# Stabilizing the Dollar/Appendix 5

APPENDIX V
PRECEDENTS
1. Contracts in Terms of a Commodity
In Appendix IV we have seen many examples of discontent growing out of the instability of monetary standards. Such discontent has often expressed itself in action—sometimes wise and sometimes unwise.
In the present Appendix, examples will be noted of intelligent attempts to meet the evils of monetary instability. These attempts are more numerous than is usually realized and constitute a surprising mass of precedent for every one of the principles of stabilization which, together, constitute the proposal of this book.
I shall begin with the simplest mode of escape from an unsatisfactory monetary standard. This is to make our contracts in terms of some staple commodity, like wheat or iron.
Professor Ferguson of Bryn Mawr tells me that: "In Roman times in Egypt, as well as previously under the Ptolemies, a large number of contracts show that wheat was used in paying rent on farm land, or, if the tenant preferred, coin (usually copper drachmas) to the amount equivalent to the value of wheat."
In England, the "tithe averages" have been made to vary with the value of grain, so that the tithe was, in effect, so much grain, not so much money; or rather it was money measured by grain. Another excellent example is the "Scotch Fiars prices" previously mentioned in another connection. These have existed ​for more than two centuries. Rents of farm land are contracted for in terms of grain but paid for in money at the average price of the grain as judicially determined.
In the reign of Queen Elizabeth a statute was passed requiring that one third of the rental of college lands should be expressed in wheat or malt. Blackstone, commenting on this law two centuries afterwards, observed that the one third in wheat or malt rent had come to be generally worth twice as much as the two thirds in money! This saved, for the colleges of England, a very important part of their revenues which would otherwise have become dissipated by the depreciation of money.
Of these acts, Professor Jevons says, "The question arises whether, having regard to these extreme changes in the value of the precious metals, it is desirable to employ them as the standard of value in long lasting contracts. We are forced to admit that the statesmen of Queen Elizabeth were far-seeing."
Mr. C. W. Barron of the Boston News Bureau and the Wall Street Journal has supplied me with a more modern instance: On September 8, 1817, David Sears, of Boston, leased to Uriah Cutting, of Boston, for 1000 years from December 1, 1817, at a yearly rental of 10 tons of First Quality of Russia Sables Iron, the land and building thereon at the northeast corner of Scollay Square and Court Street. Similar leases were executed at the time by the same parties on eleven other pieces of property. In each lease the rental is actually payable in money equal in value to the specified amount of iron.
2. The Tabular Standard
Instances have come to light of contracts based on more than one commodity, thus involving the very principle of the index number or "tabular standard."
Twice in the Colonial history of ​Massachusetts—once in 1747 and again in 1780—a tabular standard was created by law for the payment of soldiers and others as a means of combating the extreme uncertainty and depreciation of paper money.
The latter law lasted till 1786 when the extreme need of such a corrective was over. The correction was based on a crude index number of four commodities.
Most of the foregoing facts regarding Massachusetts are taken from an interesting account of these early experiments with the tabular standard by Professor Willard Fisher. These early gropings toward a goods standard were due to the dissatisfaction, mentioned in Appendix IV, § 1, following the disorganization of monetary standards by the Revolutionary War.
The Great War, also, has driven the industrial world to the use of a composite standard, though in a different way. Wage payments have, for the first time, so far as I know, been adjusted by means of index numbers of prices.
At the close of 1916 several banks, trust companies, and commercial and industrial establishments made special Christmas presents to their employees to compensate partially for the reduced purchasing power of their salaries for the preceding year, the presents being a fixed percentage of the salaries.
​Apparently most employers who made such adjustments assumed, at first, that they were made once for all. But it was found, of course, that living costs wouldn't "stay put," so that a new adjustment needed to be made next year. This led naturally to the idea of a periodical adjustment. The Bankers' Trust Co., which had made one adjustment, appointed a committee to make further investigation. Its report, made December 15, 1917, covered 22 pages.
The Oneida Community inaugurated, on January 1, 1917, a system of compensation for the high cost of living by the use of Bradstreet's index number for wholesale prices. Each workman receives two weekly pay envelopes—one containing regular wages and the other containing a certain percentage thereof calculated from Bradstreet's number. An initial adjustment of 16 per cent was made as representing the increase in the cost of living between January 1, 1916 (when the general wage scale had been revised), and January 1, 1917. This 16 per cent was applied to the wages for the first month. In each succeeding month a 1 per cent advance or decline of wages was made for each 20 points change in the Bradstreet number.
The Kelley-How-Thomson Co. (hardware), of Duluth, Minnesota, adopted, independently, a similar plan.
The George Worthington Co. (hardware), of Cleveland, Ohio, on October 1, 1917, followed the lead of the Oneida Community, with the exception that all employees were included excepting the directors or salesmen on a commission basis.
The Printz-Biederman Co. (clothing), also of Cleveland, received the idea from the George Worthington Co. The introduction of the plan here was through the employees' organization.
The Mishawaka Woolen Mfg. Co., of Mishawaka, Indiana; and the Union Bleaching & Finishing Co. of Greenville, South Carolina, both pay wages on the basis of index numbers.
​The Index Visible, Inc., of New Haven, Connecticut, adopted a simpler plan based on the index number of retail prices of the United States Bureau of Labor Statistics.
Various flouring mills in Seattle and other points in the Northwest have raised the wages of their employees on several occasions. The adjustments were made at irregular intervals, but consciously to meet the increase in living costs. The survey of prices on which the increase was determined was made under the direction of Professor W. F. Ogburn, now of Columbia University, who calculated the index figures finally used. The minimum wage laws in Oregon and Washington were also revised in accordance with the increased cost of living.
The chief use of index numbers in settling wage disputes was in the decisions of the National War Labor Board. Strikes have been settled and wage increases made specifically on the basis of index numbers.
The principle was also recognized by the Shipbuilding Labor Adjustment Board. This board adopted the plan of making half yearly (April 1 and October 1) adjustments of wages in all shipbuilding centers, based on changes in the cost of living as determined for the Board by the United States Bureau of Labor Statistics.
Another application of index numbers is by the War Department, which in fixing the prices at which it disposes of its machine tools is proposing to use an index number, among other factors, to adjust the present prices of sale to the original cost, or price of purchase.
In England, the employees in several branches of the textile trade drew up an agreement with their employers in January, 1918, canceling all previous war bonuses and establishing the regulation of wages by the index number of the cost of living as calculated by the Board of Trade.
The same principle of adjusting wages to the high cost of living has been applied in Australia.
Some of the expedients cited are in permanent use; ​others were given up when the special occasions giving them rise were over.
The reason for discontinuing these makeshifts was, in each case, the great inconvenience caused by having two standards to deal with. Theoretically, of course, we could use the index number to correct every contract just as it has been used to correct wage contracts,—consulting the index number for adjusting our rent or interest payments or trolley carfares, for instance. But this would not be practicable, certainly not through voluntary adoption by individuals.
3. Correcting the Money Unit Itself
There are instances of legislative action, intended to correct the money unit itself, but falling short of the action proposed in this book. Probably the best example of such correction in current money units themselves is the "gold exchange standard," whereby the silver standard countries have virtually converted their silver units into gold. After the breakdown of bimetallism about 1873, when gold and silver countries began to drift apart, London exchange on India ceased to have any par. Consequently its fluctuations increased and caused great inconvenience to traders between the two countries. Finally, in 1893, the Indian Government stopped the free coinage of silver, giving the Indian rupee a scarcity value and causing it to appreciate above the value of the silver it contained. It was allowed to appreciate until it became worth 16d, at which it became virtually redeemable in gold, or, more strictly, in the right to gold, situated, not in India, but in London. This device, of redeeming silver in India, in "exchange" on gold in London constituted the famous "gold exchange standard." At the time of its adoption, the gold exchange standard was probably as radical a departure from tradition as a stabilized dollar would be to-day.
The Great War has brought two crude attempts at safeguarding the money of a country against alternate ​inflation and contraction. These are the prohibition of import and of export of gold. Sweden, in 1916, defended herself from the golden flood which the war brought by stopping its import, i.e. she authorized her State Bank to refuse to accept gold for notes, and this brought the same results as did the stoppage in India of the free coinage of silver in 1893. Swedish money received a scarcity value, and depreciation in terms of commodities was checked; that is, the rise of prices was arrested. Holland and Spain did much the same thing.
We, as well as practically all other nations, defended ourselves against a possible sudden drain of gold by putting an embargo on its export.
4. Conclusion
We see, then, that precedents exist for: (1) setting up a commodity standard to replace the standard of a mere money metal, (2) employing an index number for that purpose, (3) correcting a money metal standard (e.g. silver by the gold exchange standard) through a sliding scale relation to another standard.
These are precisely the essentials of the plan to stabilize the dollar.
There is therefore no element of innovation contained in the plan to stabilize the dollar. The only innovation is combining previously tested elements into one complete whole. At the same time we retain our traditional gold as the fundamental money and make no visible change in the money in use. The only essential departure from the system we now have is one quite invisible to all but a few miners, jewelers, exporters and importers, namely, varying, by a fixed rule, the price of gold from the present $20.67 an ounce. It is hard to see why such a change, the only object of which is to prevent any real change in our monetary unit, should be feared by the veriest worshiper of precedent.
* ↑ In his Money and the Mechanism of Exchange, p. 326.
* ↑ The State issued its notes on this basis: "Both Principal and Interest to be paid in the then current Money of said State, in a greater or less Sum, according as Five Bushels of CORN, Sixty-eight Pounds and four-seventh Parts of a Pound of BEEF, Ten Pounds of SHEEP'S WOOL, and Sixteen Pounds of SOLE LEATHER shall then cost, more or less than One Hundred and Thirty Pounds current Money, at the then current Prices of the said Articles." The same principle was applied to the payment of sums due the President of Harvard College. This early example is particularly interesting because it anticipated those economists who are usually credited with originating the idea of a tabular standard, namely Sir George Shuckburgh Evelyn, 1798, Count Soden, 1805, Arthur Young, 1811, Joseph Lowe, 1822.
* ↑ "The Tabular Standard in Massachusetts," Quarterly Journal of Economics, May, 1913.
* ↑ Swedish Exchange rose, and (what was one of the most curious results) Swedish notes commanded a premium in gold bullion.