Obviously this system is unjust. It encourages debt and discourages thrift. It burdens the creditor, the wage-earner, and the salaried class. It lets the shrewd enterpriser class batten on the poor, the ignorant, and the thrifty. The remedy for these evils is to stabilize the purchasing power of money. The lender might theoretically compensate himself by demanding additional interest; if, for instance, he is content with 5 per cent interest but prices are rising 3 per cent per year, he should ask 8 per cent interest. Wages and salaries might be adjusted in proportion to the inflation of budgets. Repayments of loans might be on the basis of index numbers; $1,200, for example, should be repaid if prices have arisen 20 per cent during the period of a $1,000 loan. Promissory notes, wage contracts, and bonds, for instance, might be drawn to provide for repayment proportioned to changes in the price level. The use of index numbers for the purpose of making such adjustments is an illustration of "multiple standards," that is, a standard of value based on the mean price of a number of commodities.
The objections to multiple standards are of a threefold nature:
1. "The uncertainty as to the best way of computing index numbers, the varying results reached by different methods of equal validity, the difficulty of recording with certainty the actual changes in prices, the inevitable margin of error."2
2 Taussig, Principles Of Economics, Vol. 1., P. 30a.
2. The cessation of certainty and calculability in all credit transactions, thus adding to the speculative risk and element in business.
3. The question whether commodity or labor standards are, after all, really fair bases for computing postponed payments.
Professor Irving Fisher has recently advocated a scheme known as the "compensated dollar" for stabilizing its purchasing power. The plan is to retain our present system of certificates and coins in part, and make them redeemable at the mint for quantities of gold varying with the index number calculated by a government bureau. Adjustments would be made quarterly or monthly in the "bullion dollar," for which the coined dollar (or certificate) would be exchangeable. The pure gold in the coined gold dollar is 23.22 grains; if the price level were to rise 2 per cent during the quarter, the coined dollar (or certificate) might be exchanged at the mint for 102 per cent of 23.22 grains of uncoined gold at the will of the holder; or, vice versa, the holder of 23.6844 grains of bullion could exchange it at the mint for $1 in coin (or certificate).
The above plan constitutes a system of adjustable seigniorage, the seigniorage increasing or decreasing with the rise or fall of the index number respectively. Or, stated otherwise, the mint price of gold would vary inversely, with the price level. Under these conditions the coined dollar would purchase exactly the same amount of commodities, other than gold, the year round. If the price level rose 1 percent the coined dollar would exchange for 1 percent more gold, and this would exchange for the former amount of other goods. Instead of the purchasing power of a fixed amount of gold (23.22 grains) varying, the amount of gold would increase or decrease so as to have a fixed purchasing power over other goods. The more frequent the adjustments of the seigniorage the more stable would be the price level. Too frequent melting and minting of coins could be checked by a small brassage charge; and speculation in gold on the market could be defeated by limiting the adjustment made at any one time.
Inflation has certain advantages. It stimulates industry by increasing profits to enterprisers, and this may be desirable in times of emergency. It also tends to force economies in consumption and limits extravagant and luxurious spending. The benefits of inflation, however, are more than counterbalanced by its evils.