Readings in Money and Banking Part 22

6. "_The multiple standard is not ideal. Especially is it faulty when the cause of price movements is entirely a matter of the abundance or scarcity of goods in general._" Those who hold this objection point out that an ideal standard would not be one which always smooths out the price level but one which discriminates and leaves unchanged such rises and falls as are due to general scarcity and abundance of goods. There is much to be said in favor of such discrimination as an ideal. It must be admitted that the compensated dollar plan would not discriminate between changes in the price level due to the scarcity or abundance of goods in general and those due to changes in money and credit. It must be further admitted that a theoretically ideal standard would take some account of this distinction. But the compensated dollar plan does not claim to be ideal. The plan would simply correct the gold standard to make it conform to a multiple commodity standard. It does not pretend to correct the multiple commodity standard to make it conform to some "absolute" standard of value.

Such an ideal standard is as unattainable as is absolute s.p.a.ce. Changes in relative value indicate change in absolute value, either of goods or of money; but it is not possible for us to know, except in a general way, how much of the absolute change is in goods and how much in the dollar. On general principles we may be a.s.sured that the absolute change is wholly or mostly in the dollar. We economists in our measurements of value are in much the same predicament as the astronomers. Our economical "fixed stars" are fixed only in a relative sense. We cannot measure the empty s.p.a.ces of absolute value, but can only express values in terms of visible goods, the general average of which is the nearest approach to absolute invariability we can, in practice, reach.

But if it were possible to measure absolute values to our universal satisfaction, in terms, say, of "marginal utility," or of "disutility of labor," or of anything else, there are no statistics by which we can realize such a standard in practice. The only readily available statistics by which we can correct our present standard are price statistics from the great markets. We can, by index numbers based on these price statistics, translate from gold into commodities, but as yet we cannot translate from commodities into any ideal or absolute standard.

If I were treating of the problem of an ideal standard of value, I think I should be inclined to agree with Professor Marshall that a standard that represents a gradually descending scale of prices to keep pace with the "real" cheapening improvements in industrial processes is better than one which represents an absolute constancy of prices. But it would be quite impracticable to discover the exact rate of fall of prices which would correctly register the improvement going on in industry, and, moreover, it would, I believe, be so small as not to depart much from the mutiple standard. This I infer is also the opinion of Professor Marshall.

Professor Kinley makes the very interesting suggestion that we can suppose a more ideal standard than the tabular by making our unit a definite percentage of the national annual dividend. This appeals to me as a rough and ready way of fixing a unit more nearly ideal than that fixed by the tabular standard. But it would certainly not be practicable. It would not even be quite ideal. But if Professor Kinley will measure his standard, the compensated dollar plan will be able to take care of it.

In fact, if we could find a more absolute standard than the tabular standard and could accurately measure it in statistics, precisely the same method of compensating the dollar could be employed to keep the dollar in tune with that standard as with the tabular standard. The only difference would be that the guiding index would be different. The plan for compensating the dollar does not in essence consist in selecting the multiple or any other standard. It consists in a method of making the monetary unit conform to any standard chosen. But there is convincing evidence that the multiple standard is usually near enough to the ideal for all practical purposes and infinitely nearer than the gold standard.

_While individual goods may vary greatly in absolute value, the general ma.s.s of goods will vary comparatively little and seldom._ There may be some absolute change in the general ma.s.s of commodities, but it must usually be extremely small in comparison with changes in any one commodity like gold. It is clear from the theory of chances that this must be the case. The odds are hundreds to one that the variations in absolute value in several hundred commodities will offset each other to a large degree. We very seldom have world feasts or world famines. If the corn crop is short in some places it is abundant in others. If it is short everywhere the crop of wheat or barley or something else is practically certain not to be. We cannot expect that everything will usually move in one and the same direction. If there is a war in j.a.pan, it is not likely that there will also be a war in India. A world war or even anything as near to a world war as the present conflict in Europe is a most unusual thing.

A standard composed of several hundred commodities must therefore be, in all human probability, more stable than a standard based, as is our present gold standard, on one commodity. Bimetallists made much of this point when claiming that two metals joined together were steadier than one, just as two tipsy men walk more steadily arm in arm than separately. Still more steady is the average of a hundred commodities just as a line of a hundred tipsy men abreast and holding each other's arms will march even more steadily than two. This is because it is wholly unlikely that every man in the line will lurch in the same direction at the same instant. The lurching of some in one direction can always be depended on to offset almost entirely the lurching of others in the other direction. This theory of probabilities in its application to the present rise of prices is, I believe, borne out by the facts.

After a careful study of all available evidence, I am convinced that the present general rise in prices beginning in 1896, cannot be traced to any simultaneous scarcity of goods. I refer the reader to _Why Is the Dollar Shrinking?_ where I have given the summary of the evidence. I think the facts are equally clear that the great fall in prices from 1873 to 1896 can not be laid, wholly at least, to the increasing plentifulness of goods.

Finally, even if we could measure and apply an absolute standard, it is doubtful if, in practice, it would be of any more service in regulating contracts, than a multiple standard. For after all, as I have tried to show in _Appreciation and Interest_ what we want in a contract is something that is _dependable_ rather than something that is absolutely constant; and the multiple standard gives dependability in terms of the ordinary staple necessities of life. If we could know that the dollar always means a definite collection of goods, we could know that the bondholder or the salaried man who gets a stated income of $100 a month, would have the same command over actual goods, and such knowledge would be of great service. This whole subject I have discussed in Chapter X of my _Purchasing Power of Money_.

7. "_It would be inadequate to check rapid and large changes of the price level._" Owing to the narrow limits, _e. g._, 1 per cent. as stated, imposed on the monthly adjustments, it is quite true that a sudden and strong tendency of prices to rise or fall could not be completely checked. If prices were to rise 8 per cent. per annum and the plan permitted no more rapid shift than 6 per cent. per annum, this would leave only 2 per cent. per annum uncorrected, or only one-fourth the rate at which prices would rise if wholly uncorrected. But half (or in this ill.u.s.tration three-quarters of) a loaf is better than no bread.

Moreover, such extreme cases are rare and when they occur there is all the keener need for mitigation even if it be somewhat inadequate.

Ultimately, of course, after the rapid spurt has abated, the counterpoise, in its relentless pursuit, would overtake the escaped price level and bring it back to par.

8. "_The correction always comes too late._" It is objected that the plan does not make any correction until actual deviation has occurred, and so the remedy always lags behind the disease. It is true that the corrections follow the deviations. They could not precede them unless we foreknew what the deviations were to be; and we could not afford to entrust the work of guessing to government officials. In this respect, as in others, the plan does not attain perfection; yet it is infinitely better than the present plan, which leaves the standard haphazard. It is also pointed out that after the correction is applied it may happen that prices will take the opposite turn, in which case the remedy actually aggravates the disease. But, taking the extremely fitful course of prices since 1896 and correcting it according to the plan, month by month, as shown in the _Quarterly Journal of Economics_ diagram, we find that in nine cases out of ten the opposite is true. Even in the few remaining cases the deflections were very slight and were, of course, soon corrected immediately after the following adjustments. If the corrections are sufficiently frequent, it is impossible not to maintain, in general, an extremely steady adjustment.

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 seems no reason why the monetary automobile cannot be driven almost equally straight.

9. "_The plan a.s.sumes that a 1 per cent. fluctuation can be exactly corrected by a 1 per cent. adjustment of the dollar's weight._" Owing, I fear, to my own fault of phrasing, I have found that several people have acquired the mistaken impression that the plan requires, to be made at each adjustment, an increase of 1 per cent. in the weight of the dollar for every 1 per cent. _increase_ of the index number since the last adjustment; whereas actually the plan requires, to be made at each adjustment, an increase of 1 per cent. in the weight of the dollar for every 1 per cent. excess of the index _above par_ then outstanding.

From this mistaken premise it has naturally been inferred that, in order that the plan should work correctly, a 1 per cent. loading of the dollar would always have to exactly correct a 1 per cent. change in the index number, and, very properly, the critics doubted the truth of this. But since the premise was mistaken the objection based on it disappears.

10. "_The plan would be sure to create dissatisfaction and quarrelling._" This fear is, I believe, wholly imaginary. There would be some ground for it if the proposal were to adopt the old "tabular standard" by correcting money payments through the addition to or subtraction from the debt of a certain number of dollars. Under these circ.u.mstances the extra dollars paid or the dollars from which the debtors were excused would stand out definitely and would be a subject for debate and dispute, but if the tabular standard were merged in the actual money of the country the ordinary debtor and creditor would be as unaware of how his interests had been affected as he is now unaware of how his interests are affected by gold appreciation. It would still be true that to the ordinary man "a dollar is a dollar."

If we cannot get the ordinary man to-day really excited over the fact that his monetary standard has affected him to the tune of some 50 per cent. of his princ.i.p.al of fifteen years ago, it does not seem likely that he could get excited because some one tells him that the index number used in the "compensated dollar" plan robbed him of 1 or 5 per cent. as compared with some other possible system.

The debtor cla.s.s favored in large measure bimetallism, or free silver, as a means of helping them pay debts, while the creditor cla.s.s opposed it. But this was a question of changing the standard, not of keeping it unchanged. If it were proposed to shorten the yardstick, undoubtedly many who would profit in the outstanding contracts would and ought to oppose it. But there is and can be no contest over efforts to keep the yardstick from changing.

11. "_It has never been tried._" True; but the proposal is, in mechanism, almost identical with the gold exchange device introduced by Great Britain to maintain the Indian currency at par with gold. The system here proposed would really be to-day less of an innovation in principle than was the Indian 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.

The truth is, unless I am greatly mistaken, that the last named is the only strong objection to the plan in the minds of most of its critics; it is the const.i.tutional objection to any change of the _status quo_. It is simply the temperamental opposition to anything new. As Bunty well says in the play, "anything new is scandalous." The conservative temperament dislikes experiment because it is experiment. Accordingly it is not surprising that we find many of the objectors saying, "let well enough alone," "let us 'rather bear those ills we have than fly to others that we know not of.'" These people seldom give a.s.sent to untried experiments; yet after the new plan has been tried and established they invariably turn about and become its most staunch supporters. This fact has been often ill.u.s.trated in our monetary and banking system. Nothing short of the shock of civil war was required to divert us from a state system of banking to a national one. In spite of the intolerable evils of the former, it was easy to find many arguments in its favor. After the change these arguments never reappeared. The same was true of slavery.

But conservatism always yields gradually to pressure. Its resistance is strong but has no resiliency. It is not like the resistance of a steel spring (which, when pushed in one direction, will bend back), but a ma.s.s of dough or putty which, though it resists impact strongly, yet when it is moved stays inert and does not return. Under these circ.u.mstances, even if progress is made an inch at a time, it seems to me worth while to try to make it. The two steps first necessary have been taken, namely, the perfecting of the plan and the running the gauntlet of criticism.

It is not impossible, judging from the many and authoritative endors.e.m.e.nts of the plan, that it may be pushed rapidly toward realization. All depends on the opening up of opportunities. After the present war, for instance, it may be that "internationalism" will come into a new vogue and that some special opportunity will be afforded to bring the plan with its endors.e.m.e.nts to the serious attention of the world's administrative officials.

[88]It must be admitted at the outset that the plan, if carried out with iron consistency for a considerable stretch of time, would achieve the result mainly had in view--the prevention of a long-continued and considerable rise in prices. It might not achieve that result as smoothly and evenly as its proposer expects; and the qualifications just stated--that it must be carried out unflinchingly for a long period--should be borne in mind. No one who holds to the doctrine that the general range of prices is determined by the relation between the quant.i.ty of commodities and the volume of the circulating medium, and that the volume of the circulating medium in the end depends, _ceteris paribus_, on the amount of coined money, can do otherwise than admit the logical soundness of the scheme. He who maintains that the rise in prices during the last fifteen years is due to the greater gold supply must admit that a restriction of the monetary supply of gold will check the rise. The plan proposed is in essence one for a regulation in the monetary supply of gold. Its effects must be the same in kind as those of a cessation of free coinage, with an apportioned limited coinage....

The question arises whether it would be feasible for one country alone to adopt the plan. It would be feasible, in the same sense that it would be feasible for all countries together to adopt it. One country alone, carrying it out with unflinching consistency, might secure the desired result, subject to the qualifications which have already been indicated.

But that any one country would in fact adopt it alone seems to me in the highest degree improbable.

Consider for a moment the mode in which the scheme would work in detail if adopted by a single country. Though the immediate effect upon general prices within the country would be unpredictable, the effect upon certain kinds of prices would be certain, predictable, almost instantaneous. Exported commodities would feel the effect at once. Their prices are determined, to use the current expression, by the foreign market. It would be more accurate to say that their prices are determined by the total market, domestic as well as foreign. But it is clear that their prices must be the same (due allowance being made for transportation charges and the like) within the country as without. Now the immediate effect of a seigniorage would be, as Professor Fisher points out, a readjustment of the par of foreign exchange. The exporter would find the par of exchange lessened, and in terms of domestic money (compensated dollars) he would receive less than he got before. All commodities of export would fall in price at once, or fail to rise, to the extent of the seigniorage. Other commodities probably would be unaffected for the moment. In the long run, no doubt, these other commodities (we may call them domestic commodities) would also be affected. But, to repeat, the rapidity and extent of the change in general prices is impossible of prediction. The exporters, none the less, would feel an immediate and unmistakable effect. Beyond question they would be as hotly indignant with the plan as if an excise tax had been imposed on their commodities without any possibility of their raising the price of their products. Consider for a moment what would be the state of mind in our cotton-exporting South. Is it to be supposed that any set of legislators could resist the political pressure from the various exporting sections, and carry out the scheme unflinchingly? Can we imagine a Congressman telling his const.i.tuents that they need only wait a while, until all money incomes and all prices had adjusted themselves to the new conditions? that then n.o.body would be worse off or better off than before? To ask this sort of question is to answer it.

The very proposal of the scheme in the halls of Congress would invite the hot opposition of the exporting sections and industries. Its immediate consequences for them would be seen quickly enough, and no promise of ultimate adjustment would lessen their hostility....

Professor Fisher has predicted that prices will rise further. He is disposed to believe that there will be not only a rise, but that there will be a considerable rise. I hesitate very greatly to enter the domain of prediction. I am inclined to believe that the rise in prices will not cease for the next decade; but whether it will be considerable or moderate or negligible in extent, I should not venture to say.

Predictions concerning the output from the mines are to be taken with the greatest caution. We all recall the predictions which Suess made in 1892. The distinguished geologist believed that the prospects of an increased production of gold were of the slightest, and that the world must fall back on the use of both metals. How different the course of events has been from that which he predicted! There are those who believe that the output of gold, so far from continuing to increase, has reached, or is approaching, its maximum. For myself, I should not be surprised if there were a cessation in growth, and should certainly be surprised if there were not a relaxation in the rate of growth.

Further: it deserves to be borne in mind that the total supply of the precious metals is now so much greater than it was twenty years ago that the same annual increment will have much less effect on prices. This is the familiar consequence of the durability of the precious metals....

Finally, a circ.u.mstance should be borne in mind which bears not only upon the intrinsic desirability of a regulative plan, but also upon the att.i.tude of the general public and the consequent political and industrial possibilities. Economists are familiar with the difference between the phrase which they use in describing the new conditions, and that which is current in popular discussion. The economists speak of the "rise in prices"; the general public speaks of the "high cost of living." The difference in phraseology is not due simply to variation of the point of view. It results from the fact that very different phenomena are had in mind by the two sets of persons. The economist is thinking and reasoning about the change which has been of special interest for him--the general rise in prices. The man on the street is thinking about the exceptional rise in the prices of one important set of commodities. Any one who will examine with care the index numbers of our Bureau of Labor will see what a marked rise, much beyond that of the general index number, has appeared in the prices of farm products, and especially in the prices of meat. That special advance has taken place within the last three or four years. It is precisely within this period that general attention has been turned to rising prices. What the public has had chiefly in mind has been the commodities of wide consumption.

This, I believe, is the main cause of labor unrest....

Whatever be the particular causes that have led to the high prices of food, economists agree that these causes will operate irrespective of any compensated dollar plan. This would simply serve, at its best, to keep general prices where they are, leaving each particular group of commodities subject to its own particular set of causes. If the compensated dollar plan were to be adopted, and if the prices of food should continue to mount, there would be disappointment for the general public, but nothing to surprise the economist. And conversely, it is entirely possible that the rise in the cost of living, that is, the special rise in the prices of foodstuffs, will reach its end irrespective of any monetary change whatever. The general rise in prices and money incomes ... is not unwelcome to the great majority of people.

Its incidental consequences are perceived and debated chiefly by the economists; such as the effects on the creditor cla.s.s and the slowness of so-called fixed incomes to rise correspondingly. The general public is concerned chiefly with the conspicuous rise in the prices of foodstuffs, which is ascribable to causes very different from those that bring the general rise, and can be reached only by remedies very different....

FOOTNOTES:

[87] Adapted from Irving Fisher, _Objections to a Compensated Dollar Answered_, reprint from _The American Economic Review_, Vol. IV, No. 4, December, 1914.

[88] F. W. Taussig, _The Plan for a Compensated Dollar_, _The Quarterly Journal of Economics_, Vol. 27, May, 1913, pp. 401-416.

CHAPTER XIV

MONETARY SYSTEMS OF FOREIGN COUNTRIES

ENGLAND[89]

[90]The monetary unit is the _pound_, or _sovereign_, equal to $4.8665, divided into 20 _shillings_ of 12 _pence_ each, each penny equal to 4 _farthings_. Originally the pound was a Troy pound of silver, .925 fine.

Under the law of 1816 gold was made the standard and silver subsidiary.

The coinage of gold is free, and to avoid delay the Bank of England is required to buy all gold and pay for the same at once at the [minimum]

rate of 3 17_s._ 9_d._ per ounce, a [maximum] charge of 1-1/2_d._ being imposed for the accommodation. Silver is only coined on government account and the coinage ratio is 14.29 to one.

They have the gold _sovereign_ (containing 113.001 grains pure gold), the unit of their currency, also _half-sovereigns_, _crowns_ (5_s._), _double florins_, (4_s._), _half-crowns_, _florins_, _shillings_, _six_ and _three pence_ pieces, _four pence_ (groat), _two pence_ and _penny_, all in silver, also _penny_, _half-penny_, and _farthing_ in bronze. A few English banks, operating under old charters, issue notes to a limited extent, which circulate as money. Otherwise the paper currency of England and Wales consists wholly of notes of the Bank of England....

Extraordinary measures were resorted to by the British government in the early stages of the European war of 1914; with the close of the war currency conditions will doubtless go back to normal, as described above.

The Government, also, under date of August 6, authorized an issue of currency notes, in denominations of 1 and 10 shillings....

These notes, which were first issued to the public August 7, were deposited with the Bank of England for account of the British government, as the practical way of getting them into use; they were used for various purposes, including advances to banks at 5 per cent.

per annum, up to 20 per cent. of their deposits; the volume outstanding December 30, 1914, was 38,478,164; the amount outstanding on June 23, 1915, was 46,199,705. These notes were protected in part by securities and by an increasingly large gold reserve, exceeding 75 per cent. in March, 1915.

Postal orders were made legal tender and so remained until February 4, 1915....