The Founding of the American Republic: 12. The Scourge of Inflation
JULY 01, 1972 by CLARENCE B. CARSON
Dr. Carson shortly will join the faculty of Hillsdale College in Michigan as Chairman of the Department of History. He is a noted lecturer and author, his latest book entitled Throttling the Railroads.
A theft of greater magnitude and still more ruinous, is the making of paper money; it is greater because in this money there is absolutely no real value; it is more ruinous, because, by its gradual depreciation during all the time of its existence, it produces the effect which would be produced by an infinity of successive deteriorations of the coins. All these iniquities are founded on the false idea that money is but a sign.
- COUNT DESTUTT TRACY
Men at ease and in comfortable circumstances must find it difficult to comprehend the sufferings of the Patriot armies during the War for Independence. These armies had to suffer, in addition to those tribulations incident to war, from lack of clothing, blankets, sufficient food, drink, transport, and many other of the necessities of life. Yet it is the judgment of the generality of historians that most of this deprivation was unnecessary and unwarranted. There was food aplenty in the states, and there was at least the potentiality of enough clothing. It may be added that there were enough men of the right age to have constituted overwhelming forces against those the British actually sent to America, and there was a potentiality for manufacturing adequate munitions for the war. (For example: "In 1775 the Union produced 30,000 tons of crude iron —one seventh of the world’s total output.")1 It is quite probable that the war could have been brought to a successful conclusion long before it was had these resources been devoted to the effort in sufficient amounts. They were not.
The main reason why men and materials were not brought to focus adequately on the war effort was the method used to finance the war. The successful prosecution of a war — any war — requires that a sufficient amount of energy and resources be diverted from other uses in order to accomplish the end of winning the war. To acquire the necessary goods and services, government enters the market. (This is not to deny that a government may acquire services, and sometimes goods, voluntarily from those who are actuated by principle or other motives. To the extent that this is the case, neither force nor the market may have come into play in the acquisition. But neither the War for Independence, nor any other known to this writer, were fought primarily with such resources.) Government may enter the marketplace in such a way as to take advantage of the services offered in a market, or it may intervene in the market in such ways as to make that instrument virtually useless for its purposes. The market is a place where voluntary exchanges are made, where goods and services are sold to the highest bidder. When government enters the marketplace it becomes a bidder among bidders for the supply of goods and services available. What the government acquires there, others are denied, or vice versa.
Government Takes Goods
Before government can become a bidder in the market it must acquire goods and services, or their equivalent, for making exchanges. This necessity poses what is the most enduring problem of government: the government, as government, is not a producer of goods nor provider of services, and has none of these to offer in exchange. Before it can operate in the market, then, government must acquire these, or their equivalent, from those who own or produce them. In effect, government must take goods and services from those who provide and produce them. For this to be done equitably and justly, experience indicates that this appropriation should be spread over and apportioned among the producing citizenry.
Money has afforded a means for apportioning taxes and a way for government to enter the marketplace for trading without interfering destructively with the function of the market. In short, money can enable a government to use the marketplace as a major source of goods and services which it needs, particularly in war. For this to happen, however, government must respect the nature and character of money. Money is a medium of exchange, i.e., it is that through which are made exchanges of goods for goods, services for services, or any other combinations of these. What a given unit of money will command in goods and services in the marketplace is a ratio between the quantity of money and quantity of goods and services, as modified by the strength of the desires of all who have any of these in their possession or wish to acquire them. To put the matter concretely, if a bushel of wheat brings one dollar this means that the quantity of money is such, the quantity of wheat is such, the desire for wheat is such, and the desire for money is such, that one dollar is the price that will effect an exchange. If the quantity of money is increased, and all else remains the same, the price of wheat may be expected to rise in proportion to the increase of money. A money tax enables the government to reduce the supply of money available to private bidders, and thus to become an effective bidder for its needs in the market.
It is theoretically clear, then, what the consequences would be if the government attempted to get its needs by simply increasing the money supply. It would reduce the quantity of goods and services a given unit of money would command. But why could the government not do this as a means of taxation, thus avoiding the onerous necessity of a direct appropriation of money? Of course, it could do this. Thomas Paine declared that this is just what the Congress did during the War for Independence. It would have cost ten or twelve million pounds sterling, he estimated, to have financed the war by ordinary taxation; "and as while this money was issuing, and likewise depreciating down to nothing, there were none, or few valuable taxes paid; consequently the event to the public was the same, whether they sunk ten or twelve millions of expended money, by depreciation, or paid ten or twelve millions by taxation;… And therefore… [the] debt, has now no existence; it having been paid, by everybody consenting, to reduce as his own expense, from the value of the bills continually passing among themselves, a sum, equal to nearly what the expense of the war was for five years." 2 Thomas Paine was, as usual, an adept pleader of special causes, but he was no scholar, and certainly not an economic historian. His statement that everybody consented is simply not true, and he ignores both the ruinous train of consequences following upon the inflation and the question of whether or not it was effective in its object of providing for the armed forces.
It is not necessary, however, to explore the theoretical impact of the inflation further; it unfolds in the story of the financing of the war. The Congress and the states did attempt to finance the war effort primarily by the issuance of paper money. Congress issued what is known as Continental currency. The notes did not bear interest, as such currency sometimes did, but they were supposed to be redeemed by the states at a later date. Just how much was issued from the first issue in 1775 until an entirely new currency was issued in 1780 is in doubt. The estimates range from $191,552,380³ to $242,100,1764. It is commonly believed today to have been over $200 millions. Even if an exact figure could be agreed upon, however, we would still not know how much of the currency was in circulation, for it was extensively counterfeited. There were domestic counterfeiters; and the British government, as a matter of policy, attempted to destroy the currency by introducing counterfeit money.6 All accounts agree, however, that Congress issued more and more of the currency over the years through 1779. A recent estimate of the sums issued goes as follows:
1775 $ 6,000,000
This process of issuing more and more set in early. The initial issue was to have been for $2 million, but before it had been accomplished Congress authorized another $1 million.8 Before the end of the year $3 million more was issued." This despite the fact that Congress had intended only one issue at the beginning. And, there were those who attempted to prevent the escalation. Benjamin Franklin said: "After the first emission I proposed that we should stop, strike no more, but borrow on interest those we had issued. This was not then approved of, and more bills were issued."¹º
The process of issuing more and more of the currency and raising the amounts of single issues is easily explained. Once the money had been issued, it fell into private hands in return for goods and services. The government no longer had access to the currency. Congress then made further issues in order to have money to spend. The more it issued, the less the money was worth; larger and larger issues were made in the attempt to get the results that could be obtained by smaller issues earlier. Reliance on paper money has — for these reasons, and more complex ones where there are combinations of taxation and fiat money financing — a pyramiding effect.
Money vs. Currency
Why did the government not recover the money in some way? In general, this could have been done either by taxation or by borrowing, or some combination of these methods. The government did not retrieve the money for about the same reason it was issued in the first place, namely, to avoid taxes and because the credit of the Congress was not good. Before examining into the question of taxation and borrowing, however, one justification offered for issuing paper money needs to be explored.
Curtis Nettels, a present-day historian, describes the justification for a Continental currency this way: "The Union as a whole suffered from an acute shortage of hard money; all the coin in circulation in 1775 would not have paid a year’s expenses of the Continental Army." Some men at the time of the revolution held that a certain indeterminate amount of money is necessary to facilitate commerce. They thought that money could be issued up to the point of meeting the need without depreciating, but that once the point of sufficiency had been passed, the currency would begin to decline in value. It may not be an adequate reply to Professor Nettels to say that Congress could have issued $10 trillion in paper money and it would not have been enough to pay "a year’s expenses of the Continental Army," but the statement is correct. The only way I can make sense of the earlier idea is to suppose they believed that price is something inhering in the item offered for sale rather than being determined by supply and demand. Some clarity may be brought to the subject by distinguishing between money and currency. Money may be anything which serves as a medium through which some transactions are made. Currency is that which serves generally in an area to effect transactions. All currency is money, but not all money is currency. Money becomes currency in one of two ways: either because it is wanted by traders and is in sufficient supply to effect transactions, or because it has been made legal tender by some government. The only purpose for making a money legal tender is to force it into currency when it would not be the currency on its own merits. The very fact that Congress relied upon tender laws and used even harsher measures to give their bills currency should dispose of the argument that they were issued because of a shortage of hard money.
The real reason for the Continental currency issues, then, was that Congress and the states were attempting to finance the war without levying taxes directly. They are entitled to some sympathy for the difficult situation in which they were trying to function, but no amount 01 sympathy alters the consequences of actions. Congress had no authority to levy taxes. With equal validity, it can be said that Congress had no authority to issue money. The truth of the matter is that Congress had as little and as much power as it could manage to exercise during the period under consideration. It had no constitution, hence, no constitutional limits on what it could do. Its members, however, were delegates from the states. It may well be that had Congress attempted to levy taxes it would have been repudiated by the states or by the people. At any rate, Congress did not even attempt to levy taxes. It was not that the members could see no need for taxes. Congress declared, on many occasions, that the states should levy taxes. Elaborate schedules were devised for apportioning the costs of the war among the states. Solemn proclamations were issued urging the states to tax. For example, in 1777 Congress admonished the states to "raise by taxation in the course of the ensuing year, and remit to the treasury such sums of money as they think will be most proper in the present situation of the inhabitants…."¹¹
States Under Political Pressure
All this was of little avail. The states were not much more inclined to levy taxes to pay for the war than Congress was. One historian sums the matter up in this way: "Before 1780, most of the states shrank from collecting taxes for any purpose. Massachusetts did not vote any levy in 1776, and in 1778 resorted to a lottery to raise $2,000,000. Virginia waited until 1781 before making a serious attempt to obtain revenue from taxes. The performances of the other states were not much better."¹² There are several reasons for this state of affairs. For one, the hold of the state governments over the citizenry was sometimes precarious, particularly in states where Loyalists were numerous. Extensive taxation might have jeopardized the tenuous attachment which many had for their state governments. For another, the objection to taxation without representation by the British must have turned into a more general objection to taxation. This appears from the difficulty of collecting the taxes that were levied. "In Pennsylvania, for example, from 1778 to 1781, less than half the taxes assessed were collected; it was not uncommon for citizens to slam the door in the tax-collector’s face —and get away with it."¹³ But, above all, legislators were currying favor with their constituents by avoiding taxation. Sumner said that the "governors of the States could not urge taxation and zeal upon the legislatures without a painful and unpopular contest. The members of a legislature who laid taxes must expect to return to their constituents to face grumbling and popular dissatisfaction." 14
Instead of taxing to retire the Continental currency, the states issued large amounts of paper money themselves. "The emission of all the states exceeded $200,000,000. Virginia led the way, followed by North Carolina; then came South Carolina. Georgia, Delaware, and New Jersey exercised the most restraint."15
A minor stream that added to this flood of paper currency issued by Congress and the states was provided by domestic loans. Loan office certificates and certificates of indebtedness were issued to the extent of $20 million.16 The loan office certificates circulated generally, one writer notes, "effecting essentially the same consequences as would have attended the issue of an equal quantity of paper money."17
Paper Declared Legal Tender
Successive interventions were made in the market, interventions which followed logically from the use of fiat money to finance the war. The first of these interventions was to make the paper legal tender so that it would circulate as money. The specific actions to do this were by the states. For example, the Council of Safety of Pennsylvania declared in 1776 that anyone who refused to accept the Continental currency would forfeit whatever he refused to sell and be subject to a penalty besides — all this for a first offense —, and be banished from the state for a second offense." In the same year, Rhode Island made both state and Continental notes legal tender. In addition to providing penalties for not accepting this paper, that state prohibited the buying of specie with paper or differentiating in prices of goods when offered gold or silver instead of paper.’°
Sometimes even more drastic measures were authorized to make people take the paper money. When he was in command of forces at Philadelphia, General Putnam made this announcement: "In future, should any of the inhabitants be so lost to public virtue and the welfare of their country, as to presume to refuse the currency of the American states in payment for any commodities they may have for sale, the goods shall be forfeited, and the person or persons so refusing, committed to close confinement."²º In a similar fashion, George Washington was authorized to take goods from those who refused the Continental currency and to arrest and confine them.²¹
Rising Prices — and Controls
With such Draconian measures to support it, the Continental paper money did circulate. But the more of it that was issued, the more it depreciated. The most noticeable effect of this to the public was a general rise in prices.(Prices of particular goods and services rise and fall as demand and supply fluctuate even if the amount of money in circulation remains stable. And, given blockades and the kinds of demands incident to war, some prices would have risen inevitably during these years. However, the price increases were not only general but some of them are rises in Continental currency in relation to what they could be bought for in specie, which indicates that it was the currency which occasioned some of the increases.) Some of the state governments intervened in the market further by attempting to fix prices. As frequently happens, the legislators sought to control the effect — the rise in prices — rather than the cause —the increase in the money supply. Congress recommended that regional conventions be held to set prices for particular areas. The New England and Middle states held such conventions, but the Southern states south of Maryland steered clear of price controls. After a convention had agreed upon the general features of prices, it was up to the individual states to enforce the tariffs. The following is a description of penalties adopted by Rhode Island in 1777:
The penalty of demanding more than the tariff price was set at the value of the article,— half to the State, and half to the informer. Any one who refused for his commodities the tariff price, and afterward sold them for any other goods, was to forfeit the value thereof, half to the State, and half to the informer. If complaint was made that articles necessary for the army or navy were withheld by monopolizers, the State officers and Judges or any two Justices of the Peace might issue a warrant to impress and seize the same, breaking open buildings. The goods were to be appraised by two indifferent men at prices not to exceed those of the tariff. Anybody who contracted to receive for labour or goods more than the tariff rates was to be counted an enemy of the country, and fined twenty shillings for every article sold of the price of twenty shillings or under, and a sum equal to the value of the article, if it was worth more than that.²²
The price controls, where they were at all effective, resulted in shortages. John Eliot wrote from Boston in June of 1777: "We are all starving here, since this plaguy addition to the regulating bill. People will not bring in provision, and we cannot procure the common necessaries of life. What we shall do I know not."²³ What they did, of course, is what people ever do: evade the regulations, barter, black-market, produce a money that will purchase goods, and find a variety of means to perpetuate the market, however inadequate they are compared to the opportunities in a free market.
By 1778, the armed forces were finding it increasingly difficult to acquire goods with paper money. "Though paper money was taken, with more or less reluctance, in return for most things, some services were rendered only upon promises of receiving specie."24 George Washington wrote in 1779 that "a wagon load of money will scarcely purchase a wagon load of provisions. "25 The country was in the grip of a runaway inflation. Every man of intelligence knew that the root cause was the increase of the money supply (much as this is known in our day), yet there was not the will to deal effectively with it.
To get supplies and transport, the army had to resort to its equivalent of barter, i.e., impressment and requisition from the surrounding populace. There had been some impressment, particularly of transport, from the beginning of the war; but by the time of the Yorktown campaign in 1781 this method seems to have been relied upon almost exclusively.26 There was more and more of this done before 1781, however. By the latter part of 1779, supplies in general were being requisitioned. On December 11, 1779, Congress "voted requisitions on the States for specific supplies of flour and Indian corn. December 14, they established a system of requisitions and contributions of this kind, Maryland alone voting no. February 25, 1780, an elaborate apportionment of requisitions for such supplies was made…. Each State was called upon for the staples which it produced."27
The most drastic impact of inflation is that it tends to disintegrate and divide society, to turn employee against employer, the governed against the governors, the creditor against the debtor, the producer against the consumer, the populace against speculators, and so forth. Inflation tends to reverse the rules of economic behavior: where once it was prudent to save money, it becomes expedient to spend it; where once it was good business to supply consumers with durable goods, it becomes profitable to delay the sale; where once creditors were those who were better off, it now becomes good business to borrow money and repay it with a currency that is less valuable than when the loan was made. The solid citizen who is cautious and prudent can do well over the years by hard work, careful investments, and saving, when the money supply is stable.
His prosperity may well be described as virtue rewarded. Inflation sets the stage for wealth to be gained in a different fashion: by borrowing, by holding on to goods for the inevitable higher prices, and by attending closely to the swift changes in the value of the money. Such means of gaining riches are widely resented, particularly during a war.
Unhappy Consequences of Rampant Inflation
Men contemporary with events frequently described the consequences of the inflation as well as could be done. Josiah Quincy wrote these words to General Washington:
I am firmly of the opinion, and think it entirely defensible, that there never was a paper pound, a paper dollar, or a paper promise of any kind, that ever yet obtained a general currency, but by force or fraud, generally by both. That the army has been grossly cheated; that creditors have been infamously defrauded; that the widows and fatherless have been oppressively wronged and beggared; that the gray hairs of the aged and the innocent, for want of their just dues have gone down with sorrow to their graves, in consequence of our disgraceful depreciated paper currency….28
By 1778, John Adams could say that "every man who had money due to him at the commencement of this war, has been already taxed three-fourth parts of that money…. And every man who owed money at the beginning of the war, has put three-fourth parts of it in his pockets as clear gain. The war, therefore, is immoderately gainful to some, and ruinous to others."29
A historian who lived through that period has written:
The aged who had retired from the scenes of active business, to enjoy the fruits of their industry, found their substance melting away to a mere pittance, insufficient for their support. The widow who lived comfortably on the bequests of a deceased husband, experienced a frustration of all his well-meant tenderness. The laws of the country interposed, and compelled her to receive a shilling, where a pound was her due. The blooming virgin who had grown up with an unquestionable title to a liberal patrimony, was legally stripped of every thing but her personal charms and virtues. The hapless orphan, instead of receiving from the hands of an executor, a competency to set out in business, was obliged to give a final discharge on the payment of 6d. in the pound. In many instances, the earnings of a long life of care and diligence were, in the space of a few years, reduced to a trifling sum….
That the helpless part of the community were legislatively deprived of their property, was among the lesser evils which resulted from the legal tender of the depreciated bills of credit. The iniquity of the laws estranged the minds of many of the citizens from the habits and love of justice. The nature of obligations was so far changed, that he was reckoned the honest man, who from principle delayed to pay his debts. The mounds which government had erected, to secure the observance of honesty in the commercial intercourse of man with man, were broken down. Truth, honor, and justice were swept away by the overflowing deluge of legal iniquity….30
Decay of Public Virtue
George Washington wrote: "Speculation, peculation, engrossing, forestalling, with all concomitants, afford too many melancholy proofs of the decay of public virtue…." And a writer to a New Jersey paper assessed the blame for this: "I do not say that the abundance of money is the only cause of the decay of virtue or increase of vice, but I say it is a very principal cause, it operates more this way than any other, yea, than all other causes put together."3¹
The inflation contributed much to the loss of confidence in the Congress, the state governments, and the very cause they were committed to at the time. The idea was advanced, when the first issues of paper money were made, that its becoming currency would help to tie people to the cause of independence. Since the fate of the money — its eventual redemption — would depend upon the success of the revolt, those who came into possession of it would be committed to victory. So it might have been, I suppose, if the Congress had been content with one or two issues, if the states had refrained from issues, and if the governments had then turned to direct taxation. But the effect of issuing more and more was not only to reduce the value of the money but also to undermine confidence in the governments which issued it.
In fact, people began to suspect rather quickly that Congress would eventually repudiate its paper. To counter this fear, time and time again Congress reiterated the determination to redeem it and denounced those who said that it would be otherwise. In 1778, Congress adopted the following resolution: "Whereas a report bath circulated in divers parts of America, that Congress would not redeem the bills of credit issued by them to defray the expenses of the war, but would suffer them to sink in the hands of the holder, whereby the value of the said bills hath, in the opinion of many of the good people of these States, depreciated; and lest the silence of Congress might give strength to the said report; resolved that the said report is false and derogatory to the honor of Congress."³² One writer notes that "as paper money depreciated more and more, the pledges of Congress in respect to its redemption were more frequent and intense in form of expression."³³
They Tried to Stop
Congress resolved in September 1779 to issue paper money only to the total of $200 million. "Upon this mountain of paper," a modern historian has written, "Congress resolved to make its final stand…. But… the defiant proclamation of September 1779 proved the signal for another sharp selling wave in Continental money. By January 1780, the army was paying for supplies twice what it had paid in September 1779; and by March 1780, prices had risen four times above the level of September 1779."34
At that point, Congress began the outright repudiation of its paper, though the culmination was to come later. In March of 1780, Congress devalued the currency by proclaiming that it should now trade at forty to one of gold or silver. To finance this exchange, new paper money was to be issued to be redeemed by the states by taxation. An elaborate plan was contrived for the retiring of the old currency and replacing it with the new. The plan did not work. There was no reason why it should. If the new money was more valuable than the old, it would not circulate, according to Gresham’s Law, assuming the old money was still legal tender. In fact, the new money quickly fell to the same value as the old,35 and the whole became virtually worthless by 1781. In March of 1781, Congress abandoned the acceptance of its own paper money as legal tender. It was now to be accepted only on a sliding scale that was supposed to represent its depreciation. Thereafter, it depreciated so rapidly that it shortly ceased to circulate at all.36 Specie came out of hiding and replaced paper money as the currency of the land.
All these untoward events might be accepted as the cost of the war, but only if the currency had enabled the Congress to bring the resources of the country to bear on the war effort. That, however, was emphatically not the case. On the contrary, the paper money plus the absence of significant taxation tended to disperse the resources of the country and the energies of the people. Congress and the states were continually short of money, whereas the populace had an abundance. In consequence, the production, transport, trading, and provision of goods and services were concentrated on the civilian population, and the armed forces received short shrift.
Suppliers Refuse to Cooperate
In the later stages of the war, as already noted, the army had to abandon the use of the paper money substantially and turn to direct methods to get goods and services. This was not only an inconvenient and inefficient method of gathering material but also made people resent the army. For example, here are reports of the situation in Virginia in 1781 — at a time when a major British army was concentrated there and Washington was about to win his greatest victory. An agent sent to impress transport reported: "I have been much perplexed, for after having impressed them, the owners of some, by themselves or others, have taken, in the nighttime, a wheel or something to render them useless; and I don’t recollect any law to punish them, if it could be proved." The Quartermaster wrote to the war office: "Let me entreat, sir, that something may be done to draw the people with their means of transportation into the service willingly. I find them so opposed to every measure that is oppressive that it is almost impossible to effect anything of consequence that way. Many of the teamsters upon the late occasion have deserted with their wagons after throwing their loads out at improper places…."37
Nor were taxes in kind a way to get goods where they were wanted. General Washington wrote to the President of Pennsylvania in 1782: "A great proportion of the specific articles have been wasted after the people have furnished them, and the transportation alone of what has reached the army has in numberless instances cost more than the value of the articles themselves."38 It is not difficult to explain why this was so. The commodities had been taken without reference to a particular need, had been stored where no army might appear, except by accident, and were often spoiled when they were wanted. By contrast with this poor form of barter, the market is an efficient and felicitous device when acceptable money is in circulation; the market tends to make the goods available where and when they are wanted, and money is flexible: it can call forth a variety of goods.
The American cause was not lost as a result of the inflation. It was won despite the inflation. But victory was almost certainly delayed for several years; much suffering resulted; and the people’s confidence had been sorely tried. Indeed, we have not finished yet in this work with the consequences of the inflation, for they followed into the Confederation period. But the lessons of the experience were not lost on the leaders of that generation. In time, they were used to try to prevent a recurrence of the mistakes. Unfortunately, we cannot report that these lessons are still remembered to the seventh generation.
Next: The American Triumph.
¹ Curtis Nettels, The Emergence of a National Economy (New York: Holt, Rinehart and Winston, 1962), p. 42.
2 Quoted in Albert S. Bolles, The Financial History of the United States, I (New York: D. Appleton, 1896, 4th ed.), p. 208.
3 See Nettels, op. cit., p. 24.
4 See William G. Sumner, The Financier and the Finances of the American Revolution, I (New York: Dodd, Mead, and Co., 1891), p. 98. Sumner indicates that one estimate runs well over $300 millions, but that it includes reissues.
5 See John R. Alden, A History of the American Revolution (New York: Alfred A. Knopf, 1969), p. 255.
6 See Bolles, op. cit., pp. 150-57.
7 Nettels, op. cit., p. 24.
8 Bolles, op. cit., p. 39.
9 Ibid., p. 43.
10 Ibid., p. 39.
11 Ibid., p. 193.
¹2 Nettels, op. cit., p. 24.
13 John C. Miller, Triumph of Freedom (Boston: Little, Brown and Co., 1948), p. 458.
¹4 Sumner, op. cit., p. 274.
¹5 Nettles, op. cit., p. 25.
¹6 Samuel E. Morison, The Oxford History of the United States (New York: Oxford University Press, 1965), p. 230.
¹7 Bolles, op. cit., p. 260.
18 Ibid., pp. 121-22.
¹9 Sumner, op. cit., pp. 46-47.
²º Bolles, op. cit., p. 119.
²¹ Ibid., p. 121.
22 Sumner, op. cit., pp. 56-57. ²³ Ibid., p. 61.
²4 Bolles, op. cit., p. 68.
25 Ibid., p. 132.
26 See Sumner, op. cit., pp. 142-52.
27 Ibid., p. 239.
28 Bolles, op. cit., p. 139.
29 Ibid., p. 128.
30 Ibid., pp. 176-78.
3¹ Ibid., p. 216.
32 Ibid., p. 206.
34 Miller, op. cit., p. 463.
35 See Sumner, op. cit., p. 86.
36 Ibid., pp. 94-95.
37 Ibid., pp. 152-53.
38 Ibid., p. 243.
The Function of Price
The price system is the control board, the regulator, the thermostat — as it has been variously put — by which economic conduct is determined in a private-enterprise economy.
The guidance provided by prices has two main aspects. In the first place, by setting up judgments as to the significance of each factor the price system calls forth and allocates the available productive resources. Under the influence of price each factor flows into the channel which — according to the market’s evaluation —promises the greatest result. In the second place, through the same market appraisal that directs the utilization of productive factors, the price mechanism awards shares in output to those who furnish personal services of various kinds, to those who — by accumulating and investing — provide the tools, and to all others who make contributions in the opinion of the market. Moreover, prices chart the course of the consumer as he utilizes the general claim to output which has been awarded to him.
From Shirtsleeve Economics: A Commonsense Survey by William A. Paton