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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

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

UNE AOMINISTRATIONS

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 ;

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

2. MEDIEVAL PRICE LEVELS

1. INDEX NUMBERS .

3 . A CENTURY AND A QUARTER OF PRICE MOVEMENTS
BEFORE THE GREAT WAR

. 10

4. PRICE MOVEMENTS DURING THE GREAT WAR

CHAPTER II
THE CAUSES

1. FALSE SCENTS

2. PROFITEERS, SPECULATORS, AND MIDDLEMEN

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

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

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

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

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 .

2. PRICE MOVEMENTS AS CALCULATED BY USING DIFFER

ENT NUMBERS OF COMMODITIES

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

5 . PRICE MOVEMENTS IN FIVE GOLD-STANDARD COUNTRIES
6 . PRICE MOVEMENTS IN THE UNITED STATES UNDER THE
“ GREENBACK ” STANDARD AND IN THE UNITED KING

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

GOLD CONTRASTED WITH ITS RECIPROCAL ( THE PUR
CHASING POWER OF THE DOLLAR IN TERMS OF Com

MODITIES) AND WITH THE PRICE OF GOLD
xxiii

LIST OF DIAGRAMS

xxiv

PAGE

FIG .

11. THE RELATIVE STABILITY OF CERTAIN COMMODITIES,
EACH MEASURED IN TERMS OF COMMODITIES IN GEN
ERAL .

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

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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

SUMMAR

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

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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 —

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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.

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

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

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

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 ,

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

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.

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.

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

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 .

STABILIZI

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]

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

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

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

(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 ]

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 .

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

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.

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

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.

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 ]

segDog
Ssette

ZING

STABILI

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]

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

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 .

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

le
par

Barr
) is

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.)

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

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.

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 ,

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

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

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 .

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

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 ;

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.

STABI

LIZIN

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

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

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

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 .

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

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

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

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 ]

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 .

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

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

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

STABILIZIN

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

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]

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

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

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).

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

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.

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

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

(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

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

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

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 ]

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

STABILIZI

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

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

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

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

(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

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.

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.

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

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]

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 .

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 ]

REMEDY

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

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 .

STABILIZI

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

LIZIN

STABI

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

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

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

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 !

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

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 .

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."

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

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 .

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]

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,

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

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

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 %