Monetary reconstruction: presented without comment

The chronic UR reader will be familiar with my own humble periodization of American history, arranged by constitutional singularity: USG 1, the Congressional Republic, 1774–89; USG 2, the Original Deal, 1789–1861; USG 3, the Old Deal, 1861–1933; USG 4, the New Deal, 1933-present.

Some of us are so daring as to hope we live to see a USG 5—or at least, the last of USG 4. For this weird and conceited handful, what better recreation could there be but a study of the intellectual roots of the New Deal? And for that study, there are few better journals to skim but the fascicles of that standard-bearer of progressivism, past and present: the New Republic.

Which still exists, of course; whose paywall drops with a bang at 1923, ten years pre USG 4. But so what? We live in the tree’s vast canopy; we see its trunk; we seek its roots. Curious about the Third Reich? Try Arthur Moeller van den Bruck (1923), who not only coined the term, but had the good graces to off himself while one A. Hitler yet reposed in Landsberg am Lech. A pirate translation is here. Everything good about Nazi Germany is in this book. To know a thing, why not learn it at its youngest, its freshest, its best? And man being what he is, his best is often found not just in infancy, but utero. The unborn idea has no occasion for excuse. The oldest scans catch it in its sweetest veal, unmarked by reality’s scars, unsullied by squid-ink, full of refreshing hope and innocence—demanding true sympathy, not our usual tired contempt.

So to understand what Washington is today—what America is today—what the world is today—flick your mouse through this. For instance, you might find John Dewey’s review of Walter Lippmann’s Public Opinion. Concerned that democracy just don’t work? Like Herr Moeller van den Bruck, you’ll find yourself on the same page with Professor Dewey and Mr. Lippmann. They had no idea how their (rather different) solutions would work out. But you do! The student of history must often tense his facial muscles, lest hindsight fade to smug derision.

It’s been too long, however, since we tackled economics. So I present without comment an essay in book-review form, entirely typical of early 20C progressive thinking on matters monetary, by the distinguished (and frighteningly long-lived) American economist Alvin Johnson. Suffice it to say that the roots of Paul Krugman, not to mention Warren Mosler, are not at all invisible—and easier, perhaps, to criticize.

From the New Republic, May 3, 1922:

Monetary Reconstruction, by Carl Strover. Published by the Author, 133 W. Washington St., Chicago. $1.50.

It is not often that an economic tract, modestly published by the author, can create a vivid impression upon minds worn smooth by the flood of economic books. Mr. Strover’s essay is a brilliant exception. In ninety pages of simple, straightforward text he has presented as good a case as need be made for a currency of stable purchasing power, and a concrete plan which in point of practicability does not suffer in comparison with any other.

But the subject is not an interesting one? The money question is a closed issue, closed for all time by the adoption of the gold standard by all solvent nations? That, I think, is a shortsighted view. The gold standard is no doubt an improvement over the bimetallic confusion of the early nineteenth century. It is vastly superior to the fiat paper which is choking European commerce and industry. But considered in itself, it is not only enormously wasteful, but it is one of the most prolific sources of economic and social disorder.

Our whole economic life is based upon contracts which run in terms of price. Price is the measure of all things economic; but gold price fluctuates remorselessly. We know how many pounds constitute a bushel of wheat, how many cubic inches constitute a gallon, but nobody knows how much purchasing power constitutes a dollar, our unit of purchasing power. It follows that every contractual relation that runs over any appreciable period of time is vitiated by this defect in the standard.

The value of the dollar shrinks and millions of lenders, savings bank depositors, policy holders are defrauded of what is justly theirs. Millions of workers find that it is increasingly difficult to make ends meet, and an epidemic of high cost of living strikes afflicts the nation. The value of the dollar increases, sucking the life blood out of the debtor—and in modern times the active spirits in industry are almost all debtors—insolvencies become epidemic; production slackens; unemployment sets in, with all its attendant agonies and evils.

Is it conceivable that we shall forever content ourselves with such a disturbing ebb and flow of economic life? We shall have to put up with it until the mass of citizens begin to find such essays as Mr. Strover’s interesting.

Mr. Strover’s plan is simplicity itself. Substitute for the gold standard a standard of irredeemable legal tender paper. Immediately the reader’s mind runs off along some such line of association as this: the Continental currency of our Revolutionary period; the currency of the Confederacy; the assignats of the French Revolution; the Russian ruble or Polish mark of today. Possibly he will concede that the British pound sterling of today is in fact irredeemable paper, yet not altogether a worthless currency, and in point of stability of purchasing power, not quite so bad a standard as our own gold.

But whether one chooses horrible examples or examples not so very bad, this is the wrong track. All these ventures were in the field of fiat money, money whose value was created by exercise of the sovereign power of the state, and what is of greater importance practically, created for the fiscal convenience of the state. There are thousands of instances of paper money issued with the purpose of covering the expenditures of the state; no bona fide instances of paper money issued for the purpose of systematically regulating the movement of general prices.

Mr. Strover’s plan limits the function of the sovereign state to the establishment of legal tender and the creation of an institution of currency control entirely independent of the legislature and the exigencies of the treasury. According to this plan the control of the currency would be vested in a monetary commission of a non-political character.

The commission would be governed in its action by the results of expert statistical investigation of wholesale prices. On a falling curve of prices the commission would issue more currency—enough to check the fall. On a rising curve it would retire currency. The ordinary mechanism by which it would issue currency would be in the purchase of government bonds, or other securities of stable value. Retirement of currency would be effected through sale of such securities.

Mr. Strover admits an alternative method—retirement of currency through the impounding of taxation receipts, expansion through government expenditures. This, I think, is a tactical mistake. The separation of Treasury operations from the currency system needs to be absolute.

In putting such a plan into effect gold would have to be demonetized and government bonds based on gold would have to be readjusted to the new money. How this could be done is set forth very lucidly by Mr. Strover. It is worth noting that in the process of replacing gold with paper some billions of dollars of interest bearing bonds would be drawn into the portfolios of the Commission. There would be very considerable sums of interest to be covered into the Treasury. As for the gold itself, most of it would go abroad to serve as a medium of exchange for countries too lacking in political stability or economic common sense to follow our precedent.

But would not the adoption of such a plan throw our system of credit quite out of gear? There is no reason why it should. The new money would serve in bank reserves just as gold does now. Bond secured circulation would become an anachronism. Mr. Strover makes no place for any kind of bank notes. If he had taken the space to work out credit questions at length, I think he would have seen the advisability of allowing for a bank circulation based on commercial assets. More elasticity is needed than centralized control would provide.

But this is an unimportant detail, among a host of others that will be worth discussing once the fundamental idea has attained to its legitimate place in public opinion. That idea is that human intelligence is quite as competent to devise a rational and stable standard of value as a rational standard of weights and measures, and that much more depends on the former standard than on the latter.

It may be maintained that the present economic system is wholly perverse, not worth any effort toward improvement. Those whose believe otherwise cannot fail to recognize the evil that a fluctuating value standard works, nor can they with good grace refuse to consider well thought-out plans for removing the evil. ALVIN JOHNSON.