An argument that what is essential in any arbitrary measure--including measures of value--is that they can be counted on to convey accurate and consistent information. When a central bank tolerates inflation, it reduces an economy's ability to make decisions based on value.Money ; Dollar, American

Michael F. Bryan

English

Research Papers in Economics

The Congress shall have power…To coin
Money, regulate the Value thereof, and
of foreign Coin, and fix the standard of
Weights and Measures.
—Constitution of the United States
Article 1, Section 8 
P erhaps the most difficult idea for stu-
dents of money to grasp is that a dollar,
as it is understood today, has no intrinsic
value. By itself, it is worthless. The dol-
lar is only a measure of value, defined
entirely by its purchasing power, or what
another person is willing to give you for
it. It is a fiat standard of value.
Other nations use other scales. In France,
value is measured by “francs,” in Eng-
land, “pounds,” in Mexico, “pesos,” and
so on. These are all arbitrary measures. 
In this Economic Commentary, I exam-
ine the dollar as a standard measure of
value. This is a useful exercise primarily
because it helps us understand the prob-
lems created by inflationary periods,
when that standard is not fixed. By con-
sidering examples from other, seemingly
unrelated, measurement standards—bad
standards—we come to see that the es-
sential attribute of any measure is the
clarity of information it conveys. This
understanding illuminates the central
problem with inflation: It distorts a
nation’s measure of value.
n n   The Usefulness and 
Pitfalls of Arbitrary 
Measurement Standards
The high cost of living did not represent
that the average man was worse off; it
merely represented that the yardstick, in
terms of which wealth and income was
measured, had decreased.
—Irving Fisher (1922)
Every decision requires information. If
I’m not sure whether I would be more
comfortable with or without a jacket, I
check the weather report, which might
say that it’s raining. This information is
useful to my decision. And it is nonsub-
jective—either it’s raining or it’s not.
But many of our decisions are based on
subjective judgments, and that greatly
complicates our ability to get information
from others. If, for example, a weather
reporter informs me that the temperature
is “cool”—a subjective measurement—
can I make a good decision about wheth-
er to wear a jacket? Perhaps. But only if
I’m confident that the reporter and I
judge “coolness” the same way.
An alternative method of transmitting
information on temperature is to use an
arbitrary, but standardized, unit like
“degrees.” If the reporter says it’s 57
degrees outside, that is a standardized
measurement which clearly tells me the
coolness level, as long as I understand
what is meant by a degree.
But even this measurement can create in-
formational distortions if there is a mis-
understanding about what “degree” rep-
resents. Consider again a temperature
report of 57 degrees. It is likely that most
of our readers presumed a Fahrenheit
scale, since a majority live in areas where
this is the standard used to measure
temperature. Yet readers who use the
Celsius scale would probably have con-
cluded that 57 degrees is hot. (In fact,
very hot. Fifty-seven degrees Celsius—
or 134 degrees Fahrenheit—is the high-
est temperature ever recorded in the
United States.)
Confusion over a measurement standard
can occur just as easily when the stan-
dard is variable. Many nations measure
length in terms of the yard, the foot, and
the inch. Today, there is general uniform-
ity regarding the lengths that these units
represent.1  But this has not always been
the case. In England, where these meas-
ures originated, the foot is thought to
have been defined by the length of the
ruling monarch’s foot. Similar measure-
ments defined the yard and the inch.2 
Inches, feet, and yards are also com-
monly used in America, but through at
least the mid-nineteenth century, these
measures often varied between the states.
In 1821, John Adams reported that
measures of volume and weight at U.S.
customhouses differed by as much as 
October 1, 1997
Federal Reserve Bank of Cleveland
Bad Standards
by Michael F. Bryan
The measurement standards that we
take for granted today, such as for
weight, length, time, and temperature,
were not always so exact. Over the
years, we have come to appreciate the
importance of maintaining consistent
standards in our measurement of
these and other subjective phenom-
ena. Why, then, do we not demand the
same rigorous adherence to a stan-
dard when it comes to our measure 
of value—the dollar? We should.
ISSN 0428-127620 and 25 percent, respectively! In 1830,
a more exhaustive report commissioned
by Congress found that what constituted
two pounds was 2½ percent heavier in
Philadelphia than in Baltimore, and a
yard was 1.1 percent longer in Provi-
dence than in Philadelphia.
Among the standards established by
Congress, the nation’s standard of value
—the dollar—has received the greatest
attention and has been the subject of a
virulent debate. In fact, the measure-
ment of a dollar was the country’s first
officially determined standard.3  Be-
tween 1792 and 1873, a dollar was de-
fined as 24.75 grains of gold or 371.25
grains of silver. And from 1878 to 1968,
a dollar was defined only in terms of
gold, in what has come to be known as
a “gold standard.”
But as a measure of quantity, such as
the natural foot, fathom, or handful,
which is continually varying in its own
quantity, can never be an accurate
measure of the quantity of other things;
so a commodity which is itself continu-
ally varying in its own value, can never
be an accurate measure of the value of
other commodities.
—Adam Smith (1776)
Metallic weights as measures of value
are not without drawbacks. Chief among
these is that the intrinsic value of a metal
changes with supply and demand condi-
tions in its market. When the market for
a metal changes, the economy’s measure
of value is also altered.
Imagine that the dollar is defined by a
specific amount of gold, and that for
whatever reason—either the demand for
gold rises or its supply falls—gold be-
comes a more intrinsically valuable
commodity. All dollar-denominated
transactions and contracts are now more
expensive. People who had previously
entered into contracts agreeing to repay
with a specified number of dollars will
find that the agreement has become less
attractive, to the great benefit of the
lenders. Moreover, retailers will need to
adjust the dollar prices of their goods and
services downward. Although the intrin-
sic value of these items has not changed,
the intrinsic value of a dollar has.
Figure 1 shows the price of gold and the
price of consumer retail goods (as meas-
ured by the Consumer Price Index [CPI])
since 1960. Note that between 1960 and
1968, the dollar price of gold was an
unwavering $35 per ounce. Indeed, gold
defined the dollar, so it could not change
relative to the dollar. After 1973, how-
ever, the price of gold swung dramati-
cally relative to the average price of retail
goods and services. If the United States
had been on a gold standard between
1973 and 1996, we would likely have
experienced no inflation in the price of
goods and services (all else equal), since
the price of gold relative to the CPI is
nearly the same today as it was 24 years
ago. But the price level may have been
much more volatile, because the price of
gold relative to other goods and services
fluctuated by 300 percent between 1973
and 1996, with an average absolute
change of 18 percent per year!4
We can appreciate the needlessness—
indeed, the absurdity—of these fluctua-
tions by imagining such swings in other
weights and measures. What if we meas-
ured a foot as the height on a barom-
eter?5  As weather conditions shifted, so
too would the foot, altering with it all
contracts and agreements that specified a
particular number of feet. And there
would be no agreement between parties
on different sides of a weather front as to
the length this measure constituted. Ob-
viously, these changes would be a source
of great—and entirely unnecessary—
disruption in our lives.
A commodity money standard will al-
ways be subject to the supply and de-
mand conditions in its market. A fiat
money without intrinsic value need not
be affected by such uncertainty because
its standard is chosen arbitrarily. 
And yet you cannot have a measure of
weights that have no weight, nor a stan-
dard of measure without length. How,
then, can you have a uniform standard of
value without value?
—Mr. Clarkson Nott Potter 
(attorney arguing in support of the negative),
Supreme Court decision of 1871 
affirming the Greenback as legal tender
The idea that a fiat money can measure
value, without having any intrinsic
worth, is difficult to comprehend because
we are used to thinking about the dollar
as a valuable thing. However, because
the intrinsic value of any commodity we
choose to define a dollar will fluctuate
with the supply and demand conditions
in its market, a completely arbitrary sys-
tem for measuring value offers the po-
tential for a more efficient standard than
do commodity-based monies.
The merits of a pure fiat versus a com-
modity money standard depend entirely
on the nature of the institution setting and
maintaining that standard—the mone-
tary authority. By controlling the supply
of fiat money (relative to its demand),
monetary policymakers can set or vary
the standard as they see fit. But this abil-
ity to set the standard of value arbitrarily
offers a central bank not only the poten-
tial for enhancing economic efficiency,
but also the power to corrupt it. As a con-
sequence, there have been many calls for
policymakers to fix the standard, not in
terms of a particular amount of gold or
some other precious commodity, but in
terms of its purchasing power.
FIGURE 1 GOLD PRICES AND THE CPI
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Data Resources, Inc.; and
Samuel Montagu & Company, Annual Bullion Review, various issues.Is it not absurd to have a dollar also a
unit in weight, when it is not intended to
measure weight, but is intended to meas-
ure purchasing power. It is used in com-
merce in buying and selling, by debtor
and creditor for lending and repaying;
and we propose that the repayment shall
be just. What does that mean? It does not
mean that you shall return a given weight
of gold or a given weight of anything; it
means that you shall return to the lender
something that is a just equivalent. Value
is involved in there, and value is statisti-
cally increased by an index number aver-
age purchasing power.
—Irving Fisher (1922)
n n    Rules versus Discretion in
Maintaining a Standard
Arbitrary scales are essential tools for
measuring various phenomena. They
help us judge, among other things, tem-
perature, time, space, weight, height, 
and, of course, value. It is on such meas-
urements that a great many decisions are
based. But the combination of the impor-
tant role these measures play in the for-
mulation of decisions, and their arbitrary
determination, provides a clear incentive
for their manipulation. This is the obvi-
ous risk that a fiat money standard faces.
“Ah! That accounts for it,” said the Hat-
ter. “Now, if you only kept on good terms
with [Time], he’d do almost anything you
liked with the clock. For instance, sup-
pose it were nine o’clock in the morning,
just time to begin lessons: you’d only
have to whisper a hint to Time, and
round goes the clock in a twinkling!
Half-past one, time for dinner!”
—Lewis Carroll (1872)
Through the Looking Glass
Consider the following historical exam-
ple involving the measurement of time,
another important, but entirely arbitrary,
standard. The Julian calendar—the basis
for the one most of us use today—is a
relatively modern contrivance, intro-
duced around 47 B.C. Prior to that time,
much of the world operated on a Roman
lunar calendar, which had a major flaw:
The lunar cycle lasts only 29.5 days,
which means that over a period of 12
months, there aren’t enough days to keep
the calendar in sync with the seasons.
Indeed, the early Roman calendar had
only 355 days. Left on its own, it gradu-
ally rotated around the seasons, so that,
for example, in some years June would
occur during the summer, while in others
it would be a winter month. In a culture
where harvests, holidays, and other sea-
sonal events determine the pattern of
people’s lives, such an asynchronous
calendar is not very practical.
The somewhat predictable solution was
to periodically insert an “intercalary”
month. For a time, the intercalary period
was introduced every other year between
February 23 and 24. But the timing (and
duration) of this period occurred at the
discretion of the pontifices, members of
an official board that met in secret to
pray and confer with the gods and to ob-
serve the moon, along with others signs
from Mount Olympus. The intercalary
period often lapsed, and there were occa-
sions when the calendar was as much as
four months out of sync with the seasons.
In the end, the pontifices are believed to
have adjusted the calendar at will, and it
has been suggested that through their
manipulations, they were able to influ-
ence a wide variety of political and eco-
nomic events. Ancient Roman authors
insinuated that calendar adjustments
were rife with negligence, impropriety,
corruption, and politics. (Modern schol-
ars appear to be more forgiving of the
pontifices’ motives, however, and it is
conceivable that their manipulations pre-
sumed some social good.)6
Apparently, the pontifices were not
bound to announce the onset of an inter-
calary period until the last moment, mak-
ing commitments based on the calendar
extremely difficult. If a general was
given an order to commence an attack
on, say, March 5, no one was ever sure
when that day would occur. In fact, it
was not uncommon for Roman quaestors
(public fiscal authorities) to redate their
official records after the fact, since at the
time of a transaction’s occurrence, the
date may not have been clear.7
Of course, it was not only public offi-
cials who found the discretionary nature
of the calendar problematic. It has been
suggested that debt finance was common
in Roman society, and the imprecise cal-
endar introduced substantial uncertainty
into the terms of contracts. Examples are
reported in which debt arrangements
were calculated on two terms, one being
si intercalctum erit (“if a day or month
will be intercalated into the calendar”).
Is this substantively different from the
countless modern contracts that include
inflation clauses?
n n    Protecting the Standard
Those people who prefer a continually
upward moving to a stationary price
level forcibly remind one of those who
purposely keep their watches a little fast
so as to be more certain of catching
their trains. But to achieve their pur-
pose they must not be conscious or
remain conscious of the fact that their
watches are fast.
—Knut Wicksell (1936)
What value of the dollar is the right one?
As with temperature, length, or time, any
arbitrary scale will do: It really doesn’t
matter what the purchasing power of a
dollar is. What is essential in a measure
of value—indeed, what is essential in
any measure of subjective phenomena—
is that it can be counted on to convey
accurate and consistent information.
Only then can commitments based on
that standard be made.
It is often said that by allowing the pur-
chasing power of the dollar to fluctuate,
the Federal Reserve can improve the
national welfare. That is, a little inflation
may actually have some benefits. When
we conceive of the dollar as a measure
of value, however, such claims are hard
to justify, since we could just as easily
imagine the state attempting to boost the
nation’s welfare by varying measures of
length, weight, or any of the other arbi-
trary gauges through which information
is transmitted.
The Federal Reserve is a safeguard of an
arbitrary standard—a crucially impor-
tant standard—on which millions of
people base their financial decisions. To
ensure that decisions involving value are
as clear and as accurate as possible, the
central bank must provide stability to
that standard.
When we allow the purchasing power of
the dollar to change—that is, when we
tolerate inflation—we are causing the
nation’s measure of value to shrink. Per-
haps for a time, inflation will make some
people better off at the expense of others.
But in the end, we all lose a valuable
commodity: the ability to make clear
decisions based on an invariant standard
of value.n n    Footnotes
1.  Actually, small differences still exist. For
example, the British foot is 1/400,000 shorter
than the U.S. foot.
2. Although new royal houses occasionally
brought with them new weights and meas-
ures, “official” measures may not have
changed very often. However, practical con-
siderations did exert an influence. For exam-
ple, while an official brass bar was used to
gauge the standard inch in Norman England,
this measure was also defined as three barley-
corns, presumably a more accessible—but
more variable—standard for common use. 
3.  The accuracy of this measure seems to
have been the motivation for the first legal
standard of weight in the United States, aimed
specifically at standardizing coinage. In 1828,
Congress enacted the following: ... [F]or the
purpose of securing a due conformity in the
weight of coins of the United States—the
brass troy point weight procured by the minis-
ter of the United States at London in the year
one thousand eight hundred and twenty-
seven, for the use of the mint and now in the
custody of the Mint at Philadelphia, shall be
the standard troy pound of the Mint of the
United States, conformably to which the
coinage thereof shall be regulated.
4.  Of course, some of this volatility would
have been reduced had there been a more sta-
ble general price level over the period.
5.  This example comes from Irving Fisher,
testimony before the Committee on Banking
and Currency, U.S. House of Representa-
tives, H.R. 11788, December 18–21, 1922.
6. See A.K. Michels, The Calendar of the
Roman Republic, Princeton, N.J.: Princeton
University Press, 1967, p. 168.
7.  Indeed, some authors suggest that Caesar’s
experience with this nuisance in Gaul and
elsewhere may have played the deciding role
in his abandonment of the lunar calendar.
Michael F. Bryan is an assistant vice presi-
dent and economist at the Federal Reserve
Bank of Cleveland. The author thanks Jen-
nifer Ransom for research assistance.
The views stated herein are those of the
author and not necessarily those of the Fed-
eral Reserve Bank of Cleveland or of the
Board of Governors of the Federal Reserve
System.
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Bad standards

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