[88]It must be admitted at the outset that the plan, if carried out with iron consistency for a considerable stretch of time, would achieve the result mainly had in view—the prevention of a long-continued and considerable rise in prices. It might not achieve that result as smoothly and evenly as its proposer expects; and the qualifications just stated—that it must be carried out unflinchingly for a long period—should be borne in mind. No one who holds to the doctrine that the general range of prices is determined by the relation between the quantity of commodities and the volume of the circulating medium, and that the volume of the circulating medium in the end depends, ceteris paribus, on the amount of coined money, can do otherwise than admit the logical soundness of the scheme. He who maintains that the rise in prices during the last fifteen years is due to the greater gold supply must admit that a restriction of the monetary supply of gold will check the rise. The plan proposed is in essence one for a regulation in the monetary supply of gold. Its effects must be the same in kind as those of a cessation of free coinage, with an apportioned limited coinage....
The question arises whether it would be feasible for one country alone to adopt the plan. It would be feasible, in the same sense that it would be feasible for all countries together to adopt it. One country alone, carrying it out with unflinching consistency, might secure the desired result, subject to the qualifications which have already been indicated. But that any one country would in fact adopt it alone seems to me in the highest degree improbable.
Consider for a moment the mode in which the scheme would work in detail if adopted by a single country. Though the immediate effect upon general prices within the country would be unpredictable, the effect upon certain kinds of prices would be certain, predictable, almost instantaneous. Exported commodities would feel the effect at once. Their prices are determined, to use the current expression, by the foreign market. It would be more accurate to say that their prices are determined by the total market, domestic as well as foreign. But it is clear that their prices must be the same (due allowance being made for transportation charges and the like) within the country as without. Now the immediate effect of a seigniorage would be, as Professor Fisher points out, a readjustment of the par of foreign exchange. The exporter would find the par of exchange lessened, and in terms of domestic money (compensated dollars) he would receive less than he got before. All commodities of export would fall in price at once, or fail to rise, to the extent of the seigniorage. Other commodities probably would be unaffected for the moment. In the long run, no doubt, these other commodities (we may call them domestic commodities) would also be affected. But, to repeat, the rapidity and extent of the change in general prices is impossible of prediction. The exporters, none the less, would feel an immediate and unmistakable effect. Beyond question they would be as hotly indignant with the plan as if an excise tax had been imposed on their commodities without any possibility of their raising the price of their products. Consider for a moment what would be the state of mind in our cotton-exporting South. Is it to be supposed that any set of legislators could resist the political pressure from the various exporting sections, and carry out the scheme unflinchingly? Can we imagine a Congressman telling his constituents that they need only wait a while, until all money incomes and all prices had adjusted themselves to the new conditions? that then nobody would be worse off or better off than before? To ask this sort of question is to answer it. The very proposal of the scheme in the halls of Congress would invite the hot opposition of the exporting sections and industries. Its immediate consequences for them would be seen quickly enough, and no promise of ultimate adjustment would lessen their hostility....
Professor Fisher has predicted that prices will rise further. He is disposed to believe that there will be not only a rise, but that there will be a considerable rise. I hesitate very greatly to enter the domain of prediction. I am inclined to believe that the rise in prices will not cease for the next decade; but whether it will be considerable or moderate or negligible in extent, I should not venture to say. Predictions concerning the output from the mines are to be taken with the greatest caution. We all recall the predictions which Suess made in 1892. The distinguished geologist believed that the prospects of an increased production of gold were of the slightest, and that the world must fall back on the use of both metals. How different the course of events has been from that which he predicted! There are those who believe that the output of gold, so far from continuing to increase, has reached, or is approaching, its maximum. For myself, I should not be surprised if there were a cessation in growth, and should certainly be surprised if there were not a relaxation in the rate of growth.
Further: it deserves to be borne in mind that the total supply of the precious metals is now so much greater than it was twenty years ago that the same annual increment will have much less effect on prices. This is the familiar consequence of the durability of the precious metals....
Finally, a circumstance should be borne in mind which bears not only upon the intrinsic desirability of a regulative plan, but also upon the attitude of the general public and the consequent political and industrial possibilities. Economists are familiar with the difference between the phrase which they use in describing the new conditions, and that which is current in popular discussion. The economists speak of the "rise in prices"; the general public speaks of the "high cost of living." The difference in phraseology is not due simply to variation of the point of view. It results from the fact that very different phenomena are had in mind by the two sets of persons. The economist is thinking and reasoning about the change which has been of special interest for him—the general rise in prices. The man on the street is thinking about the exceptional rise in the prices of one important set of commodities. Any one who will examine with care the index numbers of our Bureau of Labor will see what a marked rise, much beyond that of the general index number, has appeared in the prices of farm products, and especially in the prices of meat. That special advance has taken place within the last three or four years. It is precisely within this period that general attention has been turned to rising prices. What the public has had chiefly in mind has been the commodities of wide consumption. This, I believe, is the main cause of labor unrest....
Whatever be the particular causes that have led to the high prices of food, economists agree that these causes will operate irrespective of any compensated dollar plan. This would simply serve, at its best, to keep general prices where they are, leaving each particular group of commodities subject to its own particular set of causes. If the compensated dollar plan were to be adopted, and if the prices of food should continue to mount, there would be disappointment for the general public, but nothing to surprise the economist. And conversely, it is entirely possible that the rise in the cost of living, that is, the special rise in the prices of foodstuffs, will reach its end irrespective of any monetary change whatever. The general rise in prices and money incomes ... is not unwelcome to the great majority of people. Its incidental consequences are perceived and debated chiefly by the economists; such as the effects on the creditor class and the slowness of so-called fixed incomes to rise correspondingly. The general public is concerned chiefly with the conspicuous rise in the prices of foodstuffs, which is ascribable to causes very different from those that bring the general rise, and can be reached only by remedies very different....
FOOTNOTES:
[87] Adapted from Irving Fisher, Objections to a Compensated Dollar Answered, reprint from The American Economic Review, Vol. IV, No. 4, December, 1914.