I strongly recommend the repeal of the Silver Purchase Act. There was a time, namely, during the depression, when this act, in spite of serious objections, served one useful purpose. It added a little to our volume of circulatory medium when that volume was too low. But now, when that volume is too high and is fast mounting higher, in other words when we are suffering from inflation and threatened with further inflation, that act hasn't left a leg to stand on. We all know the politics involved; but politics, especially such politics, should have no place when national defense is involved. This also goes for tariff reform. It is time to be bold. I would not only close the gates of our mints to silver but also to gold. I realize the storm of protect which such action would pr obably bring forth, not only from the producers of and importers of gold but from the misguided thinking of the gold-standard adherents still remaining. I call you to witness that if the gold standard were really what is claimed for it by its fast-diminishing group of friends, there would be no problem of inflation now. A true monetary standard should mean constancy in the value of money, while inflation means inconstancy. It is high time for this country to wake up to the fact that the gold standard is dying, if not dead, and that all we now owe it is a decent burial-as in the big tombs of Fort Knox. England and all Sterlingaria have, for a decade, been on a managed-money basis. The gold standard is not now fully operating anywhere on this globe, even in the United States. Yet we are allowing the gold mines of the whole world to continue pouring into our money reservoir their yellow metal in the form of gold certificates and deposits based on these and thus to aggravate our inflation. The time has come to demonetize gold as we have already supposedly demonetized silver. And here again opportunity knocks at the door. Every monetary reformer, Professor Kemmerer included, knows that sometime the gold standard must give way to a scientific standard which really insures constancy of purchasing power. Eventually, why not now? If we miss our opportunity it may not come again for a hundred years. The originator of the phrase "managed currency" was J. Maynard Keynes. He was ostracized in English political and financial circles in England, the home of the gold standard. He has lived to see many of his heterodox ideas adopted and himself made official advisor to the Government and the Bank of England. These facts were the subject of an editorial in the New York Times, a stanch defender of the traditional gold standard. "The world do move"-across the sea. Can it not move here? I realize that there are those who doubt the possibility of controlling inflation by controlling the volumes of money because, they say, you would have to control the velocity of money too. These people claim that the velocity of circulation of money is too variable to be controllable and think they have good evidence of this during the last 12 years. They contrast the high velocity in 1928 and 1929 with the low velocity in 1932 and 1933. But these people are badly misled. Velocity in its important sense is one of the most nearly invariable magnitudes known in statistics. The great variability which they talk about is due chiefly to speculative activities. The really significant velocity is not that "transaction-velocity" including, as it does, speculative transactions where the same property, stocks or real estate, is bought and sold over and over again, but "income velocity" which is centered on the spending of income and ultimate consumption, after the steady normal progress of commodities from farm and mine through successive manufacturing and marketing processes-jobbing, wholesale, retail. Income velocity expresses this process, being the ratio of money income to money volume and is almost always about 3.1 to 1. This implies that, if we fix the volume of money at $30,000,000,000, we thereby fix the money income at about 3.1 times that, or $93,000,000,000. And if the per capita money income is fixed we cannot have inflation or deflation affecting the consumer as distinct from the speculator. The fixation of the money volume not only fixes the national money income but it fixes approximately the price level, insuring a steady purchasing power of the consumer dollar, quite irrespective of how fast money whirls around in Wall Street. Here are the figures for income velocity (as given by W. I. King for 190928, by Eccles for 1929-33 and, for 1935-41, from my own estimates based on statistics of the Department of Commerce for Income and the Federal Deposit Insurance Corporation for check-book money, with an adjustment factor to make these estimates comparable with the preceding series). It will be seen that, until 1931, money turned over in terms of income about 3.1 times a year with remarkable constancy. The figures would doubtless be still nearer constant if the statistical data were not so rough. But just as they stand, with all their inaccuracies, we find, in these 22 years, that there were only 2 years in which the ratio exceeded 3.2 and only 3 years in which it was less than 3.0. It will be seen that this velocity was not especially high in 1929 nor in 1920, the peak years for transaction velocity, and it was not very low in 1921, 1922, 1930. Nor did it show any discernible difference during the upswings of 1909-1920 or 1926-29, and during the downswings which followed. In short, 3.1 seemed to be a normal and consistent figure. This velocity needed no control. It controlled itself. But after those 22 years the picture is very different. The ratio steadily declined to 2.0, or less than two-thirds of the previous normal. The only solution of this riddle which I can think of is that, beginning in 1933, European holders of money began to be restless and to send it or bring it here for sanctuary. They kept it idle not knowing what to do with it, and later it was "frozen" by law. It is worth noting that this steady fall in velocity from 1931 to 1941 shows no relation whatever to the recession of 1937-38 nor the recovery of 1938-39. Before closing I want to ask you not to forget plain, old-fashioned economy in Government expenses as one means of reducing the need of Government bonds, our chief source of inflation. Let us return now to the problem of individual price fixing. I am in favor of individual price control substantially to the extent that it was used in World War I, namely, to prevent profiteering by those selling war materials to the United States Government. Those who were then trying, and with success, to take advantage of Uncle Sam, were thwarted and their successors should be thwarted today. Yet even here, if I had my way, I would try not to check profits greatly when accumulated to increase our national capital but only when, as, and if spent. The second blue-print chart shows that the individual price control which was practiced from August 1917 to November 1918 succeeded to the extent of preventing further rises in the controlled prices. It will be noted that these prices. It will be noted that these prices had, before control, gotten out of line with the general price level. All that control did was to bring them back into line, not to prevent inflation, which went merrily on. individual waves were knocked down to sea level but the sea level was not brought down at all. The This successful and purely relative control was a very different thing from controlling the entire price level. Apparently only 573 commodities were controlled, while thousands were uncontrolled, as were wages, rents, real estate, and security prices. As to wages, they were largely taken care of in the World War by means of index numbers of the cost of living. Thousands of wage contracts—governmental and private-were made both in the United States and England with a sliding scale in relation to the cost of living. I was one of those who then advocated the system of an index wage, and I favor it now. Any attempt at general control by price-fixing methods would, I believe, be futile, and some of the effects would surely be very harmful. It would, at one blow, almost kill the American system of private enterprise. Suppose such a general clamping down on prices could be enforced against all bootleg business, or suppose we could succeed only partially—to the extent, say, that Germany has succeeded-suppose we used, as we would have to, the same Gestapo methods, what would happen to all the new money being created by the sale of Government bonds to banks? I am, of course, now assuming that only individual price fixing and not credit control would be employed. For if the credit control which I favor is adopted, there will be no need of price fixing to combat general inflation, however important it may be to reduce profiteering in defense material sold to the Government. Assume, then, that our currency reservoir will go on being filled with new credit, new silver, and new gold. Then those who get this new money in their pocketbooks and check books will have more on hand than they want to keep idle. This means increased demand. But there would be no corresponding increase in supply. Demand would then exceed supply, a situation which naturally would lead to bidding up prices. But this natural outlet being forbidden, there would be a world scramble of holders of the excess money (almost everybody) to buy up what little was for sale before others got ahead of them. Some would have to go without, unless a very general rationing system were put into operation. But this, too, would be un-American. It would be subject to the abuses of favoritism and could, with the purest of administration, never fully adapt itself to the ever-varying needs of the public. Probably one result would be the complete stoppage of some supplies much needed yet, by inadvert ence, malice, or otherwise, discriminated against. The only way I can think of to make such price control even halfway effective would be to "freeze" half or some other fraction of the new money when issued to the public, as we have frozen the bank accounts of foreigners. But this would mean that part of the pay which people got would not be available until some dim and distant future. So we would be living, in one way or another, under dictatorship, the very thing we are fighting. The American system of free enterprise is a precious heritage which we should aim to preserve. Why surrender it in trying to check general inflation the wrong way, when there is a right way available? Let us forswear such unnatural and destined-to-be-futile efforts. Except for emergency control of a restricted number of commodity prices, such as the 573 partially controlled in World War I, let us depend on the wholesome automatic correctives of demand and supply so that our processes may remain as normal as possible. ADDENDA BY DR. FISHER At the request of Mr. Crawford I am adding my answers to the questions submitted by him and printed in the record on pages 648 and 649, as follows: As to Colin Clark's definition of income, I think it excellent in the sense of what I call enrichment income. Nor do I have any objection to his use of the terms price and value. But the more fundamental income concept is not enrichment income but yield income. The distinction is the same as that in the stock market between the earnings of a stock, which includes undivided profits, and its yield which does not include them. Yield eventuates in "consumption" or "real" income, which does not include mere additions to, or accruals of, capital. It is true, also, that the term value may be used otherwise than as Clark uses it and that it may be so used as to mark the contrast between price and value hinted by Oscar Wilde's facetious aphorism. It is quite true, and a very important fact, that innovations, especially new inventions, add to national well-being more than it subtracted by obsolescence. It is also true that much of this increase in well-being does not get ade quate recognition in the narrow bookkeeping contemplated in Colin Clark's formula. There are important additions to capital equipment and so to income other than those actually sold at a price. The most important additions to capital equipment are those from new inventions. These may cause obsolescence of out-moded equipment but only because they supply something more valuable. Inventions are creative. They add to our equipment and our well-being much more importantly than mere ordinary savings without any new devices. The new windfall coming from new inventions, mechanical, electrical, chemical, and otherwise, may, by stretching the term, be included under savings. But they are savings of an extraordinary sort. A better term is capitalincrease. But that also is inadequate; for it does not include improvements CHART 141 IRVING FISHER'S INDEX OF COMMODITY PRICES 1940 1941 JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC. 110 110 110 100 90 80 50 о AVERAGES FOR YEARS 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 50 |