Evening star., 1933-10-08

as their contribution toward pronaot-
ing clear understanding of the
monetary system in the present con-
tr0Dersy.
The series Uiu appear In this neus-
paper IN is consecutive daily chap
ters The fourteenth is prc-ented
today.
ARTICLE NO. IA.
Shall The United States Have A
managed Currency?
Propsolas for imitation in the United
States such as those contained in the
Thomas amendment have been accom-
panied recently by demands in certain
quarters for currency tinkering of a
different and moro permanent type.
Once prices have been raised to a prede-
termined level by imitation, there are
some who believe the country should
stabilize" them at the new level by
monetary manipulation. In other words,
they advocate managed currency"
What do its advocates mean by a
managed currency" and what is to be
said for the merits Of such proposals?
The two most widely discussed schemes
OF this sort are the so-called COM
modify dollar" plan of Prof. Irving
Fisher OF Yale, and proposals for central
bank control advocated in somewhat
varying forms by Prof. Gustav Cas-
sci Of Sweden and the British econo-
mist, John Maynard Keynes.
Would Vary Gold Worth.
Prof. Fishers idea. briefly. Is that
the gold dollar should cease to be a
constant weight of gold with fluctuating
purchasing power. and should become a
fluctuating weight of gold with a more
or less constant purchasing power
There would be no actual coinage of
gold under the Fisher scheme. The
Governments gold supply would be kept
In gold bars, and the actual circulation,
then as now. would consist Of represent
atlve money, ie., bank notes and token
coins. All of the currency would be
exchangeable for gold on demand, but
the amount Of gold for which it would
exchange would vary with the price
level. If prices, as measured by some
generally accepted index, fell per cent
during the month. the weight of gold
purchasable with the dollars would be
decreased per cent. and vice versa.
How would such a plan be likely to
work?
In the first place. it would introduce
a new and indeterminable fuctuating
element in the foreign exchanges. In
Article vi of this series. in which the
mechanics of the international gold
standard were discussed. we saw that
the par of exchange between two gold
currencieS was unchanging, since it rep
resented the ratio between the amount
of gold in one to the amount of gold
in the other. Under the Fisher plan
since the number Of grains of gold in
the dollar would fluctuate with the
price level. there could, of course. be
no fixed gold parity. Therefore. in
stead of having one fluctuating element
in the exchange-that of demand and
would be two. And the
ntV one would be much the more seri-
GUS. since it would not be limited. as is
that Of demand and supply. by the up
per and lower gold points"
Would Aid Spectators.
A still more serious defect in the
Fisher plan-assuming it to be adopted
is that both American and foreign
spectators could trade against the
Government Spectators could easily
calculate, before the end o. the month
whether or not the decline had ex-
ceeded l per cent the limit by which
Fisher would alter the dollars weight
in any one MONTH. They would. there
fore. redeem their paper dollars in gold
knowing that after the end of the
month they could turn the gold in again
for more paper dollars. Moreover, the
Fisher plan would invite raids on the
gold stocks precisely when such raids
would be most harmful. i.e., in periods
of rapidly falling prices.
II the Fisher plan were adopted In
ternationally the United States would
be faced with the problem of choosing
between separate price indices for oil
ferent countries, or a single world IN
dex number Adoption OF separate IN
dices would mean that the excnangt
fluctuation problem would still exist
adoption of a single index would meaf
that the country should stu nave eH'
change confusion for another reason
namely, that because OF their Varylnt
economies, different countries woulo pt
differently affected by changes IN INT
general index. A.. ~.
central bank should keep prices on ar
even keel by manipulating the supp.
Of credit and currency. with heyne:
fayoring arbitrary control, as well, oVe'
the price of gold.
Old Theory Discredited.
To the extent that these proposai
rest on pure manipulation OF the none:
supply their effects would be extrenei:
uncertain We have seen IN an ealLe.
article of this series that, 1ar iron
being an actual cause. or even oarome
ter. of price levels. the money any
credit supply has recently shown prac
ticaily no direct relation at all to them
In other words. We have seen that th'
quantity theory of money. especially. II
its crlder form, has been totally dis
credited by the facts Of recent history
To talk Of "stabilizing prices" by suci
a mechanism is, therefore, patentl.
absurd.
AS between the Fisher mechanism
for controlling the price Of gold ant
the Keynes mechanism, the fermer
with ali its shortcomings. would b.
preferable, for 1t at least would hav'
the merit of being automatic in 1t
operations, whereas the Keynes schem
would almost certainly be affected b.
political influences.
Perhaps the chief underlying weak
ness in plans for managed curren
cies," however. is the sublime faitf
which they imply in price stability a
q cure for all the worlds ills. No bet
ter antidote for this state of mind coult
be offered than the case of Sweden
where, disciples of sterilization insist
currency management" has been car
ried out successfully during the las
two years.
Analysis Shows Defect.
The official price index of Swedel
has, it is true, been exceptionally stead.