B. Stabilization

The knowledge that the purchasing power of money could vary led some economists to try to improve on the free market by creating, in some way, a monetary unit which would remain stable and constant in its purchasing power. All these stabilization plans, of course, involve in one way or another an attack on the gold or other commodity standard, since the value of gold fluctuates as a result of the continual changes in the supply of and the demand for gold. The stabilizers want the government to keep an arbitrary index of prices constant by pumping money into the economy when the index falls and taking money out when it rises. The outstanding proponent of “stable money,” Irving Fisher, revealed the reason for his urge toward stabilization in the following autobiographical passage: “I became increasingly aware of the imperative need of a stable yardstick of value. I had come into economics from mathematical physics, in which fixed units of measure contribute the essential starting point.”61 Apparently, Fisher did not realize that there could be fundamental differences in the nature of the sciences of physics and of purposeful human action.

It is difficult, indeed, to understand what the advantages of a stable value of money are supposed to be. One of the most frequently cited advantages, for example, is that debtors will no longer be harmed by unforeseen rises in the value of money, while creditors will no longer be harmed by unforeseen declines in its value. Yet if creditors and debtors want such a hedge against future changes, they have an easy way out on the free market. When they make their contracts, they can agree that repayment be made in a sum of money corrected by some agreed-upon index number of changes in the value of money. Such a voluntary tabular standard for business contracts has long been advocated by stabilizationists, who have been rather puzzled to find that a course which appears to them so beneficial is almost never adopted in business practice. Despite the multitude of index numbers and other schemes that have been proposed to businessmen by these economists, creditors and debtors have somehow failed to take advantage of them. Yet, while stabilization plans have made no headway among the groups that they would supposedly benefit the most, the stabilizationists have remained undaunted in their zeal to force their plans on the whole society by means of State coercion.

There seem to be two basic reasons for this failure of business to adopt a tabular standard: (a) As we have seen, there is no scientific, objective means of measuring changes in the value of money. Scientifically, one index number is just as arbitrary and bad as any other. Individual creditors and debtors have not been able to agree on any one index number, therefore, that they can abide by as a measure of change in purchasing power. Each, according to his own interests, would insist on including different commodities at different weights in his index number. Thus, a debtor who is a wheat farmer would want to weigh the price of wheat heavily in his index of the purchasing power of money; a creditor who goes often to nightclubs would want to hedge against the price of night-club entertainment, etc. (b) A second reason is that businessmen apparently prefer to take their chances in a speculative world rather than agree on some sort of arbitrary hedging device. Stock exchange speculators and commodity speculators are continually attempting to forecast future prices, and, indeed, all entrepreneurs are engaged in anticipating the uncertain conditions of the market. Apparently, businessmen are willing to be entrepreneurs in anticipating future changes in purchasing power as well as any other changes.

The failure of business to adopt voluntarily any sort of tabular standard seems to demonstrate the complete lack of merit in compulsory stabilization schemes. Setting this argument aside, however, let us examine the contention of the stabilizers that somehow they can create certainty in the purchasing power of money, while at the same time leaving freedom and uncertainty in the prices of particular goods. This is sometimes expressed in the statement: “Individual prices should be left free to change; the price level should be fixed and constant.” This contention rests on the myth that some sort of general purchasing power of money or some sort of price level exists on a plane apart from specific prices in specific transactions. As we have seen, this is purely fallacious. There is no “price level,” and there is no way that the exchange-value of money is manifested except in specific purchases of goods, i.e., specific prices. There is no way of separating the two concepts; any array of prices establishes at one and the same time an exchange relation or objective exchange-value between one good and another and between money and a good, and there is no way of separating these elements quantitatively.

It is thus clear that the exchange-value of money cannot be quantitatively separated from the exchange-value of goods. Since the general exchange-value, or PPM, of money cannot be quantitatively defined and isolated in any historical situation, and its changes cannot be defined or measured, it is obvious that it cannot be kept stable. If we do not know what something is, we cannot very well act to keep it constant.62

We have seen that the ideal of a stabilized value of money is impossible to attain or even define. Even if it were attainable, however, what would be the result? Suppose, for example, that the purchasing power of money rises and that we disregard the problem of measuring the rise. Why, if this is the result of action on an unhampered market, should we consider it a bad result? If the total supply of money in the community has remained constant, falling prices will be caused by a general increase in the demand for money or by an increase in the supply of goods as a result of increased productivity. An increased demand for money stems from the free choice of individuals, say, in the expectation of a more troubled future or of future price declines. Stabilization would deprive people of the chance to increase their real cash holdings and the real value of the dollar by free, mutually agreed-upon actions. As in any other aspect of the free market, those entrepreneurs who successfully anticipate the increased demand will benefit, and those who err will lose in their speculations. But even the losses of the latter are purely the consequence of their own voluntarily assumed risks. Furthermore, falling prices resulting from increased productivity are beneficial to all and are precisely the means by which the fruits of industrial progress spread on the free market. Any interference with falling prices blocks the spread of the fruits of an advancing economy; and then real wages could increase only in particular industries, and not, as on the free market, over the economy as a whole.

Similarly, stabilization would deprive people of the chance to decrease their real cash holdings and the real value of the dollar, should their demand for money fall. People would be prevented from acting on their expectations of future price increases. Furthermore, if the supply of goods should decline, a stabilization policy would prevent the price rises necessary to clear the various markets.

The intertwining of general purchasing power and specific prices raises another consideration. For money could not be pumped into the system to combat a supposed increase in the value of money without distorting the previous exchange-values between the various goods. We have seen that money cannot be neutral with respect to goods and that, therefore, the whole price structure will change with any change in the supply of money. Hence, the stabilizationist program of fixing the value of money or price level without distorting relative prices is necessarily doomed to failure. It is an impossible program.

Thus, even were it possible to define and measure changes in the purchasing power of money, stabilization of this value would have effects that many advocates consider undesirable. But the magnitudes cannot even be defined, and stabilization would depend on some sort of arbitrary index number. Whichever commodities and weights are included in the index, pricing and production will be distorted.

At the heart of the stabilizationist ideal is a misunderstanding of the nature of money. Money is considered either a mere numeraire or a grandiose measure of values. Forgotten is the truth that money is desired and demanded as a useful commodity, even when this use is only as a medium of exchange. When a man holds money in his cash balance, he is deriving utility from it. Those who neglect this fact scoff at the gold standard as a primitive anachronism and fail to realize that “hoarding” performs a useful social function.

• 61Irving Fisher, Stabilised Money (London: George Allen & Unwin, 1935), p. 375.
• 62The fact that the purchasing power of the monetary unit is not quantitatively definable does not negate the fact of its existence, which is established by prior praxeological knowledge. It thereby differs, for example, from the “competitive price–monopoly price” dichotomy, which cannot be independently established by praxeological deduction for free-market conditions.