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Origins and developments of Irving Fisher's compensated dollar plan

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In 1911, Fisher published The Purchasing Power of Money. In chapter 13 of the first edition and in an appendix in the second section of 1913, he introduced a rule to maintain the stability of the level of prices, known as the “compensated dollar”. According to this rule, the legal definition of money is changed. In other words, the weight in gold of the dollar is modified once a month in order to impede the frequency of price changes on a basket of goods. According to Fisher, this plan would offer stability for the purchasing power of money. He sought to find an alternative system to the fixed price of gold under the Gold Standard. He wanted to introduce a dollar fixed in terms of its purchasing power, but variable in terms of its metallic weight. In this paper, we will focus on Fisher's analysis of the stability of money value and his position in the debate on the compensated dollar from 1909 to 1922. We will study the anticipations of Fisher's compensated dollar, the critical reception of Fisher's project and the evolutions it gave rise to, the gold exchange standard and the algebraic evidence. We also examine the debate's connections to the question of whether or not the compensated dollar plan is compatible with the quantity theory of money. We end with the analysis of the gold price elasticity of the net supply of gold, with an explanation of the relationship between the Yellowbacks and the varying price of the gold reserve.
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Keywords: B1; E4; E5; N11; Quantity theory; compensated dollar; gold exchange standard; prices

Document Type: Research Article

Affiliations: 1: Université Lumière Lyon 2, Triangle-ISH, 14 Avenue Berthelot, 69363, Lyon, Cedex 07, France 2: Université Paris Dauphine, Leda, Place du Maréchal de Lattre de Tassigny, 75016, Paris, France

Publication date: April 1, 2013

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