Knut Wicksell: Selected Essays in Economics - Vol. 2

By Knut Wicksell; Bo Sandelin | Go to book overview

18

THE REGULATION OF THE VALUE OF MONEY

The interesting critique Professor Davidson devotes in the last issue [of Ekonomisk Tidskrift] to Irving Fisher’s well-known proposal for regulating the purchasing power of money has led me to think of a circumstance that, if I understand it rightly, must entail that the actual principal purpose of this proposal, too, can scarcely be achieved in the way or to the extent that its author appears to have imagined. For Fisher overlooks the fact that the seigniorage he advocates would merely bring about a sharp reduction in the newly produced quantity of gold—in other words, in the quantity of coins or gold certificates that would be given in exchange for this gold—and consequently would only have an indirect and far lesser effect on the total accumulated quantity of coin or money, which of course is what determines the level of prices, according to the quantity theory. His comparison between his own method and a recoinage at a higher weight of the entire mass of coins in circulation therefore halts in the extreme: in the latter case, after all, the nominal value of the entire accumulated quantity of money would actually be reduced by a certain percentage or fraction, and the level of commodity prices would then retreat by the same amount; in Fisher’s method, however, the reduction made is only a fraction of the fraction and its effect on prices must therefore be correspondingly minimal.

If we suppose, to make matters really simple, that all other conditions were completely stationary, then in so far as the quantity theory is correct, an increase of one or a few per cent in the quantity of gold would of course bring about an equally large rise in commodity prices; to attempt to impede this advance in prices and keep prices constant by Fisher’s method would be completely impracticable unless the seigniorage were set so high that it prevented all coinage, so that the newly produced gold went in its entirety to industry—since of course the moment even the very least part of it were minted, the quantity of money would have risen and prices with it. If, in turn, the seigniorage were set at just 1 per cent, then if the newly produced gold similarly amounted to 1 per cent of the quantity of gold

Originally published as ‘Penningvärdets reglerande’, Ekonomisk Tidskrift, 1913.

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