# Stabilizing the Dollar/Chapter 4

CHAPTER IV
A REMEDY
1. 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 ownership of public utilities; socialism, of every variety; reduction 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"); housekeepers' market clubs; municipal slaughter houses; state bakeries and butcher shops; trolley freight service; coöperative selling by farmers; utilization of empty city lots; municipal markets; 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 ​oleomargarine and other taxes on consumption; reduction of railway rates (in France), namely, on vegetables 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 elsewhere; 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; regulation of cold storage plants (in the United States); granting of subsidies to cold storage plants (in France); general food control by the Government; publicity as to prices and profits ; trade unionism ; the destruction of trade unions; inflation; elastic currency; bimetallism; sliding scale of wages based on cost of living; disarmament.
Much as I should like to, I shall not take space to discuss these proposals in detail. Some of them have already been mentioned as evils rather than remedies. Others, though most excellent in themselves, are irrelevant to the problem of this book; that is, they would not tend in the least to stabilize the price level and the purchasing power of money. They would help us to endure the high cost of living but would not reduce or prevent it. Some of them may even be more important to the sum of human happiness than the remedy about to be proposed. That remedy is not in the least in conflict with such measures but supplementary 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 ​of the high cost of living is mentioned. The fact that such proposals are mostly concerned with economy and efficiency in the production, distribution, and consumption of goods shows that little thought is ordinarily 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 mentioned is that, though they are concerned with the first problem rather than the second, they are expected to solve the second problem too. Disappointment follows their application, and unless a genuine solution of this second problem, i.e. an effective means of stabilizing the price level, is found, a bewildered and infuriated 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 is no more truly a unit of ​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 terms of 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 injured 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 yardstick, 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 ​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 the arm 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 approached 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 modern 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, discontent, and disorder—are as vast as would be the evils experienced if all the other units of commerce— ​the yardstick, the bushel basket, the hour of work, etc.—should vary concertedly to the same extent.
We tolerate our erratic dollar only because the havoc it plays is attributed to other agencies. If its victims knew the truth about the dollar, it would be stabilized at the very next session of Congress.
We tenaciously cling to the blissful assumption that our dollar never varies. We seem to like not only, as Barnum said, to be humbugged, but even to humbug ourselves.
3. An Imaginary Goods-Dollar
A true standard of value (general purchasing power over commodities) such as we would like our monetary standard to be should not be dependent on one commodity merely, whether that commodity be gold or silver or wheat or any other single sort of goods.
Two commodities would be better than one, just as two tipsy men walk more steadily arm in arm than separately. Whenever they tend to lurch in opposite directions they neutralize each other. This is the argument which used to be urged for bimetallism, symmetallism, and other plans for uniting gold and silver. And the argument applies whenever gold and silver move in opposite directions, as from 1873 to 1896. If, for instance, a generation ago, we had adopted a dollar of an alloy 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 ​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 experienced. 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 numbers 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 of commodities.
In order to secure a dollar constant in its purchasing power over goods in general, it should represent a composite of those very goods in general. We should therefore make our gold dollar correspond in value to an imaginary composite goods-dollar consisting, say, of:
​1 board foot of lumber (made up of various kinds as would be the case with other commodities)
${\tfrac {1}{40}}$ of a bushel of wheat
${\tfrac {1}{4}}$ of a pound of steers
${\tfrac {1}{4}}$ of a pound of meat
15 pounds of coal
${\tfrac {1}{200}}$ of a barrel of wheat flour
${\tfrac {1}{2}}$ of a pound of sugar
${\tfrac {1}{4}}$ of a pound of hogs
${\tfrac {1}{6}}$ of a pound of cotton
${\tfrac {1}{6}}$ of a gallon of petroleum
${\tfrac {1}{2}}$ of an egg
${\tfrac {1}{2}}$ of a pint of milk
${\tfrac {1}{2}}$ of an ounce of butter
${\tfrac {1}{60}}$ of a bushel of corn
${\tfrac {1}{50}}$ of a bushel of potatoes
${\tfrac {1}{200}}$ of a pair of shoes
${\tfrac {3}{4}}$ of a pound of hay
${\tfrac {1}{2}}$ of an ounce of steers' hides
${\tfrac {1}{2}}$ of an ounce of tobacco at the farm
${\tfrac {1}{4}}$ of an ounce of manufactured tobacco
${\tfrac {3}{4}}$ of an ounce of lard
${\tfrac {1}{4}}$ of an ounce of leather
${\tfrac {1}{15}}$ of an ounce of wool
${\tfrac {1}{4}}$ of a pound of steel
${\tfrac {1}{2}}$ of an ounce of copper
${\tfrac {1}{20}}$ of an ounce of rubber
${\tfrac {1}{6}}$ 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 ​Bureau of Labor Statistics in making up its index number 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 some way, make our gold dollar equivalent 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 commodities—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 representative 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 commodities invariable (however widely its constituents might vary among themselves) as it is now to keep the price of gold invariable. The price of that composite 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 ​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 imperishable, easily divisible, easily portable, and easily salable.
And these are precisely the attributes which led to the selection of gold; and not, as some people mistakenly assume, any attribute of stability.
By all means, then, let us keep the metal gold for the good attributes it has—portability, durability, divisibility, 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 unfounded 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 ​the spot. When a man was about to make a cash purchase it was immaterial to him what the monetary unit was.
But to-day if a man buys an article and promises to pay for it in three months, the case is different. When the time for payment arrives it is very important for him to know whether the "dollar" is the same as was contemplated when the agreement was made.
With our modern contracts, running months, years, generations, or even centuries, including hundreds of billions of dollars' worth of agreements to pay money,—promissory notes, mortgages, debentures, railway bonds, Government bonds, leases, insurance contracts, etc.,—the function of a standard of value, that is, a standard of deferred payments, has grown to be perhaps the more 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 we need 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 put the ​standard into the gold standard!" 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 Mexico should adopt the same dollar that we have, no one ​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, the more 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 compensate for a loss in the purchasing power of each grain (and, of course, reversely, taking away gold to compensate 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 just made 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 has often been accomplished. European history affords numerous 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!
​And if we circulate gold only through paper representatives redeemable only in gold bullion and discontinue 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 thousand dollars of 25.8 grains each, as if that bar were cut up into a hundred separate pieces and each were stamped into a ten-dollar gold piece. The thousand gold dollars already exist embedded or welded together in that gold bar, while the right of ownership in them circulates in the form of paper "yellowbacks."
Since, then, even to-day, most of our gold dollars do their circulating in the form of paper, there would be no inconvenience if the only circulation of gold were in the form of paper. Most of the people in England who, before the war, carried gold in their pockets by preference, have already been weaned from the habit ; and most of the few Americans (in California, Oregon, and Washington) who still do so are being weaned from it in the same way.
It would, therefore, be little more than expressing in law an existing custom if gold coins were abolished altogether. 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 ​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 changing 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 representatives, it would be possible to vary at will the weight of the gold dollar without any such annoyance or complication 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 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 ​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." It is thus that gold gets into circulation through its representative, 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 always get the same quantity of gold for a dollar in yellowbacks; 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 circulation into the arts or abroad. Such exchange is the unrestricted "redemption" of the certificates.
​Thus unrestricted deposit and unrestricted redemption 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 circulation.
In short our gold-standard system may be pictured as a lake of gold, physically in storage but circulating through yellowbacks, a lake fed by miners and importers and drained by jewelers and exporters.
This system, the lake and its inflow and outflow, would continue unchanged. Only the terms on which gold would be deposited and withdrawn would be changed.
8. Periodical Variations of Weight Based on Index Numbers
We find, then, in answer to the first of our three questions that a periodical variation of the dollar's weight can be made at will, and that, too, without changing, in the least, the nature of the mechanism by which the gold standard now operates.
We are now ready for the second question: What criterion is to guide the Government in making these changes in the dollar's weight? Am I proposing that some Government 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 familiar "index number" of prices. The Bureau of Labor Statistics, which publishes our best present index number, or the Bureau of Standards or other suitable Government office, would be required to publish this number at certain stated intervals, say bimonthly.
​To be specific, every two months (or whatever the adjustment period chosen might be) the Bureau would calculate from current market prices how much our composite 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 ultimate 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 computed is found to be one per cent below par, the purchasing 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 dollar's weight by one per cent. ​
9. How the Adjustment Rule Would Work
And now we approach the last of the three questions formulated in §6: 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 automobile is turned, that it will prove to have been turned just enough and not too much. Many things may interfere 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 adjustment period, the index number is found to remain unchanged 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, next month, the index number is, let us say, l00½, i.e ½ of one per cent above par, that ½ of one per cent will call for a third addition to the dollar's weight—this time ½ 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 number 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 line marked 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 deviation, no matter how caused, would bring a counter-balancing change in the gold dollar's weight and the ​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, 100½, 101, 100, 102, 101½, 100, 98, 99, 99, 99½, 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 "governor" 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 certificates 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 dollar of yellowbacks (to be called gold bullion dollar certificates) and therefore such paper money would, exactly as now, keep at parity with these yellowbacks. Each ​dollar of these yellowbacks, or gold dollar certificates, would, in turn, be redeemable at the Government offices in a gold bullion dollar and would, therefore, always be of equal value therewith. And finally, each dollar of gold bullion would, by periodical adjustment of its weight through an index number, be kept very nearly equivalent to the imaginary basket of goods, the goods-dollar.
In short, every actual dollar, a dollar of bullion, a dollar of yellowbacks, a dollar of bank notes or any other money, and a dollar of bank deposits would be absolutely 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, the monetary yardstick would be standardized.
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 depositors 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 items making 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 ​meant to show that we have the power, if we will but use it, to stabilize the purchasing power of the dollar.
11. Comparison with Other Plans
As we have seen, most other proposals for remedying the "high cost of living" would operate through economy and efficiency. Nothing could be more laudable and nothing needs to be preached more persistently, 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 appreciable 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 ​if all the combined effort of all the statesmen and moralists of the world could possibly, in a whole year, increase 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 statistics can be adduced to show, affect the general price level as much as five per cent. That now in times of peace the effect could be half that much is almost unthinkable.
The job is too big for any man or any government. If our Government tries to fix retail prices to protect the customer it must then go further and fix wholesale prices to protect the retailer and then, likewise, fix the prices of jobber, manufacturer, and producer of raw materials. Thousands and millions of dealers will have to be watched, controlled, penalized, by a mighty host of government officials, sure to be circumvented as soon as their backs are turned.
I do not hesitate to predict that the present attempt to fix individual prices will end like all previous attempts, even those of autocratic Germany, in disappointment.
Is it not a little ludicrous to use so much force without 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!
​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 the weight 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.
* ↑ To be exact, the fine gold in a dollar is 1/20.67 of an ounce.
* ↑ A bill for this purpose was actually proposed in 1879 by Congressman Stephens (Hepburn, History of Currency in the United States, p. 288).
* ↑ 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 furnishing goods; and miscellaneous.
* ↑ 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.
* ↑ As noted in Appendix VI, §3, B, this was proposed by Ricardo.
* ↑ The wording on the certificates would, of course, need to be slightly changed. They could no longer be properly called warehouse receipts, nor would they, on the other hand, be exactly analogous to Government notes; they would be intermediate between 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.