Indirect Convertibility and Irving Fisher's Compensated Dollar

Abstract

Advocates of the private issue of money by banks have proposed to solve the problem of the credibility of such an issue by having the banks commit themselves to redeeming their money in terms of a standard bundle of goods. Since it would be inconvenient for both the banks and their customers to deal with such bundles, the proposal has been made to have the redemption take place with an amount of gold actually worth, at prevailing market prices, as many standard bundles as the Unit denominations of the banknotes and deposits being redeemed (Yeager and Greenfield 1989, p. 410). This system ofindirect convertibility has frequently been described as similar to Irving Fisher's proposal for a compensated dollar (see, for example, ibid. pp. 418-19; Cowen and Krozner 1994, ch. 3; Dowd 1995). There is, indeed, a similarity in the fact that both schemes involve the use of gold and that the purpose of both is to maintain the purchasing power of money. Otherwise, however, there are basic differences between them. To begin with, changes in the price of gold in Fisher's proposal are not those determined in a free market, but changes in the monthly mint price at which the government stands ready to buy and sell unlimited quantities of gold: in particular, to (say) lower the mint price of gold (in Fisher's words, to increase the gold content of the dollar) if the price level should increase, and to raise the mint price if the price