Reducing Fluctations in the Price Level
One of the chief uncertainties of business -- at times the uncertainty that transcends all others in dire results -- is the shifting value of money. This is a cause of stupendous profits and losses. The monetary chaos into which Europe was plunged by the World War I gave tragic proof that at times the stabilization of money values is the one means of preventing extreme business profits and losses, without which all other means are of no avail. In the years of war inflation, every one who had any money to spend found out that the chief monetary need of the world is not 'abundant money,' not 'easy money,' not 'a more elastic supply of money,' but money that is a true standard of value money that is safeguarded from excessive fluctuations in purchasing power. Without such a safeguard, money is a delusion and a snare.
A rapidly shifting price-level is sure to be attended by alternate periods of business elation and gloom, with the familiar trend of extravagance, injustice, excessive speculation, overproduction, tight money, business failures, unemployment, and hard times. Both inflation and deflation are disastrous economically, morally, socially. Neither is a cure for the ills of the other. Indeed, in an industrial order founded on the production and sale of commodities and services at a money profit, there is no economic phenomenon so far-reaching in its consequences as unstable money. All this we considered at length in a previous study. We are here concerned mainly with the relation of fluctuations in the purchasing power of money to profits and losses.
Large Profits and Losses result from Unstable Money
As the purchasing power of money declines -- that is to say, as the price-level rises -- profits are realized from the increased dollar value of commodities, quite apart from profits due to any other causes. As the purchasing power of money rises -- that is to say, as the price-level falls -- losses are suffered on account of lower prices, in addition to all other losses. These risks are the chief disadvantage of a medium of exchange. In a barter economy there are no profits and losses due to shifting pricelevels, for there is no concept of price, no such thing as a price-level. Even in a barter economy, it is true, there are profits and losses due to changes in the relative value of commodities.
If a planter barters tobacco for furs, and furs then become relatively scarce, he may profit by the change; and vice versa. But in a money economy, all such risks remain, and a new one is added; for the intermediary itself may become scarce as compared with commodities in general, or commodities in general may become scarce as compared with the intermediary. A planter who sells his tobacco for money and saves the money may find its command over commodities in general increasing or decreasing. Thus profits and losses arise from the fact that the monetary unit, unlike the yardstick, is not a good measure. Over its fluctuations the individual business man has no control. Consequently, as we have said, he sows where he does not reap, and reaps where he does not sow.
Maladjustments between Industries are caused by Unstable Prices. The 'natural adjustment and balance between the various industries' that we hear so much about, and the consequent tendency toward a leveling of costs and profits, are disturbed by sharp fluctuations in the price-level. Such maladjustments as the post-War changes in the relative purchasing power of farmers and of plasterers have not resulted chiefly from changes in the character of consumer demand. There is no evidence that our desire for food is much less, and our desire for shelter much greater, than a few years ago. So with teachers and Government clerks. The lag of their wage advances behind those of brakemen and mechanics was not caused by changing consumer needs or tastes. It was caused by changing money values. Even the coming of the automobile, which has occasioned the largest change in the character of consumer demand in the history of the United States, did not cause any sudden 'unbalancing of the industries.' This is evident from the fact that the maladjustments between the various industries followed the movements of the price-level rather than the production of automobiles.
Every influence, Federal or private, that helps to prevent extreme fluctuations in the price-level, every Influence that militates against inflation and deflation, tends to reduce excessive profits and excessive losses.