Price stability

“ The independent Central Monetary Authority assures us of a new regime of price stability. Opening of the financial system to foreign banks should bring more foreign investment and expertise. We have substantially recovered from the balance-of-payments crisis in the mid-eighties. ”

“ Stability of market price is frequently a consideration of great importance. This quality should never be confused with the quality of safety. Safety means the assurance that the maker of the obligation will pay principal and [19] interest when due; stability of market price means that the investment shall not shrink in quoted value. These are very different things, tho frequently identified in people's minds. An investment may possess assured safety of principal and interest and yet suffer a violent decline in quoted price, owing to a change in general business and financial conditions. ”

“ The President thinks it's important to have stability, and stability can come in the form of lower prices; stability can come in the form of moderate prices. But the President thinks it's important that the nation doesn't go through giant price fluctuations as it has for the last two or three years. ”

“ Those who advocate the return to a gold standard do not always appreciate along what different lines our actual practice has been drifting. If we restore the gold standard, are we to return also to the pre-war conceptions of bank-rate, allowing the tides of gold to play what tricks they like with the internal price-level, and abandoning the attempt to moderate the disastrous influence of the credit-cycle on the stability of prices and employment? Or are we to continue and develop the experimental innovations of our present policy, ignoring the “bank ratio” ”

“ In order to prove the needlessness of standardization it must be shown that, in the future, we have reason to expect neither a rise nor a fall of prices but a stable price level—a condition of things which, so far as index numbers show us, has never yet existed, and which we feel safe in saying can never exist under our present monetary system. ”

“ All prices have been fixed, or have regulated themselves accordingly. Let us now suppose that there has been a sudden exportation of $10,000,000, and under such circumstances as to delay the rapid filling up of the gap thus created. In the long run, the demand of a country for a circulation may be satisfied just as well with $90,000,000 as with $100,000,000; only it is necessary in the first instance that the circulation should be accelerated or that the price of money should rise 10 per cent. ”

“ For to keep the price level within two or three per cent of par as is here done, is, for all practical purposes, to keep it perfectly stable. The only evils of instability which are really felt are the cumulative evils of a long sustained rise or fall. In particular, as we have seen, demonstrations of popular unrest, like populism during falling prices and I. W. W.ism during rising prices, develop only after the fall or rise has proceeded both long and far; and this could not happen with the price level closely tethered to par. ”

“ If trade unions seek to raise prices of labor while trusts raise prices of commodities, the general level of everything may rise or fall; but it can rise only by a general decrease in the quantities of commodities, labor, etc., sold, or by an increase of currency, or by an increase in velocities of circulation. If there is neither an increase nor decrease in volume of business, and if the quantity and velocity of circulation of money and its substitutes remain unchanged, the price level cannot change. ”

“ The truth is, most explanations of the general rise in prices are mere graspings at the first straw in sight that seems to offer any explanation. People unconsciously pick out some particular cases with which they happen to be familiar and drag them before the public. A middleman or a trust raises prices, a firm announces a rise because of the demands of labor unions, a crop failure raises the price of a cereal,—and immediately some one hails the event as a representative cause of the high cost of living. ”

“ In the first place, the rise of prices at home, unless it should happen by an extraordinary coincidence to be accompanied by a corresponding rise of prices in all the foreign countries with which we trade, must necessarily have the two-fold effect of putting a check to the export of our own commodities to the foreign markets, and of encouraging an increased importation from those foreign markets to our own. And in the second place, the decline in the rate of interest produces a proportionate rise in the price of public securities ”

“ The foregoing are but a few examples of the world's bitter experiences with price movements in the past,—experiences, we may add with confidence, often to be repeated in the future, unless mankind shall find a way to stabilize money units. ”

“ There was a fundamental economic cause of this rapid petering out of popular interest; namely, the cessation of the fall of prices complained of and the beginning of a rise.
It appears, then, that public interest in, and understanding of, money usually gathers strength as a price movement proceeds, reaches a maximum at the end of the swing, and remains intense and excited only a few years thereafter. ”

“ IV.13 The first cause of the unhealthy increase in trade lies in the fact that prices, like interest, lag behind their full adjustment and have to be pushed up, so to speak, by increased purchases. This is especially true in cases where the original impetus came from an increase in money. The surplus money is first expended at nearly the old price level, but its continued expenditure gradually raises prices. In the meantime the volume of purchases will be somewhat greater than it would have been had prices risen more promptly. ”

“ Thus currency expands when prices are low and contracts when prices are high, and such expansion and contraction tend to lower the high prices and raise the low prices, thus working toward mutual equality. We see then that, so far from its being true that high prices cause increased supply of money, it is true that money avoids the place and time of high prices and seeks the place and time of low prices, thereby mitigating the inequality of price levels. ”

“ But the number of those who have as yet studied the plan or even considered its basic idea is very limited. Before any control of the price level can be actually undertaken, a larger public, especially in the business world, must learn to realize its necessity. ”

“ However, the general flexibility of the modern economic organization, with its mobility of capital and labour, free competition, power of choice, inventive genius and intellectual resources of entrepreneurs and merchants, takes care of the normal and temporary fluctuations of prices. But when a change in the price-level is general and persistent in one direction the case is otherwise. Arrangements based on the expectation that the price movement is only temporary, and that there will be a return to the former normal position, constantly come to naught. ”

“ Implied in the last would be the emancipation of our price level from its entangling alliance with foreign price levels. The price level of each country now depends on that of those other countries which have the same monetary standard. The "High Cost of Living," one of the manifestations of inflation, communicates itself from one country to another having the same standard and no one country can avoid the common contagion so long as it has the common unstable unit. ”

“ No one who considers the plain facts of our situation believes that commodity prices, especially agricultural prices, are high enough yet.
Some people are putting the cart before the horse. They want a permanent revaluation of the dollar first. It is the Government's policy to restore the price level first. I would not know, and no one else could tell, just what the permanent valuation of the dollar will be. ”

“ The rupture of the fixed par of exchange, having destroyed a common standard of value between gold and silver countries, removed the limits on the exchange fluctuations between such countries. As a result of such variations in the value of the standard measure, trade advanced by “rushes and pauses,” and speculation became feverishly active.193
That progress of trade depends on stability is a truism which seldom comes home until it is denied in fact. It is difficult to appreciate its importance to healthy enterprise when government is stable, credit secure, and conditions are uniform. ”

“ On the other hand, if once we deliberately choose a price level after reference to an expert and impartial commission and then keep that level unchanged we shall give it a right to exist. The verdict will soon be generally accepted. Any unadjusted factors will gradually make the needed changes. Business will be rid of the handicap of uncertainty as to what the dollar is. In particular, wages will rise to recover the purchasing power lost in the losing race with the high cost of living. ”

“ If the latter course is to be adopted so that the old relations between the various national price levels are not to be resumed and the old pars of exchange not to be reestablished, the stabilization plan as proposed in this book would afford the appropriate method for maintaining a new set of levels. For we can, by reducing the weight of European gold coins relatively to ours, enable each European nation to adopt its own price level at any desired point. If, on the other hand, we rehabilitate the old units, European price levels must go through a painful fall relatively to ours. ”

“ It is very hard to control any individual price in the face of the economic forces of supply and demand, but it is very easy to control the general scale of prices; for the general scale of prices depends, among other things, on the weight of the gold dollar and the weight of the gold dollar is whatever we choose to make it. ”

“ VI.8 But, although international and interlocal trade will never bring about exact uniformity of price levels, it will, to the extent that it exists, produce an adjustment of these levels toward uniformity by regulating in the manner already described the distribution of money. If one commodity enters into international trade, it alone will suffice, though slowly, to act as a regulator of money distribution; for in return for that commodity, money may flow and, as the price level rises or falls, the quantity of that commodity sold may be correspondingly adjusted. ”

“ If the demand for dollars increases faster than the number of dollars—as it did after 1800—the price of each dollar will rise and prices generally will fall. The relative value of the dollar may be changed by natural causes or by legislation. An increased supply—the demand remaining the same—or a decreased demand—the supply remaining the same—will reduce the exchangeable value of each dollar. Natural causes may act on both supply and demand; as, for instance, by increasing the product from the mines or by increasing the amount consumed in the arts. ”

“ So with the price level, while the strong-arm method is not only costly and vexatious but futile, the simple regulation of our instrument for measuring prices, the dollar, will accomplish the same result not only without cost and effort but, what is more to the point, with success. ”

“ The greatest beneficiaries and the greatest victims of great price movements are speculators. As long as uncertainty exists speculation will, and should, exist and the wise speculator in one way and another relieves the rest of society of some of its burden of uncertainty, while charging for this service a very high price. But every reduction of the hazards in business on which speculation feeds marks a step forward in civilization. Stabilizing the dollar would mark such a step forward, though of course it would by no means take away all opportunities to make money by taking chances. ”

“ It is inconceivable that any sinister influence, in order to help the debtor or creditor, could manipulate a sufficient number of commodities to affect appreciably the index number. Even if some one could "corner" a market and double the price of one commodity this would not raise the general price level one per cent. To accomplish even such a feat is out of the question, while to corner or control a hundred commodities is unthinkable. ”

“ Supposing the amount of trade and mode of circulation to remain stationary, if the quantity of money be increased, its value will fall, and the price of other commodities will proportionally rise, as the latter will then exchange against a greater amount of money; if, on the other hand, the quantity of money be reduced, its value will be raised, and prices in a corresponding degree diminished, as commodities will then have to be exchanged for a less amount of money. ”

“ It is well known that certain prices are sensitive and others insensitive to the various market influences. For instance, the wholesale price of silver is so responsive to every market wind which blows that rarely are the quotations on two successive days alike; while, on the other hand, street railway fares have only begun to budge from the traditional five cents after having stood stock still through more than two decades of upheaval of prices of most other goods and services. ”

“ 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. ”

“ There is not a line to be found in these cases under the Act to show the slightest recognition of the definitely established truth, that high prices always have been, and always will be, the forerunner of low prices; that freemen in a free market, with its inducements to gain the higher rewards, strive, invent and compete, so that every temporary rise in price insures not merely a return to the old price, but to a lower one, and finally to the fair and equitable exchange of all commodities, measured by the labor relatively involved. ”