PART THREE: MONEY AND BANKING
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Chapter 20
Problems of Credit Policy (cont.)
III. Problems of Credit Policy in the Period Immediately After the War
9 The Gold-Exchange Standard[29]
Wherever inflation has thrown the monetary system into confusion, the primary
aim of currency policy has been to bring the printing presses to a standstill.
Once that is done, once it has at last been learned that even the policy of
raising the objective exchange value of money has undesirable consequences, and
once it is seen that the chief thing is to stabilize the value of money, then
attempts are made to establish a gold-exchange standard as quickly as possible.
This, for example, is what occurred in Austria at the end of 1922 and since
then, at least for the time being, the dollar rate in that country has been
fixed. But in existing circumstances, invariability of the dollar rate means
invariability of the price of gold also. Thus Austria has a dollar-exchange
standard and so, indirectly, a gold-exchange standard. That is the currency
system that seems to be the immediate aim in Germany, Poland, Hungary, and many
other European countries. Nowadays, European aspirations in the sphere of
currency policy are limited to a return to the gold standard. This is quite
understandable, for the gold standard previously functioned on the whole
satisfactorily; it is true that it did not secure the unattainable ideal of a
money with an invariable objective exchange value, but it did preserve the
monetary system from the influence of governments and changing
policies.
Yet the gold-standard system was already undermined before the
war. The first step was the abolition of the physical use of gold in individual
payments and the accumulation of the stocks of gold in the vaults of the great
banks-of-issue. The next step was the adoption of the practice by a series of
states of holding the gold reserves of the central banks-of-issue (or the
redemption funds that took their place), not in actual gold, but in various
sorts of foreign claims to gold. Thus it came about that the greater part of the
stock of gold that was used for monetary purposes was gradually accumulated in a
few large banks-of-issue; and so these banks became the central reserve banks of
the world, as previously the central banks-of-issue had become central reserve
banks for individual countries. The war did not create this development; it
merely hastened it a little. Neither has the development yet reached the stage
when all the newly produced gold that is not absorbed into industrial use flows
to a single center. The Bank of England and the central banks-of-issue of some
other states still control large stocks of gold; there are still several of them
that take up part of the annual output of gold. Yet fluctuations in the price of
gold are nowadays essentially dependent on the policy followed by the Federal
Reserve Board. If the United States did not absorb gold to the extent to which
it does, the price of gold would fall and the gold prices of commodities would
rise. Since, so long as the dollar represents a fixed quantity of gold, the
United States admits the surplus gold and surrenders commodities for gold to an
unlimited extent, a rapid fall in the value of gold has hitherto been avoided.
But this policy of the United States, which involves considerable sacrifices,
might one day be changed. Variations in the price of gold would then occur and
this would be bound to give rise in other gold countries to the question whether
it would not be better in order to avoid further rises in prices to dissociate
the currency standard from gold. Just as Sweden attempted for a time to raise
the krone above its old gold parity by closing the mint time gold, so other
countries that are now still on the gold standard or intend to return to it
might act similarly. This would mean a further drop in the price of gold and a
further reduction of the usefulness of gold for monetary purposes. If we
disregard the Asiatic demand for money, we might even now without undue
exaggeration say that gold has ceased to be a commodity the fluctuations in the
price of which are independent of government influence. Fluctuations in the
price of gold are nowadays substantially dependent on the behavior of one
government, namely, that of the United States. [30]
All that could not have
been foreseen in this result of a long process of development is the
circumstance that the fluctuations in the price of gold should have become
dependent upon the policy of one government only. That the United States should
have achieved such an economic predominance over other countries as it now has,
and that it alone of all the countries of great economic importance should have
retained the gold standard while the others (England, France, Germany, Russia,
and the rest) have at least temporarily abandoned it—that is a consequence of
what took place during the war. Yet the matter would not be essentially
different if the price of gold was dependent not on the policy of the United
States alone, but on those of four or five other governments as well. Those
protagonists of the gold-exchange standard who have recommended it as a general
monetary system and not merely as an expedient for poor countries, have
overlooked this fact. They have not observed that the gold-exchange standard
must at last mean depriving gold of that characteristic which is the most
important from the point of view of monetary policy—its independence of
government influence upon fluctuations in its value. The gold-exchange standard
has not been recommended or adopted with the object of dethroning gold. All that
Ricardo wanted was to reduce the cost of the monetary system. In many countries
which from the last decade of the nineteenth century onward have wished to
abandon the silver or credit-money standard, the gold-exchange standard rather
than a gold standard with an actual gold currency has been adopted in order to
prevent the growth of a new demand for gold from causing a rise in its price and
a fall in the gold prices of commodities. But whatever the motives may have been
by which the protagonists of the gold-exchange standard have been led, there can
be no doubt concerning the results of its increasing popularity.
If the
gold-exchange standard is retained, the question must sooner or later arise as
to whether it would not be better to substitute for it a credit-money standard
whose fluctuations were more susceptible to control than those of gold. For if
fluctuations in the price of gold are substantially dependent on political
intervention, it is inconceivable why government policy should still be
restricted at all and not given a free hand altogether, since the amount of this
restriction is not enough to confine arbitrariness in price policy within narrow
limits. The cost of additional gold for monetary purposes that is borne by the
whole world might well be saved, for it no longer secures the result of making
the monetary system independent of government intervention.
If this
complete government control is not desired, there remains one alternative only:
an attempt must be made to get back from the gold-exchange standard to the
actual use of gold again.
10 A Return to a Gold Currency
A return to
the actual use of gold would be certain to have effects that would scarcely be
welcomed. It would lead to a rise in the price of gold, or, what is the same
thing, to a fall in the prices of commodities. The fact that this is not
generally desired, and the reason why it is not, have already been dealt with.
We may confidently suppose that such a fall in prices would cause just as much
dissatisfaction as was caused by the process of expelling gold from circulation.
And it hardly demands an excessive amount of insight to be able to predict that
in such circumstances it would not be long before the gold standard was again
accused of responsibility for the bad state of business. Once again the gold
standard would be reproached with depressing prices and forcing up the rate of
interest. And once again proposals would be made for some sort of "modification"
of the gold standard. In spite of all these objections, the question of the
advisability of a return to an actual gold standard demands serious
consideration.
One thing alone would recommend the abandonment of the
gold-exchange standard and the reintroduction of the actual use of gold; this is
the necessity for making a recurrence of inflationary policies if not impossible
at least substantially more difficult. From the end of the last century onward
it was the aim of etatism in monetary policy to restrict the actual circulation
of gold for three reasons: first, because it wished to inflate, without
repealing the existing banking laws, by concentrating gold reserves in the
central bank-of-issue; second, because it wished to accumulate a war chest; and
third, because it wished to wean the people from the use of gold coins so as to
pave the way for the inflationary policy of the coming Great
War.
Admittedly it will not be possible to prevent either war or inflation
by opposing such endeavors as these. Kant's proposal to prohibit the raising of
loans for war purposes is extremely naive;[31] and it would be still more naive
to bring within the scope of such a prohibition the issue of fiduciary media
too. Only one thing can conquer war—that liberal attitude of mind which can see
nothing in war but destruction and annihilation, and which can never wish to
bring about a war, because it regards war as injurious even to the victors.
Where liberalism prevails, there will never be war. But where there are other
opinions concerning the profitability and injuriousness of war, no rules and
regulations, however cunningly devised, can make war impossible. If war is
regarded as advantageous, then laws regulating the monetary systems will not be
allowed to stand in the way of going to war. On the first day of any war, all
the laws opposing obstacles to it will be swept aside, just as in 1914 the
monetary legislation of all the belligerent states was turned upside down
without one word of protest being ventured. To try to oppose future war policies
through currency legislation would be foolish. But it may nevertheless be
conceded that the argument in favor of making war more difficult cannot be
neglected when the question is being debated whether the actual domestic
circulation of gold should be done away with in the future or not. If the people
are accustomed to the actual use of gold in their daily affairs they will resist
an inflationary policy more strongly than did the peoples of Europe in 1914. It
will not be so easy for governments to disavow the reactions of war on the
monetary system; they will be obliged to justify their policy. The maintenance
of an actual gold currency would impose considerable costs on individual nations
and would at first lead to a general fall of prices; there can hardly be any
doubt about that. But all its disadvantages must be accepted as part of the
bargain if other services are demanded of the monetary system than that of
preparing for war, revolution, and destruction.
It is from this point of
view that we should approach the question of the denominations of notes. If the
issue of notes which do not make up a multiple of at least the smallest gold
coins is prohibited, then in the business of everyday life gold coins will have
to be used. This could best be brought about by an international currency
agreement. It would be easy to force countries into such an agreement by means
of penal customs duties.
11 The Problem of the Freedom of the Banks
The events of recent years reopen questions that have long been
regarded as closed. The question of the freedom of the banks is one of these. It
is no longer possible to consider it completely settled as it must have been
considered for decades now. Unfortunate expe riences with banknotes that had
become valueless because they were no longer actually redeemable led once to the
restriction of the right of note issue to a few privileged institutions. Yet
experience of state regulation of banks-of-issue has been incomparably more
unfavorable than experience of uncontrolled private enterprise. What do all the
failures of banks-of-issue and clearing banks known to history matter in
comparison with the complete collapse of the banking system in Germany?
Everything that has been said in favor of control of the banking system pales
into insignificance beside the objections that can nowadays be advanced against
state regulation of the issue of notes. The etatistic arguments, that were once
brought forward against the freedom of the note issue, no longer carry
conviction; in the sphere of banking, as everywhere else, etatism has been a
failure.
The safeguards erected by the liberal legislation of the
nineteenth century to protect the bank-of-issue system against abuse by the
state have proved inadequate. Nothing has been easier than to treat with
contempt all the legislative provisions for the protection of the monetary
standard. All governments, even the weakest and most incapable, have managed it
without difficulty. Their banking policies have enabled them to bring about the
state of affairs that the gold standard was designed to prevent: subjection of
the value of money to the influence of political forces. And, having arrogated
this power to themselves, the governments have put it to the worst conceivable
use. But, so long as the other political and ideological factors were what they
were, we cannot conclude that the mere freedom of the banks would or could have
made things different.
Let us suppose that freedom of banking had
prevailed throughout Europe during the last two generations before the outbreak
of the Great War; that banknotes had not become legal tender; that notes were
always examined, not only with respect to their genuineness, but also with
respect to their soundness, whenever they were tendered, and those issued by
unknown banks rejected; but that the notes of large and well-known banking firms
nevertheless were just as freely current as the notes of the great central
banks-of-issue in the period when they were not legal tender. Let us further
suppose that since there was no danger of a world banking cartel, the banks had
been prevented, by the mere necessity for redeeming their notes in cash, from
making immoderate endeavors to extend their issue by charging a low rate of
interest; or at least, that the risk of this was no greater than under
legislative regulation of the note system. Let us suppose, in short, that up to
the outbreak of the war, the system had worked no better and no worse than that
which actually existed. But the question at issue is whether it would have held
its own any better after July 28, 1914. The answer to this question seems to be
that it would not have done so. The governments of the belligerent—and
neutral—states overthrew the whole system of bank legislation with a stroke of
the pen, and they could have done just the same if the banks had been
uncontrolled. There would have been no necessity at all for them to proceed to
issue Treasury notes. They could simply have imposed on the banks the obligation
to grant loans to the state and enabled them to fulfill this obligation by
suspending their obligation to redeem their notes and making the notes legal
tender The solution of a few minor technical problems would have been different,
but the effect would have been the same. For what enabled the governments to
destroy the banking system was not any technical, juristic, or economic
shortcoming of the banking organization, but the power conferred on them by the
general sentiment in favor of etatism and war. They were able to dominate the
monetary system because public opinion gave them the moral right to do so.
"Necessity knows no law" was the principle which served as an excuse for all the
actions of all governments alike, and not only that of Germany, which was much
blamed because of the candor with which it confessed its adherence to the
maxim.
At the most, as has been explained, an effective if limited
protection against future etatistic abuse of the banking system might be secured
by prohibiting the issue of notes of small denominations. That is to say, not by
uncontrolled private enterprise in banking, but on the contrary by interference
with the freedom of the note issue. Apart from this single prohibition, it would
be quite possible to leave the note issue without any legislative restrictions
and, of course, without any legislative privileges either, such as the granting
of legal tender to the notes. Nevertheless, it is clear that banking freedom per
se cannot be said to make a return to gross inflationary policy
impossible.
Apart from the question of financial preparation for war, the
arguments urged in favor of the centralization, monopolization, and state
control of banks-of-issue in general and of credit-issuing banks in particular
are thoroughly unsound. During the past twenty or thirty years, the literature
of banking has got so thoroughly lost among the details of commercial technique,
has so entirely abandoned the economic point of view and so completely
surrendered itself to the influence of the most undisguised kinds of etatistic
argument, that in order to discover what the considerations are that are
supposed to militate against the freedom of the banks it is necessary to go back
to the ideas that dominated the banking literature and policy of two or three
generations ago. The bank-of-issue system was then supposed to be regulated in
the interests of the poor and ignorant man in the street, so that bank failures
might not inflict loss upon those who were unskilled and unpracticed in business
matters—the laborer, the salaried employee, the civil servant, the farmer. The
argument was that such private persons should not be obliged to accept notes
whose value they were unable to test, an argument which only needs to be stated
for its utter invalidity to be apparent. No banking policy could have been more
injurious to the small man than recent etatism has been.
The argument,
however, that was then supposed to be the decisive one was provided by the
currency principle. From the point of view of this doctrine, any note issue that
is not covered by gold is dangerous, and so, in order to obviate the recurrence
of economic crises, such issues must be restricted. On the question of the
theoretical importance of the currency principle, and on the question of whether
the means proposed by the Currency School were effective, or could have been
effective, or might still be effective, there is nothing that need be added to
what has been said already. We have already shown that the dangers envisaged by
the currency principle exist only when there is uniform procedure on the part of
all the credit-issuing banks, not merely within a given country but throughout
the world. Now the monopolization of the banks-of-issue in each separate country
does not merely fail to oppose any hindrance to this uniformity of procedure; it
materially facilitates it.
What was supposed to be the decisive argument
against freedom of banking in the last generation before the war is just the
opposite to that which was held by the Currency School. Before the war, state
control of banking was desired with the very object of artificially depressing
the domestic rate of interest below the level that considerations of the
possibility of redemption would have dictated if the banks had been completely
free. The attempt was made to render as nugatory as possible the obligations of
cash redemption, which constitutes the foundation stone of all credit-issuing
bank systems. This was the intention of all the little expedients, individually
unimportant but cumulatively of definite if temporary effect, which it was then
customary to call banking policy. Their one intent may be summed up in the
sentence: By hook or by crook to keep the rate of discount down. They have
achieved the circumvention of all the natural and legal obstacles that hinder
the reduction of the bank rate below the natural rate of interest. In fact, the
object of all banking policy has been to escape the necessity for discount
policy, an object, it is true, which it was unable to achieve until the outbreak
of the war left the way free for inflation.
If the arguments for and
against state regulation of the bank-of-issue system and of the whole system of
fiduciary media are examined without the etatistic prejudice in favor of rules
and prohibitions, they can lead to no other conclusion than that of one of the
last of the defenders of banking freedom: "There is only one danger that is
peculiar to the issue of notes; that of its being released from the common-law
obligation under which everybody who enters into a commitment is strictly
required to fulfill it at all times and in all places. This danger is infinitely
greater and more threatening under a system of monopoly." [32]
12 Fisher's Proposal for a Commodity Standard
The more the view regains ground that
general business fluctuations are to be explained by reference to the credit
policy of the banks, the more eagerly are ways sought for by which to eliminate
the alternation of boom and depression in economic life. It was the aim of the
Currency School to prevent the periodical recurrence of general economic crises
by setting a maximum limit to the issue of uncovered banknotes. An obvious
further step is to close the gap that was not reckoned with in their theory and
consequently not provided for in their policy by limiting the issue of fiduciary
media in whatever form, not merely that of banknotes. If this were done, it
would no longer be possible for the credit-issuing banks to underbid the
equilibrium rate of interest and introduce into circulation new quantities of
fiduciary media with the immediate consequence of an artificial stimulus to
business and the inevitable final consequence of the dreaded economic
crisis.
Whether a decisive step such as this will actually be taken
apparently depends upon the kind of credit policy that is followed in the
immediate future by the banks in general and by the big central banks-of-issue
in particular. It has already been shown that it is impossible for a single bank
by itself, and even for all banks in a given country or for all the banks in
several countries, to increase the issue of fiduciary media, if the other banks
do not do the same. The fact that tacit agreement to this effect among all the
credit issuing banks of the world has been achieved only with difficulty, and,
even at that, has only effected what is after all but a small increase of
credit, has constituted the most effective protection in recent times against
excesses of credit policy. In this respect, we cannot yet[33] know how
circumstances will shape. If it should prove easier now for the credit-issuing
banks to extend their circulation, then failure to adopt measures for limiting
the issue of fiduciary media will involve the greatest danger to the stability
of economic life.
During the years immediately preceding the Great War,
the objective exchange value of gold fell continuously. From 1896 onward, the
commodity price level rose continuously. This movement, which is to be explained
on the one hand by the increased production of gold and on the other hand by the
extended employment of fiduciary media, became still more pronounced after the
outbreak of the war. Gold disappeared from circulation in a series of populous
countries and flowed into the diminishing region within which it continued to
perform a monetary function as before. Of course, this resulted in a decrease in
the purchasing power of gold. Prices rose, not only in the countries with an
inflated currency, but also in the countries that had remained on the gold
standard. If the countries that nowadays have a paper currency should return to
gold, the objective exchange value of gold would rise; the gold prices of
commodities and services would fall. This effect might be modified if the
gold-exchange variety of standard were adopted instead of a gold currency; but
if the area within which gold is employed as money is to be extended again, it
is a consequence that can hardly be eliminated altogether It would only come to
stop when all countries had again adopted the gold standard. Then perhaps the
fall in the value of gold which lasted for nearly thirty years might set in
again.
The prospect is not a particularly pleasant one. It is hardly
surprising in the circumstances that the attention of theorists and politicians
should have been directed with special interest to a proposal that aims at
nothing less than the creation of a money with the most stable purchasing power
possible.
The fundamental idea of Fisher's scheme for stabilizing the
purchasing power of money is the replacement of the gold standard by a
"commodity" standard. Previous proposals concerning the commodity standard have
conceived it as supplementing the precious-metal standard. Their intention has
been that monetary obligations which did not fall due until after a certain
period of time should be dischargeable, by virtue either of general compulsory
legislation or of special contractual agreements between the parties, not in the
nominal sum of money to which they referred, but by payment of that sum of money
whose purchasing power at the time when the liability was discharged was equal
to the purchasing power of the borrowed sum of money at the time when the
liability was incurred. Otherwise they have intended that the precious metal
should still fulfill its monetary office; the tabular standard was to have
effect only as a standard of deferred payments. But Fisher has more ambitious
designs. His commodity standard is not intended merely to supplement the gold
standard, but to replace it altogether. This end is to be attained by means of
an ingenious combination of the fundamental concept of the gold-exchange
standard with that of the tabular standard.
The money substitutes that are
current under a gold-exchange standard are redeemable either in gold or in bills
on countries that are on the gold standard. Fisher wishes to retain redemption
in gold, but in such a way that the currency units are no longer to be converted
into a fixed weight of gold, but into the quantity of gold that corresponds to
the purchasing power of the monetary unit at the time of the inauguration of the
scheme. The dollar—according to the model bill worked out by Fisher for the
United States—ceases to be a fixed quantity of gold of variable purchasing power
and becomes a variable quantity of gold of invariable purchasing power.
Calculations based on price statistics are used month by month for the
construction of an index number which indicates by how much the purchasing power
of the dollar has risen or fallen in comparison with the preceding month. Then,
in accordance with this change in the value of money, the quantity of gold that
represents one dollar is increased or diminished. This is the quantity of gold
for which the dollar is to be redeemed at the banks entrusted with this
function, and this is the quantity of gold for which they have to pay out one
dollar to anybody who demands it.
Fisher's plan is ambitious and yet
simple. Perhaps it is unnecessary to state that it is in no way dependent upon
Fisher's particular theory of money, whose inadequacy as regards certain crucial
matter has already been indicated. [34]
There is no need to criticize
Fisher's scheme again with reference to the considerable dubiety attaching to
the scientific correctness of index numbers and to the possibility of turning
them to practical account in eliminating those unintended modifications of
long-term contracts that arise from variations in the value of money. [35] In
Fisher's scheme, the function of the index number is to serve as an indicator of
variations in the purchasing power of the monetary unit from month to month. We
may suppose that for determining changes in the value of money over very short
periods—and in the present connection the month may certainly be regarded as a
very short period—index numbers could be employed with at least sufficient
exactitude for practical purposes. Yet even if we assume this, we shall still be
forced to conclude that the execution of Fisher's scheme could not in any way
ameliorate the social consequences of variations in the value of
money.
But before we enter upon this discussion, it is pertinent to
inquire what demands the proposal makes concerning business practice.
If
it is believed that the effects of variations in the value of money on long-term
credit transactions are compensated by variations in the rate of interest, then
the adoption of a commodity standard based on the use of index numbers as a
supplement to the gold standard must be regarded as superfluous. But, in any
case, this is certainly not true of gradual variations in the value of money of
which neither the extent nor even the direction can be foreseen; the
depreciation of gold which has gone on since toward the end of the nineteenth
century has hardly found any expression at all in variations in the rate of
interest. Thus, if it were possible to find a satisfactory solution of the
problem of measuring variations in the value of money, the adoption of a tabular
for long-term credit transactions (the decision as to the employment of the
index being left to the parties to each particular contract) could by no means
be regarded as superfluous. But the technical difficulties in the way are so
great as to be insurmountable. The scientific inadequacy of all methods of
calculating index numbers means that there can be no "correct" one and therefore
none that could command general recognition. The choice among the many possible
methods which are all equally inadequate from the purely theoretical point of
view is an arbitrary one. Now since each method will yield a different result,
the opinions of debtors and creditors concerning them will differ also. The
different solutions adopted, in the law or by the administrative authority
responsible for calculating the index numbers, as the various problems arise
will constitute a new source of uncertainty in long-term credit transactions—an
uncertainty that might affect the foundations of credit transactions more than
variations in the value of gold would.
All this would be true of Fisher's
proposals also insofar as they concern long-term credit transactions. Insofar as
they concern short-term credit transactions, it must be pointed out that even
under the present organization of the monetary system future fluctuations of the
value of money are not ignored. The difficulty about taking account of future
variations in the value of money in long-term credit transactions lies in the
impossibility of foreknowing the direction and extent of long-period variations
even with only relative certainty. But for shorter periods, over weeks and even
over periods of a few months, it is possible to a certain extent to foretell the
movement of the commodity-price level; and this movement consequently is allowed
for in all transactions involving short-term credit. The money-market rate of
interest, as the rate of interest in the market for short-term investments is
called, expresses among other things the opinion of the business world as to
imminent variations in commodity prices. It rises with the expectation of a rise
in prices and falls with the expectation of a fall in prices. In those
commercial agreements in which interest is explicitly allowed for there would be
no particular difficulty under Fisher's scheme in making the necessary
adjustment of business technique; the only adjustment that would be necessary in
the new circumstances would be to leave out of account all considerations of
variations in the commodity-price level in future calculations of the rate of
interest. But the matter is somewhat more complicated in those transactions in
which an explicit rate of interest does not appear, but is allowed for
implicitly in some other terms of the agreement.
An example of a case of
purchase on credit will assist the discussion of this point. Let us assume that
in such a case the index number over a period of five successive months rises
each month in arithmetical progression by one percent of the index number proper
to the first month, as shown in the following table:
|
Month |
Index No. |
Quantity of fine gold for which a dollar may be redeemed, in hundredths of a gramme |
| I
|
100
|
160.0
|
| II
|
101
|
161.6
|
| III
|
102
|
163.2
|
| IV
|
103
|
164.8
|
| V
|
104
|
166.4
|
A person who had
bought commodities in February on three months' credit would have to pay back in
May .048 of a gram of fine gold for every dollar over and above the gold content
of the dollars in which he had made the bargain. Now according to present
practice, the terms of the transaction entered into in February would make
allowance for the expected general rise of prices; in the purchase then
determined the views held by the buyer and the seller as to immediate
probabilities concerning future prices would already be expressed. Now since
under Fisher's plan the purchase price would still have to be settled by payment
of the agreed number of dollars, this rise of prices would be allowed for a
second time. Clearly this will not do. In other words, the present ordinary
practice concerning purchases on credit and other credit transactions must be
modified.
All that a person will have to do after the introduction of the
commodity standard, who would have bought a commodity in January on three
months' credit at $105 under a simple gold standard, is to take account of the
expected fluctuations in the value of gold in a different way in order not to
buy dearer than he would have bought in gold dollars. If he correctly foresees
these fluctuations as amounting to three dollars, then he would have to agree to
pay a purchase price of only (160 × 105)/164.8 dollars = 101.94 dollars.
Fisher's project makes a different technique necessary in business; it cannot be
claimed that this technique would be any simpler than that used under the pure
gold standard. Both with and without Fisher's plan it is necessary for buyers
and sellers to allow for variations in the general level of prices as well as
for the particular variations in the prices of the commodities in which they
deal; the only difference is in the method by which they evaluate the result of
their speculative opinion.
We can thus see what value Fisher's scheme has
as far as the consequences of variations in the value of money arising in
connection with credit transactions are concerned. For long-term credit
transactions, in which Fisher's scheme is no advance on the old and
oft-discussed tabular standard which has never been put into execution because
of its disadvantages, the use of the commodity standard as a supplement to the
gold standard is impracticable because of the fundamental inadequacy of all
methods of calculating index numbers. For short-term credit transactions, in
which variations in the value of money are already taken account of in a
different way, it is superfluous.
But variations in the objective exchange
value of money have another kind of social consequence, arising from the fact
that they are not expressed simultaneously and uniformly with regard to all
commodities and services. Fisher's scheme promises no relief at all from
consequences of this sort; Fisher, indeed, never refers to this kind of
consequence of variations in the value of money and seems to be aware only of
such effects as arise from their reactions on debt relationships contracted in
terms of money.
However it may be calculated, an index number expresses
nothing but an average of price variations. There will be prices that change
more and prices that change less than the calculated average amount; and there
will even be prices that change in the opposite direction. All who deal in those
commodities whose prices change differently from the average will be affected by
variations in the objective exchange-value of gold in the way already referred
to (part 2, chap. 12, secs. 3 and 4), and the adjustment of the value of the
dollar to the average movement of commodity prices as expressed in the chosen
index number will be quite unable to affect this. When the value of gold falls,
there will be persons who are favored by the fact that the rise in prices begins
earlier for the commodities that they sell than for the commodities that they
have to buy; and on the other hand there will be persons whose interests suffer
because of the fact that they must continue to sell the commodities in which
they deal at the lower prices corresponding to earlier circumstances although
they already have to buy at the higher prices. Even the execution of Fisher's
proposal could not cause the variations in the value of money to occur
simultaneously and uniformly in relation to all other economic
goods.
Thus, the social consequences of variations in the value of money
could not be done away with even with the help of Fisher's commodity
standard.
13 The Basic Questions of Future Currency Policy
Irving Fisher's scheme is symptomatic of a tendency in contemporary currency policy
which is antipathetic to gold. There is an inclination in the United States and
in Anglo-Saxon countries generally to overestimate in a quite extraordinary
manner the signifi cance of index methods. In these countries, it is entirely
overlooked that the scientific exactness of these methods leaves much to be
desired, that they can never yield anything more than a rough result at best,
and that the question whether one or other method of calculation is preferable
can never be solved by scientific means. The question of which method is
preferred is always a matter for political judgment. It is a serious error to
fall into to imagine that the methods suggested by monetary theorists and
currency statisticians can yield unequivocal results that will render the
determination of the value of money independent of the political decisions of
the governing parties. A monetary system in which variations in the value of
money and commodity prices are controlled by the figure calculated from price
statistics is not in the slightest degree less dependent upon government
influences than any other sort of monetary system in which the government is
able to exert an influence on values.
There can be no doubt that the
present state of the market for gold makes a decision between two possibilities
imperative: a return to the actual use of gold after the fashion of the English
gold standard of the nineteenth century, or a transition to a fiat-money
standard with purchasing power regulated according to index numbers. The
gold-exchange standard might be considered as a possible basis for future
currency systems only if an international agreement could impose upon each state
the obligation to maintain a stock of gold of a size corresponding to its
capacity. A gold-exchange standard with a redemption fund chiefly invested in
foreign bills in gold currencies is in the long run not a practicable general
solution of the problem.
The first German edition of this work, published
in 1912, concluded with an attempt at a glimpse into the future history of money
and credit. The important parts of its argument ran as follows:
"It has
gradually become recognized as a fundamental principle of monetary policy that
intervention must be avoided as far as possible. Fiduciary media are scarcely
different in nature from money; a supply of them affects the market in the same
way as a supply of money proper; variations in their quantity influence the
objective exchange value of money in just the same way as do variations in the
quantity of money proper. Hence, they should logically be subjected to the same
principles that have been established with regard to money proper; the same
attempts should be made in their case as well to eliminate as far as possible
human influence on the exchange ratio between money and other economic goods.
The possibility of causing temporary fluctuations in the exchange ratios between
goods of higher and of lower orders by the issue of fiduciary media, and the
pernicious consequences connected with a divergence between the natural and
money rates of interest, are circumstances leading to the same conclusion. Now
it is obvious that the only way of eliminating human influence on the credit
system is to suppress all further issue of fiduciary media. The basic conception
of Peel's Act ought to be restated and more completely implemented than it was
in the England of his time by including the issue of credit in the form of bank
balances within the legislative prohibition.
"At first it might appear as
if the execution of such radical measures would be bound to lead to a rise in
the objective exchange-value of money. But this is not necessarily the case. It
is not improbable that the production of gold and the increase in the issue of
bank credit are at present increasing considerably faster than the demand for
money and are consequently leading to a steady diminution of the objective
exchange value of money. And there can be no doubt that a similar result follows
from the apparently one-sided fixing of prices by sellers, the effect of which
in diminishing the value of money has already been examined in detail. The
complaints about the general increase in the cost of living, which will continue
for a long time yet, may serve as a confirmation of the correctness of this
assumption, which can be neither confirmed nor refuted statistically. Thus, a
restriction of the growth of the stock of money in the broader sense need not
unconditionally lead to a rise in the purchasing power of the monetary unit; it
is possible that it might have the effect of completely or partly counteracting
the fall in the value of money which might otherwise have occurred.
"It is
not entirely out of the question that the monetary and credit policy of the
future will attempt to check any further fall in the objective exchange value of
money. Large classes of the population—wage and salary earners—feel that the
continuous fall in the value of money is unjust. It is most certain that any
proposals that promise them any relief in this direction will receive their
warmest support. What these proposals will be like, and how far they will go,
are matters that it is difficult to foresee. In any case, economists are not
called upon to act as prophets."
Elsewhere in the course of the argument
it was claimed that it would be useless to try and improve the monetary system
at all in the way envisaged by the tabular standard. "We must abandon all
attempts to render the organization of the market even more perfect than it is
and content ourselves with what has been attained already; or rather, we must
strive to retain what has been attained already; and that is not such an easy
matter as it seems to appear to those who have been more concerned to improve
the apparatus of exchange than to note the dangers that implied its maintenance
at its present level of perfection.
"It would be a mistake to assume that
the modern organization of exchange is bound to continue to exist. It carries
within itself the germ of its own destruction; the development of the fiduciary
medium must necessarily lead to its breakdown. Once common principles for their
circulation-credit policy are agreed to by the different credit-issuing banks,
or once the multiplicity of credit-issuing banks is replaced by a single world
bank, there will no longer be any limit to the issue of fiduciary media. At
first, it will be possible to increase the issue of fiduciary media only until
the objective exchange value of money is depressed to the level determined by
the other possible uses of the monetary metal. But in the case of fiat money and
credit money there is no such limit, and even in the case of commodity money it
cannot prove impassable. For once the employment of money substitutes has
superseded the employment of money for actual employment in exchange
transactions mediated by money, and we are by no means very far from this state
of affairs, the moment the limit was passed the obligation to redeem the money
substitutes would be removed and so the transition to bank-credit money would
easily be completed. Then the only limit to the issue would be constituted by
the technical costs of the banking business. In any case, long before these
limits are reached, the consequences of the increase in the issue of fiduciary
media will make themselves felt acutely."
Since then we have experienced
the collapse, sudden enough, of the monetary systems in a whole series of
European states. The inflation of the war and postwar periods, exceeding
everything that could have been foreseen, has created an unexampled chaos. Now
we are on the way to mastering this chaos and to returning to a new organization
of the monetary system which will be all the better the less it differs from the
system in force before the war.
The organization of exchange that will
thus be achieved again will exhibit all the shortcomings that have continually
been referred to with emphasis throughout the present book. It will be a task
for the future to erect safeguards against the inflationary misuse of the
monetary system by the government and against the extension of the circulation
of fiduciary media by the banks.
Yet such safeguards alone will not
suffice to avert the dangers that menace the peaceful development of the
function of money and fiduciary media in facilitating exchange. Money is part of
the mechanism of the free market in a social order based on private property in
the means of production. Only where political forces are not antagonistic to
private property in the means of production is it possible to work out a policy
aiming at the greatest possible stability of the objective exchange value of
money.
[29] [The reader will remember that
this was written in 1924. H.E.B.]
[30] See Keynes, A Tract on
Monetary Reform (London, 1923), pp. 163 ff.
[31] See Kant, Werke, vol. 5,
Zum ewigen Frieden (Insel-Ausgabe), pp. 661 f.
[32] See Horn, Bankfreiheit
(Stuttgart, 1867), pp. 376 f.
[33] [It should be remembered that
this was written in 1924. H.E.B.]
[34] See pp. 143 f. above.
Fisher particularly refers to this independence (Stabilizing the Dollar
[New York, 1920], p. 90) and Anderson similarly affirms it, although in his
book The Value of Money he has most severely criticized Fisher's
version of the quantity theory of money. See Anderson, The Fallacy of "The
Stabilized Dollar" (New York, 1920), pp. 6 f.
[35] See pp. 187 ff.
and 201 ff. above.
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