To secure stability in the purchasing power of money, Professor Irving Fisher has proposed a plan which has come to be known as the " compensated dollar,"2 and which has received much favorable comment by economists and publicists all over the world. This scheme involves a combination of the tabular standard with the principles of the gold exchange standard. It is based upon the idea that since "uncertainty in the purchasing power of the dollar is the worst of all business uncertainties," the dollar should be standardized so that it shall always have the same purchasing power, just as the yard and the pound have been standardized and remain fixed as measures of distance and weight. Instead of a gold dollar constant in weight but varying in purchasing power as at present, Professor Fisher would have a dollar of constant purchasing power and of varying weight. "It would compensate for any loss of purchasing power of each grain of gold by increasing the number of grains which go to make a dollar." In effect the Fisher plan proposes to restore the ancient custom of a seigniorage on gold coinage, that seigniorage to be readjusted annually according to changes in the price level as indicated by official index numbers. At present there is no seigniorage on gold coinage in this country. The miner takes 25.8 grains of gold to the mint and receives a 25.8 grain gold dollar; the coined dollar weighs the same as the uncoined or "bullion dollar," as Fisher terms it. His proposal is to increase the weight of the bullion dollar as prices rise so that 26, 27, or 28 grains of gold bullion will have to be taken to the mint to get a 25.8 grains gold dollar. The difference in weight between the two would be seigniorage, the amount of which would be changed from time to time as the index number showed a change in the level of prices. As the coined dollar would always be interconvertible with the bullion dollar the two would always be equal in value, and the dollar would always have a fixed purchasing power.

1Kinley: Money, p. 269.

2 Quarterly Journal of Economics, Feb., 1913.

Neither the gold standard nor actual gold coinage would be disturbed by this plan. The increase in weight of the gold dollar would not be added to the coins themselves but only to the bullion out of which they are made. Existing gold coin and new gold coins would remain unchanged at 25.8 grains per dollar. "Gold coins," says Fisher, " would simply become what the silver dollar now is, token coins, Or, better, they would be like the gold certificates, mere warehouse receipts, or, as it were, brass checks for gold bullion on deposit in the Treasury. Otherwise expressed, gold coin would be merely gold certificates'printed on gold instead of on paper. They would be used exactly as gold certificates are used, namely, issuable to the gold miner in return for his bullion, and redeemable for those who wished bullion for export or in the arts." The seigniorage, that is, the excess of bullion over the weight of the coined dollar itself, would be held by the Government as a trust fund for redeeming gold bullion and gold certificates in the future.

A serious objection to this plan to standardize the dollar would seem to arise if prices were falling instead of rising. The weight of the virtual gold dollar, that is, the amount of gold bullion which at any time is interconvertible with the dollar of circulation, could never be reduced below the weight of the coin dollar, for then there would be no seigniorage and all the gold coin would at once be melted into bullion, in which form it would be worth more than as coin. This would mean then that the government price of gold should never be more than $18.60 an ounce. Though Professor Fisher does not anticipate a downward movement of prices in the future, he proposes to meet this possible emergency in either of two ways.1 If the price level should sink more than, say, ten per cent below the original par or price level at the time the system was established, all gold coins could be withdrawn from circulation and gold certificates employed instead. Or it could be arranged to recall all gold coins and recoin them in lighter weight, just as a few years ago the Philippine peso was recalled and reduced in weight when the rise in the price of silver threatened to lead to the melting of the silver pesos. This would not reduce the value of the gold coin any more than the reduction of seven per cent in the weight of our subsidiary silver coins in 1853 had any tendency to reduce the value of those coins. Fisher favors the plan of eliminating the gold coins altogether.1 To prevent speculation in gold disastrous to the Government he proposes to have the Government make a small brassage charge of, say, one per cent for minting. This would mean that the price at any particular date at which the Government bought gold would be a little less than the price at which it sold it. "Without such a margin of protection to the Government, speculators would, in anticipation of a rise in the price of gold, buy it at, say, $18 an ounce and sell it back to the Government immediately after the change in price to, say, $18.10. On the other hand, if gold should fall in price from $18.10 to $18 an ounce, holders of gold bullion would rush it to the mint to sell it at the former price and immediately after the change buy it back at $18, thus profiting again at the expense of the Government.

1 For a criticism of these plans see Patterson, "Objections to a Compensated Dollar," American Economic Review, Dec, 1913, pp. 863-874.

As Professor Fisher points out, we have standardized every other unit in commerce except the most important and universal unit of all, the unit of purchasing power. Even the new units of electricity, the ohm, kilowatt, ampere and volt, have been standardized, but "the dollar is still left to the chances of gold mining." The dollar as a unit of purchasing power, and so a standard for deferred payments, has not been standardized hitherto, because we have had "no instrument for measuring it or device for putting the result into practice. With the development of index numbers, however, and the device of adjusting the seigniorage according to the index numbers, we now have at hand all the materials for scientifically standardizing the dollar and for realizing the long-coveted ideal of a 'multiple-standard' of value. In this way, it is within the power of society, when it chooses, to create a standard yard-stick, an 'unshrinkable dollar.' "2

In a textbook of this kind it would not be profitable to enter into a detailed discussion of the objections to Professor Fisher's plan for a compensated dollar. It must suffice to state briefly some of the most striking objections. In the first place, this scheme being based upon the use of the multiple or tabular standard is open to all the objections against such a method of correcting price fluctuations. Moreover, it is based upon the quantity theory of money in some form, but authorities are not agreed upon the soundness of that theory. Secondly, there does not seem to be much hope of an early international adoption of the plan, and its adoption by the United States alone would play havoc with our foreign trade and make the operations of foreign exchange uncertain and highly speculative. Thirdly, the plan is defective in that it cannot be applied to check falling prices. Professor Fisher proposes to meet this possibility either by reducing the weight of the coined dollar or by withdrawing all gold coin and substituting gold certificates. It is probable, however, that the business world would look upon either expedient as a plan to debase the standard and that it would meet with stubborn opposition.

1 The Independent (N. Y.), Jan. 2, 1913. 2 The Independent (N. Y.), Jan. 2, 1913.

Even granting that it is advisable to maintain a price average, the adoption of Professor Fisher's ingenious scheme as a practical plan seems remote. The illusion that gold is stable, produced by the fact that the price of gold is always the same, is deep-rooted in the business world. A long campaign of education will be needed before men will be willing to surrender that belief.

Reading References

Conant: Principles of Money and Banking, Vol. I, Bk. II,

Chs. II-IV. Fisher: Purchasing Power of Money.

Johnson: Money and Currency, Chs. II, IV. VI, VII, VIII. Kemmerer: Money and Prices.

Kinley: Money, Chs. VIII, IX, X, XII, XIII, XV. Laughlin: Principles of Money, Chs. III, VI-XI. Scott: Money and Banking, Chs. III, IV. Taussig: Principles of Economics, Vol. I, Chs. 8, 18, 19, 22, 31.