Cornell University Library HG 297.F53 A more stable gold standard 3 1924 013 979 673 No. 88. DECEMBER, 1912 Vol. XXII THE ECONOMIC B. JOURNAL The Quarterly Journal of Z\iz IRoi^al jecononilc Societi? Edited by J. M. KEYNES Consultative Editorial Board Professor F. Y. EDGEWORTH (Chairman) Professor W. J. ASHLEY Professor EDWIN CANNAN [ Professor S. J. CHAPMAN ^- \ V. iSfwis: Reprinted from " The Economic, Journal " December, 1912 ?^:.- ILondon MACMILLAN AND CQ., Limited NEW YORK : THE MACMILLAN COMPANY Price Five Shillings net All communications respecting Advertisements to be sent, to Messrs. Macmillan & Co., Ltd., St. Martin's Street, London, W.C. Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013979673 A MOEE STABLE GOLD STANDAED. In a recent address on the high cost of living, before the Inter- national Congress of Chambers of Commerce, I briefly described a proposal for rendering the gold standard more " stable " by vir- tually increasing the weight of the gold dollar or sovereign, so as to compensate for losses of purchasing power. I mentioned also the fact that Governor Woodrow Wilson, now President-elect of the United States, had at one time suggested essentially the same idea. Partly because so much interest has been manifested in the proposal, both among academic economists and business men, and partly because, for lack of a fuller statement, the proposal has been so often misunderstood, I am using such space as is available in this issue of the Journal to formulate in some detail the main features of the proposal. A much longer and fuller explanation, with discussions of difficulties and objections, will be published in the February issue of the Quarterly Journal of Economics. The reader is also referred, for a general statement of the plan in relation to other suggested remedies for rising prices, to my book, The Purchasing Power of Money, in the closing chapter of which I discuss the question, "Is the Price Level Controllable?" Eeaders of this Journal do not need to be told that the gold standard, as it exists at present, is unstable. The sovereign, for instance, is not a constant unit of purchasing power. Anyone who will read the literature of the last decade on rising prices, or the antecedent literature in the 'eighties and 'nineties on falling prices, will realise the shallowness of the notion that "gold is stable." I commend especially the reading of Sir David Barbour's recent book. The Standard of Value, which contains an analytical study, both of the long period of falling prices, 1873-1896, and of the present period of rising prices, beginning in 1897. As he has so well shown, it would help greatly if, instead of using the phrase "a rise in general prices," we should ordinarily use the 2 THE ECONOMIC JOUHNAL [dEC. equivalent phrase, "a fall in the purchasing power of the sovereign." In all business relations involving time, in vphich money pay- ments are fixed, vfhether by contract, by lav7, or simply by custom, any great change in the purchasing power of the monetary unit causes a transfer of wealth, enormous though unrealised, from one set of owners to another. Those who feel the pinch naturally complain, though quite unconscious of the cause of their difficulties. We therefore heard complaints in the 'eighties and 'nineties of "depression in trade," and are hearing at present complaints of the "high cost of living." It is not pretended that to stabilise the purchasing power of the sovereign would banish all complaint, much less serve as a substitute for progressive economies in industry, finance, and commerce. A stable monetary unit for measuring general pur- chasing power will not be a substitute for the fertility of the soil any more than a stable yardstick for measuring cloth is a sub- stitute for an efficient method of weaving cloth. Nevertheless, few reforms would be more far-reaching than standardising the monetary yardstick. The experience of the last thirty years, when rightly interpreted, demonstrates the imperative need of standardising the sovereign, the dollar, the franc, the mark, &c., as units of purchasing power. Bach is now fixed in weight but variable in purchasing power. It would be a great advantage if they could be fixed in purchasing power even if variable in weight. Of all commercial units the monetary unit alone, although the most important, has thus far been left unstandardised. The following is believed to be a practical method of standardisation. Whether or not it is ever adopted — and I realise the enormous inertia to be overcome— its discussion which has been begun should at least serve the purpose of demonstrating the need— not yet generally felt— of monetary standardisation. It may also lead to some better method of attaining this end. The following plan has at least a merit lacking in all former plans for regulating the purchasing power of money, that its operation would be as automatic as the operation of the mint. It would require no manipulation of the currency at the discretion of Government officials. The proposal is to increase, and to vary periodically, the weight of the bullion basis of the dollar— or the sovereign— (according to the indications of an index number of prices) in such a manner as to compensate for any future losses in the purchasing power of each grain of gold by increasing the number of grains which 1912] A MORE STABLE GOLD STANDARD 3 go to make the dollar — or the sovereign. It may be called a plan for "a compensated sovereign," a plan practically to convert the gold standard into the multiple standard. But how could this be possible? (1) How could the weight of the sovereign be increased without literally having gold sovereigns of many different weights in circulation or a recoinage every year or month, and (2) how could we know how much to increase the weight of the dollar from time to time? The answer to the first question — how to virtually increase the weight of the gold dollar without literally doing so — is easy as soon as we recognise that the ultimate basis of the sovereign is the gold bullion with which it is interconvertible. A sovereign of 123'27 grains must now always have the same value as 123'27 grains of gold bullion, 11/12 fine. This quantum of bullion may be called the "virtual sovereign," or the "redemption bullion." To be exact, by redemption-bullion is meant the amount of gold bullion which the owner of a gold dollar or sovereign can get for it if he wishes to redeem it in bullion. Now it is evidently unnecessary that the weight of the redemp- tion-bullion should be the same as the weight of the sovereign, just as it is unnecessary that the silver shilling or rupee shall be worth, as silver, the gold in which it may be redeemed. It is essential, however, that redemption-bullion shall be available. It is the possibility of turning gold sovereigns or gold certificates into commercial bullion which is the essence of the gold standard. Without some sort of convertibility into bullion, we should not have a gold standard but only fiat money. The present proposal is to increase and vary, from time to time, the weight of the redemption-bullion without necessarily disturbing the weight of the coined sovereign or dollar. Suppose, for instance, that the redemption-bullion had been gradually in- creased since 1896 until to-day it were 25 per cent, heavier, or 154'09 grains, while the actual gold sovereign were still 123'27 grains. This means that the Government would now be redeem- ing on demand each gold sovereign in 154'09 grains of gold bullion, just as the Indian Government now redeems the rupee at a fixed ratio to gold bullion.^ Gold sovereigns would, in such a system, be mere tokens — like silver shillings or rupees — entitling the holder to gold bullion. As to convertibility in the other direction, the Government ' Of course, all gold sovereigns indiscriminately would be so redeemable whether old or new, i.e., whether originally minted for 123-27 grains of bullion, or later for a larger amount. 4 THE ECONOMIC JODENAL [dEC. mint would stand ready to give back a gold sovereign for each 15409 grains of bullion plus a slight coinage fee 6r "brassage" of, say, 1 per cent. This brassage charge would serve, as after- wards explained, to prevent loss to the Government by speculation. If it were 1 per cent, it would be 1"54 grains to be added to the 154-09, making 155'63 grains in all as the bullion required at the mint to secure a gold dollar. This may be called the "mint- bullion." Thus there would be two quanta of gold bullion , slightly differ- ing from each other— 154-09 grains and 155-63 grains— the former, or "redemption-bullion," being the quantum which the Govern- ment would give for a gold sovereign, and the latter, or "mint- bullion," being the quantum it would take for a gold sovereign. The difference is a sort of Government commission. The differ- ence betwen the mint-bullion (155-63 grains) and the bullion in the gold sovereign (128-27 grains) is 32-36 grains, and would be retained by the Government as a part of its bullion reserve for redeeming gold coin. Of this 32-36 only 1-54 is brassage; the remainder, 30-82 grains, may, for want of a better term, be called "seigniorage." That is, the so-called seigniorage is the difference in weight between the literal sovereign and the virtual sovereign — the bullion in which it could be redeemed. The plan might there- fore be roughly described as one to restore the ancient custom of seigniorage.* We may also express these operations in commercial language as follows : When the Government redeems gold sovereigns in gold bullion it is selling bullion ; when it mints gold sovereigns from bullion it is buying bullion. At present the price of gold 11/12 fine is £3 17s. lOU. an ounce (or at the Bank £3 17s. 9d., the difference of IJd. in the £ being compensation for delay in minting), and never varies. This is, to all intents and purposes, the redemption-price at which the Government or the Bank sells gold bars, as well as the "mint-price " at which it buys them. It creates the market price of gold. Under the plan proposed, when the redemption-bullion was 154-09 grains (or 5/4 of the weight of the sovereign), the redemption price would be 4/5 of the present 123*27 price, i.e., jg^^^ of £S 17s. 10^., or £S 2s. SJd. per ounce, while 103.07 the mmt-pnce would be 555:53 of £3 17s. lOJd., or £S Is. Sd. per ' This "■ seigniorage," however, would bo peculiar in that it would be created not by reducing the coin, but by increasing the bullion behind it ; would not be fixed arbitrarily, but would be automatically adjusted (as explained later) ; and would not belong to the Governniout for its own profit, but would be a trust fund for redemption purposes only. 1912] A MOEE STABLE GOLD STANDAED 5 ounce. Thus the Government would stand ready to sell gold at £S 2s. S^d., and to buy it at £3 Is. 8d., the difference, 7Jd. per ounce, being the "brassage" or Government commission. The two operations, selling (or redemption) and buying (or minting) , would keep the value of the sovereign not less than the redemption-bullion of 154'09 grains, and not more than the mint- bullion of 155'63. In other words, the official prices for selling and buying gold would fix its market price between the limits of £S 2s. 3-Jd. and £3 Is. 8d. per ounce. Of course the " seigniorage " must never be negative. If, for instance, the mint-bullion were 61'63 grains, half as much as in the sovereign, every sovereign could be melted and the bullion so obtained taken to the mint and exchanged for two sovereigns, these melted and converted into four, and so on in an "endless chain." An obvious proviso in the proposed plan would therefore be that the redemption-bullion must never be lighter than the sovereign itself. The present indica- tions ^ are that gold will continue to depreciate so that the redemp- tion-bullion , in order to maintain the same purchasing power as the present sovereign, would need in general to increase in weight in the future. If, however, it should ever happen that the redemption-bullion should shrink in weight to 123'27 grains, then the proviso that it should never fall below this figure would come into operation. So long as it remained at 123'27 grains it would cease to be adjustable, and to maintain a constant purchasing power. As at present it would have a constant weight, but varying purchasing power. We are now ready to explain why two prices — the mint-price and the redemption-price — of gold are necessary. If the Govern- ment were to both buy and sell at the same price, every expected shift of that price would lead to speculation embarrassing to the Government. For instance, if the mint-price were to-day, say, £3 per ounce, and if it were known or expected that to-morrow the price would be raised to ^G3 Os. 6d., speculators would to-day buy of the Government gold bullion and sell it back to-morrow at an advance of 6d. per ounce. The opposite speculation would accompany a drop in the official price. If, however, the Govern- ment protects itself by charging a slightly higher price than it pays, it is evident that no such speculation would ensue if a provision be made that this pair of prices shall not be shifted by more than the margin between them. Let us suppose that the two prices differ by a " brassage " ' See the writer's "Will the Present Upward Trend of World Prices Continue?" AtJierican Economic Review, September, 1912. 6 THE ECONOMIC JOURNAL [DEC. margin of 1 per cent., and that the pair of prices are to be adjusted quarterly. This permits a maximum movement up or down of 4 per cent, per annum, which, though it may not be always sufficient to maintain absolutely constant the purchasing power of the monetary unit, will always tend in that direction. The important question remains : How can we know what changes to make from time to time in the weight of the redemp- tion-bullion or "virtual sovereign"? The answer is : By index numbers of prices, such as those of Sauerbeck, The Economist, the British Board of Trade, the United States Bureau of Labour, or the Canadian Department of Labour. Almost any one of these would afford a good guide, and they all agree fairly well. In my book on The Purchasing Power of Money I have discussed in detail the relative merits of various forms of index numbers. When once a system of index numbers is decided upon, their numerical calculation becomes a mere matter of clerical arith- metic. If the official index number should at any time show the price level to deviate by, say, J per cent, above the base level from which the system started, it would become mandatory to correct the redemption-bullion by increasing it J per cent, (i.e., to decrease the bullion prices by J per cent.), and similarly for any other deviation from par, subject, of course, to the restrictions above imposed. Thus, if the price level deviated by 3 per cent, below the original par, the redemption-bullion could be corrected only to the extent of 1 per cent, in any one quarter of the yea,r ; but the full correction could be reached in three quarters unless the deviation were aggravated in the meantime ; and in that case the correction would follow steadily on the heels of the deviation. The plan then, in brief, is this : — (1) To institute an official index number of prices, selecting some initial year, such as 1915, as the base of reference, the price level for that year being called 100 per cent. (2) The Government to readjust the official weight of the "redemption-bullion," or the "virtual dollar (or sovereign)" (the quantum of bullion in which it will redeem the gold dollar or sovereign) at regular intervals, say quarterly, according to the finding of the inHex number. If at any time the index number deviates from par, the redemption-bullion is to be corrected in proportion to the deviation, provided, however : — (a) That no one shift in the weight of the redemption-bullion shall exceed the "brassage" (say 1 per cent.) or such stated limits (e.g., 1 per cent, per quarter) as will safe- guard the Government from injurious speculations, and 1912] A MOEE STABLE GOLD STANDARD (b) That the redemption-bullion shall in no case be of less weight than the sovereign. (3) The Government to be responsible at all times for redeem- ing on demand gold coins in redemption-bullion and for minting bullion at the same rate (except for the "brassage" of, say, 1 per cent.), in other words, the Government must always be ready to sell gold bullion at the redemption-price, and to buy it at the mint-price (the redemption-price less the "brassage "). The following diagram shows approximately what would have been the effect of the system on the price level if it had been adopted in the United States in 1907. There are reasons why, in practice, the price level would have followed an even more uniform course. 1897 '98 '99 v'OO '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 1912 160% 1897 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 1912 The proposal is in mechanism almost identical with the gold exchange device — the innovation introduced by Great Britain to maintain the Indian currency at par with gold. No space remains in which to answer possible objections. It must suffice to refer the reader to the fuller statement appearing next year, to which allusion is made at the beginning of this article. Irving Fisher RICHARD CLAY & SONS, f.T'JITED. BRUNSWICK STREET, STAMFORD STREET, S.E., AND BVXOAY, SUFFOLK. THE ROYAL ECONOMIC SOCIETY. Correspon&euts Prof. 0. V. McLLBB for Bombay (Elphinstone College, Bombay). Mr. A. DucKWOBTH ,, Nkw South Wales (Australian Mutual Provident Society, Sydney). Prof.E.PHiLippovicH ,, Austria (University of Vienna). Prof. E. Mahaim „ Belgium (University of Li^ge). Prof. H. Westeeoaard,, Denmark (University of Copenhagen). Prof. Charles Gidb ,, . France (University of Paris). Prof. Gustav Cohn ,, Germany (University of Gcittingen). Prof. A. AKDE^ADks for Greece (University of Athens). Prof. LE Baron d'Aulnis de Bourouill for Holland Prof. Louis Lang Prof. A. 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