DOLLAR STABILIZATION. — Under the existing currency system, the so-called “level of prices” is largely at the mercy of monetary and credit conditions. The tide of prices will rise or fall with the flood or ebb of gold or of paper money or of bank credit. Evidently a rise in the level of prices is a fall in the purchasing power of the dollar or other monetary unit, and vice versa. The purchasing power of money has always been unstable because a unit of money, as at present determined, is not a unit of purchasing power, but only a unit of weight. It is the one inconstant unit of measurement left in civilization. Other units — the yard, pound, bushel, etc. — were once as unstable and crude as the dollar, sovereign or franc still are; but, one after another, the other units have all been stabilized or standardized. Short weights and measures cheat the buyer; long weights, the seller. So a unit of money which changes in value or purchasing power is always playing havoc between contracting parties. When prices are rising — in other words, when the purchasing power of the dollar is falling — the creditor and the creditor-like classes suffer injustice. The sufferers include savings-bank depositors, bond-holders, salaried classes and wage-earners. In the great upheaval of prices — i.e. in the United States, depreciation of the dollar — which took place between 1896 and 1921 such injustice amounted to over a hundred billion dollars. On the other hand, when prices fall, as they did between 1873 and 1896, it is other classes — debtors, stockholders, farmers and independent business men generally — which suffer the injustice. The indirect effects of falling or rising prices — i.e. of a rising or falling dollar — are equally bad. These indirect effects include industrial discontent (either over the “high cost of living” or unemployment) and economic crises and depressions.
Hitherto there was ample excuse for the unstable monetary units of various countries. No instrument for measuring their aberrations had been devised. Likewise, until weighing scales were devised, weights could not be standardized, and until instruments for measuring electrical magnitudes were invented, electrical units could not be standardized. But for many years the “index number” of prices has provided an accurate instrument for measuring the value of the dollar in terms of its power to purchase goods. An “index number” of prices is a figure which shows for a specific period of time the average percentage increase or decrease of prices. One of the most suggestive signs of the times is that this instrument for measuring changes in the purchasing power of money has recently been utilized in adjusting wages and salaries to the high cost of living, i.e. to the depreciated dollar. A number of industrial concerns and banks, and some official agencies, have amended wages by the use of an index number of the prices of commodities.
It has been contended by some economists that this principle may be utilized in the future more generally to safeguard agreements made at one date to pay money at another date. Such corrections of the dollar would gradually break down the popular superstition that “a dollar is a dollar”; for every time we correct the dollar, we convict it of needing corrections; and ultimately the correction might be applied, not, as at present, as a patch on the dollar from the outside, but by incorporating it in the dollar itself. Various methods for accomplishing this have been proposed. The one perhaps best known is Prof. Irving Fisher's proposal to vary the weight of the gold dollar so as to keep its purchasing power invariable. Instead of a gold dollar of constant weight and varying purchasing power, what is needed, he contends, is a dollar of constant purchasing power, and, therefore, of varying weight. It is not proposed, of course, to remint gold coins, but simply to count an ounce of gold bullion as being the equivalent not always of $20.67 ( as at present) but of as much more or less than that sum as is required from time to time in order to keep the purchasing power of the dollar constant. In other words, the proposal is to vary the price of gold according to its worth relative to other commodities, instead of, as at present, keeping it artificially constant at $20.67 an oz. pure or £3 17s. 10½d. an oz. 11/12 fine. In this way, Professor Fisher contends, we can control the price level, lowering it, raising it, or keeping it from fluctuating much, if at all. Thus, if Mexico should adopt the dollar of the U.S. (instead of its present dollar of half the weight of gold), the price level in Mexico would be disastrously cut in two. Again, if the U.S. should adopt the Mexican dollar, the price level in the U.S. would be disastrously doubled. That is, the more gold in the dollar, the greater its buying-power; and the less, the less. If, Professor Fisher contends, this principle be admitted, it follows that we hold, in the hollow of our hand, what the dollar's buying-power shall be — that is, what the level of prices shall be. It can be kept from changing greatly just as easily as it could be made to change, simply by periodical adjustments of the price of gold, each adjustment being made in accordance with the index number of prices. By this method, in conjunction with any of the sound systems of banking, Professor Fisher contends, variations of more than one or two per cent could easily be prevented except under the most extraordinary conditions. (I. F.)
Source: http://en.wikisource.org/wiki/1922_Encyclop%C3%A6dia_Britannica/Dollar_Stabilization
Full version: http://t.co/cHQXYGnu6v - THE QUARTERLY JOURNAL OF ECONOMICS FEBRUARY, 1913 A COMPENSATED DOLLAR
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Continue - discussion about the Compensated dollar plan:
Origins and developments of Irving Fisher's compensated dollar plan
In 1911, Fisher published The Purchasing Power of Money . In chapter 13 of the first edition and in an appendix in the second section of 1913, he introduced a rule to maintain the stability of the level of prices, known as the “compensated dollar”. According to this rule, the legal definition of money is changed. In other words, the weight in gold of the dollar is modified once a month in order to impede the frequency of price changes on a basket of goods. According to Fisher, this plan would offer stability for the purchasing power of money. He sought to find an alternative system to the fixed price of gold under the Gold Standard. He wanted to introduce a dollar fixed in terms of its purchasing power, but variable in terms of its metallic weight. In this paper, we will focus on Fisher's analysis of the stability of money value and his position in the debate on the compensated dollar from 1909 to 1922. We will study the anticipations of Fisher's compensated dollar, the critical reception of Fisher's project and the evolutions it gave rise to, the gold exchange standard and the algebraic evidence. We also examine the debate's connections to the question of whether or not the compensated dollar plan is compatible with the quantity theory of money. We end with the analysis of the gold price elasticity of the net supply of gold, with an explanation of the relationship between the Yellowbacks and the varying price of the gold reserve.Source: http://ideas.repec.org/a/taf/eujhet/v20y2013i2p261-283.html
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