certain classes of rail way laborers for increased money wages are exorbitant and ought not to be granted ; that the demands are necessary to balance the increased cost of living and ought to be granted ; that the demands of the rail ways for increased freight rates or of the trolley cars for increased fares are necessary to make good increased costs due to increasing prices and wages ; that these demands are not necessary for that purpose — and so on and on without end. d . Before action upon these alleged evils can be based on sure ground , it is essential to find out the facts ; but the fluctuating dollar hopelessly conceals the facts. It blinds the eyes of the mass of men whose right it is to know the facts and whose duty it ultimately is, under our democratic form of government, to choose one or more remedies for such evils as exist. The fluctuating dollar keeps us all in ignorance ; whereas a stabilized dollar would lay bare the facts. It is no exaggeration to say that stabilizing the dollar would directly and indirectly accomplish more social 112 STABILIZING THE DOLLAR (CHAP. V justice and go farther in the solution of our industrial, commercial, and financial problems than almost any other reform proposed in the world to -day ; and this it would do without the exertion of any repressive police force, but as simply and silently as setting our watches. Uncertainty is a mark of an undeveloped civilization , and its demolition (through applied science, insurance, safeguards, and standardization ) is one of the chief characteristics of a highly developed civilization . Our uncertain dollar is simply a relic of the Stone Age . It is an anomaly to-day. 7 . No Claim to Theoretical Perfection Perfection , of course, is not claimed for the proposed goods-dollar. It is not an “ absolute ” standard of value. An absolute standard of value is as unattain able as an absolute measure of length . A change in relative value may, theoretically , indicate a change in the “ absolute " value either of goods or ofmoney ; but it is not possible for us to know , except in a general way, how much of the absolute change is in the goods and how much is in the dollar. We are in much the same situa tion as the astronomers. Our economical “ fixed stars " are fixed only in a relative sense. We cannot measure the distances between them in terms of absolute value, but only in terms of visible goods, the general average of which , like the general average of the stars , is the nearest approach to absolute invariability we can , in practice , reach and measure. The present proposal, therefore, is simply to do for themost important unit in all commerce — the dollar — what we have already done for every other unit. SEC. 8 ] CONCLUSION 113 8 . Why Has So Simple a Remedy Been Overlooked The cautious and conservative reader will ask : if the evils of our present dollar are so great and the remedy so simple, why did not our civilization improve its mon etary units years ago, as it improved all other units ? Why was so simple an idea overlooked or ignored ? There are several answers, some discussed in Appen dix II : ignorance, the money illusion , and the absence, until recently, of any large mass of time contracts re quiring any reliable standard of deferred payments. But the most specific and conclusive answer is this : mankind could not have standardized money until re cently , because until recently it lacked the necessary instrument, the index number . Just as mankind could not standardize units of weight until a suitable instru ment, the scales, was devised for measuring weight; and just as electrical units , like the ohm and the kilo watt, could not be standardized until the proper in struments for measuring such magnitudes were in vented ; so money could not be standardized until the invention and the perfecting of the index number . The index number , the only instrument we possess for measuring purchasing power, is a very recent inven tion . Professor Jevons a generation ago may, I think , be truly said to have been the inventor (although the general idea had been anticipated by others). But until the last ten or twenty years, this new instrument had not been sufficiently perfected and tested to create general confidence in its results. Only within that brief period has it come into general use among busi ness journals and won the confidence of business men . Wesee, then, that the practical application of this great 114 STABILIZING THE DOLLAR (Chap. V instrument to the improvement of our crude dollar is belated , not centuries, but, at most , only a couple of decades . 9 . What Is to Hinder The plan really has had less important arguments against its adoption than any other practical proposal in the realm of money and banking of which I know . In most other proposals there are many valid pros and cons. This proposal is simply to make our monetary unit less variable . It is as unobjectionable as is a sealer of weights and measures . The greatest obstacle , as is emphasized more fully in Appendix II, 83, is the sameas that which has held back every other reform in the world 's history : namely, sheer conservatism , the “ stand pat " frameofmind , the temperamental prejudice against innovation . This filibusterer may appear in many striking costumes and embellishments ; but always it will be the same psycho logical personality. Usually, the opponents of per fectly obvious reforms are unconscious of this, the real source of their ingenious objections. And , once the composite standard has become an accomplished fact, the standpatters will be its staunchest defenders ; for they are simply the friends of what is and the enemies of what is not. We can put such people to the test (or they can put themselves to the test if they will) by a simple direct question : Instead of being asked to choose between the present gold standard and the composite standard , the former of which is in use and the latter not, let them be asked to choose between a copper standard and a composite standard , neither of which is in use. If a Sec. 9] CONCLUSION 115 contract in goods-dollars is safer than a venture in copper dollars , why is it not safer than a venture in gold dollars ? Perhaps an equally important obstacle is ignorance , or rather the lack of the requisite imagination to visualize the outrages now perpetrated by our dollar's perpetual changes and to connect the effect with the cause. If there were such a vivid realization of what is going on, both the conservatives who now deprecate any change of system and the radicals who now advo cate irrelevant changes to remedy some of the evils would unite in an immediate demand for a stable dollar. To see that this is true we only need to think what would happen if the social injustice we have discussed , now so obscure, could only be made to stand out in clear relief. Imagine a society with a stable dollar but yet with the very same injustice we now experience except that it is deliberately administered . To make this supposition definite suppose the United States had had a stable dollar during the last few dec ades but had , with some strange malice, used the index number of prices in Canada or Europe (which, it is assumed , held to the old unstable system ) to produce extraneously the identical evils we have actually ex perienced . By the caprice of the index number the debt of $ 1000 contracted in 1880 would have had to be paid literally by $ 1200 in 1896 and the debt of $ 1000 contracted in 1896 would have to be paid literally by only $ 400 in 1919. The producer would have been deprived by the operation of the supposed law of his profits before 1896 and thebondholder would have been deprived of all of his interest and part of his principal 116 STABILIZING THE DOLLAR after that date . (Chap . V The salaried man and wage earner would have had their salaries and wages definitely docked by the law so that the wage earner of 1919 would get only three fourths of what he got in 1913 . Such a whimsical use of an index number to de fraud would of course not be tolerated for an instant. The conservative would be furious, the radical still more so ; only the latter would not be devoting his efforts to sabotage, price storage, etc. fixing, restricting cold Every one would unite to stop such use of an index number to destabilize a stable standard. Yet precisely the same reasons in precisely the same degree now justify the use of an index number to stabilize an unstable standard ! 10. Precedents Even before index numbers were dreamed of, some contracting parties have, at times when the instability of monetary units became especially intolerable , sought some partial escape. A number of instances of this sort are given in Appendix V . These include contracts in terms of foreign coin , or in terms of grain , or iron , or in terms of composites of goods. The last named includes the recent adoption by many firms and official bodies of a supplement or correction to ordi nary money wages by means of an index number of the cost of living. II. What Might Have Been Let us stop to think what would have happened if, when resuming specie payments in 1879 (to go no further back ), we and other countries had applied these principles and really standardized monetary units. Sec. 11] CONCLUSION We should have escaped 117 the billions of dollars ' worth of injury from falling prices between 1879 and 1896 , to farmers, independent producers, debtors , stockholders , and enterprisers generally. There were bankruptcies , foreclosures and reorganizations, and a resultant shift of control from the natural captains of industry, — often bankrupted , as we have seen , through no fault of theirs, — to the holders of mortgage bonds and the other silent partners not fitted by tem perament or training to conduct industrial enterprises. We should also have escaped the consequent convul sions of business : the crises of 1884 and 1893 ; the throwing out of work of armies of men ; the recruiting of “ Coxey 's army ” ; the bitter feeling of the debtor West toward the creditor-East ; the growth of “ popu lism ” ; the hatred of the “ bloated bondholders ” and the “ gold bugs of Wall Street " ; the futile , costly , business-depressing , free- silver agitation ; and the peril of the political campaign of 1896 which , for a time, threatened us with a remedy worse than the disease. In like manner, we should have escaped the opposite evils — those that have occurred since 1896 : the rising cost of living ; the loss (concealed but real) of the interest on the savings of the poor and of the real in come of bondholders . We should have escaped the failure of the wage earner to secure a share of our in creasing wealth ; for instance , the net loss of 33 %