A PLAN FOR A COMPENSATED DOLLAR
[87]In the _Purchasing Power of Money_ (1911) I sketched a plan for
controlling the price level, _i. e._, standardizing the purchasing power
of monetary units. This plan was presented more briefly, but in more
popular language, before the International Congress of Chambers of
Commerce, at Boston, September, 1912. The details were most fully
elaborated in the _Quarterly Journal of Economics_, February, 1913.
Following these and various other presentations of the subject,
especially the discussion at the meeting of the American Economic
Association in December, 1912, the plan was widely criticized by
economists, both favorably and unfavorably, as well as by the general
public.
On the whole the plan has been received with far more favor than I had
dared to hope and even the adverse criticism has usually been tempered
by a certain degree of approval.
The object of the present paper is briefly to state the plan and to
answer the more important and technical objections which have been
raised. Answers to the more popular objections, omitted from this
article through lack of space, will appear in a book, _Standardising the
Dollar_, which I hope to publish in 1915.
I shall begin with a skeleton statement of the plan; space is lacking
for more. In brief, the plan is _virtually_ to vary each month the
weight of the gold dollar, or other unit, and to vary it in such a way
as to enable it always to have substantially the same general purchasing
power. The word "virtually" is emphasized, lest, as has frequently
happened, any one should imagine that the actual gold coins were to be
recoined at a new weight each month. The simplest disposition of
existing gold coins would be to call them in and issue paper
certificates therefor. The virtual gold dollar would then be that
varying quantum of gold _bullion_ in which each dollar of these
certificates could be redeemed. The situation would be only slightly
different from that at present, since very little actual gold now
circulates; instead, the public uses gold certificates, obtained on the
deposit of gold bullion at the Treasury, and redeemable in gold bullion
at the Treasury at the rate of 25.8 grains, nine-tenths fine, per
dollar. The only important change which would be introduced by the plan
is in the redemption bullion; we would substitute for 25.8 a new figure
each month. The gold miner, or other owners of bullion, would, just as
now, deposit gold at the United States Mint or Treasury and receive
paper representatives, while the jeweler, exporter, and other holders of
these certificates would, just as now, present them to the Treasury when
gold bullion was desired.
There would also be a small fee or "brassage," of, say, 1 per cent. for
"coinage," _i. e._, for depositing the bullion and obtaining its paper
circulating representative. In other words, the Government would buy
gold bullion at 1 per cent less than it sold it. This pair of prices,
for buying and selling, would be shifted in unison, both up or both
down, from month to month, it being provided, however, that no single
shift should exceed 1 per cent., a figure equal to the amount by which
the two differ. The object of this proviso is to prevent speculation in
gold.
To determine each month what the pair of prices should be, or, what is
practically the same thing, to determine what amount of gold bullion
should be received and paid out in exchange for paper, recourse would be
had to an official index number of prices. If, in any month, the index
number is found to deviate from the initial par, the weight of bullion
in which it shall be redeemable the next month is to be corrected in
proportion to this deviation. Thus, the depreciation of gold would lead
to a heavier virtual dollar; and an appreciation, to a lighter virtual
dollar.
There are, of course, other details and possible variants of the plan,
some of which will be referred to later when necessary. The objections
to the plan are classified under the following heads:
1. "_The plan assumes the truth of the quantity theory of money._" There
is nothing whatever in the plan itself which could not be accepted by
those who reject the quantity theory altogether. On the contrary, the
plan will seem simpler, I think, to those who believe a direct
relationship exists between the purchasing power of the dollar and the
bullion from which it is made--without any intermediation of the
quantity of money--than it will seem to quantity theorists.
2. "_It contradicts the quantity theory._" This objection, the opposite
of that above, is raised by some, who, like Professor Boissevain,
believe in the quantity theory, but imagine that the operation of the
plan could not affect the quantity of money at all (or would not affect
it to the degree needed). But evidently an increase in the weight of the
virtual dollar, _i. e._, a reduction in the price of gold bullion, would
tend to contract the currency, by diverting gold from the mint into the
arts; because its reduced price would cause an increased demand and
consumption. A decrease, of course, would have the opposite effect.
3. "_It might aggravate the evils it seeks to remedy._" This objection,
raised by Professor Taussig and a few others, is based on the preceding.
It is claimed that an increase in coined money may take place for years
"without visible effect on prices; then comes a flare-up, so to speak."
I doubt if Professor Taussig meant the first half of this statement to
be quite so strong. The evidence only justifies the statement that the
rise is slow at first and rapid later while similarly the effect of a
scarcity of money is slow at first and rapid later. Professor Taussig
then proceeds to apply the same idea to my plan:
The cumulative consequence would be like the cumulative
consequence of a long continued decline in gold production.
After a season or two of declining bank reserves, tight
money, and so on, a sudden collapse might be occasioned, and
apparently caused, by the announcement of some particular
seigniorage adjustment. Then there might be a decline in
prices much greater than in proportion to the bullion
change.
But the working of the compensated dollar would not be in the least
analogous to the operation of gold inflation or contraction, even as
Professor Taussig supposes it. The plan always works cumulatively
_toward_ par, never cumulatively _away from_ par. One often sees a wagon
with its wheels on a street-railway track having some difficulty getting
off; the front wheels have to be turned at a large angle before they are
forced out of their grooves; then of a sudden they jump away. This is
analogous to the delayed "flare-up" of prices which Professor Taussig
supposes under the influence of a long continued decline or increase in
the gold supply. But if the driver instead of trying to turn out is
trying to keep the wagon on the track he will pull the horse back at
every tendency to turn to the right or left. The more the horse turns to
the right the harder will the driver endeavor to turn him to the left.
Clearly the effect of the driver's efforts will be to avert or delay,
not to aggravate or hasten, any jumping out of the grooves which other
causes may tend to produce.
In other words, if it takes as much time as Professor Taussig fears for
a pressure on prices to move them, then so much the more certain is it
that, under the plan, deviations from par, though they may be
persistent, cannot be either rapid or wide. A long continued small
deviation gives plenty of time for the counter pressure exerted by the
compensating device to accumulate and head off any wide deviation.
Suppose that, following Professor Taussig's ideas, some cause such as an
increase of gold production would, in the absence of the compensated
dollar plan, gradually lift the price level as follows: during the first
year, not at all; during the second year, 1 per cent.; during the third
year, 2 per cent.; after which would come a "flare-up" of 10 per cent.
We may suppose then that, if the plan were in operation during the first
year, there being no deviation visible, there would be no change in the
weight of the dollar. After the first month of the second year when
prices were 1 per cent. above par, the weight of the dollar would
according to the plan be raised 1 per cent. If this were unavailing, so
that in the second month the deviation were still 1 per cent., the
weight of the dollar would be again increased 1 per cent. Every month,
as long as the deviation of 1 per cent. lasts, the weight of the dollar
would receive an _additional_ 1 per cent. Unless some effect were
produced on the supposed original schedule of deviations, the weight of
the dollar of the second year would be increased 12 per cent., and by
the end of the third year by 24 per cent. more, or 36 per cent. in all.
But it is clear that by this time, with so swollen a dollar, the
"flare-up" scheduled for the fourth year could not occur, but that a
counter movement would set in--in fact, would have set in long before
the dollar became so heavily counterpoised. Nor could the result of the
counterpoise, even if so heavy, be to swing suddenly prices far below
par. Prices would, by hypothesis, yield slowly and again give time for
taking the counterpoise off. If the price level sank, say to 1 per cent.
below par for six months, then to 2 per cent. for another six months and
to 3 per cent. in the next six months, evidently the entire 36 per cent.
would be taken off in eighteen months (since 1 x 6 + 2 x 6 + 3 x 6 =
36). The compensating device is thus similar to the governor on a steam
engine. It is the balance wheel that is largest and hardest to move
which is the most easily controlled by the governor. So if the
"flare-up" theory is true, the system will work more perfectly than if
it were not true.
4. "_It would not work unless every single mint in the world employed
it._" This is an error. Although it could be easily shown to be
politically inadvisable for one nation alone to operate the plan, this
would not be economically impossible. Those who hold the contrary are
deceived by the term "mint price." They reason that our mint price
($18.60 an ounce of gold, 9/10 fine) and England's mint price (L3 17_s._
10-1/2_d._ for gold 11/12 fine) are now "the same," and that,
consequently, if our price were lowered 1 per cent., _i. e._, to $18.41,
while the English price remained unchanged, _all_ our gold would be
taken to England to take advantage of the "higher" price there. But
these comparisons between English and American prices are based on the
present "par of exchange" ($4.866 of American money for the English
sovereign): which par of exchange is in turn based on the relative
weights of the dollar and the sovereign. As soon as our dollar were made
1 per cent. heavier, not only would the new American mint price go down
1 per cent., but the par of exchange would also go down 1 per cent., to
$4.82. Consequently, the new mint price of $18.41, although in figures
it is lower than the old, yet, being in heavier dollars, would still be
"the same" as the English mint price of L3 17_s._ 10-1/2_d._ This
sameness of mint price as between the two countries means at bottom
merely that an ounce of gold in America is equivalent to an ounce of
gold in England.
It is true that each increase in the weight of the virtual dollar in
America--in other words, each fall in the official American price of
gold--would at first discourage the minting of gold in America. The
miner would _at first_ send his gold to London, where the mint price was
the same as formerly, and realize by selling exchange on the London
credit thus obtained. 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 $18.41 per ounce as to ship it abroad;
and $18.41 in America would be the exact equivalent at the new par of
exchange ($4.82) of the English mint price of L3 17_s._ 10-1/2_d._
5. "_The system would be destroyed by war._" Professor Taussig fears
that if money were stabilized, the system would itself be upset by war.
"Any war would put an end to it." To this I would reply: first, that if
war did put an end to it the system would do good so long as it lasted
and its discontinuance would do no more harm than the existence of our
present unscientific system is doing at all times; secondly I do not see
any reason for thinking that war would put an end to it.
Possibly Professor Taussig has in mind the first form in which I
explained the plan, _viz._, in my book, _The Purchasing Power of Money_.
In that form one country was to serve as a centre and all other
countries were to have the gold exchange standard in terms of gold
reserves in the central country, just as now the Philippines have a gold
exchange standard with reference to the United States and India with
reference to England. Professor Taussig's objection would undoubtedly
apply, to some extent, in cases where the plan was carried out through
the gold exchange mechanism. But where the system was independently
established in each country simply parallel to the systems in other
countries, there would be no more need for its abandonment in case of
war than for the abandonment now by Germany of the gold standard because
England, its enemy, has the gold standard also. We know, of course, that
in time of war, the gold standard is often temporarily abandoned in
favor of a paper standard; and the new proposal would not escape such a
difficulty. This, however, would not be due to the international
character of the plan, but to the exigencies of war.
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 space. 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 assured 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 spaces 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
mass of goods will vary comparatively little and seldom._ There may be
some absolute change in the general mass 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 Japan,
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 illustration 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 assumes 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
circumstances 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 principal 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 class favored in large measure bimetallism, or free silver,
as a means of helping them pay debts, while the creditor class 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 constitutional 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 assent 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 illustrated 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 mass
of dough or putty which, though it resists impact strongly, yet when it
is moved stays inert and does not return. Under these circumstances,
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
endorsements 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 endorsements 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
quantity 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 constituents that they need only
wait a while, until all money incomes and all prices had adjusted
themselves to the new conditions? that then nobody 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 circumstance should be borne in mind which bears not only
upon the intrinsic desirability of a regulative plan, but also upon the
attitude 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 class 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.