On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory

V. Fisher’s Stabilization Plan

V Fisher’s Stabilization Plan 1. Political Problem The superiority of the gold standard consists in the fact that the value of gold develops independent of political actions. It is clear that its value is not “stable.” There is not, and never can be, any such thing as stability of value. If, under a “manipulated” monetary standard, it was government’s task to influence the value of money, the question of how this influence was to be exercised would soon become the main issue among political and economic interests. Government would be asked to influence the purchasing power of money so that certain politically powerful groups would be favored by its intervention, at the expense of the rest of the population. Intense political battles would rage over the direction and scope of the edicts affecting monetary policy. At times, steps would be taken in one direction, and at other times in other directions—in response to the momentary balance of political power. The steady, progressive development of the economy would continually experience disturbances from the side of money. The result of the manipulation would be to provide us with a monetary system which would certainly not be any more stable than the gold standard. If the decision were made to alter the purchasing power of money so that the index number always remained unchanged, the situation would not be any different. We have seen that there are many possible ways, not just one single way, to determine the index number. No single one of these methods can be considered the only correct one. Moreover, each leads to a different conclusion. Each political party would advocate the index method which promised results consistent with its political aims at the time. Since it is not scientifically possible to find one of the many methods objectively right and to reject all oth- 80 • monetary stabilization and cyclical policy ers as false, no judge could decide impartially among groups disputing the correct method of calculation. In addition, however, there is still one more very important consideration . The early proponents of the Quantity Theory believed that changes in the purchasing power of the monetary unit caused by a change in the quantity of money were exactly inversely proportional to one another. According to this Theory, a doubling of the quantity of money would cut the monetary unit’s purchasing power in half. It is to the credit of the more recently developed monetary theory that this version of the Quantity Theory has been proved untenable. An increase in the quantity of money must, to be sure, lead ceteris paribus to a decline in the purchasing power of the monetary unit. Still the extent of this decrease in no way corresponds to the extent of the increase in the quantity of money. No fixed quantitative relationship can be established between the changes in the quantity of money and those of the unit’s purchasing power.1 Hence, every manipulation of the monetary standard will lead to serious difficulties. Political controversies would arise not only over the “need” for a measure, but also over the degree of inflation or restriction, even after agreement had been reached on the purpose the measure was supposed to serve. All this is sufficient to explain why proposals for establishing a manipulated standard have not been popular. It also explains—even if one disregards the way finance ministers have abused their authority—why credit money (commonly known as “paper money”) is considered “bad” money. Credit money is considered “bad money” precisely because it may be manipulated. 2. Multiple Commodity Standard Proposals that a multiple commodity standard replace, or supplement, monetary standards based on the precious metals—in their role as standards of deferred payments—are by no means intended to create a manipulated money. They are not intended to change the precious metals standard itself nor its effect on value. They seek merely to provide a way to free all transactions involving future monetary payments from 1. See The Theory of Money and Credit [(yale, 1953), pp. 139ff.; (Liberty Fund, 1981,) pp. 161ff.—Ed.]. fisher’s stabilization plan • 81 the effect of changes in the value of the monetary unit. It is easy to understand why these proposals were not put into practice. Relying as they do on the shaky foundation of index number calculations, which cannot be scientifically established, they would not have produced a stable standard of value...