# Stabilizing the Dollar/Chapter 1

STABILIZING THE DOLLAR
CHAPTER I
THE FACTS
1. 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? What of it? What are you going to do about it?" 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 some way to measure it. A very simple measure has been devised, called the "Index Number."
​An index number is a number showing the average rise or fall of prices. Thus, if wheat has risen 4% since last month while beef has risen 10%, the average rise of wheat and beef is midway between 4% and 10%, or 7% (i.e. ${\frac {4+10}{2}}=7$). 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:
| | | Last Month Called | This Month |
| wheat | . . . . . | 100% | 104% |
| beef | . . . . . | 100% | 110% |
| average | . . . . . | 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 is ${\frac {4+4+10}{3}}$ or 6% and the "index number" is 106 as compared with the original price level of 100, taken as a base of comparison.
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 ${\frac {4+10}{2}}=7$, as it would be if the commodities were regarded as equal, is ${\frac {4+4+10}{3}}=6$ just as though there were three commodities, thus making the index number 106 instead of 107. This ​is known as a "weighted" average. If, reversely, beef is "weighted" twice as much as wheat, the average rise is ${\frac {4+4+10}{3}}=8$ and the index number is 108. It will be noted that there is remarkably little difference between the "weighted" averages on the one hand (106 and 108), and the "unweighted" average (107) on the other. Such is usually the case. Figure 1 illustrates this important fact. Nor does it generally make
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, $^{100}$⁄$_{67}$ being almost the same as $^{133}$⁄$_{90}$. (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 illustrates this fact.
On the whole, the best form of index number is that expressing the price of a given bill of goods. If a ​definite assortment of goods cost $1.00 at one date and $1.10 at another date, these figures may be regarded as index
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 imaginary market basket containing a representative collection of goods, e.g. one pound of meat, 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 Statistics, the Canadian Department of Labour, the London 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 ​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 consequently 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 invention. Not many good ones have been calculated back of 1890, and still fewer back of 1860. Jevons, the English 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 thirteenth 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.
We moderns 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 centuries. 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 ​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 bringing home the meat in her purse! This money became 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 Movements before the Great War
But we have no really good measure of price movements 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, according 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 interruptions) from 74 to 111.
Figure 3 exhibits these movements as well as those ​for the United States. We note the great variability of the curves. Very seldom do they run horizontally. Occasionally, even in peace times, there is a variation of over 10% within a year.
Between 1873 and 1896, in countries using the gold standard, prices fell; while in countries using the silver standard, they rose. In the United States the fall was aggravated by the necessity of getting back from the paper standard of 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 resulted, politically, in the famous Bryan campaign.
But, by the irony of fate, scarcely had the country become excited over falling prices when the movement turned upward again; and, with few exceptions, it has
Showing, in general, a close similarity. England was on a paper basis, 1801-20; and the United States, 1802-78. The dotted lines for these periods show the prices as translated back into gold.
​been upward until to-day. Between 1896 and 1914 before 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 far more 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 ⅕ of 1% per month, and in England, to still less; whereas, during the war, the rise amounted to 1½% 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 parallel among the records of index numbers which have been computed. If before the war we could become ​excited over a continued average up-grade of ⅕ of 1% per month, we may partially understand some of the Russian economic unrest with an uphill movement more 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 approximately 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."
* ↑ The reader who wishes fuller details is referred to the bibliographies given in Appendix VI.
* ↑ 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.