Evils of Unstable Money

Byron W. Holt

[A paper presented at the 4th International conference of International Union for Land Value Taxation and Free Trade, Edinburgh, Scotland, 29 July to 4 August, 1929]

The delegates to this International Conference are of the few who study and think about economic conditions. They want to improve the economic environment for all on this earth. They want to remove all restrictions upon production and distribution. They believe that, with opportunities to produce open alike to all and with no barriers to trade, we will make the best use of this earth and the most of life for all its inhabitants. They are convinced that our methods of raising revenue are crude and unjust. They see and know, as most people do not, how taxes repercuss - how they are shifted from the original to the ultimate payer. They know that taxes on labour values are shifted to the consumers of labour products, while taxes on land values are not shifted. In fact, taxes on land values decrease the selling value of land, while taxes on labour values increase their selling values.

But while the most of those here have fairly clear and definite ideas about the repercussion of taxes and the inestimable benefits that would result from untaxing all labour products and from taxing land values only, I wonder if many here have any clear perception of another hidden economic force that is silently but surely disturbing our distribution system and is making some rich and others poor, almost regardless of our methods of taxation? A few words on this subject may not be out of place here.

By common consent, the modern commercial and civilized world has adopted gold as the standard of value. Whether or not some other standard would be preferable is not the question I wish to discuss here. While the gold standard is far from perfect, it is the world's standard and is likely to continue so for many decades.

Gold as a metal is a commodity. The cost of producing gold determines, or tends to determine, the exchange value of gold with other commodities, just as the cost of producing other commodities determines, in the long run, their exchange value with each other. This being true, the value of gold will depreciate as the quantity increases, and this depreciation will be measured by the rise in the level of average prices. While this quantity-of-money theory is not accepted by all economists, it is, I believe, most widely accepted. John Stuart Mill. I think, stated a general truth when he said:

"The value of money is inversely as general prices - falling as they rise and rising as they fall."

Gold being the world's standard of value, it follows that as the average prices of all commodities go up gold goes down, and vice versa. It is not the early production of gold that determines its value or price; it is the quantity of monetary gold in the world that fixes its exchange value with other commodities.

Because of business expansion the quantity of goods for which gold is exchanged is increasing at an average rate of about 2-1/2 per cent a year. Therefore, in order to keep the price level stable, the world's stock of gold will have to increase 2-1/2 per cent a year. As the average increase was only about 1-1/2| per cent from 1870 to 1895, it is not surprising that prices declined 32 per cent during this period. As the yearly increase in the world's gold supply averaged bout 4-1/2 per cent from 1895 to 1914, it was not surprising that prices advanced bout 40 per cent from 1895 to 1914.

The World War, of course, interrupted and greatly changed the course of prices and monetary events. By withdrawing 15,000,000 or 20,000,000 men from productive enterprises and converting them into agents of destruction, it lessened the quantities of goods produced and caused prices to advance nearly 200 per cent. It also greatly reduced the number of workers in the gold mines and increased the cost of extracting gold. As a result, the yearly output of gold fell from about $470,000,000, before the war, to about $319,000,000 in 1922. Both the price level and the production of gold are only now getting back to normal, or what would perhaps have been normal there had been no war. Average prices declined from 230, in 1920, to about 149, as at present, according to the Bureau of Labor Statistics of the United bates. The gold output is again above $400,000,000 and is increasing fairly rapidly. As the monetary gold of the world is now about $10,000,000,000, and as $250,000,000 of the yearly output becomes monetary gold, it is reasonable to suppose that the increase in the supply of monetary gold is now sufficient to sustain the price level of commodities, once we get fully past the war's feet upon prices. The present average of prices is about 45 per cent above the level of 1914. Theoretically this level should decline 5 or 10 per cent more. This it may not do. The sustaining force of the increasing gold supply may possibly prevent any further decline. If the output of gold should increase further the price level may soon again resume the slow and steady advance that was interrupted by the war.

These facts indicate that the gold standard is far from a stable standard of value. Professor Irving Fisher said, before the war, that the world is doing business on a sinking platform. Not only because the platform was then sinking but because some parts of it were sinking faster than others, the entire financial and industrial world was then disturbed as never before. Meat, bread, and rice riots occurred in different countries. Mayors, governors, and presidents were advocating commissions to study the causes of the high cost living. Discontent, radicalism, and anarchy were rife in most civilized countries. The greater the civilization the greater the discontent, because the greatest sufferers from rising prices are those with fixed salaries and incomes -- professors, teachers, civil service employees, and most wage-earners. These classes suffered because the cost of living rose faster than did salaries and wages. We used to say that prices went up on the elevator while wages imbed the stairs.

The alleged causes of high prices were many. Very few of the governmental agencies even suggested the real fundamental cause. There are some economists who think that the world unrest and discontent made the World War possible. Rapidly rising prices are a most powerful revolutionary force in commerce, society, and politics. An unstable monetary unit makes business a gamble. The weight of these monetary units remains fixed, but the value or purchasing power changes. It is now less than half what it was either thirty or eighty years ago. The world's creditors were the gainers from 1870 to 1895, and many of them became millionaires, without knowing why. Since 1895 the world's debtors have been the great gainers, also without knowing why. Rather strangely the great debtors are not the poor; they are the individuals and corporations who owe the banks large sums or who are heavily bonded. While the equities in bonds have been declining for thirty years, the equities in common stocks have risen by leaps and bounds. Millionaires and multi-millionaires have multiplied rapidly. Since 1920, while prices have been falling, wage and salary earners have been faring better. In some countries, and notably in the United States, actual wages are to-day perhaps higher than ever before.

When prices are rising there are great opportunities to make money speculatively, by purchasing and holding real property. Hence, enterprising men, at such times, borrow all they can and continue to borrow as long as prices are rising faster than interest rates. This is what happened in the United States from 1897 to 1920, and in Germany from 1915 to 1920, when prices in marks were rising more rapidly than ever before. Unearned wealth was reaped by millions of great debtors because of the great decline in the purchasing power of money. Taxing land values to the limit would have prevented much of this unearned increment, but would not have entirely stopped it. It therefore seems worth while for land value taxationists to take note of this important fact. While the adoption of the single tax will solve the world's greatest economic problem, it will leave at least one important problem unsolved.

In July, 1914, I said, at Chattauqua, New York:

" Some of the great problems that demand solution grow out of the facts that prices will continue to rise; that wages and salaries will rise only about half as fast as prices; that interest rates will average abnormally high; that the cost of operating railroads and street railways will advance rapidly, while rates and fares will advance slowly; that the prices of high grade bonds and preferred stocks will decline ; that the great debtors -the rich - will gain, while the great creditors - those of moderate means - will lose heavily; that real property - farms, mines, and so forth - will increase rapidly in value ; that the landlords of the earth will absorb a larger share of the world's goods; that business will be conducted largely on a speculative basis; that wealth will concentrate, more and more rapidly, in the hands of a relatively few; that discontent, socialism, and anarchy will increase unless and until the wise men of the earth can solve these problems and stop the injustice of and evils connected with gold depreciation."

Whether or not a solution will be found I do not know. Many of the greatest economists and business men in the world are now members of THE STABLE MONEY LEAGUE. They hope to standardize the unit of purchasing power as nearly all other units of measurement - the yard, pound, hour, calorie, and kilowatt - have been standardized. I am sure that we of this Conference wish them great success. Stabilized money would, with the single tax in operation, take the speculation out of business, and stop the only two important unearned increments that prevent a just distribution of wealth.