IFC - Irving Fisher: Short story n. 56. - Inflation and Deflation an Economic Disease

Fisher's short stories on wealth 56-64 

No. 10 • October 2001

---
"56. Inflation and Deflation an Economic Disease
I HAVE now finished two of the four divisions into which economics seem most properly to be grouped. The first divisions consisted in describing and defining the fundamentals – wealth, property, services, price value, capital and income. I called all this “economic anatomy.” The second division consisted in explaining how all this economic machinery works – how prices, the level of prices and distribution of wealth are determined. I called all this “economic physiology.”
So far we have not criticised the economic machine and its working. It was taken for granted.
But no one is satisfied stopping here. Every one recognizes that the economic machine gets out of order and needs correction. Some are radical enough to propose rebuilding it from the ground up.
We must therefore, before ending these short stories, say something about the disorders of the economic machine and how they can be remedied.
In doing this we enter a very controversial field. To avoid undue discussion I shall try to be conservative and sometimes I may seem dogmatic.
The first disorder is two-fold – a sort of economic chills and fever – or inflation and deflation, or changes in the buying power of money. This disease is the commonest and the worst of all those we shall examine. It is especially dangerous because so often overlooked. Few even suspect that the dollar ever changes. At the present moment our depression in trade is largely due to just such a change.
The persistent idea that a dollar is a stable unit like a yardstick, instead of varying, as it really does, in purchasing power, is what I call the “Money Illusion.”
Some people think gold is stable because “the price of gold” never varies. In the United States pure gold sells at about $20 an ounce (exactly $20.67) and has remained at that fixed price ever since 1837 when the pure gold content of a dollar was fixed at about one-twentieth of an ounce (exactly 23.22 grains) of pure gold. Of course the two figures mutually imply each other and afford absolutely no evidence that gold is constant in its buying power over other commodities. They merely mean that gold is constant in terms of gold.
 
I once jokingly asked my dentist – at a time when people were complaining about “the high cost of living” – whether the cost of gold for dentistry had arisen. To my surprise he took me seriously and sent his clerk to look up the figures. She returned and said: “Doctor, you are paying the same price for gold that you always have.”
Turning tomethe dentist said: “Isn’t that surprising? Gold must be a very steady commodity.”
“It’s exactly as surprising,” I said, “as that a quart of milk is always worth two pints of milk.”
“I don’t understand,” he said.
“Well, what is a dollar?” I asked. “I don’t know,” he replied. “That’s the trouble,” I said. 

“The dollar is approximately one-twentieth of an ounce; there are, therefore, twenty dollars in an ounce of gold, and naturally an ounce of gold must be worth $20. The dollar is a unit of weight, just as truly as the ounce. It is a unit of weight masquerading as a stable unit of value or buying power.” Our fixed-weight dollar is as poor a substitute for a really stable dollar as would be a fixed weight of copper, a fixed yardage of carpet, or a fixed number of eggs. If we were to define a dollar as a dozen eggs, thenceforth the price of eggs would necessarily and always be a dollar a dozen. Nevertheless, the supply and demand of eggs would keep on working. For instance, if the hens failed to lay, the price of eggs would not rise but the price of almost everything else would fall. One egg would buy more than before. Yet, because of the Money Illusion, we would not even suspect the hens of causing low prices and hard times. 

In what sense then should a dollar be fixed, if not in weight? Evidently in buying power. We usea dollar as a unit of value, or buying power, not as a unit of weight. We have other units of weight, the pound, ounce, grain, gram. We want these units of weight for weighing. But the dollar is a unit of weight never used for weighing; 23.22 grains of copper or even silver is not a dollar. Only 23.22 grains of gold is a dollar and then, while the grain seems to us weight, the dollar does not. We never think of it in any such way. We think of it as a unit of value. No one cares, or should care, what a dollar weighs. What it buys is the vital question. As an economist, General F.A.Walker said “Money is as money does” or “the dollar is what the dollar buys.” To confuse the fixed weight of the dollar with a fixed value is like confusing a fixed weight of a yardstick with a fixed length. If the Bureau of Standards should put out yardsticks always weighing the same, that would not insure their having the same length. They could be used accurately for weighing sugar but not, with any great accuracy, for measuring cloth.
It follows that our dollar could be used accurately for weighing sugar, but it can not at present be used with accuracy, for measuring value. This fact nevertheless is hidden from us by the Money Illusion."


Source: http://www.bis.org/ifc/publ/ifcb10.pdf#page=75

[Mrt: This is the n1 story in the series of Fisher stories I have discovered in bis archives. More to come]