In addition to these features of the plan itself should be mentioned the tacit assumption that we retain a sound banking system. Without such, the effectiveness of the stabilization plan would be quite lost.[1]
2. The Crux of the Plan
The crux of the plan lies in (4)—the provision for adjusting the weight of the gold bullion dollar. This is the adjustment rule by which the index number regulates the dollar's weight. Its significance is that:
To keep the dollar from shrinking in value we make it grow in weight, thus recognizing that a depreciated dollar is a short-weight dollar; and, reversely, to keep the dollar from growing in value we make it shrink in weight, thus recognizing that an appreciated dollar is an overweight dollar.
Or, in alternative terms, since a heavier or lighter dollar simply means a lowered or raised price of gold, we may say that:
To keep the price level of other things from rising or falling we make the price of gold fall or rise.[2]
- ↑ For details, see Appendix I, §7.
- ↑ These two statements and paragraph (4) of the above summary are really three different formulations of the same adjustment rule. There is a fourth: we prevent a loss or gain in the purchasing power of the dollar by lowering or raising the price of gold. All four modes of statement may be united as follows:
We restrain a rise or fall of the price level a fall or rise of the purchasing power of the dollar by increasing or decreasing the weight of the dollar decreasing or increasing the price of gold. For most people I think the original formulation (the 4th paragraph of the summary above) is the most convenient, namely, the one in terms of the price level and dollar's weight rather than in terms of the purchasing power of the dollar or the price of gold, or both.
