Evening star., 1933-10-15
What Initiation Means to You
BY THOMAS NIXON CARVER,
Professor Emeritus Of Political Economy q
Harvard University.


Professor Emeritus of Political Economy at
Harvard University.
A RE we to have currency infla-
II sai We have Ms = Ass shsspsnsd s dol dollar, r,
1 \ which means higher price quo
tations. Are we likely to have
more? Something will have to be done
to start another wave of buying. What
better expedient could there be than
currency imitation?
Imitation means a cheapening Of our
monetary unit, the dollar. Dollars may
be cheapened. sometimes. but not al
ways by issuing more Of them: that is,
by increasing the supply. They may
demand for them. We have already
definitely decreased the demand for
paper dollars by making them slightly
less desirable. One element in their
desirability was the ability to get def
mite quantity of gold. 25.8 grains nine
tenthS fine, for every paper dollar pre-
sented. That element of desirability
was destroyed when our Government
repudiated its promise to pay gold for
paper.
Issuing more paper dollars will not
necessarily cheaper them so long as
we are on the gold standard; that is,
so long as the Government Is able and
willing to redeem them in gold as prom
ised So long as the holder of paper
dollar can always get 25.8 grain OF
standard gold for it, he will never let 1t
go for less than the value Of that guam
tity of gold, and every paper dollar in
the country will always have the value
! of gold dollar, no matter how many
Of them are issued.
Parity Of Paper Maintained.
Ignorance of this simple fact IS re-
sponsible for some Of our recent diff
cultieS. Issuing more Federal Reserve
notes, in the hope that they would
raise prices, was fatuous proceeding.
| So long as these notes were actually
redeemable in gold, the parity Of paper
and gold was maintained. This meant
that, no matter how many notes were
issued, each and every one OF them
would have the same value or purchas-
ing power as a gold dollar. The only
possible way to raise prices. under that
| system. was to cheaper gold.
| Up to certain point, gold may be
cheapened by substituting paper money
for it and releasing gold from circula-
tion. The gold thus released and
thrown onto the markets Of the world
would tend to cheaper it. This rule
| works so long as there is more gold in
the purpose of redeeming paper and
maintaining its parity with gold.
When, however, this so-called gold re-
serve Is so depleted as to compel the
Government to go out of its way to
find gold, a different result follows.
This quest of the Government for gold
is an increase in the demand for gold.
Thus. from this point on. the overissue
of paper currency. instead Of releasing
al Io fnr ~ O.
tually increases the demand Tor 1t.
Prices Sometimes Depressed.
The situation becomes acute when
men begin to fear that there Is SO much
paper currency in existence as to make
it impossible for the Government to
continue to redeem it. They sec that
II the Government repudiates, paper
must depreciate. The fear Of deprecia-
tion starts scramble Tor gold as 2
store of value. This scramble for gold
makes 1t scare and dear and forces
further fall in prices. So long as the
Government is able to maintain the
parity of gold and paper, the overissue
of paper currency may and does force
panicky fall in prices. An increase
in the supply Of money docs not always
raise prices, it sometimes depresses
them.
When, however, the Government re-
pudiates its promises to pay gold for
paper is gone. Then an increase in
the number of paper dollars cheapens
them and raises prices. But the pres
cnt cheapening Of the dollar is not the
result Of an increase, since March 4,
in the number Of paper dollars. There
has been no sufficient increase to pro-
ducc such a result We must look on
the side Of demand for an explanation.
The demand for money is quite as
important as the supply Of it. Both
constitute the quantity theory Of money,
though many quantity theorists seem
to think that it is the supply alone that
counts That is no more true of money
than of anything else.
The demand for paper money, like
the demand. for anything else, is a
combination of two factors, the desire
for it and the possession of something
to give in exchange for it. The great
mass of commodities offered for sale
are all now offered in exchange for
paper money. There is no lack there.
There has been no scarcity OF sucn
commodities to account for the decrease
in the demand for paper money. We
must see what has happened to the
desire for it.
Several Elements Of Desirability.
There are several elements Of desira-
bility in paper money, that IS. there
are several things which lead men to
desire it.
First. The government will accept 1t
in payments to itself-in the purchase
of stamps, the payment OF duties ana
taxes. A certain small quantity OF paper
could be hoated, without depreciation,
on that basis alone.
Second. II it is legal tender Tor the
payment of all debts, the debtor class
at least will desire it for that purpose.
A certain small quantity Of paper
money could be circulated on that basis
alone. If this is combined with the gov
ernment's willingness to accept It,
larger quantity could be circulated.
Third. After time, custom would
make it acceptable in the making OF
all purchases. This would constitute an.
other large element OF desirabiity ana
a considerable quantity could be hoated
on this basis alone.
Fourth. II the government will al
ways give fixed quantity OF gold, say
25.8 grains of standard gold. for each
and every paper dollar, this adds an
other element of desirability.
A combination of all four OF these
elements of desirability will enable a
larger number of dollars to circulate
without depreciation than would be
possible If only one. two or three OF
them were present. Take away any one
Of them and the total desire for paper
money will decrease Even If only q few
ever want to exchange paper for q fixed
quantity of gold, those few have to be
counted and their desire is an element
in the total desire for DaDer money!
Rerudiation Will Bring Drop.