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• Foreword
• On the Manipulation of Money and Credit Three Treatises On Trade-cycle Theory
• Stabilization of the Monetary Unit— From the Viewpoint of Theory
• Introduction *
• I: The Outcome of Inflation
• II: The Emancipation of Monetary Value From the Influence of Government
• III: The Return to Gold
• IV: The Money Relation
• V: Comments On the “balance of Payments” Doctrine
• VI: The Inflationist Argument
• VII: The New Monetary System
• VIII: The Ideological Meaning of Reform
• Appendix: Balance of Payments and Foreign Exchange Rates *
• Monetary Stabilization and Cyclical Policy
• Preface *
• Part I: Stabilization of the Purchasing Power of the Monetary Unit
• I: The Problem
• II: The Gold Standard
• III: The “manipulation” of the Gold Standard
• IV: “measuring” Changes In the Purchasing Power of the Monetary Unit
• V: Fisher’s Stabilization Plan
• VI: Goods-induced and Cash-induced Changes In the Purchasing Power of the Monetary Unit
• VII: The Goal of Monetary Policy
• Part II: Cyclical Policy to Eliminate Economic Fluctuations
• I: Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle
• II: Circulation Credit Theory
• III: The Reappearance of Cycles
• IV: The Crisis Policy of the Currency School
• V: Modern Cyclical Policy
• VI: Control of the Money Market
• VII: Business Forecasting For Cyclical Policy and the Businessman
• VIII: The Aims and Method of Cyclical Policy
• The Causes of the Economic Crisis an Address
• I: The Nature and Role of the Market
• II: Cyclical Changes In Business Conditions
• III: The Present Crisis
• A.: Unemployment
• B.: Price Declines and Price Supports
• C.: Tax Policy
• D.: Gold Production
• IV: Is There a Way Out?
• The Current Status of Business Cycle Research and Its Prospects For the Immediate Future
• 1.: The Acceptance of the Circulation Credit Theory of Business Cycles *
• 2.: The Popularity of Low Interest Rates
• 3.: The Popularity of Labor Union Policy
• 4.: The Effect of Lower Than Unhampered Market Interest Rates
• 5.: The Questionable Fear of Declining Prices
• The Trade Cycle and Credit Expansion: the Economic Consequences of Cheap Money
• 1.: Introductory Remarks *
• 2.: The Unpopularity of Interest
• 3.: The Two Classes of Credit
• 4.: The Function of Prices, Wage Rates and Interest Rates
• 5.: The Effects of Politically Lowered Interest Rates
• 6.: The Inevitable Ending

VI

Goods-induced and Cash-induced Changes in the Purchasing Power of the Monetary Unit

1.

The Inherent Instability of Market Ratios

Changes in the exchange ratios between money and the various other commodities may originate either from the money side or from the commodity side of the transaction. Stabilization policy does not aim only at eliminating changes arising on the side of money. It also seeks to prevent all future price changes, even if this is not always clearly expressed and may sometimes be disputed.

It is not necessary for our purposes to go any further into the market phenomena which an increase or decrease in commodities must set in motion if the quantity of money remains unchanged.1 It is sufficient to point out that, in addition to changes in the exchange ratios among individual commodities, shifts would also appear in the exchange ratios between money and the majority of the other commodities in the market. A decrease in the quantity of other commodities would weaken the purchasing power of the monetary unit. An increase would enhance it. It should be noted, however, that the social adjustments which must result from these changes in the quantity of other commodities will lead to a reorganization in the demand for money and hence cash holdings. These shifts can occur in such a way as to counteract the immediate effect of the change in the quantity of goods on the purchasing power of the monetary unit. Still, for the time being we may ignore this situation.

The goal of all stabilization proposals, as we have seen, is to maintain unchanged the original content of future monetary obligations. Creditors and debtors should neither gain nor lose in purchasing power. This is assumed to be “just.” Of course, what is “just” or “unjust” cannot be scientifically determined. That is a question of ultimate purpose and ethical judgment. It is not a question of fact.

It is impossible to know just why the advocates of purchasing power stabilization see as “just” only the maintenance of an unchanged purchasing power for future monetary obligations. However, it is easy to understand that they do not want to permit either debtor or creditor to gain or lose. They want contractual liabilities to continue in force as little altered as possible in the midst of the constantly changing world economy. They want to transplant contractual liabilities out of the flow of events, so to speak, and into a timeless existence.

Now let us see what this means. Imagine that all production has become more fruitful. Goods flow more abundantly than ever before. Where only one unit was available for consumption before, there are now two. Since the quantity of money has not been increased, the purchasing power of the monetary unit has risen and with one monetary unit it is possible to buy, let us say, one and a half times as much merchandise as before. Whether this actually means, if no “stabilization policy” is attempted, that the debtor now has a disadvantage and the creditor an advantage is not immediately clear.

If you look at the situation from the viewpoint of the prices of the factors of production, it is easy to see why this is the case. For the debtor could use the borrowed sum to buy at lower prices factors of production whose output has not gone up; or if their output has gone up, their prices have not risen correspondingly. It might now be possible to buy for less money factors of production with a productive capacity comparable to that of the factors of production one could have bought with the borrowed money at the time of the loan. There is no point in exploring the uncertainties of theories which do not take into consideration the influence that ensuing changes exert on entrepreneurial profit, interest and rent.

However, if we consider changes in real income due to increased production, it becomes evident that the situation may be viewed very differently from the way it appears to those who favor “stabilization.” If the creditor gets back the same nominal sum, he can obviously buy more goods. Still, his economic situation is not improved as a result. He is not benefited relative to the general increase of real income which has taken place. If the multiple commodity standard were to reduce in part the nominal debt, his economic situation would be worsened. He would be deprived of something that, in his view, in all fairness belonged to him. Under a multiple commodity standard, interest payable over time, life annuities, subsistence allowances, pensions, and the like would be increased or decreased according to the index number. Thus, these considerations cannot be summarily dismissed as irrelevant from the viewpoint of consumers.

We find, on the one hand, that neither the multiple commodity standard nor Irving Fisher’s specific proposal is capable of eliminating the economic concomitants of changes in the value of the monetary unit due to the unequal timing in appearance and the irregularity in size of price changes. On the other hand, we see that these proposals seek to eliminate the repercussions on the content of debt agreements, circumstances permitting, in such a way as to cause definite shifts in wealth and income relations, shifts which appear obviously “unjust,” at least to those on whom their burden falls. The “justice” of these proposed reforms, therefore, is somewhat more doubtful than their advocates are inclined to assume.

2.

The Misplaced Partiality to Debtors

It is certainly regrettable that this worthy goal cannot be attained, at least not by this particular route. These and similar efforts are usually acknowledged with sympathy by many who recognize their fallacy and their unworkability. This sympathy is based ultimately on the intellectual and physical inclination of men to be both lazy and resistant to change at the same time. Surely everyone wants to see his situation improved with respect to his supply of goods and the satisfaction of his wants. Surely everyone hopes for changes which would make him richer. Many circumstances make it appear that the old and the traditional, being familiar, are preferable to the new. Such circumstances would include distrust of the individual’s own powers and abilities, aversion to being forced to adapt in thought and action to new situations and, finally, the knowledge that one is no longer able, in advanced years of life, to meet his obligations with the vitality of youth.

Certainly, something new is welcomed and gratefully accepted, if the something new is beneficial to the individual’s welfare. However, any change which brings disadvantages or merely appears to bring them, whether or not the change is to blame, is considered “unjust.” Those favored by the new state of affairs through no special merit on their part quietly accept the increased prosperity as a matter of course and even as something already long due. Those hurt by the change, however, complain vociferously. From such observations, there developed the concepts of a “just price” and a “just wage.” Whoever fails to keep up with the times and is unable to comply with its demands becomes a eulogist of the past and an advocate of the status quo. However, the ideal of stability, of the stationary economy, is directly opposed to that of continual progress.

For some time popular opinion has been in sympathy with the debtor. The picture of the rich creditor, demanding payment from the poor debtor, and the vindictive teachings of moralists dominate popular thinking on indebtedness. A byproduct of this is to be found in the contrast, made by the contemporaries of the Classical School and their followers, between the “idle rich” and the “industrious poor.” However, with the development of bonds and savings deposits, and with the decline of small-scale enterprise and the rise of big business, a reversal of the former situation took place. It then became possible for the masses, with their increasing prosperity, to become creditors. The “rich man” is no longer the typical creditor, nor the “poor man” the typical debtor. In many cases, perhaps even in the majority of cases, the relationship is completely reversed. Today, except in the lands of farmers and small property owners, the debtor viewpoint is no longer that of the masses. Consequently it is also no longer the view of the political demagogues.2 Once upon a time inflation may have found its strongest support among the masses, who were burdened with debts. But the situation is now very different. A policy of monetary restriction would not be unwelcome among the masses today, for they would hope to reap a sure gain from it as creditors. They would expect the decline in their wages and salaries to lag behind, or at any rate not to exceed, the drop in commodity prices.

It is understandable, therefore, that proposals for the creation of a “stable value” standard of deferred payments, almost completely forgotten in the years when commodity prices were declining, have been revived again in the twentieth century. Proposals of this kind are always primarily intended for the prevention of losses to creditors, hardly ever to safeguard jeopardized debtor interests. They cropped up in England when she was the great world banker. They turned up again in the United States at the moment when she started to become a creditor nation instead of a land of debtors, and they became quite popular there when America became the great world creditor.

Many signs seem to indicate that the period of monetary depreciation is coming to an end. Should this actually be the case, then the appeal which the idea of a manipulated standard now enjoys among creditor nations also would abate.

[1. ]Whether this is considered a change of purchasing power from the money side or from the commodity side is purely a matter of terminology.

[2. ][Since this was written almost every government has become the largest borrower in its respective country. Thus today’s government officials are inclined to the debtor’s viewpoint, favoring low interest rates to keep down government interest payments.—Ed.]