# Stabilizing the Dollar/Chapter 5

CHAPTER V
CONCLUSION
1. Summary of the Plan
The plan, as set forth in the last chapter, is in brief:
(1) To abolish gold coins and to convert our present gold certificates into "gold bullion dollar certificates" entitling the holder, on any date, to dollars of gold bullion of such weight as may be officially declared to constitute a dollar for that date.
(2) To retain the "free coinage," i.e. to be more exact, the unrestricted deposit, of gold, and to retain also the unrestricted redemption of gold bullion dollar certificates.
(3) To designate an ideal composite or "goods-dollar," consisting of a representative assortment of commodities, worth, at the outset, a gold dollar of the present weight, and to establish an "index number" for recording, at stated times, the market price of this ideal goods-dollar in terms of the gold bullion dollar.
(4) To adjust the weight of the dollar (i.e. the gold bullion dollar) at stated intervals, each adjustment to be proportioned to the recorded deviation of the index number from par.
(5) To impose a small "brassage" fee for the deposit of gold bullion and provide that no one change in the bullion dollar's weight shall exceed that fee.
​In addition to these features of the plan itself should be mentioned the tacit assumption that we retain a sound banking system. Without such, the effectiveness of the stabilization plan would be quite lost.
2. The Crux of the Plan
The crux of the plan lies in (4)—the provision for adjusting the weight of the gold bullion dollar. This is the adjustment rule by which the index number regulates the dollar's weight. Its significance is that:
To keep the dollar from shrinking in value we make it grow in weight, thus recognizing that a depreciated dollar is a short-weight dollar; and, reversely, to keep the dollar from growing in value we make it shrink in weight, thus recognizing that an appreciated dollar is an overweight dollar.
Or, in alternative terms, since a heavier or lighter dollar simply means a lowered or raised price of gold, we may say that:
To keep the price level of other things from rising or falling we make the price of gold fall or rise.
3. Artificiality of a Fixed-Weight Dollar
At present, with a dollar always containing 23.22 grains of gold, the price of gold is always $20.67 an ounce. However far gold may really depreciate, our artificially defined dollar creates an artificially fixed price for gold. It does not allow gold depreciation to show itself in a lowered price of gold. Consequently it shows itself abnormally,—in the raised prices of other things.
It is both wrong and absurd thus to force these other things to register the fluctuations in the value of gold. When gold depreciates, its price should be reduced. Furthermore, when we see the price of anything else, say corn, rising, we ought to be able, as we are not now, to be reasonably sure that all of this rise represents a rise in that corn and not some of it a fall in gold. Reversely, when gold appreciates, its price should be raised; and when the price of anything else falls it should represent wholly a fall in that particular commodity, not partly a rise in gold.
At present the Government is not authorized by law to mark gold down when it goes down, nor up when it goes up. The grocer can mark his goods up or down. He can increase or decrease the number of pounds of sugar he will give for a dollar. But the Government is helpless.
When a flood of gold pours in from Cripple Creek or the Rand, or from war-ridden Europe, the Government is not permitted to increase the weight of a dollar's worth of gold above 23.22 grains or to decrease the price of gold below $20.67 an ounce. Instead, therefore, there is a redundant currency and a "high cost of living."
​When, on the other hand, our exporters demand gold our Government is equally helpless to charge more for it—that is, to reduce the weight of a dollar's worth of gold below 23.22 grains. The law compels it to go on selling its diminishing store at the same old price of $20.67 an ounce; and so a violent contraction of the currency may follow.
In either case we leave our precious standard at the mercy of foreign conditions, of metallurgical inventions, the luck of gold prospectors, the fashions in jewelry, the changes in banking systems, and the policy of Government financiers.
The proposal here made is to authorize a raising or lowering of the sluice gates by which gold flows in or out, so as to keep our money lake at a uniform level. By increasing or decreasing the dollar's weight, we would thus be providing against either a flood or a drain.
4. Transition Would Cause No Shock
The plan should, of course, start off with a price level close to that actually existing immediately before its adoption. There should, I believe, be no attempt to put prices back where they were many years ago. There would, therefore, be no shock. Business would simply be set free from future shocks.
There would be less shock than when we adopted standard time and changed our watches accordingly. Just as the time engagements of the whole world have been modified and improved by the shift of watches from local to standard time, and more recently by the ​"daylight-saving" shifts, so the money engagements of commerce would all be put on a true standard without jar or confusion.
Substantially the same kinds of money would be passed from hand to hand as before the system was adopted; and the ordinary man would be quite unaware of any change in system,—as unconscious, in fact, of the operation of the new system as he is now unconscious of the operation of the present system, or as were the inhabitants of India when the "gold exchange" standard went into force a quarter of a century ago.
The only classes of people who would notice the change would be those who sell and buy gold bullion. The gold miners and importers of gold bringing gold to the Government for deposit, on the one hand, and the goldsmiths and exporters of gold, on the other hand, taking gold away, would find that the price they could get or would have to give respectively would not always be $20.67 per ounce.
5. Contract-Keeping Would Cease to Be Virtual Pocket-Picking
The plan would put a stop, once for all, to a terrible evil which for centuries has vexed the world, the evil of upsetting monetary contracts and understandings. All contracts, at present, though nominally carried out, are really tampered with as truly as though false weights and measures were used for delivering coal or grain.
As noted in a previous chapter, our National Constitution forbids the state to impair the obligation of contracts and the Government itself is supposed to ​conform to the principle of this prohibition. But with our variable yardstick of commerce, observance of the constitutional provision, at best, conforms only to the letter, not the spirit, because the letter of the contract, through the law, fixes the obligation in gold by weight, whereas the contracting parties are not properly concerned with what a gold dollar weighs; usually, in fact, they do not even know that a dollar is a weight-unit. The meeting of their minds is essentially on the basis of what a dollar is worth—that is, of what it will do for them in commerce; and they can make little or no allowance for any change in that worth.
Thus, under the very protection of the constitutional provision mentioned, one of the parties to the contract always does rob the other to some extent. This social pocket-picking, unconscious but real, would cease, if our monetary yardstick were regulated; and with it would cease also discontent, jealousy, and suspicion, in so far as these grow out of that species of social injustice. Crises and depressions of trade would be reduced in intensity, if not rendered impossible, and the fundamental reason for much unsound speculation would be taken away.
Business, now periodically disturbed by the pranks of our mischievous dollar, would be put on a foundation more secure than ever before because the greatest and most universal uncertainty or gamble, all the more disastrous because unseen—the gamble in gold—would be removed.
6. Not a Cure-All
It is not pretended that to stabilize the purchasing power of the dollar would banish all complaint in the financial, business, and industrial world, much less serve as a substitute for progressive economies. A stable monetary unit would be no more a substitute for the fertility of the soil than a stable bushel basket. Yet a reliable bushel will indirectly help even the tilling of the soil; and a reliable dollar would remove a heavy handicap now put on our productive energy and so indirectly help all production. Dependable weights, measures, and standards eliminate those enormous wastes which come from uncertainty, and, of all the possible wastes from uncertain units used in commerce, those from an uncertain dollar are by far the greatest and the gravest.
Nor do I mean to imply that a stable dollar will insure a just distribution of wealth. It will, however, help toward that end not only by preventing a species of subtle pocket-picking (described in Chapter III), but also by clarifying the whole distribution situation. It will make sun-clear that the goods that come out of the annual wealth production of the nation are really growing or shrinking, and not merely being tossed about on the stream of money. It will give each man a sound basis for an opinion whether, when his fortunes change, they change relatively with the fortunes of others. It will go far to rid us of the conflict of opinion and assertion which now holds us back from effective action and uses up our energies in discussions and investigations of the most elementary facts. Current economic discussion is underlaid by conflicting assertions,—that the ​laborer's real wages (i.e. the goods he can buy with his money wages) are increasing; that they are decreasing; that the hardships of wage earners are due to their own wasteful expenditures; that they are due to the greed of employing capitalists who seize an increasing share of the product; that they are due to neither of these things but to the absorption of an ever increasing share of the annual production by the do-nothing landlord or the private owner of natural resources, who expends neither labor nor capital on the development of these resources but merely leases them to men who do, and exacts tribute from the laborer and capitalist for the privilege; that the demands of certain classes of railway laborers for increased money wages are exorbitant and ought not to be granted; that the demands are necessary to balance the increased cost of living and ought to be granted; that the demands of the railways for increased freight rates or of the trolley cars for increased fares are necessary to make good increased costs due to increasing prices and wages; that these demands are not necessary for that purpose—and so on and on without end.
Before action upon these alleged evils can be based on sure ground, it is essential to find out the facts; but the fluctuating dollar hopelessly conceals the facts. It blinds the eyes of the mass of men whose right it is to know the facts and whose duty it ultimately is, under our democratic form of government, to choose one or more remedies for such evils as exist. The fluctuating dollar keeps us all in ignorance; whereas a stabilized dollar would lay bare the facts.
It is no exaggeration to say that stabilizing the dollar would directly and indirectly accomplish more social ​justice and go farther in the solution of our industrial, commercial, and financial problems than almost any other reform proposed in the world to-day; and this it would do without the exertion of any repressive police force, but as simply and silently as setting our watches.
Uncertainty is a mark of an undeveloped civilization, and its demolition (through applied science, insurance, safeguards, and standardization) is one of the chief characteristics of a highly developed civilization. Our uncertain dollar is simply a relic of the Stone Age. It is an anomaly to-day.
7. No Claim to Theoretical Perfection
Perfection, of course, is not claimed for the proposed goods-dollar. It is not an "absolute" standard of value. An absolute standard of value is as unattainable as an absolute measure of length. A change in relative value may, theoretically, indicate a change in the "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 the goods and how much is in the dollar. We are in much the same situation as the astronomers. Our economical "fixed stars" are fixed only in a relative sense. We cannot measure the distances between them in terms of absolute value, but only in terms of visible goods, the general average of which, like the general average of the stars, is the nearest approach to absolute invariability we can, in practice, reach and measure.
The present proposal, therefore, is simply to do for the most important unit in all commerce—the dollar—what we have already done for every other unit.
8. Why Has So Simple a Remedy Been Overlooked
The cautious and conservative reader will ask: if the evils of our present dollar are so great and the remedy so simple, why did not our civilization improve its monetary units years ago, as it improved all other units? Why was so simple an idea overlooked or ignored?
There are several answers, some discussed in Appendix II: ignorance, the money illusion, and the absence, until recently, of any large mass of time contracts requiring any reliable standard of deferred payments.
But the most specific and conclusive answer is this: mankind could not have standardized money until recently, because until recently it lacked the necessary instrument, the index number. Just as mankind could not standardize units of weight until a suitable instrument, the scales, was devised for measuring weight; and just as electrical units, like the ohm and the kilowatt, could not be standardized until the proper instruments for measuring such magnitudes were invented; so money could not be standardized until the invention and the perfecting of the index number.
The index number, the only instrument we possess for measuring purchasing power, is a very recent invention. Professor Jevons a generation ago may, I think, be truly said to have been the inventor (although the general idea had been anticipated by others). But until the last ten or twenty years, this new instrument had not been sufficiently perfected and tested to create general confidence in its results. Only within that brief period has it come into general use among business journals and won the confidence of business men. We see, then, that the practical application of this great ​instrument to the improvement of our crude dollar is belated, not centuries, but, at most, only a couple of decades.
9. What Is to Hinder
The plan really has had less important arguments against its adoption than any other practical proposal in the realm of money and banking of which I know. In most other proposals there are many valid pros and cons. This proposal is simply to make our monetary unit less variable. It is as unobjectionable as is a sealer of weights and measures.
The greatest obstacle, as is emphasized more fully in Appendix II, §3, is the same as that which has held back every other reform in the world's history: namely, sheer conservatism, the "stand pat" frame of mind, the temperamental prejudice against innovation. This filibusterer may appear in many striking costumes and embellishments; but always it will be the same psychological personality. Usually, the opponents of perfectly obvious reforms are unconscious of this, the real source of their ingenious objections. And, once the composite standard has become an accomplished fact, the standpatters will be its staunchest defenders; for they are simply the friends of what is and the enemies of what is not.
We can put such people to the test (or they can put themselves to the test if they will) by a simple direct question: Instead of being asked to choose between the present gold standard and the composite standard, the former of which is in use and the latter not, let them be asked to choose between a copper standard and a composite standard, neither of which is in use. If a ​contract in goods-dollars is safer than a venture in copper dollars, why is it not safer than a venture in gold dollars?
Perhaps an equally important obstacle is ignorance, or rather the lack of the requisite imagination to visualize the outrages now perpetrated by our dollar's perpetual changes and to connect the effect with the cause. If there were such a vivid realization of what is going on, both the conservatives who now deprecate any change of system and the radicals who now advocate irrelevant changes to remedy some of the evils would unite in an immediate demand for a stable dollar.
To see that this is true we only need to think what would happen if the social injustice we have discussed, now so obscure, could only be made to stand out in clear relief. Imagine a society with a stable dollar but yet with the very same injustice we now experience except that it is deliberately administered.
To make this supposition definite suppose the United States had had a stable dollar during the last few decades but had, with some strange malice, used the index number of prices in Canada or Europe (which, it is assumed, held to the old unstable system) to produce extraneously the identical evils we have actually experienced. By the caprice of the index number the debt of $1000 contracted in 1880 would have had to be paid literally by $1200 in 1896 and the debt of $1000 contracted in 1896 would have to be paid literally by only $400 in 1919. The producer would have been deprived by the operation of the supposed law of his profits before 1896 and the bondholder would have been deprived of all of his interest and part of his principal ​after that date. The salaried man and wage earner would have had their salaries and wages definitely docked by the law so that the wage earner of 1919 would get only three fourths of what he got in 1913.
Such a whimsical use of an index number to defraud would of course not be tolerated for an instant. The conservative would be furious, the radical still more so; only the latter would not be devoting his efforts to sabotage, price fixing, restricting cold storage, etc. Every one would unite to stop such use of an index number to destabilize a stable standard.
Yet precisely the same reasons in precisely the same degree now justify the use of an index number to stabilize an unstable standard!
10. Precedents
Even before index numbers were dreamed of, some contracting parties have, at times when the instability of monetary units became especially intolerable, sought some partial escape. A number of instances of this sort are given in Appendix V. These include contracts in terms of foreign coin, or in terms of grain, or iron, or in terms of composites of goods. The last named includes the recent adoption by many firms and official bodies of a supplement or correction to ordinary money wages by means of an index number of the cost of living.
11. What Might Have Been
Let us stop to think what would have happened if, when resuming specie payments in 1879 (to go no further back), we and other countries had applied these principles and really standardized monetary units.
​We should have escaped the billions of dollars' worth of injury from falling prices between 1879 and 1896, to farmers, independent producers, debtors, stockholders, and enterprisers generally. There were bankruptcies, foreclosures and reorganizations, and a resultant shift of control from the natural captains of industry,—often bankrupted, as we have seen, through no fault of theirs,—to the holders of mortgage bonds and the other silent partners not fitted by temperament or training to conduct industrial enterprises.
We should also have escaped the consequent convulsions of business: the crises of 1884 and 1893; the throwing out of work of armies of men; the recruiting of "Coxey's army"; the bitter feeling of the debtor-West toward the creditor-East; the growth of "populism"; the hatred of the "bloated bondholders" and the "gold bugs of Wall Street"; the futile, costly, business-depressing, free-silver agitation; and the peril of the political campaign of 1896 which, for a time, threatened us with a remedy worse than the disease.
In like manner, we should have escaped the opposite evils—those that have occurred since 1896: the rising cost of living; the loss (concealed but real) of the interest on the savings of the poor and of the real income of bondholders. We should have escaped the failure of the wage earner to secure a share of our increasing wealth; for instance, the net loss of 33% of real wages (as measured in food) between 1907 and 1917, the year we entered the war. We should have escaped the food riots all over the world. We should have escaped much of the speculation which has been so widespread; much of the muckraking agitation; much of the "I. W. W." affliction; much of the class ​hatred directed against business men because of the lucky "profiteers." We should have escaped the crisis of 1907. We should have escaped many of the strikes for higher wages paralyzing our preparations for war. We should have escaped much of the embarrassment of the railroads, street railways, and other public-service industries which, with rates fixed by law, could not pay just wages to labor and, at the same time, make money or invest new capital and give the public the service it needed. Finally, while gold would still have come to us during the war, we should have escaped the inflation of prices which, under our present system, we have suffered.
It is cold comfort for the losers in this gold lottery to be told that others have won what they have lost. And it isn't even true; for, as we have seen, the confusion and uncertainty, the dislocating and shifting of the wheels of industry, have caused a general and absolute loss of wealth, in which loss the very winners in this gold lottery have, most of them, shared. Only a few have emerged with net profits and swollen fortunes, as the lucky winners of the biggest prizes; and no public-spirited man can rejoice in such unearned gains.
12. What Is in Store
We do not yet know "which way the cat will jump." If European nations make prompt preparations for resuming specie payments, there will be the same disastrous contraction in Europe that we experienced after the Civil War; and we shall feel the reflex effects of that contraction by having our hoard of gold drained back to Europe.
​On the other hand, the nations may not only avoid contracting their currencies but may still further inflate them. The huge task of reconstructing Europe may lead to new issues of paper money; and it is reasonably sure that there will be new expansions of commercial loans. It is almost certain that general deposit banking, now confined almost wholly to Anglo-Saxon countries, will spread over the continent of Europe, adding billions of virtual currency to the circulating medium. As A. C. Miller of the Federal Reserve Board says: "If the League of Nations, the reduction of armaments and the like become realities, then the accumulation of hoards of gold under the impulse of national fears or ambitions must be suffered to go the way of other outworn practices"; and this fact will tend toward inflation.
There are many unknown elements—including the rearrangement of European currencies and the policy as to Government debts (whether it shall be immediate payment out of capital, slow payment out of income, repudiation, or deeper debt). No one yet knows which group of influences will prevail,—the group tending toward inflation or the group tending toward contraction. Perhaps first one group and then the other will prevail in convulsive alternation, as in a mighty battle, just as, after the outburst of war, our gold first left us and then returned, convulsing foreign exchanges. Probably few periods in history—if any—have presented so puzzling an outlook. We may make our forecasts or guesses but no man lives whose eyes can see clearly through the mist.
​Of one thing we may be all but sure! The price level will not stand still unless we hitch it. It never has; and now, of all times, with the vast conflicting forces ahead, we shall be foolish if we expect complete equilibrium. On the contrary, we are probably destined to see, in the next generation, important price movements, perhaps more erratic than those in the past.
The whole question of monetary standards will inevitably come up for discussion. History will repeat itself in some degree and Europe will almost certainly see a "greenback" party arise as we did after the Civil War, opposed to any return to the old price level especially as that return will double or quadruple the cost of paying off the war loans. The bimetallist and free-silver exponent also are once more asking a hearing. The gold producers, hard hit by the fact that their product has been made a drug on the markets (by the vast amounts of paper and credit substitute for gold), were recently asking for relief by measures which would only aggravate the situation.
I venture to predict that our present problem—of a price level dislocated by the war—will continue insistently to press for solution until it is settled. It will not settle itself. If prices rise much further—which is by no means impossible—discontent may turn to fury or revolution.
If prices fall far toward pre-war levels we shall be on the road to depression of trade, unemployment, and all those ills and grievances of twenty-five years ago.
If, by accident and contrary to all recorded experience, the price level should remain fairly constant, its right to continue so high will be long contested.
On the other hand, if once we deliberately choose a ​price level after reference to an expert and impartial commission and then keep that level unchanged we shall give it a right to exist. The verdict will soon be generally accepted. Any unadjusted factors will gradually make the needed changes. Business will be rid of the handicap of uncertainty as to what the dollar is. In particular, wages will rise to recover the purchasing power lost in the losing race with the high cost of living. The sense of social grievance, so far as this is due to monetary instability, will, year by year, fade. In other words a great step forward, toward settling many of the questions which now vex the whole world, will have been taken.
13. Our After-War Opportunity
All this being the case, shall we leave our standard of value to drift, the puppet of circumstances, when we can so easily stabilize it? Are we going to let the value of our American dollar and of the billions upon billions of dollars' worth of American contracts be the shuttlecock of unknown and unknowable European policies after the war? Are we forever to be at the mercy of conditions over which we have no control?
And be it noted that the problems for Europe will be greatly simplified if, for once, a really scientific solution of the problem of money standards is reached by one nation.
The world is now, as never before, looking to us for leadership. It is our golden opportunity to set world standards. If we adopt a stable standard of value, it seems certain that other nations, as fast as they can straighten out their affairs and resume specie payments ​and secure again stable pars of exchange, will follow our example. After gold and silver fell apart in 1873, the nations, one after another, adopted the common standard of gold; and now, after the falling asunder of all the pars of international exchange from the World War, the new order will probably be set by whatever nation first seizes the opportunity and takes the lead.
14. If We Miss the Opportunity
If we do not do this; if we do not provide a really scientific remedy; if we take the ground that we must drift with the tides of gold and credit, that we are helpless to rectify or prevent in the future the great social injustices which history warns us will surely come, as between creditor and debtor, wage earner and employer, salaried man and profit-taker, we shall be simply fertilizing the soil of public opinion for a crop of dangerous radicalism. Then surely some demagogue will flourish, and offer some ill-considered remedy which will sweep everything before it. Then shall we see, not a scientific study of a technical problem with all parties ready for an equitable settlement, but outraged justice calling for a revengeful policy and a great selfish class struggle. Discontent, unrest, suspicion, class hatred, violence, charlatanism,—all these will follow. And even if out of such unpromising soil a fairly satisfactory settlement should eventually grow, bitterness would remain; and it would remain so deeply and so tenaciously embedded in the soil that we would not be quit of it for generations.
Even if our shifting dollar were guiltless of most of the offenses charged, even if the high cost of living had ​no relation to the dollar, there would still be excellent reasons for standardizing it—on the same general principle on which we have standardized all other units. Accordingly, a friend suggests that the plan be presented independently of the "cost of living" discussion, purely as a problem of weights and measures.
But the indictment will stand. The more the evidence in the case is studied, the deeper will grow the public conviction that our shifting dollar is responsible for colossal social wrongs and is all the more at fault because these wrongs are usually attributed to other causes. When the intelligent public who can apply the remedy realize that our dollar is the great pickpocket, robbing first one set of people and then another,—robbing them of billions of dollars a year, confounding business calculations, convulsing trade, stirring up discontent, fanning the flames of class hatred, perverting politics and, withal, keeping its sinister operations out of sight and unsuspected,—when, I say, the public and legislators realize this, action will one day follow; and we shall have secured a boon for all future generations, a stable yardstick of contracts, a stabilized dollar.
* ↑ For details, see Appendix I, §7.
* ↑ These two statements and paragraph (4) of the above summary are really three different formulations of the same adjustment rule. There is a fourth: we prevent a loss or gain in the purchasing power of the dollar by lowering or raising the price of gold. All four modes of statement may be united as follows: We restrain $\scriptstyle {\left\{{\begin{matrix}\ \end{matrix}}\right.}$ a rise or fall of the price level a fall or rise of the purchasing power of the dollar by $\scriptstyle {\left\{{\begin{matrix}\ \end{matrix}}\right.}$ increasing or decreasing the weight of the dollar decreasing or increasing the price of gold. For most people I think the original formulation (the 4th paragraph of the summary above) is the most convenient, namely, the one in terms of the price level and dollar's weight rather than in terms of the purchasing power of the dollar or the price of gold, or both.
* ↑ This point is amplified in Appendix I, §4.
* ↑ With certain exceptions, such as bankruptcy laws for extraordinary cases. In this connection, see Appendix I, §6.
* ↑ For my own guess see The New Price Revolution, United States Department of Labor, Information and Education Service, March, 1919.