Irving Fisher

“ A widow, or a trustee, or other long-time investor, would prefer to buy bonds which guaranteed a regular yearly purchasing power over subsistence, rather than those which merely promised a given sum of money of uncertain value. ”

“ Only those who fail to grasp the significance of what a scientific law really is can fail to see the significance and importance of the quantitative law of money. A scientific law is not a formulation of statistics or of history. ”

“ The prejudice of business men against the variability of, and especially against a rise of the rate of interest, probably stands in the way of prompt adjustment in that rate and helps to aggravate the far more harmful variability in the level of prices and its reciprocal, the purchasing power of money. The business man has, in fact, never regarded it as a part of the preparation for his work to understand the broad principles affecting money and interest. ”

“ Business men naturally and properly prefer a uniform system of accounts to two systems warring with each other. They would complain of such a double system of accounts in exactly the same way, and on exactly the same grounds, as they have always complained of the double system of accounts involved in international trade between gold and silver countries. A business man's profits constitute a narrow margin between receipts and expenses. ”

“ Now that we have adopted a gold standard, it is almost as difficult to substitute another as it would be to establish the Russian railway gauge or the duodecimal system of numeration. And the fact that the question of a monetary standard is today so much an international question makes it all the more difficult. ”

“ The theory of bimetallism contemplates the circulation side by side of two metals; that of polymetallism looks to the contemporaneous circulation of more than two. So long as several metals could be maintained in circulation together, the price level might fluctuate less than if one metal only were used. But all of the theoretical objections against bimetallism apply also against polymetallism. One metal would eventually drive all the others out of a country, or,—if polymetallism were international,—into the arts. ”

“ We shall first consider those which are more particularly applicable to secular price changes, and afterward consider those more particularly applicable to the price changes involved in credit cycles. The secular price changes are, as we have seen, chiefly due to changes in money and in trade. There has been for centuries, and promises to be for centuries to come, a race between money and trade. ”

“ Since bimetallism, as usually proposed, would greatly overvalue one of the two metals, the first great effect of its adoption might be not to steady prices but to disrupt them and upset the relation of debtor and creditor. While the great overvaluation of one metal is not a necessary feature of bimetallism, it has always been the feature which has made it politically popular. Thus, the bimetallism advocated in the United States during the last twenty or thirty years has been a bimetallism which would grossly overvalue silver. ”

“ Thus, the amount of gold obtainable for a paper dollar would vary inversely with its purchasing power per ounce as compared with commodities, the total purchasing power of the dollar being always the same. The fact that a paper dollar would always be redeemable in terms of purchasing power would theoretically keep the level of prices invariable. The supply of money in circulation would regulate itself automatically. Should money tend to increase fast enough to impair its purchasing power, the notes would be presented for redemption in gold ”

“ So long as the rank and file even of business men fail to realize that they are daily gambling in changes in the value of money, a fact of which they are blissfully unaware, they will exert no demand for preventing those changes. They are the parties whose interests are chiefly involved, and the first essential step in the reform process is that they shall be made to comprehend the benefits of a stable purchasing power.*53 Until this time arrives, any political proposals will be premature. ”

“ On the results of that race depends to some extent the fate of every business man. The commercial world has become more and more committed to the gold standard through a series of historical events having little if any connection with the fitness of that or any other metal to serve as a stable standard. So far as the question of monetary stability is concerned, it is not too much to say that we have hit upon the gold standard by accident just as we hit on the present railway gauge by the accident of previous custom as to road carriages ”

“ While the gold-exchange standard purports to be a system of redemption, or partial redemption in gold of the native coin, yet as a matter of fact, no gold is necessarily required in the country itself where the system is in operation. Thus, the Philippine government does not offer gold for silver pesos, even when gold is wanted for export to New York. ”

“ XIII.7 From a practical point of view the most serious problem revealed by this historical and statistical study is the problem of stability and dependability in the purchasing power of money. We find that this purchasing power is subject to wide variations in two ways: (1) It oscillates up and down with the transitional periods constituting credit cycles; and (2) it is likely to suffer secular variations in either direction according to the incidents of industrial changes. The first transition is connected with the banking system; the second depends largely upon the money metal. ”

“ He is compelled to pay, when prices have fallen, on the same basis in terms of money, and a much higher value in terms of goods, than when prices ranged higher. Hence failure often results, credit currency contracts still further because of the general distrust, and depression becomes more severe. With payment in terms of purchasing power, the situation would be altogether different. Falling prices would neither injure borrowers nor benefit lenders. ”

“ XIII.10 I shall not attempt to offer any immediate solution of this great world problem of finding a substitute for gold. Before a substitute for gold can be found, there must be much investigation and education of the public. ”

“ The official who regulates does so merely by buying and selling at specific prices fixed by others; and he must buy or sell at the pleasure of the public. He would have no more choice than a broker who is ordered to buy or sell at prices specified by his customers, or than his prototype, the present official in the Philippines, who now buys or sells foreign exchange. The danger of abuse or fraud in the Statistical Office, the work of which is based on published market prices and is necessarily done in the light of day, would seem negligible. ”

“ Every change in the weight of the gold dollar would be definitely measurable, and would have to be justified to the public. A reduction in weight not fully explained by a fall in prices would be a clear confession of depreciation. ”

“ No individual nation could inflate the currency without withdrawing from the international arrangement and isolating itself accordingly, while it is quite inconceivable that all the civilized nations of the world should voluntarily and simultaneously commit the folly of inflationistic legislation. ”

“ In time of war many plausible defenses can be given, notably the need of government supplies. The history of our own country in this respect is not reassuring. It is natural, therefore, that such schemes should have gotten in bad odor. Indeed, their odor has been so bad that many have impulsively concluded that the "quantity theory" which has been appealed to as making possible government manipulation of prices must be fundamentally unsound. ”

“ The seigniorage could never be reduced to less than zero. Money can never be materially cheaper than the metal composing it, since the slightest tendency in this direction will result in coin being exported or melted into bullion. In a period of rising prices, regulation would be easy; in a period of falling prices, regulation might be quite impossible.*41
XIII.24 Another plan is a convertible paper currency, the paper to be redeemable on demand,—not in any required weight or coin of gold, but in a required purchasing power thereof. ”

“ While we cannot expect our knowledge of the future ever to become so perfect as to reach this ideal, viz. compensations for every price fluctuation by corresponding adjustments in the rate of interest—nevertheless every increase in our knowledge carries us a little nearer that remote ideal. ”

“ XIII.34 The successful operation of the system is not only compatible with, but actually requires, an overvaluation of the metallic content of the silver currency. In fact, in the Philippines it was found necessary to reduce the silver pesos from 374 grains to 247 grains, to prevent their disappearance. Without a margin between the coin-value and the bullion-value of the peso, the power to regulate its circulation would exist only in one direction—contraction; with such a margin, the power exists to expand as well as to contract. ”

“ Edison, in a recent interview, predicts the further downfall of gold, through the discovery,—sure to be made sooner or later—of cheap methods of extracting immense quantities of gold from some Southern clays. He asks the pertinent question: "Is it not absurd to have, as our standard of values, a substance, the only real use of which is to gild picture frames and fill teeth?" ”

“ Normally, the price level is an effect and not a cause in the equation of exchange; but during such transition periods its fluctuations temporarily react on the other five factors, and especially on deposits. A rise will thus temporarily generate a further rise, while a fall temporarily operates in the opposite direction. ”

“ Such an overvaluation of silver would mean that silver would be imported from Mexico, India, China, and other silver countries, as well as mined in larger quantities and coined in the United States, thus depreciating the currency both greatly and suddenly. The proposal was well satirized by a cartoon in the "free silver" campaign of 1896 representing the United States as a ship sailing over Niagara Falls in order to reach smooth sailing below the falls,—if only it survive the shock of the fall! ”

“ At this cheap price the public will buy gold bullion of the government and surrender currency in return. Therefore the currency will be contracted and general prices will fall until no more gold is called for, or until there is declared a new official gold price. Should the next official gold price be set above the market price, the government would become a buyer of gold and would thus reissue some of the currency previously called in, or if need be, issue new currency. ”

“ As we have seen, the real evils of changing price levels do not lie in these changes per se, but in the fact that they usually take us unawares. It has been shown that to be forewarned is to be forearmed, and that a foreknown change in price levels might be so taken into account in the rate of interest as to neutralize its evils. ”

“ Statistics and history can be used to illustrate and verify laws only by making suitable allowances for changed conditions. It is by making such allowances that we have pursued our study of the last ten centuries in the rough and of the last decade and a half in detail. ”

“ The contraction of the currency is secured by selling foreign bills of exchange and locking up the currency received therefor, while the expansion of the currency is secured by releasing this currency to circulation, or, if necessary, by coining more currency. ”

“ In fact, it is evident that the method of maintaining par by selling exchange on other countries, and by exchanging currency directly for some commodity, such as gold, are at bottom much the same thing. ”

“ It is, of course, true that, in practice, velocities and trade seldom remain unchanged, just as it seldom happens that temperature remains unchanged. But the tendency represented in the quantity theory remains true, whatever happens to the other elements involved, just as the tendency represented in the density theory remains true whatever happens to temperature. ”

“ XIII.28 It is to be noted that such a custom, however general it might become, would not do away with the desirability of having an elastic currency to respond to seasonal variations of business. Seasonable readjustments of wages, for instance, and of many other prices, are difficult. Custom tends to establish standards holding through successive seasons. Since there is more business at some seasons than others, there will be an element of strain unless there is also an expansion of credit. ”

“ Fortunately, such increase in knowledge is now going on rapidly. The editors of trade journals to-day scan the economic horizon as weather predictors scan the physical horizon; and every indication of a change in the economic weather is noted and commented upon. ”

“ Yet it is probably in regard to the fundamental mechanism by which such forecasts are based that there is the greatest need of a wider diffusion of knowledge. The range of the ordinary business man's theoretical knowledge is extremely narrow. ”