Richmond times-dispatch. [volume] (Richmond, Va.) 1914-current, 1920-07-06
From Other Viewpoints
How Stable Prices Arc Determined.
DY }. LAWRENCE I.AUGiILlN.

That socal!siic appeal to the interference
OF man under our present system leads TO dis
satisfaction, is today apparent in
monetary affairs. Such manifestations, how
ever. at al! new. We have had them
before: after the Civil War-and usually after
an important financial crisis Al the prcsen,
moment. ii is 10 be noted that the alterations
o: mind on momcntary matters have very
practical bearing on prices and the cost 81
living. Therefore cannot be too careful
TO set clear in our own minds the fund ais
Of money and prices.
The old theory OF Ricardo that the level OF
prices could be regulated by state action on
the quantity OF money in circulation belonged
20 set Of conditions quite different from
those OF today. Eat in spite OF its staleness
!, has been rcvampsa by some pure theorists
and actually proposed practical scheme
for contI ollinS prices.
Based the quantity theory OF money
(Which orig! mated with Locke and wholly
Theoretical! writets). according TO which prices
are determined by the quantity of money in
circulation and tas now amended) by the
quantity OF credit offered as purchasing power
Ggains; goods, /; is seriously proposed To
regulate prices by changing the weight of
standard gold dollar. That is. ii prices rise,
reduce the number Of grains in the dollar: II
PRICES fall. increase the number
TO my mind such plan is both utterly i'm
practicable and unsupported by good none
;ary reasoning. In the first place it would
th:o~ into utter confusion all our foreign
exchange transactions If were to frequent
~ change the weight OF our gold coins. to sag
nothins Of the disturbance occasoncd thereby
liz settling domestic contracts.
II the second place. the quantity theory on
which II IS based is established the absurd
lily o' SuppoSing that the price Of anything
is sOlcly by the offer Of purchasing power
chat IS. merely by dcmand). irrespcctive Of
tae effect OF supply and changes In the cost OF
production.
Moreover. in talking about the quantity Of
money. these theorists make no distinction
between the standard money. common de-
nofninaior. in which prices are expressed. and
the medium of exchange OF which goods. after
their price has been arrived at. are in fact
exchanged. st the hottom OF the confusion of
mind. however. no correct conception. or den
n'tI"n. OF price has been kept in mind. \ lit
u" explanation VIII make this matter clear
In this country. where gold is the standard
price IS TN" quantity Of gold for which an
Aftic!" exchanges The standard is not an a b.
atlhctioh. but q material commodity. in which
rric" is expressed: price is simply the ratio
between goods and gold
In short. gold may increase in value II
goods arc chcapcncd in their expenses Of pro-
""ct'"n' bui this fact may not be due any
ch9s O .f'nhtlng with operating on gold
dioHc. Anything which increases or dimin-
Ishcj IN" demand for. supply OF gold and
any t"!hs which Increases the expenses OF pro-
mict'o:' o! goods. affects their price In gold.
lhcf"!orc' II ~ shallow to suppose that prices
'hn i'. modified only by changes on the gold
sue % me comparison. And yet volumes have
besh written based on that error.
- "'HMt not 1" be necessary in this age to
explain that purchasing power alone canno;
NIX iT!ce, regardless OF the supply. Take The
Hiico 81 steel rails, Only a few years ago they
"er" sold az 500 10 $50 ten. and before the
European war they had FALLEN as low AS sl7 10
S27 Il ton. why? Certainly not because Of
IN" absence OF purchasing power. ANY prac-
t'"ai "tcc man wouId undoubtedly think n
person was silly - he did not know that steel
rals had fallen In price because OF amazing
change in methods of production by which
costs were lowered. And yet tho quantity
theorists have no place IN their formula for
the effect o. Improvement and reduced costs