Misleading dollar;

              114 HASKINS & SELLS December
The Misleading Dollar
THE dollar is in trouble. Its integrity
as a medium for the expression of
financial value is assailed. Changing eco­nomic
conditions are responsible. Due to
the general rise in the price level of com­modities
the dollar is no longer trust­worthy
as an index to conditions.
With the increase in prices the purchas-ing
power of the dollar has declined. It
represents to-day only from a third to a
half the quantity of a commodity which
it did five or six years ago. Hence, it is
unsafe for comparative purposes.
Formerly, an increase in the inventory
figure on a comparative balance sheet
meant an increase in the quantity inven­tory.
From the latter inventory, taking
into consideration the average stock and
average volume of sales, a conclusion
might have been reached as to whether or
not the management responsible for a
given enterprise was maintaining a rational
position with regard to the amount of
capital invested in the stock of merchan­dise.
To-day, unless the increase in the price
level is taken into consideration, any
attempt to use the figures representing
values as a basis for comparison is filled
with danger.
A striking example of the dollar fallacy
for comparative purposes is brought out
by Mr. O. P. Austin, statistician of The
National City Bank of New York, in an
interesting article on Foreign Trade which
appeared in the October, 1920, issue of
The Americas, a publication of The Na­tional
City Bank of New York.
A list of the principal exports of the
United States expressed in terms of dollars
and comparing the 1920 period with a
similar period for the year 1914 shows the
following:
1920 $5,473,563,755
1914 1,667,448,585
Increase $3,806,115,170
Percentage of increase 228.2
The same list is compared on a quantity
basis with a somewhat different result:
1920 Pounds 148,693,415,297
1914 110,408,739,580
Increase 38,284,675,717
Percentage of increase 34.6
In attempting to interpret the signifi­cance
of an increased inventory it is neces­sary
therefore to take into consideration
the quantities involved. Dollars for com­parative
purposes, where quantities enter
into the situation, are misleading and dan­gerous.
The application of the quantity test is
not always practicable in accountancy
engagements because of conditions, or of
the time required. It is sometimes possi­ble,
on the contrary, to test the major
items in an inventory using the prices in
force previous to the upward trend of the
price level. For example, taking the quan­tity
exports of the United States for the
year 1920 and comparing them, at 1914
prices, with the value of exports in 1914,
produces the following results:
1920—148,693,415,297 lbs.
at 1914 prices. . . $2,245,567,958
1914 1,667,448,585
Increase $578,119,373
Percentage of increase 34.6
It is axiomatic that unlike things may
not be compared. To compare dollars at
two dates when there has been a change in
the value of the dollar during the period
intervening between the dates is to com­pare
unlike things. The result cannot be
otherwise than misleading.