# Stabilizing the Dollar/Appendix 4

APPENDIX IV
PUBLIC INTEREST
1. Either an Upheaval or a Collapse of Prices Weakens Confidence in Money
In Chapter III certain historical effects of changes in the level of prices were noted. These were selected to illustrate the evils of an unstable dollar.
We are here interested in certain other historical effects of price movements, namely those on popular ideas of money.
Any noticeable change in the price level is practically sure to produce a crop of complaints and of proposals to remedy the disturbance. At first these popular complaints and proposals ignore money, for the reason that, as explained in Chapter II, the popular mind is full of fallacies about money. To look to the dollar as a cause of great price movements in food, steel, and cotton, is literally the last thing to occur to the ordinary man. When those more versed in monetary theory suggest that the dollar may have any such rôle to play, the idea is at first greeted with derision. But if the price movement is rapid and long continued, the idea of a monetary cause behind it gradually begins to enter the minds of men least impervious to new ideas.
The chief, though not the only, examples of such violent price convulsions are found during and following great wars.
During a war, if the fiscal needs are great, inflation is apt to take place. After inflation has wrought its harm, a healthy distaste for inflation sets in and leaves its impress on politics, legislation, and the national tradition. Each war supplies its particular object lesson ​and adds a little to the education of the people on the money problem, although, unfortunately, the lesson is largely forgotten by the time it is next needed and the old costly way of learning to lock the door only after the horse is stolen, goes on.
It is surprising how often a forgetful public will repeat its old mistakes. The exigencies of war finance again bring a tremendous pressure toward inflation which again brushes aside the feeble scruples left from a dimly remembered past.
And sometimes these faint traditions are made to count for much less by changing the form of inflation. The public will often condone the new and disguised form of inflation even when they would turn their backs on the old forms. For instance, many business men, while having a healthy dread of irredeemable paper money, yet did not object to the laws of 1878 and 1890 providing for inflating our currency with silver, and they nearly yielded to the "free silver" sirens in 1896. In recent years we have had much gold inflation. Yet even to-day, only a small minority of people will admit the possibility that there could be any such inflation.
Credit inflation is even more subtle and enticing. Many will remember the fallacies current when the United States entered the war. One orator told his audience they need make no effort at all in order to subscribe to Liberty Loans. "All you need to do," he said, "is to go to a bank and borrow the money which you are to lend to the Government, agreeing to let the bank have the bond you buy with that money as collateral security. It's just perpetual motion!"
Even to-day there are those who will deny that there has been inflation of any kind during the Great War. Such denial is always found as a mental "defense" whenever there has been inflation.
But sooner or later the truth is admitted and the temper of the people and their statesmen becomes one of "good resolutions."
​The abuses of paper money inflation have usually called forth some attempts to safeguard against it. It was in order to escape from such evils in Colonial days that, in Massachusetts, the commodity bonds described in Appendix V, § 2, below, were devised. These Colonial abuses and those of the Continental paper currency of the American Revolution led also to the provision in our Constitution forbidding states to emit "Bills of Credit."
After the English experience with depreciated money in the Napoleonic wars came, as natural consequences, the great investigations on prices by Tooke and Newmarch and the classic Bullion Report of Parliament.
After the flood of gold in the '50s we note a great interest in the instability of money. It was soon after this that Jevons devised the index number as a measure of the general level of prices and wrote on "a serious fall in the value of gold."
After our experience with the greenbacks of the Civil War, the subject of money and prices became one of intense interest. There were soon developed two parties, the inflation and the contraction parties, and acts of Congress alternately favored first one and then the other of the opposing policies. Our "Legal Tender" controversies, our Greenback party and our Resumption Act, were direct outgrowths of the monetary instability of the Civil War.
An increasing and worldwide interest in money and prices was displayed through the long years of falling prices, experienced throughout the world, between 1873 and 1896.
During that period we find increasing complaints, many official inquiries and reports, and numerous proposed remedies, including various forms of bimetallism and several anticipations of the very stabilization plan of this book (see Bibliography, Appendix VI). International conferences assembled to discuss the gold and bimetallic questions.
To be more definite, there were the Bland-Allison ​Act and the Sherman Act for the purchase of silver, and there was the "16 to 1" campaign of 1896 for the restoration of the free coinage of silver as a means of restoring the old price level.
The same interest was displayed when the upward price movement between 1896 and the Great War was going on. There was then worldwide discussion of the "High Cost of Living" and of gold inflation as its possible cause. The newspapers were full of cartoons and editorials; and the magazines, of elaborate articles. Numerous books appeared; much legislation was proposed and some enacted; many investigations were made, both official and unofficial; ponderous reports were issued in many countries and proposals were made for an international conference on the subject. Bread and meat riots had occurred in many cities throughout the world, from Berlin to Tokio. Some people insisted that there was gold depreciation. Mr. Edison predicted that some day the southern clays would give up their gold and cause further loss in the purchasing power of the dollar. Mr. Carnegie, in making a gift of ten millions to the Carnegie Institution of Washington, stipulated that a certain part of the income should be set aside as a sinking fund against "the diminishing purchasing power of money."
This interest in the High Cost of Living reached its highest point in 1914, but was then, for a time, overshadowed by the war.
Afterward it became apparent that the war itself had put the "High Cost of Living" still higher. The result was to revive interest in the subject. We spoke of food famines and of a supposed world scarcity of goods. We had begun even to talk of the inflation brought about by issues of paper money, by expanding war loans, and by inflowing gold. Sweden practically demonetized gold. Price fixing on a vast scale was tried in belligerent countries.
Soon after the Armistice, the interest in the subject took a new start. The business world began eagerly ​to discuss the question whether the war level of prices was to continue. Mr. Redfield, Secretary of Commerce, tried in vain to stabilize prices by price fixing. A large number of the members of the Massachusetts legislature petitioned President Wilson to come home from Paris, stating that the problem of the High Cost of Living here needed him more than the peace problems at Paris.
The foregoing are but a few examples of the world's bitter experiences with price movements in the past,—experiences, we may add with confidence, often to be repeated in the future, unless mankind shall find a way to stabilize money units.
It is safe to make the generalization that when prices go up or down fast and far, the public invariably shows a lively curiosity as to the reasons why and an unwonted willingness to consider monetary causes as at least a partial explanation.
Unfortunately, it is also usually true that, only a few years after the price movement giving rise to this dim idea has subsided or reversed itself, the idea is forgotten by most people and the public sink back into the fogs of the money illusion described in Chapter II, which illusion seems, in spite of all the lessons of history, to "fool some of the people all of the time and all of the people some of the time."
To-day, for instance, it requires the archaeological grubbing of an economist to bring to light the commodity bonds used in Massachusetts in 1747. Again, the phrase "it isn't worth a Continental" is the only surviving trace in popular memory of the depreciation of the Continental paper money and scarcely any one who uses that phrase to-day knows its original meaning. Few, in this generation, know anything of the greenback days. Even the more recent "16 to 1" excitement, with the remarkable vogue of that seductive book, "Coin's Financial School," and the still more remarkable counter campaign for "sound money," seem dim and distant to-day and have scarcely been ​heard of by millions of the younger generation. In 1896 when this "free silver" contest was going on, the interest in money and prices was at fever heat. But, by the following presidential campaign, that interest had grown cold, though the very same presidential candidates, expressing the very same opinions and standing on much the same platforms as in 1896, were in the field. In another four years the question was practically forgotten. There was a fundamental economic cause of this rapid petering out of popular interest; namely, the cessation of the fall of prices complained of and the beginning of a rise.
It appears, then, that public interest in, and understanding of, money usually gathers strength as a price movement proceeds, reaches a maximum at the end of the swing, and remains intense and excited only a few years thereafter.
As prices have now been rising 23 years, we may reasonably expect public interest, as soon as the Peace Treaty excitement has subsided, to grow intense and remain so for a few years at least. If, as I expect, prices continue high, the popular idea that the high prices were due to war-scarcity will have no leg to stand on, and the quest for a satisfactory explanation will go on with the greatest eagerness. A member of the Federal Reserve Board says the price level problem is the after-the-war problem. Moreover, as the problem is acute throughout the world, the noise of the discussion will be reënforced by reverberations from one country to another.
Unfortunately, the discussion still shows great bewilderment and confusion of thought. We may say, very solemnly, that seldom was there more need of correct thinking. Without it a misguided public may attempt the impossible; or, like an infuriated mob of lynchers, hang the wrong victim to the lamppost.
But, in spite of the confusion and the great capacity to forget old lessons which the public always exhibits, ​some of the hard experiences of history do leave traces of good results.
In Europe, the Napoleonic wars, and in America, the Civil War, seem to have left at least one indelible impression on the minds of business men—that what seems to be a rise in the price of gold bullion in terms of current irredeemable paper money is, in reality, rather a fall in the value of paper money; in short, that it is better to measure paper money in terms of gold than gold in terms of paper money. This idea may be said to be now a commonplace.
I venture to predict that the Great War will have left at least one other indelible impression, marking a new era in popular intelligence on this subject. This new idea, which I believe will sink into the minds of millions of people, is that, just as gold is a stabler standard than paper, so are goods a stabler standard than gold.
The chief reason that the writers of the famous bullion report did not take this step forward is that, in their day and generation, no index number by which to contrast the two existed. They could not go back of gold to commodities. Thus, while they tore off the outer husk surrounding money, the kernel remained hidden from view.
And this has been the situation almost till to-day. One interesting consequence is that, during the Great War, the one anxiety of most governments and bankers as to monetary standards was to avoid a "premium on gold." It was felt that we were in honor bound to prevent paper money and bank deposits from "depreciation." But the only test of depreciation generally recognized was the depreciation of paper money relatively to gold. The idea that gold itself could depreciate was conspicuous by its absence. The result was that there was little thought and less effort to keep gold at par with commodities. There were, however, economists in England and the United States and a few business men who did their best to point out the ​absurdity of considering money stable simply because there was no open premium on gold.
It is clear now that, in this effort to avoid the reproaches which followed the Napoleonic and the Civil Wars, there was an exaggerated attention to the form rather than the substance, to the letter rather than the spirit.
Sometimes the anxiety to avoid technical depreciation became a little ridiculous and turned into a desire to conceal rather than prevent; for there was, apparently, in some places and times, an unpublished and unacknowledged premium on gold. Some of the efforts to forbid sales of gold seem now somewhat ostrich-like. It was also a little strange, although there were some valid reasons for the practice, to preserve gold reserves by forbidding their use as reserves. This reminds one of the story of the sea captain whose anxiety to keep an adequate supply of life preservers was so great that he nailed them to the deck and forbade anyone to take them up!
It is now getting to be realized that, in spite of all the laudable efforts to prevent the usual war-time depreciation of money, depreciation did actually occur none the less and in a greater degree than in most previous wars. Lord D'Abernon of England remarked in a recent speech in the House of Lords that the fall in the value of money during the four years of the war had exceeded the fall in two preceding centuries. Similar observations are not uncommon from other influential sources and will, I believe, become increasingly frequent and emphatic. It ought not to be surprising if succeeding generations should criticize the inflationistic financiering of the Great War, especially of the European belligerents, as severely as we criticize that of the Civil War.
​In any case, we shall gradually come to feel that our technical prevention of "depreciation" was a hollow mockery, that we have erred in thinking of depreciation as relative to gold instead of as relative to commodities.
The many adjustments of wages during the war by an index number of prices are really a confession that the dollar does change and needs correction. In the future, there will be a cumulative effect on the minds of business men from the tell-tale index number. It will increasingly impress upon them the fact of the dollar's instability and ultimately make some real stabilization inevitable. It will gradually dawn on the public that if the dollar needs correcting the correction should be incorporated in the dollar itself instead of being patched on from the outside.
Just now this problem of the price level is very real and insistent. Business men will long remember that, for months after the ending of the Great War, there was hesitation, amounting almost to paralysis, owing to uncertainty as to the future level of prices. Abroad, the problem of the price level is even more acute, for inflation there proceeded much further than it did here.
Many expect prices to drop. A well-known and influential business man has said that our present high prices continue "without the slightest reason under the sun." There is, however, an uneasy feeling that a fall of prices would be as uncomfortable as was the rise.
Thus, in one way or another, the Great War has demonstrated anew the instability of monetary standards. The present gold standard, supposedly so solid, has been largely discredited in the eyes of many people and we hear of various proposals to replace it by something better.
In view of all the facts, we may reasonably expect that the money fog in the public mind will be more nearly dispelled during the period immediately ahead of us than at any former time in history; first, because the rise in prices has been one of the most rapid and ​long continued ever experienced; secondly, because the major part of the rise has been a war phenomenon; thirdly, because the use of index numbers by which the rise in prices is clearly exposed introduces a new, strong, and very persistent reminder of what has occurred; fourthly, because, whatever the reason, there is to-day, to start with, a more general and intelligent understanding of, and interest in, this matter than at any previous time; and fifthly, because at least one practical solution of the problem of stabilizing the price level, hitherto assumed to be insoluble, is now available.
2. The Present Plan Grew Out of the Price Movement Beginning in 1896
I wish now to recur to the influence on public opinion of the rise of prices preceding the war and concentrate attention on that part of this influence which led up to the proposals of this book.
The rise of prices which began in 1896 did not attract much attention for five or ten years. In fact, as has been noted, people continued to talk of prices as abnormally low. The failure of the public to appreciate the situation was illustrated by the lack of literature on the subject.
The list of publications on the high cost of living published in 1910 by the Library of Congress gives for the five-year period, 1896–1900, only 7 titles; while for the next five years, 1901–1905, the number was 36 and, for the next, 1906–1910, it was 121.
As usual, political interest lagged behind public interest. When the High Cost of Living did attract the attention of political leaders and parties it led first to official reports in France, 1900 and 1910; Austria, 1903; Germany, 1909; United States, 1910; Australia, 1911; Canada, 1911; Italy, 1911; Great Britain, 1911 and 1912; New Zealand, 1912; India, 1914.
Many other investigations were projected but never carried out, having been overshadowed by the war.
​The chief of these was the project agitated in the years 1911–1913 to hold an international conference on the high cost of living. Those most interested in this proposed conference hoped to see, as one of its results, a study of plans for stabilizing monetary units. This proposed conference was the subject of a special message to Congress in 1912 by President Taft. A bill "for the purpose of considering plans to be submitted to the various Governments for an international inquiry into the high cost of living, its extent, causes, effects, and possible remedies," was passed by the Senate and reported favorably by the Committee on Foreign Affairs of the House of Representatives. Unfortunately it was not reached on the House Calendar before adjournment, March 4, 1913. It was never revived in the next Congress—not because of opposition but because of the preoccupation of the new administration and of Congress with matters of greater importance, or so regarded.
The proposed conference was favored by a number of leading statesmen and financiers in this country and in England, France, Germany, Italy, and Japan. In the Report of the House of Representatives' Committee on Foreign Affairs on this subject 106 prominent men in the United States were mentioned by name as favoring the project, 27 in Great Britain, 35 in France, 13 in Germany, 7 in Austria, 2 in Canada, 2 in Japan, 4 in Switzerland, 3 in Italy, 7 in Belgium, 3 in Holland, 3 in Denmark.
These included Governor (now President) Wilson, the American Secretaries of Commerce and Labor, of War, and of the Treasury, Senator (now President) Poincare, Signor (now Premier) Nitti, Baron Sakatani, former Minister of Finance of Japan, Lord Courtney of England, many Chambers of Commerce and other organizations in this and other countries. After the failure of the project in the United States, but before the Great War burst upon us, the plan came near being ​revived by the Canadian and then by the Austrian governments. During the war comparatively little was done or thought concerning the High Cost of Living. The revival of interest now following the war is causing this international conference to be again considered. New Zealand, in particular, has shown an active desire for such a conference. Possibly the conference will actually come about in or through the League of Nations.
3. Approval of the Plan for Stabilizing the Dollar
Whether or not the price-level problem becomes the subject of special international study, it cannot escape solicitous consideration in the immediate future in almost every country on the globe and, in that consideration, the role of money cannot be ignored.
In fact I venture to predict that the role of money will be increasingly recognized and much faster than is dreamed of by most people. This prediction is based on the reasons given in § 1 above.
The plan described in this book has already run the gantlet of many of the chief minds of the world and has met with almost universal acceptance wherever it has been examined. As one observer expresses it, "only those oppose who do not understand."
The unfavorable opinions and comments have already been dealt with in Appendix II. In this section I shall refer to the favorable opinions.
Of the many other prominent persons—some 200 in number—who have expressed their approval I would mention especially, Arthur T. Hadley, President of Yale University; Royal Meeker, Commissioner of Labor Statistics, Department of Labor; the late Senator Newlands; Senator Robert L. Owen; ex-Senator John F. Shafroth; Clarence H. Kelsey, banker; Henry Lee Higginson, banker; John Perrin, United States Federal Reserve Agent, San Francisco; George Foster Peabody, Director Federal Reserve Bank, New ​York; Leo S. Rowe, formerly Assistant Secretary of the Treasury; Roger W. Babson, Babson's Statistical Organization; John Hays Hammond, mining ngineer; Sir David M. Barbour, one of the originators of the Gold Exchange Standard introduced in India in 1893; Adolphe Landry, member Chamber of Deputies, Paris; Achille Loria, University of Torino, Italy.
From among the letters received from these and others I select a few quotations:
President Hadley: "I will own that when I first read of the plan I thought it would be very difficult to carry out in practice. On further consideration, I am confident that this difficulty is much less than I at first supposed; and that the advantage to be gained by the adoption of a project of this kind makes it worth while to meet and solve whatever difficulties are incident to its introduction."
Royal Meeker: "I think you have answered all difficulties. Your scheme seems to me to be the simplest and most practical scheme possible to be devised. I most heartily endorse your plan."
John Perrin: "Even if put into effect for this country alone upon the basis of one of our present imperfectly constructed index numbers, it would obviously eliminate largely the fluctuating value of the dollar which now injects such uncertainty into all our dealings. The direct and collateral benefits from such a result are almost beyond conception."
Roger W. Babson: "Your only critics are those who misunderstand you."
Sir David M. Barbour: "I think it likely that some such system may ultimately be adopted."
The American Economic Association Committee on the Purchasing Power of Money, consisting of economists who have chiefly worked in the field of Currency and Banking (i.e. Professor B. M. Anderson, Jr., Professor E. W. Kemmerer, Dr. Royal Meeker, Professor Wesley Clair Mitchell, Professor Warren M. Persons, and Professor Irving Fisher), studied the plan with care and expressed itself as follows:
The Bridgeport Chamber of Commerce appointed a committee, the report of which was adopted, and from which report I quote:
"Resolved: That the Bridgeport Chamber of Commerce, recognizing the many evils that flow from the ever-changing value of the dollar, hereby calls upon Congress to enact such legislation, if it be feasible, as shall tend to make the dollar stable at all times in its purchasing power ; and to that end it respectfully recommends the adoption, in substantial form, of the plan put forward by Professor Irving Fisher for stabilizing the dollar by adding weight thereto or subtracting therefrom in accordance with the fluctuations of prices as represented by the index numbers."
The Waterbury Chamber of Commerce adopted a similar report, of which the chief paragraph reads:
"Therefore, Be It Resolved, that The Waterbury Chamber of Commerce records itself as in favor of the enactment by Congress of such legislation as is necessary to put Professor Fisher's plan into operation."
The Society of Polish Engineers and Merchants in America passed the following resolution:
"After a thorough discussion of the lecture by Professor Irving Fisher, the members of the Society of Polish Engineers and Merchants and their guests present at this meeting, agree with him unanimously in the soundness of his theory and propose that the Board of Directors of the Society of Polish Engineers and Merchants take the necessary steps to foster this idea in Poland."
The New England Association of Purchasing Agents resolved:
"that we, the New England Association of Purchasing Agents, record our earnest belief that, in the interests of sound business, and justice between contracting parties, the purchasing power of the dollar should be stabilized, either, as we believe has been shown to be feasible, by varying the weight of gold in the dollar, or by such other means as may be found by Congress most expedient."
​In Article 10 of the International Trade Union Conference at Berne, February, 1919, it was resolved that:
"the contracting States shall call as soon as possible an international conference instructed to take effective measures to prevent the depreciation of the purchasing power of wages and to insure their payment in a non-depreciated money."
The American Federation of Labor resolved:
"That the Executive Council be and is hereby instructed to make a study of the problem of establishing a dollar of stabilized purchasing power as it may be presented through legislative effort, or otherwise during the year, and to submit a report upon the subject at the 1920 convention."
Mr. Husted of New York introduced a bill in the House of Representatives on Oct. 6, 1919, to create a National Monetary Commission:
"...to inquire into and report to Congress at the earliest date practicable what changes are necessary or desirable in the monetary system of the United States or in the laws relating to banking and currency, and especially to the end that the purchasing power of the dollar may be stabilized...."
In short, a considerable sentiment for stabilizing the dollar already exists, and there is much more, latent or in solution, which is ready to be precipitated.
I place emphasis on the fact that so many able and practical men have already expressed emphatic approval of the plan because it will be through the leadership of such men that public sentiment for stabilizing the dollar will grow and the great and only obstacle of inertia be overcome.
Inertia is a dangerous state of mind when effective and far-reaching action is sorely needed, as at present.
If the question of stabilization is not faced and solved in an impartial and scientific spirit, we ought not to be surprised if it should become the bone of contention of special interests or if specious but unsound monetary schemes should again find a hearing.
​If the price level is left, as it always has been, to chance, the grave evils of this policy, or lack of policy, may be greater in the future than they have been in the past, because of the already inflamed or Bolshevist condition of the public mind.
In short, we now hold the future prosperity and stability of the world in our hands. The situation, both as to the price level and as to public interest in the price level, is such that we have a rare opportunity to take a new step forward in our economic life, a radical step to be sure but one which will save us, as nothing else can, from the dangerous radicalism with which we are now threatened.