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New York

All rights reserved


JUN ahi 1942




COPYRIGHT , 1920 .
Set up and electrotyped . Published January, 1920.

Norwood Press
J. 8. Cushing Co. - Berwick & Smith Co .
Norwood, Mass., U .S .A .




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



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.


general approval, if obtained, will mark the second

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


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 ;



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 .


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


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.

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 .


I. THE Facts .












. 214




. 252


. 279 .
. 286




























. . . . .









































. 10

















. . .













. . .









. 41

. . .


. 49
. 51

























4. Rates FIXED BY LAW OR Custom Also Slow















6 . The Fault Is Not PERSONAL BUT Social .


















16. THE Loss Is GENERAL .





















. 79










. 84
















.. .















. 97








. 101



. 104





2. The Crux OF THE PLAN . . . .


. 105
. 106
. 107









6 . Not A CURE-ALL .







. 110




. 112



9. What Is to HINDER
. . 114














· · · · ·

11. What Might HAVE BEEN








. 125

A . Stabilizing the Dollar Would Destabilize the Present

100 % Reserve . · · ·
B . Restabilizing the 100 % Reserve



· 125
. 126


C . The Reactions Involved Thereby
D. The Definite and the Indefinite-Reserve System





E . Stabilization in Small and Large Nations Compared . 131

F. A 50 % Minimum Reserve .



G . How Soon Might the " Indefinite " System Reach Its











1. Putting the Surplus to Work






K . The Interest on Surplus Would Save Taxes
L. The Future .


M . Summary













A . Preventing “ Overnight” Speculation .



. 138

. . .



. 134

. . .

J. Reactions Therefrom .


H . A Constant 50 % Reserve and a Variable Surplus

B. Speculation beyond One Adjustment Period


C . Unofficial Prices of Gold




D . Conclusion .










. 147





. 154





. 147






D . The Rôle of Bank Discount


A . The Mint Price . . . .

. 163



. 168

· 168
. 169


. . . .


C. Maintenance of Redemption

. . . .

B . The Effect of War on Bank Credit


. .
A . Misconceptions . . . . .

. 170


. 172




B . Gold Reserves and Price Levels as Internationally











C . Exports and Imports .






. 177

D . Spreading the Gold Points .





. 179

E. The Adoption of the Plan Would Spread .


. 180

. 183
A . The Standard Hypothetical Case .
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


(a) Assumptions same as in standard case except :

brassage changed from 1 % to 2 %



(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”


(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



. . 193

F . Changing the Assumption as to the “ Influence”


(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

(d ) Conclusions as to influence . .
G . General Conclusions on Variations from the Assump
tions of the Standard Case .
H . The Stabilization Process Applied to the Actual

Course of Prices









(a) The assumptions suitable for practical conditions 199

(6) Calculation of stabilized index number


. 201











· 205




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 ”




J . “ It Would Shift to the Government the Losses Now

Borne by Private Contracting Parties ” .


. 221




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 ”




. . .
. . .

“ It Would Be Destroyed by War" .
“ It Could Not Check Rapid Changes"
“ It Is Too Inelastic " . . .
“ The Correction Comes Too Late " .

. .


G . Conclusion on Alleged Defects ,






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











· · · ·

B . Gold Producers .

· 231


A . Debtor and Creditor .


· · · ·






E . “ The Evils Are Unreal” .
F . Conclusion .





A . “ It Has Never Been Tried ”


· · · · · · ·


A . “ A Goods-Dollar Is Not Ideal” .
B. “ People Could 'Contract Out' "

· · · · ·



. .



· · ·

FIX who









A. Introduction

E . Summary








. . . .

B . Redemption Warrants
C . Unrestricted Redemption via Warrants
D . Unrestricted Deposit of Goods- Dollars










· 257








. 258
. 259
•. 260


. 260

















. 263







. 272





. 279





. 280

4 . CONCLUSION . . . . . .



. 284
. 285













A . Bimetallism




B . Gold Exchange Standard
C. Irredeemable Paper Money
D . The Tabular Standard





. 288
. 288







. 291
. 294

(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.)





























. 25


. . . . . . .






























. 218

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



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



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



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.

1. Index Numbers. An index number of prices
shows the average percentage change of prices.


taking 1913 as a basis for comparison and calling its

price level 100 % , the index number representing the
price level of 1917 was 176 % , and of 1918, 196 % .

There are many different methods of computing index
numbers, but their results usually agree approximately.
(Figures 1 and 2 .)
2 . Medieval Price Levels. Prices have usually

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

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



4 . Price Movements during the Great War.


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 .



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.



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.


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



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
when superabundant. The individual always
wants more than he has and is apt to think that a
whole country would be benefited by more money .

He doesn 't realize that the more money there is the
less it will buy. He keeps thinking of a dollar as fixed .

Some allege that gold is stable because its price is



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

12. The Instability of the Gold Standard as 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



new gold pursues low prices throughout the world and

raises them .
15. Tracing the Invisible Source of the Tide.


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.
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 .


rise or fall more slowly than prices. The purchasing
power of wages just before the United States entered
the war averaged only two thirds of what it was ten
years earlier and after the war it was still less.
4 . Rates Fixed by Law or Custom Also Slow . Trolley



fares, for instance, remained the traditional five cents
through two decades of rising prices.

5. Periods before and after 1896 Contrasted. 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.


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



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



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.


1. Remedies Which Have Been Proposed.

The 43

remedies proposed almost ignore the money side of

the problem . They aim at economy and efficiency ,
and concern the problem of our incomes rather than that
of the purchasing power of the dollar.
2 . The Dollar the Only Unit as Yet Unstandardized.
The dollar is now a unit of weight, not a unit of power
to purchase goods, which is what we need . We have
gradually stabilized or standardized every other unit

used in commerce, including the yard, pound , bushel,
horsepower, volt. Formerly these were as roughly

defined as the dollar is now .

The yard was once the

girth of the chief.
3. An Imaginary Goods- Dollar.

Two commodities

like gold and silver make a better standard than one and
many make a better standard than two.

The dollar

standard should be worth a specified bill of goods such

as one board foot of lumber, fifteen pounds of coal,



half a pound of sugar, half an ounce of butter, a quarter

of an ounce of leather , a quarter of a pound of steel,
etc. Such an aggregate of goods, selected on the basis

of their relative importance in trade, may be called
a goods-dollar or a market-basket dollar.

4 . The Gold Standard Not to Be Abandoned . Such
a goods-dollar would be a good standard of value but a

poor medium of exchange, being too heavy, bulky,
perishable . It is proposed therefore to retain gold as
a medium of exchange but to correct the gold dollar
so as to make its value equal to that of the imaginary

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

in circulation as the gold 's proxies .


The outflow is to

jewelers and exporters who redeem certificates and
withdraw the gold . These essentials would remain
unchanged , but the terms for depositing and 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

This proviso and other technical de

tails are elaborated in Appendix I, § 1.


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.

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 .



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,

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
12. What Is in Store. That depends on which way

the dollar moves , which , in turn , depends on govern






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 .
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

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



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



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

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 .



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

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 —



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

1. Misunderstandings are natural and numerous.

They make up most of the supposed objections to the
plan . ( Figure 13.)



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.

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

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 .

I. Either an Upheavalor a Collapse of Prices
Weakens Confidence in Money and arouses public
curiosity as to the “ reason why ."

Great wars usually



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.
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



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 .
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 .


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.



(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 %


= 7).

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 :


. . .

. .


. . . . .

100 %


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



SEC. 1]

is known as a " weighted ” average. If, reversely,
beef is “ weighted ” twice as much aswheat, the average
rise is 4 + 10 + 10P

= 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







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


(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

242 - 267 compare







But ccon

T 140

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]


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


(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


for the United States.
We note the great va



Sec. 3]

riability of the curves.
Very seldom do they run
horizontally .


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 ,


fell ; while in countries


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


paper standard of the


(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.


more he becam

If before the war we could become

SEC. 4 )


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 .


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

Sec. 1 ]



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

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.



those of trust-controlled


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
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 ]


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
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.



(Chap. II

prices since 1896 , while they tended to increase when
prices were falling before 1896 . In other words, whole

sale prices move faster, in either direction, than re
tail prices. Figure 4 illustrates this fact, and more


- 100


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 ]



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 .





(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


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

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






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

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



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


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


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



(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.


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.


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

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

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 .

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 .



(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]



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.


(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.

United States.


Britb .


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

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 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."
210 .


/ 70

150 -


Fig . 6 . Price Movements in the United States under the “ Green
back " Standard and in the United Kingdom under the Gold

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.



(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.


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







Sec. 7 ]









[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



U. S. U. K .



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]



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.


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



(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 .



SEC. 9 ]


180 +






+ 480








) is




+ 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.)



(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]



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.



(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

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 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 ,



(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

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]



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

ounce ofpure gold is 480, or 2007 dollars. In other

words, any lump of gold containing one hundred





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)



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
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

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 ;




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
gold in




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 ,


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.







Pig lead


abpre commodities combined

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]



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


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 .


(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

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]



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



(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 ]


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






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 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



(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
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


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 .



(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

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 .




1. The Evil of High Prices is Not General

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



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



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

enforcible by legal process .

There are

many charges which remain fixed from mere custom or






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

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 prices they charged were fixed , their costs of opera
tion had gone up with the rise of the general price

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.


amounts to only about 21 % ad valorem , based on the prices of to-day.


(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 .


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



(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 !


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

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).



(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
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.


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 ]



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.




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

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]



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.




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

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


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 ]



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 .”





(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

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


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






to newspaper reports, that in his opinion 80 % of the
labor discontent of Europe is due to this cause.


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 ]



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
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




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 )



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
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.



(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.


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

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 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




(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 ]


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.




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
either from rising prices or from falling 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 .


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



(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 ;
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]



of the high cost of living is mentioned. The fact that
such proposals are mostly concerned with


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 .




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 ]




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 —


(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
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
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 ]



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 .






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 ]


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







(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
which led
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]



the spot. When a man was about to make a cash pur

chase it was immaterial to him what themonetary unit

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



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 ]



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 !





(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


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


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 ]



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 .




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



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

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
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 .



(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]



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,




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]



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



(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

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



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



(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


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

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)



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 .


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

( 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.

Sec. 2]



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

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 .




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."


SEC. 4 ]


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.



(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
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]


conform to the principle of this prohibition.


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 .




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 ]



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




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 .


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 ]



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



(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]



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

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



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


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]


We should have escaped


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 :


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 % of
real wages (as measured in food ) between 1907 and
1917, the year we entered the war. We should have
escaped the food riots all over the world . We should
have escaped much of the speculation which has been

so widespread ; much of the muckraking agitation ;

much of the “ I. W . W .” affliction ; much of the class



(Chap. V

hatred directed against business men because of the

lucky “ profiteers.” We should have escaped the
crisis of 1907. We should have escaped many of the
strikes for higher wages paralyzing our preparations for
war. We should have escaped much of the embarrass
ment of the railroads, street railways, and other
public- service industries which , with rates fixed by law ,
could not pay just wages to labor and, at the same time,
make money or invest new capital and give the public
the service it needed . Finally, while gold would still

have come to us during the war, we should have
escaped the inflation of prices which, under our present
system , we have suffered .
It is cold comfort for the losers in this gold lottery to

be told that others have won what they have lost.
And it isn 't even true ; for, as we have seen , the con
fusion and uncertainty, the dislocating and shifting of

the wheels of industry, have caused a general and
absolute loss of wealth , in which loss the very winners
in this gold lottery have, most of them , shared. Only
a few have emerged with net profits and swollen

fortunes , as the lucky winners of the biggest prizes ;
and no public -spirited man can rejoice in such un
earned gains.

12 . What Is in Store
We do not yet know “ which way the cat will jump."
If European nations make prompt preparations for

resuming specie payments , there will be the same
disastrous contraction in Europe that we experienced
after the Civil War ; and we shall feel the reflex effects
of that contraction by having our hoard of gold drained
back to Europe.

Sec. 12)



On the other hand, the nations may not only avoid
contracting their currencies butmay still further inflate

them .

The huge task of reconstructing Europe may

lead to new issues of paper money ; and it is reason
ably sure that there will be new expansions of com
mercial loans. It is almost certain that general

deposit banking, now

confined almost wholly to

Anglo -Saxon countries, will spread over the continent

of Europe, adding billions of virtual currency to the
circulating medium . As A . C . Miller of the Federal
Reserve Board says : “ If the League of Nations, the
reduction of armaments and the like become realities,
then the accumulation of hoards of gold under the im
pulse of national fears or ambitions must be suffered to
go the way of other outworn practices" ; and this fact
will tend toward inflation .
There are many unknown elements – including the
rearrangement of European currencies and the policy

as to Governmentdebts (whether it shall be immediate
payment out of capital, slow payment out of income,
repudiation , or deeper debt). No one yet knows which

group of influences will prevail, — the group tending
toward inflation or the group tending toward contrac
tion. Perhaps first one group and then the other will

prevail in convulsive alternation, as in a mighty battle ,
just as, after the outburst of war, our gold first left us
and then returned, convulsing foreign exchanges.

Probably few periods in history — if any — have pre
sented so puzzling an outlook . We may make our
forecasts or guesses but no man lives whose eyes can

see clearly through the mist .1
1 Formyown guess see The New Price Revolution ,United States De
partmentof Labor, Information and Education Service, March , 1919.



(Chap. V

Of one thing wemay be all but sure ! The price level
will not stand still unless we hitch it. It never has ;
and now , of all times, with the vast conflicting forces
ahead, we shall be foolish if we expect complete equilib

rium . On the contrary, we are probably destined to
see, in the next generation, important price movements ,
perhaps more erratic than those in the past.
The whole question of monetary standards will in

evitably come up for discussion. History will repeat
itself in some degree and Europe will almost certainly
see a “ greenback ” party arise as we did after the Civil
War , opposed to any return to the old price level es
pecially as that return will double or quadruple the

cost of paying off the war loans. The bimetallist and
free-silver exponent also are once more asking a hear
ing. The gold producers, hard hit by the fact that
their product has been made a drug on the markets
(by the vast amounts of paper and credit substitute

for gold ), were recently asking for relief by measures
which would only aggravate the situation .

I venture to predict that our present problem —
of a price level dislocated by the war — will con

tinue insistently to press for solution until it is settled.
It will not settle itself. If prices rise much further
- which is by no means impossible — discontent may
turn to fury or revolution .
If prices fall far toward pre -war levels we shall be on

the road to depression of trade, unemployment, and all

those ills and grievances of twenty-five years ago.
If, by accident and contrary to all recorded experi

ence, the price level should remain fairly constant, its
right to continue so high will be long contested .
· On the other hand , if once we deliberately choose a

Sec. 13 ]



price level after reference to an expert and impartial
commission and then keep that level unchanged we
shall give it a right to exist. The verdict will soon
be generally accepted . Any unadjusted factors will
gradually make the needed changes. Business will be
rid of the handicap of uncertainty as to what the
dollar is. In particular, wages will rise to recover the

purchasing power lost in the losing race with the high
cost of living.

The sense of social grievance , so far as

this is due to monetary instability, will, year by year,

In other words a great step forward , toward

settling many of the questions which now vex the
whole world , will have been taken .
13 . Our After-War Opportunity

All this being the case, shall we leave our standard
of value to drift, the puppet of circumstances, when

we can so easily stabilize it ? Are we going to let the
value of our American dollar and of the billions upon
billions of dollars' worth of American contracts be

the shuttlecock of unknown and unknowable European
policies after the war ? Are we forever to be at the
mercy of conditions over which we have no control?
And be it noted that the problems for Europe will be
greatly simplified if, for once, a really scientific solu

tion of the problem of money standards is reached by
one nation .
The world is now , as never before, looking to us for

leadership . It is our golden opportunity to set world
standards. If we adopt a stable standard of value, it
seems certain that other nations, as fast as they can
straighten out their affairs and resume specie payments



(Chap . V

and secure again stable pars of exchange, will follow

our example. After gold and silver fell apart in 1873,
the nations, one after another, adopted the common

standard of gold ; and now , after the falling asunder of
all the pars of international exchange from the World
War, the new order will probably be set by whatever
nation first seizes the opportunity and takes the lead .

14 . If We Miss the Opportunity
If we do not do this ; if we do not provide a really

scientific remedy ; if we take the ground that we must.
drift with the tides of gold and credit, thatwe are help
less to rectify or prevent in the future the great social

injustices which history warns us will surely come, as
between creditor and debtor, wage earner and employer,

salaried man and profit-taker , we shall be simply fer
tilizing the soil of public opinion for a crop of danger
ous radicalism . Then surely some demagogue will
flourish , and offer some ill-considered remedy which

will sweep everything before it .

Then shall we see, not

a scientific study of a technical problem with all
parties ready for an equitable settlement, but out
raged justice calling for a revengeful policy and a great
selfish class struggle . Discontent, unrest, suspicion ,
class hatred , violence, charlatanism , — all these will
follow . And even if out of such unpromising soil a
fairly satisfactory settlement should eventually grow ,
bitterness would remain ; and it would remain so deeply
and so tenaciously embedded in the soil that we would
not be quit of it for generations.

Even if our shifting dollar were guiltless of most of
the offenses charged , even if the high cost of living had

Sec . 14]



no relation to the dollar, there would still be excellent
reasons for standardizing it - on the same general prin
ciple on which we have standardized all other units.
Accordingly, a friend suggests that the plan be pre
sented independently of the cost of living " discussion ,
purely as a problem ofweights and measures.
But the indictment will stand . The more the evi

dence in the case is studied, the deeper will grow the
public conviction that our shifting dollar is responsible
for colossal social wrongs and is all the more at fault

because these wrongs are usually attributed to other

causes . When the intelligent public who can apply
the remedy realize that our dollar is the great pick
pocket, robbing first one set of people and then an
other, — robbing them of billions of dollars a year,
confounding business calculations, convulsing trade,
stirring up discontent, fanning the flames of class

hatred, perverting politics and , withal, keeping its
sinister operations out of sight and unsuspected , —
when , I say, the public and legislators realize this,

action will one day follow ; and we shall have secured a
boon for all future generations, a stable yardstick of
contracts , a stabilized dollar.


1 . The Reserve against Certificates
A . Stabilizing the Dollar Would Destabilize the Present
100 % Reserve . To the plan for stabilizing the dollar,
as described in Chapter IV , there should be added a
proviso of some kind to insure the permanent adequacy
of the gold reserve.

We have a 100 % Government reserve against our
present gold certificates.

These certificates are really

warehouse receipts, issued at the rate of one dollar
for every 23 .22 grains of pure gold deposited, and re
deemable at all times at this same rate.

But, under

the plan here proposed, involving , as it does , varying
the weight of the gold dollar, there would cease to be
an exact equality between the number of dollars of gold
in the Treasury and the number of dollars of certificates

Either might exceed the other ; or first

one and then the other might be in excess.
Any increase of the dollar's weight decreases auto

matically the number of dollars in a given physical

stock of bullion . A hundred ounces of pure gold con
tains 2067 dollars of the present weight of 23.22 grains
of pure gold . But if the weight of the dollar were
doubled , the 100 ounces would contain only half (10331)

that number of dollars. Or if, instead , the weight of
the dollar were halved , the same 100 ounces would con

tain double (4134 ) that number of dollars. Thus the
Treasury reserve (even if there were no variation in its

physical amount) would count for more or less dollars
according to what a dollar might happen to weigh from

time to time.



(App. I

Suppose that, at the timeof adopting the stabilization
plan, the Treasury bullion behind the gold certificates
contained 23.22 billion grains of pure gold . This mass

of gold would, at that time, count as one billion dollars

of 23.22 grains each and would be represented by one
billion dollars of certificates in circulation . The re
serve would then be 100 % of the certificates against it.

But as soon as the dollar's weight were changed , this
exact equality would

disappear. Suppose the dol

lar's weight were raised 1 %

(from 23.22 to 23.4522

Although , at the instant after this change,

there would be the self-samegold in the reserve and the
self -same certificates outstanding, yet the number of
dollars in the reserve would no longer be a billion but

about 990 millions ( or exactly , 23.22 billion grains ;
23.4522 grains). The gold reserve would then be ap
proximately a 99 % reserve instead of a 100 % reserve.
On the other hand, a reduction of the dollar's weight

by 1 % would increase by about 1 %

the number of

dollars contained in a physically unchanged reserve.

In this case the gold reserve would become approxi
mately a 101 % reserve !
Thus the gold dollar certificates, while they would be

certificates exactly like our present gold certificates in
that (so far as heretofore provided for) they come into
existence only by the deposit of gold and go outof exist
ence only by their redemption in gold , would , at the
same time, be very different from our present gold cer
tificates in that they would no longer be true warehouse

receipts. Having an indefinite reserve behind them ,
they would partake of the nature of Government notes.

B . Restabilizing the 100 %

Reserve . It would , of

course, be perfectly possible, although quite unneces
sary, constantly to restore the reserve to 100 % .
When gold was depreciating it would cost the Gov

ernment thus to replace the depreciation . When ,
on the other hand, gold was appreciating the Gov

ernment would reap a profit.
If the reserve became less than the certificates it

Sec. 1, B ]



could evidently be restored to equality either by more
gold or by less certificates. The simpler method would
obviously be to withdraw from circulation and cancel
the requisite number of certificates. Thus, if there were
$ 990 ,000 ,000 of gold reserve and $ 1,000 ,000 ,000 of cer

tificates against them , the Government would simply
call in and cancel $ 10 ,000,000 of certificates obtained
through taxes or otherwise . In this case the Govern
ment would lose that sum .
Reversely, if the reserve should exceed the certifi

cates, the equality could be restored either by less gold
or more certificates.

The latter method would be the

simpler . The Government would issue and put into
circulation the requisite number of new certificates, in
making Government expenditures. Thus, if the gold
reserve were $ 1 ,010 ,000 ,000 and the certificates out

standing were only $ 1,000,000, 000, the Government
would print and issue $ 10,000 ,000 of new certificates.

In this case the Government would be making a profit
of that amount.

Thus the circulation of certificates would be regu
lated , by issue or retirement, so as always to be equal
to the number of dollars in the reserve.

As has been

stated , the issue could be through the payment by the

Government to the public for expenses of any kind
from time to time, and the retirement could be through
the payment to the Government of taxes or other

revenues from time to time.

But,as promptness of regulation is desirable, it would
be best to anticipate such expenditures or receipts so as

to make the issue or retirement follow immediately after
the appearance of any discrepancy between the reserve

and the certificates. Such immediate issue or retire
ment could best be effected by depositing certificates
with banks or withdrawing deposits therefrom .

In this

way the effect of issue or retirement on the volume of
money “ in circulation ," i.e . outside of Government

vaults, would be immediate .
These dealings with banks would not, of course, alter



(App. I

the essential fact that, in the last analysis, the retire
ment of certificates would be through taxes, or other

revenues, while their issue would make possible a re
duction in taxes.

C . The Reactions Involved Thereby. These opera
tions of canceling old , or printing new , certificates

to make the certificates even with the gold reserve
would , as has been noted , be quite apart from the
routine operations of redemption and issue in ex

change for gold , although , of course, there would be
reactions between the two sets of operations.
Thus, if gold is depreciating relatively to commodi

ties, as shown by a tendency of the index number of
commodity prices to rise, the consequences would be
that: (1 ) the weight of the gold dollar would be in

creased , i.e . the price of gold would be reduced ;

(2 ) the deposit of gold (issue of certificates) would be
discouraged , and the redemption of certificates en

couraged ,both operations tending to reduce the volume
of certificates in circulation ; ( 3 ) as the gold reserve
would fall below 100 % , some of the certificates in the

Government's possession would be destroyed instead
of being put back into circulation , thus further lessen

ing the volume of certificates.
The third of these operations would thus reënforce

the second in effecting contraction, would help bring
down the rising index number to par, and would ob
viate, or reduce by that much , the need , at the next
adjustment period , of a further increase of the dollar's

If gold were appreciating , the opposite conditions
would obtain , namely : ( 1 ) the dollar would be reduced
in weight ; ( 2 ) the deposit of gold (issue of certificates)

would be encouraged and redemption discouraged ;
( 3) new certificates would be created and issued to
bring the total volume of certificates up, so as to equal
the reserve. The effect of (3) would be to reënforce
( 2 ) in expanding the currency and bringing up the
sinking index number ; so that the need at the next

Sec. 1, D]



adjustment period of a further decrease of the dol
lar's weight would be lessened .
In short, if we thus keep the reserve constant

(relatively to the certificates), we thereby lessen the va
riations which have to bemade in the dollar's weight.1
D . The Definite - and the Indefinite -Reserve System
Contrasted . The last sentence indicates only one of
several interesting contrasts between the two forms of
the stabilization system , the first, or indefinite-reserve

system (described in A above), in which the reserve is
tem (illustrated in B), in which the reserve is regulated .
Under the “ indefinite -reserve ” system the only in
flow and outflow of certificates would be through the
deposit and withdrawal of gold, just as at present ;
allowed to drift, and the second , or definite -reserve sys

1 It will be noted that, if gold is depreciating, the value of the
gold reserve diminishes and taxation (or other financing ) is required
to keep it up to 100 % . Under such circumstances theGovernment
is in the position of the holder of a perishable commodity . Its gold
is like ripe fruit spoiling on its hands and the Treasury suffers a
loss accordingly . It taxes the public to provide for the depreciation .
The loss from gold depreciation is not, however, due to stabilizing
the dollar and maintaining the reserve. The same loss, in some
form , occurs whenever gold is depreciating and whether or not the
dollar is stabilized . Under our present system the loss falls on the
individual holder of gold certificates instead of on the Government

Treasury . Every dollar of these certificates now in our pockets
shrinks in purchasing power whenever gold depreciates. To
stabilize the dollar simply affords a specific measure of this loss, and
the operation of maintaining the reserve translates that loss into
The same principle applies to the opposite case . Under our
present system , when gold appreciates every individual holder of
gold certificates receives an increment of value. The gold certifi
cates grow in value in our pockets. Under the system of a stab
ilized dollar, and a constant 100 % reserve, the Government
Treasury would reap this advantage and bestow it back on the public
by lightening , by that much , the tax burden .
Thus,maintaining the reserve constant at 100 % merely changes
the form of the gain or loss always involved when the gold in exist
ence varies in value. Any gain or loss, under the stabilization plan ,
would simply be more conspicuous than at present, entering as it
would into Government accounts.
Such gain or loss must, of course, not be confused with the gains
and losses of contracting parties which would be annihilated

altogether by stabilization. (See Appendix II, § 1, J.)




whereas under the “ definite-reserve ” system there
would be, in addition , an inflow and outflow of certifi
cates through special issues or cancellations to keep the
total outstanding volume of certificates in tune with
the gold reserve.

Under the “ indefinite ” system the only regulator
of the price level consists in adjusting the weight of
the dollar. Under the “ definite ” system there is the
added regulator of directly adjusting the volume of

Both regulators, however, act on the price level by
influencing the volume of certificates. The indefinite
system does so indirectly . Under this system , as noted

in Chapter IV , 39, when the dollar's weight is de
creased , i.e . the price of gold is increased , the deposit of

gold is encouraged (as compared with what it would
otherwise be) and its rwithdrawal
i ally,, each
tific w
couraged , and , sas
con of corerwithdrawal
the deposit

of gold implies an issue or cancellation of certificates.
In short and practically, the “ indefinite ” system
depends for its stabilizing effect on affecting or prevent

ing the international movements of gold which would
otherwise happen , whereas the “ definite " system dis

penses with the need of interfering with the gold move
ments as they now occur.

The “ indefinite ” system is always subject to the

risk of a breakdown , whereas the “ definite ” system
is not. Under the “ indefinite ” system the reserve
might sometime sink to zero and redemption become

impossible, whereas under the “ definite " system the
adequacy of the reserve is always safeguarded .

The “ definite " system would act more promptly to
stabilize the price level than would the “ indefinite ,”
because, for one reason, the change in the circulation
would bemore prompt.

The instant any change in the

dollar's weight is made there is a change in the number
of dollars of the reserve, and the volume of certificates
is readjusted to this changed reserve immediately .

Under the “ indefinite ” system , on the other hand, the

Sec. 1, E )



circulation would be affected somewhat more slowly
and only as the flow of gold deposits and withdrawals
became changed .
E . Stabilization in Small and Large Nations Com

pared . The displacement of gold caused or averted by
the operation of the “ indefinite " system would react
on the value of gold per unit of weight. Practically,
however, this effect would be negligible unless the
stabilization system , in the “ indefinite ” form , were in

almost universal use. Any one country, — at any rate,
any one small country , like Switzerland , - could em
ploy the “ indefinite ” - system
system without
old whing tthe
he ggold
old market
; for any displacement of
gold which such a country could cause or avert would
be too trifling ( in relation to the vast reservoirs of gold
outside its own circulation ) to affect the value, i .e. the

purchasing power, of gold in the markets of the world .

But if a large country, — or at any rate a large
number of large countries, — should adopt the stabi

lization system in the “ indefinite ” form , any change
caused in the movements of gold from , or into , their
circulation might be so great as to glut or drain the
small outside reservoirs, i.e. the gold in the arts and

the gold in the circulation of any countries not employ
ing the system .
An acceleration of the movement of gold from the
country or countries having the system or a retardation

of the movement of gold to them , such as would be
caused by an increase in weight of their monetary units ,
would tend sensibly to depreciate the world ' s gold and
so require a further increase of weight of themonetary
units , while the reverse tendency would have the re
verse effect.

The result would be that, in the process of compen
sating for the tendency of prices to change by a given
percentage, the dollar's weight would be eventually
changed by a larger percentage than would be the case
if the definite reserve system were used .

Thus, suppose the system to have been started in




1900 and consider the situation in 1915 . The price
level would then have been kept unchanged , but there
would have been an increase of the dollar' s weight of

more than 30 % although there was only a 30 % rise of
prices to be overcome.

F . A 50 % Minimum Reserve.

The maintenance of

the 100 % Government gold reserve, as described in
“ B ,” is only one of several possible solutions of the

reserve problem . It is the one which would fit in with
the idea implied in our present system of gold certifi
cates, namely, the idea that the certificates are circu
lating proxies for gold .

latibut there are let the reservare minimu
But there are other ways of solving the

problem .
One is simply to let the reserve alone so long as it re
mains in excess of a specified safe minimum and to re

plenish it only when , if ever, it falls below that minimum ,

i.e. to keep the indefinite-reserve system until a definite

reserve system became necessary. When , if ever , the
reserve should fall to that minimum , say 50 % , the

principles described under “ B ” for maintaining a 100 %
reserve would thereafter apply. If the reserve became
insufficient, in other words, if, at any time, the number
of dollars of certificates outstanding were in excess of
double the number of dollars of reserve, the excess of
certificates would be retired .

The 50 % limit would be reached if, for example, the
present gold reserve remained unchanged in physical
amount but, after a time, the dollar's weight grew to be
double what it now is .

G . How Soon Might the “ Indefinite " System Reach
Its Limit ? The time required for such a change, should
such a change ever occur, would depend, of course, on
the rate of change in the dollar, following the rate of
depreciation of gold . Let us take a case which is
extreme for rapidity of depreciation in times of peace.
Suppose that gold should depreciate at the rate it

did between 1896 (the low ebb of prices) and 1914 (the
coming of the Great War) . During this period the
price level rose in the United States at the average rate

Sec. 1, H ]



of 21 % per year, which , let us assume, would require a

yearly increase in the dollar's weight of about 2 % .
From this figure we can calculate the time required to
double the dollar's weight, and to reduce by half the

number of dollars in a given physical reserve.


would be twenty -eight years .
This result assumes a gold reserve unchanged physi
cally .

As a matter of fact, the reserve would increase

slightly .

While the effect of the system would be to

keep gold out of the country, this effect would stop
short of sending it out, for that would contract the

certificate circulation and, unless some special opposing
cause intervened, reduce the price level. The displace

ment effect would stop at the point which would main
tain the price level, and this, in a growing country,
would admit of a slight inflow which would bring the

twenty -eight yearsmentioned up to thirty or thirty-five.
H . A Constant 50 % Reserve and a Variable Surplus.

A third method would differ from the second , as de
scribed in “ D ” above, only from a bookkeeping point
of view .

Therewould be some advantage in separating

off any surplus gold above the legal 50 % .

This “ sur

plus " would then be considered as a secondary reser
voir out of which the “ reserve ” proper could be main
tained at a constant level of 50 % . Reversely,whenever

this “ reserve ” should tend to exceed 50 % , the excess
would overflow into the “ surplus.”
The “ reserve "
proper would then be maintained at an unchanged

ratio at all times .
We may, for convenience of thought, suppose the
“ reserve ” and the “ surplus ” to be kept physically
apart in two separate vaults in the Treasury and every
week , or every day , the Treasury accounts to be squared

off and gold physically transferred between the two
rooms, in whichever direction it might be needed to
keep the “ reserve ” at 50 % and no more. We should

then have a “ reserve ” the amount of which (in dollars,
notweight) would always be 50 % of outstanding certifi

cates, and a " surplus” which would represent all above




50 % , the percentage varying up and down owing to
changes in the declared weight of the dollar as well as
to the deposits of gold and the brassage receipts.
Under this system of bookkeeping, the " reserve "
would need to be eked out (or rather, the excess cer

tificates would need to be retired ) at the expense of the

Treasury only when, if ever, the " surplus ” should dis
appear entirely .

By this method the system would start off with a
large bookkeeping profit for the Government.
I . Putting the Surplus to Work . A fourth method ,
and one which appeals to me as probably the best , is

very similar to the third, described in “ H ," butmakes
more than a mere bookkeeping use of the “ surplus."

By putting the idle and otherwise useless “ surplus ”
to work , a profit could be earned and the day of ex

hausting the “ surplus " could be postponed still longer ,
if not indefinitely.
So far, we have supposed both the “ reserve " and

entbonicht be inte the profit Part, or only

the “ surplus ” to be kept in physical gold . But only

the “ reserve ” proper need be so kept.. Part, or all,
of the “ surplus ” representing the profit with which

the system starts might be invested in , i .e . exchanged
for, Government bonds and so virtually made to earn

interest ; for any bonds thus brought into the “ sur
plus " fund would , of course, earn interest for that fund
just as truly as though they were in private hands, the
general fund of the Treasury paying over into that

“ surplus ” fund the interest which would otherwise

have to be paid to private holders of these bonds.
This system would recognize the needless waste in

volved in a 100 % , or other high “ reserve."

In these

days of economy such a “ reserve ” is, as one economist
has said , an “ expensive luxury ” and one almost pecul
iar to the United States. In fact we are already dis
pensing with it , in part, by virtually converting gold
certificates into Federal Reserve notes.

J . Reactions Therefrom . It should be pointed out,
however, that the very operation of converting the

Sec. 1, J]



idle gold surplus into an active bond surplus would ,
theoretically at least, have its own effects on the value

of gold .

It mighteither lower or raise that value.


net effect would be the resultant of two opposite ten

Of these two the tendency to lower that value will
be explained first. This tendency can be clearly pic
tured if we follow the processes involved , step by step .
These processes are best followed if pictured , not as
one immediate sale of the entire gold surplus for bonds,

but as a gradual sale , extending over a number of ad
justment periods.
The gold thrown on the market to buy up bonds

would mostly
lly itsy way
w uld, i.e . go
iginaofl circulation
he out


b t or

blo wo

be no

abroad or into the arts. This outflow would be in
direct ; for presumably the original bondholders would

not wish personally to deal in the gold bullion supposed
to be given them for their bonds. They would hand

back this bullion to the Government in exchange for
gold dollar certificates , just as though it were new gold
from the mines.
The result would be substantially the same as though
the bonds were bought not with gold , but with newly

created certificates, the gold remaining in the surplus.
But this extra output of certificates would not remain

in circulation butwould disappear again and becanceled ;
for they would tend to raise the index number and lead
to an increase of the dollar's weight, i.e . a decrease of
the price of gold , and there would be a decreased inflow
of gold from the mines and imports and an increased

outflow into the arts and abroad , i.e. a decrease in

certificates issued by the Government to miners and
gold importers and an increase of certificates received
by the Government from jewelers and gold importers.

The upshot is, substantially, that, while gold would
not find a welcome among bondholders, it would , as

gradually cheapened at successive adjustment periods,
find a market abroad, or in the arts.

That is , in effect,

the gold displaced by the bonds, after being bandied




about between the Government, the sellers of bonds,
and the gold exporters and jewelers , would go abroad
or into the arts , being displaced from the “ surplus ”
by bonds.
But, the dollar being now heavier than before, the

gold “ reserve ” of 50 % would be proportionally de
pleted , even assuming the physical gold in the“ reserve "
to remain unchanged , and so would have to be replen

ished from the “ surplus."

In short, the original “ surplus,” in the process of
being converted from gold into bonds, would tend to

shrink in value. It would so tend to shrink both be
cause , if the gold was forced on the market, it would
have to be sold at some sacrifice and also because the

resultant impairment of the “ reserve ” would rob
some of the “ surplus ” before it could all be sold .
We are now ready to describe the opposite tendency
by which the conversion of the gold surplus into a bond

surplus would work toward a higher value of gold . The
reactions so far described take no account of an impor
tant indirect effect on the price level from reducing the

volume of outstanding bonds. As recentwar experience
has illustrated , bond issues tend toward inflation
so that bond retirements would tend toward contrac

tion . This effect would be considerable, not only be
cause bonds are used as a basis for circulating bank
notes but also because, as the most convenient form
of collateral security for private loans, they are often
made the basis for such loans and so for deposits sub

ject to check .

The withdrawal into the Treasury of

bonds would thus tend to contract the note and de
posit circulation and thereby offset, in part or in whole,

the expansion from the issue of gold dollar certificates.
After the supposed initial replacement of the gold

surplus by bonds, if the reserve needed replenishment
from time to time, or, expressed differently, if the cer
tificates outstanding needed to be reduced , the surplus
fund would simply reconvert some of its bonds into
certificates which would then be canceled up to the

Sec. 1, K ]



the h50
% ratio
c e mmaintenance
aint of reserve
. Onlyin wcirculation
here .desThe
of this
ratio by the method here described would cease to be

possible only when the surplus fund should be ex
hausted . It could then buy up no more certificates
and recourse would need to be had to taxation , as pre

viously explained . (See “ B ” above.)
K . The Interest on Surplus Would Save Taxes .

As .

long as the surplus earned any interest the expense of

replenishing the reserve would be borne in part, or in
whole , by this interest earned . It is roughly estimated
that interest earned on this surplus would extend the
35 year period , in the imaginary example mentioned
under “ G ,” to about 50 years. If, instead of the very
high rate of 21 % per annum for the accretion of the
dollar' s weight, we were to assume a 17 % per annum
rate , which would itself be a high rate, the net result
of the calculation , under the same assumptions, is that
the investment of the surplus would aboutmeet the loss

indefinitely. In this case the " indefinite ” system would
last indefinitely and require no taxation .

L . The Future. These calculations are, of course,
purely illustrative. No one can guarantee, for instance,
that great gold depreciation is not in store for us from
extraneous sources.

e absoilirapid
zation as
tract 1 , for should
a mto
to exdepreciation
wayIf this
the cost to the Government of stabilization a matter of
real moment, — if, for instance, science should find a
way to extract profitably the enormous amounts of
gold now held in the southern clays, or in sea water,
or in the alluvial deposits said to be at the mouth of
the Sacramento River, — then the time would clearly
have arrived for dispensing with the gold standard
altogether, just as we would dispense with a standard

based on decaying fruit and adopt something more re
tentive of value.

At any rate, the expense to the Government of such
a future possible cataclysm is no argument against
stabilization ; for, as we have seen , if depreciation




comes, its cost must be borne by the people anyway,
whether the dollar is stabilized or not.

The argument

is rather the other way ; for the private individual

ought not to be forced to take a gamble as to the value

of the money he carries any more than as to the vari
ations of any other unit.

Instead of taking such drastic action as to give up
the gold standard , we could, if we chose, make gold it
self less perishable in value by limiting its production ,
just as diamond mines limit the production of diamonds
in order to maintain their value. Such a control of
gold production would simplify the problem of stabi

lization ; for it would be a partial stabilization itself.

It would be the first rough adjustment, by hand as it
were, of a scientific instrument, made in advance of

the finer adjustments by means of a micrometer, —
i .e. the index number.

If, on the other hand, gold should , without any Gov
ernment interference, become scarce and appreciate ,

the monetary system would be earning a handsome
profit for the Government.

M . Summary. Each change in the dollar's weight
changes the number of gold dollars in the reserve and
disturbs the ratio of reserve to certificates.

If gold appreciates, or does not depreciate too far,

the reserve will always be adequate to insure redemp
tion . But as there is always the possibility of an
excessive depreciation of gold , somemethod of insuring

an adequate reserve should be provided . Of several
possible methods, the best seemsto be : to fix a definite
ratio of reserve to certificates, such as 50 % , which shall
always be maintained ; to appropriate at the outset,
to the profit of the Government, all surplus above the
50 % and invest it in Government bonds ; likewise, in

the future , to appropriate, to the profit of the Govern
ment, any further surplus which may accrue and to
defray, at Government cost, any expense involved in
bringing the reserve up to the 50 % limit .
These Government gains and losses are not new but

Sec. 2 , A ]



merely transformed . They are the same gains and

losses which , under our present system , are felt by the
public as individuals .
The maintenance of a definite ratio of reserve to cer
tificates compels both of them to expand or contract
in unison and leaves the currents of gold between coun

tries and between the arts and the currency substan

tially as they are at present.
An “ indefinite ” reserve system would disturb those
currents somewhat, mitigating a flood of gold into the
country or an ebb of gold out of it, and, if the country

be a large one, affecting the value of gold .
2. Speculation in Gold
A . Preventing “ Overnight ” Speculation . The best

“ brassage ” fee . In the text (Chapter IV , § 10 ) it was
briefly stated that a small fee should be charged by the

Government for the deposit of gold .

This fee would

correspond somewhat to the old “ brassage " charge for

coinage and may, for convenience, be so called . Its
object, however, is not primarily to defray the expense
of the mint office but to prevent speculation in gold ,
injurious to the Government .
Without some such safeguard the Government
1 The weight of the gold bullion dollar, at any time,may be called
the redemption -weight of gold , i.e. theweight of gold in which a gold
bullion dollar certificate can be redeemed . The amount of gold which
must be deposited at any time for a gold bullion dollar certificate
may be called the deposit-weight of gold (corresponding to the

presentmint-weight). . This exceeds the redemption -weight (i.e. the
*.dollar " ) by the brassage fee. If this fee be 1 % , reckoned on the
dollar 's weight, and the dollar's weight (in pure gold ) were 23.22

grains as at present, this fee would be .2322 grains. Hence the
depositor of gold , in order to receive a dollar of certificates, would
have to deposit not only a dollar of gold bullion (23.22 grains)
but a “ brassage ” fee of .2322 grains besides, or 23.4522 grains in all .
In other words, while the redemption -price would be $ 20.67 an
ounce (i.e. 480 grains in an ounce • 23 .22 grains in a dollar ) the
depositor of gold would receive a deposit-price (corresponding to the
present mint- price ) not of $ 20 .67 an ounce, but of 480 • 23 .4322

or $ 20 .47 . Under this system of terminology the dollar and the
official price of gold are defined in terms of redemption , not of

deposit, which latter involves the brassage fee as well.



(App. I

would be in danger of sustaining loss every time a pro
spective change of the dollar's weight and the price of
gold was known. For instance, if, at any time, the

Government stood ready to buy or sell gold at, say,
$ 20 .00 per ounce and if it were known that to -morrow

that price would be raised to $20 . 10, speculators could

to-day buy, of the Government, gold bullion at $20.00
and sell it back to -morrow at $ 20 .10, thus pocketing a

profit of 10 cents an ounce overnight at the expense of
the Government. Were this operation allowed or
made possible, it would be costly to the Government

Treasury and might temporarily deplete its gold re

The opposite speculation would , were it not pre

vented , accompany a drop in the official price. Specu
lators who possessed stocks of gold could conceivably

sell to the Governmentto -day at, say, $ 18 .00 and buy
back to -morrow at $ 17.90, likewise profiting 10 cents an

ounce at the expense of the Government.

This last

operation would also be costly to the Government,

though it would (during the period of operation ) in
crease its gold reserve.

But the “ brassage ”

requirement would

tually protect the Government from


either sort of

speculation . The Treasury would be put thereby in
the usual position of any merchant or broker, charging,
at any time, a slightly higher price than it pays at that

time and making a profit.

This profit, or brassage,

would be the Government's fee for its services in main
taining themonetary system . Wedged between the two

Government prices , it would remain a fixed percent
age, say, 1 % , so that the pair of prices would rise
or fall together.

In order that this margin should always fully safe
guard the Government it should be provided in the

plan that the extent of any one shift in the pair of
prices, whether that shift be upward or downward ,

must never exceed themargin or brassage fee.

Thus, if

the fee is 1 % , no one shift could bemore than 1 % .

SEC. 2 , A ]



Evidently such a limitation would effectually stop
any embarrassing speculation . Thus suppose the fee
to be 1 % on the Government's deposit — or buying —
price, which to-day is, say, $ 18 .00 . Then the pair of

Government prices , to -day, will be:
For buying gold . . . . . . $ 18.00
For selling gold


. .

. .


18 .18

Suppose that to-morrow both prices are to be raised
17 cents, almost to the limit of 1 % , or so as to be :

For buying gold . . . . . . $ 18.17
For selling gold . . . . . .


Clearly a speculator who tried to profit on the rising
market would fail ; for he would have to give to -day

$ 18. 18 and would get to -morrow only $ 18. 17 , actually
losing 1 cent an ounce. Evidently , at best (i.e. if the
shift were not 17 but the full 1 % , or 18 cents), he would
come out only even .

Reversely , if the pair of Government prices are

marked down nearly to the limit , say, by 16 cents, or

a buying price of $ 18.00
and a selling price of 18. 18

a buying price of $ 17.84
and a selling price of 18.02 ,

clearly the speculator cannot profit by the fall. To
attempt it would mean to let the Government buy his

gold to -day at $ 18 .00 and sell it back to him to -morrow
at $ 18.02, causing him actually to lose two cents an
ounce. Evidently at best (i.e. if the shift were not
16 cents but the full 1 % , or 18 cents) hewould comeout
only even .
It is true that this limitation imposed on the shift,

up or down, of the pair of official prices, while it would



(App. I

effectually stop injurious speculation , might, in some

cases and for the time being, prevent the full adjust
ment in the dollar' s weight (and in the price of gold )
called for by the index number .

Thus the index number might indicate a change of
2 % in gold prices, while only 1 % was permitted under
the restriction mentioned . Suppose the redemption

price of gold to be $ 18 . 00 and the deposit-price 1 % less,
or $ 17.82. Suppose , further, the index number at
some adjustment period to be found to be 2 % above

Then , it is true, the price of gold could not be

changed more than 1 % , or 18 cents. Instead of being
reduced the full 2 % , or 36 cents , as would be the case
if there were no restriction , the redemption price would ,
on account of the 1 % restriction , only be reduced from

$ 18 .00 to $ 17 .82 (instead of to $ 17 .64) and the de
posit price from $ 17 .82 to $ 17.64 (instead of to $ 17.46 ) .

The sacrifice in efficiency of the system here implied
is , however, insignificant, assuming, of course, that
the fee or margin is wisely chosen in reference to the
adjustment period . And even if the sacrifice of
efficiency were greater, the superiority of a merely

partial adjustment over the present unyielding system
of no adjustment at all would be very great.

If the adjustment is to occur monthly, or bi-monthly,
a brassage of 1 % would seldom hamper stabilization
appreciably ; if quarterly , 2 % might better be used,
as giving more latitude. I incline, however , toward a
bi-monthly adjustment period and a 1 % fee, the prices

being quoted, let us say, for the first Wednesday of
January and of every alternate month and the result
ant index number proclaimed and made effective on the

Wednesday following or earlier. Calculations with a
1 % fee applied to the actual prices of 1900 - 1914 seem
to justify this choice.

B . Speculation beyond One Adjustment Period.


only kind of speculation thus far considered is the
“ overnight ” variety based on a foreknown change in
1 This is shown in figures in § 9 below .

Sec. 2, B ]



the Government prices of gold ; and this is the only
kind against which any safeguard is necessary .
We may, however, add here a short statement as to

other kinds of speculation in gold , in order, chiefly , to
show that no provision against them is needed .

It is

conceivable that a speculator might buy (or sell) gold



to -day in order to resell to (or to rebuy of) the Govern

effect adjust
thenext, but
100t the
ment after, not
y grsucceeding
ment. Assume, for simplicity, that the adjustment is
monthly and limited to a 1 % increase or decrease .

While the brassage fee of 1 % would effectually prevent
a speculator from buying (or selling) in January in

order to resell or rebuy in February, it would not prevent
him from an operation extending from January to
March or later months in the hope that the first shift
of gold prices, — that, say , on February 1, — might

be followed by others in the same direction .
First consider bull operations. Thus, if the Govern

ment is buying gold on January 31 at $ 20 .00 an ounce
and selling it at 1 % more, or $ 20.20 , and if the specula

tor knows that on the following day, February 1,
this pair of prices will be advanced the full limit of 1 %
and hopes that on March 1 it will be advanced an

other 1 % , while it is true that he could make no profit
by selling in February, he could , evidently, if his highest
hope were realized , make a 1 % profit by selling in

March , and he may, if he chooses to take the risk in
volved , speculate in that hope. That is, he may buy
gold of the Government in January, planning to re
sell it to the Government in March or later, the mini
mum period for the turnover being a month and a day .
But will he ? Seldom , if ever, and for several

reasons ! In the first place , opportunities for such

gain will be few and far between . The maximum gain
possible will be 1 % a month and that maximum will

seldom continue. So far as statistics are available to tell
us, gold has very seldom appreciated for a year more
than 5 % and never as much as 10 %

( except once in

greenback days when gold was not the standard ).



(App. I

In the second place, against these small possible

gains which might present themselves from time to
time, the speculator would have to reckon with large,

if not prohibitive, expenses.

Prominent among them

would be interest. If the rise per cent in the price of
gold is less than the rate of interest he will be a loser

anyway . If he has to pay 5 % for “ carrying " his load
through the year and, at the end , the price of gold has
risen 5 % , he has not even earned interest . For when
he closes hisoperation and sells gold back to the Govern
ment, the brassage charge of 1 % must be paid , and be

sides these two expenses are expenses for cartage of the
gold from the Government
erim , and in dvaults
ull opestorage
of hback,
charges in the interim
, and insurance.
Another obstacle is the difficulty of assembling the
yellowbacks necessary to begin such a bull operation .
If they are kept ready in advance, the interest expense
involved in “ carrying " them would be much more

than merely the interest for the period of the specula
tive operation .

Finally, of course, the risk of failure in such an
operation has always to be reckoned with . The only
case in which such speculation would be reasonably

likely to succeed would be when , in any month , the 1 %
rise in the price of gold were inadequate completely to
meet the fall of the index number, so as to create the

presumption that it, the price of gold , would be raised
again in the following month . If a rise of 1 % were
announced for February 1, which was several per

cent less than the fall in the index number , there would

be a high probability that a month -and -a -day bull opera
tion would yield a gross profit of 1 % , the net profit, if
any, being what is left of that 1 % after deduction of
expenses. But this is scarcely an attractive speculative
proposition .
We conclude : ( 1) that for short periods, like two or
three months, the expenses, e.g. the expense for the
cartage of gold away from and back to the Government
vaults and the expense , time, and labor of preparation


SEC. 2, B]


in order suddenly to assemble the yellowbacks (or else
to “ carry ” them for long beforehand),would beprohibi

tive ; and (2) that for long periods, like a year, the risk

would be prohibitive. It is clear, then , that specula
tion of the sort here discussed would be conspicuous by
its absence.

The effect of any such speculation , so far as it did
exist , would , of course, be to cause expense to the
Government or rather deprive it of the profit it would

have made if the gold which the speculator held for a
rise had been held by itself ; the temporary withdrawalof

gold from the Government reserve should also perhaps

be counted as a slight disadvantage to the Government.
But this is only a small part of the picture. As we

have seen in the previous section, the Government,
during such a period of gold appreciation as we have

supposed , would itself be in the very position of the
bull speculator and on an immeasurably larger scale.

It would , as it were, be holding for a rise its entire gold

Its percentage of reserve would be gaining

and might, conceivably, even grow to exceed a 100 %

reserve. The speculator's losses, if any, would there

fore simply be a negligible offset against the Govern
ment's own gains from the rising tide of gold value.1
1 If the view which has been given (that such bull speculation
would be too trifling to require any special provisions against it)
were incorrect, — if, after all , the Government might be seriously
embarrassed , — such a raid on the Treasury could be altogether
avoided by a special proviso : the price of gold could be further
restricted , so far as any upward change is concerned , so as not to
be raised more than, say, one half of one per cent a month , i.e. at
80 small a rate, at most, as to be more than offset by the inter
est , etc ., which the bull speculator would have to carry

This restriction would only slightly hamper the stabilizing
process ; for it is only seldom , and never for long periods, that gold
has appreciated relatively to goods more than one half of one per cent

a month . This safeguard is mentioned , however, merely to meet
completely all possible objections, however far-fetched or imaginary .
Such a proviso would , I believe, be as superfluous as it would be

If, as I suggested in " A " above , the brassage were 1 % and the
adjustment period two months the terms of the restriction just
mentioned would be met anyway.



(App. I

But let us return to the contention that such bull
speculation would be practically non -existent. The
price movements needed for it seldom occur, and when

they do occur are not foreseen . In fact, if price move
ments were so well foreseen , the evils which this book

proposes to remedy would not be very serious !
Somewhat the same considerations apply to the
opposite sort of speculation , that of the bear operator.
But this type of operation , — first selling gold to the
Government and then buying it back at a lower price

some months later, — would amount to lending the
Government temporarily an addition to its gold reserve.
It would be helping the reserve when , because of its
depreciation in value, it would need help . Practically ,

the advantage to the Government from such an opera
tion would be small ; for the possible bear operations
would be limited to very small dimensions by the fact
that only small amounts of idle gold bullion are avail

able, i.e. could be, at any moment, found in stock out
side the Treasury and so be capable of being immedi
ately deposited there for the period of the supposed
bear operation .

C . Unofficial Prices of Gold . We have spoken only
of the official pair of prices of gold .

These are like the

two “ gold points ” in foreign exchange or the two
limits used in the gold exchange standard . As dis

tinct from these two officialGovernment prices of gold
bullion , the actual price in the open market might be at

any point within these two limits, just as the price of
foreign exchange may be any price within the “ gold
The market price could never lie outside these

limits. It could never exceed the redemption -price ;
for no one would pay more for gold than the price
asked by theGovernment. Nor could it fall below the

deposit-price ; for no one would take less for his gold
than he could get for it from the Government..
But, within the range set by these two official

prices, themarket price could float unhampered . Thus,

Sec. 3 ]



if the limiting, or official, prices were $ 18 .00 and $ 18. 18 ,
the market price might be $ 18. 10 .

There would , so

long as this intermediate price ruled in the market, be
no actual redeeming or depositing.

For no one would

sell bullion to the Government for $ 18.00 an ounce
when he could get $ 18.10 in the open market, nor
would any one buy bullion of the Government for
$ 18 . 18 an ounce when he only needs to pay $ 18 .10
for it in the open market.
Evidently, therefore, the deposit of gold would only

take place when the deposit -price, i.e. the lower limit,
ruled the market ; and its redemption would only take
place when the redemption -price, i.e . the upper limit,

ruled the market. The buying and selling of gold
within the two official price limits would thus not
directly concern the Government.
D . Conclusion .

Our main conclusion is that specu

lation in gold , whether or not the Government be in
volved as a buyer or seller, would , if the brassage safe
guard be used , not embarrass the Government finances
nor affect the smooth working of the plan for stabiliz

ing the dollar. Moreover, such speculation would be

negligible , probably more so than speculation in silver
to -day .
3. Selection of the Index Number
The method of stabilizing the dollar set forth in this
book consists in periodically readjusting the weight of
the gold dollar so as to make its purchasing power
correspond to an ideal composite dollar of commodi
ties. The criterion for this adjustment is an index

number of prices. Consequently the selection of the
right type of index number is one of the essential de

tails of the plan .
Many different methods of averaging and of weight
ing and many different selections of commodities,
sources, and periods of price quotations have been

used or suggested,making many sorts of index numbers .




The selection of the best index number is a fascinat
ing subject. It is a curious fact, however, that
index numbers of different types usually agree with
each other remarkably well, whatever the formula for
calculation , the method of weighting , the number of
commodities , etc.

In Chapter I some diagrams illustrating this im
portant fact were given . Any reader unconvinced as

to the correctness of this conclusion has only to con
sult the literature on the subject indicated in Appen
dix VI (especially the writings of Mitchell and Edge
worth ) in order to be reassured .
Nevertheless , there are always some differences be
tween the movements of different index numbers, and
occasionally these differences are large. Therefore,

just as, in determining the physical yardstick, it is
worth while to eliminate the effects of temperature and

other disturbing factors in order to obtain a unit as

nearly perfect as practicable, so it is worth while to
construct an index number as nearly perfect as possible.

I shall therefore indicate the points which seem to
me of most importance.

The chief factors of an index number are : (1 ) the
agency authorized to calculate the index number ;

( 2) the markets and sources of quotations ; (3 ) the
kinds of prices (i.e . wholesale or retail, etc.) to be
quoted ; ( 4 ) the list of goods to be included ; (5 ) the

frequency of calculation ; (6 ) the formula for calcula
tion .
Out of the wide range of choice presented under
each of these six heads I would , tentatively at least,
make my own choices as follows :

( 1) The calculation of the index number might well
be put in the hands of the Bureau of Standards which

now has charge of standardizing every unit other
than the money unit. An alternative is the Bureau of
Labor Statistics which now publishes excellent index

numbers of prices for other purposes.

(2) The markets should be the chief public markets

Sec. 3]



of the United States such as those now used by the
United States Bureau of Labor Statistics ; and the
sources, government agents, standard trade journals,
and books of business houses.

( 3 ) Only wholesale prices should , I think , be used .
We could not profitably use retail prices or prices of
labor (wages) or the prices of securities or the prices of

real estate or rents.
There are several reasons for the restriction to

wholesale commodity prices, especially : (a ) the greater
ease of fixing or standardizing definite grades of whole
sale commodities than of any of the other classes of
goods mentioned ; (b ) the greater importance of
wholesale trade and the fact that most important con

tracting parties are more concerned with wholesale
prices than with retail; (c ) the greater sensitiveness
of wholesale prices to the influences which affect

price levels ; (d ) the fact that stabilization of the
wholesale index number will carry with it the stabiliza

tion of the level of retail prices far more promptly and

fully than vice versa.
The last two points are worth a little elaboration .
It is well known that certain prices are sensitive and
others insensitive to the various market influences.

For instance, the wholesale price of silver is so respon
sive to every market wind which blows that rarely are
the quotations on two successive days alike ; while ,

on the other hand , street railway fares have only be
gun to budge from the traditional five cents after
having stood stock still through more than two dec

ades of upheaval of prices of most other goods and

As our index number is designed to register

promptly the effects of an increase or decrease of money
in circulation , an index number made up of prices,

almost unchangeable like street railway fares and the
price of postage stamps, would be, to that extent,

like a painted clock , a false and useless indicator.

In short, the prompter the indications for needed
adjustments , the prompter the adjustments, and





the history of prices has repeatedly and clearly
shown that wholesale prices respond the most promptly
of all classes of commodity prices. They rise or fall
before retail prices, just as retail prices do before wages,
and wages before salaries.

Not only are wholesale prices a prompter and
better index of the purchasing power of money but, if

the level of wholesale prices is stabilized , the level of
retail prices will be stabilized also . It is true that
when the wholesale level changes the retail level lags

behind. But the lag depends on the change ; that is ,
other things equal the lag is most, absolutely at least,

when the change in wholesale prices is most and least

when that change is slowest. If the level ofwholesale
prices did not change at all the level of retail prices

would likewise keep fairly stable ; for there can be no
lagging behind when there is no movement behind
which to lag . When a fisherman moves his pole back
and forth , the line and sinker follow , lagging behind .
But if he ceases to move the pole, the line will hang
more nearly plumb .

(4 ) What has just been said paves the way for the

selection of the particular commodities to be included .
Just as prices of commodities at wholesale are more
sensitive or responsive than those at retail, so some
wholesale prices are more responsive than others.

In other words, for one reason or another , the prices of
certain commodities, even at wholesale , are more or
less resistive to change, i.e. they change only sluggishly
and after the pressure to change them

has accumu

lated. Steel rails, for instance, remained $ 28 a ton
for many years.
With these requirements in mind, the next con

sideration is that the list of commodities be as general
as possible .

I would myself prefer a more general

standard than food , although almost any standard
based on a number of commodities would be superior
to the gold standard based on one alone. If a very

general standard were adopted , it is quite true that the


SEC. 3]


“ cost of living " in any restricted sense (such as the
cost of food alone) could change somewhat, though not

greatly. Furthermore an index number must serve
not simply the purpose of stabilizing the value of
money to wage earners but serve the purposes of
transactions generally . For a large share of those
transactions, a general wholesale index number is the

I have had a special index number calculated for me
through Mr. Bell of the United States Bureau of Labor

Statistics , derived from the same data and calculated
by the same methods as those used by the Bureau but

excluding the articles sluggishly changing, i.e. most
frequently remaining unchanged in successive months.
The resulting index number is, therefore, presumably
more promptly responsive to any influences affecting
it than any other index number of wholesale prices

which has been constructed . The list of commodities
on which it is based includes 75 commodities and 155
series of price quotations as follows:
Farm Products



( Barley

Grain I Oats

| Wbeat


Cloths and clothing
Boots and shoes

Cotton flannels
Cotton yarns










( Rye
our |Wheat

Linen shoe thread
Print cloths

Meal, corn
( Bacon

Meat Beef
( Lamb


Women's dress goods



| Lead , carbon

Fuel and lighting

(App. 1
ate of



Linseed oil



| Zinc, oxide of


Metals and metal products
Bar iron
Lead , pig
Lead pipe


Drugs and chemicals



Pig iron


| Billets, Bessemer


Lumber and building materials

Cottonseed meal
Cottonseed oil


(5 ) The frequency of calculating the index number,
which means the frequency of adjusting the dollar's
weight, depends on a number of circumstances, in

cluding the time required to calculate the index num
ber and that required for the effect of each adjust

ment to be felt .
The time required for calculation should be trifling.

Judging from the expeditiousness with which some
of the commercial index numbers are now calculated ,

and with which our Government weather maps are
published , I believe that, with the aid of the tele
graph, an index number could easily be calculated
within two or three days after the date for which the

prices are quoted .
How quickly the index number responds to a
change in the money supply has never been fully

demonstrated. Professor J. Shield Nicholson , plot
ting English war currency and index numbers of prices
at quarterly intervals , found that the behavior of the

price level seemed to correspond to that of the cur

Sec. 3]



ter, thus quarter
nd effinectthe
quarter rrather

than to that in
the same quarter, thus suggesting a lag between cause

and effect of one quarter of a year. His figures did
not admit of a closer analysis . A lag about half as

great seems to exist in the United States between the
changes in the money in circulation (i.e . in pockets,

tills , and banks other than Federal Reserve Banks)
and the index numbers of Dun or Bradstreet or the

United States Bureau of Labor Statistics .
The specially responsive index number which I have
had calculated seemsto show a still shorter lag, namely,
about one month . Perhaps the most sudden and
unmistakable single instance of a right-about-face of

prices succeeding thatofmoney is that in the autumn of
1915 . In August of that year the money in the United
States shot up suddenly and rapidly. In September,
one month later, the price level likewise shot up
suddenly and rapidly and has scarcely receded since.
i. ng other cases sa
neisss here
itoan month
of Indone
isat interesting
other cases sufficiently

intes 93 is inficiently
f re of or
in 18 th po
to be illuminating on this point. The

closure of the Indian mints in 1893 showed the same
promptness of influence on the value of the rupee.1

The rate of exchange on London in New York has
often changed from the maximum to the minimum
inside of a fortnight. Again , Canadian and American
price levels, as worked outby the labor bureaus of the
two countries, correspond with each other year by

year with extreme precision. Even month by month ,
judging by a

careful comparison for

months, the agreement is very noticeable .

twenty - four

The price

levels of different countries tend to approximate each
other like two connected lakes, through the overflow of

currency from one to the other, back and forth.


1 See, e .g ., tables of silver and rupees in relation to gold in Finan
cial and Commercial Statistics for British India , Calcutta , 1895 ,
p . 353. After the closure of the mints in June, 1893, the first figures
available , which were dated about a month and a half after that
event, show a marked appreciation of the rupee .




the adjustment should be so delicate and prompt as

between countries whose centers average hundreds of
miles apart and whose trade currents are obstructed

by high tariffs is not only surprising but extremely
If this estimate of a month and a half be near the
truth , a monthly or, at most, a bi-monthly adjustment
of the index number would usually give sufficient time

for any adjustment to make itself felt in the index
number before the next adjustment was made.

Some such period of waiting for the effect of one ad
justment to work itself out before another adjustment

is made is advisable so as to avoid , as far as possible ,
occasional cases in which the new adjustment might

prove to have been in the wrong direction and need to
be recorrected later.
(6 ) In my book , the Purchasing Power of Money
(Chapter X and Appendix to Chapter X ), I have dis

cussed at length the question of the best formula for
calculating an index number.

The merits of forty

four formulæ are there considered . On the whole, I
favor a weighted arithmetical average like that adopted
by Dr. Meeker, Commissioner of Labor Statistics, and

used in the index number of the Bureau of Labor Sta
tistics . This system was used in calculating the special
index number of “ responsive " commodities to which I
have already referred .
As this last-named index number is the one I would ,
at present,most favor, it is given on the opposite page
and the regular index number of the Bureau of Labor

Statistics is given for comparison .
4. Selection of the Par
Wemay distinguish three classes of contracts , past,
present, and future, i.e . those both made and fulfilled in
the past, those made in the past but to be fulfilled
in the future , and those to be both made and fulfilled in

SEC. 4 ]


1913 = 100

January 1913
May · · ·
July . . .
September .

. . .
· · · ·
. . . .

July . . . . .
September .

. . .

May . . . .

November :
January . . 1916. . .

. .


. . . .

. .

November .


March . . .
May . . . .

. . . . . . . . . . . . . . . . .
. . . . . . . .
. .
. . .


. . . . .

January 1918

November .

March . . .
May . . .
July . . .

September .

. . . . . . . . . . . .
. .
. . . . . . . .
. . . . . . . . . . .


March . . .
May . . . .

. .

March . . . .




January 1919
March · · · · · ·
May · · · · · ·
July . . . . . .
September . .

November . . .

1913 = 100

99 .65
98 .52
99. 28
103 .51
97 .17
96 .47
98 .24
103. 93

99 .53
98. 92
99 . 17

102, 11


98 .47

106 . 26
114 .47
115 . 96

102. 36
113 .58
117 .77

119 .37

118 .75
126 . 94


99. 32
98 .34
100 .53


102 .90

97 .70
98 .02


100 .32


156 .09


163. 28





199 .47

184. 96

196 .46
197 .44
206 . 14
207 .48
217 . 16

187 .45
198. 12
206 .65
206 . 14

213 .02
198 .40


214 . 19

206 .55
216 .37






the future. In the start-off, i.e . in the selection of
the par or price level which the new system would
undertake to maintain , only the middle of these three
groups need be considered .

It is true that the chief purpose of the new plan is
to provide for the third class, future contracts ; for these
include the numberless contracts of generations yet
unborn . But for this purpose any price level what

ever would serve for the par aswell as any other, even
if it were ten times as high or as low as the present price

Nor do the contracts of the past concern us. They
have been written off the books and are beyond recall

or correction. Nor can those who suffered losses or
made gains on past contracts be selected out and in

demnified or assessed damages to -day. And, if these
past victims could be found , the adjustments they

would require could not be accomplished by selecting
any particular price level such as that existing at some

particular date in the past. A reversion to standards
from which we have drifted far will only make bad
matters worse. Two wrongs do not make a right.
Bygones must be bygones.

To urge going back to an antiquated price level was
a fatalmistake in the 16 to 1 proposal in the ' 90s which

aimed to go back to the “ dollar of the daddies " and

the price level of 1873.
To-day those who talk ofpre-war prices as “ normal ”
might almost as well talk of the price of 1896 as “ nor


They do not stop to think that most of the

adjustments have been made nor of the injustice which a

reversion to an obsolete standard would do to the con
tracts of the present.

The war debts both in this country and in Europe,
for instance, have been , for the most part, contracted
at high price levels. If we should drop back to the
1913 level of prices it would almost double the burden

of our national debt, for the government would have
to repay dollars almost twice as big in purchasing

SEC. 4 ]



power as the average of those which it borrowed at
the five Liberty Loan dates.

In considering Europe's burden of debt we must re
member the unacknowledged premium on gold and

the grave circumstance, of similar significance, that

the price upheaval in Europe was even more serious, far
more serious, than with us.

In the absence of any more exact estimate let us as
sume that the average price level in western Europe

is threefold that of 1913 while ours is only two
fold .

Conformable to this situation wemay further assume
that to resume specie payments and get back to and

maintain the old pars of exchange, European price

levels must drop relatively to ours by about one third ;
for, if our present price level be maintained , Europe's
would have to fall in the ratio of 3 to 2 .

This means that the purchasing power of her money
must appreciate in the ratio of 2 to 3. Such an appre
ciation would alone add 50 % to Europe's burden of
debt as compared with what it is at present prices.

Now , if we in America insist on reverting to our
pre-war level — if, that is, we double the present pur
chasing power of our dollar, Europe 's price level, in

order to get back to the normal relation to ours,must
be cut in three and her war debt virtually tripled .

Even without war debts Europe would be ruined eco
nomically if her money units were thus tripled in pur
chasing power within a generation . Even an enhance
ment of 50 % would be almost unbearable and would
probably fan social discontent into revolution .

To see

that this is a grim fact we need only to recall how be
1 The average index number at the five dates was 195 (on the
basis of 100 for 1913 ) , calculated as follows :

1st Liberty Loan June 1917 index number 184 X2.0 billion = 368
2d Liberty Loan Nov . 1917 index number 182 X3.6 billion = 655

Liberty Loan May 1918 index number 191 X 4 . 1 billion = 783

4th Liberty Loan Oct. 1918 index number 204 X7.0 billion = 1428
5th Liberty Loan May 1919 index number 200 X5.3 billion = 1060
weighted average index number 195 x 22 billion = 4294




tween 1873 and 1896 business men and farmers in Amer
ica struggled to swim against the ebbing tide of prices.
Yet our burden of debt was negligible compared
with Europe's to -day, we were not as economically ex

hausted as Europe is, and the fall of prices was not so
great as that we are assuming .
Under these circumstances we may well ask : Is it
reasonable to expect Europe to drop her price levelback
to the old relation to ours or should it not be fixed at

some intermediate level?
If the latter course is to be adopted so that the old

relations between the various national price levels are
not to be resumed and the old pars of exchange not to
be reëstablished , the stabilization plan as proposed in
this book would afford the appropriate method for

n owe
lita any desired can natioFor
ins can
Winge rthe
of European gold Ccoins

maintaining a new set of levels.

ours, enable each European nation to adopt its own

price level at any desired point. If, on the other hand ,
we rehabilitate the old units , European price levels
must go through a painful fall relatively to ours .

As to individual debts, we long ago abandoned, as
impractical, the theory that a bankrupt must pay the
uttermost farthing or go to prison. If there ever was a
time when the modern theory of treating bankrupts
should be extended to nations it is now . In fact we
have already applied it to fixing the indemnity of Ger
many according to her ability to pay rather than ac
cording to the damage she did .

Similar considerations apply to the reconstruction
loanswe are making to Europe. If after loaning , in the
near future, billions of dollars to Europe we double the
purchasing power of the dollar, we are not only put
ting ourselves in the position of an unjust (and much to
be hated ) Shylock but the pound of flesh we would thus
exact of Europe would drain her life blood and weaken
her usefulness to us as a customer. The sound policy,

which we are now adopting, of giving Europe long and
easy credits should be carried out in fact as well as in

SEC. 41



name and this implies that we should not permit any

undue appreciation of our dollar.
For various reasons, therefore, in starting the new
and permanent level of prices, we cannot, very well, ad
vocate any drastic departure from the level at which we
happen to be when the start is ja
made. In short, we
ought not to start with a serious jar.

This does not mean that we must adopt the exact
level of the moment.
We must take care to do justice as between the then
existing debtors and creditors. To these particular

debtors and creditors this question of the start-off is

We cannot now say , of course, what the price level

will be when the new system shall begin . All that can
now be done toward deciding what the start-off should
then be, i.e. what par or particular price level is there

after to be maintained , is to point out the principles
which should guide us.
If the time of adoption of the plan should happen
to come after a long steep rise of prices, such as in 1919,
1873 , 1865, or 1814 , it is clear that the price level then

existing would be too high to afford a just and proper
starting point and that a somewhat lower level ought

to be selected to which we should deliberately descend .
Otherwise most outstanding debts would have to be

paid in terms of a dollar of less value than the dollar
contemplated when the debts were contracted , before
prices were so high .

On the other hand, if the time of adoption of the
plan should happen to come after a long steep fall of
prices, such as in 1896 , 1849, or 1821, the price level
then existing would be too low to afford a just and

proper starting point and a somewhat higher level ought
to be selected to which we should deliberately ascend.
Otherwise most outstanding debts would have to be
paid in terms of a dollar of greater value than that

contemplated when the debts were contracted , before
prices were so low .




But in such cases of a rapidly changing price level,
with existing contracts originating at many different

previous levels, it is impossible to select any one price
level well adapted to them all. If we are to apply a

single correction to them all, it must be an average.
We must cut our Gordian knots as we did when we
resumed specie payments after the Civil War and as

we always have to do in readjusting monetary stand
ards .

To strike such an average, the price level

selected should , I believe, extend back of the moment
when the system starts to the center of gravity, as it
were, of the outstanding contracts and understandings
now in existence which would be affected by the new law .
We can strike this proposed rough average of justice
by making a calculation as to the past duration of exist
ing contracts of different kinds. The contracts to pay

money are the important factors to be considered .


havemade a very rough estimate, largely a guess, of the

average duration of the existing indebtedness which
would be affected , — railroad bonds, mortgages, bank
loans, and other obligations, — which seems to indi

cate that it is one year, or in that neighborhood .
When the proper time comes, a judicial commission
to make a special intensive expert investigation of out
standing contracts might be created and the start-off
then fixed in the light of the facts found, and of common
sense .

If the average thus selected should effect substantial
justice — which implies that this recent average price
level is not far from the price level at the moment the

system is launched , nor far from the price level for any
other moment during the past year at least , — nothing

more need be done to secure justice on existing con

But if the case is otherwise — if, for instance, the
average price level as calculated should differ say by
more than 5 % or 10 % from that of any date within a
year previous to the launching of the new plan, we
might perhaps better give up the idea ofmaking a single

Sec. 5 )



average correction to apply to outstanding contracts.
Instead , special legislation “ scaling ” or adjusting
debts might be adopted , as was sometimes done in the
case of Colonial paper money . If this solution were
chosen the price level for the start-off need not be

changed at all from the level then existing.
Under any ordinary circumstances the price level
does not vary more than 5 % in a year.

Probably by

the time the plan could go into force the present, or
recent, troubled course of prices may be sufficiently
tranquilized as not to require any special legislation
for scaling debts nor to afford much discrepancy be
tween the then existing price level and the average price
level for a preceding period of severalmonths at least.
Such a debt-scaling law is, of course, not involved

in the proposal to stabilize the dollar. In fact, if debt
scaling is really needed after stabilization it is far more

needed without it and not once only but atmany times.
But once the Gordian knot is cut and the new price
level is steadily maintained , all elements still unadjusted

would gradually become adjusted — wages, salaries ,
rents, railway rates, etc. In the long run it will be
better to adjust these laggards to the price level than
to adjust the price level to them . Even labor discon
tent would , I believe, be more successfully combated
to -day by a rise of wages without a rise of the cost of

living than by the reverse adjustment.

5 . What Shall Be Done with Existing Gold Coins
The question is sometimes asked : How are existing
gold coins to be retired , as they are assumed to be in

Chapter IV ?

The answer is : by putting a premium

on the retirement of the coins or a penalty on their re

tention , or both. To retire the Philippine peso (and
replace it by another of less weight) a slight premium
was offered to holders of the old coin up to a specified

date, after which the coin was not to be received by
the government except at a discount.



(App. I

It may be worth mentioning that neither the retire
ment of existing gold coins nor the cessation of their
coinage in future need be insisted upon . By a slight

modification of the plan , we could permit gold coins
and coinage to continue.

In fact in the formulations

of the plan which I usually made before the war, gold
coins and coinage were retained . I then thought
that the custom of handling gold coins was so firmly
intrenched in some places, notably Great Britain , that

the plan would be more welcome if gold coins were

retained even if only as token coins.
Since then , the war itself has brought about the very
retirementwhich we are discussing and has conquered
most of the popular prejudice which stood in its way ;
and, from motives of economy, all nations, including

Great Britain , will probably now prefer not to return
to the general use of gold coins.

It has therefore seemed

best not to cumber the present text with the description 1
of what now proves, apparently, to be an unnecessary
complication .
There is, however , a third plan possible , intermedi
ate between the plan of the present text ( in which

gold coins are retired and their coinage ceases) and
the plan formerly put forward (in which both coins and

coinage are retained ).
This intermediate plan is to authorize the retention

of the existing gold coins but to stop the coinage of new
coins — though retaining , of course, the unrestricted

deposit of gold bullion in return for the issue of gold
dollar certificates .
This third plan would seem to me to be preferable

in practice to either of the other two as itwould dispense
with the need of recalling the few gold coins now out
side of government vaults and would not involve any
1 This will be found in the Quarterly Journal of Economics,
February , 1913, pp. 213 - 235 .

It is interesting to observe that Simon

Newcomb, one of the earliest writers who anticipated me in formu

lating the plan, also suggested this feature by which gold coin could
be retained . See North American Review , September, 1879 .

Sec. 6 ]



special difficulties no matter which way the value of
gold should change.

Thus if, at any time, the gold coins were worth more
than their contained bullion , they would continue to

circulate as token coins, each eagle of 258 grains en
titling the holder on demand to a ten -dollar certificate
or ten dollars of gold bullion (of more than 25. 8 grains

per dollar).
On the other hand if, at any time, they were worth
less as money than the contained bullion , they would
be melted by the owners, disappear as coin , and be de
posited with the government as bullion in return for
certificates. Any gold coin in the government vaults

would likewise be melted .
But the process would stop there, limited by the
amount of gold coin available . There would be no
“ endless chain ” of redemption of certificates at one
rate and recoinage at another such as would (as ex
plained in my article in the Quarterly Journal of Eco

nomics, February, 1913) have to be guarded against in
the second of the three plans.
In spite of the slight practical superiority of this
third method of handling existing coin , I have preferred
in Chapter IV to present the first method as simpler
to understand , and less confusing to the reader. With
so few coins as are now in circulation it is really almost

immaterial which of these two methods is adopted .
6 . What Shall Be Done Concerning the “ Gold
Clause " in Existing Contracts
One of the questions which will have to be faced
when stabilization is adopted is : What should be

done with the numerous bonds and other contracts
containing a “ gold clause " to the effect that the con
tract calls for payment in “ gold coin of the present
weight and fineness ” ?
This clause had its origin in the nineties when the

“ free coinage of silver at 16 to 1 ” was agitated .




(App. I

was intended to safeguard the creditor against pay
ment in silver dollars which, it was justly feared , would
be greatly depreciated in purchasing power, if the 16
to 1 proposal were adopted .

The statute enacting stabilization ought to include
a specific settlement of this gold - clause question .

Otherwise, it would be left for the courts to interpret,
and long and costly litigations would be sure to result .
Pending a decision by the Supreme Court the status
of all gold -clause contracts would be uncertain . In
attempting legally to resolve this uncertainty there
would be two widely different views possible. It might
plausibly be argued that in the gold clause, “ coin ”
was specified only for its convenience to handle , as
compared with bullion . According to this interpreta
tion gold -clause contracts ought, under stabilization ,
to be reckoned in terms of gold bullion , and when
the gold dollar became greater or less than 23. 22
grains of pure gold , contracts containing the gold
clause would still have to be measured in dollars of
bullion of 23 .22 grains each .

But, on the other hand, it might with almost equal
plausibility be argued that the word “ coin ” must be

taken literally and that the creditor had the right to
require the delivery of such coins or their equivalent.
If such were the interpretation and (as supposed in

Appendix I , § 5 ) gold coin were not retired but con
tinued in existence as token coins, i.e . at a value above

that of the contained bullion, the technical fulfillment
of the gold clause by the payment of these “ over


coins, or their equivalent, would coincide

with the use of stabilized dollars to which they would

be equivalent (as explained in Appendix I, § 5).
This interpretation , insisting on “ coins," would ,
however, encounter difficulties if gold coins were
abolished entirely (as suggested in the text) or if, though
not recalled by law , they were all melted into bullion

because the bullion in them had cometo be worth more
than their face value (as supposed in Appendix I , § 5 ).


SEC. 6 ]


All these technical controversies would be avoided if,
in the statute establishing a stable dollar, the gold
clause in existing contracts were abrogated entirely and
unambiguous requirements were substituted to meet the

new situation and carry out the real object of the gold
It should be pointed out that abrogation , though
beyond the power of our individual states under Article

I of our Federal Constitution , is apparently quite
within the power of the Federal Congress.

Having thus abrogated the gold clause in all con
tracts outstanding at the date of the stabilization law ,

Congress could replace that clause by whatever pro

vision it chose.
The provision which , on the whole , seems to me the

fairest from various standpoints is to make all such

contracts exactly like all others, i.e . payable in stabi
lized dollars.

That such a requirement would, even technically ,
reinstate the gold clause — under at least certain cir
cumstances (such as the retention of gold coin as “ token
coin ” ) — mightwell be argued , ashas just been shown.

But the only justification worth while for such a law
is that it would do justice and by doing justice we would ,

in a broad sense, be carrying out the intent of the gold

This clause was never intended to introduce

a hazard into contracts but to take one away, not to
enable one of the contracting parties to mulct the other
1 This power is , I understand , well recognized in a general way
although no case precisely like that here considered seems to be on
record . The nearest cases were,apparently, the famous legal tender
cases in reference to which the Supreme Court certified the right of
Congress to make United States notes legal tender for the payment
of debts contracted prior to the legislation . The legal tender act, it

is true, related only to contracts to pay money generally and not to
contracts to pay a specific kind of money such as “ gold coin of the

present weight and fineness. " But Justice Bradley ( 12 Wall. 457 ,
566 , 567) said : “ I do not understand the majority of the Court
to decide that an Act so drawn as to embrace in terms contracts
payable in specie would not be constitutional. Such a decision
would completely nullify the power claimed for the Govern
ment. ”



but to prevent it.



In a broad sense , therefore, the sub

stitution of stable dollars for “ gold coin of the present
weight and fineness ” would carry out the spirit if not

the letter of that clause under the new conditions.
Stabilization would supersede the gold clause as a more
perfect way of attaining the same general object —
contractual justice.
And not only would complaint over such substitution

be unjustified but it would rarely , if ever, be made or
thought of for the very simple reason that we would
go on in our habit of thinking in terms of dollars.

Under stabilization the debtor for $ 10 ,000 would
still expect to draw his check for exactly $ 10 ,000
and the creditor would expect to receive exactly
that sum . In 99 out of 100 cases the question of

whether , under the gold clause, the check ought per
haps to be drawn for a larger or smaller sum than
the face of the obligation would never enter the head

of either party .
On the other hand, if exceptional treatment were

given to contracts having the gold clause , so that these
were not to be fulfilled in stabilized dollars, there would
be great complaint. For then the only way to discharge
a gold - clause contract to pay $ 10 ,000 would be to pay
something more or less than $ 10 ,000 according as the

price of gold had risen or fallen . If, because of a raking
up of the gold clause, a debtor owing $ 10,000 is informed
by his creditor that he has to pay, say, $ 10,842 .79 the

$842.79 will obtrude itself like a sore thumb and seem
to the debtor, as it really would be, the exact measure
of an injustice.

On the other hand, if the discrepancy between the
stabilized dollar and “ gold coin of the present weight
and fineness ” were in the other direction and a debtor
tendered what he owed under a $ 10 ,000 debt subject

to the gold clause by offering to pay $ 9,500 (which we
shall suppose is the equivalent of ten thousand dollars
of 23.22 grains of pure gold each )- the creditor would
always feel, and justly , that he had been robbed of $500

SEC. 6 ]



by a wrong interpretation of a clause originally inserted
to safeguard him against just such injustice.
Moreover, if the gold clause were not thus assimi

lated to the new dollar great confusion would be in
troduced from

the double reckoning.

Probably the

most extreme instance would be that of the insurance
companies, the assets of which are invested largely in
gold -clause bonds but the liabilities of which to their

policy holders are payable in “ lawful money.”

If the

dollars used for measuring both assets and liabilities
are to be made different, these companies might be

come either bankrupt or greatly enriched as a conse

It seems clear, therefore, that the solution here offered
of the gold - clause problem is the justest , simplest , and
most smoothly working of the various solutions which
might be considered .

If, however, Congress should conclude that it was
necessary to provide further against the possibility of

any complaint, it could leave the contracting parties
some choice in the matter. That is , the Act to stabi
lize the dollar could serve notice that stabilized dollars
would be understood unless objections were raised by

either contracting party between the date of the Act
and the date on which the new system was to be put
into effect. For cases where such objection was actu
ally raised , the law could provide that the two parties

to the contract might come to an agreement and fur
ther that, in case of their failure to do so , the creditor
should have the right to choose, in advance, between the
stabilized dollar and a dollar of bullion of the present

weight and fineness. When this choice was made, it

could not, of course, be altered afterward, even if, as
would be quite possible, the creditor should find that
he had chosen against his own interests.
The result would undoubtedly be that even the few

contracting parties who would raise the question of the
gold clause would find an easy way to settle it, while
none of those who failed to raise the question could



(App. I

ever maintain that they had not been given a fair
chance, for they had at one time been virtually told
to speak then or else forever after hold their peace.
7 . Bank Credit and the Plan
A . Misconceptions. It should be pointed out that
the plan proposed in this book , by maintaining the
purchasing power of the gold dollar, necessarily main
tains also the purchasing power of all other dollars, so

long as these other dollars are kept interconvertible
with gold dollars.

This implies that due provision for redemption , in
gold , of paper money and bank deposits must be main

tained by suitable legislation or regulations, such as
are usually afforded by sound currency and banking
laws and practices. That is, the stabilization plan pre
supposes sound
banking though not any special form of

coasthe notisome
this connection
so InIn this
on ancurious
d not misconceptions have

sound banking.

arisen , such as thenotion that to stabilize the gold dollar

can apply only to gold and not to credit or can only
correct such instability as has its origin in gold and not
such as has its origin in credit, in commodities, or else

These views overlook the fact that all dollars

are interconvertible.
One friend of the plan fell into an opposite error in
that , instead of finding any limitations on the power
plan toin teffect
the plan
We could,that it would
of the
he nestability,
ed of anyhe assumed
dispense with the need of any restrictions whatever on
the inflation of paper or credit ! We could , he thought,

“ run the printing press " ad libitum and , for instance,
pay the cost of the Great War thereby, without suffer
ing the penalty of high prices !
Of course the process of stabilizing the dollar has
no such magic power to take the place of sound cur
rency and banking. If, with one hand , we were to
stabilize the gold dollar and, with the other, we were

to inflate paper or deposits , we should be pulling both


Sec. 7, B]

athe ifinfthe
ere ccontinued
hichd atneonce
the end,wwere


enough inflation would , in the end, exhaust and defeat
stabilization .

The inflation , tending to raise prices,

would necessitate an increase in the dollar's weight
which would involve a proportionate decrease in the
number of dollars in the reserve. The reserve would
also be depleted by the increased tendency to redeem

d and drivin dollars, tredency to
o All would ingolthe
heavier dollars, the certificates


placing the gold and driving it abroad .
All would go well and the price level and purchasing

power of the dollar be approximately maintained , so
long as redemption could also be maintained . But

if the inflation were persisted in far enough , the con
stant increase in the credit superstructure and decrease
in the gold base (i.e. in the number of dollars in it)

would ultimately break down redemption . Thereafter
the gold dollar would cease to exist as a factor in our

monetary system , leaving only irredeemable paper and
deposit dollars in actual use. After this breakdown
the paper and deposit dollars would depreciate.

B . The Effect of War on Bank Credit. During the
Great War, as in other great crises, the exigencies of

Government finance caused, in almost all countries , an
expansion of paper and credit almost regardless of the
effect on prices or on redemption . At such times the
pressure for inflation is almost, or quite, irresistible. The

paramount object is then financing the war rather than
1 This assumes the existence of the “ indefinite ” reserve system
(see Appendix I , § 1, G ) .
If the “ definite ” reserve system (see Appendix I, § 1 , B and F )
is maintained , inflation of certificates would be impossible ; for as

fast as the issue of certificates went on , their redundancy and back
flow would require their cancellation . Other forms of inflation , such
as deposit inflation , would , however, still be possible. These would
have the effect (through raising prices and weighting the dollar) of

decreasing both the gold reserve and the certificates in unison . The
result would be not to weaken the Government gold reserve as
against certificates, but to weaken all other, e.g. bank, reserves held
in these certificates.

The ultimate disaster, which would still over

take continued inflation, would then consist in a cleavage, not
between gold and certificates, but between these two and the other
forms of money and credit based on them .



(App. I

maintaining monetary standards, and any stabilization
plan might have to be temporarily suspended as one
of the emergency measures of war, just as the English

Bank Act is temporarily suspended during a crisis .
Stabilization could be maintained provided the war

could be financed without recourse to inflation, i.e .
could be paid for out of taxes and loans from savings.

Inflation , which is really a forced loan , puts the other
wise unpaid cost of the war on the shoulders of
those of “ fixed ” incomes, in the form of a high cost
of living.

In the future, we have reason to believe, no such

world crises are in store. But should they come, and
stabilization were suspended , we would , of course, be
no worse off than if there had been no stabilization .
(See also Appendix II , § 2 , D .)
C . Maintenance of Redemption . Thus stabiliza
tion , to be successful, implies the maintenance of re

demption . The typical or ideal, though by no means
the only efficient, type of a redemption -law is onewhich
keeps deposits and paper money more or less pro
portional to bank reserves (of gold bullion dollar cer
tificates) together with a Government reserve law (as

described in § 1)which keeps the volume of gold bullion
dollard certificates proportional
t tovethe volume of gold

s of theen rreserve.
eser . - euUnder such con
expan inor the
ditions all parts of the circulating medium tend to
expand or contract in unison and a change in weight
of the basic gold dollar carries with it a control of the

whole mechanism of exchange, cash , and credit.
Bank credit, paper , and the gold reserve (in dollars)
would then expand or contract asneeded by the require
ments of trade, etc.) to keep the price level constant.

D . The Role of Bank Discount. It would be going
somewhat outside the scope of stabilization plans to

discuss, in detail, the banking procedure for keeping
the credit superstructure more or less proportional to

the redemption base of gold or gold certificates.
Suffice it , in this connection , to call attention to one

Sec. 7, DD



factor in the case, the importance of which is seldom

guli ther
the rediscount.
t anyof bank
realizedd —- the

Under almost any sensible banking system the rate
of discount is one of the regulators of the volume of
credit relatively to reserve. If there is undue expan
sion of credit relatively to the reserve , the rate of dis
count is raised to curb it . If, on the other hand, there
is a plethora of reserve, the rate of discount is lowered
to stimulate an increase of credit. As the expansion
and contraction of credit are directly related to the price

level , the rate of bank discount is thus concerned very
vitally with the price level.

The greatest of banks, the Bank of England, is a
model in this respect. It alternately defends and

releases its gold reserve, which is the basic gold
reserve of England, by raising and lowering the bank
rate .

The report, after the Armistice, of the Lord Cunliffe
Committee on Currency, Banking and Foreign Exchange

shows clearly how the bank rate keeps the English price
level in tune with world price levels. Speaking of this

long-established system the report says :
“ When , apart from a foreign drain of gold , credit at home
threatened to becoine unduly expanded , the old currency system
tended to restrain the expansion and to prevent the consequent
rise in domestic prices which ultimately causes such a drain . The

expansion of credit, by forcing up prices, involves an increased
demand for legal tender currency both from the banks in order
to maintain their normal proportion of cash to liabilities and from
the general public for the payment of wages and for retail transac

tions. In this case also the demand for such currency fell upon the
reserve of the Bank of England , and the bank was thereupon
obliged to raise its rate of discount in order to prevent the fall in

the proportion of that reserve to its liabilities . The same chain
of consequences as we have just described followed and speculative

trade activity was similarly restrained . There was, therefore,
an automatic machinery by which the volume of purchasing power

in this country was continuously adjusted to world prices of com

modities in general. Domestic prices were automatically regulated
so as to prevent excessive import.” 1

1 Federal Reserve Bulletin , December, 1918 , p. 1178.



[App. I

Professor Knut Wicksell of Sweden has, for many
years, advocated a more extensive use of this regula
tive function of the rate of bank discount as a means

of preventing cycles of credit and prices. Mr. Paul
Warburg, formerly of the Federal Reserve Board , has
suggested that the index number of prices should be
one of the data scrutinized by the Federal Reserve

Board to help guide it in fixing the rate of discount.
Senator Shafroth proposed that the Federal Reserve

Board should fix discount rates in such a manner as

to regulate credit with the object of stabilizing the level
of prices.
This adjustment would not of itself, however , be
sufficient to keep the price level stable ; for while it
controls the credit superstructure, it does so only rela
tively to the metallic base and if this base is uncon

trolled relatively to the needs of business, the credit
superstructure being proportional to the base, that

credit superstructure is equally uncontrolled relatively
to the needs of business.
But, given both a stabilization of the base and any
sound banking system , that is , any system which makes
credit expand or contract with an expansion or con
traction of reserves, we can secure complete stabili

zation .
8 . International Aspects of the Plan

A . The Mint Price. It goes without saying that the

plan would have a wider usefulness if adopted by all
nations than if adopted by only one, or a few . But,
if at first its general adoption were not found feasible ,
the question remains : Would the plan work and work

well if adopted , say , by the United States alone ?
Many persons have imagined that a single nation

could not make the plan work, that the money prob
lem , being essentially an international one, requires

concerted action, that it is therefore imperative that
there should be “ the samemint price of gold " through

Sec. 8 , A ]



out the world , otherwise gold would flee entirely from
or to the nation which should alter the present “ uni

form " price.
We shall see that these ideas are mistaken .

In the

first place let us see clearly the “ fallacy of the mint
price.” Superficial reasoning, starting from the fact

that our mint price ($ 20 .67 an ounce of pure gold )
and England 's mint price ( £3. 17s. 10 d . for gold

1 fine) are now “ the same," concludes that, if our
price were lowered 1 % , i.e. to $ 20.46, while the English
price remained unchanged , all our gold would be sent to
England to takeadvantage of the “ higher " price there.

But $ 20.67 would then cease to be “ the same " as
£3. 17s. 10 d . and $ 20 .46 would become “ the same "
as £3. 17s. 10 d . ! The reason is that comparisonsbe
tween English and American prices are based on the
“ par of exchange ” and this par would change.


present the par is $ 4 .866 of American money for £1 of

English money ; but this par of exchange is based on
the relative weights of the dollar and the sovereign !
Consequently a change in the weight of the dollar
and the price of gold will change proportionally the par
of exchange.

If the dollar's weight is changed 1 % so

that the mint price becomes $ 20 .46 (instead of $ 20 .67),

the par of exchange will become $ 4 .82 (instead of
$ 4.86 ).
It is true that each increase in the weight of the

gold dollar in America — in other words, each fall in
the official American price of gold — would at first

tend to discourage the minting of gold in America.
The miner might send more of his gold to London ,
where the mint price had not changed , and “ realize "

by selling exchange on the London credit thus ob
tained . But the rate of exchange would soon be
affected through these very operations by which he

attempted to profit, and his profit would soon be
reduced to zero ; the export of gold to England would
increase the supply of bills of exchange in America

drawn on London and lower the rate of exchange




until there would be no longer any profit in sending
gold from the United States to England and selling
exchange against it . When this happened it would

be as profitable to sell gold to American mints at
$ 20 .46 per ounce as to ship it abroad ; and $ 20.46 in
America would be the exact equivalent, at the new par

of exchange ($ 4 .82), of the English mint price of
£3. 17s. 10d.
Consequently , although the new mint price of $ 20.46
is in figures lower than the old , yet, as it is in heavier

dollars, it would still be “ the same ” as the English

mint price of £3. 178. 10id .
It is clear that this sameness of mint price as be
tween the two countries really means nothing of
economic consequence, for the reason that all prices of

gold are in terms of gold . At bottom the basic fact

is simply that exchange is at par when an ounce of gold
in America will, in the exchange market, buy the
right to an ounce of gold in England.

This obvious fact is concealed , or “ camouflaged ,”
by measuring gold in America in terms of dollars, and

gold in England in terms of sovereigns ; but the
dollar and the sovereign are merely units of weight,

like the ounce , with definite ratios to the ounce and to
each other. Of course the price of gold in America
(in terms of itself) is “ the same " as the price of gold

in England (in terms of itself) when either is trans
lated into the other by means of the par of exchange
(or ratio between the two units ) .

This would be self-evident if the numbers were a
little simpler. Thus, if the dollar were exactly a

twentieth of an ounce of pure gold and the sovereign
exactly a quarter of an ounce, the mint price in America
would be $ 20 .00 an ounce and in England, £4 an
ounce ; and the par of exchange would be 2 , or $ 5

per £ . Naturally , then, £4 an ounce would be “ the
same ” price as $ 20 an ounce when we translate £ ' s
into dollars at $ 5 per £ , i.e. $ 20 = 5 X $ 4 , or 20 = 20 X 4 .

Such sameness of price would evidently still exist if the

Sec. 8, B ]



dollar were doubled , i.e. were made a tenth of an ounce.
The mint price in America would then be $ 10 per ounce

which (the par of exchange being

or $ 2 } per £ ) would

be “ the same ” as £4 an ounce ; for $ 10 = $ 24X4, or
10 = 120X4.
To turn from theory to experience, if those against
whom I am reasoning were correct, everybody would

now take his gold to the Mexican mint where he could
get twice as many dollars as he can get from the United
States mint! Obviously the fallacy lies in the fact

that Mexican dollars are half as heavy as ours.
B . Gold

Reserves and

Price Levels as Internation

ally Related. So much for the effect of our individual
action on the international exchanges.

The second

effect to be emphasized is the release of the United
States from the danger of alternate gold famines and
feasts. At present foreign countries may deluge us with
gold or drain it away. The only effectual stop to the
inflowing tide comes from the rise of our price level and

our only importantdefense against the continued ebb of
gold is from the fall of our prices.

Thus is our gold

reserve now at the mercy of Europe.

Their bank

ing and currency policies, over which we have no con
trol, their trade and tariffs, their wars, all affect our gold
supply. Thus the Great War, by dumping the gold of
thebelligerents on neutral countries (including, in 1915 –

1917 , the United States ), inflated prices in these neutral
countries and a reflux of gold may deflate them when
ever Europe deflates her currencies sufficiently .
The only methods used in the war to safeguard
against these floods and ebbs of gold were : (1 ) – as

against a flood — the action of Sweden , Holland , and
Spain virtually stopping the free coinage of gold and

(2) — as against an ebb — the “ embargo ” on the ex
port of gold adopted by many countries, including the

United States.
These were attempts at a partial control of a nation 's
gold supply by stopping the inflow of gold into the
nation 's circulation or its outflow therefrom .



(App. I

But the stabilization plan would afford a complete
control of the amount of gold , measured in dollars,
without forbidding or much affecting the inflow or
outflow of gold measured in ounces !
Had we had stabilization in 1915 we would have

been protected against gold inflation , from which we
have suffered so grievously. When the gold began to
flow in and prices to rise, our gold dollar would have

been enlarged . Also the number of gold dollars in
the country would have been kept from increasing ,

despite the increase in the physical amount of gold .
Finally the price level would be kept from rising.
Likewise we would have been defended against a
drain of gold and would have needed no embargo .

If gold began to leave us and prices to fall, gold dollars
would be lightened , their numbers would be thereby
kept from decreasing, despite the decrease in the physi
cal amount of gold , and the price levelkept from falling.
If, then , the United States should go it alone,"
wewould be emancipated from the present involuntary
“ entangling alliance ” of our currency with foreign
Implied in the last would be the emancipation of
our price level from its entangling alliance with foreign
price levels .

The price level of each country now

depends on that of those other countries which have
the same monetary standard . The “ High Cost of
Living,” one of the manifestations of inflation , com
municates itself from one country to another having
the same standard and no one country can avoid the

common contagion so long as it has the common un
stable unit .

In short , under our present system

our money,

credit , and price level are far more internationally en
tangled than they would be if we had stabilization .

So long as we let the gold standard drift we are help
less to protect ourselves from the effects of our neigh
bors' acts on that standard . The close of the war

makes us especially liable to the influence of changing

Sec. 8, C]




currency policies of Europe, policies as yet unknown
and unknowable.1
C . Exports and Imports . As to the effect on inter

national trade in commodities, these effects would be
complex and somewhat varied according to circum
stances, though not, probably, important in magnitude.

Suppose that the United States had a stable dollar and
other gold standard countries had not. Suppose further
that gold units tended throughout the world to depre
ciate and therefore thatwe were obliged successively to
increase the weight of the dollar, i.e. to decrease the

price of gold , and thereby to lower the rate of foreign
exchange as measured in American dollars.
Under these circumstances the price level in the

United States would remain stationary , the price levels
in other countries would rise , and the rates of exchange
between the United States and those countries would

change accordingly , e.g . exchange on London would

Normally , or in the long run , the change in the ex

change between two countries is proportional to the
divergence of their price levels .

Thus, let us assume

that prices in England gradually increase until they
have doubled while those of the United States remain
the same, and that the exchange on London falls
correspondingly from $ 4.86 to $ 2 .43 per pound sterling.
Under these assumptions imagine an American ex

porter who now finds that, while the American prices
with which he is concerned are about the same, the
English prices he can get for his goods are doubled .
He receives a bill of exchange for £200 where before
he received one for £100. But when he sells the £200
bill at $ 2 .43 per pound he receives the same $ 486 which

he used to get when he sold the £100 bill at $ 4.86 .
Evidently if the changes in price level and the
changes in the rate of exchange thus correspond to
each other, there is neither gain nor loss.

1 For further discussion see Appendix I,84.




So far as gains or losses do exist they are only dif
ferential and due to the failure of the price and ex
change movements to correspond as exactly as is

assumed above. That is , there is here, as always
where price movements occur, some lagging behind of

certain elements. These evils are evils of transition
and tend to disappear as the transition , i.e. the price

movement, disappears or the movement is reversed .
Whatever harm is done is due not to a changed 1
price level, but to a changing price level.
If, as seems to be usually the case, the rate of ex
change is adjusted more promptly than the price level,
the exchange will reach $ 2 .43 before the price level has

doubled and the exporter will receive less than £200
and, so , less than $ 486 .

In this case he would have

suffered somewhat from English inflation which, pre
sumably, he would not have suffered had there been
no stabilization and had American prices but kept

pace with English prices. On the other hand, if the
pound sterling should appreciate,the American exporter
would gain slightly.
Reversely, the American importer would gain a

little from stabilization when foreign price levels rose
and lose when they fell.

We see that stabilization in one gold standard coun
try alone would expose importers and exporters to the
chance of certain slight differential gains and losses,

one of the two classes always gaining from the malad
justment while the other is losing.

This evil of intro

ducing a new risk to importers and exporters is offset,
1 The common crude idea that a mere difference in the purchasing
power of monetary units of two countries will help exporters in the
country with the cheaper " money and hurt importers is , of course ,
absurd . If this idea were correct, there would be an enormous
stimulus to the flow of goods from Mexico to the United States and
check to the flow from the United States to Mexico because the
Mexican dollar is only half our dollar. Naturally that difference

between the dollars is fully taken into account. It is only when the
relation between the two is disturbed and before the new relation
has been fully taken into account that exporters and importers are
affected , even in a slight degree.

Sec. 8 , D ]



however, by the removal of the old risks connected with
their dealings within the United States.
Furthermore, since the war, there is no common gold
standard anyway ! Currencies are in chaos, both rela

tively and absolutely .

A stabilized dollar could well

be resorted to as a common denominator in foreign

trade, just as the old “ trade dollar ” was resorted to .
If international contracts were drawn in stabilized dol
lars we would be freed from

all the uncertainties of

roubles, marks, lire, francs, etc.

These uncertainties

would then fall only on the countries employing such

But even if foreign trade were somewhat disadvan

taged by stabilization,wemust
remember that usually

nine otenths
over nine
and udoubtless
a larger
tes so thtrade
at bean
f riofcaAmerican

fraction of American contracts are within the borders

of the United States so that, to the great bulk of
Americans, stabilization would be an unmixed blessing .
It is unfortunately true, however, that, to most
people , international trade looms up , out of its true

perspective, as a far bigger factor in a nation 's eco
nomic life than it ever really is. As every teacher
of economics knows, the average citizen , untutored in

economics, is a victim of the old mercantilistic fallacy

and still imagines that the old mercantilistic phrases
- “ favorable balance of trade ” and “ unfavorable
balance of trade " — which have been handed down to
us are to be taken literally . Often it is even assumed ,
absurd though it obviously is , that the only gain

which a country as a whole can get is in an excess of
exports over its imports and an accumulation of money .

This is not the place to consider such elementary
errors. Any textbook on economics exposes the
fallacy ; and the lessons of our recent experience with
an accumulation of gold should make it clear that an
accumulation of money in a country simply debases the

purchasing power of thatmoney.
D . Spreading the Gold Points . There would then
be no real international inconvenience introduced by



(App. I

the stabilization plan unless we count as an incon
venience the fact that the “ gold points ” of exchange

would , under certain conditions, be wedged a little
further apart (by the amount of the brassage) than at
present. Even this would not happen so long as con

ditions were such that in both of the countries gold
is flowing into circulation and not out (or, in both,
out and not in ) so that the price of gold within each
country remains continuously at the lower (or con

tinuously at the upper) of the two limits set by the

brassage and discussed, in another connection, in
§ 2 above.

Under these conditions, a periodical shift in the
official prices of gold would not widen the gap between
the gold shipping points ; it would merely raise or
lower them both in unison . Nor would the re
versal of the golden stream from an inflow into circu

lation to an outflow from circulation widen that gap ,
provided the reversal took place simultaneously in
both countries. Only when it happened that gold

would flow into circulation in (say) the United States
and out of circulation in (say ) England , would the
gold shipping points between the two countries be
spread apartby the amount of the brassage.
By proper international arrangements as to ex
change, even this occasional result could be avoided .
The international exchange could be itself stabilized at

Government expense as has been done during the war.

E . The Adoption of the Plan Would Spread. Thus, on
the merits of the question , there is little or nothing to
be said against stabilization by one country alone ,
while its advantage to the country adopting it would

be very great indeed . In this connection I may call
attention to a recent dispatch from London which
says : “ English capitalists are certain that the country
which first succeeds in reorganizing its currency will be

able to obtain a large share of international business."
Sooner or later the perception of the advantages of

stabilization would probably lead to the general adop

Sec. 8, E]



tion of the stabilization principle . This might come
about either at once by concerted action or gradually
by individual action .
With a league of nations, joint action in such
matters will be far easier than ever before ; and we
must not forget that there was joint action once in
the case of the “ Latin Union ” which maintained

bimetallism . In this case France, Belgium , Switzer
land , Greece, and Italy joined in a uniform standard of

currency based on gold and silver.

The present exi

gency will create a powerful motive toward some such
action .

The war has upset the monetary standards of the
whole world and has brought forward the questions

of resumption, deflation, high cost of living, and price
movements generally . All of these are related to the
more fundamental question of a standard of value, of

which that of stabilization is an unescapable part.
Monetary standards already constitute an inter

national question because, under our present system ,
any disturbance in the price level in one country
necessarily affects the price levels of the rest.

If the stabilization plan were adopted internation
ally , there should , of course, be a common index num
ber . This would not sacrifice greatly the accuracy of
adjustment for any one nation ; for we have already
seen that the index numbers of different countries

having the same monetary standards are very similar
and we know that, with the future development of

international trade, there will come about an even

closer harmony of price movements.
In case joint action could not be secured at the
outset, individual action by one country , especially if

that country were the United States, would , almost
certainly, lead to the general adoption of the plan .

Objectors point out that this was not true of bi
metallism .

Their argument is that if an agreement on

international bimetallism could not be secured we
cannot hope to secure anything so ambitious as an





(App. I

international standardization of monetary units and

that, therefore, we need not trouble ourselves about
attempting the impossible .

But, as one will see

by reading H . B . Russell's book on " International
Monetary Conferences,” when the proposal to re
sumebimetallism was made there was a special obstacle

which would not exist in the case of the stabilization
plan .
This obstacle was the realization , based on the ex

perience of the Latin Union , that when any nation or

nations have bimetallism in successful operation , all
the other nations enjoy its benefits as much as if they

had it themselves but without the trouble or responsi
bility of operating it . For instance, the Latin Union

had, as an intermediary between the gold standard
countries and the silver standard countries, virtually
held together the rupee and the pound sterling in a
fixed ratio to the great benefit of England without
effort on her part. Under such conditions, for a long

time after bimetallism broke down in 1873, almost
every nation wanted some other nation to restore it

but wanted , if possible, to avoid doing so for itself !
In modern slang each would “ let George do it.”
In the case of the standardized dollar, on the other
hand, if one nation should break the inertia of custom
and adopt theplan , and if it were soon seen that this na
tion was getting benefits from it while all the other na

tions lacked these benefits and, in fact, were being some
what injured by the upset in their exchange pars, these

other nations would soon want to come in , as the only
way to escape the evils and secure the benefits. The
case would be analogous, not to the reluctant atti

tude toward international bimetallism , but to the
“ scramble ” of nations to get on to the gold standard .
After the breakdown of bimetallism in 1873 commer

cial nations turned , one after another , to the gold

standard in order to secure the advantage of a stable
rate of exchange on London and other important
commercial centers.

SEC. 9, A ]



9. Numerical Illustrations under Various Assumptions
A . The Standard Hypothetical Case. A mental pic
ture of the actual operation of the stabilizing process
can best be obtained from illustrative numerical ex
amples, such as are considered in this section .

There are five factors determining the stabilization
process : the “ brassage " charge, which serves as the
limit on any single adjustment of the dollar' s weight,

the amount of “ adjustment ” of the dollar's weight
for a given deviation from par of the index number,
the amount of the “ influence ” which said adjustment

has on the index number, the “ lag ” of time elapsing
between the adjustment and completion of its in

fluence, and the prior “ tendency ” of the price level
to rise or fall, were it not combated by the stabiliza
tion process.

Our first example will be called the “ standard
hypothetical case ." In later sections the several con
ditions will be separately varied from those of this
standard case.

The standard hypothetical case assumes the five fac
tors to be as follows :

( 1) Brassage charge : 1 % .
(2 ) Adjustment rule : 1 % for each 1 % of deviation

from par of the index number (no one adjustment to
exceed the brassage).
( 3 ) Influence thereof on index number : 1 % for
each 1 % of adjustment.
(4 ) Lag of said influence following the adjustment

causing it : 1 adjustment interval.1
(5 ) Tendency of price level : were it not for stabiliza

tion the price level would at first increase 1 % each in
terval; afterward, it would decrease 1 % each interval.
The fifth assumption implies that, were it not for

stabilization , the index number would be :
1 Wemay , to fix our ideas, consider this interval between succes
sive adjustment dates to be two months. But its absolute length
affects neither the argument nor the calculations.




At beginning of the 1st interval 100 .

At the beginning of the 2d interval 1 % above 100
or 101.

At the beginning of the 3d interval 1 % above 101
or 102.01.

At the beginning of the 4th interval 1 % above 102.01
or 103.0301

At the beginning of the 5th interval 1 % above
103.0301 or 104.060401.

Etc., increasing as by compound interest .

Not to put too fine a point on these figures , we may
omit decimals and use the figures 100 , 101, 102, 103,

104, etc., until the “ compounding ” produces an appre
ciable effect. When, for instance, the index number
is in theneighborhood of 150 the 1 % increase will make
the next index number greater by about 1 } ; and when

it is in the neighborhood of 200, the 1 % increase will
make a difference of about 2. Thus, if we assume that
(were it not for stabilization ) the course of prices

would rise 1 % each adjustment interval from 100 to
200 and then fall, the index numbers would run approxi
mately as follows: 100, 101, 102, 103, 104 , . . . 150 ,
1511, 153, . . . 198 , 200, 198, 196 , . . . 150, 1481,

Under the fifth assumption , we may distinguish
four types of price movements — the four which
could take place in actual experience, - a rise, a fall, a
reverse after an upward movement, a reverse after a
downward movement.

Weare now ready to calculate 1 what, under the five

assumptions formulated , the stabilized course of the
index number will be.

At the start, the index number being 100 or par, no
adjustment in the dollar's weight will be made. Con
1 In all the calculations of this section it is assumed that either
the mint price rules the market all the time or the redemption price
rules it all the time. If, or when , themarket price shifts between the
two , in the manner discussed in Appendix I, 82 , the results would be
slightly different, as can readily be calculated .

Sec. 9 , A )



sequently , during the ensuing or first interval, the
index number will be subject only to the assumed

tendency to rise 1 % , so that, at the beginning of the
next adjustment interval, it will be 101, just as though

no system of stabilization existed .
At this adjustment date, therefore, there is a devia

tion from par of the index number of + 1 % . This
leads (by assumption 2 ) to an adjustment of the
dollar's weight of 1 % .
The influence of this adjustment will (by assump
tion 4 ) be felt during the ensuing interval and be regis
tered at its close. That influence is (by assumption 3 )
1 % . If there were no other force, therefore, than this

par -ward influence, the index number would then re
turn to 100 , or par.
But there is another force ; namely, the tendency of
the index number to rise 1 % during this (second)

interval. This force restrains the index number from
returning to par and keeps it at 101. In short, the
downward and upward forces neutralize each other so

that the index number remains unchanged at 101.
Summarizing thus far, we may schedule the events
as follows :

At beginning of 1st interval: index number 100 ; no
adjustment of dollar's weight.

During 1st interval: no influence from adjustment,
but only unhindered tendency of index number to rise ,

+ 1% .
At beginning of 2d interval: index number , 101 ; ad
justment of dollar's weight, + 1 % .
During 2d interval: influence of aforesaid adjust
ment on index number , - 1 % , neutralizing tendency
of index number to rise, + 1 % , leaving, –

At beginning of 3d interval: index number un
changed at 101.

But the deviation from par being still + 1 % , the ad
justment in weight at the adjustment date now reached
(the beginning of the 3d interval) is again + 1 % , which
will again strive to bring down to par the index number




during the 3d interval by 1 % , and again be foiled by
the 1 % rising tendency.
The same reasoning gives precisely the same result
for each subsequent adjustment interval, as long as the
1 % upward tendency continues.

That is, in each case , the new index number is the
last index number (101) minus the 1 % influence toward
par, due to adjusting the dollar's weight, plus the 1 %

tendency to rise.
Thus, at each successive milestone, the formula for
finding the new index number in terms of the old is

101 - 1 + 1 = 101, as long as the 1 % upward tendency
exists .

The sequence is :
Influence of

Tendency OF


Beginning of 1st interval
During 1st interval


Beginning of 2d interval


+ 1%

- 1%

During 2d interval

+ 1%


Beginning of 3d interval

+ 1%

During 3d interval
Etc., repeating .

1 This column also shows (by subtracting 100 ) the deviation

from par and the adjustment of the dollar's weight, which is equal
thereto .

When the downward tendency begins, the price level
in the first adjustment interval will fall from 101 to 99.
The reason is that, during this interval, the 1 % in

fluence exerted by the adjustment in the weight of the
dollar is reënforced by the assumed tendency to fall 1 % .

That is, the index number after the first interval of fall
will be 101 - 1 - 1 = 99.

The index number, 99, is now 1 % below par, i.e . the

deviation is now

- 1 % . The dollar will, therefore,

Sec. 9, A]



be reduced in weight 1 % . The influence of this adjust
mentwill now be 1 % upward , counteracted , however,by
the 1 % tendency to fall, still assumed to exist.

That is,

the next index number will be 99 plus the 1 % influence
less the 1 % tendency, or 99 + 1 - 1 = 99 ; and it will,

thereafter, remain 99 as long as the tendency to fall
uph th to Dfixomeour wideas,tuzthat
at the reversal from

an ich een

nt ing


an upward to a downward movement occurs at thepoint
at which the index number would have reached 200

had there been no stabilization , the index numbers in
successive adjustment intervals are given (omitting

decimals ) in the following table as they would be,
both without and with stabilization .


+ 1 = ) 101
(101 - 1 + 1 = ) 101
(101 – 1 + 1 = ) 101
+ + + +



( 101 - 1 + 1 = ) 101


(101 – 1 + 1 = ) 101


(101 - 1 + 1 = ) 101
(101 – 1 + 1 = ) 101


( 101 –

+ + + +


(101 - 1 + 1 = ) 101
(101 - 1

(101 – 1 – 1 = ) 99
(99 + 1 – 1 = ) 99


(99 + 1 - 1 = ) 99






etc .

From the standard hypothetical case, just calcu

lated, experimental departures will be made in order
to determine what set of rules will serve best in
controlling price movements, as they are actually
experienced .



(App. 1

B . Changing the Assumption as to the “ Lag."

(a ) Assumptions same as in standard case except: lag
changed from 1 to 2 adjustment intervals .

The index number , being uninfluenced by stabili
zation , will follow the assumed tendency for two adjust
ment intervals, and run : 100, 101, 102.

That is, at the start, or beginning of the first in
terval, there is no deviation from par and so no adjust

ment in weight ; at the beginning of the second interval
there is an adjustment in weight of + 1 % ; but, as the
lag between this adjustment and its influence on the
index.number is now assumed to be two adjustment
periods, the following index number is unaffected and
remains 102.

The par-ward influence (assumed as 1 % ) of the 1 %
adjustmentmade at the beginning of the second interval
will, under our present assumptions, be felt during the

third interval. During that interval this par-ward
influence will strive to bring the index number down 1 %

from 102. But the assumed upward tendency of 1 %
keeps the index number at 102. At the beginning of
the third interval, the 2 % deviation would cause

a 2 % increase in the weight of the dollar, were it
not for the brassage charge limiting any one increase
in the dollar's weight to 1 % , which will therefore
be the increase effected . This 1 % increase in the

dollar's weight, made at the beginning of the third
adjustment interval, influences the index number dur
ing the fourth interval to pull it downward ; but the
upward tendency will keep it still at 102. Thus the
formula will be : 102 (the index number at any
adjustment date) - 1 (the influence of the adjustment

at the preceding date) + 1 (the tendency to increase)
= 102 .

The following table shows the results :
1 Since the lag is beyond our regulation , while the adjustment
interval is what we make it, the lengthening of the lag in terms of
adjustment intervals really means, in practice, the shortening of the

adjustment interval in terms of the lag.

Sec. 9, B ]


Beginning 1st interval

Influence of

Tendency , IF

+ 1

During 1st interval
Beginning 2d interval


During 2d interval
Beginning 3d interval .


+ 1
+ 1

During 3d interval

Beginning 4th interval
During 4th interval





+ 1

Etc., repeating .
1 This column also shows (by subtracting 100 ) the deviation from
par and the adjustment of the dollar' s weight (except as this is
limited to 1 % by the brassage).

Upon reversal of the assumed price tendency the

stabilized index number falls to, and remains slightly
below , par.
(6 ) Assumptions same as in standard case except:
lag changed to 3 adjustment intervals.
Following the samereasoning as under “ a ,” we find

the index number rising to 103, and then remaining at
103, the influence, thereafter, of the 1 % adjustment

being exactly neutralized so long as the 1 % tendency to
rise continues.

(c) Conclusion as to lag.
In the preceding examples the stabilization process
is very simply and effectively applied , the restrain
ing influence sooner or later (depending on the ratio
between the lag and the adjustment interval) taking

effect and thereafter, while unable to restore the index
number to par on account of the steady upward (or
downward ) tendency , keeping the index number con

stant at a point slightly above (or below ) par.
We see that the greater the lag in proportion to the ad
justment interval, the greater is the range of the index
number from par. Yet, even if the lag is many times the

adjustment interval, the index number keeps near par.




Thus, if the adjustment interval is two months and
it is assumed that the effect of any adjustment were
not felt until six times that interval, or a whole year,
the index number would at most deviate only 6 % ,
assuming the other conditions unchanged from the
standard case.
As a matter of fact the lag is not great.
Our experience during the war and other evidence
mentioned elsewhere (Chapter II, § 8 and Appendix I ,

§ 3 ) show that the influence of inflation or contraction

is apparently rather prompt, the lag being probably less
than two months, and possibly less than one month for
an index number composed of the most responsive

It is desirable that our adjustment intervals should
not be too short compared with the lag,say not shorter
than a quarter of the lag.

On the other hand , the adjustment interval might
be taken longer than the lag .

For such a case the

calculations and results would be the same as where
the lag is one entire period . The influence of the ad
justment would then be complete some time before the
following adjustment date arrived ; but since no index
number is calculated during the interval, our calcu

lations would not be affected .
Ideally, i.e. to secure the greatest attainable degree
of closeness to par, the adjustment interval should be

as nearly equal to the lag as possible.

If the interval

is shorter than the lag the influence is not felt fully

until another adjustment, perhaps in the opposite direc
tion , is made. A daily adjustment would therefore
not help but hurt the closeness of the approximation .
If the interval is longer than the lag, the price level
is left for the balance of the interval to vary uncor

rected . We would be neglecting the opportunity to
correct it promptly .

C . Changing the Assumption as to the “ Tendency .”
(a ) Assumptions sameas in standard case except: tend
ency increased from 1 % to 2 % per adjustment interval.

Sec. 9 , D ]



Although the assumption hitherto made (of a 1 %
change in price level during every adjustment interval)

implies a very rapid change (if the adjustment interval
is two months), we shall now assume a movement twice
as rapid .

In this case, the index number will be 102 at the
end of the first adjustment interval. This deviation
calls for an increase of 2 % in the dollar's weight, but
the brassage charge limits this increase to 1 % . Hence,
at the end of the second interval the index number is

acted upon by two forces, the restraining influence
( from the increased weight of the dollar) of - 1 % and
the tendency to a further increase of + 2 % . The net
result is + 1 % ; that is, the index number becomes 103.
At the next adjustment period a similar conflict be

tween a 1 % decrease and a 2 % increase causes the
index number to become 104, and this process con

In short, instead of increasing by 2 %


adjustment interval, the index number increases by 1 % .

The stabilization process, under these circumstances,
cannot altogether control the price tendency, as long as
this continues upward , but can decrease it by half. On
the reverse movement, after passing par, themovement

below par is similarly retarded by stabilization .

If, however , the brassage limitation permitted a
larger adjustment, the restraint would, of course, be
more effective. We shall see this clearly after the

effects of different amounts of brassage are shown.
(6) Conclusion as to tendency .
We conclude that the greater the tendency of the index

number to vary , the further the index number will de
viate from par beforebeing arrested — especially if the
tendency exceeds the brassage — but that, unless the
tendency to change is very great or long continued or
both , the index number will still stay close to par.

D . Changing the Assumption as to the “ Brassage."

(a ) Assumptions same as in standard case except:
brassage changed from 1 % to 2 % .
The results are exactly the same as in the standard




case. The higher brassage makes no difference be
cause it was already high enough not to limit the adjust
ment, the tendency and lag also being as assumed .
(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 % .
Under these conditions, the restraining influence
exactly neutralizes the tendency and the index number

is stabilized at 102 (during the upward tendency ) and
at 98 (during the downward tendency) .
(c ) Assumptions same as in standard case except:
brassage changed from 1 % to 2 % and also : lag changed
from 1 to 3 adjustment intervals .
In this case, the stabilization process results, while
the price tendency is upward , in a movement of the

index number between 1 % below par and 5 % above
par. At reversal, the index number at first drops as
low as 93 , but recovers and (during the downward

tendency ) fluctuates between 1 % above par and 5 %
below par.

(d ) Conclusion as to brassage.
We conclude that, in general, the greater the bras

sage the greater the freedom of the index number to
vary .

It is freer to approach toward par ; but it is

also freer to depart from par, if the lag is very great,

i.e. if the adjustment interval is made a very small
fraction of the lag .

Practically , the brassage should be between , say , 1 %

and 3 % . Within such limits it makes remarkably
little difference to the result whether the exact figure
is near one extreme or the other and any figure within

these limits is adequate to secure a close approxi
mation of the index number to par except under most

extraordinary conditions such as those existing in a
World War.
E . Changing the Assumption as to the “ Adjustment."
(a ) Assumptions same as in standard case except:
adjustment changed from 1 % to 2 % (per 1 % deviation ) .

The results are exactly the same as in the standard



Sec. 9, E ]

case . The larger adjustment would make no differ
ence because the brassage limitation would prevent it
from taking effect.

(6) Assumptions same as in standard case except :
adjustment changed from 1 % to 2 % and also : brassage
changed from 1 % to 2 % or above .
A deviation above par of 1 % would then call forth a
2 % increase in the weight of the dollar. The influence
of this 2 % adjustment would be to decrease the index
number by 2 % , which influence, however, would be
partly neutralized by the assumed upward tendency of
1 % . The net result would be a fall of 1 % which would

bring the index number back to 100 at the next ad
justment date. This would call for no adjustment in
thenext period , and the index number,being acted upon

only by the upward tendency ,would become 101. Thus
it would continue to alternate between 100 and 101.
(c) Assumptions same as in standard case except :

adjustment changed from 1 % to 1 % .
We find the following results :

Beginning 1st interval .




During 1st interval .





Beginning 4th interval
During 4th interval .



2d interval .
interval . .
3d interval .
interval . .


During 2d
During 3d


Beginning 5th interval
During 5th interval .


Etc .

i This column also shows (by subtracting 100 ) the deviation from

par and (by subtracting 100 and dividing by 2 ) the adjustment of
the dollar's weight. The latter is also always equal, numerically ,

to its influence , given in the second column .

The index number increases but never reaches 102.
( d) Conclusion as to adjustment.
We conclude that the nearer the adjustment is to




the deviation the better stabilization will work — al

ways assuming, of course , that the influence of the
adjustment is as in the standard case.

F . Changing the Assumption as to “ Influence.”
(a ) Assumptions same as in standard case except :
influence decreased from 1 % to 1 % (per 1 % of adjust

We have hitherto assumed that an adjustment of 1 %
in the dollar's weight would influence its purchasing

power 1 % . But this need not be assumed and would
not be strictly true in practice, especially if the num

ber of dollars, both of money in circulation and of
deposits subject to check , were not kept strictly

proportioned to the number of gold dollars in the
reserve (as by the method described in Appendix I,
$ 1 and $ 7 ).

The calculations, in the present case, are very sim
ilar to those of “ E (6 ) ” above.
Calling the original price level 100 % , the index
number at the end of the first adjustment period will
be 101 % .

The dollar will now be increased by 1 %

which, according to our present supposition , would
tend to lower the price level only half as much , i.e. 1 % .
As, during the second interval, the price level tends
to go up 1 % the new index number will be 101 - 1 + 1
or 1011. The excess of 11 % above par will now call

for a corresponding increase in the dollar's weight ;
but the brassage limitation holds it to 1 % .
Accordingly, the next adjustment date will see an
increase in the dollar' s weight of 1 % and the price level
will be 1011 - 1 + 1 or 102. The next increase in the

dollar's weight will be again limited to 1 % and the in
dex number will be 102 - 1 + 1 or 1021, and so on .

Evidently , as the brassage is 1 % the power of the
system to stabilize will be limited to 1 % per adjust
ment interval.

(6 ) Assumptions same as in standard case except :
influence changed from 1 % to 1 % and also : brassage

changed from 1 % to 2 % or more.

Sec. 9, F]



The results are, evidently :


Beginning 3d interval .




During 1st interval . .
Beginning 2d interval .
During 2d interval .



Beginning 1st interval .


During 3d interval . .


Beginning 4th interval .
During 4th interval . .



1 This column also shows (by subtracting 100 ) the deviation from

par and the adjustment of the dollar's weight,which is equal thereto.

The stabilization now keeps the index number within

2 % of par, the figures being identical with those of
“ E (c) ” above, although the conditions as to the
adjustment and its influence are different.
(c) Assumptions same as in standard case except :

influence changed from 1 % to 2 % .
The index number will alternate between 100 and
101 as follows:

Beginning 1st interval .
During 1st interval . .
Beginning 2d interval .




+ 1

+ 1

During 2d interval .

Beginning 3d interval .


During 3d interval .


+ 1

1 This column also shows (by subtracting 100 ) the deviation and
(by subtracting 100 and multiplying by 2 ) the adjustment.

(d ) Conclusions as to influence.

We conclude that the adjustment of the dollar may
be greater or less than the influence it has on the index



[APP . I

number without greatly lessening the efficiency of
stabilization .
G . General Conclusions on Variations from the As
sumptions of the Standard Case . We have seen that
the stabilization device is such as to adapt itself, in

a remarkable degree, to widely varying conditions.

The brassage charge may be anything from , say, 1 %
to 3 % without greatly affecting the results and also
(under any ordinary conditions) without impairing

greatly the efficiency of stabilization .
The adjustment of the dollar's weight may be any

thing from , say, 1 % to 2 % per 1 % of deviation without
very greatly impairing the efficiency of stabilization , —
at least under reasonable assumptions as to the other
factors influence, tendency, lag, and brassage ).

The influence of the adjustment on the index number
may be anything from , say, 1 % to 2 % per 1 % of adjust

ment without greatly affecting the results, — at least
under reasonable assumptions as to the other factors.

The lag may vary widely relatively to the adjustment

interval. Practically this means that the frequency
of adjustment may (other things equal) be anything
from , say, a quarter of the lag to many times the lag
without greatly restricting stabilization.
The tendency of prices to rise or fall may be perma
nently rapid and temporarily very rapid without often

pulling the index number more than 1 or 2 %


par, — assuming the other factors which


stabilization (brassage, adjustment, influence , lag) to
be as in the standard case. And no matter how

great the tendency of prices to vary , almost all of this
tendency can be eliminated if those other factors are
adapted to the situation .

Practically , the problem is to secure the most ideal
adaptation of these other four factors to the tendency
as it exists.
The tendency (barring extraordinary times such as

those of the Great War) has seldom averaged for long
more than 4 % per annum , which is more than the

Sec. 9, G ]



average rate in the long, and almost unprecedentedly
rapid, peace-timemovement from 1896 to 1915 .

In any one year the movement seldom reaches 12 %
or an average of 1 % per month . In the whole pre-war
period , 1890 – 1915 , of 25 years for which we have figures

of the United States Bureau of Labor Statistics this
happened only twice, the figures then being 13 % and
14 % .

We have monthly figures beginning only with 1900 .
From these we find that, beginning with January, 1900 ,
and taking every other month up to the end of 1915 ,
the successive jumps of the index number by bi

monthly intervals were not over 1 % in two cases out
of three, were not over 2 % in nine cases out of ten ,
and were not over 3 % in 31 cases out of 32.
Our problem , as already stated , is how best to deal

with such a tendency by selecting, as ideally as is open
to us, the other four factors.

First consider the ideal brassage. This is scarcely
capable of exact formulation . Evidently 3 % would

permit a full adjustment in almost all cases. But, as
the calculations in “ H ” below will show , even a 1 %
brassage will be adequate for all practical purposes and

other calculations which I have made show that there
is remarkably little difference in the results between
1 % , 2 % , 3 % , and 4 % brassages .
To fix a figure, let us call the ideal brassage 11 % .

The ideal adjustment is, evidently , that which will
tend exactly to correct the deviation on which it is
based , thus bringing the index number back to par

(except as further deviated by further tendency, and
this of course is apt to be in either direction ).

This ideal adjustment depends on what influence
that adjustment has on the index number .

If the in

fluence is less than in the standard case the adjustment

might advantageously be greater and vice versa . For
instance, if the adjustment is 2 % per 1 % of deviation ,
this will just correct the deviation when the influence

of that adjustment is 1 % per 1 % of adjustment. For



(App. I

an influence of 1 % per 1 % of adjustment (i.e. of 1 %
per 2 % of adjustment) makes an influence of 1 % per

1 % of deviation , which is the ideal.
As a matter of fact the conditions as to adjustment

and influence assumed in the standard case are, doubt
less , approximately true to life. At any rate if the

“ definite ” reserve system (described in Appendix
I, § 1, B , F ) and the method of regulating the
volume of bank credit (favored in Appendix I, $ 7) are
adopted so that the entire volume of circulating media

is controlled as a whole in direct proportion to the per
centage change of the dollar, a 1 % adjustment in the
weight of the dollar would have a 1 % influence .

Even to employ the “ indefinite ” reserve system

would , as we have seen in Appendix I, § 1, D , not greatly
change the situation , unless or until a very large part
of the world adopted that system . In that case there

would be someadvantage in increasing the adjustment
to 13 % per 1 % of deviation or even to 2 % , the exact
ideal figure depending on the results of an investiga
tion of the repercussive effect of adjusting the weight

of the dollar on the value of a given weight of gold .
We comenext to the ideal lag relatively to the adjust
ment interval ; or, to express it in more practical terms,

the ideal length of the adjustment interval relatively
to the lag, or the ideal frequency of adjustment.
As we have seen , the ideal frequency is not the
greatest possible frequency , but is such a frequency as

will make the interval equal to the lag.
The lag for Dun 's index number is probably about
1 } months.

The lag for the index number of respon

sive commodities described in Appendix I, § 3, is prob
ably less than 1 month . The ideal frequency is
therefore probably

somewhere between a fortnight

and a month and a half. In the calculations of “ H ”

below it is conservatively taken as two months.
1 A study of this sort has been made by Professor J. M . Clark
in his able paper “ Possible Complications of the Compensated

Dollar," American Economic Review , September, 1913 , pp . 576 - 588 .


Sec. 9 , H ]


The influence being as indicated , the adjustment

should evidently be 1 % per 1 % deviation .
It will be seen then , that ( 1) the tendency is beyond
our control ; ( 2 ) the lag measured in months is under
control only to a small extent as we may choose the

index number but,measured relatively to the adjustment
period , is fully under control; and (3 ) the influence
may be assumed to be 1 % per 1 % of adjustment, pro
vided we have a proper reserve system for the certifi
cates and a proper banking system for deposits (as ex
plained in Appendix I, § 7 ) .
Practically , therefore, these three factors influence,

absolute lag, and tendency ) must be taken as we find
them and we can merely choose the best brassage, ad

justment, and frequency of adjustment.
These we find to be, in round numbers, substantially
those of the standard case.
In the following subsection we shall see what the

results would be as applied to the historical facts since
1900 , taking the brassage as 1 % and the frequency of
adjustment as bi-monthly , both somewhat more con
servatively than the ideal.

H . The Stabilization Process Applied to the Actual
Course of Prices.

( a ) The assumptions suitable for practical conditions.
We pass now from the highly theoretical calcula
tions just given to the practical question of how close
to par the actual index number would keep under

t probably
stabilization . The best answer
be reached
er frosort
cs dapplying
ulations as those
attoe othe
f thactual
price movements experienced since ,
say, 1900 , the year from which the monthly index
number of the United States Bureau of Labor Statis
tics dates.

We shall assume, as the best adjustment period ,

two months.

This, as has been observed, is more than

the length of probable lag between any adjustment
and its influence on the price level, as explained in

Appendix I, 83.

To be still more conservative, how



(App. I

ever, we shall assume that only two thirds of the in
fluence from the adjustment is felt within the first

adjustment period of two months and that the remain
ing third is felt in the ensuing period .
We shall assume the brassage to be 1 % .


11 % or possibly 2 % would be better, but the above
examples and various other calculations applied to
the actual price tendencies in the period mentioned
show substantially the same degree of closeness to

par under brassage charges varying from 1 % to over
4 % .

We shall assume that (except where limited by the
brassage) the adjustment of the dollar's weight is 1 %
for every 1 % deviation from par of the index number,
and that the influence of this on the index number is

1 % for each 1 % adjustment.
These assumptionsmay be put in the following form :
( 1 ) Brassage : 1 % .
(2 ) Adjustment: 1 % for each 1 % of deviation from
par of the index number (subject to the condition that
no one adjustment shall exceed 1 % , the amount of the

(3 ) Influence: 1 % for each 1 % of adjustment in
weight of the dollar.

(7 ) Lag : ſ of this influence felt within the first
adjustment interval of two months and the remaining

} in the second adjustment interval.
(5 ) Tendency : What it actually was according to

the index number of the United States Bureau of
Labor Statistics between 1900 and the present.

Assumption (5 ) means that, instead of considering
purely hypothetical cases, we are now to study what

would have happened if we had had stabilization
started January , 1900 .

This affords a very severe test ; for the period taken
1 Except that, beginning with January, 1913, I have substituted
the special index number of responsive commodities described
in Appendix I, § 3 . The difference in results between the two
index numbers is not great.


is one of unusual variability of the price level before

Sec. 9, H ]

the war (although of less average variability than the
1 % every two months, assumed in the standard hypo
thetical case ).
(6 ) Calculation of stabilized index numbers. The

following table shows the first stages of the calcu
lation :





Jan . 1 . . .
During Jan.and
Feb .
Mar. 1
Apr. . . .

Two Thirds of One Third of CHANGE OF
the Influence the Influence ACTUAL INDEX
felt in First
felt in Second






+ 1.35


- 1.33

- .67

May 1 . . .
During Mayand


June . . .
July 1


During July and
Aug. . . .
Sept. 1 . . .


- .33

- 1.88

+ .67

+ .22

- .64

+ .67

+ .33

+ .92

+ .43

During Sept.
and Oct. . .





i This column also shows (by subtracting 100 ) the deviation from
brassage ).

par, and the adjustment (except that this is limited to 1 % by the

Let us follow the above calculations in detail, taking
the index numbers cited from the bulletin of the United
States Bureau of Labor Statistics. Changing them by

simple proportion so that the price level of January,
1900,when the system is supposed to have been adopted ,



(App. I

shall be 100 , the index number for March 1, 1900 , is

found to be 1.35 % above this par of January. This
is the signal for raising the weight of the redemption
bullion 1 % , since the brassage will not permit the full

increase of 1.35 % . This 1 % increase in the weight of
the dollar, by assumption (3 ), affects the index number
by 1 % . Also, by assumption (4 ), ſ of this influence

is felt in the following adjustment interval (ending

May 1) and { in the next (ending July 1).
The May index number will then combine the effects

of the of 1 % or .67 % downward influence as well as
of the downward tendency during this interval which
is – 1.33. The stabilized figure for May is, therefore,
101.35 - .67 - 1.33, or 99.35 .

This figure is below par, and calls, in turn , for a
decrease in the weight of the dollar. In this case,
however, the brassage limitation does not come into

play. The deviation is - .65, the adjustment - .65,
and the influence + .65 of which two thirds, or + .43,
follows in the next interval, and the remaining third ,
+ .22, follows in the interval next but one. The July
stabilized index number is found from that of May as
follows : 99.35 + .43 - .33 – 1.88 = 97.57 .

The stabilized and unstabilized index numbers are :

Jan . 1 . . . . . . . . . .
. . . . . . . . .
May 1 . . . . . . . .
July 1 . . . . . . . . .
Etc .

Mar. 1 .



100 .00

100 .00

100 .00
98 . 11

99. 35
97 .57

Figure 12 gives, for comparison, the curves from

1900 to 1918 for this stabilized index number and for
the actual course of prices in that period .
Except for the period when the war begins (as it does

at the close of 1915) to produce a great effect on the

Sec. 9, H ]



price level, stabilization works almost perfectly ,1 keeping
the index number within 2 % of the original par during
two thirds of the time, within 3 % of par six sevenths
of the time, and within 4 % all of the time. During
this same period, on the other hand, the unstabilized
index number wandered from the starting point 30 % .

Beginning with the fall of 1915, however, the up
ward tendency becomes too strong and , in spite of the

stabilization mechanism , the stabilized price level rises
in the diagram 86 % above par. This, of course, is a
small rise as compared with the rise which actually
occurred, as the index number rose 200 % above the
original starting point.
The deviation from par of the stabilized index num
ber would be slightly less if the brassage were 2 %
and less still if it were 3 % , etc. Yet I doubt whether
the brassage should be increased much , if any, above
1 % , (1) because presumably we do not now need to
provide against a contingency so remote as a repetition

of such a situation as that caused by the Great War,
and (2) because, if another such situation should
develop , a partial stabilization is the most we could
expect. The fiscal necessity of the Government is
then so paramount a necessity that inflation is prob

ably unavoidable. If the Government itself succeeds

in avoiding direct inflation , the people, in subscribing
to bonds by borrowed money , will bring about an in

direct inflation .
1 It should be remembered that this stabilization of wholesale
prices would carry with it the stabilization of retail prices as ex

plained in Appendix I, § 3 . In fact, as retail prices change slug
gishly, their index number would doubtless keep even closer to par
than that of wholesale prices.
? This close conformity to par is maintained in spite of the fact
that, as already noted , the “ lag'' assumed is much greater than we
may reasonably believe is the truth . In fact the conformity would
be close even if the lag were much longer. Assuming that the
influence of each adjustment came even a full year later, the index
number would (up to the close of 1915 when the great influence
from the war began ) keep within 3 % of par half of the time, within
5 % two thirds of the time, and within 10 % nineteen twentieths
of the time.









)t( only


(under 2





Sec. 10 ]



Of course the foregoing figures do not pretend to
give, with absolute exactness, what would have hap

pened under stabilization, for the reason that the five
hypotheses do not state the exact conditions which
would obtain .

Thus the tendency is of course ever

changing. The influence of the adjustment in weight
of the dollar would doubtless be distributed somewhat
differently from the distribution assumed in the figures.

But the stabilization process , by its very nature, adapts
itself to whatever situation is presented and relent

lessly pursues and ultimately eliminates each deviation
as it occurs.

The figures give us as good a picture as

we can secure, until the actual plan is inaugurated , of
what the general behavior of the index number would be.
This behavior would usually be very stable. For
to keep the price level within two or three per cent of
par as is here done, is , for all practical purposes, to keep

it perfectly stable . The only evils of instability which
are really felt are the cumulative evils of a long sus
tained rise or fall. In particular, as we have seen ,
demonstrations of popular unrest, like populism during

falling prices and I. W . W .ism

during rising prices,

develop only after the fall or rise has proceeded both

long and far ; and this could not happen with the price

level closely tethered to par.

10 . A Tentative Draft of an Act to Stabilize the

Be it enacted by the Senate and House of Represent
atives of the United States of America in Congress
assembled :

(Replacement of Unstable, by Stable Dollar)
Sec. 1. That at three o 'clock , Eastern time, in the
morning of January 1, 1921, the gold dollar of the
United States shall cease to be a constant quantity
of gold of variable purchasing power, and thereafter

shall be a variable quantity of standard gold bul




lion of approximately constant computed purchasing

Said quantity of standard gold bullion , constituting
a gold dollar at any given time, shall be ascertained

and fixed , from time to time, by the computation and
use of index numbers of wholesale prices as hereinafter
set forth .

Provided : That the gold dollar shall remain 25. 8

grains of standard gold until some other quantity is
fixed under this Act.
(Computation of Index Number and Its Deviation
from Par)
Sec. 2 . That for the purpose of computing approxi

mately the fluctuations of various wholesale prices in
the United States after the year 1920 , and of comput
ing index numbers such as will approximately measure
the average of such fluctuations, and of computing
therefrom the approximate fluctuations in the purchas

ing power of gold, the Bureau of Standards (or Bureau
of Labor Statistics ) hereinafter referred to as the Com
puting Bureau , shall proceed as follows :
(a ) From the list of commodities and the quantities

thereof marketed at wholesale in the United States in
1909, heretofore compiled by the Bureau of Labor
Statistics from data of the Census of 1910 and other
data and published in Bulletin No. 181, Wholesale
Prices Series No. 4 , the Computing Bureau shall,
immediately after the passage of this Act, make up a
list of selected commodities comprising about 100 com

modities (not less than 75 nor more than 125) deemed

by it to be the most suitable (as to importance and
otherwise) to be used for computing the said index

(6 ) Immediately after December 25 , 1920, the Com
puting Bureau shall compute, from the best accessible
data, the average price of each of these commodities

for the year 1920 (to December 25 ).

Sec. 10 )



(c) From the severalaverage prices, so computed for
1920 , and the quantities so listed for 1909 by the
Bureau of Labor Statistics, the Computing Bureau shall

compute an ideal composite “ goods-dollar " for refer
ence purposes consisting of such quantities of the sev

eral selected commodities, proportional to the quantities
so listed by the Bureau of Labor Statistics, that their
aggregate value, at the average prices so computed for
1920 , shall equal one hundred cents . ( This selection

of the price level of 1920 as the base or par is, of course,
merely illustrative.

See Appendix I, § 4 .)

(d ) From average wholesale prices computed from
price quotations taken on the first Wednesday (or , if
that day be a holiday, the next business day) of the

months January, March , May, July , September, No
vember of 1921 and each year thereafter, the Computing

Bureau shall speedily compute the value, in cents, of
the composite “ goods-dollar,” and such value in cents
shall be the index number of prices for that date.
(e ) The Computing Bureau shall compute the devi
ation from par of such index number by subtracting
one hundred cents from said index number. Thus
if the index number is $ 1 .01 the deviation is 1 cent or

1 % above par, and if the index number is $ 0 .98 the

deviation is 2 cents or 2 % below par.

( Transmission Thereof to Bureau of the Mint)
Sec. 3 .

The index number, deviation percentage,

and all the data from which they are computed shall
(unless delayed by unavoidable causes ) be transmitted
by the Computing Bureau to the Bureau of the Mint,
within one week from the day to which the data relate.

(Calculation of the Correction of the Dollar's Weight)

Sec. 4 . That the Bureau of the Mint, upon receipt
from the Computing Bureau of such percentage devi
ation , shall forthwith calculate a percentage correction
or adjustment to be added to , or subtracted from , the



(App. I

then weight of the dollar. Said adjustment (pro
vided it shall never exceed the “ brassage " charge of
1 % described below ) shall be equal to the percentage
deviation .

(Proclamation Thereof)
Sec. 5 . The Bureau of the Mint shall then forth
with give public notice that, on and after the day next
following such notice, and until changed by further like

notice under this Act, the number of grains of standard
gold so computed shall constitute the gold dollar of
the United States ; and thereupon the number of grains
of standard gold in the gold dollar of the United States
shall be fixed as prescribed in such notice.

(Unrestricted Issue of Certificates for

Gold (Free Coinage))
Sec. 6. That after December 31, 1920, the Bureau
of the Mint shall receive, subject to a “ brassage
charge ” of one per cent and subject to such conditions

and limitations as are now provided by law touching

the receipt of gold bullion to be coined , all gold bullion
offered to it and shall pay for the same with “ gold

bullion dollar certificates ” described hereinafter at
the rate of one dollar for the number of grains of stand

ard gold in the dollar as then last fixed by or under
this Act and (as to any balance less than one hundred
dollars) in lawful money.

(Unrestricted Redemption of Certificates in Gold )
Sec. 7 . That after December 31, 1920 , the Mint
Bureau shall receive all gold bullion dollar certificates
tendered to it and shall forthwith pay for the same,

ate ooff
d Stabars
nce foinr thstandard
te of at
y for
for the number of grains of standard gold
in the gold dollar of the United States (as fixed by or
under this Act for the time of such receipt) and (as
to any balance less than five ounces of standard gold )
in lawful money .



SEC. 10)

(Conversion of Coin into Bullion )

Sec . 8. That after the passage of this act no gold
coin shall be struck by the United States.

The Secre

tary of the Treasury shall provide, by rules and regu
lations to be issued within three months after the
passage of this act, for the conversion before January

1 , 1921, of gold coin of the United States owned or
acquired by the United States into bars of standard
gold each containing not less than five ounces, and for

like prompt conversion of all like gold coin thereafter

acquired by the United States.
(To facilitate the withdrawal of gold coin from circulation
into the Treasury through the Federal Reserve and
National Banks)
Provided : That the United States, under such rules
and regulations as the said Secretary may prescribe,

shall receive all standard gold coin of the United States
offered to it and pay for the same in lawful money at
the rate of ten dollars and one cent of lawful money for
every ten dollars of standard gold coin so offered from the

date of this act to December 31, 1920, inclusive , and at
the rate of one dollar for every dollar of standard gold

coin offered to it thereafter.

Such payment shall

be made in the gold bullion dollar certificates herein

authorized and (as to any balance less than one hun
dred dollars ) in lawful money.

(Conversion of Old Certificates into New )
Sec . 9.

That within three months after the passage

of this act the preparation, issue, and paying out by
the United States of present gold coin certificates shall
cease. For all gold coin certificates then owned or

thereafter acquired by the United States there shall be

substituted, dollar for dollar, gold bullion dollar cer
tificates certifying that



(App. I

“ the United States of America will pay the bearer
on demand $ 100 in standard gold bars of not less than

5 ounces each and any smaller balance in any lawful
money .”

Upon such substitution such gold coin certificates shall
be destroyed .
( To accelerate said correction at the start especially through

the Federal Reserve and National Banks)
Provided : That the United States, under rules and
regulations to be prescribed by the Secretary of the
Treasury, shall receive all gold coin certificates offered
to it and pay for the same in lawful money at the rate

of ten dollars and one centof lawfulmoney for every ten
dollars of gold certificates so offered from the date when
their issue ceases to December 31, 1920 , inclusive, and at
the rate of one dollar of lawful money for every dollar

of such certificates so offered after December 31, 1920.

(GovernmentGold “ Reserve ” and “ Surplus "')
Sec . 10 . That the Secretary of the Treasury shall
divide all the gold against which gold coin certificates
and gold bullion dollar certificates are outstanding at
3 A . M . January 1 , 1921, into two parts, one part to be
known as the “ reserve " against outstanding gold

bullion dollar certificates and equal to 50 % of the

emain Leservinde penera syste aine
i part to beknown
l as the
m i“ surplus,”

value of the gold certificates then outstanding and the

in excess

This remainder or “ surplus " shall be forthwith
transferred to the general fund of the Treasury as the

initial profits of the new system .

reserve ” shall be maintained daily , as nearly

as possible at 50 % of the gold bullion dollar certificates
outstanding from time to time.
If, on any date, the reserve falls short of 50 %

it is to be restored by withdrawing from circulation

and cancelling gold bullion dollar certificates.



SEC. 10 )

If, on any date, the reserve exceeds said 50 % it is to
be restored by issuing, and putting into circulation ,
the requisite number of new gold bullion dollar cer
The Secretary of the Treasury is authorized to make

said withdrawals of certificates from

circulation by

withdrawing from the Government deposits in National
Banks, and to issue certificates and place them


circulation by adding to those deposits.
(Certificates Available for Bank Reserves)
Sec. 11 . That all provisions of existing banking laws
of the United States regulating the holding of gold
reserves, including reserves of any Federal Reserve
Bank , National Bank , or other bank , shall be deemed

to be satisfied by such holding of gold bullion dollar

(Legal Tender )
Sec. 12 . (a ) That gold coin of the United States
shall not be a legal tender in payment of debts falling

due after December 31, 1920.
(6) That all debts, public and private, falling due
after December 31, 1920 , including debts theretofore
created and expressed in dollars of “ gold coin of the
present standard of weight and fineness,” or expressed
in words of like import, shall be payable in standard
gold bars at the rate in grains per dollar fixed by or
under this Act for the time when each debt falls due,

and the balance, if any, less than five ounces, in lawful
money . Such standard bars shall be lawfulmoney and
a legal tender for this purpose.
( Publicity )
Sec. 13. The Computing Bureau shall, as promptly
as possible , make public in suitable public documents
all the pertinent facts and figures concerning the calcu

lation of the index number and its percentage deviation




(App. I

from par, including the market quotations for the con
stituent commodities.

The Mint Bureau shall likewise

make public its findings as to the adjustment of the

dollar's weight.

(Financing the Administration of This Act)
Sec. 14. That a sum equal to the initial profit as
defined in Sec. 10, or so much thereof as may be neces
sary, is hereby appropriated and is made available until
expended as the Secretary of the Treasury shall direct
for all expenses necessary for the administration of
this Act ; and the Secretary of the Treasury is author

ized to use the receipts from time to time from the
“ brassage charge ” as defined in Sec. 6 , for the same

(Future Revisions of Index Numbers)
Sec. 15 . That immediately after the data of the
census of 1920 , and other subsequent censuses respect

ively , are available, the Computing Bureau, from such
data and the best other available data , shall revise the
list of selected commodities and designate a revised
composite “ goods-dollar ” by the same method as
hereinbefore described and such that, at the moment
of revision , the value of the new or revised goods
dollar shall be equal to that of the old .

Sec. 16 .

(Penal Code Amendment)
That Section 147 ofthe Penal Codeapproved

Mar. 4 , 1909, defining “ obligation or other security
of the United States ” is hereby amended to include

the gold bullion dollar certificates hereby authorized .

(Repeal of Former Acts )
Sec. 17. That all Acts and parts of Acts inconsist
ent with this Act are hereby repealed .

Sec. 10)



The above Act assumes that a reasonable banking

system , such as our Federal Reserve System , already
exists under which deposits subject to check will be
kept in some reasonable relation to bank reserves.

The Federal Reserve Board could assist in the prompt
and efficient operation of the new system by having
due regard to the rise and fall of the Index Number,

as suggested by Mr. PaulWarburg .

This would help

its adjustment of the rate of discount and its general

loan policy to be such as to keep the volume of indi

vidual deposits subject to check approximately propor
tional both to bank reserves and to the Government

gold reserve against gold bullion dollar certificates.


1. Misunderstandings
A . Introduction. Some readers will wish to know
what objections have been found or alleged against
stabilizing the dollar.
The chief of these have already been disposed of in

the text. The other objections are to be found ,
stated in the objectors' own language, in articles cited
in the bibliography of Appendix V .

Answers by me or

other writers are cited in the same bibliography .1
Nevertheless it seemsdesirable , in order to make this
book complete, to renew the arguments here. I shall

therefore state and answer the alleged objections as fully
as space permits. If difficulties still remain in any
reader's mind, I hope he will do me the favor of com
municating with me to the end that I may , if possible,
clear them up by correspondence.

I shall try to treat seriously and on its real merits
each objection which has been offered and to show how ,

in every case, the objection falls to the ground .
Most of the alleged objections turn out, on exami
nation , to be mere misunderstandings. Of the remain - ,
ing objections, most consist, at bottom , of unreasonable

hostility, due to prejudice and fear of disturbing the

status quo. The few objections still remaining amount
simply to emphasizing the fact that the plan does not
attain an ideally perfect standard of value.
1 See especially my answers to objections in the New York Times,
December 22, 1912, and “ Objections to a Compensated Dollar
Answered , ” American Economic Review , December, 1914 .

Sec. 1, D ]



In this section I shall consider the misunderstand

B . “ The plan only corrects those deviations in the
purchasing power of the dollar which are due to gold
causes,” and not those due, for instance, to causes con
nected with credit or commodities. On the contrary,
it corrects all deviations indiscriminately . The crite

rion is the index number , and the plan operates against

any deviation from par of the index number whether
that deviation is due to gold or to any other cause

The reason , of course, is that all dollars

are interconvertible so that if the value of the gold

dollar is kept constant, that of every other dollarmust
be constant also .

C . “ It assumes ' the gold theory ' — that high prices
are due to the abundance of gold .” No ; it merely
assumes that the purchasing power of gold does change
relatively to commodities.

It does not assume any

particular cause of these changes. Gold depreciation
relatively to commodities may be due, for instance,

to scarcity of commodities ; it may be due to the in
flation of money other than gold , circulating alongside
of gold , such as silver and paper money ; it may be due

to credit inflation ; or it may be due to causes speeding
up the velocities of circulation of money and credit.
D . “ It assumes the quantity theory of money." The
impression that the plan is dependent on acceptance of
the quantity theory of money is presumably due to the
fact that I have espoused that theory (in a modified

form ) in my Purchasing Power of Money . But there is
nothing in the plan itself which could not be accepted
equally well by those who reject the quantity theory
altogether. On the contrary , as one opponent of the

quantity theory has pointed out, the plan should seem
even simpler to those who do not accept the quantity
theory but believe that a direct relationship exists be

tween the purchasing power of the dollar and the
1 As to credit in particular see Appendix 1, $ 7 .




bullion from which it is made, than to believers in the
quantity theory.
It will be clear to any one who follows the reasoning
and explanations in this book , that the only money
theory assumed is that common to all theories, and
accepted universally ; namely, that a large quantity of
gold will buy more goods than a small quantity — a

pound , than an ounce, for instance — and that an in
crease of the gold in a dollar will, somehow , increase
the dollar's purchasing power. As to the exact process
by which this acknowledged result is attained we need
have no concern .

Personally, like the great majority of economists, I
believe that this process is through the fact that in
creasing the weight of a dollar decreases the number of

dollars in circulation (not only of gold but of fiduciary
money and bank credit ) .

But any one who reasons

on some other theory cannot avoid reaching the same
result ; namely, that the plan would work, provided , as
I have said , he admits simply that the heavier the

dollar the more valuable it is.
To take an example cited in Chapter IV , if the
Mexicans should change the weight of their dollar

to the weight of ours, the price of wheat and other
things would become about the same on both sides
of the Rio Grande, just as they are at present (ex

cept for the tariff) the same on both sides of the
Canadian border where the dollar is of the same
weight on both sides.

E . “ It contradicts the quantity theory.” This ob
jection , the opposite of the last, has been raised by

some who believe in the quantity theory but imagine
that the operation of the plan could not affect the
quantity of money at all or not in the degree needed .
But, as explained in the text (Chapter IV , § 9 , and

Appendix I, $ 9), it is not assumed that a 1 % change
in the weight of the gold dollar will necessarily affect
1 See Chapter IV , 88 4 - 9.

Sec. 1, F ]



either the quantity of money or the price level by
exactly 1 % . It is only necessary to assume that it
works in the right direction and that, if the first ad
justment proves insufficient, its insufficiency will be

registered in later index numbers and , in consequence,
it will be reënforced by subsequent adjustments as
required .

That a change in the weight of the dollar will change
the number of dollars has been made evident already.

It will affect the number of gold dollar certificates
(see Chapter IV , § 7 , and Appendix I, § 1 ) and the num

ber of dollars of circulating credit ( see Appendix I, § 7 ) .
F . “ It aims to fix all prices.” On the contrary , it
does not aim to fix any price , except the price of gold
which is already fixed — though wrongly so — in
our present system . The prices of wheat and sugar
and everything else would be as free as now to vary
relatively to the general level and to each other. The

adjustment of the dollar would control only the scale
or “ level ” of commodity prices and not interfere
with the freedom of their relative movements.
Only the general level is fixed , a rise in one com
modity being balanced by a fall in others.



sea level does not prevent wave motions.
As Treadwell Cleveland , editor of the Newark Even
ing News, well says, “ the aim is by no means to
freeze all ratios of exchange fast ” or to compel all
prices in dollars to be “ petrified into everlasting im
mobility .”

The upper curve of Figure 13 shows the actual
market price of wheat in terms of gold in contrast with
the middle curve which shows the price of wheat as it

would have been under stabilization , i.e. its price in
terms of the commodity standard . The lower curve
shows the course of the general price level in terms of

gold .

Themiddle curve exhibits abundant freedom to

fluctuate, the fluctuations being due to harvests and

other conditions connected with the production of this
specific commodity, wheat. The upper curve shows


(App. II
these same fluctuations ; but it shows also other fluctua
tions, mostly upward, due to the movement in general,
prices, which means the opposite movement of the

Wheat in gold .



at in commo


All commoditi

Fig . 13. The Price of Wheat in Terms of Gold and in Termsof
The curve for " wheat in gold ” represents the movement of the actual
market price of wheat.

The curve for “ wheat in commodities " is the same as that in Figure 11
and represents the real purchasing power of wheat.

The curve for " all commodities " is repeated from Figure 10. Wemay .
say that the upper curve is a compound of the other two, the lower curve
containing the monetary element and the middle curve the wheat element.
The year to year fluctuations in the price of wheat seem to be due chiefly
to wheat, while the general upward trend is chiefly due to money.
The middle curve shows how the price of wheat would behave if the dollar

were stabilized . This price would fluctuate almostasmuch as it does now .

dollar. The upper curve is compounded, as it were, of
the two lower curves, one representing changes in
wheat, the other representing changes in the purchasing.
power of the dollar.

Sec. 1, G )



G . “ It would interfere with supply and demand ."
Rather would it simply disentangle the supply and
demand of, say, wheat, from the supply and demand
of the money medium . As things are now the price

of wheat always includes , besides the effects of the
supply and demand of wheat, the effects of the supply

and demand of gold , of credit, etc.
A study of the two curves of Figure 13 shows how
the two sets of phenomena are now entangled as well as
how natural is the error of overlooking the money
ingredient in the price of wheat. In their year-to

year changes the two curves agree in moving up to
gether or down together in 24 cases out of 26 ! A
wheat merchant could doubtless see, for each of these
24 changes, a definite reason in the wheat market, with
out any apparent need to invoke the monetary ele
ment. He would be able to say that between 1914
and 1915 , for instance, the price of wheat rose rapidly

because of certain specific war conditions affecting
wheat. And he would be substantially right quali
tatively . Only a quantitative analysis such as Figure
13 gives could disclose the fact that of the 27 % rise,

only 25 % was due to the causes he saw and 2 % was
due to the depreciation of the dollar.
Under a stabilization system the price of wheat
would have gone up 25 % as in the middle curve.


supply and demand of wheat would not be inter
fered with but simply




fluctuations which would be registered in the price of
gold .

Under our present system , the price of gold is cut
off from the operation of supply and demand alto
gether. If gold were as plentiful as the pebbles on

the beach , its price would , under the present arbitrary
system , remain immovable at $ 20.67 an ounce !
This fixity of the price of gold might itself be called

an arbitrary interference with natural supply and de
mand, as was indicated in Chapter V , § 3 . Were the

natural law of supply and demand allowed to take its




course and not artificially restrained, the changes in the
supply of, and demand for, gold and its substitutes
would make themselves felt in the price of gold , and

not in the prices of goods, as at present they are forced
to do .

H . “ It is a plan to control the value of gold .”


valorization of coffee in Brazil, or the valorization

of silver as proposed by some “ friends of silver,"
has nothing in common with the plan here proposed .
The latter plan does not attempt to impound gold .
It does not attempt anything so colossal or useless

as to raise the value of gold by cornering and stor
ing it or by any other means.

It does not aim


affect at all the value of gold per ounce , but aims
simply to change the quantity of it in a dollar. It is
the dollar, not gold, which we are trying to stabilize .
The distinction is as important as the distinction be
tween valorizing or fixing the price of a pound of sugar
by controlling the sugar market, and adjusting the num
ber of pounds of sugar to make up a dollar's worth ,
whatever the market conditionsmay be.

1. “ It works only through the flow of gold.” This
misunderstanding is common . It pictures the regu
lative machinery as though the flow of gold into and
out of circulation were the main factor.

It implies

that the only, or chief, effect of a change in the price
of gold is to divert the flow of gold from one channel
to another, overlooking the factor under a definite

reserve (see Appendix I , § 1) , — that a change in the
price of gold and in the weight of a gold dollar changes

the number of dollars in a given physical mass of gold .
Laboring under the above mentioned misappre

hension , one correspondent imagines that if all the
world adopted the plan the result would be to alter

nately “ dump ” immense quantities of gold on to
the very limited jewelry market or denude that mar

ket of all its gold , and that the system would demoral
ize the gold market and ultimately break down, for

the jewelry market is too small to be used as a regu


Sec. 1, J]

lator of the gold of the world .


The tail could not

wag the dog .

The truth is, of course, that, even if there were no

jewelry use whatever , there would be ample regu
lation .

Thus a lowered gold price, or raised dollar

weight, can reduce any stock of gold , however large,
into a small number of dollars simply by enlarging
each dollar ; while, contrariwise , a raised gold price,
or lowered dollar weight, can multiply any stock of
gold , however small, into an ample supply simply by
breaking it up into a larger number . It is like multi
plying the loaves and fishes, — except that there is

nothing miraculous about it, since small dollars will
feed our monetary needs as well as larger dollars, pro
vided they buy as much .

A correspondent calls attention to the fact that, at
critical times like that of the war, each nation tends to
grab gold and reasons that this would destroy the

regulatory action . On the contrary , while such action
does destroy the regulatory action of our present sys

tem , thus revealing one of its worst defects , it would
not affect that of the proposed plan . As explained in

Appendix I, § 8 , the stabilization system becomes
independent of foreign influence. Under it we could
let other nations take any part of our gold they chose

and the remainder, by sufficient subdivision, would
meet our needs. Likewise we could withstand any
flood of gold — and without suffering inflation , or

shutting gold out as did Sweden , — simply by en
larging the dollars and so diminishing their number.
“ It would shift to the Government the losses now

borne by private contracting parties .”

This confuses

the losses and gains on contracts and understandings
expressed in terms of gold with the losses or gains to
holders of actual gold . Except where the Govern

ment is itself a party to contracts, the losses and

gains of contracting parties do not affect the Govern
ment Treasury.
It may be added , incidentally , that if it were true that




such a shift to the Government of all private gains

and losses were really effected by stabilization the
net resulting burden on the Government would be

just zero ! For the same number of dollars that the
private creditor now

loses from



private debtor gains and vice versa .
This is the reason that, above, in referring to con

tracts, the phrase “ losses and gains " was used whereas,
in referring to physical gold , the phrase “ losses or
gains " was used . When gold depreciates its holders

suffer loss and no one else has any corresponding gain ,
just as when a case of eggs or a box of fruit spoils the

owner loses and no one else gains. Contrariwise when
gold appreciates the owner of gold gains and no one
else loses.

This slight gain or loss from holding gold is trans
ferred , by the stabilization plan , to the Government
(or rather, is transferred from the pockets of the

people back to their pockets through increase or de
crease of taxation ) as was shown in Appendix I,
§ 1 , D . But the colossal gains and losses to contract

ing parties are not so transferred by stabilization .
They are simply destroyed altogether .
K . “ It would make a pretext for raising prices.”
This idea is probably an echo of the fact that dealers
have often used the excuse that prices in general were
high to raise their own. The excuse was usually

valid . Retail prices must adjust themselves to whole
sale prices and vice versa .

But it is precisely this excuse which the stabiliza
tion system would take away ; for the general price
change which it presupposes is avoided .

It would

certainly be a curious excuse for a dealer to tell his
customers that he had to change the price of coal be
cause , last month , the mint price of gold had been
changed with the expressed object of making such

changes in other prices unnecessary !
L . “ It would ' tamper ' with the standard of value. "
In truth it would prevent the standard of value from

Sec. 1, M ]



being tampered with by all sorts of influences which

at present do tamper with it constantly . The dis
covery of gold in California tampered with the stand

ard of value ; the cyanide process of extracting gold
tampered with it, and so did the abolition of bimet
allism , the introduction of the gold exchange standard ,

the rapid growth of bank deposits , and the inflation of
the currency in war- time.
At first sight the plan seems to many people a plan to

change the dollar, while in fact it would keep the dollar

from changing. It would change the present system ,
the fault of which is that it lets the value of the dollar

The plan aims at an invariable dollar. If pre

venting the dollar from changing is tampering with the
standard of value then the Bureau of Standards is con

stantly tampering with weights and measures.
One sarcastic objector asks: “ Why not change the
weight of a pound of coffee ? ” If the dollar served the
purpose merely of a unit for weighing gold , it would be
as absurd to alter it as to alter the number of ounces

in a pound of coffee. A unit of weight ought cer
tainly to remain invariable in weight. But we do not
need the dollar as a unit of weight. We need it as a
unit of value, and the trouble is that its constancy
in weightmakes it inconstant as a unit of value.

M . “ Changes in the weight of the dollar cannot affect
its value because only Government fiat can fix the value of
money.” Can any one believe that if the weight of a
dollar were increased from the present twentieth of
an ounce to an ounce, or a pound, or a ton , or the

entire mass of gold in the world , that the dollar
would buy no more than it does at present?

If any

one by taking a ten -dollar gold certificate to the Sub
Treasury or Assay Office could get with it a cartload
of gold , would that certificate not command more, not

only of gold , but of things in general than it does
now ?

As to Government fiat, the mere calling pieces of
paper by certain names without reference to the amount




(App. II

in circulation has been proved both by theory and by
experience to be illusory .

N . “ It is a fiat money system .”

This misunder

standing is the opposite of the last and even more

absurd . It is not a fiat money system ; for the paper
money, under it, is redeemable and dependent for its
value on the gold in which it is redeemed.
2 . Alleged Defects
A . “ A goods-dollar is not ideal.”

Doubtless this

is true. But our present gold dollar is still further

from the ideal ! It is significant that those who offer

this “ objection ” do not suggest some third kind of
dollar which might, practically, be used .

The discussion of an ideal dollar is purely academic .
It will be time enough to discuss the merits of a mar
ginal-utility unit of value, a labor unit, or a unit con
sisting of a given fraction of the National income, when
any of these units can be statistically fixed , that is,
when an index number in terms of such a unit is forth

coming. Until that time the ideal standard , if such
there be, has about as much practical availability for
human use as the money of the planet Mars. The
only practical question is that already discussed in
Appendix I, § 3 , as to what is the best index number
available .

It might be advantageous, were it possible , to distin
guish between that part of a given change in the value
of the dollar which is due to money and that part
which is due to goods. And this could be done by the

plan if there were any reliable index number of " abso
lute value." By employing such an index number, if
it existed , we could stabilize the dollar “ absolutely.”
Practically, of course , we can only measure the value

of money relatively to other goods.
This same answer applies to those who have the idea

that, instead of a constant price level, a slightly falling
or a slightly rising or a cyclically changing price level

Sec. 2, B ]



is more ideal. If those who set up such standards in
theory will set them up in practice, i.e. will show , in
figures, exactly how much the price level ought to

change, it will be as easy to make the index number
follow that prescribed course as to keep it uniform .
This can beaccomplished by precisely the samemethods
as those described above for stabilization . Let us, for
example, assume that, ideally, prices ought to rise 1 %

per annum instead of remaining constant. It would
evidently be as easy to apply exactly the same method

of regulation as that described in Chapter IV except
hew to a moving par.

If , at the start, the par were

100 % , a year later it would be 101 % . At that time,

therefore, if the index number should happen to be
101 % no change in the dollar's weight would be made ;

if, instead , the index number should be 102, or 1 % too
high , the dollar' s weight would be increased 1 % ; if,

instead, the index number should be 100, or 1 % below
par, the dollar's weightwould be decreased 1 % . Like
wise if the ideal course of prices could be shown to

be first in one direction and then in the other, all we
should need to do would be to map out that course
in figures and hew to that line .

B . “ People could 'contract out,' " i.e. they could
frame their contracts in terms of ounces of gold or any
other units than the new dollars. So they could, —
just as they can now .

But they wouldn ' t — not even

asmuch as they do now ! There would be no need for
such action and no desire for it. “ Contracting out ”
is a phenomenon which is frequent only when it is neces
sary to escape from some flagrant case of instability
as in the days of greenbacks or of Colonial paper

money . It was such a case, or the danger of it in the
'90s, which gave rise to the “ gold clause " in bonds.
When the railways adopted “ standard time ” there
were those who predicted that many people and com
munities would refuse to shift their watches. One

country town in Maine did !

But more than 99 % of




the country were led by the convenience of the new
system to adopt it, just as, later, they adopted the
similar shift for “ daylight saving ," at which time also

similar predictions of failure were made.
If any contracting parties should fancy that a stabi
lized dollar was less suitable to their needs than some

other standard , their preferences should be and could
be gratified . But such people would be very few and
far between .

C . “ It would be destroyed by war.” It is true that
war is apt to put a strain on whatever monetary system

exists at the time. It does so when the fiscal needs of
the belligerents require or seem to require resort to
inflation .

It is also true that there would be more

strain on a system which combats inflation than on one

which yields to it . Inflation affords the cheapest and

easiest, although the worst , way to pay for a war. It
is, therefore, inevitably the resource of war finance

when all others fail.

As we have seen (Chapter II,

§ 9 ) it has many subtle forms.

If the dollar is to be

kept stable , it will be necessary to raise the whole
revenue of the Government in ways other than by

inflation (i.e. by taxes or by loans out of the savings of
those who make the loans). If the Government or the
banks or the people who finance the Government can

not, or will not, finance it completely, without resort
to inflation , stabilization will have to be sacrificed .
We have already noted (Appendix I, § 7 , A ) how
this breakdown would come about under paper money

inflation . The same principle would apply under any
kind of inflation (by paper issues of the Government,
or of authorized banks, or by creation of new bank
deposits put to the credit of the Government, or to the
credit of individuals who borrow of banks to loan to
the Government) .
1 Resort to inflation (which puts the burden of the war in the
form of the High Cost of Living on those with relatively fixed money
incomes instead of on the tax payer ) is , at bottom , a reversion to

Colbert's idea of Government Finance, “ the art of plucking the
goose with the least amount of squealing . "

Sec. 2, C]



In short, stabilization and inflation are mutually
incompatible. If stabilization is to be retained during
a war emergency, inflation must be sacrificed as a
method ofwar finance. Or, if inflation is to be resorted

to, stabilization must be sacrificed . When the emer
gency comes choice between the two must be made.
In all ordinary wars there is no need of inflation and
the stabilization process could go on unmolested . But
if we were to have another world war and if the fiscal
need were so great that there was, or seemed to be, no
way to secure all the needed funds without resort to
inflation , then , it is quite true, the stabilization ma
chinery , if left to work , would break down . It would

be better under such circumstances not to leave it to
work but to suspend it temporarily just as the Bank

Act for the Bank of England is temporarily suspended
at critical times.

In practice , an intermediate course between a stab
ilization left helpless to break down, and its suspen
sion would probably be the result.

The brassage lim

itation would prevent perfect stabilization when the
tendency of prices to rise was greater than the brassage,
ng atrise
es ccould
ould bbee mitigated and sufficient
atedyetby kithe
revenue from taxes could be secured to keep the system

thus working at half speed, so to speak. This is illus
trated by Figure 12.

A friend insists that a stabilization system must
be devised which will withstand any war. One might

as well say that an automobile should be built to with
stand any collision .
Furthermore, it should be emphasized that the present
system not only contains the danger of monetary de

preciation in war time among warring nations but in
volves neutrals as well.

In fact the war inflation in

the United States was almost wholly suffered while we
were neutral and before we entered the war. It was
a secondary effect from European inflation and the
upset of international trade through which we were
inundated by gold imports. From such a catastrophe




in future wars, stabilization would deliver us ; for, as
shown (Appendix II, $ 1 , I ), the only result of an influx
of gold would be to make our gold dollars larger. Our
price level would remain intact, for the neutral would
not be under the necessity of paper and credit inflation

as a fiscal expedient.
Another sort of answer to this objection is the
League of Nations ! We are not likely for a long time,
if ever again , to have such an exigency as a World War.

In short, the full answer to the objection of inadequacy
in war time is :
( 1) In all ordinary wars stabilization would be
adequate .

(2 ) Wars in which it would not be adequate are now
extremely unlikely .

( 3) In such an emergency the system might still
work “ at half speed ," which would be better than

(4 ) Or, it could , if necessary , be suspended , which
would leave us no worse off than under the present

system .
(5 ) It would , in any case , safeguard the standards

of non-belligerent nations.
(6 ) In no case would it leave usworse off than before.

D . “ It could not check rapid changes.”

Owing to

the narrow limits, e. g. 1 % or 2 % as stated , imposed
on bi-monthly adjustments of the dollar's weight, it

is quite true that a sudden and strong tendency of
prices to rise or fall, should such occur, could not be

completely checked . If, for instance , prices were tend
ing to rise 18 % per annum and the plan permitted no
more rapid shift than 12 % per annum , this would leave

6 % per annum uncorrected .
But this 6 % would be only one third the rate at
which prices would rise if wholly uncorrected . Half

a loaf (or, in this illustration , two thirds) is better than
no bread .

Moreover, such cases are extreme and rare. When
they do occur there is all the keener need for their

Sec. 2, F ]



mitigation . If an 18 % correction is needed we cannot
argue that we ought to make no correction rather than

correct by 12 % ! Furthermore it should be noted that
ultimately , of course, after the rapid spurt had abated ,
the accumulated weight of the dollar would overtake

the escaped price level and bring it back to par.
E . “ It is too inelastic.” This is the opposite of the
last objection . The one objector who makes this
claim thinks the limitation complained of in the pre
ceding objection is a positive advantage of the plan .
He would prefer to limit the possible change of the

weight of the dollar to 2 % per annum ! His idea is
that only secular, or long continued , changes in the

purchasing power of money are injurious while shorter
cyclical changes are desirable as an expression of the
changing spirit of business.
To me this is more fanciful than practical. The
“ credit cycle ” is one of the very evils which stabi
lization aims to remedy. The satisfaction the enter
priser has while the boom phase lasts is partly gained
because of false hopes and therefore nullified later when
the depression comes — like the joys of a drunken
debauch — and partly gained at the expense of others

of more “ fixed ” incomes — a species of social in

I have little doubt that crises and panics would be
practically impossible if we had a stable dollar and

that the wide fluctuations in credit which precede and
follow a crisis would be practically out of the question .

In short, crises would be nipped in the bud. If there
be, ideally , a normal credit cycle it has never been

shown and any hit or miss restriction would be just as
apt to make the actual cycle less normal as to make it
more normal.

But, even if it could be granted that there is some
substance to this objection , it cannot be denied that

the plan proposed would be a great improvement over
the present system .

F . “ The correction comes too late ."

It is objected




that the plan does not make any correction until an
actual deviation has occurred , and so the remedy al

ways lags behind the disease.

This is true.


corrections do follow the deviations and so the correc

tion can seldom be absolutely perfect. The practical
point, however , as cannot be too often emphasized , is
that it is approximately perfect and far nearer perfect

than our present system . When steering an automobile ,
the chauffeur can only correct the deviation from its
intended course after the deviation has occurred ; yet,
by making these corrections sufficiently frequent, he
can keep his course so steady that the aberrations are
scarcely perceptible .

There is no reason why the mone

tary automobile cannot be driven very nearly straight.
It is also pointed out that, after the correction is

applied , it may happen that prices will take an oppo

site turn , in which case the remedy actually aggravates,
for an instant, the disease . But, taking the extremely
fitful course of prices since 1900 , and correcting it, ac
cording to the plan, every two months, we find that

this does not often happen and never for long . Even
in the few remaining cases the deflections caused were

very slight and were soon corrected immediately after
the following adjustments .

G . Conclusion on “ Alleged Defects.”

It will be

seen that the objections which have been mentioned

ihe gground
round ofof
biny this
the section
arourtly are

inadequacy .
They are partly answered directly and all are answered
by the argument that, however inadequate the pro
posal may be, our present standard is even more so .
Nothing practical is ever perfect and the imper
fection of a plan does not condemn it if it is better
than the plan which it replaces and if no plan still better

is available .
If those who object to stabilization as proposed , be

cause it is not perfect, are sincere, they should either
supply a criterion of the imperfection they emphasize
in the form of a better index number, or — if the plan
1 As shown in Appendix I, 8 9 .


Sec. 3, A ]


as proposed , though not perfect, is more nearly so than
our present crude fixed -weight-of-gold standard , —
they should support it heartily as a big step toward
their own ideals. They should certainly not oppose it .
In the terse phrase of modern slang, they should “ put

up or shut up."
Those who press the above six objections do not
treat the question as a practical one but as purely

So far as the objectors have any other

purpose than intellectual gymnastics their purpose is ,
subconsciously at least, obstructive rather than con

They seem

to think that, by finding some

shortcoming in the plan , they have justified the mone
tary system which we now have. They are, if I catch
their spirit correctly, staunch defenders of the status
quo , trumping up excuses for their temperamental

hostility to change. This emotional attitude is dis
cussed further in the following section .

3. The Obstacle of Conservatism
A . “ It has never been tried.”

Not as a whole ; but

every feature in it has been tried and tested — the
index number, issue and redemption ad libitum of gold
certificates, varying the redemption rate (as in the

gold exchange standard ), etc . It is simply a combina
tion of these tried elements.
Perhaps the nearest existing approach to the plan as

a whole is the “ gold exchange standard ” of India

which has virtually converted the silver rupee into
the gold standard somewhat as the proposed plan
would virtually convert the gold standard into the
composite standard .

The system here proposed would really be no more
of an innovation in principle than was the Indian

Gold Exchange System when introduced and developed
between 1893 and 1900 , while the evils it would correct
are similar to , but vastly greater than , the evils for

which the Indian system was devised . It was con




servative England which , in order to get rid of the
comparatively trifling inconvenience of a fluctuating

rate of exchange with India, adopted this gold ex
change system .

It is true that it is often better to “ bear the ills we
have than fly to those we know not of.”

But that

bit of practical wisdom was never intended to blind
us to the ills we do bear. These ills are not only far

greater than the ordinary business man has imagined ,

but they are, I believe, destined in the future to be
come greater still. The reason for this prophecy is
found in the ever-growing tendency to spread and
multiply the ramifications of business contracts and

Sometimes this same objection takes the form


the innuendo : “ The plan is altogether too simple
not to have been adopted long ago." This is an
inarticulate suggestion that, while the plan looks
sound , we must beware of it ; for surely our wise fore
fathers would long ago have discovered and applied
anything so simple.

While this objection will seem to most people who

think for themselves merely inane, it really constitutes
a serious obstacle in the minds of many to whom all
new ideas are suspect. They do not realize that
their own attitude answers their own question . It is
just because so many people like themselves distrust

any change, that any change is so slow in coming .
The truth is , however, that neither the idea of

stabilization, nor its application , is as new as it
seems to most people, as is shown in Appendices V

and VI.

To my mind, considering how slowly new

ideas usually spread , the wonder is that the progress
toward acceptance of the idea has been so rapid .


generation ago index numbers , a vital element in the
plan , were suspect ; now they are almost universally
used among intelligent business men . At the be
ginning of the Great War the correction of wages by

means of an index number was a purely academic



idea and was ridiculed when first suggested seriously .
To-day, as recorded in Appendix V , § 2 , it is in use

among a number of progressive industrial concerns
and some official agencies.

The present stabilization plan has itself received the
approval of several hundred prominent economists,

educators, bankers, business men , lawyers, publicists ,

and officials , as is shown in Appendix IV , $ 3.
B . “ The tide may turn." This suggestion is to let
well enough alone because perhaps the wrongs of the
present may be righted in the future by a reverse

movement of the price level.
But, even if there should be such a reversal in store
for us, two wrongs will not make a right. If prices are
to fall, there is the same need of a stabilizer as though
they were to rise. When prices were falling the same

sort of cheer was offered us : “ Wait, prices may rise !"
If this reasoning were correct we ought now to be
thankful for the rising cost of living as a providential

compensation for the falling prices of 1873 - 1896 !
In order to prove the needlessness of standardization

it must be shown that, in the future, we have reason
to expect neither a rise nor a fall of prices but a stable
price level — a condition of things which , so far as
index numbers show us, has never yet existed , and

which we feel safe in saying can never exist under our
present monetary system .
C . “ It requires governmental interference.”

In these

days of Governmental participation in economic prob
lems this objection will not frighten many people ,
especially as the increase in Governmental func

tions over those already existing in the regula
tion of the value of money

is infinitesimal.


Government already buys and sells gold , handles
gold reserves of several kinds, and publishes an index
number. The plan does little more, except to use the
index number to set the price at which the Govern
ment buys and sells gold , in order to make the dollar
a real standard of value instead of leaving its value



(App. II

to chance. The Government also standardizes every
important unit other than the dollar.
Furthermore, the Constitution of the United States
in Section 8 expressly authorizes Congress “ to coin

money , regulate the value thereof, — and fix the stand
ard of weights and measures.”

While , when the Constitution was adopted , there
could have been no thought of employing an index

number for regulating the value of money any more
than there was thought of using aeroplanes for carry
ing the mails , there was thought of stabilizing the pur
chasing power of money.

In fact it was the instability

of the Colonial and “ Continental ” paper money
which was doubtless largely responsible for this clause

and for the clause forbidding the individual states
from coining or issuing money .
Therefore, not only should we not complain of
the plan as giving new functions to the Government
but we may complain that this ancient Constitutional
function has not been performed as it should be to

keep pace with modern methods of measuring the
value of money .

We may go further and say that some Governments

have not only been negatively guilty (ofneglect to pro
vide a stable yardstick of commerce) but positively
guilty (of disturbing the monetary standard ) .
In our own Colonial, Revolutionary , and Civil
War history our American Colonies and national

Government depreciated their monetary standards.
In the Great War every belligerent country did so and
incidentally ruined the monetary standards of neutral

countries. It should be added , however, that our
own Government officials, from the President down,

strove to avoid inflation and succeeded more nearly
than did the officials of any other belligerent country
- a fact in which we may take some pride.
1 Asshown elsewhere American inflation was chiefly gold inflation
before we entered the war, and our war inflation , such as occurred ,
was largely credit inflation of private persons borrowing of banks.


Sec. 3, ED


D . “ We could not interest other countries." The
force of this objection has been greatly weakened by
the war which has created world -wide interest in the


of reconstructing monetary standards. No

country can fail to be interested in all proposals toward

that end .

Furthermore, as has been shown in Ap

I, § 8 , the adoption of stabilization in one

country, especially if that country be the United
States, would probably lead to its general adoption
elsewhere .

E . “ The evils are unreal.”

So far as this objection

is definite it has been answered in Chapter III which
shows how real the evils are. One ingenious objector
seriously suggests that the increase in gold may be

due to “ some as yet unknown social law which brings
out this increased supply to meet or to stimulate the

growing and changing needs of industry.”

It is diffi

cult to answer this objection specifically, until the

“ as yet unknown social law ” is discovered . As yet
no one has been able to discover such a law . Surely
the quest for gold is instigated by private gain and
not by any desire to “ meet or stimulate industrial

es of which
needs ” nor
n suprospector
reccult puriree
10. is lathe

ceives or hopes for proportionate to the occult public


ci are can
ave no
Only hhave
of sosuccess
service suggested . His
quantitative relation to social needs. On the con

trary , the discoveries of gold are fortuitous and con
form to no “ law ” of social benefit , known or un

This objection is clearly born of the dis

credited tradition of laissez faire with its fallacious
dogma that the public interest is always served by

allowing rampant individualism . Under this idea
we used to have unplanned streets without standard
building lines, unsanitary and fire- trap tenements,
wildcat banking, railway rate discrimination , un

sound insurance , chaotic and fraudulent weights and

measures, private coinage. Our present difficulties
as to monetary standards are due precisely to this

rampant individualism . We have intrusted the de





(App. II

termination of our yardstick of commerce to the luck
of the gold prospector, to the inspirations of geniuses

in metallurgy, to changes in banking systems, and to
policies of Government finance .
F. Conclusion. Unless I am greatly mistaken the
foregoing objections — that the plan has never been
tried ; that it is suspiciously simple ; that it would
mean Governmental interference ; that it would be

impossible to enlist the interest and coöperation of
foreign countries (even granted that, after much labor

and pains, we secured the requisite attention at

home) ; that, rather than go to so much, possibly
futile, trouble , it is far better to wait and see if the price

situation will not right itself ; that, after all, it is not
so bad that it might not be worse ; and that, anyway ,

we should rather “ bear the ills we have than fly to
those we know not of,” — are at bottom not intellec
tual but emotional objections. They are, as the

modern psychologist might put it, the “ rationalized ”
excuses by which a preëxisting and temperamental
hostilityc to anything new is defended
ontrast cbetween
dersta and the
The contrast
1° The
e misunumber
e oblgreat
e of all ththe
small importance of all the objections offered is note

worthy .

The large number of misunderstandings is

what we always expect in the subject of money .


the large number of trumped up and trivial objections
is what one might expect when a deeply rooted prej

udice against a plan , as a “ novelty,” is combined
with a lack of any real ammunition with which to
attack it . The impression is forced on us that those
who find so many objections to the new plan really

have just one — that it is new .

This impression is further strengthened when it is
observed how the various objections so often destroy
each other . I have sometimes observed that when
many different objections are offered to any proposi
tion they are mutually inconsistent. If the plan were

wrong, some glaring defect would presumably stand
out in the foreground.

But in this case every oppo

SEC. 3, F )



nent has his own set of objections. In fact, as the
objections show , they are often mutually contradic

tory. It is “ too simple ” and “ too complicated ” ;
“ too slow ” and “ too sudden " ; it is wrong “ be
cause it is fiat money ” and “ because it is not fiat
money ” ; “ it is simpler to make extraneous adjust
ments by index numbers” and “ adjustments are

unnecessary anyhow ” ; “ gold is stable enough as it
is ” and “ the adjustment would not be sufficiently
accurate ” ; “ it ties us up to the quantity theory

and “ it is inconsistent with that theory " ; " it would
not permit cycles of credit ” and “ it would produce

crises ” ; “ it fails to be ideal ” and “ it is too idealis
tic ” ; “ a national stabilization would isolate us too

much ” and “ an international stabilization would en
tangle us too much ” ; “ it would offer the govern

ment a dangerous chance to secure profit ”
would cost the government unduly ” ; “ it is
cal ” and “ it is mere temporizing with evils
the total abolition of money or capital " ; "

and “ it
too radi
it would

not permit needed inflation in war time ”

and “ it

would be totally destroyed by war," and so on.
After careful examination , I think every fair-minded
man who has any serious wish to see the world in which

he lives improved will agree that all the objections
brought against the plan are, without exception ,
either fallacious or trivial.
Long experience with public propaganda has taught
me how intensely stubborn is the temperamental

resistance to change, and perhaps quite as much so
among the intelligent as the ignorant, especially as
the intelligent have the advantage of being more

fertile in inventing objections.
Gold has become a sort of fetish of business men ,
almost worshiped with superstitious awe. Our fathers
had told us that “ nothing is so solid as gold .” Only
recently are people awakening to the fact that the
fetish is erratic and tricky. The argument that we
ought not to try to improve our monetary unit be




cause of the purely mythical wisdom of those who un
consciously and accidentally handed it down to us
is only an appeal to that curious and baneful preju
dice against progress which every hoary tradition

Our present standard, or lack of standard , is due to
an historical accident and yet we go on traditionally

using it simply because we got started in that groove,
just as Boston still uses its crooked streets, never
originally chosen with any reference to modern traffic ;

or just aswe still use the original railway gauge, set by
the horse carriage ; or just as we left our National

banking system virtually undisturbed for two genera
tions after the passing of the CivilWar conditionswhich
gave it birth ; or just as until May 19, 1828 ,we had no
standard weight for determining the contents of coins ;

or just as until after 1832 we had no standard units of
length , weight, or volume for the use of the custom

All our customary units of length , weight, and
volumewere changed on April 5 , 1893, by order of the
Superintendent of Weights and Measures, under

authority of an international agreement.

Acts to

standardize measures of fruits and vegetables (the

standard barrel and box ) have been very recently
passed by Congress . The National Food Adminis
tration has lately ordered that potatoes be sold by the

pound (which is uniform in all the states) instead of
by the bushel, which varies in weight. The long
pending bills to substitute the metric for the custom
ary standards are still pending. No standard unit

has any sacredness of age. We have changed and
perfected them throughout our history , and we are
still busy with changing and perfecting them . Physi
cists are now beginning to suggest that our standard of
length should be the wave length of light at a certain
1 History of Standard Weights and Measures of the United States,
by L . A . Fischer. Bulletin of the Bureau of Standards, Vol. I ,

pp . 365- 381.

Sec. 3 , F ]



point in the spectrum . Why, then, should we be
afraid to perfect the dollar ?

After any new plan has been tried and established
these same conservatives turn about and become its

most staunch supporters. This fact hasbeen often illus
trated in our monetary and banking system . Nothing
short of the shock of Civil War was able to divert
us from a state system of banking to a national one.
Later the proposal for a Federal Reserve system was

objected to most vigorously by bankers accustomed
to the old system .

The resistance of conservatism is strong at first but
has no resiliency .

It is not like the resistance of a steel

spring which , when pushed in one direction , will press
back , but rather like the resistance of a mass of dough
or putty which , though it resists impact strongly, yet
when it is once moved stays inert and does not return .
Under these circumstances, even if progress is made an
inch at a time, it is worth while to try to make it.
And now this obstacle of conservatism — the one
great obstacle — has been considerably lessened by
the Great War, which has shaken the whole world out

of old ruts. Even Great Britain is considering giving
up her ancientmonetary system — of pounds, shillings,
and pence — in favor of a decimal coinage. Such a

change would be felt by the people generally far more
than would the proposal here made.
The prejudice and ignorance on this subject of
monetary standards may be overcome either (1 )
slowly , by education beginning in the universities, and

filtering gradually through the business world , as edu
cation in the index number has, or ( 2 ) more quickly ,

under the stimulus of some sudden and spectacu
lar change in the purchasing power of monetary units
such as the war is now affording or such as may come
later from

some great chemical discovery of how to

extract gold from the low -grade clays of the South , the
gravel of the Sacramento River or from sea water.

Just now the all-sufficient answer to those who fear




to take so " radical ” a step should be that its so -called
radicalism would save us from the real and dangerous

radicalism with which the world is now threatened !

Some time, sooner or later , the idea will cease to be
new . We shall get as used to it as we have to Day
light Saving or the League of Nations, which were new

ideas a short time ago ; for the index number, more
and more utilized , will continue to remind us of our

present instability . Already in spite of the distin
guished character of someopponents or semi-opponents,

the weight of real authority is on the side of the plan
and not of its opponents.

But the number of those who have as yet studied
the plan or even considered its basic idea is very
limited . Before any control of the price level can be
actually undertaken , a larger public, especially in the
business world , must learn to realize its necessity .

So long as the mass of businessmen fail to realize that
they are daily gambling in changes in the value of
money , a fact of which they are blissfully unaware,

no great demand for preventing those changes is

likely to be felt ; and the business man is the party
whose interests are chiefly involved .

4 . The Obstacle of Special Interests
A . Debtor and Creditor . One of the supposed ob
stacles to the stabilization of the dollar is the opposition
of interest between debtor and creditor.
This supposed obstacle takes two forms, one the

fear that there would be a struggle for advantage at
the outset over the par to be adopted for the price level
and the other the fear that the subsequent operation

of the system would give rise to disputes between these
two general classes.

The first supposition represents, it is true, what may
prove a real difficulty .

The settlement of this ques

1 See Appendix IV , $ 3.

SEC. 4, A ]



tion will be like the adjustments of the interests of
various classes of stockholders and bondholders in a
reorganization or like retiring the greenbacks and re

suming specie payments . This is a Gordian knot which
will have to be cut when the time comes in themanner
which then seems best in view of all the circumstances.
But it is quite possible that even the introduction
of the system would scarcely call for more than passing

notice. This has usually been true when monetary
standards have been changed whether for good or ill.
The average Filipino, or the average inhabitant of
India , had no real conception of the changes which were
wrought by the adoption of the “ gold exchange stand

ard," if indeed he ever heard of it.

The average

American in 1873 paid little attention to the de
monetization of silver, or in 1879 to " resumption ,”
once that it had been decided on in 1875 . So also
to -day the average American is still unaware of the
recent changes in our banking and currency laws, even
of the extensive substitution of Federal Reserve notes
for gold certificates.

But, — to turn to the second form of the supposed
obstacle , — after the start-off had once been decided
upon , the subsequent operation of the system would
not arouse contests. On the contrary , it would avoid
them . Experience proves that the creditor and debtor
classes do not get aroused when the price level is fairly

stable but only after the most drastic and long con

tinued changes.
Thus it took over two decades of falling prices after
1873 to arouse the debtor class to a realization of its
losses, and then only after much agitation .

Likewise to -day it is hard to make the average man
realize that the depreciation of the dollar has affected
the interests of creditor and debtor. Though econo

mistsmay clearly show by index numbers that the bond

holder has not really been getting any interest, i.e. has
1 For my suggestions as to how to solve this part of the
problem , see Appendix I, § 4.



(App. II

been losing the equivalent ofmore than 100 % of his in
come, yet the ordinary man who believes “ a dollar is a
dollar ” gives scant attention to such a proposition
and, if he finds any fault at all with rising prices, vents
his wrath not upon inanimate gold or credit but upon
the luckless “ profiteers,” the retailers, the landlords,
the trusts, themiddlemen , the tariff, or the tradeunions.
So also the dsavings
bank depositor,
i during the

last ttwo
the prhas
wo decades
t. facdefrauded
t or its of all

through the depreciation of the dollar, does not yet
understand either this fact or its cause.

The reason for such astounding indifference to the
colossal interests involved is that the loss is indirect

and , until recent years, has not even been measured .
It has always been found that there is less complaint
under indirect than under direct taxation . The or

dinary tax payer feels, and complains of, direct taxa
tion because he can see and measure it. But the

economist cannot rouse the tax payer from his lethargy
enough to make him cry out against the outrages of
indirect taxation . All the cartoons and figures de
signed to show , for instance, how the tariff taxes the

consumer, make comparatively little impression ; and
it has required several generations to bring the Amer
ican consumer to the point of even mildly protesting
against a high tariff.1
If, then , there is so conspicuous an absence of com
plaint over huge losses, because hidden , it is not to
be expected that there will be complaint over the cor
rection of these losses, especially as these corrections
also lie hidden from view , or over the small fluctuations

left uncorrected . To bespecific : if,as experience proves,
the price level has to change more than twenty - five per

cent before eliciting protests we need not fear quarrels
over one or two per cent.

In short, if the monetary system proposed were once
1 Even this protest was largely based on the recent general rise
in the cost of living mistakenly attributed to the tariff as the chief

Sec. 4, A



adopted , there would be very little attention paid to
it .

The business world would be as unconscious of

the operation of stabilization as a healthy man is of
his stomach or liver. Only the changes in the price

of gold would register the operation of the system and
few persons besides the gold exporter, importer , jeweler ,
and miner would ever notice what the price of gold
was. The ordinary man would , just as to -day, buy

and sell with yellowbacks or other money or checks,
blissfully unaware that these have any relation to gold .
The case would be quite different if the proposal
were to adopt the “ tabular standard ” by correcting

money payments through the addition to , or subtrac
tion from , a debt of a certain number of dollars. Under
these circumstances the extra dollars paid or withheld
would stand out definitely like direct taxes as con
trasted with indirect taxes. There might then be
some disputes over the correctness of these extraneous

adjustments of contracts. But, even in such cases ,
disputes would probably be rare.

At any rate there

seems no evidence of extensive disputes where the
tabular standard has actually been used as it has, for
instance, in Scotch Fiars prices, in the Massachusetts

law of 1780 described in Appendix V , § 1 , and in the re
cent adjustments of wages by various official bodies and
private firms in the United States and elsewhere. This
being the case, surely when the tabular standard is,

as it were, incorporated in the actual money of the
country, the ordinary debtor and creditor would be
even less aware of how his interests had been safe
guarded than he is now aware of how his interests are
jeopardized under our present gold standard . He

would simply note, – after a decade or two, — that
prices had kept stable.

It is still more difficult to imagine a quarrel be
tween debtor and creditor over technical details, over
whether iodine ought or ought not to be included in
the index number, or whether wheat ought to be given
a “ weight ” of three per cent or four per cent of the




(App. II

total. As we have seen , the influence on the final index

number of any one commodity or of any other single
detail of the system is almost infinitesimal.

Sometimes the objection takes the shape not of fear
that debtors and creditors would quarrel over the plan

but that they would find ways to corrupt or pervert
its administration .

But no room for abuse is open either in the Bureau

of the Mint which would regulate the weight of the
dollar, or in the Computing Bureau , which would

calculate the index number. In either case the func
tions involved would be clerical ; the acts required ,
specific. Departures from a strict compliance with
the law would be instantly recognized , and would bring
upon the culprit wrath and punishment proportionate

to the gravity of the offense .
Thus, the Bureau of the Mint, which would regulate

the weight of the dollar,would do so merely by buying
and selling gold at specific prices fixed for it by the
Computing Bureau ; and it would have to buy or sell at
the pleasure of the public. It would have no more

choice than does a broker who is ordered to buy or sell
at specified prices.

In the Computing Bureau , the work of which is
based on published market prices and is necessarily

done in the light of day, the danger of abuse or fraud
is also negligible . There is some experience to guide
us here. The gold exchange system which has more
of a discretionary element in it than the proposed sys

tem has not been found to be open to abuses but has
been faithfully executed .
If manipulation of prices is to be expected at all we
should expect to find it most in the Scotch Fiars prices al
ready referred to. In this case money rents are deter

mined by prices of wheat (“ corn " ). Complaints of
unfairness have undoubtedly been made, but to leave
money rent uncorrected was considered much more un
fair. I have examined carefully the records of the only
complaint of which I have found mention in the Yale

Sec. 4, A ]



University Library . This complaint was simply that
the jury was not wholly disinterested and did not take

sufficient testimony. That the system itself was not
in dispute is shown by the following interesting pas
sage :

“ It is evident, thatGrain , sooner or later, and, probably , within
a short period , will become the only standard, by which land- rents
will be paid throughout the kingdom . Money, from its fluctuating

character for the last thirty years, has proved a medium mutually
unfair , and not less dissatisfactory , to both landlords and tenants.

Taught by past experience, no landlord is now willing, without
the assurance of an adequate rent, to alienate his property for any
considerable length of time; and without lease of acre endurance ,

no tenant is disposed to embark his capital and skill in the adventure
of cultivation . In Grain , as a measure of value , a medium has, at
length , been found , which , while it preserves the just rights of the

one, secures a return for the honest industry of the other.”

Were the system very unsatisfactory it would scarcely
have been continued through over two centuries.
It should be further emphasized that, whatever slight

danger now exists of abuse of Scotch Fiars prices,
would be almost infinitely reduced by the plan here

proposed ; because, in that plan, we are concerned
with great public markets in big cities, with highly
standardized grading of goods and standard price

quotations instead of with small crude country markets,
and because we have to deal with a large number of

commodities instead of with only one. It is incon
ceivable that any sinister influence, in order to help
the debtor or creditor, could manipulate a sufficient

number of commodities to affect appreciably the index
number. Even if some one could “ corner ” a market

and double the price of one commodity this would not
raise the general price level one per cent.

To accom

plish even such a feat is out of the question , while to
1 In the “ Report of a Committee of The Commissioners of Supply
for Lanarkshire ; Appointed to enquire into the procedure by which
the Fiars of Grain for that county were struck , for the year 1816 ;
together with some investigation of its principles and some sugges
tions for its improvement," Edinburgh , 1817 . Recorded in Tract

579, Yale University Library .



(App. II

corner or control a hundred commodities is unthinkable.
Moreover, supposing such control of commodities pos

sible , we are now far more exposed to the danger of a
corner in gold than we could be to a corner in hundreds
of other commodities !

The same argument applies to any supposed danger
of misquoting of prices.

Any gross misquotation such

as doubling the true figure would be, of course, out of
the question , while anything less would be of no use to

the would-be rascal. And if there should be an effort
to stretch some price quotations as far as this could
be done without detection (which would be only a

single per cent or two), the result would not affect the
average more than a small fraction of one per cent,
which likewise would not be enough to be worth while.

Furthermore, experience shows that the manipula
tion of weights and measures and moneys has not

occurred where they were entrusted to official technical
scientific bureaus but only where either private or

political control was permitted.
One may still see in the museum of the old Hanseatic
League at Bergen, Norway, two sets of weights . The
heavier was used for buying and the lighter for selling !
The modern official sealer of weights and measures has
reduced such fraud to a minimum .

Similarly under the old private right of coinage there
was confusion and fraud.

But no modern official mint

has been accused of making light-weight or counterfeit

We conclude, then , that the fear of contests or ma
nipulations arising from the operation of a stabilized
dollar is quite groundless. Wemay go further and say
that, on the contrary , such a dollar would remove the
danger of contests and manipulations, which danger is

not only now present, but is clearly due to our unstabi
lized dollar, ever affording grievances to the debtor

against the creditor, or vice versa . In 1896 the “ free
silver " campaign derived its strongest support from the
debtor class , which sought to " get even ” for the losses

SEC. 4, A ]



and increase of debt-burden due to falling prices, i.e. to
the rising purchasing power of the dollar.
The recent great rise of prices, i.e . fall in the pur
chasing power of the dollar, now threatens a similar
conflict of interests. The millions of bondholders,
creditors to the tune of hundreds of billions of dollars

mostly growing out of the war, will have an interest
in stopping inflation and creating contraction , while
the debtor classes, including the governments and the
taxpayers, will have an opposite interest.

The conflict will be mitigated, of course, by the fact
that the bondholder and the taxpayer are, to a large
extent, one and the same person . But this may not
prevent the conflict becoming a bitter one. In fact
already at least one bitter book has appeared in Eng

land against contraction , alleging that a conspiracy
is now being plotted by the creditor class to destroy

the war currency and produce contraction .
The abuse most common in currency history has

been inflation in the interest of the debtor class, and
especially of the Government exchequer.

The pro

posed scheme would not only be free of this danger

but, when once in operation , would be a strong safe
guard against the whole idea of inflationistic legislation .

There is always with us a latent danger of inflation ;
but if a stable dollar should be adopted , that danger
would be greatly diminished .
The plan would involve a double education . For,
first, it could not be adopted until it was realized that
its object was to stabilize prices and maintain the con

stancy of the purchasing power of the dollar. In the
second place , it would , therefore , always be a standing
object- lesson as to the principle of stability . Its adop

tion , or even its discussion , would tend to increase the
understanding of, and desire for, a stable standard and
so fend off unsound schemes.

The fact of the buying

and selling of gold by theGovernment at variable rates
would itself be informative as to the object in view ;

and the constant clinging to par of the published index





(App . II

number of prices would be eloquent testimony of how
the system worked.
Under our present system

inflation can be sug

gested without the question of changing the purchasing

power of the dollar being so clearly thrust forward ,
since our present system

does not even pretend to,

or afford any mechanism for, such stability.

In fact,

inflation almost invariably comes by subterfuge and
indirection .

If a stabilization system were adopted

any attempt to break it down would be an evident

and deliberate departure from the principle of uniform
ity in the purchasing power of the dollar.
We see then long as we leave monetary units

crude, unscientific , unstandardized, we run far more
risk of political manipulation than we shall when we
intrust them , like other units, to standardization .
We should set about our search for a just settle
ment of this question before it is allowed to become a
partisan or political question . To stabilize the dollar
and intrust it to a scientific bureau would put it as
much beyond the reach of manipulation as are the
astronomical clocks of the Naval Observatory or the

weights and measures of the Bureau of Standards.
B . Gold Producers.

There is one special commer

cial interest which might, until it had thought the
matter through , feel inclined to oppose the proposal,

— the gold mining interest. The very crude fallacy
that the stabilization plan would “ throw the losses "
now suffered generally on to the Government has al
ready been answered (see Appendix II, § 1, I ). The
same crude fallacy has been adapted to mean that

“ the loss would be thrown ” on to the gold miner .
Gold producers might, under some such notion ,
mistakenly prefer the present fixed price of gold to a

variable price. They might on first thought regard
a fall in the price of gold as a calamity .

Any who would take this view would overlook the
fact that this lower price would be in terms of a heavier

dollar. It really makes no difference whether the gold

SEC. 4, B ]



miner sells an ounce of gold for twenty dollars, of
a twentieth of an ounce each , or for forty dollars,
of a fortieth of an ounce each . In fact the former is

approximately the case in the United States and the
latter in Mexico . If the view were correct that a

lower price of gold in terms of a heavier dollar were
really injurious to the gold miner , why is it , as I have
said before, that gold miners do not now sell all of their

gold in Mexico instead of in the United States, so as to
receive a price twice as high ?
Again, it does not matter whether the gold miner
receives a high mint price and has to pay dearly for
his machinery , labor, supplies, and other costs of opera

tion , or receives a low mint price and can buy his

machinery, labor, and supplies more cheaply.
Still again , it does not matter whether the miner
makes large money profits while the cost of living is
high or small money profits while the cost of living is

lower. In fact the former is true in Mexico and the
latter in the United States.
In the long run, then , there is no advantage or dis
advantage to gold miners from changing the price of

gold .

This is fundamentally because the price of

gold is in terms of gold itself. It ought to be clear
that the interests of the gold miner are not concerned
with the price of gold in terms of itself ! Their in
terests lie in exchanging their gold for real wealth .

This is well illustrated by recent history . Despite
the “ fixed price of gold ,” the war has, none the less,
hurt the gold producer by inflating the world ' s cur
rencies with credit substitutes for gold and so lower
ing the value of gold , in terms of other things.

Had the dollar been stabilized before the war and

been kept stabilized during the war the gold miners
would not have been hurt by the war.

They havebeen

hurt by inflation — the flooding of the currency with
substitutes for their product. Consequently they have
asked for relief. They were soon made to see the futility
of any relief from raising the price of gold in terms of





gold . They should have no difficulty, therefore , in
seeing also that lowering the price of gold in terms of
gold would not harm them .

On the other hand, while the gold miner would feel
no special effect from the stabilization plan he would

enjoy the same general advantages which it would
bring to society .

Furthermore, resistance by the gold miners to ac
cepting a variability in the price of their product
which every other industry has to accept, when the
object of the plan is to relieve all industries, their

own included , of the variable unit of value, might be
shortsighted ; for the world will not forever tolerate
the intolerable evils of an unstable dollar, and if the

gold standard cannot be rectified it will some day be

abandoned altogether.
It is clear, therefore, from several points of view ,

that only shortsighted gold producers would oppose
the plan . In this connection it may be said that
several prominent gold mine owners have approved of
the plan .

C . Devotees of Panaceas. Another special class of
objectors consists of reformers who have panaceas
and who, therefore, consciously or unconsciously , ob
ject to the intrusion of any rival remedy. The so

cialist, the single taxer, and the devotees of various
other reforms, when they object to the plan , usually
do so merely because they think that their own pet

remedy is adequate to solve the whole problem
social injustice.

Anything else, they

“ go to the root of the matter.”


say , fails to

They seize the

opportunity , afforded by the general desire for a
remedy, to make capital for their own proposals,
however remote from the problem in hand.


ists especially systematically pooh -pooh any method
other than socialism as “ mere temporizing."
Such objections answer themselves. We might as
well object to standardizing the yard or the pound , on
the ground that such a measure would not put a stop

SEC. 4, DI



to social discontent while socialism or the single tax
would .

The plan to stabilize the dollar is , needless to say,
not put forward as a panacea or as a substitute for
general schemes of social reform . It has simply one
object, — to supply a dependable unit of value. That

object is not in conflict with any other sincere plan
for social betterment. Only those who wish to retain
existing evils, confusion , discontent, and suspicion in
order to make use of them

to further their own pet

plans can oppose stabilizing the dollar.
In this connection I may mention an incident of a few

years ago . Following an address by me on stabilizing

the dollar, a prominent radical socialist addressed the
same audience and attributed the high cost of living
to “ capitalism .” Afterwards he frankly told me,
privately , that he realized the truth of my contentions

but that, as a socialist, he wanted to “ make hay while
the sun shines ” and that the high cost of living was a

good lever by which to make the people hate the exist
ing social order !
D . Speculators. This is the only class which would
be really deprived of great opportunities by stabilizing

the dollar. Speculation feeds on uncertainty. It did
so after the Civil War and is doing so after the Great
War. The greatest beneficiaries and the greatest victims

of great price movements are speculators. As long as
uncertainty exists speculation will, and should , exist and

the wise speculator in one way and another relieves the
rest of society of someof its burden of uncertainty, while
charging for this service a very high price. But every
reduction of the hazards in business on which speculation

feeds marks a step forward in civilization . Stabilizing
the dollar would mark such a step forward , though of

course it would by no means take away all opportuni
ties to make money by taking chances.


I. A Sound Alternative

A . Introduction . This book was written not so
much in behalf of the specific plan described , which
is regarded as the most practicable, as to show that

the problem of stabilizing the dollar and the price level
is soluble .

Many readers would like to know what alternative
plans have been suggested . Of these the only one
which seems worthy of careful consideration is that

suggested , in a conversation with me, by Professor
Gilbert N . Lewis, Professor of Chemistry of the Uni
versity of California . He asked if it would not be
possible to have paper certificates redeemable in the
actual goods-dollars instead of in their gold equivalent.

It would , of course, be impracticable literally to main
tain the “ free coinage,” i.e. deposit, of goods-dollars for
certificates on the one hand and the free redemption of
these certificates in goods-dollars on the other ; because

these goods-dollars would be too heavy ,bulky, and per
ishable to use as reserve, as well as for other reasons.
Nevertheless it would be entirely practicable to
secure the desired regulation of the quantity and
value of paper certificates by a simple device for in
direct issue and redemption .

Such a system would first be launched by the con
version of our present gold certificates into certifi
cates entitling the bearer to redemption in goods in

accordance with the plan described below . All other

Sec. 1, B ]



money, bank notes, etc .,would of course be redeemable
in these goods-dollar certificates.
B . Redemption Warrants. The essence of redemp
tion of these goods-dollar certificates is that their
holder would be able, with certainty and withoutmuch

trouble , expense , or delay, to exchange them for the
commodities specified and in the quantities specified .
This object could be substantially attained, as Pro
fessor Lewis suggested to me, by using the device of
warrants for commodities as intermediate between

money and commodities.

This would break up re

demption into two stages. The first stage would be
when the holder of certificates would present them in
convenient lots of, say, one thousand dollars) at the

Treasury and receive, in exchange, a set of separate
specific warrants or orders, each warrant being for a
specified amount of a particular one out of the collec
tion of commodities represented . Thus one warrant
might be for a thousand board feet of lumber, another

for half a ton of sugar, etc., the entire collection consti
tuting a thousand goods-dollars.

The second stage would be when these various war

rants would be presented at separate offices for redemp
tion in their respective commodities.
It is not necessary to discuss, at length , the exact

organization of such voffices.
ffices , hhere
ods iscosimply
ere willitMy
ion oobject
to show that, if we were willing to make the innovation

of establishing such redemption offices , the plan would

GovernmewVarious methods could
be economically feasible.
tor,e inor aWash
used . Thus the Government
nt sup
or inset
ington , New York, or elsewhere, or in several different
places, a great Government department store or agency
which , whatever else it did , would receive these warrants
and either hand over the goods from stock or
agree, as immediately as practicable , to secure and
deliver the goods called for . Another method would
be for the Government to license a single private
agency to conduct the business of redeeming the war
rants for due consideration . A third method would



(App. III

be to license a number of such agencies, say one for
each commodity .

In this case, the most natural agen

cies would be existing large dealers in the various com

modities concerned , a lumber merchant for redeeming

lumber warrants , a wheat dealer for the wheat war
rants, a coal dealer for coal, etc.
Nor do we need to discuss, in detail, the method by
which the Government would reimburse
any agencies

which theed. It could puhe method,for instanceor said

l, ang a w.arItfocould
r the pay
or the
ohe lump
met sum rretainers
method simplest to under

actual costs involved .

stand would be for the coal dealer, for instance, after
honoring a warrant for coal, to present a bill for said

coal, at current prices, or at contract prices, to the
Government, accompanying the bill with the warrant

as evidence of the validity of the bill.

This arrange

ment would be like that made for tourists by “ Cook 's ”
and other companies which sell warrants for meals
and lodgings which are honored by hotels and later

sent back to Cook 's with bill for services rendered .
C . Unrestricted Redemption via Warrants. What
ever may be the business arrangements best suited

for providing a working mechanism by which the
Government would redeem certificates in the particu
lar commodities which the certificates represent, our

present interest lies in the working of that mechanism
to stabilize the dollar.

The essence of the operations described is that
certificate dollars are freely redeemable in goods
dollars (via warrants).
Such redemption would serve to correct any incip
ient depreciation of the certificate- dollar relative to
the goods-dollar.

For, if the index number should rise much above par,
i.e. if, in the open markets, the collection of goods con
stituting one thousand goods-dollars cost much more

than a thousand dollars of certificates, recourse would
be had to redemption . Speculators or warrant-brokers

would arise who would find it profitable to gather to
gether , say, $ 100,000 in certificates, redeem them in

Sec. 1, D ]



warrants, redeem those warrants in commodities, and
sell these commodities in the open market for, say ,

$ 110 ,000 of certificates, thus making a profit of $ 10 ,000
(less expenses) on the series of transactions. As long

as the index number were enough above par to make
such operations pay, redemption would go on .


certificates so redeemed would be canceled , thus con

tracting the currency and reducing the index number
toward par.
In short , if such redemption of money into com
modities existed some people would refuse to patronize

the markets at very high prices and , instead, patronize
the Government which guaranteed to redeem certifi
cates in goods.

D . Unrestricted Deposit of Goods-Dollars . So far
we have considered only one of the two great regu

lators of the value of money ; namely, unrestricted
redemption of certificates in goods, constituting the

outflow of money from circulation . The other is the
“ free coinage ” or unrestricted deposit of goods, or

some equivalent system of issuing certificates for
goods, constituting the inflow of money into cir
culation . While , as already said , it would be imprac
ticable to have literal composite goods-dollars brought
to the mint to be exchanged for certificates exactly in
the manner that gold is now exchanged , yet essentially
the same result could be secured by the intermediation

of warrants. The warrants would , in this case, pass
from merchants to the Government instead of from
the Government to merchants as in the operation
of redemption .

To fix our ideas, we may suppose a licensed war
rant-broker executing the following operations : First,
with money ( certificates) he buys up from


laneous sources , wherever he can get the lowest prices,
the bill of miscellaneous goods constituting, say,
$ 100 ,000 in goods-dollars. Some or all of these may

be left in the custody of the respective dealers from
whom he buys ; but their ownership passes to him .




Secondly , he draws a sworn warrant for each of
these lots of goods and presents at the Treasury the
total assortment of such warrants, i .e. in the propor

tions required to constitute goods-dollars. He re
ceives, in

exchange , $ 100 ,000 of certificate-dollars.

He has then virtually coined his goods into money or,
at any rate, deposited 100,000 goods-dollars and re
ceived 100,000 certificate -dollars .
After the operation the Government then owns the

miscellaneous bill of goods, or, let us rather say, a
credit or right against the warrant-brokers to furnish
100, 000 goods-dollars on demand or short notice (a

right which would be enforced whenever the goods
were needed for redemption of certificates).

The above process , simulating free coinage, would
prevent the goods-dollar falling much below the cer
tificate-dollar ; for, as long as it is low enough to make
such “ coinage " of goods into money profitable, such
coinage or deposit would continue. Thus if the mer
chant described above found that, at current prices,

he could buy up the commodities constituting 100,000
goods-dollars for only $ 90 ,000 he would , after deposit

ing them for $ 100,000 , be making a profit of $ 10 ,000
(less expenses). The volume of money would then
expand , prices would rise, and the profit on such
operations would cease .

In short, the “ free coinage ” of goods-dollars would
keep prices up because holders of goods, rather than
sell at very low prices in the open market, would avail

themselves of the Government's standing offer to buy
1000 goods-dollars for 1000 certificate-dollars.
E . Summary. These two processes, equivalent to
our present free or unrestricted coinage and redemp
tion , would keep prices from falling much below , or

rising much above, par. They would thus put limits
on the possible fluctuations of the index number, re

demption taking place when the upper limit was
reached and “ coinage ” or deposit taking place when
the lower limit was reached. As long as the price level

SEC. 2]



lay between these limits, there would be neither redemp
tion nor “ coinage.”
It is scarcely worth while , as I am not advocating
this plan , to go into much further detail. But it may
be pointed out that, if desired , the limits to the index

number may be narrowed if the Government would
bear the expense in clerk hire, rent, interest, etc., in

volved in the broker's work of conducting his opera
tions (just as, to -day, for an analogous reason the
Government bears the expense of the Mint).

We have, so far, assumed that money , i.e . certifi
cates, would come into being , as to-day , only by the act

of “ coinage,” i.e. by the deposit of (warrants for)
commodities and never by mere arbitrary issue to

defray Government expenses, as in the case of “ fiat
money ” ; and , likewise, that money would pass out
of existence only by the act of redemption , i.e . by the
issue of warrants for commodities. The monetary

system would then be strictly analogous to our present
system , gold being replaced by a composite of com
modities. It would not be a " fiat money ” system .

2 . The Same System Modified by the Omission
of “ Free Coinage "
We could , although with danger to the system ,
omit the “ free coinage ” feature, provided we per
mitted the issue of certificates for Government ex
penses and relied on such issue ceasing as soon as the
resulting tendency toward redundancy brought about

a demand for redemption .

If , under such an arrange

ment, the Government should persist in overissuing
paper certificates with one hand while redeeming them

with the other , it would be losing through redemption
what it would gain by the issue, in an “ endless chain ."

As to the opposite possibility, that of contraction ,
there would , if free coinage were not employed , be no

safeguard. Nor would any be needed ; for while ,
theoretically , the issue of certificates might be in



(App. III

sufficient to keep the price level up to par, in actual

practice the Treasury would be sure, in self-interest ,
to issue all it could without producing redundancy and
loss from redemption .
The system described in this section would be exactly
analogous to a system into which our present gold
standard system would be transformed if we were to
drop the free coinage, or deposit of gold (and permit,

instead , the issue of certificates in payment of Govern
ment expenses limited merely by the obligation to


in gold ) .

3. The Same System Modified by the Omis
sion of Redemption
To make our statement complete and symmetrical

it should be added that we could imagine the opposite
modification of the system , the “ free coinage " feature
being retained but the redemption feature omitted, the
Treasury being allowed to issue certificates not only
in exchange for (warrants for) commodities but also, at
discretion , for expenses. But such a system would

work only theoretically , i.e. on the assumption that the
Treasury should systematically keep down its issues.
It would be effectually stopped from undue contraction
(were there any danger of that !) by the loss which
would be imposed on it by warrant-brokers in demand
ing “ coinage ” of commodities. But, practically, the
temptation would always be to expand and, as there

would bebe noalmclear
mp coinagesuch
ly. It
s callecheck
d are"onfiatexpansion,
money » ystem and he, in

would be almost sure to break down . It would be, in
effect, what is called a “ fiat money ” system and little,
if any, better than a pure “ fiat money " system in which

there is neither redemption nor coinage but only dis
cretionary issue.

Such a system is fundamentally un

sound because there is nothing to check inflation . It
would be analogous to a system into which our pres

ent gold standard system

could be transformed by

omitting redemption . Many writers (e.g . Parsons,

Sec. 4 )



Winn, and even Alfred Russel Wallace) have, it is
true, seriously proposed such a discretionary system .
But both experience and theory condemn it. No

system yet proposed is really sound which omits the
feature of redemption (nor is any system entirely

sound if it omits the feature of deposit). Where paper
money is vaguely assumed to “ represent ” commodi
ties without any active redemption to make it good

such representation is a mockery. Thus the famous,
or infamous, “ assignats ” of the French Revolution
were supposedly “ based ” on land but were in no way
restricted thereby.
4 . A Money Based on Labor

Others have suggested a plan somewhat analogous to
the foregoing , the standard being a day 's work of com
mon labor.

We have as usual to consider the two fundamental
operations of issue and redemption .

The plan provides for the virtual free “ coinage "
of such day's work into labor certificates by having
the Government offer work on public roads or other
public works issuing a fixed sum of money, e .g . three
dollars for such day's work of common labor.
No provision for redemption is made, however.
The certificates are receivable in taxes, but this does

not make them convertible into day 's work . The
theory is that, should there be, at any time, an excess
of certificates in circulation , their issue would be checked
as workmen would refuse to work for the Government

at the fixed price when , as a consequence of inflation ,
they could get more from private employers.

This system is in essence , therefore, the one- sided
system described in $ 3 . It is as if we had free coinage
or unrestricted deposit of gold for our present gold cer

tificates without provision for redemption (although
the certificates would , of course, be legal tender and
receivable for taxes).




The faults of such a system are : (1) Lack of redemp
tion as a decisive check on inflation . (2) The conse
quent temptation to inflate by issuing the certificates

for general expenses . ( 3 ) The inconvenience and help
lessness of the Government as to the amount of thepub

lic work it would thus give out. Sometimes workers
would apply in large numbers and the Government
would have to

give them

work , even if it did not

really need them . At other times workers would apply
in small numbers or not at all, because attracted , for
the time, by private employers and the Government

could not secure their services as it could not, without
spoiling the currency , bid above its fixed price. Public
works would thusbe entirely subordinated to themain

tenance of the currency . (4 ) The lack of definiteness
of “ a day 's work of common labor ” and the lack of
its fluidity.

The question of the relative virtues of the labor
standard and the commodity standard is discussed in

my Purchasing Power of Money, Chapter X , § 4 .
5 . Governmental Control of Gold Production
Mr. B . M . Anderson , Jr., suggests international
Governmental control of gold mining, or a variable
tax on gold mining. The former has already been
mentioned .

The latter would be unjust to


miners and, for that reason alone, impracticable .


plan proposed in this book must not be confused with
such a plan . It is not a plan to control the output of

gold . As shown in Appendix II, § 4 , the gold miner
would not be adversely affected but would share in
the general advantage and prosperity which the plan
would bring .
6 . The Tabular Standard
As is shown under “ anticipations " in Appendix VI,
§ 3 , D , the idea of a tabular standard is a very old one,
1 See Appendix I, § 1, L .

Sec. 6 )



and , as shown under “ precedents,” in Appendix V , it

has in a number of instances , notably during the Great
War, been actually employed.
The proposal is , not to change the monetary stand

ard itself but to correct its injustices in any contract
by supplementary payments from

the debtor to the

creditor or vice versa according to an index number.
If a debt for $ 1000 were contracted in 1900 and paid
in 1920 and if the index number in 1920 were 250, on the

basis of 100 for 1900 the debtor who had engaged to
pay by the tabular standard would , in 1920 , owe 250 %

X $ 1000 , or $ 2500 ; that is, he would supplement the
$ 1000 which his debt calls for by $ 1500 under the
tabular standard agreement.

This plan would , apparently , accomplish everything
which the plan proposed in this book would accom
plish and without disturbing our monetary system in
the least.

Practically , however, it would never accomplish
more than a small fraction of what a true stabilization

of the dollar would accomplish and, if widely used ,
would really cause considerable disturbance, of one

sort and another.
As a makeshift in an emergency this plan is worth
while , especially for correcting wages, but its incon
veniences stand in the way of a wide adoption ,
especially in ordinary times.

In the absence of a real

standardization I favor1 it most heartily and hope
that it may serve as a stepping stone toward something

The two chief objections are ( 1) the inconvenience
of calculating (which would be like that which would

be caused if we were to use as our yardstick of length
the height of a barometer and had to employ a new
correction factor each day for selling cloth ) and ( 2 ) the
trouble which would come from the fact that the tabu

lar standard would only be partially employed . Thus
See Irving Fisher, “ Adjusting Wages to the Cost of Living,”
Monthly Labor Review , November, 1918.




if a merchant corrects the itemsonly on one side of his
ledger by an index number, his profits would be destab

ilized rather than stabilized.
1See Irving Fisher, The Purchasing Power of Money, New
York (Macmillan ), p . 336, and “ Rejoinder by Professor Fisher ,'
American Economic Review , June, 1919, pp . 256 – 262.



1 . Either an Upheaval or a Collapse of Prices

Weakens Confidence in Money
In Chapter III certain historical effects of changes

in the level of prices were noted .

These were selected

to illustrate the evils of an unstable dollar.

We are here interested in certain other historical

effects of price movements , namely those on popular
ideas of money.
Any noticeable change in the price level is practically

sure to produce a crop of complaints and of proposals
to remedy the disturbance. At first these popular
complaints and proposals ignore money , for the reason

that, as explained in Chapter II , the popular mind is
full of fallacies about money. To look to the dollar
as a cause of great price movements in food , steel, and
cotton , is literally the last thing to occur to the ordinary
man . When those more versed in monetary theory
suggest that the dollar may have any such rôle to play ,

the idea is at first greeted with derision . But if the
price movement is rapid and long continued , the idea
of a monetary cause behind it gradually begins to enter
the minds of men least impervious to new ideas.
The chief, though not the only , examples of such
violent price convulsions are found during and follow
ing great wars.
During a war, if the fiscal needs are great, inflation
is apt to take place. After inflation has wrought its

harm , a healthy distaste for inflation sets in and leaves
its impress on politics, legislation , and the national tra
dition . Each war supplies its particular object lesson



(App. IV

and adds a little to the education of the people on the
money problem , although , unfortunately, the lesson is

largely forgotten by the time it is next needed and the
old costly way of learning to lock the door only after
the horse is stolen , goes on .
It is surprising how often a forgetful public will
repeat its old mistakes. The exigencies of war finance
again bring a tremendous pressure toward inflation


he feeble
Cound again
past, tthe
feeble scruples left from
a dimly remembered past.

And sometimes these faint traditions are made to
count for much less by changing the form of inflation .

The public will often condone the new and disguised
form of inflation even when they would turn their
backs on the old forms. For instance, many business

men , while having a healthy dread of irredeemable
paper money, yet did not object to the laws of 1878 and
1890 providing for inflating our currency with silver,
and they nearly yielded to the “ free silver " sirens
in 1896 . In recent years we have had much gold in
flation. Yet even to-day, only a small minority of
people will admit the possibility that there could be
any such inflation .

Credit inflation is even more subtle and enticing.
Many will remember the fallacies current when the
United States entered the war . One orator told his
audience they need make no effort at all in order to

subscribe to Liberty Loans. “ All you need to do,"
he said , “ is to go to a bank and borrow the money
which you are to lend to the Government, agreeing to

let the bank have the bond you buy with that money
as collateral security. It's just perpetualmotion ! ”
Even to -day there are those who will deny that

there has been inflation of any kind during the Great

Such denial is always found as a mental “ de

fense " whenever there has been inflation.
But sooner or later the truth is admitted and the
temper of the people and their statesmen becomes one

of “ good resolutions.”

SEC. 1]



The abuses of paper money inflation have usually
called forth some attempts to safeguard against it .

It was in order to escape from such evils in Colonial
days that, in Massachusetts , the commodity bonds

described in Appendix V, § 2, below , were devised.
These Colonial abuses and those of the Continental

paper currency of the American Revolution led also
to the provision in our Constitution forbidding states
to emit “ Bills of Credit."
After the English experience with depreciated money
in the Napoleonic wars came, as natural consequences,

the great investigations on prices by Tooke and New

ey. of Parliament.
s of monReport
d of itBullion
After the flood of gold in the '50s we note a great

interest in the instability of money. It was
her as
s aa meas
this that Jevons devised the index number
ure of the general level of prices and wrote on “ a
serious fall in the value of gold .”

After our experience with the greenbacks of the Civil
War, the subject of money and prices became one of
inflation aThere
ntely fwere
r " Legal two
d foudeveloped
ties, the inflation and the contraction parties, and acts
of Congress alternately favored first one and then the

other of the opposing policies. Our “ Legal Tender "
controversies, our Greenback party and our Resump

tion Act, were direct outgrowths of the monetary in
stability of the Civil War.

An increasing and worldwide interest in money and
prices was displayed through the long years of falling
prices, experienced
1873 and 1896 .

throughout the world , between

During that period we find increasing complaints ,
many official inquiries and reports, and numerous

proposed remedies, including various forms of bimetal
lism and several anticipations of the very stabilization
plan of this book (see Bibliography, Appendix VI) .


ternational conferences assembled to discuss the gold
and bimetallic questions.

To be more definite, there were the Bland -Allison



(App. IV

Act and the Sherman Act for the purchase of silver,
and there was the “ 16 to 1 ” campaign of 1896 for the
restoration of the free coinage of silver as a means of

restoring the old price level.
The same interest was displayed when the upward

price movement between 1896 and the Great War was
going on. There was then worldwide discussion of
the “ High Cost of Living ” and of gold inflation as its
possible cause. The newspapers were full of cartoons
and editorials ; and themagazines, of elaborate articles.

Numerous books appeared ; much legislation was pro
posed and some enacted ; many investigations were

made, both official and unofficial ; ponderous reports
were issued in many countries and proposals were made
for an international conference on the subject. Bread

and meat riots had occurred in many cities through
out the world , from Berlin to Tokio . Some people
insisted that there was gold depreciation . Mr. Edison
predicted that some day the southern clays would give

up their gold and cause further loss in the purchasing
power of the dollar. Mr. Carnegie , in making a gift
of ten millions to the Carnegie Institution of Washing

stinside asathat
ostofo the income should
ton,, stipulated
sitofa mcertain

be set aside as a sinking fund against “ the diminishing
purchasing power ofmoney.” .
This interest in the High Cost of Living reached its
highest point in 1914 , but was then , for a time, over
shadowed by the war.

Afterward it became apparent that the war itself

had put the “ High Cost of Living ” still higher . The
result was to revive interest in the subject. We spoke
of food famines and of a supposed world scarcity of

goods. We had begun even to talk of the inflation
brought about by issues of paper money , by expanding

war loans, and by inflowing gold . Sweden practically
demonetized gold . Price fixing on a vast scale was
tried in belligerent countries.

Soon after the Armistice, the interest in the subject
took a new start. The business world began eagerly


Sec. 1]


to discuss the question whether the war level of prices
was to continue. Mr. Redfield, Secretary of Commerce ,
tried in vain to stabilize prices by price fixing .

A large

number of the members of the Massachusetts legisla
ture petitioned President Wilson to come home from

Paris, stating that the problem of the High Cost of
Living here needed him more than the peace problems
at Paris.

The foregoing are but a few examples of the world 's
bitter experiences with price movements in the past,
experiences, we may add with confidence, often to be

ake th unless
ca thmankind
T stabiliinz tthemfuture,
e pul shall find a way


e o

e r,

It is safe to make the generalization that when prices

go up or down fast and far, the public invariably shows
a lively curiosity as to the reasons why and an unwonted
willingness to consider monetary causes as at least a
partial explanation .

Unfortunately , it is also usually true that, only a
few years after the price movement giving rise to this
dim idea has subsided or reversed itself, the idea is
forgotten by most people and the public sink back
into the fogs of the money illusion described in Chap
ter II, which illusion seems, in spite of all the lessons

of history , to “ fool some of the people all of the time

and all of the people some of the time.”
To -day, for instance, it requires the archæological
grubbing of an economist to bring to light the com
modity bonds used in Massachusetts in 1747. Again ,
the phrase " it isn ' t worth a Continental " is the only
surviving trace in popular memory of the depreciation
of the Continental paper money and scarcely any one
who uses that phrase to -day knows its original mean

ing. Few , in this generation , know anything of the
greenback days. Even the more recent “ 16 to 1 "
excitement, with the remarkable vogue of that seduc
tive book , “ Coin 's Financial School," and the still

more remarkable counter campaign for sound money,"
seem dim and distant to-day and have scarcely been




(App. IV

heard of by millions of the younger generation . In
1896 when this “ free silver " contest was going on ,
the interest in money and prices was at fever heat.

But, by the following presidential campaign, that in
terest had grown cold , though the very same presi
dential candidates, expressing the very same opinions
and standing on much the same platforms as in 1896 ,

were in the field. In another four years the question
was practically forgotten . There was a fundamental
economic cause of this rapid petering out of popular
interest ; namely, the cessation of the fall of prices com

plained of and the beginning of a rise.
It appears, then , that public interest in , and under
standing of, money usually gathers strength as a price

movement proceeds, reaches a maximum at the end
of the swing , and remains intense and excited only a
few years thereafter.

As prices have now been rising 23 years, we may
reasonably expect public interest, as soon as the Peace
Treaty excitement has subsided , to grow intense and

remain so for a few years at least. If, as I expect,

prices continue high , the popular idea that the high
prices were due to war -scarcity will have no leg to

stand on , and the quest for a satisfactory explanation
will go on with the greatest eagerness.

A member of

the Federal Reserve Board says the price level problem
is the after-the-war problem . Moreover, as the problem
is acute throughout the world , the noise of the discus

sion will be reënforced by reverberations from one coun
try to another.

Unfortunately , the discussion still shows great be
wilderment and confusion of thought.

We may say,

very solemnly , that seldom was there more need of
correct thinking. Without it a misguided public may

attempt the impossible ; or, like an infuriated mob
of lynchers, hang the wrong victim to the lamp
But, in spite of the confusion and the great capacity

to forget old lessons which the public always exhibits,

SEC. 1]



some of the hard experiences of history do leave traces
of good results .

In Europe, the Napoleonic wars, and in America ,
the Civil War, seem to have left at least one indelible

impression on the minds of business men — that what
seems to be a rise in the price of gold bullion in terms

of current irredeemable paper money is, in reality,
rather a fall in the value of paper money ; in short,
that it is better to measure paper money in terms of
gold than gold in termsof paper money . This idea may
be said to be now a commonplace.

I venture to predict that the Great War will have
left at least one other indelible impression , marking a
new era in popular intelligence on this subject. This
new idea , which I believe will sink into the minds of
millions of people , is that, just as gold is a stabler stand

ard than paper, so are goods a stabler standard than
gold .

The chief reason that the writers of the famous bul
lion report did not take this step forward is that, in
their day and generation , no index number by which to

contrast the two existed .

They could not go back of

gold to commodities. Thus, while they tore off the
outer husk surrounding money , the kernel remained
hidden from view .

And this has been the situation almost till to-day.
One interesting consequence is that, during the Great
War, the one anxiety of most governments and bankers
as to monetary standards was to avoid a “ premium

on gold .” It was felt that we were in honor bound
to prevent paper money and bank deposits from
“ depreciation ."

But the only test of depreciation

generally recognized was the depreciation of paper
money relatively to gold .

The idea that gold itself could

depreciate was conspicuous by its absence. The result
was that there was little thought and less effort to keep

gold at par with commodities.

There were, however ,

economists in England and the United States and a
few business men who did their best to point out the



. (APP. IV

absurdity of considering money stable simply because
there was no open premium on gold .

It is clear now that, in this effort to avoid the re
proaches which followed the Napoleonic and the Civil

Wars , there was an exaggerated attention to the form
rather than the substance, to the letter rather than
the spirit.
Sometimes the anxiety to avoid technical deprecia

tion became a little ridiculous and turned into a desire
to conceal rather than prevent ; for there was, appar

ently , in some places and times, an unpublished and
unacknowledged premium on gold.

Someof the efforts

to forbid sales of gold seem now somewhat ostrich - like.

It was also a little strange,although therewere somevalid
reasons for the practice, to preserve gold reserves by for

bidding their use as reserves. This reminds one of the
story of the sea captain whose anxiety to keep an ade
quate supply of life preservers was so great that henailed

them to the deck and forbade anyone to take them up !
It is now getting to be realized that, in spite of all
the laudable efforts to prevent the usual war-time

depreciation of money , depreciation did actually occur

none the less and in a greater degree than in most pre
vious wars. Lord D ’Abernon of England remarked
in a recent speech in the House of Lords that the

fall in the value of money during the four years
of the war had exceeded the fall in two preceding cen
turies. Similar observations are not uncommon from
other influential sources and will, I believe, become

increasingly frequent and emphatic . It ought not to
be surprising if succeeding generations should criticize

the inflationistic financiering of the Great War, es

pecially of the European belligerents, as severely as
we criticize that of the Civil War.
1 Although gold sales at a premium were forbidden by Order in

Council in England there were illicit sales. On April 24 , 1919, for
instance, gold was sold at £5 10s although the mint price is £3

178 9d . The premium on gold was further concealed by the “ peg
ging ' of foreign exchanges at government expense. In Russia and
Italy the premium on gold was openly admitted . Since the war the
premium has been explicit even in England .


Sec. 1 ]


In any case, we shall gradually come to feel that our
technical prevention of “ depreciation " was a hollow
mockery , that we have erred in thinking of depreciation

as relative to gold instead of as relative to commodities.
The many adjustments of wages during the war by
an index number of prices are really a confession that
the dollar does change and needs correction . In the
future, there will be a cumulative effect on the minds
of business men from the tell-tale index number. It
will increasingly impress upon them the fact of the

dollar's instability and ultimately make some realstab
ilization inevitable . It will gradually dawn on the

public that if the dollar needs correcting the correction
should be incorporated in the dollar itself instead of
being patched on from the outside.
rent isWavery
the price
r, owreal
Just now this problem ofof the
and insistent.

Business men will long remember that,

for months after the ending of the Great War, there
was hesitation , amounting almost to paralysis, owing
to uncertainty as to the future level of prices.

Abroad ,

the problem of the price level is even more acute , for
inflation there proceeded much further than it did here.

Many expect prices to drop .

A well-known and in

fluential business man has said that our present high
prices continue “ without the slightest reason under

the sun."

There is, however, an uneasy feeling that

a fall of prices would be as uncomfortable as was the

Thus, in one way or another, the Great War has

demonstrated anew the instability of monetary stand
ards. The present gold standard, supposedly so
solid , has been largely discredited in the eyes of many
people and we hear of various proposals to replace it
by something better .
In view of all the facts, we may reasonably expect

that the money fog in the public mind will be more

nearly dispelled during the period immediately ahead
of us than at any former time in history ; first, because

the rise in prices has been one of the most rapid and




long continued ever experienced ; secondly, because
the major part of the rise has been a war phenomenon ;
thirdly, because the use of index numbers by which the
rise in prices is clearly exposed introduces a new , strong ,

and very persistent reminder of what has occurred ;
fourthly , because, whatever the reason , there is to -day ,
to start with , a more general and intelligent under

standing of, and interest in , this matter than at any
previous time; and fifthly, because at least one prac
tical solution of the problem

of stabilizing the price

level, hitherto assumed to be insoluble, is now available.

2 . The Present Plan Grew Out of the Price
Movement Beginning in 1896
I wish now to recur to the influence on public opinion
of the rise of prices preceding the war and concentrate
attention on that part of this influence which led up to

the proposals of this book .
The rise of prices which began in 1896 did not attract
much attention for five or ten years. In fact, as has
been noted , people continued to talk of prices as ab
normally low . The failure of the public to appreciate
the situation was illustrated by the lack of literature

on the subject.
The list of publications on the high cost of living

published in 1910 by the Library of Congress gives
for the five -year period , 1896 - 1900, only 7 titles ;
while for the next five years, 1901 - 1905 , the number
was 36 and , for the next, 1906 – 1910, it was 121.
As usual, political interest lagged behind public

interest. When the High Cost of Living did attract
the attention of political leaders and parties it led first

to official reports in France, 1900 and 1910 ; Austria ,
1903 ; Germany , 1909 ; United States, 1910 ; Australia ,

1911 ; Canada, 1911 ; Italy , 1911 ; Great Britain ,
1911 and 1912 ; New Zealand , 1912 ; India , 1914.
Many other investigations were projected but never
carried out, having been overshadowed by the war.

SEC. 2 ]



The chief of these was the project agitated in the
years 1911 - 1913 to hold an international conference
on the high cost of living.

Those most interested in

this proposed conference hoped to see , as one of its
results, a study of plans for stabilizing monetary

units. This proposed conference was the subject of
a special message to Congress in 1912 by President
Taft. A bill “ for the purpose of considering plans

to be submitted to the various Governments for an
international inquiry into the high cost of living, its

extent, causes, effects, and possible remedies," was
passed by the Senate and reported favorably by
the Committee on Foreign Affairs of the House of


Unfortunately it was not reached

on the House Calendar before adjournment, March 4 ,
1913 .

It was never revived


the next Congress

- not because of opposition but because of the
preoccupation of the new administration and of Con
gress with matters of greater importance, or so re
garded .

The proposed conference was favored by a number

of leading statesmen and financiers in this country
and in England, France, Germany, Italy , and Japan .
In the Report of the House of Representatives' Com
mittee on Foreign Affairs on this subject 106 promi

nent men in the United States were mentioned by
name as favoring the project, 27 in Great Britain , 35 in

France, 13 in Germany, 7 in Austria , 2 in Canada , 2
in Japan , 4 in Switzerland , 3 in Italy, 7 in Belgium ,

3 in Holland, 3 iniryDenmark.
e and ent)WWilson
son,, the
r of (noincluded
w Pnrceem Governor
y na
tt on side

Labor, of
of War,
and of the Treasury, Senator (now President) Poincaré,

an ChiSecretaries
,Bar Pand
of JaNofi Commerce

Signor (now Premier)Nitti, Baron Sakatani, formerMin
ister of Finance of Japan , Lord Courtney of England,
many Chambers of Commerce and other organiza
tions in this and other countries. After the failure
of the project in the United States, but before the
Great War burst upon us, the plan came near being re




vived by the Canadian and then by the Austrian gov
ernments . During the war comparatively little was
done or thought concerning the High Cost of Living.

The revival of interest now following the war is causing
this international conference to be again considered .
New Zealand, in particular, has shown an active desire
for such a conference. Possibly the conference will
actually come about in or through the League of

3 . Approval of the Plan for Stabilizing the Dollar
Whether or not the price-level problem becomes the
subject of special international study, it cannot escape
solicitous consideration in the immediate future in

almost every country on the globe and, in that con
sideration , the rôle of money cannot be ignored .
In fact I venture to predict that the rôle of money

will be increasingly recognized and much faster than is
dreamed of by most people. This prediction is based

on the reasons given in § 1 above.
The plan described in this book has already run the
gantlet of many of the chief minds of the world and
has met with almost universal acceptance wherever
it has been examined . As one observer expresses it ,
“ only those oppose who do not understand .”

The unfavorable opinions and comments have al
ready been dealt with in Appendix II. In this section
I shall refer to the favorable opinions.
Of the many other prominent persons — some 200
in number — who have expressed their approval I

would mention especially , Arthur T . Hadley, President
of Yale University ; Royal Meeker, Commissioner of
Labor Statistics, Department of Labor ; the late
Senator Newlands ; Senator Robert L . Owen ; ex
Senator John F . Shafroth ; Clarence H . Kelsey ,banker ;

Henry Lee Higginson , banker ; John Perrin , United
States Federal Reserve Agent, San Francisco ; George
Foster Peabody , Director Federal Reserve Bank , New

SEC. 3]



York ; Leo S . Rowe, formerly Assistant Secretary of
the Treasury ; Roger W . Babson , Babson 's Statis
tical Organization ; John Hays Hammond , mining
engineer ; Sir David M . Barbour, one of the origi
nators of the Gold Exchange Standard introduced in

India in 1893 ; Adolphe Landry , member Chamber
of Deputies, Paris ; Achille Loria , University of Torino ,
Italy .
From among the letters received from these and

others I select a few quotations:
President Hadley : " I will own that when I first read of the plan
I thought it would be very difficult to carry out in practice . On
further consideration , I am confident that this difficulty is much

less than I at first supposed ; and that the advantage to be gained

by the adoption of a project of this kind makes it worth while to
meet and solve whatever difficulties are incident to its introduction .”

Royal Meeker : “ I think you have answered all difficulties .
Your scheme seems to me to be the simplest and most practical

scheme possible to be devised . I most heartily endorse your plan .”

John Perrin : “ Even if put into effect for this country alone
upon the basis of one of our present imperfectly constructed index
numbers, it would obviously eliminate largely the fluctuating value
of the dollar which now injects such uncertainty into all our dealings .

The direct and collateral benefits from such a result are almost
beyond conception ."

Roger W . Babson : “ Your only critics are those who misunder
stand you.”

Sir David M . Barbour: “ I think it likely that some such system

may ultimately be adopted .”
The American Economic Association Committee on

the Purchasing Power of Money, consisting of econo
mists who have chiefly worked in the field of Currency
and Banking (i.e. Professor B . M . Anderson , Jr., Pro
fessor E . W . Kemmerer, Dr. Royal Meeker, Professor

Wesley Clair Mitchell, Professor Warren M . Persons,
and Professor Irving Fisher), studied the plan with care

and expressed itself as follows :
“ The Committee regards the stabilizing of the value ofmonetary
units under international agreement as desirable and economically

feasible . The details of the plan , the time of its introduction , and
the question whether international agreement is indispensable ,

should receive the immediate attention of statesmen and econo

The Bridgeport Chamber of Commerce appointed a
committee, the report of which was adopted , and from
which report I quote :
“ RESOLVED : That the Bridgeport Chamber of Commerce ,
recognizing the many evils that flow from the ever-changing value

of the dollar, hereby calls upon Congress to enact such legislation ,
if it be feasible , as shall tend to make the dollar stable at all times
in its purchasing power ; and to that end it respectfully recommends
the adoption , in substantial form , of the plan put forward by
Professor Irving Fisher for stabilizing the dollar by adding weight

thereto or subtracting therefrom in accordance with the fluctuations

of prices as represented by the index numbers .”

The Waterbury Chamber of Commerce adopted a
similar report, ofwhich the chief paragraph reads :
“ THEREFORE , BE IT RESOLVED, that The Waterbury Chamber
of Commerce records itself as in favor of the enactment by Congress

of such legislation as is necessary to put Professor Fisher's plan into
operation .”

The Society of Polish Engineers and Merchants in
America passed the following resolution :
“ After a thorough discussion of the lecture by Professor Irving
Fisher, the members of the Society of Polish Engineers and Mer
chants and their guests present at this meeting, agree with him
unanimously in the soundness of his theory and propose that the

Board of Directors of the Society of Polish Engineers and Merchants

take the necessary steps to foster this idea in Poland .”

The New England Association of Purchasing Agents
resolved :
" that we, the New England Association of Purchasing Agents,
record our earnest belief that, in the interests of sound business,

and justice between contracting parties, the purchasing power of the
dollar should be stabilized, either , as we believe has been shown to
be feasible, by varying the weight of gold in the dollar, or by such

othermeans asmay be found by Congressmost expedient.”

SEC. 3 ]



In Article 10 of the International Trade Union Con
ference at Berne, February, 1919, it was resolved that :
“ the contracting States shall call as soon as possible an inter
national conference instructed to take effective measures to prevent

the depreciation of the purchasing power of wages and to insure

their payment in a non-depreciated money."

The American Federation of Labor resolved :
“ That the Executive Council be and is hereby instructed to
make a study of the problem of establishing a dollar of stabilized
purchasing power as it may be presented through legislative effort,

or otherwise during the year, and to submit a report upon the subject
at the 1920 convention ."

Mr. Husted of New York introduced a bill in the
House of Representatives on Oct. 6 , 1919, to create a
National Monetary Commission :
" . . . to inquire into and report to Congress at the earliest date
practicable what changes are necessary or desirable in the monetary
system of the United States or in the laws relating to banking and

currency, and especially to the end that the purchasing power of
the dollar may be stabilized . . . ."

In short, a considerable sentiment for stabilizing
the dollar already exists, and there is much more,

latent or in solution , which is ready to be precipi
tated .

I place emphasis on the fact that so many able and
practical men have already expressed emphatic approv
al of the plan because it will be through the leader

ship of such men that public sentiment for stabilizing
the dollar will grow and the great and only obstacle

of inertia be overcome.
Inertia is a dangerous state of mind when effective
and far-reaching action is sorely needed , as at present.
If the question of stabilization is not faced and
solved in an impartialand scientific spirit, we ought not

to be surprised if it should become the bone of conten
tion of special interests or if specious but unsound
monetary schemes should again find a hearing .




If the price level is left, as it always has been, to
chance, the grave evils of this policy , or lack of policy ,
may be greater in the future than they have been in

the past, because of the already inflamed or Bolshevist
condition of the public mind .
In short, we now hold the future prosperity and
stability of the world in our hands. The situation ,

both as to the price level and as to public interest in
the price level, is such that we have a rare opportunity
to take a new step forward in our economic life, a
radical step to be sure but one which will save us, as

nothing else can , from the dangerous radicalism with
which we are now threatened .


I . Contracts in Terms of a Commodity
In Appendix IV we have seen many examples of dis
content growing out of the instability of monetary

standards. Such discontent has often expressed itself
in action — sometimes wise and sometimes unwise.

pt,s examples
ts attotemmeet
te a evils
. InInlthe
of monetary
instability . These attempts are more numerous than
is usually realized and constitute a surprising mass of

precedent for every one of the principles of stabiliza
tion which , together, constitute the proposal of this
book .

I shall begin with the simplest mode of escape from an
unsatisfactory monetary standard .

This is to make

our contracts in terms of some staple commodity, like
wheat or iron .
Professor Ferguson of Bryn Mawr tells me that :

“ In Roman times in Egypt, as well as previously
under the Ptolemies, a large number of contracts
show that wheat was used in paying rent on farm

land , or, if the tenant preferred , coin (usually copper
drachmas) to the amount equivalent to the value of

In England, the “ tithe averages ” have been made

to vary with the value of grain , so that the tithe was,
in effect, so much grain , not so much money ; or
rather it was money measured by grain . Another ex

cellent example is the “ Scotch Fiars prices” previously
mentioned in another connection .

These have existed



(App. V

for more than two centuries. Rents of farm land are

contracted for in terms of grain but paid for in money
at theaverage price of the grain as judicially determined .

In the reign of Queen Elizabeth a statute was passed

requird bethat
much alands
is laofwirthed irental
n wheatofas college
should be expressed in wheat or malt . Blackstone,
commenting on this law two centuries afterwards,
observed that the one third in wheat or malt rent

commend that the orally worth twice for the colenues

had come to be generally worth twice as much as the
two thirds in money !

This saved , for the colleges

of England, a very important part of their revenues
which would otherwise have become dissipated by the
depreciation of money .
Of these acts, Professor Jevons says, “ The ques
tion arises whether, having regard to these extreme
changes in the value of the precious metals , it is de

sirable to employ them as the standard of value in long
lasting contracts . We are forced to admit that the
statesmen of Queen Elizabeth were far-seeing.”
Mr. C . W . Barron of the Boston News Bureau and
the Wall Street Journal has supplied me with a more
modern instance : On September 8 , 1817, David Sears,
of Boston , leased to Uriah Cutting , of Boston , for 1000
years from December 1 , 1817, at a yearly rental of 10

tons of First Quality of Russia Sables Iron, the land
and building thereon at the northeast corner of

Scollay Square and Court Street. Similar leases
were executed at the time by the same parties on

eleven other pieces of property . In each lease the
rental is actually payable in money equal in value to
the specified amount of iron .

2 . The Tabular Standard
Instances have come to light of contracts based
on more than one commodity , thus involving the very

principle of the index number or “ tabular standard .”'

Twice in the Colonial history of Massachusetts —
1 In his Money and the Mechanism of Exchange, p . 326 .

Sec. 2]



once in 1747 and again in 1780 — a tabular standard

was created by law for the payment of soldiers and
others as a means of combating the extreme uncer
tainty and depreciation of paper money.
The latter law lasted till 1786 when the extremeneed
of such a corrective was over.

The correction was

based on a crude index number of four commodities.1

Most of the foregoing facts regarding Massachusetts
are taken from an interesting account of these early

experiments with the tabular standard by Profes
sor Willard Fisher. These early gropings toward a

goods standard were due to the dissatisfaction , men
tioned in Appendix IV , § 1, following the disorganiza
tion of monetary standards by the Revolutionary

The Great War, also , has driven the industrial world
to the use of a composite standard , though in a dif
ferent way. Wage payments have, for the first time,
so far as I know , been adjusted by means of index

numbers of prices.
At the close of 1916 several banks, trust companies,

and commercial and industrial establishments made
special Christmas presents to their employees to com
pensate partially for the reduced purchasing power of

their salaries for the preceding year, the presents
being a fixed percentage of the salaries .
1 The State issued its notes on this basis : “ Both Principal and
Interest to be paid in the then current Money of said State, in a
greater or less Sum , according as Five Bushels of CORN , Sixty
eight Pounds and four -seventh Parts of a Pound of BEEF, Ten

Pounds of SHEEP ' S WOOL, and Sixteen Pounds of SOLE
LEATHER shall then cost, more or less than One Hundred and
Thirty Pounds current Money , at the then current Prices of the
said Articles.”

The same principle was applied to the payment of sums due the
This early example is particularly interesting because it antic

President of Harvard College.

ipated those economists who are usually credited with originating
the idea of a tabular standard , namely Sir George Shuckburgh

Evelyn , 1798, Count Soden, 1805, Arthur Young, 1811, Joseph Lowe,
2 " The Tabular Standard in Massachusetts,” Quarterly Journal
of Economics, May, 1913 .




Apparently most employers who made such adjust
ments assumed , at first, that they were made once for

all. But it was found, of course , that living costs
wouldn't “ stay put, ” so that a new adjustmentneeded

to be made next year. This led naturally to the idea
of a periodical adjustment. The Bankers' Trust Co.,
which had made one adjustment, appointed a com
mittee to make further investigation . Its report,

made December 15, 1917, covered 22 pages.
The Oneida Community inaugurated , on January 1 ,
1917 , a system of compensation for the high cost of

living by the use of Bradstreet 's index number for
wholesale prices. Each workman receives two weekly
pay envelopes — one containing regular wages and
the other containing a certain percentage thereof

calculated from Bradstreet's number. An initial ad
justment of 16 per cent was made as representing the

increase in the cost of living between January 1, 1916
(when the general wage scale had been revised ) , and
January 1 , 1917 .

This 16 per cent was applied to the

wages for the first month . In each succeeding month
a 1 per cent advance or decline of wages was made
for each 20 points change in the Bradstreet number.
The Kelley -How - Thomson Co. (hardware) , of Du

luth , Minnesota , adopted , independently , a similar
plan .

The George Worthington Co. (hardware), of Cleve
land, Ohio , on October 1, 1917, followed the lead of
the Oneida Community , with the exception that all
employees were included excepting the directors or
salesmen on a commission basis .

The Printz -Biederman Co. (clothing), also of Cleve
land , received the idea from the George Worthington

Co. The introduction of the plan here was through
the employees' organization .

The Mishawaka Woolen Mfg . Co., of Mishawaka ,
Indiana ; and the Union Bleaching & Finishing Co. of
Greenville, South Carolina, both pay wages on the
basis of index numbers.

Sec. 2 ]



The Index Visible, Inc., of New Haven , Connecticut,
adopted a simpler plan based on the index number of
retail prices of the United States Bureau of Labor

Various flouring mills in Seattle and other points in
the Northwest have raised thewages of their employees
on several occasions.

The adjustments were made at

irregular intervals , but consciously to meet the in
crease in living costs.

The survey of prices on which

the increase was determined was made under the direc
tion of Professor W . F . Ogburn , now of Columbia
University, who calculated the index figures finally used .

The minimum wage laws in Oregon and Washington
were also
revised in accordance with the increased
: vinc
cost of 1living.
The chief use of index numbers in settling wage dis
putes was in the decisions of the National War Labor

Board. Strikes have been settled and wage increases
made specifically on the basis of index numbers.

The principle was also recognized by the Shipbuilding

Labor Adjustment Board .

This board adopted the

plan of making half yearly (April 1 and October 1)

adjustments ofwages in all shipbuilding centers , based
on changes in the cost of living as determined for the
Board by the United States Bureau of Labor Statistics.
Another application of index numbers is by the War

Department, which in fixing the prices at which it dis
poses of its machine tools is proposing to use an index

number , among other factors, to adjust the present
prices of sale to the original cost, or price of purchase.

In England , the employees in several branches of
the textile trade drew up an agreement with their em
ployers in January, 1918 , canceling all previous war

bonuses and establishing the regulation of wages by the
index number of the cost of living as calculated by the
Board of Trade .

The same principle of adjusting wages to the high

cost of living has been applied in Australia .
Some of the expedients cited are in permanent use ;



(App. V

others were given up when the special occasions giving
them rise were over.

The reason for discontinuing these makeshifts was,
in each case, the great inconvenience caused by having
two standards to deal with . Theoretically , of course,
we could use the index number to correct every con
tract just as it hasbeen used to correct wage contracts,

- consulting the index number for adjusting our rent
or interest payments or trolley carfares, for instance .

But this would not be practicable, certainly not
through voluntary adoption by individuals.

3. Correcting the Money Unit Itself
There are instances of legislative action , intended to
correct the money unit itself, but falling short of the

action proposed in this book .

Probably the best ex

ample of such correction in current money units them

selves is the “ gold exchange standard,” whereby the
silver standard

countries have virtually


their silver units into gold . After the breakdown of
bimetallism about 1873 , when gold and silver countries
began to drift apart, London exchange on India ceased

to have any par. Consequently its fluctuations in
creased and caused great inconvenience to traders be
tween the two countries. Finally, in 1893, the Indian
Government stopped the free coinage of silver, giving
the Indian rupee a scarcity value and causing it to

appreciate above the value of the silver it contained .
It was allowed to appreciate until it became worth 16d ,
at which it became virtually redeemable in gold , or,
more strictly, in the right to gold , situated , not in India ,
but in London . This device, of redeeming silver in

India , in “ exchange ” on gold in London constituted
the famous “ gold exchange standard.” At the time
of its adoption , the gold exchange standard was
probably as radical a departure from tradition as a
stabilized dollar would be to -day.

The Great War has brought two crude attempts at
safeguarding the money of a country against alternate

SEC. 4 ]



inflation and contraction . These are the prohibition
of import and of export of gold . Sweden , in 1916 , de

fended herself from the golden flood which the war
brought by stopping its import, i.e . she authorized her
State Bank to refuse to accept gold for notes, and this

brought the same results as did the stoppage in India
of the free coinage of silver in 1893. Swedish money
received a scarcity value, and depreciation in terms of
commodities was checked ; that is, the rise of prices was
arrested . Holland and Spain did much the same thing.

We, as well as practically all other nations, defended
ourselves against a possible sudden drain of gold by
putting an embargo on its export.

4 . Conclusion
We see, then , that precedents exist for : (1 ) setting
up a commodity standard to replace the standard of

a mere money metal, (2 ) employing an index number
for that purpose, (3) correcting a money metal standard
( e .g. silver by the gold exchange standard) through a
sliding scale relation to another standard .

These are precisely the essentials of the plan to
stabilize the dollar .
There is therefore no element of innovation con
tained in the plan to stabilize the dollar. The only

There in the plombining

innovation is combining previously tested elements

lamental morhe only
as the fundamental money and

into one complete whole . At the same timewe retain
our traditional gold

makeno visible change in the money in use .

The only

essential departure from the system we now have is

one quite invisible to all but a few miners, jewelers ,
aras to phbenamely
expo, the and
fear , varying, by a fixed
His himporters,
rule , the price of gold from the present $ 20 .67 an
ounce. It is hard to see why such a change, the only

object of which is to prevent any real change in our
monetary unit, should be feared by the veriest wor

shiper of precedent.
Swedish Exchange rose, and (what was one of the most curious
results ) Swedish notes commanded a premium in gold bullion .



I. Some of the Chief Index Numbers Current

U . S. Bureau of Labor Statistics. Wholesale . For period beginning

1890 . Published annually in separate bulletins. Figures by
years and (beginning 1900) months. Number of commodities
now 296 .
U . S . Bureau of Labor Statistics. Retail. For period beginning

1907. Published at intervals in separate bulletins. Figures
by years and (beginning 1913)months. Number of commodities
22 (foods).

Bradstreet's, New York City . Wholesale. For period beginning
1892 (as now published ). Publishedmonthly. The index num
ber is found by adding the prices per pound of 96 commodities.
Dun 's, New York City . Wholesale . For period beginning 1860 . Pub

lished monthly. Number of commodities about 200 , as reck

The exact method of computation has never been pub
lished .
The New York Times Annalist. Wholesale. For period beginning
1913. Published weekly (diagram ). Number of commodi
ties 25 (foods).
Gibson's, New York City . Wholesale. For period beginning 1912 .
Published weekly (market letter). Number of commodities
22 (foods) .

Department of Labour. Wholesale . For period beginning 1890 .
Published in the annual reports of the Department and monthly
in the Labour Gazette, its official organ . Number of com
modities 271.

Department of Labour. Retail. For period beginning 1900. Pub
lished monthly in the LabourGazette . In 1900 and 1905 index
number given for December only ; 1913– 1916 , by years ;
1914- 1916 , for August ; beginning July , 1917, monthly. Num
ber of commodities 30 (foods) .

Sec. 1]




British Board of Trade. Wholesale. For period beginning 1871.
First published in a report of 1903 (with chart for 1801 -1902
joining index numbers of Jevons (1801- 1846), Sauerbeck (1846 –
1871) ,and Board of Trade). Continued annually in the January
number of the official Labour Gazette. Based in part on
declarations of importers and exporters, and on contract prices
at hospitals and institutions. Number of commodities 47 .

British Board of Trade. Retail. For period beginning July , 1914.
Published monthly in the official Labour Gazette with corre
sponding figures for other countries. Number of commodities
23 (foods).

Economist. Wholesale. For period beginning 1851. Published
monthly in the weekly journal of that name and compiled
annually in the first January issue . Number of commodities
now 44 .

Sauerbeck -Statist. Wholesale. For period beginning 1846 . Now
published monthly in the Statist, London , with yearly résumé
in the March number of the Journal of the Royal Statistical

Society. Number of commodities 45 .

Annuaire Statistique. Wholesale. For period beginning 1857.
Published annually in the Annuaire Statistique de la France .
Number of commodities 45.

For more complete lists and descriptions of current, as well as of
discontinued , index numbers see :

U . S . Bureau of Labor Statistics. Bulletin 173, Index Numbers of
Wholesale Prices in the United States and Foreign Countries.
1915 .

J . Lawrence Laughlin . Principles of Money, pp. 142 –224 . Scrib
ners, 1903.

Bulletin , Institute internationale de statistique, tomeXIX , livraison 3,
pp . 124 – 244. Paris, 1911.
U . S. Library of Congress. Select list of references on the cost of

living and prices, 1910. Also : Additional references on the
cost of living and prices, 1912.
For application of index numbers to war prices in different coun
tries see :
Wesley Clair Mitchell. International Price Comparisons. War
Industries Board . Price Bulletin No. 2. 1919.




2. Some of the Chief Writings on the Principles
of Index Numbers
William Stanley Jevons. Investigations in currency and finance.
Sections II - IV , pp. 13 - 150 , give an index number computed .

from 39 articles from 1782 to 1865. London , 1909. (Re
prints of various articles published earlier.)
F . Y . Edgeworth . Reports of the Committee (of the British Asso
ciation for the Advancement of Science) appointed for the
purpose of investigating the best methods of ascertaining and
measuring variations in the value of the monetary stand

ard . In Reports of the Association for 1887, pp . 247 - 301 ; 1888,
pp . 188 – 219 ; 1889, pp. 133– 164 .
Correa Moylan Walsh. The measurement of general exchange
value. 580 pp . Macmillan , 1901.
G . H . Knibbs. Prices, Price Indexes, and Cost of Living in Aus
tralia . Commonwealth Bureau of Census and Statistics,
Labour and Industrial Branch, Report No. 1, Appendix .
McCarron , Bird & Co., Melbourne. December, 1912 .
G . H . Knibbs. Price Indexes, their Nature and Limitations, the
Technique of Computing them , and their Application in Ascer
taining the Purchasing-Power of Money . Commonwealth

Bureau of Census and Statistics, Labour and Industrial

Branch , Report No. 9. McCarron , Bird & Co ., Melbourne.
1918 .
Irving Fisher. The Purchasing Power of Money , Chapter 10 and
Appendix to Chapter 10 . Macmillan , 1911.
Wesley Clair Mitchell.

The Making and Using of Index Numbers,

U . S . Bureau of Labor Statistics, Bulletin No. 173, pp. 5 – 114 ,
1915 .

3. Remote Anticipations of the Plan to

Stabilize the Dollar
A . Bimetallism . There would be little use, even
if it were possible, to include all writings which touch
on the need for combating the instability of monetary

standards. I shall, therefore, merely run over, very
briefly, the proposals which anticipate only remotely
the proposal of this book . These fall under four heads :
Bimetallism and other schemes for combining the
precious metals.

The Gold Exchange Standard .

SEC. 3 ]



Irredeemable Paper
Stan Moneyc,onthe
s quantity to be regu

hular to dthe
dered curs.
lated by
be istandard
by reference

In this subsection A will be considered the first of these.
The literature on bimetallism is, of course, enormous.
Bibliographies were published in the '90s by Soetbeer
and others . The nature of the proposal, including
the claim that it would stabilize the price level, is well

set forth in Francis A . Walker' s International Bimetal
lism , N . Y ., Holt, 1896 , and Major Leonard Darwin 's
Bimetallism , London , Murray, 1897 .

That bimetallism would work under certain circum
stances but would break down under certain other
circumstances has been shown by Irving Fisher, in

“ Mechanics of Bimetallism ,” Economic Journal, Sept.
1899, pp. 527 –537.

Professor F . Y . Edgeworth has shown that bimetal
lism would, on the theory of probability , have only a
slight influence toward stabilization and that " sym

metallism ” would be somewhat more stable than
bimetallism .

(“ Thoughts on Monetary

Reform ,”

Economic Journal, Sept. 1895 , pp . 434 – 451.)
What Professor Edgeworth named “ symmetallism "
is a method first proposed , apparently, by Professor
Alfred Marshall for joining two metals virtually in a
joint coin , obviating the danger of a breakdown to
which bimetallism is always subject.

Other proposals of this sort for joining two metals
have been made, e .g . by Dr. Theodor Hertzka in Das
Internationale Wahrungsproblem

und dessen


1892, and Mr. A . P. Stokes in Joint Metallism , 1894.
Léon Walras, in Théorie de la Monnaie, Lausanne,
1886 , advocates, rather than bimetallism , a system of
gold money with a variable amount of silver bullion
to be issued or recalled as a “ regulator.”

B . Gold Exchange Standard.

The idea of the gold

exchange standard was, apparently , first proposed in
1 Evidence before the Gold and Silver Commission ( 1888 ) Q . 9, 837 ;
and “ Principles of Economics, " Book V , ch . 6 .




1876 by A . M . Lindsay, treasurer of the Bank of Bengal.
The idea was suggested to him by reading Ricardo's
Proposals for an Economical and Secure Currency."
Lindsay published a pamphlet on the subject in 1892
entitled Ricardo's Exchange Remedy, a Proposal to
Regulate the Indian Currency by Making it Expand and
Contract Automatically at Fixed Sterling Rates with the
Aid of the Silver Clause of the Bank Act. London

(Effingham , Wilson & Co.), 36 pp .

The first step toward applying Lindsay's idea was
taken in 1893 , when , as a consequence of the work of
Sir David Barbour and the other members of the Her

schell Committee on Indian Currency , the Indian Mints
were closed to silver and, consequently , the rupee was

given a scarcity value above that of its contained silver .
The second step was taken in 1898 when a gold re
serve was begun. The full- fledged gold exchange
standard was first put in force in 1900 , when rupees

in India were virtually made redeemable in gold in
London through bills of exchange on London .
A different plan for preventing money in silver stand
ard countries from sinking in value relatively to gold
was to impose a seigniorage on silver coinage increas
ing as the price of silver decreased . This proposal

was made by Henry Coke before the Herschell Com
mittee in 1893 ($ 139). In principle , it is nearer the
proposal of this book than is the gold exchange stand
ard .

Fuller information concerning the gold exchange

system and other plans of currency reform will be
found in E . W . Kemmerer's Modern Currency Reforms,

Macmillan , 1916 .

C . Irredeemable Paper Money. This dangerous ex
pedient has always had its advocates, and these have
1 Ricardo's plan , however, did not go further than merely to propose
abolishing gold coin and substituting gold bullion as a reserve, using
paper for actual circulation , the Government to sell and buy gold ,
for paper, at the pleasure of the public, with a slight margin (13 % )
between the two prices. It will be seen that Ricardo' s proposal was
like that of this book except that the prices set were not to vary .

Sec. 3]



usually been inflationists. But a considerable number
have proposed a paper money regulated by an index
number of prices. Such a plan is in purpose similar
to , but in method very different from , the proposal
of this book . The essential difference is that between
redeemability and irredeemability .

Among the many who have suggested this form of
monetary system are :
Carl Menger , the Austrian economist, who suggested
that the price level could be stabilized by the issue of
paper money, as required , to neutralize fluctuations

of purchasing power ; Charles Gide,who in Principles of
Political Economy (1883) speaks favorably of Menger 's

proposal, but favors it only in the form of international
paper money ;

E . Benjamin

Andrews, An Honest

Dollar ( 1889), pp . 36 –42 ; Henry Winn, " The Invari
able Dollar," The Traveler, Oct. 17 , 1891 ; Arthur
Kitson , “ A Scientific Solution of the Money Question ,"

The Arena, 1895 ; Eltweed Pomeroy, “ The Multiple
Standard for Money, ” The Arena , Sept. 1897 ; Frank
Parsons, “ RationalMoney ” (1898 ), who would effect
the expansion or contraction of currency through theuse

of call bonds, or a sliding scale of interest on govern
ment loans, etc., in accordance with the movement of

prices (this book contains a discussion of most of the
above references and mentions others] ; Alfred Russel

Wallace, “ Paper Money as a Standard of Value ” (origi
nally in The Academy, Dec. 31, 1898 , and reprinted
in Studies, Scientific and Social, Vol. II, London , 1900 ) .
D . The Tabular Standard . This has been described
in Appendix III, 36 . One of the earliest writers on

this method of correcting aberrations in themonetary
standard was Joseph Lowe, who , in his Present State
of England in Regard to Agriculture, Trade and Fi

nance , Chap. LX (London , 1822) , proposed “ to correct
the legal standard of value (or at least, to afford to

individuals themeans of ascertaining its errors), by the
periodical publication of an authentic price current,

containing a list of a large number of articles in general




use , arranged in quantities corresponding to their rela
tive consumption , so as to give the rise or fall, from
time to time, of the mean of prices ; which will indi
cate, with all the exactness desirable for commercial
purposes, the variations in the value of money ; and
enable individuals , if they shall think fit , to regulate

their pecuniary engagements by reference to this tabu
lar standard ."

Another writer who made the same suggestion was

G . Poulett Scrope, M . P ., An Examination of the
Bank Charter Question , with an Inquiry into the Nature
of a Just Standard of Value (London , 1833) , p . 26 , and
Principles of Political Economy (London, 1833), p . 406 .
Another was Mr. G . R . Porter, The Progress of the

Nation (Sections III and IV , p . 235). He added a
table showing the average fluctuations of fifty com
modities monthly during the years 1833 and 1837.
W . Stanley Jevons was an enthusiastic advocate of
this plan .

In his Money and the Mechanism

of Ex

change (London , 1893) ,Chap. XXV, he discusses Lowe's ,

Scrope's, and Porter's proposals , and comments : “ Such
schemes for a tabular or average standard of value

appear to be perfectly sound and highly valuable in
a theoretical point of view , and the practical difficulties
are not of a serious character. To carry Lowe's and
Scrope's plans into effect, a permanent government
commission would have to be created , and endowed

with a kind of judicialpower. The officers of the depart

mentwould collect the current prices of commodities in
all the principalmarkets of the kingdom , and,by a well
defined system of calculations, would compute from
these data the average variations in the purchasing

power of gold . The decisions of this commission would
be published monthly, and payments would be adjusted
in accordance with them .”
“ At first the use of this national tabular standard

might be permissive, so that it could be enforced only
where the parties to the contract had inserted a clause

to that effect in their contract . After the practicabil

Sec. 4 )



ity and utility of the plan had become sufficiently
A to the con, tdit, might
in the be
amore than inth tthe
sense that every money debt of, say, more than three

months' standing, would be varied according to the
tabular standard , in the absence of an express provi
As shown in Appendix V , 82, plans very similar to
the above are now actually employed to some extent.
4 . Direct Anticipations
We next cite the writings which describe plans sub
stantially like that proposed in this book (i.e. plans
for adjusting the weight of gold in a monetary unit by
the aid of an index number of prices) and which were

published earlier than the author's Purchasing Power
of Money. For others who anticipated the idea but

did not publish , see Preface.
John Rooke. Inquiry into the Principles of National Wealth .
Edinburgh , 1824.

“ The regulation of the new system is, that in whatever pro
portion the general and annual price of farm labour throughout
the kingdom has a tendency to rise or fall, that rise or fall

shall be counteracted by a reverse rise or fall in the current
price of the gold and silver coin ,” p . 221.

" It would probably be advisable to discard the gold coin from
circulation almost entirely, and employ it chiefly as the grand
corrector of the value of bank paper," p . 222 .
Simon Newcomb. The Standard of Value. The North American

Review , Sept. 1879, pp . 234 - 237.
“ The first and most obvious method of attaining the object
is to issue a paper currency which shall be redeemable , not in
gold dollars of fixed weight, but in such quantities of gold and
silver bullion as shall suffice to make the required purchases."

(Newcomb also anticipated the device, shown in Appendix I,
$5 , for retaining gold coins in circulation , if desired .)
Alfred Marshall. Remedies for Fluctuations of General Prices.

The Contemporary Review , March , 1887, p. 371, footnote.
(Marshall gives two possible plans (neither of which is advo
cated ) . One is for an inconvertible currency to be issued (by
purchase of consols ) whenever a sovereign is worth in com
modities more than par and retired (by sale of consols ) when

ever it is worth less . The other is for a convertible currency,




each £ note being redeemable at any time in as much as is then
silver as is worth the other half .
The second plan is , in principle , virtually that of this book .)
Aneurin Williams. A “ Fixed Value of Bullion ” Standard –
A proposal for preventing general fluctuations in trade. Eco
nomic Journal (London ), June, 1892, pp. 280 – 289. Discus
sion by Sir Robert Giffen , " Fancy Monetary Standards,"
worth (in commodities) half the unit together with as much

ibid ., pp. 463–471; reply by Aneurin Williams, pp. 747– 749.
[ The proposal here made is practically identical with that of
this book .]

J . Allen Smith . A Multiple Money Standard . The Annals of the
American Academy of Political and Social Science, March
1896 , pp. 1 -60 .

[Smith suggests several plans for stabilizing the purchasing
power of monetary units, among them one which , in all essen

tials, is identical with that proposed in this book .]

D . J . Tinnes. An Ideal Measure of Value. The Adrian (Min
nesota ) Guardian , Nov. 16 , 1896 .
[The proposal made here and in Mr. Tinnes' subsequent pub

lications, mentioned in the list below , is practically identical
with that of this book .]

5. Recent Writings on Stabilizing the

(Omitting most newspaper and minor publications, numbering
about a thousand)

Irving Fisher. The Purchasing Power of Money. New York ,
Macmillan, 1911, Ch. 13 .
0 . M . W . Sprague. Fisher's Purchasing Power ofMoney . Quarterly
Journal of Economics , Nov. 1911, pp . 148 – 151.
Irving Fisher. International Conference Regarding the Cost of
Living. Report before Congress of Chambers of Commerce .

Boston, Sept. 1912, reprinted in Independent, Sept. 26 , 1912,
pp. 700 – 706 .

Commercial and Financial Chronicle, Editorial, Oct. 5 , 1912. Re
plies by Irving Fisher and further discussion , Oct . 26 , and
Nov. 16 , 1912.
Irving Fisher. Standardizing the Dollar (replies to objections).
New York Times, Dec. 22, 1912.
Irving Fisher . A More Stable Gold Standard. Economic Journal
(London ), Dec. 1912, pp. 570 - 576 .

William F . Blackman . The Increasing Cost of Living ; Its Cause
and Cure . Rollins College Bulletin , Dec. 1912.
Lucien March . Un Projet de Stabilization des Prix . Communi

Sec. 5 )



cation à la Société de Statistique de Paris , le 15 janvier, 1913,
reprinted from its journal, pp. 10– 24 . Discussion by Edmond
Théry, G . Roulleau , Aug. Deschamps, Adolphe Landry,
Lucien March , Irving Fisher.
Irving Fisher. A Compensated Dollar. Quarterly Journal of Eco
nomics, Feb . 1913, pp . 213- 235 . Appendices, pp. 385 - 397 .
Irving Fisher. Standardizing the Dollar. American Economic
Review Supplement, March 1913, pp . 20 – 28 . Discussion
by Nat. C . Murray, Albert C . Whitaker, Willard C . Fisher,
O . M . W . Sprague, B . M . Anderson, Jr., R . R . Bowker, E . W .
Kemmerer, and Irving Fisher, ibid ., pp . 29 –51.

David Kinley. Objections to a 'Monetary Standard Based on
Index Numbers . American Economic Review , March 1913,
pp. 1 - 19.
Augusto Graziani. Di una nuova proposta per rendere più stabile
il valore della moneta . Reale Instituto d ' Incoraggiamento
di Napoli. Nota letta nella tornata del 6 marzo 1913.
(Napoli, Coöperative Tipografica , 1913 .)
Peyton R . Anness. The Compensated Dollar. Yale Scientific

Monthly,March 1913.
Corrado Gini. L 'equazione dello scambio e il potere di acquisito
della moneta . Revista Italiana di Sociologia , Rome, Anno
XVII , Fasc . II (March -April 1913) .

E . B . Wilson . Review of the Purchasing Power of Money.
Science, May 16 , 1913, pp. 761-763.
F . W . Taussig. The Plan for a Compensated Dollar Quarterly
Journal of Economics ,May 1913, pp . 401-416.
F . Zeuthen . Irving Fisher's Forslag til Prisniveauets Stabilisering.
Nationalökonomisk Tidskrift (Copenhagen ), Hefte 4 (July
Aug., 1913), pp . 350 – 364.
Irving Fisher. What an International Conference on the High
Čost of Living Could Do. Institut International de Statis
tique, Vienna, XIVe Session , Rapports, no. 25, Sept. 1913.
J . M . Clark . Possible Complications of the Compensated Dollar.

American Economic Review , Sept. 1913, pp. 576 –588.
E . M . Patterson . Objections to a Compensated Dollar. American
Economic Review , Sept. 1913, pp. 863– 875.
Irving Fisher . La Hausse Actuelle de la Monnaie, du Crédit et
des Prix , Comment y Remédier. Revue d 'Economie Poli

tique, Paris, 1913, pp. 419–434.
Irving Fisher. De la Nécessité d'une Conférence Internationale
sur le coût de la Vie. La Vie Internationale , Brussels, Tome
III, Fasc. 12 (1913), pp . 295 –311.
G . M . Boissevain . “ Een Ideale Waarde-Standaard ? ” De Econo
mist, The Hague, 1913, pp. 441-473.
David Davidson. Irving Fisher 's förslag att reglera penningens
köpkraft. Economisk Tidskrift (Stockholm ), Haft 3, 1913,
pp. 88 – 107 .




W . Eggenschwyler. Review of article in American Economic
Review Supplement, March 1913. Archiv für Sozialwissen

schaft und Sozialpolitik , Tübingen , Germany, Band 37 , Heft I,
July 1913, pp . 258 - 264 .
Irving Fisher. Objections to a Compensated Dollar Answered .
American Economic Review , Dec. 1914, pp. 818 - 839.
D . J . Tinnes.

Tinnes' Market Gage Dollar an Ideal Measure of

Value. Leaflets 1- 4, Privately published , 1917 .
Irving Fisher. Standardizing the Dollar. University of Cali
fornia Chronicle, October 1917 , pp. 347 – 363.

D . J. Tinnes. The Market Gage Dollar (An Ideal Measure of
Value). The Quarterly Journal of the University of North
Dakota , Jan . 1918, pp . 187 – 192.
Irving Fisher. Stabilizing the Dollar in Purchasing Power . (In
American Problems of Reconstruction , Elisha Friedman ,

Editor, New York , Dutton , 1918, pp. 361- 390.)
D . J. Tinnes. The Market Gage Dollar. American Economic Re

view , September 1918, pp . 579– 584.

Irving Fisher. Stabilizing the Dollar. American Economic Re
view Supplement, March 1919, pp. 156 – 160.
G . H . Knibbs. Consideration of the Proposal to Stabilize the Unit
of Money American Economic Review , June 1919, pp . 244

255. Rejoinder by Irving Fisher, pp. 256 – 262.
D . J. Tinnes. An American Standard of Value. American Eco
nomic Review , June 1919, pp. 263– 266 .
Edward T . Peters. On Stabilizing the Dollar. Quarterly Journal
of Economics, Aug. 1919 , pp . 652–671.

Act to stabilize the dollar, tentative | Babson, Roger, cited on losses of

draft of an, 205– 213.

| street railways, 57 ; in favor of

Adjustment of salaries and wages stabilization plan, 275 .
after an upward price movement, Bank credit, effect on, of proposed
55– 56 .
I plan for stabilizing the dollar,
Alternative plans for stabilization 168 – 172.
of dollar, 252 - 261.
Bank discount, regulative function
American Economic Association , re- of rate of, 170 - 172.
port of Committee of, on pur- Barbour, Sir David , The Standard
chasing power ofmoney, 33 ; Com - of Value, quoted , 43; approval
mittee of, quoted on plan for by, of plan for stabilizing the
stabilizing the dollar, 275- 276 .
dollar, 275.
American Federation of Labor, reso - Barron , C . W ., example supplied
lution of, in favor of a dollar of by, of contract in terms of a com
stabilized purchasing power, 277 . modity, 280 .
Anderson , B . M ., Jr., approval by, Bell, Chas. A ., calculation of a special
of proposal to stabilize value of index number by, 151 - 152.
dollar, 90 n . ; governmental con - Bengal, rate of assessment of, 57 .

trol of gold production suggested Bibliography of literature relating
to stabilization plans, 286 – 296 .
in favor of stabilization plan, 275. Bimetallism , literature on, 288 – 289.

by, 260 ; member of committee

Approval by economists, financiers. Bland-Allison Act, causes leading
and others of plan for stabilizing up to, 265 –266 .
the dollar, 274– 278.
Bolshevist Government, paper money
Argument from probability, regard inflation by, 30.
ing relation between monetary Bondholders, position of, under ris
inflation and price fluctuation,
17 - 19 ; from statistics, 19 – 23.

Artificiality of a fixed -weight dollar,
106 - 107.

ing and under falling prices, 58 ;
plight of, at present time, 61;
position of, in period of falling
prices, 77 .

Assignats of French Revolution , 6 , Brassage fee, for deposit of gold
bullion , 100, 104 ; as a means of
Austin, O. P., address on “ Prices, preventing speculation in gold ,
Yesterday, Today, and Tomor- 139 – 142, 147; as a factor in
row ," quoted , 22–23 ; quoted on determining stabilization process,
inflation, 35.
183 ff. ; the ideal, 197 .
Australia, use of index numbers of Bryan campaign, downward price
prices for adjusting wages in , 283. movement resulting in , 7 , 68.
Austria , effect of Great War on Bullock, C . J., Monetary History of
I United States, cited , 35 , 61.
prices in, 8.



Bureau of Labor Statistics, United Crime of '73, the, 68 , 75 .
States, index number of, 4 -5 ; Crises resulting from price fluctua
figures from , 56 ; commodities tions, 66 .
used by, in making up index num - | Cycles in trade caused by price

ber, 86 – 87 ; index number of, fluctuations, 65 -66 .
to be a guide in making proposed
Lord, quoted on advanc
changes in dollar's weight, 95 - 96 . D ’Abernon,
ing prices in England, 23 ; cited
labor discontent due to high
Canada, price movement in, from on
prices, profiteering, and grafting,
1896 to 1914 , 8 ; effect of Great 69
-70 ; cited on rate of fall in
War on prices in, 9 ; chief index value
of money, 270 .
numbers current in , 286 .
and creditor, opposition of
Cassel, Gustav, cited on correspond Debtor
interest between , a supposed ob
ence between money supply and stacle
to stabilization of dollar,
price level, 30.
240 - 248.
Chambers of Commerce in favor of Deposit
currency, price level affected
stabilization plan, 276 .

by, 51 -52.
China, similarity of price movements Discontent,
by upward price
in India and , 25 ; fixed rate of movement,caused
66 -68 ; caused by
import duties of, 57 n .
prices, 68-69 ; as a result
Circular reasoning in regard to price offalling
war prices, 69– 71 ; examples
movements, 14 - 15 .
of, growing out of instability of
Clark , J. M ., paper by, on “ Possible monetary
standards, 265 – 267.

Complications of the Compensated Dollar, the only unit unstandardized ,
Dollar," 198 n .
-84 ; suggestion of an imaginary
Class hatred traceable to muck 81
composite goods-dollar, 84 -87 ;
raking, 67 -68 .

Treadwell, quoted on
aim of stabilization plan,

artificiality of a fixed -weight, 106
107. See Gold dollar.

" Coin 's Financial School," quack England. price movements in , as

remedy for price convulsions con measured by index numbers from
1789 forward , 6 ; price movements
of, 267.
and , under different mone
Cold storage, as a stabilizer of taryIndia
standards, 27 ; ratio between
prices. 13.
levels of America and,
Conservatism , as an obstacle to price
with ratio of American
plan for stabilizing the dollar, 114, tocompared
; correspond
231- 240 ; lessening of, as the ence in, between, 28money
one great obstacle, by Great War, and
price level, 30 ; chief index
numbers current in , 287 .
Continentalpapermoney, effectsof,6 .
war, effect of, on price
Contracts, upsetting of, by price European
8 -9 ; effect of, on
movements, 54 –55 ; advantages movements,
bank credit , 169– 170.
to, of proposed plan for stabiliz Exports and imports, effect on , of
ing dollar, 108 - 109 ; made in
for stabilizing dollar, 177
terms of a commodity, as an plan

tained in, 75 ; remarkable vogue

attempt at monetary stabiliza
tion, 279 – 280 .
Farmer-and -buggy illustration , 73.
Cost of living, high . See High Favorable opinions of proposed plan
cost of living.
for stabilizing
273 - 278 .
Credit inflation , during Great War, Ferguson,
on con
30 - 34 ; subtle and enticing quali tracts made in terms of a commod
ties of, 264. See Inflation .
ity, 279.



Fiat money system , charge that speculation in, 139- 147; a fetish
stabilization plan is a , 224 .
I that is erratic and tricky, 237 ;
Finished products and raw materials, suggestion for governmental con
reasoning in a circle regarding, 15 .

trol of, 260.

Fischer, L . A ., History of Standards Gold certificates, reserve against,
of Weights and Measures of United 125 ff.
States, cited , 238 .
Gold clause in existing contracts,
Fisher, Irving, Why Is the Dollar
Shrinking, cited , 11 ; The New

treatment of, under plan for
stabilizing the dollar, 163 – 168.

Price Revolution , cited , 11, 65 , Gold coins, proposed circulation of,
119 ; articles by, on price fluctua in form of paper only , 91- 94 ;
tions, cited , 20 ; article on “ The disposal of existing, under plan
*Scarcity ' of Gold," cited , 35; for stabilizing the dollar, 161- 163.
Purchasing Power of Money , cited, Gold dollar, to be retained , under
51 n ., 154, 260, 262 ; articles on

“ Equation of Exchange for 1914 ,
and the War," cited , 52 ; The Rate
of Interest, cited , 64 ; article on
“ Adjusting Wages to the Cost of
Living," cited , 261; member of
American Economic Association
Committee on Purchasing Power
of Money, 275.
Fisher, Willard , account by, of early
experiments with tabular standard , 281.
Fixed incomes, mockery made of,
by money inflation , 63.
Fixity of value of money, illusion in

use of proposed goods-dollar, 87
90 ; merely the weight of, to be
varied , 90 –91 ; method of conform
ing, to goods-dollar, 95– 100 .
Gold exchange standard , correction
of current money units by, 284 ;
writings on , 289– 290 .
Gold inflation, 30, 32 ; method of
transforming into credit inflation
during Great War, 33.
Gold points of exchange, effect of
stabilization plan on, 179– 180.
Gold producers, possible objection
of, to stabilization of dollar, 248–
250 .

regard to, 36 - 39.
Gold reserves, international rela
Foxwell, H . S., Papers on Current tion between price levels and,
175 - 177.
Finance, cited , 33.
France, effect of Great War on Gold Standard , price movements
prices in, 9 ; index numbers in countries using, 7 ; similarity
current in , 287.
cited , 13.

Franklin, Fabian , Cost of Living,

Fraser, Drummond , advocate of
" Continuous borrowing,” 33.
Free trade, idea of, stimulated by
rising prices, 78 n .

Free-trade countries, prices in, 12.

of price movements in countries

having, 23– 25 ; effect of a country
changing from , to silver standard,
26 ; the essentials of a, 94 -95.
Gold theory , so-called , not implied
in stabilization plan , 215 .
Goods-dollar, an imaginary, 84
87 ; machinery for conforming
our gold dollar to the, 95 – 100 ;
argument that it is not ideal,
224 - 225 ; unrestricted deposit of
goods-dollars, as an alternative
plan for stabilization of mone

George, Henry , single-tax prop
aganda of, 74 .
Germany, effect of Great War on
prices in , 8, 9 ; war finance in , 32.
Gold, illusion concerning fixity of tary unit, 255 – 256 .
value of, 36 – 39 ; comparative Governmental control of gold pro
instability of, as standard, 39 -41 ; duction, proposal for, 260.
results of sudden increase in supply Governmental interference requir
of, 45- 49 ; method of changing ing of, not a valid objection to

weight of, 91- 94 ; prevention of

stabilization plan, 233- 234.



Greenback inflation during Civil I select right type of, to carry out
War, 7.

stabilization plan , 147 - 154 ; cal
culation of stabilized , 201- 203 ;

Hadley , President Arthur T ., in

favor of stabilization plan, 274 ;

diagram of, with and without
stabilization, 204 ; adjustment of

wage payments by, since Great
quoted, 275 .
Hammond, John Hays, stabilization War, 281; instances of modern
use of, 282– 284 ; bibliography of,
plan approved by, 275.
Hepburn , A . B ., History of Currency 286 – 288.
in the United States, cited, 84 .
Index Visible, Inc., plan of adjust
Higginson, Henry L ., in favor of ment of, 283.

High cost of living, various remedies

India, similarity of price movements
in China and, 25 ; price move

proposed for, 79 - 81 ; effect of

ments in England and, under

stabilization plan, 274.

public interest in , 263 -272 ; pro
different monetary standards, 27 .
posals for international conference Indian Gold Exchange System , an
innovation no greater than stabili
on , 273- 274.

High prices, causes of, found to bezation plan, 231.
of monetary origin, 10 -52 ; evils Industrial companies, increase in
of, 53 ; result of, not general im - earnings of, due to upward price
poverishment, 53- 54 ; chief evilſ movement, 70 –71.
of, in unequal effect on individual Inelasticity , charge of brought
incomes, 54 ; effects on contracts, against stabilization plan, 229 .
54 -55 ; adjustments of salaries Inflation , paper money, gold , and
and wages made necessary by, credit, 30 ; war finance a prolific
55 - 56 ; disadvantageous results source of, 30 ; in Russia before
of, on rates fixed by law or cus and during Bolshevist régime, 30 ,
tom , 56 - 57 ; results of, in the way 32 ; in Germany during the war,
32 ; in United States by means of
of social injustice, 61-63.
Holland, attempt of, during Great Liberty Bonds, 32 - 33 ; gold , trans
War, to safeguard its money , 285 . formed into credit inflation, 33 ;
House of Representatives, resolu
viewed as legal counterfeiting ,
tion by, looking toward a stabilized 36 ; Santa Claus illustration of,
dollar, 277.
45 -49 ; how prices are raised by,
49-52 ; the last resource of war
Ignorance, an obstacle to plan for finance, 226 ; incompatibility of
stabilizing the dollar, 115 .

stabilization and, 226 – 227 .

Illusions, popular, in regard to International aspects of plan for
money, 35–39 ; methods of eman stabilizing the dollar, 172- 182.
cipation from , 41-44 .
International conference on high cost
Index numbers, a device to measure of living, proposals for, 273- 274 .
movement of prices, 1- 2 ; method International governmental control
of determining, 2 ; effect of of gold mining suggested , 260.
weighted averages on, 2 – 3 ; various | International Trade Union Con
systems of, 4 ; index number | ference at Berne (1919), resolu
of United States Bureau of Labor tion by , to prevent depreciation
Statistics, 4 ; history of, 5 ; price of purchasing power of wages, 277.
movements since 1780 asmeasured Irish land agitation , stimulated by
by, 6 - 8 ; to be a guide in making

falling prices, 74 , 78 n .

proposed changes in dollar's weight, I. W . W ., causes of growth and
95 - 96 ; lack of, a reason for bitterness of, 67 ; could have
overlooking plan for stabilizing

been avoided by standardizing

the dollar, 113 – 114 :

monetary units, 117.



Jevons, W . Stanley, responsible for


of Bureau of Labor Statistics

perfected by, 4 - 5 ; in favor of
ments as measured by index stabilization plan , 274 ; quoted ,
number of, 6 – 7 , 113 ; popular 275 .
interest in stability of money Menger, Carl, a writer on irredeem
index numbers, 5 ; price move

leading to devising of index num -

able paper money, 291.

ber by, 265; quoted concerning Middle Ages, price levels in the, 5-6 .
use of precious metals as standard Middlemen, rise of prices not due
of value in long-lasting contracts,

to, 13 .

280 ; work by, dealing with prin - Miller, Dr. A . C ., quoted , 34 , 119.
ciples of index numbers, 288 ; |Mint price, fallacy of the, 172- 175.
an enthusiastic advocate of the Mitchell, Wesley Clair, diagrams
tabular standard , 292 – 293.

adapted from , 3, 4 , 14 ; statistics

by, 20 - 21, 25 n . ; member of

Kansas,land problem in, accentuated
by falling prices, 74.
Kelsey , Clarence H ., approves, 274.

committee in favor of stabiliza
tion plan, 275 ; publication by,
showing application of index num

Kemmerer, E . W ., article on “ Infla - || bers to war prices in different

tion," cited , 20 ; member of commit countries, 287.
tee in favorofstabilization plan , 275. Monetary inflation as cause of

King, W . I., Wealth and Income of
People of United States, cited , 20 ;

fluctuations in prices of commodi
ties, 19.
statistics by, 54.
Money, popular ideas of, as affected
by price movements, 263- 272.
Labor, proposal for a money based Money illusions, discussion of, 35

on , 259– 260.
39 .
Labor troubles caused by high cost Money -lenders, different effects on ,

of living , 69-71.
of rising and of falling prices, 58–
Land problem , produced during | 59 .
period of falling prices, 74 .
Money standards, relation of price
Landry, Adolphe, in favor of stabili levels to, 23 – 29 .
zation plan, 275 .
Money supply, how price levels
Latin Union for maintaining bi- l follow the, 29– 30.

metallism , 181.
Money unit, attempts at correcting
Lewis, Gilbert N ., alternative stabili- the, 284 -285 .
zation plan suggested by, 252. Muckraking, reason for and ill
Liberty Bonds, inflation by means effects of, 67 ; avoidance of,
of, 32 – 33.
possible by standardizing mone
Loria, Achille, an advocate of stabili tary units, 117.
zation plan, 275 .

Murray, Nat C ., statistics by, 20.

McAdoo, W . G ., railway rates raised Newcomb, Simon , article by, antici
by, 72 .
pating plan to stabilize the dol
McKechnie, Major W . E ., quoted lar, 293.
on assessment of Bengal, 57.
New England Association of Pur
Marshall, Alfred , article by, antici- chasing Agents, in favor of stabili
pating stabilization plan , 293.
zation plan , 276 .
Massachusetts, use of tabular stand - I Newlands,
Senator, stabilization plan
approved by, 274.
ard in Colonial, 280- 281.
Meade, Professor, cited on stability New Zealand, labor troubles in , due
in price of trust-made products, to high cost of living, 70 .
12 n .

Nicholson , J. S., War Finance,

Meeker, Dr. Royal, index number ! quoted, 21 n., 30 ; cited on quick



ness of response of index number | Price movements, index numbers a
to change in money supply, 152.
device for measuring, 1 -5 ; gen
Norton , J. Pease, “ Stocks as an
Investment When Prices Are Ris

ing," quoted , 61.
Ogburn , W . F., index numbers for
use of Seattle flouring mills cal
culated by, 283 .

“ One Way Out,” solution proposed
in, for high cost of living, 79.
Overnight speculation in gold, pre
vention of, 139- 142.

Owen , Senator Robert L ., in favor
of stabilization plan, 274 .

eral upward trend of, 5 - 6 ; history
of, during past century and a
quarter, 6 - 8 ; effect of the Great
War on, 8 - 9 ; causes of, 10 ff.;
various reasons assigned for, 10
12 ; effect on , of profiteers, specu
lators, and middlemen , 13 - 14 ;
tendency to reason in a circle in
regard to , 14 - 15 ; fallacy of
accounting for, by selected cases,
16 - 17 ; argument from probability ,

pointing to monetary . inflation
as cause of, 17 - 19 ; argument
from statistics regarding , 19 - 23 ;
similarity of, in countries having
like monetary standards, 23 –25 ;
difference in , in countries with
unlike monetary standards, 25
28 ; correspondence of, with money

Panaceas, attitude of devotees of,
toward stabilization plan, 250
Panics, traceable to price fluctuations,
65 - 66 .
Paper money, fluctuations of price supply , 29 - 30 ; other causes of,
level from use of irredeemable, than quantity of money, 51 -52 ;
5 -6 ; literature on irredeemable, conclusion as to, that they are
290 - 291.
due to monetary causes, 52 ;
Paper money inflation, enormity evils of, 53 ff. ; chief evil in un
of evils of, 61.

Par, selection of the, in carrying

out plan for stabilizing the dollar,
154 - 161.
Parker, Carleton, on results of public
muckraking, 67 .
Peabody, George Foster, favorable
opinion held by, of stabilization
plan, 274 .
Perrin , John, stabilization plan ap
proved by, 274 ; quoted , 275 .
Persons, Warren M ., member of
committee in favor of stabilization
plan, 275 .

equal effect on individual incomes,
54 ; hardships worked in regard
to contracts, 54 -55 ; evils as to
salaries and wages, 55 - 56 ; effects
of, on rates fixed by law or cus
tom , 56 - 57 ; periods before and
after 1896 contrasted, 58 - 59 ;
social injustice wrought by, 61
63 ; trade cycles due to , 65 -66 ;

bad remedies for evils of, 74 - 76 ;
loss resulting from , is general,
76 -78 ; a remedy for, 79- 103 ;
effects of, on popular ideas of

money , 263 - 272 ; proposed special

Polish Engineers and Merchants international study of, 273- 274 .
in America , stabilization plan Profiteering, effect of, on price
movements, 13 ; rising prices
favored by Society of, 276 .
Populism , reason for rise and cessa responsible for, rather than the
tion of, 68 -69.
dollar, 116 , 279- 285 .

Precedents for plan of stabilizing the

result of, 14 ; rise of, in period of
rising prices, 58 –59 ; remedy for,
60 ; justification of so -called , in

Price, Theodore H ., article on “ The rents, 72.
Index Number Wage," cited, 72. Protective tariffs, idea of, stimulated
Price control, impracticability of, as by falling prices, 78 n .
remedy for high cost of living, 102.
Price levels, medieval, 5-6 ; follow I Quack
remedies for price convul
sions, 74–
money standards, 23- 29.

76 .



Quantity theory of money , exposi- | Great War, 8 - 9 ; methods of
tion of, 29 ff.; not accepted by war finance in , 30 ; correspondence
all students of money, 51 n. ; / in, between money supply and
assumption of, not implied in price level, 30.
stabilization plan, 215 -216 ; the
objection that stabilization plan Salaries, adjustment of, after up
ward price movement, 55 –56 .
contradicts, 216 –217 .

Santa Claus illustration, to show
Railroads, hardships of, from up - results of addition to total cir
ward price movement, 56 – 57 ; culation, 45–49.
why rise in rates of, is necessary , Sauerbeck , index number of, 6.
71 -72.
Scarcity of money, illusions regard
Rapidity of circulation, price level ing, 16 , 35 – 36 .
Scotch Fiars prices, 243, 245 ; an
affected by , 51-52.
Rates fixed by law or custom , effects example of contract made in
of upward price movement on
terms of a commodity, 279- 280.
56 - 57.

Shakespeare, an economic truth as

Raw materials and finished products, stated by, 59.
circular reasoning in regard to, Sherman Act, causes leading to
15 .
passage of, 265 – 266 .
Redemption via warrants, alterna- Silver standard, price movements
tive plan of, 254 – 255 .
in countries using, 7, 25.
Redemption warrants, an alterna- Single taxers, as objectors to stabili
tive stabilization plan, 253 -254. I zation of dollar, 250.
Redfield , Secretary, effort of, to Sixteen -to -one remedy for falling
stabilize prices by price fixing, price movement, 75 ; campaign

of 1896 , 266 .
ing monetary units, 294.

Reformers, objections of, to stabili- Smith , J. Allen, plans of, for stabiliz
zation of dollar , 250 – 251.
Remedies, bad, for evils resulting Social injustice resulting from chang
from price fluctuations, 74– 76 ; ing price level, 61-63.
variety of, good and bad, 79–81. Socialism , cue taken by, from high
Rent profiteers, so -called , 72 .
cost of living, 68 ; growth of, due
Resentment as one evil resulting to rising costs of living, before the
from redistribution of wealth war, 69.
through price fluctuations, 66 -68. Socialists, objections of, to stabili
Reserve against gold certificates, zation plan , 250 – 251.
effect on , of stabilizing the dollar, Spain , safeguarding of money by,
125 - 126 ; restabilizing the, 126 - 1 during Great War, 285 .
128 ; definite and indefinite sys- Spanish paper money; counterfeit,
tem of, contrasted , 129 – 131.
I issued by Bolshevist Government,
Retail prices, movements of, com - 30 , 32 .
pared with those of wholesale Special interests, an obstacle to
prices, 13 – 14 .
stabilization of the dollar, 240 –

Ricardo, abolition of gold coins


proposed by , 92 n .
Speculation, evening-up of price
Rist, Charles, article by, cited , 61 n . fluctuations by, 13 ; activity of,

Rooke, John, work by, anticipating
plan to stabilize the dollar, 293.

in period of changing price levels,
64 .

Rowe, Leo S., approves, 275 .
Speculation in gold, methods of
Russell, H . B ., book by , on “ Interna - l dealing with, 139 – 147 .
tionalMonetary Conferences," 182. Speculators, objection of, to stabili
Russia , price movements in, during zation plan, 251.



Stabilizing the dollar, need for, Statistics concerning relation be
81 -84 ; proposed method of, 84 tween monetary inflation and
87 ; adjustment of machinery price fluctuation, 19 - 23.
for, 95– 100 ; advantages of pro- Stockholders, position of under
posed method, over other remedies, rising and under falling prices, 58.
101- 103 ; summary of plan for, Street railways, losses of, from up
104- 105 ; crux of plan , 105 ; ad- ward price movement, 57 ; reason

vantages of, in case of contracts,
108 - 109; not a cure-all for all
financial complaints, 110 - 112 ; reason for previous overlooking of
remedy 113–114 ; obstacles in
of plan , 114 - 116 ; precedents
for plan , 116 , 279 - 285 ; troubles
that might have been avoided
by, 116 - 118 ; technical details
of plan, 125 ff.; effect of, on

for raising fares on , 72 .
Sumner, History of American Cur
rency , cited , 61.
Supply and demand , relation of
stabilization plan to, 219– 220 .
employment of, under plan
for a 50 % minimum reserve.
133 – 137 ; saving in taxes by
interest on , 137.
Sweden , prohibition of import of

present 100 % reserve, 125 - 126 ; gold by, in 1916 , 285 .
nations, 131 - 132 ; selection of Tabular standard , as an alternative
the index number, 147 -154 ; selec for stabilization plan, 260- 262 ;

operation of, in small and in large

tion of the par or price level,
154 – 161 ;

disposal of existing |

gold coins, 161- 163 ; the gold
clause in existing contracts, 163 – |
168 ; bank credit and the plan,
168 - 172 ; international aspects of
plan, 172- 182 ; illustrative numerical examples to show opera -

examples of use of, 280 - 284 ;

question of origin of idea of, 281 n . ;
writings on , 291 - 293.
Tinnes, D . J., proposals in writings
of, anticipating present stabiliza
tion plan , 294.
Tithe averages, in England, made
to vary with value of grain , 279.

tion of stabilizing process, 183– | Trade cycles, caused by price fluctua
205 ; tentative draft of an act tions, 65- 66 .
for, 205 -213 ; discussion of dis - Trust-made products, price of, more
approval of plan , 214 ff.; dis- stable than that of competitive
approval due to misunderstand | products, 12 n .
ings, 214– 224 ; alleged defects
in , 224 - 231 ; conclusion on alleged Uncertainty , as an evil resulting
defects of plan , 230 - 231; the from price fluctuations, 63 -65.

obstacle of conservatism , 231- Underwood tariff, adopted in period
240; the obstacle of special in - of rising prices, 78 n .
terests, 240- 251 ; alternative plans, United States, price movements
252- 262; origin and growth of in , as measured by index num
present plan , 272- 274 ; approval bers, 7 - 8 ; effect of Great War
of plan , 274 - 278 ; literature of on prices in , 8 - 9 ; rise in prices
remote and direct anticipations in , due to gold inflation and to
of plan , 288 – 294 ; list of recent
writings on , 294– 296 .

credit inflation , 23 ; ratio of Eng
lish price level to that of, compared

Standard hypothetical case, to show with ratio of American to English
operation of stabilizing process, money, 28 ; correspondence be
183 - 187.

Standardizing of monetary units.
See Stabilizing the dollar.
Standard of value, effect of stabiliza
tion plan on , 220 -221.

tween price levels and money

supply in , 29- 30 ; credit inflation
in , during the war, 32– 33 ; extent
of war inflation in, 34 ; chief
index numbers current in , 286 .



Violence caused by redistribution War Labor Board , use of index num
of wealth through price fluctua- bers by , 283.
tions, 67 -68.
War prices, discontent caused by ,
Volume of trade, as an element in 69–71.
Wars, business crises following, 66.
fluctuation of price levels, 52.
Weighted average, explanation of,
Wages, circular reasoning in regard 2 - 3 .
to prices and, 14- 15 ; adjustment Wholesale prices, faster movement
of, after an upward price move of, than of retail prices, 13- 14 .
ment, 55 -56 ; actual lowering of, Wicksell, Knut, advocate of regula
since 1913, 56 ; effect on, of period tive
use of rate of bank discount,
of falling prices, 77 –78 .
War, effects of, on stabilization plan , Williams, Aneurin , proposal in writ
226 - 228 .
ings of, anticipating stabilization
Warburg , Paul, suggestion by, con plan , 294.
cerning use of index number of Wilson, President, address on High
prices, 172.
Cost of Living by (August 8, 1919),
War inflation, discussion of, 30 -34 ; 21.
extent of, 34 -35 .

Printed in the United States of America .