summaryrefslogtreecommitdiff
path: root/34823-8.txt
diff options
context:
space:
mode:
authorRoger Frank <rfrank@pglaf.org>2025-10-14 20:02:25 -0700
committerRoger Frank <rfrank@pglaf.org>2025-10-14 20:02:25 -0700
commit3c0f1e41e65743d040b623b285cb05089846f323 (patch)
treee74ed213950584cab96f25d5dbdf50bd6994908f /34823-8.txt
initial commit of ebook 34823HEADmain
Diffstat (limited to '34823-8.txt')
-rw-r--r--34823-8.txt22225
1 files changed, 22225 insertions, 0 deletions
diff --git a/34823-8.txt b/34823-8.txt
new file mode 100644
index 0000000..0daeb96
--- /dev/null
+++ b/34823-8.txt
@@ -0,0 +1,22225 @@
+Project Gutenberg's The Value of Money, by Benjamin M. Anderson, Jr.
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever. You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+
+Title: The Value of Money
+
+Author: Benjamin M. Anderson, Jr.
+
+Release Date: January 2, 2011 [EBook #34823]
+
+Language: English
+
+Character set encoding: ISO-8859-1
+
+*** START OF THIS PROJECT GUTENBERG EBOOK THE VALUE OF MONEY ***
+
+
+
+
+Produced by Curtis Weyant and the Online Distributed
+Proofreading Team at http://www.pgdp.net (This book was
+produced from scanned images of public domain material
+from the Google Print project.)
+
+
+
+
+
+
+
+
+
+ HARVARD COLLEGE
+ LIBRARY
+
+ FROM THE
+
+ QUARTERLY JOURNAL
+ OF ECONOMICS
+
+
+
+ THE MACMILLAN COMPANY
+ NEW YORK · BOSTON · CHICAGO · DALLAS
+ ATLANTA · SAN FRANCISCO
+
+ MACMILLAN & CO., LIMITED
+ LONDON · BOMBAY · CALCUTTA
+ MELBOURNE
+
+ THE MACMILLAN CO. OF CANADA, LTD.
+ TORONTO
+
+
+
+
+ THE
+ VALUE OF MONEY
+
+ BY
+
+ B. M. ANDERSON, JR., PH. D.
+ ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY
+ AUTHOR OF "SOCIAL VALUE"
+
+
+ New York
+ THE MACMILLAN COMPANY
+ 1917
+
+ _All rights reserved_
+
+
+
+ COPYRIGHT, 1917
+ BY THE MACMILLAN COMPANY
+ Set up and electrotyped. Published May, 1917.
+
+
+
+ To
+
+ B. M. A., III
+ AND
+ J. C. A.
+
+ WHO OFTEN INTERRUPTED THE WORK
+ BUT NONE THE LESS INSPIRED IT
+
+
+
+
+PREFACE
+
+
+The following pages have as their central problem the value of money.
+But the value of money cannot be studied successfully as an isolated
+problem, and in order to reach conclusions upon this topic, it has been
+necessary to consider virtually the whole range of economic theory; the
+general theory of value; the rôle of money in economic theory and the
+functions of money in economic life; the theory of the values of stocks
+and bonds, of "good will," established trade connections, trade-marks,
+and other "intangibles"; the theory of credit; the causes governing the
+volume of trade, and particularly the place of speculation in the volume
+of trade; the relation of "static" economic theory to "dynamic" economic
+theory.
+
+"Dynamic economics" is concerned with change and readjustment in
+economic life. A distinctive doctrine of the present book is that the
+great bulk of exchanging grows out of dynamic change, and that
+speculation, in particular, constitutes by far the major part of all
+trade. From this it follows that the main work of money and credit, as
+instruments of exchange, is done in the process of dynamic readjustment,
+and, consequently, that the theory of money and credit _must be a
+dynamic theory_. It follows, further, that a theory like the "quantity
+theory of money," which rests in the notions of "static equilibrium" and
+"normal adjustment," abstracting from the "transitional process of
+readjustment," touches the real problems of money and credit not at all.
+
+This thesis has seemed to require statistical verification, and the
+effort has been made to measure the elements in trade, to assign
+proportions for retail trade and for wholesale trade, to obtain
+_indicia_ of the extent and variation of speculation in securities,
+grain, and other things on the organized exchanges, and to indicate
+something of the extent of less organized speculation running through
+the whole of business. The ratio of foreign to domestic trade has been
+studied, for the years, 1890-1916.
+
+The effort has also been made to determine the magnitudes of banking
+transactions, and the relation of banking transactions to the volume of
+trade. The conclusion has been reached that the overwhelming bulk of
+banking transactions occur in connection with speculation. The effort
+has been made to interpret bank clearings, both in New York and in the
+country outside, with a view to determining quantitatively the major
+factors that give rise to them.
+
+In general, the inductive study would show that modern business and
+banking centre about the stock market to a much greater degree than most
+students have recognized. The analysis of banking assets would go to
+show that the main function of modern bank credit is in the direct or
+indirect financing of corporate and unincorporated _industry_.
+"Commercial paper" is no longer the chief banking asset.
+
+It is not concluded from this, however, that commerce in the ordinary
+sense is being robbed by modern tendencies of its proper banking
+accommodation, or that the banks are engaged in dangerous practices. On
+the contrary it is maintained that the ability of the banks to aid
+ordinary commerce is increased by the intimate connection of the banks
+with the stock market. The thesis is advanced--though with a recognition
+of the political difficulties involved--that the Federal Reserve Banks
+should not be forbidden to rediscount loans on stock exchange
+collateral, if they are to perform their best services for the country.
+
+The quantity theory of money is examined in detail, in various
+formulations, and the conclusion is reached that the quantity theory is
+utterly invalid.
+
+The theory of value set forth in Chapter I, and presupposed in the
+positive argument of the book, is that first set forth in an earlier
+book by the present writer, _Social Value_, published in 1911. That book
+grew out of earlier studies in the theory of money, in the course of
+which the writer reached the conclusion that the problem of money could
+not be solved until an adequate general theory of value should be
+developed. The present book thus represents investigations which run
+through a good many years, and to which the major part of the past six
+years has been given. On the basis of this general theory of value, and
+a dynamic theory of money and exchange, our positive conclusions
+regarding the value of money are reached. On the same basis, a
+psychological theory of credit is developed, in which the laws of credit
+are assimilated to the general laws of value.
+
+In a final section, the constructive theory of the book is made the
+basis for a "reconciliation" of "statics" and "dynamics" in economic
+theory--an effort to bring together the abstract theory of price
+(_i. e._, "statics") which has hitherto chiefly busied economists, and
+the more realistic studies of economic change (_i. e._ "dynamics") to
+which a smaller number of economists have given their attention. These
+two bodies of doctrine have hitherto had little connection, and the
+science of economics has suffered as a consequence.
+
+This book was not written with the college student primarily in mind.
+None the less, I incline to the view that the book, with the exception
+of the chapter on "Marginal Utility," is suitable for use as a text with
+juniors and seniors in money and banking, if supplemented by some
+general descriptive and historical book on the subject, and that the
+whole book may very well be used with such students in advanced courses
+in economic theory. I think that bankers, brokers, and other business
+men who are interested in the general problems of money, trade,
+speculation and credit, will find the book of use. Naturally, however,
+it is my hope that the special student of money and banking, and the
+special student of economic theory will find the book of interest. The
+book may interest also certain students of philosophy and sociology, who
+are concerned with the applications of philosophy and social philosophy
+to concrete problems.
+
+My obligations to others, running through a good many years, are very
+great. With Professor E. E. Agger, I talked over very many of the
+problems here discussed, in the course of two years of close association
+at Columbia University, and gained very much from his suggestions and
+criticisms. Professor E. R. A. Seligman has read portions of the
+manuscript, and given valuable advice. Professor H. J. Davenport has
+given the first draft an exceedingly careful reading, and his criticisms
+have been especially helpful. Professor Jesse E. Pope supervised my
+investigations in the quantity theory of money in 1904-5, in his seminar
+at the University of Missouri, and gave me invaluable guidance in the
+general theory of money and credit then. More recently, his intimate
+first hand knowledge of European and American conditions, both in
+agricultural credit and in general banking, has been of great service to
+me. Mr. N. J. Silberling, of the Department of Economics at Harvard
+University, has been helpful in various ways, particularly by making
+certain statistical investigations, to which reference will be made in
+the text, at my request. Various bankers, brokers, and others closely in
+touch with the subjects here discussed have been more than generous in
+supplying needed information. Among these may be especially mentioned
+Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the
+_Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H.
+Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston,
+various gentlemen in the offices of Charles Head & Co., and Pearmain and
+Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr.
+W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate
+Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee
+Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade,
+DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of
+the Bankers Trust Company, New York. My greatest obligations are to two
+colleagues at Harvard University. Professor F. W. Taussig has given the
+manuscript very careful consideration, from the standpoint of style as
+well as of doctrine, and has discussed many problems with me in detail.
+Professor O. M. W. Sprague has placed freely at my service his rich
+store of practical knowledge of virtually every phase of modern money
+and banking, and has read critically every page of the manuscript. None
+of these gentlemen, of course, is to be held responsible for my
+mistakes. I also make grateful acknowledgment of the aid and sympathy of
+my wife.
+
+In the course of the discussion, frequent criticisms are directed
+against the doctrines of Professors E. W. Kemmerer and Irving Fisher,
+particularly the latter, as the chief representatives of the present day
+formulation of the quantity theory. Both their theories and their
+statistics are fundamentally criticised. I find myself in radical
+dissent on all the main theses of Professor Fisher's _Purchasing Power
+of Money_, and at very many points of detail. To a less degree, I find
+myself unable to concur with Professor Kemmerer. But I should be sorry
+if the reader should feel that I fail to recognize the distinguished
+services which both of these writers have performed for the scientific
+study of money and banking, or should feel that dissent precludes
+admiration. I acknowledge my own indebtedness to both, not alone for the
+gain which comes from having an opposing view clearly defined and ably
+presented, but also for much information and many new ideas. My general
+doctrinal obligations in the theory of money and credit are far too
+numerous to mention in a preface. My greatest debt in general economic
+theory is to Professor J. B. Clark.
+
+ B. M. ANDERSON, JR.
+
+ HARVARD UNIVERSITY, March 31, 1917.
+
+
+
+
+ANALYTICAL TABLE OF CONTENTS
+
+
+_PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE_
+
+
+CHAPTER I
+
+ECONOMIC VALUE
+ PAGE
+ Problem of value of money special case of general theory of
+ value; present chapter concerned with general theory 1
+
+ Formal and logical aspects of value: value as quality; value
+ as quantity; value and wealth 5-6
+
+ Absolute _vs._ relative conceptions of value: value of money
+ _vs._ "reciprocal of price-level"; value prior to exchange;
+ value and exchangeability; do prices correctly express
+ values? 6-12
+
+ Doctrine so far in accord with main current of economic
+ opinion 12-14
+
+ Causal theory of value new: marginal utility, labor theory,
+ etc., rejected 14-16
+
+ Social explanation required: "individual" a social product,
+ both in history of individual and in history of race 16-19
+
+ And above individual impersonal psychic forces, law, public
+ opinion, morality, economic values 19-20
+
+ Three types of theory have dealt with these: theory of
+ extra-human objective forces; extreme individualism;
+ social value theory 20-21
+
+ Illustrated in jurisprudence, ethics, and economic theory 21-26
+
+ Law, morals, and economic values generically alike, but have
+ _differentiæ_ 26-28
+
+ But not differentiated on basis of states of consciousness
+ of individual immediately moved by them, because many
+ minds in organic interplay involved 28-33
+
+ Economic social value (a) of consumers' goods and services:
+ "utility" and scarcity; "marginal utility"; social
+ explanation of marginal utility; marginal utilities the
+ conscious _focus_ of economic values of consumers' goods;
+ but only minor part of these values; individuals, classes
+ and institutions heavily weighted by legal, moral, and
+ other social values, in power over economic values of
+ consumers' goods 33-38
+
+ Economic social value (b) of labor, land, stocks, bonds,
+ "good will," etc.; based only in part on values of
+ consumers' goods; partially independent, directly
+ influenced by contagion, and centers of power and
+ prestige 38-41
+
+ Pragmatic character of theory 41-43
+
+ Relation of social values to individual values 43-45
+
+
+CHAPTER II
+
+SUPPLY AND DEMAND, AND THE VALUE OF MONEY
+
+ _Hiatus_ between general theory of value and theory of value
+ of money 46-47
+
+ Partly because former has been developed by different writers
+ from those who have developed latter 47-49
+
+ But chiefly because supply and demand, cost of production,
+ etc., _assume_ fixed value of money, and are theories of
+ _price_, rather than _value_ 49
+
+ Supply and demand useful but superficial formula, common
+ property of many value theories 49-50
+
+ Crude and unanalyzed in Smith and Ricardo; first made precise
+ by J. S. Mill, who gives essentials of modern doctrine 49-51
+
+ Böhm-Bawerk's pseudo-psychology spoils Mill's clean-cut
+ doctrine 51-52
+
+ Supply and demand assumes fixed _value_ of money-unit, and
+ hence inapplicable to money itself 52-56
+
+ But supply and demand does _not_ assume fixed _price-level_ 56-57
+
+ Cairnes _vs._ Mill 57-58
+
+ Mill's unsuccessful effort to apply supply and demand to
+ money 59-62
+
+ Walker's attempt 62
+
+ Supply and demand in the "money market" 62-63
+
+
+Chapter III
+
+COST OF PRODUCTION AND THE VALUE OF MONEY
+
+ Types of cost theory: modern cost doctrine is "money costs"
+ doctrine, and inapplicable to value of money 64
+
+ Labor cost: Smith; Ricardo; Ricardo's confession of failure;
+ "real costs" in Senior and Cairnes; Mill's "money-outlay"
+ cost doctrine, and Cairnes' criticism; but "money-cost"
+ has survived 64-67
+
+ Because "real cost" doctrine does not square with facts 67-69
+
+ "Money-cost" of producing money-metal 69-70
+
+ Austrian cost doctrine runs still in money terms, assuming
+ value, money, and fixed value of money 70-71
+
+ "Negative social values" as "real costs" note, 71
+
+
+CHAPTER IV
+
+THE CAPITALIZATION THEORY AND THE VALUE OF MONEY
+
+ Money as "capital good," and "money-rates" as rentals 72-73
+
+ Capitalization theory; formula; capital value passive
+ resultant of annual income and rate of discount 73-74
+
+ But in case of money, rental and rate of discount not
+ independent variables 74-76
+
+ And in case of money, capital value not passive shadow,
+ but active cause of income 76
+
+ Capitalization theory assumes money, and fixed value of
+ money 76-77
+
+ Assumed fixed value of money absolute, and not relative 77-78
+
+ Capitalization theory, in current formulation, inapplicable
+ to value of money 78-79
+
+
+CHAPTER V
+
+MARGINAL UTILITY AND THE VALUE OF MONEY
+
+ Marginal utility theory usually thinly disguised version of
+ supply and demand, and hence inapplicable to money 80
+
+ View that money is unique in having no utility _per se_ 81-83
+
+ Marginal utility and "commodity theory" of money-value 81-82
+
+ Quantity theorists and marginal utility of money 81-82
+
+ Money an instrumental good, and marginal utility no less
+ applicable here than elsewhere; marginal utility invalid
+ as general theory of value, hence invalid when applied to
+ money 82-120
+
+ Wieser's theory of value of money 83-88
+
+ A circle in reasoning 88-90
+
+ Schumpeter's similar circle 100
+
+ But Schumpeter's general utility theory, though inapplicable
+ to value of money, in form avoids a causal circle 90-98
+
+ Schumpeter's _conspectus_; different from Böhm-Bawerk and
+ most utility theorists 90-92, 113-120
+
+ Defects and limitations of Schumpeter's general theory 90-98
+
+ Schumpeter's substitutes for social value concept 98-99
+
+ Von Mises sees circle of Wieser and Schumpeter 100
+
+ Seeks to avoid it by construing utility theory as historical,
+ instead of static, theory 101
+
+ But this departs from fundamentals of utility theory; other
+ difficulties 101-110
+
+ Kinley's doctrine 110-111
+
+ General criticism of utility theory 111-115
+
+ Davenport, Wicksteed, Fisher, Perry 113-120
+
+
+_PART II. THE QUANTITY THEORY_
+
+
+CHAPTER VI
+
+THE QUANTITY THEORY OF PRICES. INTRODUCTION
+
+ Preliminary statement of quantity theory, and of critical
+ theses to be developed in following chapters. Virtually
+ every contention and every assumption of quantity theory
+ to be challenged 123-129
+
+
+CHAPTER VII
+
+DODO-BONES
+
+ Quantity theory doctrine that valueless objects can serve as
+ money; Nicholson's assumption: money made of dodo-bones 130-131
+
+ Fisher's view also 130
+
+ And Ricardo's 131-132
+
+ Will dodo-bones circulate? Dodo-bones and poker chips;
+ circular reasoning 132
+
+ Both medium of exchange and standard of value must be
+ valuable 133
+
+ Is inconvertible paper an exception? 133-134
+
+ Doctrine that money gives legal claim to things in general 134
+
+ Kemmerer's assumptions; money made of commodity, once
+ valuable, now used only as money 135
+
+ Commodity theory requires present commodity value 135
+
+ Historical _vs._ cross-section view: possibility that such
+ money would circulate 135-136
+
+ Value not tied up with marginal utility or commodities:
+ social value theory; derived values often become
+ independent of original presuppositions, in economic
+ as well as legal and moral spheres 136-139
+
+ But this no basis for quantity theory: social psychology,
+ not mechanics 139
+
+ "Banker's psychology" _vs._ psychology of blind habit:
+ India, Austria, United States; monetary phenomena of war
+ times; "credit theory" of Greenbacks 139-142
+
+ Question-begging definitions 142-143
+
+ Assumptions of quantity theory: blind habit and fluid prices 143-144
+
+ Extreme commodity theory denies that money-use adds to value
+ of money; usually not true; analysis of money-functions 144-150
+
+ Hypothetical case in which whole value of money comes from
+ commodity value 150-152
+
+ Money must have value apart from monetary employments, but,
+ in general, gains additional value from employment as
+ money 152-153
+
+
+CHAPTER VIII
+
+THE "EQUATION OF EXCHANGE"
+
+ Fisher leading, most consistent, most uncompromising
+ quantity theorist: wide acceptance of his views 154
+
+ Taussig _vs._ Fisher 155
+
+ Fisher and dodo-bone doctrine: logical part of quantity
+ theory; Fisher's value concept 155-156
+
+ "Equation of exchange": analysis of Fisher's version,
+ typical of all 156-171
+
+ In what sense equality between two sides of equation?
+ Meaning of "T" 158-161
+
+ No "goods side" to equation; both sides sums of money;
+ equal because identical; equation meaningless 161-162
+
+ All factors in equation highly abstract 162-163
+
+ "P" and "T" cannot both be given independent definitions:
+ P defined as _weighted_ average, with T in denominator;
+ and must be changed from year to year, as elements in T
+ change, even though no prices change 164-166
+
+ This makes circular theory: _problem_ defined in terms of
+ _explanation_ 165-166
+
+ Causal theory associated with equation of exchange 166
+
+ Equation amplified to include credit; not acceptable to
+ Nicholson or Walker, and caricature of conditions in
+ Germany and France 166-170
+
+ Book-credit, bills of exchange, etc., excluded 167-170
+
+ Why a one-year period? 170-171
+
+
+CHAPTER IX
+
+THE VOLUME OF MONEY AND THE VOLUME OF CREDIT
+
+ Mill thought credit acts on prices like money, and that
+ this reduces quantity theory tendency to indeterminate
+ degree; Fisher holds volume of money _in circulation_
+ governs volume of credit, so that quantity theory stands 172
+
+ Fisher's arguments for fixed ratio, _money_ to
+ bank-deposits 172-173
+
+ Argument a _non-sequitur_, even if contentions true 173-177
+
+ Contentions untrue: no fixed ratio between _reserves_ and
+ deposits, or reserves and demand liabilities, either in
+ America or Europe 177-182
+
+ Taussig's views; virtually surrender of quantity theory in
+ modern conditions 182-185
+
+ Bulk of quantity theorists in between Fisher and Taussig,
+ but nearer to Fisher's view than to Taussig's 185
+
+
+CHAPTER X
+
+"NORMAL" VS. "TRANSITIONAL" TENDENCIES
+
+ Quantity theory qualified by distinction between "normal" and
+ "transitional" effects of change in quantity of money, etc. 186
+
+ Meaning of distinction, and extent of qualification hard
+ to determine: is "normal period" real period in time?
+ How long is "transitional period"? Is it realistic, or
+ hypothetical? Is equation of exchange realistic?
+ Concrete _vs._ hypothetical price-levels 186-189
+
+ Legitimate and illegitimate abstraction 189-190
+
+ Causation and temporal order 190-191
+
+ Fisher admits very slight qualification of "normal theory" 192
+
+ Mill's quantity theory "short run" theory; Taussig's "long
+ run" theory; radically different logic in the two 192-193
+
+ Fisher's theory sometimes "long run" and sometimes "short
+ run" 194-195
+
+
+CHAPTER XI
+
+BARTER
+
+ Quantity theory spoiled if resort to barter possible and
+ important 196
+
+ Extent of barter and other flexible substitutes for money and
+ bank-credit; simple barter; different methods of corporate
+ consolidations; flexibility, with state of money-market;
+ clearing-house arrangements in speculative exchanges;
+ offsetting book-credits 197-200
+
+ Barter made easier under money economy, by measure of
+ value function of money 201
+
+ Bills of exchange; foreign trade 201
+
+
+CHAPTER XII
+
+VELOCITY OF CIRCULATION
+
+ Velocity conceived by quantity theory as causal entity,
+ independent of quantity of money and prices; necessary
+ assumption for law of proportionality 203
+
+ "Coin-transfer" _vs._ "person-turnover" concepts 203-204
+
+ Velocity really non-essential by-product, meaningless
+ average 204-205
+
+ Doctrine that velocity independent of money; habit and
+ convenience; hoarding; hoarding by banks 205-209
+
+ Velocity and volume of trade; vary together 209-214
+
+ Value of money causally governs velocity 214-215
+
+
+CHAPTER XIII.
+
+THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION
+
+ Quantity theory doctrine that volume of trade, and volume
+ of money (and credit), are independent; trade governed
+ by physical and technical conditions, not money 216-219
+
+ View that quantity of money vitally affects production and
+ trade 219
+
+ Walker, Sombart, Withers, Price, Holt 219-222
+
+ Increase of money increases trade, even on static theory:
+ increase of money increase of capital; lowered margin
+ in exchanges; money-rates and interest; money tool of
+ exchange; elasticity of demand for money-service; in
+ Arizona and New York City 222-225
+
+ _Trade_ distinguished from _production_ and from _stock_ 225-226
+
+ Trade chiefly speculation; Fisher's $387,000,000,000 of
+ trade in U. S. in 1909 analyzed; index of variation in
+ trade; figure based on Kinley's returns from 12,000
+ banks; double-counting 227-230
+
+ Figure largely represents speculation; statistics of total
+ wealth of U. S.; small rôle of wholesale and retail
+ deposits; "all other deposits" bunched in speculative
+ centers, especially New York; trifling "deposits" in
+ country banks; evidence of bank-clearings: clearings
+ and stock speculation; clearings and ordinary business 230-241
+
+ Measurement of "ordinary trade" 241-248
+
+ Volume of stock speculation 248-251
+
+ Commodity speculation 251-252
+
+ Unorganized speculation 252-254
+
+ Bill and note speculation 255
+
+ Fisher's and Kemmerer's indicia of trade variation wholly
+ misleading 255-257
+
+ Production waits on trade; selling costs _vs._ "cost of
+ production"; "good will"; are banks useless? 257-262
+
+ "Normal _vs._ transitional": statics _vs._ dynamics; money
+ and credit make static assumptions possible; very little
+ trade in "normal equilibrium" or static state; volume
+ of trade depends on transitions and dynamic changes;
+ functional theory of money and credit must be dynamic
+ theory; abstraction from money by static theory; no
+ static theory of money and credit possible; quantity
+ theory misses whole point of money-functions 262-266
+
+
+APPENDIX TO CHAPTER XIII
+
+THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES
+
+ Ambiguity of "domestic trade": figures comparable with
+ export and import figures cannot include turnovers; net
+ income of United States, minus imports on retail basis,
+ counted as domestic trade; exports on retail basis
+ counted as foreign trade; net income for 1910; index of
+ variation for other years; cautions and qualifications;
+ ratio of foreign to domestic trade, 1890-1916 267-278
+
+
+CHAPTER XIV
+
+THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT
+
+ Interdependence of trade, and money (and credit);
+ increasing trade causes increase of money and credit 279-281
+
+ Quantity theory doctrine: Fisher _vs._ Laughlin 281-282
+
+ Quantity theory has no explanation of elastic bank credit:
+ "Currency Theory" of deposits 282-285
+
+ Loans and deposits 285-288
+
+ Bills of exchange 288-290
+
+ Summary of quantity theory doctrine 290-291
+
+
+CHAPTER XV
+
+THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES"
+
+ Heart of quantity theory: price-level cannot change without
+ prior change in money, deposits, trade, or velocities:
+ independently rising price-level, unable to alter trade
+ or velocities, would drive money away, and so be unable to
+ sustain itself; individual prices can rise independently,
+ but other prices must fall to compensate 292-295
+
+ Criticism: argument impressive only because it assumes an
+ _uncaused_ rise in general price-level; when causes
+ assigned, prices can independently rise, compelling
+ modification in other factors in "equation of exchange";
+ "transitional" and "normal" effects: instances 295-299
+
+ Quantity theory conflicts with supply and demand: supply
+ and demand holds good: particular prices and price-level 299-300
+
+ Generalization of conflict to include cost of production,
+ capitalization theory, imputation theory 300
+
+ Capitalization theory _vs._ quantity theory; different
+ psychological assumptions of the two theories 300-306
+
+ Cost of production _vs._ quantity theory; money-_income_
+ _vs._ quantity of money 306-308
+
+ Quantity theory false, granting all its assumptions 308-310
+
+ Doctrine that price-level independent of particular prices,
+ and presupposed by them, false; absolute value of money,
+ not price-level, presupposed; price-level may change
+ with value of money constant, through changes in absolute
+ values of goods 310-314
+
+
+CHAPTER XVI
+
+THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS
+
+ Quantity theory holds that gold movements depend on
+ price-_levels_; but price-level mere average, cause
+ of nothing 315-316
+
+ Some prices, rising, tend to repel gold, but most prices
+ have no such effect 316-317
+
+ Some prices, rising, bring in gold 317-319
+
+ Gold movements and money-rates 319-320
+
+
+CHAPTER XVII
+
+THE QUANTITY THEORY _vs._ GRESHAM'S LAW 321-323
+
+
+CHAPTER XVIII
+
+THE QUANTITY THEORY AND "WORLD PRICES"
+
+ Types of quantity theory: world's volume of _gold vs._
+ quantity of _money_ in given country; standard _vs._
+ token money; abandonment of dodo-bone theory and
+ "equation of exchange" 324-326
+
+ Credit does not rest on money: measure of values _vs._
+ reserves; loans and wealth; value of money _vs._
+ price-level 326-328
+
+ Loose relation of reserves and credit in world as whole;
+ no proportionality of quantity of gold to value of gold;
+ no quantity theory needed to assert that value of gold
+ related to its quantity 328-330
+
+
+CHAPTER XIX
+
+STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY
+OF A BURIED CITY
+
+ Criticism of quantity theory statistics yields constructive
+ conclusions; Mitchell and Greenbacks; Kemmerer's and
+ Fisher's statistics of "equation of exchange"; Kemmerer's
+ criticism of earlier statistics 331-335
+
+ Kemmerer's and Fisher's figures all wrong except for volume
+ of money and deposits, and prices in base year; if correct,
+ would not prove quantity theory 335-337
+
+ Fisher's statistics, resting on Kemmerer's, chiefly studied:
+ their relation to Kinley's "deposits" figures 337-338
+
+ M´V´ calculated: errors in calculation; New York very
+ incomplete in Kinley's figures; private banks and trust
+ companies; clearings and "deposits," in New York and
+ outside; "total transactions" and clearings; Fisher
+ exaggerates country checks by at least 116 billions, for
+ 1909; major part of all "check deposits" in New York City 348-353
+
+ New York as "clearing house" for United States: extent of,
+ and influence of on New York clearings, much overestimated;
+ bulk of New York clearings and New York "deposits" grow
+ out of New York business 353-361
+
+ Index of variation for M´V´ wrongly weighted; V´ wrongly
+ calculated for all years; which upsets calculation of V 361-363
+
+ Volume of trade: greatly exaggerated by bank transactions,
+ which include vast deal of duplications in checks, loans
+ and repayments, etc. 363-368
+
+ Fisher's reply; _under_counting offsets _over_counting 368-369
+
+ Main items of undercounting in clearing houses of speculative
+ exchanges; measurement of, in New York Stock Exchange, and
+ Chicago Board of Trade; swamped by call loan transactions,
+ which exceed security sales 369-381
+
+ Price-indexes of Kemmerer and Fisher, dominated by wholesale
+ prices, have no relevance to their "equations of exchange" 381-383
+
+ In general, their figures bury speculation and New York City 383
+
+
+PART III. THE VALUE OF MONEY
+
+
+CHAPTER XX
+
+RECAPITULATION OF POSITIVE DOCTRINE
+
+ Recapitulation of constructive theses of Parts I and II,
+ and program of Parts III and IV 387-396
+
+
+CHAPTER XXI
+
+THE ORIGIN OF MONEY, AND THE VALUE OF GOLD
+
+ Problem stated 397-401
+
+ Value _vs. saleability_: degrees of saleability; theory
+ of saleability; "buying price" _vs._ "selling price";
+ indirect exchange in barter economy; development of
+ commodity of superior saleability into money 401-406
+
+ Money never unique 406-407
+
+ Origin of gold money: ornament; store of value; social
+ prestige of prodigality and of ornament; love of
+ approbation, sex-impulse, and competitive display;
+ elastic value-curve of gold; industrial employments
+ of gold 407-413
+
+ Distribution of wealth and power, and value of gold 413-416
+
+
+CHAPTER XXII
+
+THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY
+
+ Classification 417-418
+
+ Measure of values (standard of value) distinguished
+ from medium of exchange; former does not add value
+ to money metal, latter does 418-424
+
+ Reserve function 424
+
+ Money as "bearer of options"; distinguished from store of
+ value; the _dynamic_ function of money _par excellence_;
+ explanation of low rates on call loans, and short loans,
+ and low yield of high grade bonds, which share "bearer of
+ options" function; "pure rate" of interest _vs._ "money
+ rates": Austria; the New York money market 424-432
+
+ Legal tender; the _Staatliche Theorie_ 432-436
+
+ Standard of deferred payments; which functions add to
+ value of money metal? 436
+
+ Relation of money rates to capital value of money 436-442
+
+ Agio when coinage is restricted: India _vs._ Western World 442-450
+
+ Equilibrium of gold in arts and gold as money: difficulties
+ of marginal analysis; the money-market phenomena 450-458
+
+
+CHAPTER XXIII
+
+CREDIT
+
+ Analysis rather than definition: "futurity" not essence
+ of credit; credit part of general value system; stocks
+ as credit instruments; juridical and accounting phases 459-462
+
+ Confidence; involved in general value phenomena as well
+ as credit; social psychology of confidence; contagions;
+ influence of centers of prestige; nothing unique in
+ credit; selling _vs._ borrowing 462-469
+
+ Definition of credit; credit _vs._ credit transaction;
+ credit and exchange; bulk of credit grows out of
+ dynamic conditions 469-474
+
+ Functions of credit; increasing saleability of
+ non-pecuniary wealth; corporate organization;
+ limits of credit expansion 475-478
+
+ Consideration of objections: that personal loans do not
+ rest on wealth; public loans; that value behind loan
+ would not exist if loan were not made 478-484
+
+ Schumpeter's "heresies"; his view of the function of the
+ banker: "dynamic credit"; America _vs._ Continental
+ Europe 484-488
+
+ Peculiarities and functions of bank credit; technique of
+ banking: capital; assets; reserves; "liquidity"; money
+ market 488-496
+
+
+CHAPTER XXIV
+
+CREDIT--BANK ASSETS AND BANK RESERVES
+
+ Traditional view that liquid commercial loans normal and
+ dominant type of bank asset disproved; cannot exceed
+ 11-1/2 per cent of assets of American banks; analysis of
+ bank assets: "other loans and discounts"; stock collateral
+ loans; loans on "other collateral security";
+ stocks and bonds held by banks; classes of banks; various
+ combinations; excluding real estate loans, more
+ than half of credit extended by State and national
+ banks and trust companies is to stock market; rapid
+ development of stock collateral loans: New York;
+ Europe 498-512
+
+ Activity of different types of loans: banking assets get
+ liquidity chiefly from stock market, and from produce
+ speculators 512-516
+
+ Credit extended to Wall Street not at expense of ordinary
+ commerce; country banks and Wall Street 516-518
+
+ Federal Reserve Banks should rediscount stock collateral
+ loans; "Money Trust" a trust in financing corporations,
+ not ordinary commerce; panics and Federal Reserve System 520
+
+ Quantity theory, putting all exchanges on a par, grotesque:
+ volume of trade and prices in the stock market 520-523
+
+ Direct and indirect financing of corporations by banks;
+ "margin dealer" as "banker" 523-526
+
+ Adam Smith's view of banker's functions, and of safe bank
+ loans 526
+
+ Correct on basis of facts of his day, but corporate
+ organization and organized stock market have made
+ smelting house as liquid as consumers' goods 527
+
+ Division of labor in banking: America _vs._ Germany 527-528
+
+ Agriculture in money market 528-529
+
+ Reserve problem: special case of problem of liquid assets;
+ many flexible substitutes for cash 529-532
+
+ Causal relation runs from deposits to reserves; gold
+ production and reserve-ratio 532-535
+
+ No static law or "normal ratio" possible; reserve function
+ entirely dynamic function; reserve not needed in "static
+ state"; illustrated by London money market; "ideal
+ credit economy" 536-544
+
+
+_PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS_
+
+
+CHAPTER XXV
+
+THE RECONCILIATION OF STATICS AND DYNAMICS
+
+ Theory of money as focus of general economic theory,
+ exhibiting interdependence of doctrines; basis of
+ further unification of statics and dynamics in higher
+ synthesis 547-548
+
+ Statics _vs._ dynamics, normal _vs._ transitional, and
+ related contrasts; illustrations; divergent lines of
+ doctrine: tariffs, wars, overproduction, extravagance,
+ etc. 548-552
+
+ Statics quantitative; dynamics qualitative 552-553
+
+ Statics and dynamics both abstract 553-554
+
+ Dynamics and "friction" 554-555
+
+ "Theory of prosperity" and dynamics 555-556
+
+ Statics and cross-section analysis; statics as
+ price-theory; dynamics as value-theory 556-560
+
+ Generalization of statics: price-theory applied to
+ dynamic phenomena: capitalization; costs; "taxonomy;"
+ "discounting" dynamic changes; money the static
+ measuring-rod: wide scope of money-measure;
+ measurement of non-economic values 560-569
+
+ Generalization of dynamics: all values, whether of wheat
+ or "good will," have social psychological explanation;
+ technological and biological factors, and the static
+ equilibrium; business cycles 569-575
+
+ Business man _vs._ economic theorist, and value-theory;
+ manipulation of values and prices 575-578
+
+ Statics and time 578-580
+
+ Immaterial capital 580-582
+
+ Statics and dynamics have not different subject-matter 583-586
+
+ Equilibrium of all social values: statics and dynamics
+ of the law: social forces and social control 586-589
+
+ Summary of Part IV 589-591
+
+
+
+
+PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE
+
+
+
+
+THE VALUE OF MONEY
+
+
+
+
+CHAPTER I
+
+ECONOMIC VALUE
+
+
+The problem of the value of money is a special case of the general
+problem of economic value. The present chapter is concerned with the
+general theory of value, while the rest of the book will consider the
+numerous peculiarities and complications which make money a special
+case. The main proof of the theory here presented is to be found in a
+previous book[1] by the present writer. A number of periodical articles
+by several writers which have since appeared, in criticism or in further
+development of the theory, have at various points led to shifting
+emphasis and clearer understanding on the author's part, and the present
+exposition, without seeking explicitly to meet many of these criticisms,
+or to embody the new developments, will none the less be different
+because of them. To one writer in particular, Professor C. H. Cooley,
+the theory is indebted for restatement, amplification, and important
+additions.[2] On the whole, however, the theory presented in this
+chapter is substantially the theory presented in the earlier book. The
+theory is set forth in the present chapter with sufficient fullness to
+make the present volume independent of the earlier book.
+
+Value has long been recognized as the fundamental economic concept.
+There have been many and divergent definitions of value, and many
+different theories as to its origin. It is the belief of the present
+writer--not shared by all his critics!--that the definition of value
+which follows, and the conception of the function of value in economic
+theory involved in it, conform to the actual use of the term in the main
+body of economic literature. The theory of the _causes_ of value here
+advanced is new, but the definition of value, and the conception of the
+relation of value to wealth, to price, to exchange, and to other
+economic ideas, seem to the present writer to conform to what is
+implied, and often expressed, in the general usage of economists.[3]
+
+It is important to separate sharply two questions: one, the theory of
+the causes of value, and the other, the definition of value, or the
+question of the formal and logical aspects of the value concept. The two
+questions cannot be wholly divorced, but clarity is promoted by
+considering them separately. We shall take up the formal and logical
+aspects of the matter first.
+
+Value is the common quality of wealth. Wealth in most of its aspects is
+highly heterogeneous: hay and milk, iron and corn-land, cows and calico,
+human services and gold watches, dollars and doughnuts, pig-pens and
+pearls--all these things, diverse though they be in their physical
+attributes, have one quality in common: Economic Value.[4] By virtue of
+this common or generic quality, it is possible to add wealth together to
+get a sum, to compare items of wealth with one another, to see which is
+greater, to get ratios of exchange between items of wealth, to speak of
+one item of wealth, say a crop of wheat, as being a percentage of
+another, say the land which produced it, etc. This common quality,
+value, is also a _quantity_. It belongs to that class of qualities which
+can be greater or less, can mount or descend a scale, without ceasing to
+be the same quality,--like heat or weight or length. Such qualities are
+_quantities_. There is nothing novel in the statement that a quality is
+also a quantity. It is implied in every day speech. We say that a man is
+tall, or heavy, or that the room is hot--qualitative statements; or we
+may say exactly how tall, or how heavy, or how hot--quantitative
+statements. The distinction between qualitative analysis and
+quantitative analysis in chemistry implies the same idea. Thus we may
+speak of a piece of wealth as having a definite quantity of value, or
+say that the value of the piece of wealth is a definite quantity. We may
+then work out mathematical relations among the different quantities of
+value, sums, ratios, percentages, etc.
+
+Ratios of Exchange are ratios between two quantities of value, the
+values of the units of the two kinds of wealth exchanged.[5] A good many
+economists, particularly in their chapters on definition, have defined
+value as a ratio of exchange. This is inaccurate. The ratio of exchange
+presupposes _two_ values, which are the terms of the ratio. The ratio is
+not between milk and wheat in all their attributes. It is between milk
+and wheat with respect to one particular attribute. Compare them on the
+basis of weight, or cubic contents, and you would get ratios quite
+different from the ratio which actually is the ratio of exchange. The
+ratio is between their values.
+
+ [Illustration:
+ Ratio of Exchange
+ Milk ------------------------- Wheat
+ \ /
+ \ /
+ \ Value Value /
+ \ /
+ \ /
+ \ /
+ \ /
+ Social Mind
+ ]
+
+In the diagram above, something of what is to follow is anticipated,
+since the cause of value is indicated. Wheat is shown to be exerting
+an influence on milk, and milk exerts an influence on wheat. The
+comparative strength of these two influences determines the ratio of
+exchange between them. But these two influences are not ultimate. The
+ratio of exchange is a relation, a _reciprocal_ relation. It works both
+ways. But behind this relativity, this scheme of relations between
+values, there lie two values which are absolute. These values rest in
+the pull exerted on wheat and on milk by the human factor which is
+fundamental, which in our diagram we have called the "social mind."
+Values lie behind ratios of exchange, and causally determine them. The
+important thing for present purposes is merely to note that value is
+prior to exchange relations, that it is an absolute quantity, and not,
+as many economists have put it, purely relative. The ratio of exchange
+is relative, but there must be absolutes behind relations.
+
+A _price_ is merely one particular kind of ratio of exchange, namely, a
+ratio of exchange in which one of the terms is the value of the money
+unit.[6] In modern life, prices are the chief form of ratio of exchange,
+but it is important for some purposes to remember that they are not the
+only form.
+
+Values may simultaneously rise and fall. There may be an increase or
+decrease in the sum total of values. Ratios of exchange cannot all rise
+or fall. A rise in the ratio of the value of wheat to the value of milk
+means a fall in the ratio of the value of milk to the value of wheat.
+Both may have fallen in absolute value, but both cannot simultaneously
+rise or fall with reference to one another. This is the truism regarding
+ratios of exchange which many economists have inaccurately applied to
+value itself in the doctrine that there cannot be a simultaneous rise or
+fall of values. There can be a simultaneous rise or fall of values, but
+not a simultaneous rise or fall of ratios of exchange.
+
+There can be a general rise or fall of prices. Goods in general, other
+than money, may rise in value, while money remains constant in value.
+This would mean a rise in prices. Or, money may fall in value while
+goods in general are stationary in value. This would also mean a rise in
+prices. In either case, more money would be given for other goods, and
+the ratio between the value of the money unit and the value of other
+goods would have altered adversely to money. There are writers to whom
+the term, value of money, means merely the average of prices (or the
+reciprocal of the average of prices). For them, a rise in the average of
+prices is, _ipso facto_, a fall in the value of money. This view will
+receive repeated attention in later chapters. The view maintained in the
+present book is that the value of money is a quality of money, that
+quality which money shares with other forms of wealth, which lies
+behind, and causally explains, the exchange relations into which money
+enters. Every price implies _two_ values, the value of the money-unit
+and the value of the unit of the good in question.
+
+Value is prior to _exchange_. Value is not to be defined as "power in
+exchange." Certain writers[7] who see the need of a quantitative value,
+which can be attributed to goods as a quality, still cling to the notion
+that value is relative, that two goods must exist before one value can
+exist, and that value is "power in exchange," or "purchasing power." The
+power is conceived of as something more than the fact of exchange, and
+as a cause of the exchange relations, but is, none the less, defined in
+terms of exchange. This position, however, does not really advance the
+analysis. It is a verbal solution of difficulties merely. To say that
+goods command a price because they have power in exchange is like saying
+that opium puts men to sleep because it has a dormitive power.
+Physicians now recognize that this is no solution of difficulties, that
+it is merely a repetition of the problem in other words. If we wish to
+explain exchange, we must seek the explanation in something anterior to
+exchange. If value is to be distinguished from ratio of exchange at all,
+it cannot be defined as "power in exchange."
+
+To seek to confine value to exchange relations, moreover, makes it
+impossible to speak of the value of such things as the Capitol at
+Washington City, or the value of an entailed estate, or of values as
+existing _between_ exchanges. Nor can we make the price which a good
+would command at a given moment the test of its value, except in the
+case of the highly organized, fluid market. Land, at forced sale,
+notoriously often brings prices which do not correctly express its
+value. Moreover, even for wheat in the grain pit, the exchange test is
+valid only on the assumption that a comparatively small amount is to be
+sold. If very much is put on the market, the situation is changed, and
+the value falls. In other words, if "bulls" cease to be "bulls," and
+shift to the other side of the market, the very elements which were
+sustaining the value of the wheat have been weakened, and of course its
+value falls. "Power in exchange" is a function of two factors, (1) value
+and (2) saleability. A copper cent has high saleability, with little
+value, while land has high value with little saleability.[8] Some things
+have value with no saleability at all. In a socialistic community, where
+all lands, houses, tools, machines, etc., are owned by the state, and
+where such "prices" as exist are authoritatively prescribed, value and
+exchange would have no necessary connection. Values would remain,
+however, guiding the economic activity of the socialistic community,
+directing labor now here, now there, determining the employment of lands
+now in this sort of production, now in that. Exchange is only one of the
+manifestations of value. More fundamental, and more general, including
+"power in exchange," but not exhausted by it, is the power which objects
+of value have over the economic activities of men. This is the
+fundamental function of values. The entailed estate, which cannot be
+sold, still has power over the actions of men. The care which is taken
+of it, the amount of insurance which an insurance company will write on
+it, etc., are manifestations and measures of its value. The same may be
+said of the Capitol at Washington.[9]
+
+In the fluid market, prices correctly express values. Assuming that the
+money-unit is fixed in value, variations in prices in the fluid market
+correctly indicate variations in values. The great bulk of our economic
+theory, the laws of supply and demand, cost of production, the
+capitalization theory, etc., do assume the fluid market, and a fixed
+value of the dollar.[10] Our economic theory is static theory, in
+general, and abstracts from the time factor and from "friction." In
+fact, values change first, and then, more or less rapidly, and more or
+less completely, prices respond. In the active wholesale and speculative
+markets, where the overwhelming bulk of exchanging takes place, the
+prices respond quickly. Static theory is thus adequate for the
+explanation of these prices, for most practical purposes, so long as the
+changes in prices are due to changing values of goods, rather than to
+changing value of the money-unit. Moreover, the distinction between
+value and price is, in a fluid market, where the value of money is
+changing slowly, often not important. In the assumption of money, and of
+a fixed value of money, the absolute value concept is already assumed.
+No harm is done, however, if the economist does not explicitly refer to
+this, but goes on merely talking about money-prices. Very many economic
+problems indeed may be solved that way. This is why the inadequate
+character of the conceptions of value as "ratio of exchange" or
+"purchasing power" has not prevented these notions from being
+serviceable tools in the hands of many writers. But there are many
+problems for which these conceptions are not adequate, because the
+implicit assumption of a fixed value of money cannot be made. Among
+these problems is the problem of the value of money itself, which
+constitutes the subject of this book. For that problem, an absolute
+value concept is vital.
+
+If, in our diagram above, we substitute for "social mind" the more
+general expression, "human factor," we should find that our value
+concept is the common property of many writers. We should find it
+fitting in with the absolute value notion of Adam Smith and of
+Ricardo.[11] The "human factor" which _explains_ the absolute value is,
+for them, labor. We should find it fitting in with the "socially
+necessary labor time" of Marx: the value of a bushel of wheat is the
+amount of labor time which, on the _average_, is required to produce a
+bushel of wheat. It is an absolute value. It is a causal coefficient
+with the absolute value, similarly explained, of the bushel of corn, in
+explaining the wheat-price of corn. Our concept will fit in exactly with
+the "social use-value" of Carl Knies, according to whom the economic
+value of a good in society is an _average_ of its varying use-values to
+different individuals in the market. This average is an absolute
+quantity. The absolute values of units of two goods, thus explained,
+causally fix the exchange ratio between the goods. Knies' value-theory,
+it may be noticed, is explicitly modeled on that of Marx, to whom he
+refers, the difference being that Knies takes an average of individual
+use-values, while Marx takes an average of individual labor-times, as
+the causal explanation.[12] Our value concept will fit perfectly with
+Professor J. B. Clark's "social marginal utility" theory of value.
+Indeed, the present writer gratefully acknowledges that the concept is
+Professor Clark's rather than his own, and that all that is necessary
+for its explanation has been set forth by Professor Clark.[13]
+Professor Clark's _causal_ theory of value, his explanation of this
+absolute quantity of value as a _sum_ of individual marginal utilities,
+we have elsewhere[14] criticised as involving circular reasoning, like
+all marginal utility theories, in so far as they offer causal
+explanations. But his statement of the logical character of value, of
+the relation of value to wealth, of value to price, of value to
+exchange, of the functions of the value concept in economic theory, and
+of the functions of value in economic life,--Clark's doctrines on these
+points we have accepted bodily, and in so far as the present writer has
+added anything to them it has been by way of elaboration and defence.
+
+The concept of value here developed is explicitly adopted by T. S.
+Adams, David Kinley, W. A. Scott, W. G. L. Taylor, L. S. Merriam, and A.
+S. Johnson, among American writers, to name no others. All of these
+writers would concur in the formal and logical considerations[15] as to
+the nature of value here presented, whatever differences might appear
+among them as to the causal explanation of value.
+
+The value concept here presented performs the same logical functions as
+the "inner objective value" of Karl Menger, Ludwig von Mises, and Karl
+Helfferich, discussed in our chapter on "Marginal Utility," below, and
+is, in its formal and logical aspects, to be identified with that
+notion. It is essentially like Wieser's "public economic value,"
+discussed in the same chapter.[16] That there should remain critics[17]
+who consider the present writer a daring innovator, who is thrusting a
+personal idiosyncracy in terminology upon economic theory, is striking
+evidence that men often talk about books which they have not read! The
+reader who accepts, provisionally, the doctrine so far presented, as a
+tool of thought which will aid us in the further progress of the
+argument, may do so with the full assurance that he is accepting a tried
+and tested concept, which has seemed necessary to very many indeed of
+the great masters of the science.[18]
+
+So far, the writer feels himself in accord with the main current of
+economic thought. When we come to a causal explanation of the value
+quantity, however, earlier theories appear unsatisfactory. The labor
+theory of value has long since broken down, and has been generally
+abandoned. The reasons for this will appear in the chapter on "Cost of
+Production." The effort to explain value by marginal utility, by the
+satisfactions which individuals derive from the last increment consumed
+of a commodity, has likewise broken down, as will appear in the chapter
+on "Marginal Utility." In general, it may be said that the effort to
+pick out feeling magnitudes,[19] either of pleasure or pain, in the
+minds of individuals, and combine them into a social quantity, leads to
+circular reasoning. Thus, the utility theory: It is not alone the
+intensity of a man's marginal desire for a good which determines his
+influence on the market. If he has no money, he may desire a thing ever
+so intensely without giving it value. If he is rich, a slight desire
+counts for a great deal. In other words, utility, backed by _value_,
+gives a commodity value. But this is to explain value by value, which is
+circular. So with the theory of average labor _time_. How shall we
+average labor time? The problem is easy if we confine ourselves, say, to
+wheat. If one bushel of wheat is produced with ten hours' labor, a
+second with eight hours' labor and a third with six hours' labor, the
+average is eight hours, and we may fix the value of the bushel of wheat
+according. But suppose we wish to compare the labor engaged in making
+_hats_ with the labor engaged in raising wheat. How can such labor be
+compared? Hats are, in their physical aspects, incommensurable with
+wheat. The one quality which they have in common, relevant to the
+present interest, is _value_. Given the value of the wheat and the value
+of the hats, you may compare and average out the labor engaged in
+producing them. But if value must be employed as a means of averaging
+labor, it is clear that average labor can be no explanation of value.
+This is not the only flaw in the labor-time theory, but it illustrates a
+vice which it has in common with all those theories which start with
+individual elements, and seek to combine them into a social quantity.
+The whole method of approach is wrong. It makes two abstractions,
+neither of which is legitimate: first, it abstracts the individual from
+his vital and organic connections with his fellows, and then, second, it
+takes from the individual, thus abstracted, only a small part, that part
+immediately concerned with the consumption or production of wealth. In
+this process of abstraction, very much of the explanation of value is
+left out. The _whole_ man, in his _social_ relations, must be taken into
+account before we can get an adequate theory of value. We turn, then, to
+a brief discussion of society and the individual, and to a discussion of
+those individual activities and social relations which are most
+significant in the explanation of economic value.
+
+ * * * * *
+
+All mental processes are in the minds of individual men. There is no
+social "oversoul" which transcends individual minds, and there is no
+social "consciousness" which stands outside of and above the
+consciousnesses of individuals. So much by way of emphatic concurrence
+with those critics of the social value theory[20] who persist in
+foisting upon the theory the notion that there is a social oversoul, or
+that the "social organism" is some so far unclassified biological
+specimen. To say that economic value is a social value, the product of
+many minds in organic interplay, is not to say that economic value is
+independent of processes in the minds of individual men, or that it
+results from any mysterious behavior of a social oversoul.
+
+The human animal is born with certain innate instincts and capacities.
+Human animals of different races and different strains are in highly
+important points different in their instincts and capacities. But the
+human animal is not born with a _human mind_. Nor could the human
+animal, apart from association with his fellows, ever develop a human
+mind. "The human mind is what happens to the human animal in a social
+situation."[21] Of course, without the care of adults, the infant would,
+in general, promptly perish. But, more fundamental for our purposes, is
+the fact that all the important stimuli which play upon the child during
+his first two years, when the human mind is being developed, are social
+stimuli. So true is this, that the child's commerce with physical things
+runs in social terms. The child interprets the physical objects about
+him _personally_, attributes life and human attributes to them, holds
+conversation with them, praises and blames them, makes companions of
+them. This _animism_ of the child, so puzzling to an old-fashioned
+psychology, is readily explained by social psychology. It is a social
+interpretation of the universe. It follows naturally from the principle
+of apperception: the interpretation of the unknown in terms of the
+known; the extension of accumulated experience to the interpretation of
+new experiences. The first experiences of the human animal are social
+experiences.
+
+In the history of human society, a similar generalization is possible.
+The human _individual_ is found, not in primitive life, but late in the
+scale of social evolution. Individuality is a social product. The savage
+is not a free, self-conscious person, who can set himself off against
+the group, and feel himself an isolated centre of power. His life is
+wrapped up in the group life. In the great barbarian states like Ancient
+Egypt or China, the life of the individual was so controlled by social
+tradition, and innovation was so ruthlessly crushed out that
+individuality had little scope. Greece and Judea gave larger scope to
+individual variation, but the individual still felt himself bound up
+with his group, and was stoned, given hemlock, or crucified if he
+challenged the existing social order too seriously. The break-up of the
+Greek city states, as independent sovereignties, and their subjection to
+the universal sway of Rome, made it possible for the cultured Greek to
+set himself up in opposition to the State; the coming of Christianity,
+substituting personal relations with deity, for the communal worship
+which had preceded it, gave the individual a vital interest apart from
+the life of the group about him, so that he could still further feel
+independent of his immediate social environment. The development by the
+Roman lawyers of the _Jus Gentium_, the law which is common to all
+nations as distinguished from the particular law of a given group,
+emphasized the doctrine of the Christian religion and of the Stoic
+philosophy of a humanity which transcends the limits of a given
+state,[22]--a notion which tended to free the individual from dependence
+on his immediate associates. But note that in all this we have merely a
+widening and multiplying of social relationships, and that the
+individual gains freedom from one set of social relationships only by
+coming into others. The Christian gains freedom from his immediate
+surroundings because he feels himself in communion with "angels and
+archangels and all the glorious company of Heaven." Francis Bacon could
+survive his degradation in the England of his day because he could leave
+his "name and memory ... to foreign nations and to the next age."
+
+Bagehot, in his _Physics and Politics_, Tarde, and Baldwin, to name no
+others,[23] have shown how tremendously responsive human beings are to
+suggestion, how wide is the sway of imitation in human life, how
+fashion, mode, custom, etc., make and mold the individual. Cooley,[24]
+with an improved psychology, has amplified the analysis, tracing the
+development of the individual mind in interaction with the minds of
+those about him, making still clearer the sweep and pervasiveness of
+social factors in framing the very self of the individual. In what
+follows, I assume the results of these investigations. They constitute
+the starting point from which we set out on the quest of a theory of
+economic value.
+
+So much for the individual. He is a social product. But what of society?
+Objective, external, constraining and impelling forces, which are not
+physical, which are seemingly not the products of the will of other
+individuals with whom the individual holds converse, meet the individual
+on every hand. There is the Moral Law, sacred and majestic, which stands
+above him, demanding the sacrifice of many of his impulses and desires.
+There is the Law, external to him and to his fellows, in seeming,
+failure to obey which may ruin his life. There is Public Opinion, which
+presents itself to him as an opaque, impersonal force, before which he
+must bow, and which he feels quite powerless to change. There are
+Economic Values ruling in the market place, directing industry in its
+changing from one sort of production to another, bringing prosperity to
+one individual and bankruptcy to another, not with the caprice of an
+individual will, but with the remorseless impersonality of wind and
+tide. He who conforms to them, who anticipates their mutations, gains
+great wealth--but no business man dare set his personal values against
+them. There are great Institutions, Church and State and Courts and
+Professions and giant Corporations and Political Parties, and
+multitudinous other less formal or smaller institutions, which go on in
+continuous life, though the men who act within them pass and change.
+Their Life seems an independent life, and the individual who tries to
+change their course finds that his efforts mean little indeed, as a
+rule. There is a realm of Social Objectivity, a realm of organization,
+activity, purpose and power, not physical in character, not mechanical
+in nature, which is set in opposition to individual will, purpose,
+power, and activity. How is the individual related to this objective
+social world?
+
+Three main types of theory have sought to answer this question. On the
+one hand, there is a type of theory, doubtless the oldest type, a type
+which arises easily in a period when social changes are slow, which sees
+in the objective social world something really separate and distinct
+from individual life, having a non-human origin, and deriving its power
+from something other than the human will. On the other hand, there is an
+extreme individualism, which emphasizes individual separateness, which
+posits as a _datum_ the individuality which we have seen to be a social
+product, and thinks of the objective social realm as a mere mechanical,
+mathematical summing up of individual factors, or as a something which
+individuals have consciously made, by contract or agreement, or what
+not. Finally, there is a type of theory, to which the present writer
+would adhere, which finds a false antithesis in the contrast thus
+sharply made between society and individual, which holds that the
+individual is not, in his psychological activity, so much set off from
+the activities of his fellows as the contrast would indicate, but rather
+shares in the give and take of a larger mental life. This larger mental
+life is completely accounted for when all the individuals are completely
+accounted for, but it cannot be accounted for by considering the
+individuals _separately_. No individual is completely, or primarily,
+accounted for until his _relations_ to the rest of the group are
+analyzed. Thinkers who start out with the individuals separately
+conceived, and then seek to combine them in some arithmetical way,
+abstract from those organic social relations which constitute the very
+heart of the phenomenon we are seeking to explain. The parts are in the
+whole, but the whole is not the _sum_ of the parts. The relationships
+are not arithmetical, additive, mechanical, but are vital and organic.
+Men's minds _function_ together, in an organic unity.[25]
+
+The first two of these types of theory (perhaps because individuals are
+_physically_ sharply marked off from one another, and go on in
+_biological_ functioning in obvious separateness) have falsely
+accentuated the self-dependence and separateness of individual _minds_.
+The second type of theory, which has sought to work out the whole thing
+on the basis of this false conception of the individual, has largely
+failed to see the objective social realities, or has, with
+methodological rigor, denied their existence. This second type of
+thinking has especially characterized a good deal of economic theory,
+which rests on the philosophy and psychology of David Hume.[26] We will
+set our doctrine in clearer light if we contrast three parallel types of
+theory which have appeared with reference to the nature of morality, of
+law, and of economic value. For each of these phenomena, we have
+theories which represent all three of the types of social thinking to
+which we have referred.
+
+In the theory of morals, we have, at one extreme, doctrines like those
+of Kant and Fichte, according to whom morality is a matter of
+obligation, independent of the human will, independent of consequences,
+inherent in the nature of things. Man's mind can find out what the moral
+law is, but man's mind has nothing to do with the making of the moral
+law. The same notion is involved in the ideas of "natural rights,"
+"justice though the heavens fall," and the like. The conception is
+strikingly brought out in the question about which old theologians
+sometimes debated: is Right right because God enjoins it, or does God
+enjoin Right because it is Right? Whether or not Right is supreme over
+God, these old theologians never questioned that Right is supreme over
+all human wishes and desires, and in no sense an outcome of them. At the
+other extreme, we have the moral doctrine of the Sophists, for whom each
+man's _will_ was right for him--a doctrine which reappears in every
+individualistic and anarchistic age. For this doctrine, there are no
+valid social standards of right and wrong. There is nothing binding on
+the moral agent but his own will. In between, is the moral doctrine of
+such thinkers as Friedrich Paulsen, or John Dewey, who represent the
+reigning type of moral theory to-day. For them, morality is a purely
+human matter. It grows out of the needs and interests of men. What is
+good at one time and place is not necessarily good at another time and
+place. There are no immutable moral principles, valid throughout the
+ages. None the less, morality is not a private matter, about which men
+may do as they please. Morality is the product of an organic society,
+the product of the interplay of many minds. To a given individual, the
+moral law is, indeed, an external constraining and impelling force. It
+is the will of the rest of the group. It may be his own will too, but if
+it is not, it overrides his personal preference, He, on the other hand,
+is part of the group which constrains and guides every other individual.
+There are, in fact, many sets of moral values: on the one hand, the
+social moral values _par excellence_, which the group will _enforce_ in
+various ways; and then, for each individual, his own moral values, which
+may correspond qualitatively more or less with the group values, or may
+antagonize them. But the Moral Law is the will of the group. It is no
+simple composite of the moral values of individuals. It has its organic
+interrelations with all phases of social life. Economic changes modify
+it, legal changes modify it, religious values modify it, all phases of
+social life are expressed in it.
+
+In legal theory, we find these three types of doctrine also. The first
+type is clearly indicated in the general attitude of American and
+English courts, especially toward the common law, though it influences
+their interpretation of all law. The law is something which the mind of
+man may find out, but may not make. If a new situation arises, the court
+"finds" the law--in theory the principle "discovered" by the court was
+in the common law at the beginning. Of course, we know that the judge
+invents the rule he makes, to fit a novel case, but the judge himself
+will not admit it. The theory of the law and the theory of morality have
+developed in close connection, and the notion of "natural right" is a
+juristic as well as a moral idea. At the other extreme, we have from
+certain recent students of law the doctrine that "The Law" is a myth,
+that there is nothing but the particular opinion of a particular judge
+at a particular time. Individualism cannot go so far in legal theory as
+to give every individual in society a chance to put his oar in, and have
+a separate law for himself! The social and institutional character of
+law is too obvious to permit that. But individualism has gone so far in
+legal theory as to deny all objectivity to law except in a given
+decision in a particular case. In between these two extreme views,
+appear the views of writers like Savigny, or Professor Munroe Smith, for
+whom the law is a changing product of social psychology, volitional[27]
+rather than intellectual in character, objective enough to the
+individual who violates it, or the judge who seeks to pervert it, but
+none the less not outside the minds and interests of men. In Professor
+Munroe Smith's phrase, law is "that part of the social order which by
+virtue of the social will may be supported by physical force."[28] I
+venture to describe this type of legal theory as the "social value"
+theory of the law. In the chapter on "The Reconciliation of Statics and
+Dynamics," _infra_, I have cited certain opinions of Mr. Justice Holmes
+which apply it, and even bring into it the notions of the marginal
+analysis.
+
+There are, similarly, three types of economic theory. At the one extreme
+we have theories of "intrinsic" value, which would place economic value
+outside the wills of men. The mediæval discussions of "just price" often
+illustrate this notion. It creeps not infrequently into judicial
+opinions,--to which such notions are essentially congenial! The working
+economist of our own day has found little use for it, but in periods
+when economic change was slow it suggested itself not unnaturally to
+men, as an explanation of the seeming impersonality of market phenomena,
+and as a practical idea for combatting extortion and injustice.
+Something of the idea is involved in a sentence of Shakspere's:[29]
+
+ "But value dwells not in particular will;
+ It holds his estimate and dignity
+ As well wherein 'tis precious of itself
+ As in the prizer."
+
+At the opposite extreme would be those economists, as Professor
+Davenport and Jevons, who find no value for a good except in the minds
+of individual men, so that there may be as many different values as
+there are different men. That something social and objective exists in
+the market place can hardly be denied, but when pressed for an account
+of it, these writers reduce it to a bare, abstract, mathematical
+ratio.[30] Each individual mind is shut up within its own limits,
+inscrutable to other minds, and there can be no psychological phenomena
+which include activities in many minds, for this view. In between these
+two extremes, is the social value theory of the present writer. Economic
+value is not intrinsic in goods, independent of the minds of men. But it
+is a fact which is in large degree independent of the mind of any given
+man. To a given individual in the market, the economic value of a good
+is a fact as external, as objective, as opaque and stubborn, as is the
+weight of the object, or the law against murder. There are individual
+values, marginal utilities, of goods which may differ in magnitude and
+in quality from man to man, but there is, over and above these,
+influenced by them in part, influencing them much more than they
+influence it, a social value for each commodity, a product of a complex
+social psychology, which includes the individual values, but includes
+very much more as well. Our theory puts law, moral values, and economic
+values in the same general class, _species_ of the _genus_, social
+value, alike in their psychological "stuff" and character, to be
+explained by the same general principles, even though differentiated in
+their functions, and in the extent to which they depend on various
+factors in the social situation. They are parts of a social system of
+motivation and control. They are the _social forces_, which govern, in a
+social scheme, the actions of men.
+
+It may be well to suggest rough _differentiæ_ which mark off these
+values from one another. Legal values are social values which will be
+enforced, if need be, by the organized _physical_ force of the group,
+through the government. Moral values are social values which the group
+enforces by approbation and disapprobation, by cold shoulders and
+ostracism or by honor and praise. Economic values are values which the
+group enforces under a system of free enterprise, by means of profits
+and losses, by riches or bankruptcy. The group may, under a communistic
+or socialistic system, rely in whole or in part upon the machinery of
+the law; in which case economic values appear not in their own form as
+immediately guiding production, but as "presuppositions" of some of the
+legal values.
+
+The differentiation of these types of social value may also run in
+terms of their _functions_,[31] though it is not so easy to mark them
+off here, since their functions overlap. The function of economic values
+is to guide and control the economic activities of men, to send labor
+from one industry to another, to cause one sort of thing to be produced
+or another, to supply the motive force which _impels_ industry. Legal
+and moral values also directly affect industry, often working to check
+the results which the economic values alone would lead to--as when the
+law forbids the production and sale of liquor, or checks child labor,
+etc. The law, on the other hand, does not, primarily, in its influence
+on industry, seek _positively_ to determine its direction. The law
+forbids the production of liquor, but does not decree the production of
+bread. The law may seek to affect industry positively, by protective
+tariffs, for example, which aim at the building up of certain
+industries, but its effects are here indirect, reached through
+modifications in the economic values. Economic values, on the other
+hand, do not primarily aim at the regulation of the conduct of men
+outside the market place, or the shop or the farm, etc. Economic values
+are not primarily concerned with making men be good husbands or good
+neighbors, or brave soldiers. Economic values may be used, in part, for
+these purposes, as when a father-in-law uses his wealth as a lever to
+make his son-in-law behave--or, indeed, as a bait to get a son-in-law!
+It is hard to find a phase of social life which is not touched by all
+types of social values, but it is possible, roughly, to mark off those
+phases of social life which are subject to primary regulation by one or
+the other sort of social value.
+
+The differentiation is easier when we look at the social _institutions_
+which have to do primarily with the one or the other sort of value.
+Courts and legislatures are easily marked off from stock exchanges and
+banking houses. There is not so clearly an institutional nucleus for
+moral values, since the church has lost its control over the moral
+situation.
+
+When we view the matter from the standpoint of the _objects_ of value,
+_differentiæ_ also appear. The main type of object of moral value is
+modes of conduct; the "type object" of economic value is physical things
+which men eat, wear, drink, etc., even though _quantitatively_ the major
+part of the sum total of economic values attach to other things,
+instrumental goods, lands, labor, and social relations, like franchise
+rights, good will, which in the main reflect the values of consumers'
+goods;[32] objects of legal value are in large degree the same as
+objects of moral value, namely, modes of conduct, but moral values
+attach to a wider group of objects, and legal values attach to certain
+forms of conduct which are morally indifferent.
+
+It is not so easy to make the differentiation when we view the thing
+from the standpoint of the consciousness of men who are at the centre of
+the situation, to whose consciousness the social values are presented.
+We may put at the very forefront of the economic value of oranges the
+gustatory feelings or desires of those who consume them; at the
+forefront of the moral value of a heroic rescue by a fireman the thrill
+that runs through the onlookers. Qualitatively, these psychological
+states are different, as those who have experienced both will know. But
+it is difficult indeed to put the difference into words. When it comes
+to a legal value, say the legal value of a given contract right which a
+man seeks to enforce in court, it is not easy to find any particular
+emotion or state of consciousness which is peculiar or appropriate to
+it. The value is so highly institutionalized and impersonal, that it
+seems to the court and lawyers and even the litigants to be merely a
+question of fact to be intellectually analyzed. Its roots are deep in
+human emotions, but not in the emotions, primarily, of those who are
+handling the transaction. Perhaps the jurist has states of consciousness
+we know not of. There may be a distinctively legal emotion. It seems to
+crop out at times when one questions, in conversation with a judge or
+lawyer, the infallibility of the courts. But the law does not derive its
+power therefrom! Rather, the law derives its power from the general
+consent and acquiescence and support of the mass of men, who turn over
+to experts the details of administering it, and who support The Law in
+general, rather than the rule of the _corpus delicti_, with their
+emotional sanction.
+
+I think that we have here a clue to a vital point for our theory. We
+need not expect to find the major part of the explanation of any of
+these social values in the conscious emotions of those who are moved by
+them. In the case of the orange or the heroic act, we are, indeed, close
+to pretty simple human feelings and desires. In general, in the case of
+moral values, the individual emotion and the social value are
+_qualitatively_ comparable, since moral values rarely take on a highly
+institutional character. They are more free from class or institutional
+control than other social values. This need not be true. Thus, the
+plantation negro need not feel any personal shame in the moral
+delinquency which he none the less hides from the "white folks" whose
+values he must more or less conform to. But, on the whole, moral values
+are much more "participation values,"[33] shared by the whole group in
+common, than are economic values or legal values. When we pass beyond
+the simple case of a consumption good, and get into the realm of the
+more institutional economic values, we lose all guidance from the clue
+of satisfactions in consumption. Just what emotion, for example, is
+appropriate in the presence of the four and a half per cent convertible
+bond of the Chesapeake and Ohio Railway Co.? If it be answered that
+ultimately that bond represents satisfactions in consumption, since the
+owner of it may spend the income for consumers' goods, or since the
+railroad in question carries coal which goes to Italy to be used in a
+cruiser which will sink an Austrian warship, thereby giving consumers'
+satisfactions to individuals in Italy, so that the value of the bond is
+ultimately reducible to specific satisfactions of given individuals, we
+may still hold that those satisfactions do not constitute the value of
+the bond, as such. Moreover, the same is true of the legal values.
+Ultimately, very specific human emotions are affected by the rule of the
+_corpus delicti_, or the rule governing pleas in _estoppel_. Both in
+legal and in economic values we have an elaborate and complex system of
+social psychological character, which can by no means be reduced to
+elementary desires or feelings of individuals, even though when the
+whole story is told, no part of the system will be found outside the
+minds of individual men. The point has been well put by Professor C. H.
+Cooley: "It would be as reasonable to attempt to explain the theology of
+St. Thomas Aquinas, or the _Institutes_ of Calvin, by the immediate
+working of religious instinct as to explain the market values of the
+present time by the immediate working of natural wants."[34] I think
+that any attempt to differentiate the various kinds of social value on
+the basis of the type of emotion in the minds of those who have most
+immediately to do with them, or to explain them primarily by those
+emotions, is foredoomed. The law does not get its power from the emotion
+of the judge who gives a decision, nor does the value of a rare painting
+rest chiefly in the intensity of desire of the few rich connoisseurs who
+compete for it. Back of the judge, giving _validity_ to his decision,
+stands the will of the group; back of the rich connoisseurs stand the
+legal and other social values concerned with the distribution of wealth,
+by virtue of which they are able to make their wants felt in the market.
+Both judge and connoisseur are focal points, through which stream the
+social forces affecting the values in question. Both are important. But
+the emotions and ideas of neither exhaust the psychological causation
+involved in the values.
+
+This is very much more apparent when we consider the values that arise
+in the great speculative markets, say in the wheat pit, or the stock
+exchange. Those who buy and sell are primarily interpreters, students,
+of impersonal, social forces, seeking to adjust themselves to them, to
+forecast them, in such a way as to derive profit from them. Their
+choices and decisions are also factors. Indeed, it is possible to view
+the matter in such a way as to make their decisions the whole story. In
+the same way, it is possible to make the mind of the judge the final
+explanation of the legal value. But the speculators themselves are under
+no such illusion. They know very well that if they run counter to the
+facts they will lose money. And the judge knows very well that the range
+of arbitrary choice which he can exercise without impeachment, or at
+least without reversal by a higher court, is very limited. Nor is even
+a Supreme Court of the United States free to do its arbitrary will. Just
+because it is so conspicuous, and because its doings are so important,
+it has manifested more respect for judicial tradition, and more
+responsiveness to the tides of public sentiment, than any other court in
+the Federal Judiciary.[35]
+
+The head of a great banking house makes a decision regarding an
+underwriting operation. On his decision depends the question of whether
+or not the securities are issued. On the issue of the new securities
+depends, in part, the values of the existing securities of the
+corporation in question, and the nature of the future employment of
+thousands of men and great quantities of land and capital. Tremendous
+power is concentrated in the hands of this banker. But it is not _his_
+power! He cannot exercise it in an arbitrary or capricious way. He
+approaches his problem in much the same spirit that the judge approaches
+a disputed question of law. He analyzes the factors involved. He
+considers the condition of the money-market, the question of the
+probable ease or difficulty of marketing the new securities to
+investors, the prospects of the business of the corporation in question,
+the probable future demand for its products, the stability of that
+demand, the personnel of the management of the corporation, the attitude
+of the government toward it, the nature of its other outstanding
+securities, with special reference to the proportion of bonds to stocks,
+and the amount of "fixed charges" against its earnings. He may also take
+into account other enterprises of similar character which he has
+connections with, and the question of whether or not building up the
+corporation in question may injure other corporations to which he has
+responsibilities. He looks far into the future, seeking to conserve his
+prestige, and unwilling to assume responsibility for an issue which
+investors will later lose faith in. Proximately, his decision is
+tremendously important, and his thoughts and feelings are of immense
+significance, but ultimately, _they_ are determined by all manner of
+social considerations, and _always_, _the degree to which they count_ in
+determining values depends on his weight in the economic situation,
+which rests (1) on his _prestige_, _i. e._, the massing of beliefs and
+hopes of many men, (2) on his _wealth_, which rests in the legal and
+moral values governing distribution, and (3) on his institutional
+relationships, which again are psychological facts, partly legal in
+character. He is as much a social instrument as is the judge. Both may
+abuse their power. Both do at times abuse their power. But the
+significant point is that the power both have is social power, and is in
+no sense proportional to the intensity of their own emotions. It arises
+from the emotional power in the minds of many men.
+
+It would be easy to elaborate the points in which morals, laws, and
+economic values are alike, and to show in detail that the theory of
+economic value is merely a special case of the general theory of social
+value. For our present purposes, however, it is enough to have
+illustrated the general doctrine, and to have set up the economic values
+as true social forces. It may be noticed that the effort to
+differentiate the different kinds of value is not altogether successful.
+They are not in watertight compartments in social life. It is a
+commonplace among students of ethics that moral values grow, in greater
+or less degree, out of economic factors. Indeed, the "economic
+interpretation of history" has as its central theme the doctrine that
+morality, law, and ideal values in general are governed by the economic
+situation. This is a one-sided view. Moral and legal values are
+influenced and modified by economic forces. Legal and moral values do,
+in part, derive their power from economic values. But on the other hand,
+economic values likewise derive part of their power from legal and moral
+values. The "social mind" is an organic whole, in which no factors exist
+"pure," and in which there is constant give and take. The effort to
+explain moral values by a single principle, as sympathy, legal values by
+another simple principle, as fear, and economic values by a different
+simple principle, as utility, is foredoomed. It has been given up by the
+students of law and morals, and should be abandoned by the students of
+economics.
+
+Let us consider more narrowly the main factors affecting and explaining
+economic social values. Let us take, first, the simplest case, that of
+goods and services which minister directly to human wants, goods and
+services "of the first order." Goods of this sort would be oranges,
+bread, clothing, jewels. Services of this sort would be the services of
+the barber, the valet, the physician, the preacher, the teacher, the
+actor. I abstract, in discussing these values, from the complications
+that grow out of the friction in retail trade, and the existence of many
+customary prices, and prices fixed by other than economic values, in the
+case of teachers, or preachers. I shall concentrate attention upon such
+things as oranges, bread, clothing, and jewels. The _focus_ of the
+values of these things, and an essential condition of their existence,
+is their utility, that is to say, their power to satisfy human wants.
+Utility as used in economics does not mean usefulness in any moral
+sense. From the standpoint of the economist, whiskey and opium are as
+useful as bread, if they satisfy wants equally intense. And the
+economist is not concerned with the general utility of things considered
+in their totality. Air is more useful than jewels, but a carat of air is
+not as useful as a one-carat diamond. Air exists in such abundance that
+it does not need to be economized. Scarcity with reference to the
+extent of the wants involved is also essential to economic value. A
+combination of the ideas of utility and scarcity gives us the simple
+notion for which the formidable name of "marginal utility" has been
+devised. The marginal utility of a good to a man is the power the last,
+or "marginal," unit of the good which the man consumes has to give him
+satisfaction, or, viewed from the standpoint of the man, is the
+intensity of his desire[36] for, or of his satisfaction in, the final
+unit consumed. So far, our account of the value of the orange will seem
+perfectly acceptable to those accustomed to traditional discussions of
+the problem in the text-books. The difference is that many text-books
+stop at this point, leaving the impression that with the definition of
+marginal utility the whole value problem has been solved. For the social
+value theory, the conception of marginal utility is barely a starting
+point. Indeed, it is not even a starting point. We shall have to look
+both in front of it and _behind it_. Recognizing that marginal utilities
+to individuals are essential to economic values of consumption goods, we
+shall have to point out other things which are also essential, and we
+shall have to explain the factors determining these marginal utilities
+themselves.
+
+The last point may be considered first. Men's desires are socially
+determined. Even the simplest, most instinctive, wants of human nature
+are, in their concrete manifestations, the product of social culture in
+overwhelming degree. Consider sex and hunger. We do not enjoy our food
+when our neighbors pick their teeth with their forks. This would not
+trouble a chimpanzee, whose _instinctive_ equipment in the matter of
+hunger is vastly more like that of a man than is the _actual_ hunger
+impulse of a highly civilized man like that of a savage. Civilized men
+will often starve rather than eat human flesh. Even when moral scruples
+are overcome, actual physical revulsion may prevent it. Men of different
+times and places wish food of special sorts, served in special ways.
+They wish to eat in the company of their fellows, but only of those
+fellows who can know and obey the ritual that is appropriate to the time
+and place. This is true of humble folk as of those who "dress for
+dinner." The ritual differs for the two sorts of people. But there is a
+spirit, a type of conversation, a code of etiquette, which prevails at
+the mealtime of virtually all men, and too serious digressions therefrom
+will take away the appetites of all. About the mealtime and the festal
+board have gathered a great host of traditions, ideals, and social
+activities, till they have become in verity an institution, and not the
+least important, by any means, of social institutions. Out of the simple
+instinct of sex, we have evolved many of the most precious things of our
+civilization, and between the sex impulse of the animal and the sex
+impulse of the gentleman who is seeking to marry the one woman in all
+the world, there is a difference so great that comparison between the
+two is difficult.
+
+Here we have wants which grow out of the most elementary things in human
+nature, wants which are intense and universal, but which vary, in their
+concrete manifestations, enormously from age to age and from place to
+place. When we come to the wants which change more quickly, the fact
+that social factors dominate needs no arguing. Fashion, mode, custom,
+obviously account for the concrete wants that exist in clothing,
+ornamentation, amusement, housing, etc. If we wish to know what women
+will be wanting to wear six months hence, we do not go to women
+individually and ask them. We could not find out that way. They would
+not know. We go rather to the theatre, and study the stage and the
+boxes, to the famous designers of women's dress, to the metropolitan
+centres of various sorts, to the "radiant points of social control"[37]
+from which emanate the suggestions which pass in imitative waves through
+the women of the country in the next few months. The laws of imitation
+have been elaborately developed by Bagehot, Tarde, Baldwin, Ross, LeBon,
+Cooley, and others, and I content myself here with referring to their
+writings. The wants of women--and men--are socially given, grow out of a
+give and take, a social process. And in this social process, it is not
+true that each man counts one! Rather, a few lead, and many follow.
+There are centres of prestige which count overwhelmingly.
+
+Certain wants are competitive.[38] Where social status depends on having
+as good a house as one's neighbors, and where social leadership depends
+on having a better house than one's neighbors, there is no limit to
+men's desires for better houses. With each improvement which one
+introduces, each feels the desire to improve, however contented he might
+have been had the other not made the improvement. To this we shall recur
+in our discussion of the origin of money, in explaining the value of
+gold.
+
+So much for the human wants which stand as the focus of economic values
+in the case of articles of immediate consumption.
+
+But, given these wants, and given their marginal intensities, we are
+only at the beginning of our explanation of the economic values of the
+consumption goods. It is again not a case of each want counting one, to
+the extent of its intensity. There are again, by virtue of the legal and
+moral values governing the distribution of wealth, _centres_ of power.
+The wants of some men count for nothing, however intense they may be.
+The pauper, the prisoner, the beggar--popular proverb about "beggars and
+horses" understands them, however much the "marginal utilitarian" may
+forget that their wants count for nothing.[39] The slightest whim, on
+the other hand, of the man who has inherited millions may count heavily
+in giving values to goods. For the explanation of the values of
+consumption goods, then, we need both the socially determined marginal
+utilities of individuals, and the socially determined _weight_ which
+these individuals have in our economic system. This _weight_ would
+involve a very elaborate explanation. Many factors affect it. We call
+attention here, however, especially to the fact that it rests in large
+part on the legal and moral values and institutions concerned with the
+distribution of wealth. Changes in the distribution of wealth are as
+important as changes in the wants themselves in giving the explanation
+of changes in values. The economic social values of consumption goods
+include not merely the values of those goods _to_ the individuals who
+consume them, but also the values _of_ the individuals themselves in the
+social scheme of things.
+
+What of the values of instrumental goods, of goods of "higher orders,"
+of labor, of stocks and bonds, of lands, of franchise rights and good
+will?
+
+It is the one great contribution of the Austrian economists to have
+shown that the causation in value runs, primarily, from consumption
+goods to the goods of higher "orders" which are concerned with their
+production, and that these values of instrumental goods, etc., are
+derived and secondary values. The value of wheat is based on the value
+of bread, the value of land on the value of wheat. The value of the
+stock of United States Steel rests in part on the value of iron lands,
+which rests on the value of ore, which rests on the value of pig iron,
+which rests on the value of steel rails, which rests on the value of the
+service of transporting building materials, which rests on the value of
+a building, which rests on the value of the services which a dentist
+performs in an office in the building. This is the main line of
+causation. This is the first approximation which gives us a clue,
+without which we should find problems insoluble. But is it not clear
+that this cannot be the whole story? At every step complications enter.
+The whole thing cannot be got out of the value of the dentist's
+services, and the other consumers' goods and services, which are
+indirectly aided by the property to which title is given by ownership of
+U.S. Steel stock; nor is the value of the stock to be fully explained by
+the value of the property to which it gives title.
+
+At every step, we meet the complication that men must estimate and
+calculate, for one thing. And rarely indeed can men see all the steps,
+the end from the beginning. Take first a very simple case, wheat land.
+The value of the wheat land of to-day rests on the value of wheat, but
+it is the wheat of to-morrow and for many years to come; the wheat of
+to-morrow rests for its value on the value of the bread of the day after
+to-morrow. Sometimes the differential between goods at two consecutive
+steps in the productive process is pretty constant. Wheat and flour vary
+pretty closely together. The differential is not strictly fixed even
+there. But bread and wheat land have a much looser connection in their
+variations. If land could produce no wheat or corn or other good that
+would satisfy human wants, and if it could not itself satisfy human
+wants, it would ordinarily have no value.[40] But the connection
+between the value of the bread and the value of the land is loose and
+uncertain, while the connection between the value of the land and the
+intensity of the wants actually satisfied by the bread produced from it,
+is absolutely _nil_. Whether the bread saves a starving man or feeds the
+pet pigeons of a millionaire, is a matter of indifference so far as the
+value of the land (or of the bread) is concerned.
+
+We take the values of consumption goods, and break them up, attributing
+part to the labor that immediately produced them, part to the raw
+materials that entered into them, part to the machine that fashioned
+them, and so on. We then break up the value attributed to the raw
+material, attributing part to the labor that worked in producing it
+immediately, part to the machine that fashioned it, part to the rawer
+material of which it was made. And so with the values of the machines.
+Ultimately we get back to the values of labor, or of land, or of
+securities giving title to complexes of lands, machines, etc.--values
+which we do not further break up. But at every step, we find additional
+factors. We find these derived values becoming independent, substantial,
+standing in their own right. Moral and legal values affect them
+directly, as in the case of patriotic support of government securities,
+moral antagonism to the securities of the Distillers' Securities
+Corporation, or the influence of court decisions, legislation and
+elections on security values. Such values rest, in large degree, on the
+massing of _beliefs_ and hopes, not concerned with specific
+satisfactions of wants, but with the existence of _future_ economic
+values. These beliefs and hopes again have their social explanation. It
+is not a case where each man counts one. There are centres of prestige
+and power, bankers and financial magnates, whose opinions and decisions
+count heavily, and waves of optimism and pessimism, which affect the
+whole group. We shall discuss these matters more fully in connection
+with the analysis of credit, at a later point of our study. For the
+present, it is enough to point out that the whole thing cannot be
+explained on the basis of the values of consumers' goods, and that the
+values of consumers' goods are only in small part explained by the
+intensities of the wants they serve.
+
+In summary: Economic value is the common quality of wealth, by virtue of
+which it is possible to compare divers kinds of wealth, and treat wealth
+quantitatively, getting ratios of exchange, sums of wealth, etc. Value
+is a quantity, _i. e._, a quality which has degrees of intensity. Ratios
+of exchange are ratios between values. Price is a particular sort of
+ratio of exchange, namely, a ratio in which one of the terms is the
+value of the money-unit. Prices correctly express values on the
+assumption of the fluid market, and on the assumption that the value of
+the money-unit does not vary.
+
+The value quality is psychological in character. It rests in human
+minds. But not in the minds of individuals thought of separately.
+It is a complex of many individual mental activities, highly
+institutionalized, and including legal and moral values, hopes and
+beliefs and expectations, as well as the immediate intensities of men's
+wants for consumption goods.
+
+The ultimate test of scientific theory must be practice. If a theory
+aids in manipulating facts, if it leads to the discovery of ways of
+doing things which are better than old ways, if it solves problems which
+have hitherto remained unsolved, or carries the solution of problems
+farther than has hitherto been the case, it is a good theory. It need
+not be the best possible theory. It need not be a final theory. The
+chief claim for the present theory of value is that it not only unlocks
+all the doors that earlier theories have unlocked, but also others which
+have resisted the old keys. The man who goes into the modern stock
+market armed with marginal utility and the quantity theory is like the
+man who would fight Hindenburg with bows and arrows. Bows and arrows are
+effective in the hands of expert archers, and the great figures in the
+history of economics have done wonderful things with marginal utility,
+"real costs," and the quantity theory. But the social value theory is
+offered as a better weapon.
+
+The writer believes that the problem of the value of money has not been
+solved by the older theories of value. He believes that the social value
+theory will solve it. He proposes on the basis of the social value
+theory to make clearer the nature of credit phenomena, and to assimilate
+the laws of credit to the general laws of value. He proposes with the
+social value theory to bring together in a higher synthesis two
+divergent types of economic theory, the "static" and the "dynamic." He
+thinks that a rigorous and consistent application of the absolute
+concept of value will clarify confusions at various points in the
+general body of price theory, as the laws of supply and demand, etc.
+
+He offers the social value theory as the only way of giving a
+_psychological_ explanation to the demand-curve, and a marginal _value_
+explanation of marginal demand-_price_. Demand-curves are social value
+curves, on the assumption of the fixed social value of the dollar. The
+utility theory, as will appear in the chapter on "Marginal Utility," has
+failed to give psychological magnitudes corresponding to _any_ point on
+the demand-curve. In general, he offers the social value notion as the
+justification for the assumption of a quantitative value which, as we
+shall see, underlies the whole of our current price analysis.
+
+The theory here outlined has been, as stated, developed and defended
+more fully in a previous book. For the rest, the author would have it
+judged by its usefulness or failure as a tool of thought in the
+investigations which follow.
+
+ NOTE. It has seemed best not to break the main course of the
+ argument of this chapter for the elaboration of one point on
+ which there has appeared to some critics to be vagueness in the
+ exposition of the social value theory in my earlier volume,
+ namely, the relation of social values to the individual values
+ of those who are moved by the social values. Social values have
+ as their function the guidance and control of the activities of
+ men. But men are also moved by their own individual feelings,
+ interests, and desires.
+
+ What is the relation between these two sets of factors? In what
+ has gone before, it has been made clear that social values
+ present themselves to the individual as opaque, objective
+ facts, largely beyond his control, to which he must adjust
+ himself. They represent the minds of other men, acting in
+ corporate and organic ways, putting pressure on him, or
+ offering him lures. Now the individual reckons with these
+ social values in the same way that he reckons with any other of
+ the facts affecting the economy of his life. He must adjust
+ himself to them in the same way that he must, if he is a
+ blacksmith, adjust himself to the technical qualities of the
+ iron he is manipulating. This does not mean that he is passive
+ before them, any more than he is passive before the iron. He
+ rather seeks to carry out his personal purposes and desires by
+ actively adapting himself to objective facts, whatever they be.
+ This means that different individuals will react in different
+ ways to the same social value. The fear of the law will keep
+ one man from burning dead leaves in the street where it will
+ not keep another man from murder. A given degree of social
+ pressure will make one man crease his trousers, while another
+ man will not even know that the pressure to crease one's
+ trousers exists! There are great individual variations in
+ responsiveness and sensitiveness to social pressure. In part,
+ these variations are due to inborn qualities. In larger part,
+ they are due to social education, and to social status. Thus,
+ the fact that one man will work all day in a ditch in response
+ to the lure of a dollar and a half, while another will not
+ work in the ditch for a hundred dollars a day, may rest in
+ slight degree on the greater inborn sensitiveness of the latter
+ to the physical pain of labor, but rests primarily on the fact
+ that the latter doesn't need the money, and has a social
+ standard, growing out of his class-associations and education,
+ which would make him ashamed to be seen in the ditch. Indeed,
+ we may think of the social standard in question as a social
+ value acting _on_ him, rather than _in_ him. He fears ridicule.
+ The same degree of social power, luring men toward the ditch,
+ exists in the dollar in each case, but the response is very
+ different in the two cases.
+
+ Later formulations of the utility theory and the labor cost
+ theory, as represented by the theory of Schumpeter, which we
+ shall discuss in the chapter on "Marginal Utility," give us, in
+ a scheme of purely static equilibrium, a picture of the
+ adjustment of the individual values to the social values. As we
+ shall see, they give us no account whatever of the social
+ values. They do not explain causation at all. But they do show
+ that there is a tendency for the individual marginal utilities
+ of consumption to become proportional to the social values of
+ the goods consumed by each individual; and for the individual
+ marginal disutilities in production to become proportional to
+ the social values of the rewards that come to producers. The
+ scheme is highly unrealistic. It has been emphatically
+ repudiated by Böhm-Bawerk, so far as the disutility equilibrium
+ is concerned. ("Ultimate Standard of Value," _Annals of the
+ American Academy_, Vol. V, pp. 149-209.) But it is worth
+ something, not as explaining social values or market prices,
+ but rather, as showing how individuals _conform_ to social
+ values and market prices. _Cf. Social Value_, pp. 43-44, n. 2,
+ and 148.
+
+ The theory that individual marginal utilities and disutilities
+ are proportional to market values is unrealistic enough, in the
+ light of the analysis of individual utilities which we have
+ given, even for the utilities. It is quite impossible to make
+ anything of importance of it from the side of individual
+ disutilities. The length of the working day is not fixed for
+ each worker by a comparison of his own labor pain with the
+ satisfactions he expects from his wages. It is fixed by
+ conditions largely external to him, and the whole group works
+ the same number of hours, with the machine. The law may limit
+ the working day. Trades-union effort may do it. Opportunities
+ for alternative employment may do it, for the labor force of a
+ factory as a whole. But the theory, which really must rest in
+ the notion that each individual has many options, and that the
+ working period is flexible, cannot mean much. The prosperity of
+ the laborer does more to limit the working day than does his
+ suffering!
+
+ The reactions of individuals as consumers or producers on the
+ social values modify the social values. But, as we have shown,
+ the primary explanation of the social values is not to be found
+ in the individual utilities and disutilities of those who react
+ to them. Utilities and labor pains are parts, but minor parts,
+ in the explanation of social values.
+
+
+
+
+CHAPTER II
+
+SUPPLY AND DEMAND, AND THE VALUE OF MONEY
+
+
+The theory of the value of money is a special case of the general theory
+of economic value. To the layman, this would seem to go without saying.
+To the student of the literature of the subject, however, who has
+noticed the wide divergence between the method of approach to the
+general problem of value and the method of approach to the problem of
+the value of money, in most treatises which include both these topics,
+the proposition will sound unusual if not heretical. Most text-books in
+English to-day will offer the marginal utility theory as the general
+theory of value. The same books commonly present the quantity theory of
+the value of money. Whether or not the two theories are consistent may
+wait for later discussion, but that the quantity theory of money is a
+_deduction from_ the utility theory of value, and a _special case_ of
+the utility theory of value, will not, I believe, be contended by
+anyone. Certainly in its origin, the quantity theory is much the older
+theory. The same is true for those writers who seek to explain value in
+general on the basis of cost of production, and who at the same time
+offer the quantity theory to explain the value of money. The two
+theories may or may not be consistent, but in any case, they are
+logically and historically independent, neither being a deduction from
+the other. Older writers (as Walker and Mill), whose treatment of the
+general theory of value runs in terms of "supply and demand," have
+stated that the quantity theory is merely a special case of the law of
+supply and demand, and the statement is occasionally met in present-day
+writings, though one of the most recent and best known of the
+expositions of the quantity theory, Professor Fisher's _Purchasing Power
+of Money_, very explicitly repudiates this doctrine.[41] But it may be
+easily shown, and will be shown later, that the quantity theory, and the
+present-day formulation of the law of supply and demand, are in no way
+logically dependent upon each other. This lack of connection between two
+bodies of doctrine which should be in a most intimate and essential way
+related to each other, may well throw suspicion on the current
+treatments of both topics. In any case the lack of connection raises a
+problem, and calls for explanation.
+
+Part of the explanation may be sought in the fact that the writers who
+have developed the general theory of value have not been, in general,
+the writers who have most elaborated the theory of the value of money.
+The theory of money has been for a long time a more or less isolated
+discipline. In Ricardo, we have an elaboration of the labor theory of
+value, and we also have the quantity theory of money. But it is not
+clear that Ricardo added anything to the quantity theory. He found it,
+in much the form in which he used it, in the writings of predecessors,
+among them Locke and Hume. Ricardo makes large use of the quantity
+theory as a premise, but apparently feels the theory to be so
+self-evident that it needs little exposition or defence at his hands.
+John Stuart Mill is a clear exception to the general statement. Cairnes,
+likewise, did treat both topics in considerable detail, but while his
+interest in the general theory of value was that of the theorist, his
+treatment of money was primarily in the spirit of the publicist, and his
+interest was less in the justification of the theory--which he again
+seems to feel needs little defence--as in its application. A similar
+statement may be made with reference to Jevons. He worked out his
+general theory of value for its own sake; his utterances on the theory
+of the value of money must be sought scattered through his practical
+writings on money. Alfred Marshall's _Principles_ (Vol. I) says almost
+nothing about the theory of money; his opinions on that subject are to
+be found in some _ex cathedra_ replies to questions from a Parliamentary
+Commission. The most important discussions in England of the value of
+money are to be found in the long polemic between the Currency and the
+Banking Schools, by writers who would not be listed among the makers of
+the general theory of value. In the United States to-day, with the
+exceptions of Professors Fisher and Taussig, the writers who have been
+interested in the general field of economic theory have done
+comparatively little with the value of money (_e. g._, Professors Clark
+and Fetter), and the writers who have been most interested in the value
+of money have usually not written largely on the general theory of value
+(_e. g._, Professors Laughlin, Scott, Kinley). Professor Kemmerer might
+well be included as an illustration of this last statement. His primary
+interest is in money, rather than general theory, even though he does
+precede his theory of the value of money with an exposition of the
+utility theory of value. In German, a similar situation obtains.
+Böhm-Bawerk has touched the theory of money scarcely at all. Menger has
+written an important article on "Geld" in the _Handwörterbuch der
+Staatswissenschaften_, but the important thing about this article is the
+theory of the origin of money, and the reader will find little on the
+problem of the value of money. Wieser has recently taken up the value of
+money (in articles published in 1904 and 1909), but no trace of his
+views has as yet manifested itself in the English literature on money,
+and the writer may here express the opinion that Wieser's contributions
+to the theory of money are not likely to be very influential, or to add
+to his reputation.[42] Austrian writers on the value of money, as Wieser
+and von Mises, have recognized more clearly than anyone in America or
+England, the essential dependence of the theory of the value of money on
+the general theory of value. The German writer on money who has
+attracted most attention recently, however, G. F. Knapp, troubles
+himself about the general theory of value not at all.
+
+But the main explanation of the hiatus between the two bodies of
+literature and doctrine is to be sought in something more fundamental.
+Neither utility nor costs nor supply and demand furnishes an adequate
+basis from which the quantity theory, or any other theory of the value
+of money can be deduced. The cost theory, and the supply and demand
+theory, in their present-day formulation, are really not theories of
+value at all, but are theories of _prices_, theories which presuppose
+_value_, and _money_, and a _fixed value of money_. And the utility
+theory, as usually presented, is either a theory of barter relations, or
+else (more commonly) speedily settles down into the grooves of supply
+and demand, leaping by means of a confusion of utility curves and
+demand-curves (or sometimes by a deliberate identification of them, _e.
+g._, Flux and Taussig[43]) to the treatment of market prices. I shall
+take up these points in order.
+
+A historical summary of the development of the notions of supply and
+demand will aid the exposition. It may be noticed, first of all, that
+supply and demand is really a very superficial formula even though an
+exceedingly useful one. By virtue of its superficial character, it
+antagonizes few other theories, and it has been the common property of
+almost all schools of value theory. Cost theories and utility theories,
+labor theories, or social value theories, all find use for it, in one
+form or another. It is really quite neutral and colorless, so far as the
+ultimate questions of value-causation are concerned. The more
+fundamental causal factors offered by one theory or another are commonly
+supposed to operate _through_ supply or demand, in price-determination.
+Adam Smith seems to see this more clearly than does Ricardo. Ricardo,
+indeed, sometimes thought of demand and supply as forces antithetical to
+the forces of labor-costs which he was considering. In ch. xxx of his
+_Principles of Political Economy and Taxation_ (ed. McCulloch, pp.
+232ff.) he holds that his natural value ultimately rules, except (p.
+234) in the case of monopolized articles. Supply and demand govern the
+prices of monopolized articles and of all articles in the short run. I
+do not find in Ricardo any clear statement to the effect that cost of
+production operates _through_ influence on supply. Neither Adam Smith
+nor Ricardo felt the need of very much precision in the definition of
+supply and demand. Smith does, indeed, distinguish "effectual" from
+"absolute" demand, in a well-known passage (ed. Cannan, I, p. 58),
+defining effectual demand as the demand of the effectual demanders,
+_i. e._, these who are willing to pay the "natural price" of the
+commodity. The term "supply" he does not use in this passage, but speaks
+of the "quantity which is actually brought to market," and gives as the
+law of market price that it is determined by the "proportion" between
+this quantity and the effectual demand. That much is wanting in this
+analysis will be sufficiently clear when the views of J. S. Mill and
+Cairnes are considered. Ricardo offers even less than Smith in the way
+of definition. The reader may compare the pages in _Ricardo's Works_
+cited above, and the discussion of the demand for labor on p. 241 in the
+same volume.
+
+In J.S. Mill, a clean-cut notion first appears. The doctrine that price
+is determined by a ratio between effectual demand (_i. e._, the wish to
+possess combined with the power to purchase) and supply (_i. e._, the
+quantity available in the market), is sharply criticised. How have a
+ratio between two things not of the same denomination? "What ratio can
+there be between a quantity and a desire, or even a desire combined with
+a power?" To make supply and demand comparable, demand must be defined
+as "quantity demanded," and then the difficulty arises that the quantity
+demanded will vary with the price, which seems to present a case of
+circular reasoning if demand is to be a determinant of price. The
+solution which Mill develops for this difficulty really gives us our
+modern conception, virtually complete except that Mill does not present
+it in the useful diagrammatic form and does not whisper the magic word,
+"margin." There is a demand-schedule, which, plotted, would give a
+demand-curve. At such and such prices, such and such quantities are
+demanded, or will be purchased. There is a supply schedule, presenting a
+supply situation of similar character (though not so clearly indicated).
+The price reached is that price which _equalizes_ amount demanded and
+amount supplied. A higher price will lead to competition among sellers,
+forcing down the price, a lower price will lead to competition among
+buyers, forcing up the price. The notion of a _ratio_ between supply and
+demand is replaced by the notion of an _equation_ between them. The
+present writer wishes to remark, in this connection, that Böhm-Bawerk's
+elaborate analysis, with his "marginal pairs," etc., has not advanced
+one step beyond this conception of Mill's, that it is really less
+satisfactory than Mill's analysis, because of the impedimenta of
+pseudo-psychology it has to carry, and because of its confusion of
+utility schedules with demand schedules.[44] In our present-day
+expositions, as presented in the diagrams, we are accustomed to say that
+price is fixed when marginal supply-price and marginal demand-price are
+equal, putting the stress on the ordinate, rather than on the abscissa,
+on the identity of the dollars paid or received, rather than on the
+identity of the goods given or received. But this is merely another way
+of stating the same equilibrium which Mill perceived--when marginal
+demand and supply prices are equal, amount supplied and amount demanded
+will be equal, and conversely.
+
+One point is to be added, making explicit what is implicit in the modern
+theory of supply and demand. Supply and demand doctrine assumes _money_,
+and a _fixed value_ of money. That there should be a given schedule of
+money-prices for varying quantities of a good, is possible only if there
+be a given value of the money-unit.
+
+That the modern doctrine of supply and demand necessarily involves the
+assumptions of value, of money, and of a fixed value of money, may be
+proved by the following considerations:
+
+Supply-situation, represented by the supply-curve, and demand-situation,
+represented by the demand-curve, are conceived of as antithetical and
+independent causal forces, whose equilibrium determines both "supply and
+demand" (in the sense of quantities supplied and demanded) and price.
+Mill's doctrine that supply and demand determine price gets out of the
+circle that demand (amount demanded) is itself dependent on price, only
+by making both demand in this sense and price _results_, rather than
+causes, and by putting the causation back into the more complex factors
+which I call "supply-situation" and "demand-situation." The two
+independent causes, then, are summed up in the supply-curve and the
+demand-curve. But, first, these curves are expressed in money. And
+second, a change in the value of money would affect _both_ of them
+proportionately. But a theory which is concerned with supply and demand
+as independent and antithetical must abstract from factors which give
+them a _common_ movement, without modifying their _relation_ to each
+other. A change in the value of money would lead the supply-curve to
+move to the right, and the demand-curve to move to the left, the change
+in each being proportionate, and the amount supplied, and amount
+demanded, would remain unchanged. Changes in the value of money must,
+therefore, be abstracted from.
+
+Again, we must precise the notion of an _increase_ in demand, or of
+supply. Increase in demand may mean mere increase in amount demanded,
+consequent upon a lower price, consequent, _i. e._, upon a lowering of
+the supply schedule. In this sense, increase in demand is a passive
+fact, a result rather than a cause. On the other hand, if the increase
+in demand is an increase in the amount demanded at the _same_ price, if
+it means a change in the demand-situation, represented by the moving to
+the right of the demand-curve, we have a causal factor in increase in
+demand, a factor which raises the price and compels new supply to come
+into the market. We may distinguish these two meanings as increase in
+demand in the active and in the passive senses. _Mutatis mutandis_, we
+may speak of increase of supply in the active and passive senses. These
+distinctions have been made before, but it has not been clearly seen
+that these distinctions, and the connected doctrines, involve the
+assumption of a fixed value of money. But consider: it is the current
+doctrine that increase in demand in the active sense, the demanding of
+a greater amount at the same price, the moving of the demand-curve to
+the right, not only raises the price, but also tends to _increase the
+supply_. But this is true only if the _cause_ of the increase in demand
+is not a cause which simultaneously works on supply, neutralizing that
+tendency. If the increase in amount demanded at a given price be due to
+a lowered value of money, then the same lowered value of money will
+reduce the supply available at that price _pro tanto_, and the new
+equilibrium, _cæteris paribus_, will be at a higher price, to be sure,
+but with the same amount supplied and demanded. "Demand" is a term which
+carries the connotation of motivating power in economic theory. Through
+demand run the forces which regulate production and supply. The function
+of increased demand is to induce increased supply. But the value
+concept, and the assumption of a fixed value of money, are needed to
+preserve this part of the doctrine. Without them we have no way of
+distinguishing a _real_ increase in demand in the active sense, which
+does modify the adjustments in production, and alter the proportions of
+different supplies, from a _nominal_ increase in demand in the active
+sense, which merely raises a money-price, without affecting supply.[45]
+
+Another approach will lead to the same conclusion. Demand and
+supply-curves are not to be understood merely in terms of brute,
+physical quantities. They are rather curves expressing economic
+_significances_, manifesting _psychological_ forces which lie behind
+them. No considerations of mere physical quantity will explain why one
+demand-curve should be "elastic" and another inelastic,--each curve has
+its own peculiarities, which are not mechanical in their nature.
+Demand-curves express the diminishing economic significance of goods as
+their quantity is increased. How economic significance is to be
+interpreted need not be argued here. I have elsewhere undertaken to show
+that the utility theory of value does not explain the economic
+significance which demand-curves express--that demand-curves are not
+utility curves. My own theory is that demand-curves are to be explained
+only in terms of a social psychology, that demand-curves are
+social-value curves. But my argument at this point does not rest on the
+particular type of causal theory of value one chooses. It is enough that
+the demand-curve be recognized as expressing economic significance, and
+diminishing economic significance.[46] But for the demand-curve to
+express variation in economic significance of a good, there is need for
+a unit in which to express that variation. That unit is the economic
+significance of the dollar, itself assumed to be invariable--as all
+measures must be assumed to be invariable if measurement is to mean
+anything. If the unit chosen vary in the course of a given
+investigation, the curve tells you nothing at all.
+
+Another way of reaching the same conclusion is to say that an increase
+in demand in the active sense will lead to an increase in supply only if
+there be no corresponding increase in demand for the alternative
+employments of the sources of that supply, that, _e. g._, an increased
+demand for wheat will lead to increased production of wheat only if
+there be not a corresponding increase in the demands for corn and other
+crops which can be raised on land and with labor and capital that would
+otherwise produce wheat. This is only another phase of the argument that
+went before, that an increase in demand due to a falling value of money
+would lead to a corresponding shift in the supply-curve. It is not quite
+the same argument, however, because that was an argument concerned with
+short run tendencies, resting on the assumption that the holders of
+supply would immediately react to a change in the value of money,
+whereas the argument just presented rests on the longer adjustments,
+based on the law of costs, as worked out by the Austrians. This point
+will be made clearer in the next chapter.
+
+Yet another, and perhaps simpler, approach to the same conclusion is by
+pointing out that an individual, deciding to buy, must take account of
+the prices of other things in his budget--that individual
+demand-schedules would be different if market prices of other
+things--which depend on the value of money--were different.
+
+The doctrine that supply and demand (and cost of production, the
+capitalization theory, and other elements in the current price-analysis)
+presuppose a fixed value of money, must be sharply distinguished from
+the doctrine of Professor Fisher (_Purchasing Power of Money_, ch. 8),
+and others, that a fixed _general price level_ is assumed by supply and
+demand, etc. I should deny that a fixed general price level is assumed.
+The point rests in the distinction between value as _absolute_ and value
+as _relative_. For my theory, it is perfectly possible for the general
+price level to rise, with the value of money constant, because of a rise
+in the values of _goods_. In a later chapter, on "The Passiveness of
+Prices," I shall examine the doctrine of Professor Fisher more closely,
+and set these two views in clearer contrast. For the present, it is
+enough to point out one vital difference between a rise in prices due to
+a fall in the value of money and a rise in prices due to a rise in the
+values of goods, with the absolute value of money unchanged: in the
+latter case, there is an increase in the psychological stimulus to
+industry, an increase in economic power in motivation, which energizes
+and increases production. In the latter case, especially when the fall
+in the value of money is rapid, and the rise in prices is clearly due to
+that cause (as in the case of Confederate paper, or the French
+_Assignats_), we find a reverse effect on industry. Intermediate cases,
+where money is falling in value, but where goods are also rising, give
+us intermediate results.
+
+In what follows, I shall from time to time refer to this distinction. In
+my own exposition, I shall always use "value of money" in the absolute
+sense, as distinguished from the mere "reciprocal of the price
+level,"--a practice which I have sought to justify in the chapter on
+"Value," and in other places there referred to.[47]
+
+The modern theory of supply and demand, then, assumes money, and a fixed
+value of money. It is, therefore, obviously unfitted as an instrument to
+solve the problem of the value of money. If supply and demand concepts
+are to be applied to this problem, they must be of a different sort.
+This was pointed out by Cairnes[48] who criticised Mill's formulation,
+and pointed out that Mill departed from it in three capital doctrines:
+in the theory of the value of money, in the theory of wages, and in the
+theory of international values. By the demand for money, Mill means, not
+the amount of _money_ demanded, but the quantity of goods offered
+against money--a very different conception. (Mill, _Principles_, Bk.
+III, ch. viii, par. 2.) In what sense a quantity of goods can equal a
+quantity of money, or in what sense there can be a ratio between goods
+and money, (to recur to Mill's former problem as to the ratio between
+things not of the same denomination) Mill does not make clear, nor is it
+defensible to speak of either a ratio or an equation on the basis of
+Mill's system, since Mill had no absolute value concept. Cairnes seeks
+to reconstruct the notion of supply and demand, in such fashion as to
+make it possible to apply it universally, and takes up the question of
+the comparability of supply conceived as a quantity of goods, and
+demand, conceived, not as a quantity of goods, but as desire combined
+with the ability to pay. He concludes that in both supply and demand
+there is a physical, as well as a mental, element. Demand he defines as
+the desire for a commodity backed by general purchasing power; supply as
+the desire for general purchasing power, backed by the offer of a
+commodity. Thus he thinks he has made the two of the same denomination,
+so that comparison may be instituted between them, and the ideas of
+equation, ratio, and proportion made legitimate. By "general purchasing
+power," Cairnes seems to mean money and the representatives of money. It
+is not an abstract power, since it is the "physical" element in demand,
+comparable with, and of the same denomination with, the physical element
+in supply, a commodity. Cairnes' solution of Mill's difficulty seems to
+me to be merely verbal, however. First, in what way is the desire for
+general purchasing power in the mind of one man comparable with the
+desire for a commodity in the mind of another man? I pass over the
+supposed difficulty that knowledge of other men's emotions is
+impossible,[49] and emphasize simply the point that price offer, either
+by demander or supplier, is no test of the intensity of desire where
+there are inequalities in the distribution of wealth. But second: in
+what sense is general purchasing power, money and money-funds, of the
+same denomination as a commodity? Cairnes emphasizes the physical
+character of both. But surely they are not comparable on the basis of
+any physical attributes--weight, bulk, etc. Certainly if we look at the
+concept of demand here given, the physical aspect is simply
+irrelevant--gold money goes by weight, but what of paper money and
+credit instruments? And in what sense is even gold money physically of
+the same denomination with, say, wheat, or hay or base-ball tickets? Not
+physical quantities, but economic quantities, are relevant here; not
+weight or bulk, but _value_. By means of a concept of value, as the
+homogeneous quality of wealth, present in each piece of wealth in
+definite, quantitative degree, could Cairnes bring about comparability
+between the "physical" elements in supply and demand. But not otherwise.
+Only significances, values, are relevant here. Supply and demand
+presuppose value.
+
+It will be interesting to consider the effort to solve the problem of
+the value of money by means of supply and demand on the lines employed
+by Mill, where demand for money is defined as quantity of goods to be
+exchanged, and supply of money as quantity of money times rapidity of
+circulation, and where physical quantities are treated as the relevant
+factor, no value concept of the sort here contended for being
+presupposed. This is, essentially, Mill's method. There is, in this
+conception, first the difficulty that "quantity of goods to be
+exchanged" is not a true quantity at all, but is a mere collection of
+things of different denominations, dozens of eggs, pounds of butter,
+gallons of milk, etc., incapable of being funded into a quantity.[50]
+There is, second, the difficulty that increasing the amount of any one
+of the items in this heterogeneous composite need not increase the
+"demand" for money, in the sense that it increases the "pull" on money,
+or tends to increase the supply of money. Yet, under the general
+doctrine of supply and demand, an increase in demand should be a
+stimulus to increase in supply. Indeed, it is easy to construct a case
+where an increase in the quantity of one of the items in this composite,
+the others remaining unchanged, would actually tend to _repel_ money, to
+reduce the _supply_ of money. Suppose that one item in America's stock
+of goods, say cotton, is much increased in quantity, and suppose that
+cotton has a highly inelastic demand-curve, so that the increased
+quantity sells for less money than the original quantity.[51] Suppose,
+too, that cotton is our chief article of export, and that the bulk of
+our cotton is exported. Would not the "balance of trade" tend to turn
+against us, so that gold would tend to leave the country, and the supply
+of money be reduced? There is nothing in the situation assumed to raise
+the prices of other goods,[52] so that they could exert a counteracting
+"pull" on money. Europeans, to be sure, having less to pay for cotton,
+could demand more of other things, and Americans paying less for cotton
+could demand more of other things. But, on the other hand, American
+producers of cotton, receiving less for their cotton--receiving
+precisely as much less as the others had more--could then demand less of
+other things, exactly as much less as the others are able to demand
+more. The original tendency for gold to leave the country, and the
+tendency for gold to leave the money-form and be used in the arts, would
+remain unneutralized. An "increase of demand for money," in Mill's
+sense, would in this case present the remarkable phenomenon of driving
+money away. Physical quantities are irrelevant. Psychological
+significances are what count.
+
+It is interesting to note, in this connection, that some striking
+contradictions in quantity theory reasoning on any formulation, whether
+connected with the notions of supply and demand or not, are involved in
+this hypothesis. The illustration above gives a case where a lowered
+price level leads money to flow away from your country. But, on the
+quantity theory explanation of foreign exchange, it is _rising_ price
+levels which drive gold away, and _falling_ price levels which attract
+gold![53]
+
+Mill's effort to apply the notion of demand and supply to the value of
+money is, then, (1) not an application of his formal doctrine of supply
+and demand, and (2), is a failure, leads to results contradictory to the
+general law of supply and demand, as soon as we take account of the
+peculiarities of individual commodities, and cease to look at
+commodities in one huge lump. Psychological forces, rather than
+physical quantities, are what count. Whether or not the supply and
+demand notion of Cairnes, reinterpreted by putting a quantitative value
+concept into it, could serve as a means of approach to the value of
+money, I shall not here argue. No one so far as I know has attempted to
+do the thing that way, and my own theory is best developed by another
+method. It is interesting to note, however, another somewhat different
+effort to apply the supply and demand formula. General Walker does so,
+including among the factors determining the demand for money, not only
+the quantity of goods to be exchanged, but also the _prices_[54]
+prevailing. Since by value of money Walker means merely the reciprocal
+of the price-level, this is the clearest possible case of a vicious
+circle. It would be a circle even if he were trying to explain the
+absolute value of money, as distinguished from the reciprocal of the
+price-level, since the former is one of the determinants of the latter.
+Value of money and values of goods determine prices; prices and quantity
+of goods determine demand for money; demand and supply of money
+determine value of money,--a hopeless circle.
+
+I know no sense in which the terms, demand and supply of money, can have
+relevance to the problem of the value of money. There is one sense in
+which the terms can be used which fits in with the modern supply and
+demand-curves, and that is the sense in which they are used in the money
+market. Demand for money comes from borrowers; supply of money from
+lenders. The price paid is a money-price, the curves express the short
+time money-rates, the rental of money, in terms of money, for stated
+periods of time. There is a relation, later to be investigated, between
+the rental of money, the money-rate, and the value of money, but the two
+are in no sense the same. It should be noted, too, that we are here
+concerned with "money-funds" rather than with money in the strict
+sense,--distinctions and relations in this connection properly belong at
+another stage of our inquiry. Whenever the terms, demand and supply of
+money, appear in the following pages, they will be used in the sense
+developed in this paragraph.
+
+Demand and supply are superficial formulæ. They cannot touch a problem
+so fundamental as that of the value of money.
+
+
+
+
+CHAPTER III
+
+COST OF PRODUCTION AND THE VALUE OF MONEY
+
+
+When the cost theory was a labor theory, as with Ricardo, the
+expression, cost of production of money, could have a definite meaning.
+It meant the labor-cost of producing the money metal. Even in this form,
+it is recognized that cost of production has a looser connection with
+value in the case of money than in the case of most commodities, because
+the supply of money metal is large and durable, and the annual
+production affects it slowly. But cost of production theories, in the
+form of labor theories, or labor-abstinence-risk theories, have little
+standing in modern economic theory. Ricardo himself saw the break-down
+of the pure labor theory; and Cairnes, Ultimus Romanorum, so limited and
+modified the "real costs" doctrine as to leave little validity in it,
+even on his own showing. The prevalent doctrine of cost of production
+runs in terms of "money-costs"--and hence is of no use when the problem
+of the value of money itself is to be solved.
+
+A brief historical sketch of the cost theory will be helpful. Costs are
+sometimes conceived as a cause of value, and sometimes as a measure of
+value. Often these two aspects are mixed, and writers shift from one
+notion to the other. This is particularly true of the labor theory. In
+Adam Smith the contention sometimes is that labor is unvarying in value,
+hence an admirable measure of values, and an excellent standard of
+long-time deferred payments. Smith compares wheat and silver from the
+standpoint of the constancy of their relation to labor, and concludes
+that wheat is the better standard in the long run, because it remains
+more nearly fixed with reference to labor than does silver. Sometimes
+Smith thinks of labor as a cause of value, and thinks of the labor that
+enters into the production of a good as the significant thing. At other
+times, the labor that goods will command or purchase is the significant
+thing--and here one is not clear whether he thinks of labor as a cause
+or as a measure. Whether labor is to be funded as labor-pain, or as
+labor-time, Smith does not state. Sometimes labor seems to be considered
+as homogeneous in its efficiency. At other times, he makes comparison
+between different kinds of labor as to their efficiency, and compares
+the efficiency of labor in different occupations. One can find nearly
+anything one pleases in Adam Smith on these points. At times he speaks
+of "labor and expense," rather than labor alone, as governing prices.
+
+Labor-cost to the laborer would take the form of labor-pain or
+labor-time. To the employer, it would take the form of outlay in wages.
+Adam Smith never makes any definite statement of point of view here, and
+shifts back and forth from one to the other. He recognizes variations in
+labor-pain, in danger, etc., in different kinds of labor when discussing
+wages.
+
+Ricardo elaborated the labor theory of value, and tried to think it
+through. He was too keen a logician to shift view-points with Smith's
+facility, and he tried to make a completed system.[55] There is some
+shifting from the theory of labor as a cause of value to labor as a
+measure of value, as in the following passage: "If the state charges a
+seigniorage for coinage, the coined piece of money will generally exceed
+the value of the uncoined piece of metal by the whole seigniorage
+charged, because it will require a greater quantity of labour, or,
+which is the same thing, the value of the produce of a greater quantity
+of labour, to procure it." (_Works_, McCulloch ed., 213.) In general,
+however, Ricardo developed a causal theory of value, quantity of labor
+being the basis of the absolute values of goods, their _relative_ values
+depending on the relative amounts of labor involved in the production of
+each. I shall not go into the matter fully, but shall call attention to
+the rock on which the system split, as Ricardo himself admits. A greater
+or less proportion of capital works with labor in producing different
+things, and the value of product, in that case, varies not merely with
+the labor, but also with the amount of capital, and the length of time
+the capital is employed. How say, then, that labor alone governs value?
+How reduce labor-cost and capital-cost to homogeneous terms? James Mill
+tried to do it for him by making capital merely stored up or petrified
+labor, which gives up its value again in production. But this doesn't
+meet the difficulty, because there is a _surplus_ value, over and above
+that explained by all the labor, including the labor which produced the
+machine, and the labor which produced the raw materials which entered
+into the machine, etc. The case of wine is a particularly obstinate
+case. Wine increases in value merely with the passage of time, at a rate
+which corresponds to the profit on capital. Ricardo finally, in
+correspondence with McCulloch, definitely abandons the case, stating
+that there are many exceptions to the proportionality between exchange
+value and labor-cost. "I sometimes think that if I were to write the
+chapter on value again which is in my book, I should acknowledge that
+the relative value of commodities was regulated by two causes instead of
+one, namely, by the relative quantity of labor necessary to produce the
+commodities in question, and by the rate of profit for the time that the
+capital remained dormant." (Davenport, _Value and Distribution_, p.
+41.) But this is a "dualistic" rather than a "monistic" explanation--one
+element is a money-expense, or at all events a pecuniary item, while the
+other is a "real cost" item. The two are incommensurate and
+incommensurable.
+
+Senior seeks to supply the unifying principle. "Abstinence" and labor
+have pain as a common element, and so are commensurable. Costs, reduced
+to labor and abstinence, become homogeneous again. Monism is restored.
+Cairnes completes the doctrine by adding risk to the real cost elements:
+a triune cost concept, sacrifice being the generic fact in the three
+manifestations.
+
+With John Stuart Mill, in general, we have an entrepreneur view-point.
+Money-expenses of production, entrepreneur outlay, plus wages of
+management, or including wages of management, are the factors with which
+Mill reckons. He is no longer concerned with psychological ultimates, or
+real costs. Cairnes criticised Mill sharply for this. No distinction is
+more fundamental he holds, than that between costs or sacrifice on the
+one hand, and rewards on the other. Labor, abstinence and risk are
+sacrifices; wages, interest, profits are rewards. None the less, in cost
+doctrine, as in supply and demand doctrine, it is Mill's view which has
+prevailed. Cost as conceived by Mill is a superficial, pecuniary notion.
+It tells little as to ultimate causation. But it is virtually only as a
+pecuniary doctrine, costs from the entrepreneur view-point, that the
+cost doctrine is met in modern theory.
+
+Why is this? Well, first, the real-cost doctrine simply does not square
+with the facts. The hardest labor does not produce the most valuable
+goods. Value in fact does not vary either with labor-pain or labor-time.
+In fact, whatever the explanation, it would seem to be truer that the
+relation is an inverse relation. Nor does the abstinence that pinches
+hardest produce the largest amount of capital. And while there is some
+correlation between risks and profits, the correlation is at best low
+and is not a correlation between psychological sacrifice and profits.
+Even "marginal abstinence" for a Rothschild or a Rockefeller causes no
+pain. It is absurd to seek to find a common element in the "abstinence"
+of a rich man and the pain of a poor and aged laborer. I pass over the
+supposed difficulty that abstinence is, in general, suffered by one set
+of minds, and labor-pain by a different set of minds, and hence, since
+men cannot compare their own emotions with the emotions of other men,
+there is no comparability. This subjectivistic psychology would, of
+course, make it equally impossible to fund labor-pains of different
+laborers, or to get any common denominator at all.[56] It is enough to
+point out that differences between rich and poor, between successful and
+unsuccessful, between efficient and inefficient, (apart from acquired
+differences which may be smoothed out by the "stored up
+labor-of-training" principle) make labor-pain, and marginal labor-pain,
+vary greatly from value, and make labor-pain, abstinence and risk quite
+incommensurable, and quite without fixed relation to value. Cairnes saw
+this in part, and developed his doctrine of non-competing groups to deal
+with it. Labor-pain and value vary together only when we are comparing
+goods produced by laborers within a competing group. Laborers in one
+group do not compete with laborers in another group. There is perfect
+competition in the capital market, however, and so capital costs
+("abstinence") are perfectly correlated with value, to the extent that
+capital enters. Cairnes seems to think that the whole difficulty with
+his real cost doctrine comes from the failure of competition. In fact,
+however, it comes also from the inequalities in wealth. And even in his
+highly competitive capital market it is equally true that abstinence, or
+even marginal abstinence (a term which Cairnes does not use) has no
+constant relation to amount of capital accumulated, value produced, or
+interest received. The cost theory breaks down at every point when it
+runs in labor-abstinence-risk terms. So generally has this been
+recognized, that the cost theory has generally given way to the utility
+theory, and cost doctrine when it appears in modern economics is either
+the very superficial money-outlay notion of Mill, or else the Austrian
+cost doctrine, later to be discussed, which is still a pecuniary
+concept. I have elsewhere undertaken to show (_Social Value_, chs. 3-7,
+and the ch. on "Marginal Utility," _infra_) that these defects of the
+"real-cost" theory, are just as much in evidence in the utility theory.
+The failure of the real cost theory of value is by no means a
+vindication of the utility theory. Both have the same vice--the effort
+to combine into a homogeneous sum a lot of individual psychological
+magnitudes measured in money, when the money-measure has a different
+psychological significance for each individual, and so comparison and
+addition are impossible. But in any case, the real cost doctrine of the
+Classical School has failed, and so cannot serve as the basis of the
+theory of the value of money.
+
+Obviously the money-outlay cost theory of Mill cannot explain the value
+of money itself. The marginal cost of producing twenty-three and
+twenty-two hundredths grains of gold will always be a dollar, however
+the dollar may vary in value. Indeed, in general, the assumption of a
+constant value of the money-unit is implied in the monetary cost
+concept. Cost curves are _supply_-curves and the reasoning already given
+as to the need for assuming constant value for money in the supply and
+demand concept will apply here. Costs function in value-determination
+only by checking supply. Rising costs tend to mean a lessened supply.
+But if the cost-curve is rising _because_ of a fall in the value of
+money, then the demand-curve will be rising also, and production will
+not be checked. The general law as to the relation of cost to demand and
+supply assumes a fixed value of the unit of cost, the dollar.
+
+To the Austrian economists we owe a rational theory of costs which gives
+the money-outlay concept more than a merely empirical basis. First, they
+see in costs not causes, but results. Value causation comes ultimately,
+not from the side of supply, but from the side of demand. I shall not
+now undertake a criticism of their explanation of demand. I have
+elsewhere criticised their confusion of demand-curves and
+utility-curves, and pointed out that marginal utility gives no
+explanation of demand. I shall recur to the utility theory of value at a
+later point. For the present, it is enough to point out that the
+Austrian theory of costs is independent of their utility vagaries, and
+rests best on the notion of supply and demand, as expressed in the
+modern curves, with the assumption of a fixed value of the money-unit.
+Costs consists of entrepreneur money outlay of various kinds, chiefly
+wages, interest, and rent. Rent is, for the Austrians, as much a cost as
+any other item of entrepreneur outlay. But these items of cost are not
+ultimate data. They are rather reflections of the positive values of the
+products. Value runs from finished product to agents of production,
+labor, and instrumental goods, and land. Avoiding needless complications
+from a discussion of interest as a factor in cost--a doctrine on which
+the Austrians, say Wieser and Böhm-Bawerk, are not agreed,--it is enough
+to point out that high wages or high rents, which limit production in
+any given industry or establishment, are high _because_ the land and
+labor in question have _alternative_ uses, because other industries, or
+other competitors in the same industry, bid for them. Cost-curves,
+then, are reflections of demand-curves. The cost-curve of wheat, _e.
+g._, is what it is because of the demand-curve for corn, for cattle, and
+for every other commodity that could be produced with the same labor and
+land. Cost doctrine thus becomes part of the general doctrine of supply
+and demand, and runs in pecuniary terms, assuming money, and a fixed
+value of money, and hence is incapable of serving as a theory of the
+value of money itself.
+
+That some vaguer form of cost doctrine, where the unit of cost is, not
+money, but some composite commodity of things used in the production of
+the standard money metal, or a unit of abstract value, might be worked
+out, is doubtless true. Gold production, like other industry, is part of
+the general economic scheme, and there is some sort of equilibrium
+reached which draws labor and capital now away from, and now back to,
+the gold mine. To bring this equilibrium into the general scheme of the
+modern theory of costs, however, in terms precise enough to make a
+satisfactory theory of the value of money, is a thing which has not so
+far been done, and I do not have high hopes of its early accomplishment.
+In any case, such a theory must rest upon a positive theory of value.
+Cost doctrine is negative, and can never be fundamental.[57]
+
+
+
+
+CHAPTER IV
+
+THE CAPITALIZATION THEORY AND THE VALUE OF MONEY
+
+
+Money is capital. A dollar is a capital-good. Money is, moreover, a
+durable form of capital, which gives forth its services bit by bit, and
+indeed, in a community where the state bears the burden of wear and
+tear, never ceases to give forth those services. In any case, from the
+standpoint of a given individual, so long as there is a limit of
+tolerance prescribed for legal tender, it is a matter of accident if he
+ever incurs a loss from the wastage of the capital instrument, money,
+through wear and tear. Moreover, the fact that money is "fungible," and
+that its use is to be found in a process which commonly returns to the
+owner, not the same coin, but a different coin, we may, in general,
+abstract from the wear and tear of the dollar, and look upon the dollar
+as a capital instrument which promises its owner, if he chooses to use
+it as capital, a perpetual annuity. The nature of this money service
+will be more fully described later. For the present it is sufficient to
+say that exchange is a productive process, that exchange creates values,
+in as true a sense as manufacturing does, and that money facilitates
+exchange in as true a sense as coal facilitates manufacturing. There is,
+at any given time, a demand-curve for this money service, manifesting
+itself in the money market, a demand for the short time use of money as
+a tool of exchange, and the "prices" which come out of the interaction
+of demand and supply in the money market are the short time "money
+rates" including the "call rates." These are properly to be conceived,
+not as pure interest on abstract capital, but as rents[58] which are to
+be attributed to money as a concrete tool.
+
+Now, in general, when such rents appear, they may be capitalized. And
+the price of the instrument of production that bears these rents, will
+be the sum of the rents, discounted at the prevailing rate of interest,
+with considerations of risk, etc., allowed for. The reasoning of the
+capitalization theory is really quite simple. Take, for example, a piece
+of urban site land, which is expected to bring a perpetual annuity of
+one hundred dollars. The whole economic significance of the land is
+contained in its services, present and prospective. The possession of
+land under certain circumstances brings other services, as social
+prestige, than the services which can be alienated to a lessee. But in
+this case I am abstracting from considerations of that sort, and also
+from the factor of risk. The whole value of the piece of land under
+consideration comes from the value of the one hundred dollars a year.
+But these annual incomes are not all equally valuable, even though all
+expressed as one hundred dollars. The first one hundred dollars is due
+one year hence, the tenth ten years hence, the thousandth, a thousand
+years hence. The principle of perspective comes in--I abstain from any
+detailed discussion of the theory of interest, simply stating that in a
+general way I agree with the contention that _time_ constitutes the
+essence of the phenomenon, or rather, the tendency to discount the
+future. The capital price of the land is the sum of an infinite
+convergent series of the "present worths" of the incomes. The formula
+is as follows: capital price of land = $100/1.05 + $100/(1.05)^2 +
+$100/(1.05)^3 ... + $100/(1.05)^n when the rate of interest is 5%. The
+limit of this series, assuming the series to be infinite, is $2000, and
+a simple formula for calculating it under the assumptions, is to divide
+$100, the annual income, by .05, the rate of interest. Given the annual
+income, given the prevailing rate of interest, the capital price is
+determined. The relation may be illustrated, roughly, by the figure of a
+candle, a disk, and the shadow of the disk on the wall. The disk
+represents the annual income, the shadow on the wall the capital value,
+and the distance between the flame and the disk the rate of interest.
+Increase the distance between the flame and the disk, the rate of
+interest, and the shadow becomes smaller; shorten the distance, and the
+shadow is increased. Similarly, enlarge the disk, and the shadow is
+enlarged. The capital value varies directly with the annual income, and
+inversely with the rate of discount. Now my purpose here does not
+involve a detailed examination of the validity or limitations of the
+capitalization theory. For the present, the only question is, has this
+theory any application at all to the problem of the value of money? It
+offers itself as a general theory of the values of durable bearers of
+income. Money is a durable bearer of income.
+
+The capitalization theory, however, is of no use for the purpose in
+hand. Money does not obey the general law in the relation which the
+magnitude of the income bears to the rate of interest. In general, the
+income and the rate of discount are independent variables. Their
+influence, operating in opposite directions, fixes the capital value,
+increasing income increasing the capital value, increasing discount rate
+reducing it. In the case of money, however, the two factors are not
+independent. The short time money rate is not, to be sure, identical
+with the long time rate of interest, which is the rate of discount for
+the purpose in hand. But the two tend to vary together in the long run
+average in fact, and they are related in the _expectation_ of those who
+are concerned in the capitalization process.
+
+In our chapter on the "Functions of Money," in Part III, it will be
+shown that normally there tends to be a difference between the money
+rates and the long time interest rates, the long time rates tending to
+be higher than the rates on short loans, the rate on very short loans
+being lower than the rate on somewhat longer short time loans, and the
+call loan rate being lowest of all. The explanation of this must be
+deferred till we have analyzed the functions of money. But the important
+thing, for present purposes, is that the money rates, though lower than
+the "pure rate" of interest, tend to vary, in long time averages, with
+that "pure rate,"[59] and that, consequently, the income from renting
+money, and the discount rate to be applied in capitalizing that income,
+are not independent magnitudes, but tend to vary together. They thus
+tend to neutralize one another. If money rates go up, and if they are
+expected to stay up long enough to justify (on the ordinary
+capitalization theory) a rise in the capital value of money, we have a
+counteracting influence in the long time interest rate, which also
+rises, and tends to pull down the capital value of money. To recur to
+our illustration of the candle and the disk, as the disk increases in
+diameter, the distance between the candle and the disk grows greater,
+and so the _shadow_ tends to remain the same.
+
+There is a further difficulty, to which attention will be called more
+fully in later chapters, particularly the chapter on "Dodo Bones," and
+the chapter on the "Functions of Money." In other cases, in general, the
+capital value is, as the capitalization theory requires it to be, a true
+shadow, a passive function of the income and the discount, of the disk
+and the distance between the candle and the disk. In the case of money,
+however, the income is causally dependent, in part, upon the capital
+value. Money can function as money only by virtue of having value. The
+shadow becomes substance in the case of money. It is the _value of
+money_ which makes possible the _money work_. The capitalization theory,
+thus, if applicable at all, must be radically modified before being
+applied. We shall subsequently, in the chapters above referred to, take
+account of this fundamental complication. For the present, we can state
+it merely as a problem: how can we construe the interaction of the
+income value of money and the capital value of money in such a way as to
+avoid a circular theory?
+
+But further, the capitalization theory, as heretofore formulated, like
+the doctrines of supply and demand and cost of production, assumes
+_money_, and a _fixed absolute value_ of money. This assumption must be
+made if we are to be able to predict, on the basis of the capitalization
+theory, that a given annual income, at a given rate of discount, will
+give a specified capital value. This may be shown by the following
+considerations: If men anticipate that the value of the income, which is
+a fixed sum of dollars, is to grow less in the future, then the present
+worth of the bearer of that income will shrink to an extent greater than
+the "pure rate" of interest would call for. The principle of
+"appreciation and interest" comes in. The nominal interest, in times of
+falling value of money, tends to exceed the pure rate by an amount which
+compensates for the loss in value of future income as the dollar falls
+in value. We have here, however, a principle different from the
+principle of time discount. It is not the influence of time, which makes
+a _given_ value appear smaller as it is further removed in time, but it
+is an anticipated lessening in the value of the income itself, that
+counts. In terms of our candle and disk illustration, it is a factor
+affecting the size of the disk, rather than a factor affecting the
+distance between the disk and the candle. For the purposes of
+calculation, the two elements in the nominal rate of interest may be
+lumped together, and the nominal rate, rather than the pure rate, may be
+taken as the rate of discount for capitalization purposes. But for
+theoretical purposes, the two must be kept distinct. The capitalization
+theory rests on the assumption of a fixed value of the money unit.
+
+That the fixed value of the money unit assumed is an absolute value, and
+not a mere "reciprocal of the price level," may be proved by some
+further considerations regarding relations among these same factors.
+Assume a fall in the rate of interest. Then, on the capitalization
+theory, prices of lands, stocks and bonds, houses, horses, and all items
+of wealth which give forth their services through an appreciable period
+of time, will rise, and with them the average of prices, or the general
+price level, will rise.[60] If one hold the _relative_ conception of
+value, according to which the value of money necessarily falls when
+prices rise, because the two are merely obverse phases of the same
+thing, then this rise in the price level is, _ipso facto_, a fall in the
+value of money. But we have seen that a fall in the value of money
+means, on the "principle of appreciation and interest," a rise in the
+interest rate! Hence, we would have proved that a fall in the interest
+rate causes a rise in the interest rate--which is absurd. If, however,
+we recognize that prices can rise without a fall in the value of money,
+if, _i. e._, we use the absolute conception of value, this difficulty
+disappears. The capitalization theory and the theory of appreciation and
+interest can be reconciled only on the basis of the absolute conception
+of value.
+
+The capitalization theory, then, in its present formulation, assumes
+money, and a fixed absolute value of money. It is, therefore,
+inapplicable to the problem of the value of money itself.
+
+In general, none of the polished tools of the economic
+analysis,--neither cost of production, the capitalization theory,[61]
+nor the law of supply and demand,--is applicable to the problem of the
+value of money. The reason is that they get their edge from money
+itself. The razor does not easily cut the hone. It is to this fact, I
+think, that we owe the widespread and long continued vogue of a theory
+so crude and mechanical as the quantity theory. In the next chapter we
+shall show that the utility theory of value--which we shall not
+recognize as a polished tool!--has also failed to give us help in
+explaining the value of money.
+
+
+
+
+CHAPTER V
+
+MARGINAL UTILITY AND THE VALUE OF MONEY
+
+
+A good many writers have attempted to apply the marginal utility theory
+to the value of money. Among these, I may particularly mention Friedrich
+Wieser, Ludwig von Mises, Joseph Schumpeter, and, in America, David
+Kinley, and H. J. Davenport.
+
+The marginal utility theory is ordinarily merely a thinly disguised
+version of supply and demand doctrine. As usually presented in the
+text-books, we have an analysis of the phenomenon of diminishing utility
+of a given commodity to a given individual, illustrated by a diagram, in
+which the ordinates represent diminishing psychological intensities.
+Often a money measure is given to these diminishing intensities, and the
+curve is presented as the demand schedule of a given individual. Then,
+with little further analysis, a leap is made to the market, and it is
+assumed that the market demand-curve, of many individuals, differing in
+wealth and character, is a utility-curve, and value in the market is
+"explained" by means of marginal utility. I need not here repeat my
+criticisms of this procedure.[62] It gives simply a confused statement
+of the doctrine of supply and demand. The analysis of utility which
+precedes the discussion of market demand is wholly irrelevant, and
+merely mixes things up. That such a conception is of no use in solving
+the problem of the value of money has been sufficiently indicated in the
+chapter on supply and demand.
+
+Sometimes the contention is made that money is unique among goods in
+having "no power to satisfy human wants except a power _to purchase_
+things which do have such power."[63] This contention, in Professor
+Fisher's view, precludes the application of the marginal utility theory
+to the problem of the value of money, and he makes no use of marginal
+utility in his explanation. Indeed, in the passage from which this
+quotation is taken, Professor Fisher says that the quantity theory of
+money rests on just this peculiarity of money. Not all writers who
+contend that money has no utility _per se_, however, have felt it
+necessary to give up the marginal utility theory as a theory of money,
+as we shall later see.
+
+On the other hand, writers of the "commodity school" (or "metallist
+school"), writers who see the source of the value of money in the metal
+of which it is made, can apply the utility theory readily to the value
+of money, making the value of money depend on the marginal utility of
+gold, or the standard metal, whatever it is. To the writers of this
+school, it is incredible that anything which has no utility should
+become money. Money must be either valuable itself, or else a
+representative of some valuable thing. The value of money comes from the
+value of the standard of value, and that value may, so far as the logic
+of the situation is concerned, be as well explained by marginal utility
+as the value of anything else. Typical of this view is Professor W. A.
+Scott's discussion in his _Money and Banking_[64], though the emphasis
+there is not on marginal utility as the explanation of the value of the
+standard, but on the value (conceived of as an absolute quantity) of the
+standard as essential to the existence of money, and the performance of
+the money functions. Professor Scott attacks vigorously and effectively
+Nicholson's exposition of the quantity theory,[65] where the assumption
+is made that money consists of dodo-bones (the most useless thing
+Nicholson could think of). Most quantity theorists would share
+Nicholson's view that dodo-bones would serve as well as anything else
+for money--or, to put the thing less fantastically, that the substance
+of which money is made is irrelevant, that the only question is as to
+the quantity, rather than the quality, of the money-units, and the
+quantity of the money-units, not in pounds or bushels or yards, but in
+abstract number merely. For writers who seek the whole explanation of
+the value of money in its monetary application, and who see that money,
+_qua_ money, cannot administer directly to human wants, the view that
+Professor Fisher expresses, namely, that money has no utility, and is
+unique among goods in this respect, seems on the surface, to have
+justification. On the surface merely, however. Money is not unique among
+goods in being wanted only for what it can be traded for. Wheat and corn
+and stocks and bonds and everything else that is speculated in is
+wanted, by the speculators, only as a means of getting a
+profit[66]--they are remoter from the wants of the man who purchases
+them than the money profit he anticipates. Ginsing, in America, has
+value, though consumed only in China. And there are people, particularly
+jewelers, who often want money as a raw material for consumption goods.
+The difference is at most a difference of degree--and of slight degree
+indeed in the case of such things as bonds, which count on the "goods"
+side of the quantity theory price equation, but which really are in all
+cases remoter than money itself from human wants. Money really stands,
+for the purpose in hand, on the same level as any other instrumental
+good.[67] It does not give forth services directly, as a rule. Neither
+does a machine, or an acre of wheat land, or goods in a wholesaler's
+warehouse. Exchange is a productive process, an essential part of the
+present process of production. Money is a tool which enormously
+facilitates this process. It has its peculiarities, no doubt. One of
+them is--and money is not unique in this as will later appear--that it
+must have _value_ from non-monetary sources[68] before it can perform
+its own special functions, from some of which it draws an increased
+value. But there seems to me to be nothing in the contention quoted from
+Professor Fisher, to justify setting money sharply off from all other
+things, or to justify the view that marginal utility is inapplicable to
+the value of money, if it be applicable to the value of anything at all
+that is not destined for immediate consumption. I do not believe that
+the marginal utility theory is valid for any class of goods, not even
+those for immediate consumption. Where marginal utility theory is,--as
+in the conventional text-book expositions--merely another name for
+supply and demand theory, it is, as already shown, not applicable to the
+value of money, and it is useful in the surface explanation of
+market-prices of goods. But where marginal utility theory really seeks
+to get at value fundamentals, it is precisely as valid for money as for
+goods of other sorts--invalid, in my judgment, in both places, and for
+the same reasons in both.
+
+Among the writers who would apply the utility theory to money, while
+still insisting that money, as such, has no utility, are Wieser,
+Schumpeter--who accepts Wieser's theory in its main outlines--and von
+Mises, who develops a notion very different from that of the other two.
+
+Wieser's doctrines are set forth in two expositions, separated by five
+years, the second representing a considerable development in his
+thought, though resting in part on the first. The first is an address
+upon the occasion of his accession to the professorship at the
+University of Vienna, in 1904, and is published in the _Zeitschrift für
+Volkswirtschaft, Sozialpolitik und Verwaltung_, vol. 13 entitled, "Der
+Geldwert und seine geschichtlichen Veränderungen." The second is a
+discussion, partly written and partly spoken, "Der Geldwert und seine
+Veränderungen" (written), and "Ueber die Messung der Veränderungen des
+Geldwertes" (spoken), in _Schriften des Vereins für Sozialpolitik,
+Referate zur Tagung_, no. 132, 1909. For the purpose in hand, a brief
+statement of one or two points would suffice to show the futility of
+Wieser's effort to get an explanation of the value of money _via_
+marginal utility, but I think that readers may be interested in a fuller
+account of Wieser's doctrine, just because it is Wieser's, and so shall
+undertake to give a more systematic account of it. For brevity, in the
+exposition which follows, I shall refer to the first article as "I," and
+to the second as "II."[69]
+
+Wieser holds that it is possible to have money wholly apart from a
+commodity basis (I, p. 45), citing the Austrian _Staatsnoten_ as a case
+in point. The reason for giving them up is that they do not circulate in
+foreign trade. Gold fulfills its international money-functions the more
+easily because of its various employments, but, after it is thoroughly
+historically introduced, as money, it could fulfill its money functions
+even if all these employments be thought away (46). Wieser gives no
+argument for this contention, and its validity will be examined
+later.[70] There are, he says, two sources for the value of gold, the
+money use and the arts use, interacting. Money is further removed from
+wants, not only than consumption goods, but also than production goods,
+which are but consumption goods in the seed. The latter are technically
+destined for definite goods. But money may be used to procure whatever
+good you please, in exchange. (The absoluteness of this distinction,
+also, may be questioned. Pig iron is almost as unspecialized as money in
+its relation to wants, since tools enter into the production of almost
+every service that human wants require, from surgical operations,
+through instrumental music, to wheat and horse-shoes. On the other hand,
+money is not the only thing by means of which other things are
+purchased. The extent of barter in modern life will wait for later
+discussion.[71] I do not think that _any_ sharp distinction between
+money and all other things is valid.) Wieser complains of the older
+economics which treats money as a commodity. And he contends that as
+money and commodities show a contrast in their essence (_Wesen_), they
+should also manifest a contrast in the laws of their values, even though
+the fundamental general theory of value applies to both (I, 47). He
+finds in representatives of money (_Geldsurrogate_) and in velocity of
+circulation of money, factors which are lacking in commodities. (Again a
+question must be interjected by the writer. Are not corporation
+securities essentially like _Geldsurrogate_ from this angle? And do not
+goods vary greatly in the number of times they are exchanged? What of
+the speculative markets, where more sales are made in an active market,
+at times, than there are commodities or securities of the type dealt in
+in existence?) The value of money is essentially bound up with the
+money-service. Wieser indicates that he is not talking about the
+subjective value of money, but its objective value, using the popular
+meaning of the term, which, he says, is not strictly logical, but is
+useful: the relation of money to all other goods which are exchanged,
+the purchasing power of money. This depends on goods as well as on
+money. In the second article, Wieser refines and elaborates his
+conception of the objective value of money, seeking to get away from the
+notion of relativity which is involved in the conception of purchasing
+power, and to get an absolute conception, which shall be a causal factor
+in the determination of general prices, rather than a mere reflection of
+them. It is to be a coefficient with the objective values of goods in
+determining prices. A change in general prices may be caused by a change
+in the value of money, and may be caused by a change in the values of
+goods (II, p. 511). In explaining this objective value concept (which,
+in its formal and logical aspects, is in many ways similar to the
+absolute social value concept maintained by the present writer, though,
+in the present writer's judgment, inadequately accounted for by Wieser,
+so far as a psychological causal theory is concerned) Wieser objects to
+the term, "objective value" which he had used in the earlier article. He
+prefers "volkswirtschaftlicher Wert." (This term is perhaps best
+rendered "public economic value," for present purposes, to distinguish
+it, on the one hand, from individual or personal value, and, on the
+other, from the social economic value concept of the present writer. At
+the same time, the connotation of a communistic or authoritive value
+must not be read into the term. It is, in its formal and logical
+aspects, really the most common of all the value notions, and may, best
+of all perhaps, be translated simply "value," or "economic value," or
+"absolute value." But for the present discussion, we shall call it
+"public economic value.") This public economic value, in the case of
+goods, is not a mere objective relation between a good and its
+price-equivalent. It is a subjective (psychological) value, like
+personal value. If one wishes to call it objective value, one is using
+objective in the sense of the general subjective as distinguished from
+the personal individual idiosyncracy (II, p. 502). The objective
+exchange value of goods (here Wieser uses "objektiver Tauschwert" as the
+equivalent of his "volkswirtschaftlicher Wert" above mentioned) is the
+common subjective part of the individual valuations leaving out the
+remainder of individual peculiarities ("der allgemein subjective Teil
+der persönlichen Wertschätzungen mit Verschweigung des individual
+eigenartig empfundenen Restes").[72] Wieser does not seem to me to think
+out clearly the distinction between absolute and relative value in this
+connection. He wishes to get something more fundamental than a mere
+relation between goods and money; he wishes a psychological phenomenon.
+He wishes to have a value of goods which can be set over against the
+value of money, the two, in combination, determining prices. And yet, he
+wishes somehow to get these out of the prices themselves. "We must seek
+a concept of the public economic value of money which, to be sure,
+proceeds from the general price-level (_Preisstand_), but which excludes
+from its content everything that comes purely from the value of goods"
+(II, 511). To the public economic value of money, however, Wieser gives
+no independent definition. The definition runs in terms of the values of
+the goods. "The value of money rises when the same inner values (_innere
+Werte_) of commodities are expressed in lower prices; it falls, when
+they are expressed in higher prices" (II, 511-12). "Inner value" of
+goods is not defined, but I take it that Wieser uses it as meaning
+essentially the same thing as the public economic value already
+described--an absolute value. (_Cf._ the usage of Menger and von Mises,
+_infra_, in this chapter, with respect to the terms, "inner" and "outer"
+value.) The definition is not strictly circular, perhaps, but at least
+it is pretty empty. Nothing appears to give the value of money, as
+distinct from its purchasing power, an independent standing. The reason
+for this will later appear. It should be noted, however, that the
+definition is not in terms of prices or purchasing power. Prices might
+remain unchanged, in Wieser's scheme, and yet the value of money sink,
+if the inner values of goods should sink.
+
+The value of money, thus defined, is to be explained by marginal
+utility. But money has no marginal utility of its own, it has no
+subjective use-value, but only a subjective exchange value,--derived
+from the use-value (marginal utility) of the commodity purchased with
+the marginal dollar (II, 507-8). This subjective-exchange value of money
+is the personal value of money, as distinguished from its public
+economic value, and is the cause of the public economic value. The
+personal value of money changes (1) with the volume of one's personal
+income, (2) with the intensity of one's need for money, and (3) with
+market prices. The personal value of money is directly influenced and
+measured only in exchanges for consumption goods. Expenditures of other
+kinds affect it only indirectly by leaving less for consumption
+expenditures. The laborer always reckons with the personal value of
+money, but not the business man, in his business calculations. As in the
+case of goods, we pass from personal to public economic value (II, 509).
+The personal value of money depends on the relation between an
+individual's money income, and his real income, in terms of goods. The
+public economic value of money depends on the money income of the
+community as a whole, and its real income. (II, 516-18). Money income
+grows faster than real income, through the extension of the money
+economy. Money income is not, like real income, dependent on quantity.
+The mere extension of the money economy increases the volume of money
+income, lowers the personal value of money, lowers its public economic
+value, and raises prices. Witness the effect on a rural community of
+bringing it into the great market, where all costs are reckoned in money
+and rising costs compel rising prices. Hence, there is a tendency for
+the public economic value of money to sink, and this has been the
+historical fact (I, II, 519-520.)
+
+Criticism of this theory is almost superfluous. There are elements in
+Wieser's discussion, not here presented, which have very considerable
+importance, and which will be presented in a later chapter when the
+criticism of the quantity theory is taken up. Wieser deals some heavy
+blows to the quantity theory. But his constructive doctrine presents the
+clearest possible case of the Austrian circle. The value of money
+depends, not on its subjective use-value, its own marginal utility--it
+has none. The value of money depends on its subjective value in
+exchange, the marginal utility of the goods which are exchanged for it.
+But these depend on prices. And prices depend, in part, on the value of
+money itself! This circle, present in every form of the Austrian theory
+which seeks a causal explanation of value and prices by means of
+marginal utility,[73] though often less obviously present, is here quite
+glaring. The distinction between volume of money income and quantity of
+money is, on the other hand, an important one, and will be emphasized
+when the quantity theory is taken up.[74] One further point in Wieser's
+doctrine calls for comment. It is strange indeed to find an Austrian
+seeing in a rise in money costs a _cause_ of a general rise in prices.
+The Austrian doctrine is rather that rising money costs are
+_reflections_ of rising general prices. Wieser's doctrine that the
+extension of the money economy to rural regions, compelling the farmer
+to reckon all his costs in money and so to raise his prices, has been
+adequately criticised by von Mises, who points out that Wieser sees only
+half the phenomenon; that eggs and butter are, indeed, higher in price
+in the rural region when it comes into contact with the city, but that
+they are correspondingly lower in the city from the same cause. On the
+other hand, the doctrine of costs is not the whole point in Wieser's
+notion of the extension of the money economy as a cause of higher
+prices, and we shall deal with the doctrine again, in a different
+connection.
+
+By devitalizing the marginal utility theory, by stating it in such a way
+that it makes no causal assertions, and in such a way that it leaves the
+real value problem untouched, it is possible to free it from the circle
+just pointed out. Schumpeter does so state it.
+
+Schumpeter's theory of value,[75] though he attributes it to
+Böhm-Bawerk, seems to the present writer to be essentially different.
+Böhm-Bawerk undertakes to explain the value (objective value in
+exchange) of each good by its _own_ marginal utility to different
+individuals, buyers and sellers of the good--indeed, by its marginal
+utility to _four_ individuals, the two "marginal pairs."[76] He sees at
+points that the prices of other goods are sometimes factors, making
+marginal utility give way to "subjective value in exchange," as the
+determinant of an individual's behavior toward a given good in the
+market--as in his much discussed overcoat illustration.[77] But
+Böhm-Bawerk never gets out of the circle which this reaction of the
+market-prices on the individual subjective values involves. Schumpeter
+seems to rise to a higher conspectus picture, which, in form, avoids the
+circle. His picture is that of a vast equilibrium, in which, instead of
+attributing the market value of each good to its own marginal utility,
+you explain the exchange ratios[78] of every good to every other good,
+all at once, by reference to a total situation: _given_ the number of
+goods of each class, given the number of individuals in the market,
+given the _distribution_ of each class of goods among the individuals,
+given the utility-_curves_ (not marginal utilities) of each good to each
+individual, an equilibrium will be reached, through trading, in which
+ratios between marginal utilities of each kind of good to each
+individual are inversely proportional to the abstract ratios (ratios of
+exchange) between the same goods, each measured in its own unit. The
+ratios are abstract ratios, between pure numbers, so far as the market
+ratios are concerned; the ratios in the mind of each individual are
+concrete ratios, between marginal utilities. The scheme, thus stated,
+says nothing as to the _causal_ relation between marginal utility and
+market ratios; it merely states certain _mathematical_ relations between
+each individual system of marginal utilities on the one hand, and the
+abstract market ratios on the other. By avoiding _assertions_ as to
+causation, it avoids a causal circle. In such a situation, marginal
+utilities and market ratios are, in reality, alike resultants,
+_effects_, of the given quantities of goods, distribution of goods,
+numbers of buyers and sellers, and individual utility-_curves_--not
+_marginal_ utilities. To this picture, one may add--what Schumpeter does
+not add--the curves showing time-preferences of each individual for each
+sort of good, and (an element which Schumpeter does include) the curves
+of _dis_-utility for the individuals who produce each kind of good. The
+system, it may be noted, is as good a proof of _real cost_ doctrine as
+it is of utility doctrine.
+
+Such a picture, I submit, avoids the circle which is presented in all
+other formulations of the Austrian theory of value. I wish, however, to
+indicate its limitations as a theory of value, and the impossibility of
+any application of it to the problem of the value of money. (1) Its data
+are inaccessible: nobody could possibly know all the utility-curves and
+all the time-preference curves (and disutility of labor-curves, etc.) of
+all goods to all individuals in, say, the United States. To explain
+market ratios by utility-curves is a case of _ignotum per ignotius_, so
+far as practical application is concerned. Moreover, the scheme is so
+difficult to visualize that it is useless as a tool of thought--as one
+will find who tries to think it through, without the aid of higher
+mathematics, for ten goods, and ten persons, with unequal distribution
+of wealth, and different utility curves, time-preference curves, and
+disutility-curves for each kind of good to each individual. (2) The
+scheme must assume smooth curves and infinitesimal increments in
+consumption, which is a fiction so far as the individual psychology is
+concerned. Without this assumption, the point-for-point correspondence
+between individual and market ratios does not exist. It is only in
+social-value curves, or in demand-curves in the big market (which are
+social-value curves, expressed in money),[79] that you have, as a matter
+of fact, the right to smooth out your curves. (3) The theory must assume
+the frictionless static state, in which marginal adjustments are
+perfectly accomplished, and equilibrium really reached. Without this
+assumption, again the point-for-point inverse correspondence of market
+ratios and individual ratios fails. But this makes it quite impossible
+to apply the doctrine to any functional theory of the value of money, or
+to bring money in any realistic way into the scheme. As will be shown
+more fully in later chapters, money functions in bringing about just
+the absence of friction which static theory assumes. That is what money
+is _for_. The functional theory of money, therefore, cannot abstract
+from friction and dynamic change.[80] It is, of course, possible, on
+this scheme to pick out any one of the goods in the system, say the
+1-1000th part of a horse, call it the "money-unit," and determine a set
+of money-prices. These "money-prices" are already given in the scheme in
+the ratios between the abstract numbers of this unit and the abstract
+numbers of the units of all other goods. But this is meaningless, so far
+as a theory of money is concerned. It abstracts entirely from the
+_differences_ in _salability_[81] of goods, on which the theory of money
+must rest. It gives us no clue to that part of the value of the
+money-article which comes from its money-functions.
+
+(4) The theory has no bearing on the problems of supply and demand.
+Demand-curves are curves, not of utility, but of money-prices. They are
+concerned, not with a _system_ of ratios among goods in general, but
+with the absolute money-prices of particular goods, one at a time. The
+modern demand-curves and supply-curves, representing the demand and
+supply doctrine first made precise by J. S. Mill,[82] are concerned with
+the money-prices of particular goods, and the "equation of supply and
+demand"--amount supplied and amount demanded--gives an equilibrium in
+which only one price is determined. Austrian theory, in Böhm-Bawerk's
+hands, and in the hands of practically all adherents of the Austrian
+School, including Davenport,[83] has been offered as really bearing on
+the explanation of demand, and as giving a psychological account and
+explanation of the demand-curve. The scheme of Schumpeter has simply no
+bearing at all on this vital point. The equilibrium picture in which
+_all_ goods are involved supplies no data from which to construct any of
+the magnitudes above or below the margin of the demand and supply-curves
+of any given good. One reason why this is so will appear from the point
+made with reference to "money-prices" in the preceding paragraph. For
+Schumpeter's scheme, the significance of the article chosen as "money"
+would be as much a problem as anything else, when the conditions are
+laid down. It would vary in the process of reaching the equilibrium. Its
+ratios with all other things would, thus, fluctuate until the
+equilibrium was reached. But, as we have seen, in the chapter on "Supply
+and Demand," curves of supply and demand must assume a fixed
+significance of the money-unit. It may be further noticed, as marking
+off Schumpeter's scheme from supply and demand analysis, that in
+Schumpeter's scheme, the individual is the centre of interest, and his
+reactions _toward all kinds of goods_ is emphasized; whereas in supply
+and demand analysis, the _good_--one good--is the centre of interest,
+and the price-offers streaming toward it from all kinds of individuals
+is emphasized. The two bodies of doctrine are quite distinct.
+
+(5) The theory has no bearing on the explanation of entrepreneur
+cost--money-outlay, "opportunity cost," alternative positive values, or
+what not. It finds no place for the modern cost doctrine. It does not in
+any way open the path to the Austrian theory of costs. Costs, for
+Austrian theory, as, in general, for modern theory, are reflections of
+_demand_ for the employment of the agents of production in alternative
+uses. Thus, it costs a great deal to raise wheat in Illinois, because of
+the rival demand for the land to produce corn. Labor costs are high in
+ordinary manufacturing, because of the rival demand for labor in the
+munitions factories, etc. As Schumpeter's theory can give no account of
+the _demand_ for labor in the munitions factories, it follows that it
+can give no account of the _cost_ of labor in the other factories.
+Instead, indeed, of giving us the modern cost doctrine, we see
+Schumpeter's scheme reviving the old _real cost_ doctrine, running in
+terms of sacrifices in production.[84]
+
+(6) The foregoing paragraph gives emphasis to the point with which we
+started, namely, that Schumpeter's theory is not a _causal_ theory, but
+merely a theory which gives mathematical relations in a static picture.
+For the general theory of the Austrians, this real cost doctrine is
+anathema. Values are positive. The emphasis is put on positive wants, as
+_causes_ which guide and motivate industry. The _clue_ to all values is
+in the values of _consumption_ goods, which are in direct contact with
+the utilities which are the source of value. From the values of
+consumption goods, we _derive_ the values of production goods, labor,
+etc., which are goods of "second, third and fourth _ranks_" and whose
+values are merely reflected from the causal marginal utilities of the
+consumption goods they are destined to create. None of this causation is
+brought into Schumpeter's conspectus picture. On the contrary, with the
+bringing in of disutility of production, we have the doctrine of the
+earlier English School revived. The equilibrium picture is as good a
+proof of the one theory as of the other. If we assume the utility-curves
+constant, and allow the cost-curves to vary, then causation would be
+initiated by the cost-curves.[85]
+
+(7) Such an equilibrium picture leaves untouched the vital question
+which any theory must answer which means to be of practical use in
+concrete situations: what are the real _variables_ in the situation, and
+what factors are constant? What causes are _likely_ to produce changes
+in market prices? The individual-utility curves, which in Austrian
+theory are commonly treated as the only variables, except quantities of
+goods,--in the strict static picture there are no variables at all!--are
+really, when conceived of as individual, as growing out of the mental
+processes of each individual separately, the most _constant_ factor in
+the situation. For, on the principle of the inertia of large numbers,
+each unit of which is moved by its own peculiar causes, changes in the
+utility-curves of one man will be offset by opposite changes in the
+utility-curves of another, and so the general system will remain much
+where it was. Of course, if a rich man changes his curve, a poor man's
+change will not offset it in the market, but this is to emphasize the
+_distribution of wealth_ rather than the utility-curves. It is only when
+you get changes of a sort that the individualistic psychology, and the
+"pure economic" explanation factors, of the Austrians find no place for,
+that you can predict a change in the general price-system. It is only
+changes in fashion or mode, in general business confidence,[86] in moral
+attitude toward this or the other sort of consumption or production, in
+the distribution of wealth, changes in taxes and other laws--causes of a
+general social character--that you can count on to produce important
+changes in values. Of course, changes in the adequacies of supplies
+would be taken account of on either interpretation.
+
+(8) The scheme under consideration gives no value concept which the
+economist can make any particular use of. It gives only ratios between
+marginal utilities in the mind of the same individual, and abstract
+market ratios. It gives no _quantitative_ value, which can be attributed
+to goods as a quality,[87] a homogeneous quality of wealth by means of
+which diverse sorts of wealth may be compared, funded, etc. Such a
+concept is, however, necessary for the economic analysis, and Schumpeter
+is driven to creating substitutes for it of various sorts, notably
+_Kaufkraft_ and _Kapital_. _Kaufkraft_, as Schumpeter uses the term, is
+not derived from marginal utility, but is an abstraction from the idea
+of money. It is not a quantity of money alone, nor even of money and
+credit, but is a fund of "abstract power," which depends not alone on
+the quantity of money and credit in which it is embodied, but also on
+the prices of goods.[88] This _Kaufkraft_ is needed to give the causal
+"steam," the "motivating power," which the social value concept
+connotes, but which ratios in the market lack. Similarly, _Kapital_ is
+conceived of as an agent, a dynamic force, distinguished from
+accumulations of concrete productive instruments, by means of which the
+entrepreneur gets control of land, labor and instrumental goods.[89]
+Other functions of the quantitative value are shouldered on a
+hard-worked and unusually defined concept, _Kredit_, which leads
+Schumpeter into certain "heresies"[90] regarding credit, which are
+mostly harmless in themselves, but which will arouse misunderstanding
+and opposition. "_Præter necessitatem entia non multiplicanda sunt_,"
+and the social value concept, which covers by inclusion the notion of
+market ratio--market ratios being ratios between social values--and
+which does all the work that Schumpeter attributes to _Kapital_ and
+_Kaufkraft_, and most of the new work which he attributes to _Kredit_,
+is to be preferred,[91] if only on grounds of intellectual economy.
+"Capital" is then saved for more usual meanings, and economy in
+terminology is also effected. Schumpeter also departs, as shown, from
+the abstract market ratio notion in erecting a causal theory of value,
+in which "marginal utility" is used as the equivalent of a quantitative
+value, and is traced by the Austrian imputation process back to the
+original factors of production. He even speaks of labor as having
+"utility," whereas labor,[92] unless used in domestic service, has, not
+utility, but only value.
+
+In the marginal utility scheme above outlined there is no place
+for money, on the assumptions laid down. It is a scheme of barter
+relations. The utilities which come into equilibrium are not
+subjective-exchange-values, which, as Schumpeter, with Wieser, contends,
+are the only subjective values money has, but are real subjective use
+values--marginal utilities. The scheme, assuming as it does, perfect
+exchangeability of all goods, with infinitesimal increments in
+consumption, has no place for money. There really is no money service to
+be performed. Schumpeter, indeed, speaks of money as a mere "Schleier,"
+which does not touch the essence of the phenomena, and such it is on his
+assumptions. In a similar situation, Professor Irving Fisher gives up
+the effort to find a psychological explanation of the value of
+money,[93] and offers the quantity theory as a mechanical principle,
+additional to the psychological barter scheme. Schumpeter, however, does
+lip service still to the need for a psychological explanation. His
+answer runs in Wieser's terms--indeed, he attributes it to Wieser. The
+_Preis_ of money[94]--Schumpeter does not use Wieser's absolute value
+concept, but lets his value of money run in purely relative terms--the
+price of money in goods depends on the subjective value of money. This
+subjective value of money rests on the experience of each individual in
+making purchases--rests on the prices of consumption goods, determined
+by the relation between real income and money income. The circle is as
+clear as day.
+
+Ludwig von Mises sees this circle, and tries to avoid it. In von Mises
+there seem to me to be very noteworthy clarity and power. His _Theorie
+des Geldes und der Umlaufsmittel_ is an exceptionally excellent book.
+Von Mises has a very wide knowledge of the literature of the theory of
+money. He has a keen insight into the difficulties involved. He
+recognizes fully that, so far, the utility school has failed to solve
+the problem (119-120). His theory is as follows: Individual valuations
+(93) constitute the basis of the objective exchange value of money. But
+while for other goods, subjective use-value and subjective
+exchange-value are different concepts, for money the two coincide, and
+both rest on the objective value of money (94). This seems to be our old
+circle in unmistakable form, but Mises thinks he has an escape, as will
+later appear. No function of money is thinkable which does not rest on
+its objective exchange value. The subjective value of money rests on the
+subjective use-values of the goods for which it can be exchanged (95).
+Money, at the beginning of its money-functioning, must have objective
+exchange value from other causes than its money-function, but it can
+remain valuable, even though these causes fall away, exclusively through
+its function as general instrument of exchange (111). He gives no
+argument in support of this contention, but refers with approval to
+Wieser (_loc. cit._), and to Simmel (_Philosophie des Geldes_, 115ff.).
+Hence, the important consequence that in the value of money of to-day a
+historical component is contained. Herein is to be found a fundamental
+contrast between the value of money and the values of other goods
+(119-120.). The individual valuation of money rests on the objective
+exchange value of money of _yesterday_. This individual value of money
+is the explanation, on the money side, of the objective value of money
+of to-day. Going back, step by step, you come ultimately to the
+subjective use-value of the money-stuff in its non-monetary
+employment--a temporal _regressus_. This opens the way to a theory of
+the value of money based on marginal utility. This avoids the circle of
+explaining the objective value of money of to-day by the subjective
+exchange value of money of to-day, which in turn rests on the
+contemporary objective value of money.
+
+I find this particularly interesting, since it employs a device which
+had once suggested itself to me as a means of escape from the Austrian
+circle, but which reflection led me to abandon. I have discussed the
+whole matter in my _Social Value_, and therefore venture a quotation
+from that book.[95]
+
+"How are we to get out of our circle:[96] The value of a good, A,
+depends, in part, upon the value embodied in the goods, B, C, and D,
+possessed by the persons for whom good A has 'utility,' and whose
+'effective demand' is a _sine qua non_ of A's value? The most convenient
+point of departure seems to be the simple situation which Wieser has
+assumed in his _Natural Value._[97] Here the 'artificial' complications
+due to private property and to the difference between rich and poor are
+gone, and only 'marginal utility' is left as a regulator of values. But
+what about value in a situation where there are differences in
+'purchasing power'? How assimilate the one situation to the other?
+
+"A _temporal regressus_, back to the first piece of wealth, which, we
+might assume, depended for its value solely upon the facts of utility
+and scarcity, and the existence of which furnished the first 'purchasing
+power' that upset the order of 'natural value,' might be interesting,
+but certainly would not be convincing. In the first place, there is no
+unbroken sequence of uninterrupted economic causation from that far away
+hypothetical day to the present, in the course of which that original
+quantity of value has exerted its influence. The present situation does
+not differ from Wieser's situation simply in the fact that some, more
+provident than others, have saved where others have consumed, have been
+industrious where others have been idle, and so have accumulated a
+surplus of value, which, used to back their desires, makes the wants of
+the industrious and provident count for more than the wants of others.
+And even if these were the only differences, it is to be noted that
+private property has somehow crept in in the interval, for Wieser's was
+a communistic society. And further, an emotion felt ten thousand years
+ago could scarcely have any very direct or certain quantitative
+connection with value in the market to-day. Even if there had been no
+'disturbing factors' of a non-economic sort, the process of 'economic
+causation' could not have carried a value so far. It is the living
+emotion that counts! Values depend every moment upon the force of live
+minds, and need to be constantly renewed. And there would have been, of
+course, many 'non-economic' disturbances, wars and robberies, frauds and
+benevolences, political and religious changes--a host of historical
+occurrences affecting the weight of different elements in society in a
+way that, by historical methods, it is impossible to treat
+quantitatively.[98]
+
+"What is called for is, not a temporal _regressus_, which, starting with
+an hypothesis, picks up abstractions by the way, and tries to synthesize
+them into a concrete reality of to-day, but rather, a _logical analysis_
+of existing psychic forces, which shall abstract from the concrete
+social situation the phases that are most significant. This method will
+not give us the whole story either. Value will not be completely
+explained by the phases we pick out. But then, we shall be aware of the
+fact, and we shall know that the other phases are there, ready to be
+picked out as they are needed for further refinement of the theory, as
+new problems call for further refinement. And, indeed, we shall include
+them in our theory, under a lump name, namely, the rest of the
+'presuppositions' of value.
+
+"Our reason for choosing a logical analysis of existing psychic forces
+instead of a temporal _regressus_--instead, even, of an accurate
+historical study of the past--is a two-fold one: first, we wish to
+coördinate the new factors we are to emphasize with factors already
+recognized, and to emerge with a value concept which shall serve the
+economists in the accustomed way--it is illogical to mix a logical
+analysis with a temporal _regressus_. But, more fundamental than this
+logical point, is this: the forces which have historically _begot_ a
+social situation are not, necessarily, the forces which _sustain_ it.
+The rule doubtless is that new institutions have to win their way
+against an opposition which grows simply out of the fact that we are,
+through mental inertia, wedded to what is old and familiar. We resist
+the new _as_ the new. Even those who are most disposed to innovate are
+still conservative, with reference to propaganda that they themselves
+are not concerned with. The great mass of activities of all men, even
+the most progressive, are rooted in habit, and resist change. When,
+however, a new value has won its way, has become familiar and
+established, the very forces which once opposed it now become its surest
+support. Or, waiving this unreflecting inertia of society, as things
+become actualized they are seen in new relations. What, prior to
+experiment, we thought might harm us, we find beneficial after it has
+been tried, and so support it--or the reverse may be true. The psychic
+forces maintaining and controlling a social situation, therefore, are
+not necessarily the ones which historically brought it into being."[99]
+
+Since the foregoing was written, I have found that another theorist,
+Professor Alvin S. Johnson, had also given consideration to the same
+idea, as a means of escape from the Austrian circle. Professor Johnson
+refers to the notion briefly in his review of _Social Value_ (_Am. Econ.
+Rev._, June, 1912, p. 322), holding that the doctrine is logically
+tenable, though rejecting it on psychological grounds. "The value of a
+thing newly created can be explained only with reference to values
+antecedently existing." That there is a continuity in the value system,
+as in the whole social-mental life of men, I should be the last to deny.
+But it is not the antecedently existing values, _as_ antecedently
+existing, that give value to the new piece of wealth. The antecedent
+values function only as _persisting_, as _contemporary_ social forces.
+We do not find the motivating power of existing values in the ashes of
+burnt out desire! It seems to me very essential to distinguish the two
+methods of approach to the problem. It is possible to state a historical
+sequence--if you know it,--showing how values have historically come and
+gone. But for an equilibrium picture, of the sort that our price theory
+demands, where there is a mechanical balancing of contemporary factors
+(as in Marshall's balls in the bowl illustration), such an account is of
+no use. Existing social forces have their history. But, at a given
+moment, they are what they are, and what they _were_ at a different time
+adds no ounce of weight to the power they now exert. If a quantitative
+account of value is called for--and price-theory is essentially
+concerned with the measurement of values--we must bring measure and
+measured into contemporary balance. The historical account is one
+thing; the cross-section analysis is another. "Static theory" is a
+mechanical abstraction from the organic cross-section picture, which, by
+making it superficial, is able to make it exact.
+
+It seems to me that this distinction must be kept clear if progress in
+the science is to be made. At every point, divergent conclusions are
+reached if the two view-points are merged. The distinction between
+statics and dynamics is, in a general way, the same as the distinction
+here made between the historical and the cross-section view. It is no
+answer to the Ricardian theory of land-rent for Carey to point out that
+historically, in new countries, the uplands are cultivated first, and
+the more fertile river-valleys later. Ricardo is talking about statics,
+and Carey about dynamics. Carey does not answer Ricardo, because he is
+talking about a different problem. The utility theorist especially has
+no right to leave the static view-point. All the elementary laws on
+which the utility theory is based are static laws. The law of satiety,
+of diminishing utility, is a static law, and the utility theorists are
+careful to point out that it holds only for an individual at a given
+time. It rests on nerve fatigue. Give the nerve time to rest, and
+utility does not sink. On the contrary, the dynamic law of wants is that
+wants expand. As old wants are satisfied, new wants arise, so that, in
+the course of time, _marginal_ utilities do not sink--the competition of
+new wants forces up the margins of the old wants. Moreover, with time,
+tastes change, habits are formed, and the same wants may grow more
+intense--as in the case of olives or whiskey. All this has been seen by
+the creators of the utility theory. Thus, Wieser: "The want as a whole
+of course retains its strength so long as a man retains his health;
+satisfaction does not weaken but rather stimulates it, by constantly
+contributing to its development, and, particularly, by giving rise to a
+desire for variety. It is otherwise with the separate sensations of the
+want. These are narrowly limited both in point of time and in point of
+matter. Anyone who has just taken a certain quantity of food of a
+certain kind will not immediately have the same strength of desire for a
+similar quantity. Within any single period of want every additional act
+of satisfaction will be estimated less highly than a preceding one
+obtained from a quantity of goods equal in kind and amount." (_Natural
+Value_, p. 9.) A similar statement is in Taussig's _Principles_ (I,
+124), "In such cases, however, the tastes of the purchasers may be said
+to have changed in the interval. At any given stage of taste and
+popularity, the principle of diminishing utility will apply."
+Illustrations could be multiplied.
+
+It is true that _future_ marginal utilities come into the utility theory
+scheme, but they come in, not as future utilities, but as "_present
+worths_" of future utilities, or as "present anticipated feelings" in
+Jevons' phrase[100] suffering a discount, usually, in the process. But I
+am not aware of any writer among the founders of the utility school, who
+has sought to bring past utilities into the scheme. The past is dead.
+Its effects persist in the present only in present processes. A _memory_
+is a _present_ psychological fact.
+
+Consider further. Is it the prices of yesterday that determine the
+subjective value of money to an individual, if the prices of yesterday
+are different from the prices of to-day, _and the individual knows it_?
+In so far as we have the clear, intelligent economic mind, seeking its
+interests--and the marginal utility theory assumes this type of
+mind--the tendency is to bring all the factors in the problem into the
+present. If prices change slowly, so that the individual can count on
+essentially the same situation to-day that he had yesterday, doubtless
+he will not take the trouble to recast his value system. There is a
+tremendous lot of trouble in bringing about, in the individual's mind,
+the rational equilibration of values--trouble which the Austrian theory
+commonly abstracts from, but which should be recognized in the analysis,
+and accorded its own marginal significance in the scale. To throw the
+emphasis on inertia, however, and to assume that men do not readjust
+their margins to meet changed conditions, is to depart from the
+fundamentals of the Austrian theory. If the price-situation is a rapidly
+changing one, men do rapidly readjust their estimates of money. If money
+is fluctuating rapidly in value--as, say, during a time when there is
+depreciated paper money, whose future depends on military events, the
+adjustments may be very rapid indeed. I quote the following from the
+news columns of the _New York Times_, of April 4, 1914, p. 2: "Jaurez,
+Mexico, Apr. 3.--After the hysterical outbursts last night that greeted
+the news of the fall of Torreon, this city was preternaturally calm
+to-day.... The silent gentleman with the dyed mustache who spins the
+marble at the roulette wheel in the Jaurez Monte Carlo, conducted by
+Villa's officers for the benefit of the rebel treasury, seemed the only
+person who was not excited. When the crowd of players suddenly deserted
+him on the sound of the bugle call of victory, he gave the marble
+another whirl from sheer force of habit, but none returned.... In an
+hour, however, play was faster and more furious than ever, for holders
+of Constitutionalist money early realized that their currency had
+suddenly increased in value, and that they were somewhat richer than
+before." I do not question the fact, however, that men are slow in
+making calculations, and that society is often unconscious of changed
+conditions, and often readjusts less rapidly than occasion requires.
+There is a vast deal of inertia, of blind habit, of custom, etc. But
+emphasis on these factors is not marginal utility theory! Factors like
+these are emphasized by a functional psychology, and by a social
+psychology--not by an individualistic psychology which rests on the
+assumption of rational calculation. It is not _past_ utilities that
+explain present subjective values of money when these subjective values
+are out of harmony with the present market facts, but rather _present_
+habits, present customs, present disinclination to readjust, etc. There
+is a big difference, psychologically, between the mental processes
+through which one arrived at one's present state of mind, and the
+present state of mind itself. The original "commodity utility" of the
+money metal, in the far away time before the money use affected its
+value, is surely no longer a factor. Certainly not on the basis of an
+individualistic psychology of the Austrian type. All the individuals who
+experienced that original utility are long since dead! Not even memories
+of the original utilities persist.
+
+When writing the passage in _Social Value_, quoted above, I did not
+suppose that I was dealing with a notion that anyone else would ever
+take seriously. My purpose in discussing it was chiefly to throw into
+sharp relief the contrast between the historical and the cross-section
+viewpoints, and to make clear that my own theory was based on analysis
+of existing psychological forces. Since finding, however, that two
+writers for whose views I have so much respect have independently
+developed the same idea, and have taken it seriously, I have felt it
+worth while to give it this extended consideration.
+
+Von Mises, like Wieser, needs an absolute value of money in his
+thinking. He does not call the concept by that name, but, following
+Menger[101] speaks of the "inner objective value of money" and the
+"outer objective value of money." (Mises, p. 132.) The latter is the
+purchasing power of money, a relative concept, exactly expressed in the
+price-level. The inner objective value of money is designed to cover the
+causes of changes in prices which originate on the money-side of the
+price relation alone.[102] This inner objective value of money performs
+the same logical function in the theory of money that the absolute
+social value concept of the present writer does, even though the
+psychological explanation lying behind it is very different.
+
+Von Mises considers the quantity theory at length, noting a number of
+defects in it, chief of which is the fact that it has no psychological
+theory of value behind it, that it does not account for the _existence_
+of the value of money, and at most gives a law for _changes_ in a value
+whose existence is taken for granted. The details of this criticism,
+however, need not be here presented. The quantity theory is to be
+treated in detail at a later point of our study.
+
+The writer who has most definitely stated the relation of utility to the
+functions of money, is David Kinley (_Money_, ch. viii). He would
+explain the value of money, by (a) its utility as a commodity, and (b)
+its utility in the money-employment, the employments reaching a marginal
+equilibrium. The utility of the money metal in its commodity use calls
+for no analysis. But what is meant by the utility of money as money?
+Where the writers so far discussed have denied that money as money has
+any utility, Dean Kinley finds a utility in the money-function itself:
+money facilitates exchange, and exchange, by transferring goods from
+those who do not need them to those who do need them, increases the
+utility of those goods. Money, as money, thus produces utility.[103] The
+utility of money is the extra utility which comes into being by virtue
+of its use, as compared with what would exist in a state of barter. The
+marginal utility of money is the utility of money in the marginal
+exchange--the exchange which would be effected by means of barter if
+money were any more difficult to procure. The marginal utility of money,
+then, is not the whole of the marginal utility of the good for which it
+is exchanged, but rather is the differential part of that utility which
+is created by means of the use of money in exchange. The marginal
+utility of money, thus, appears in separate services of money. Money is
+a durable good, which gives forth its services bit by bit. The value of
+money is based on these separate services, it is "the capitalized value
+of the service rendered in the marginal exchange."
+
+This conception is, it seems to me, much truer to the spirit of the
+general marginal utility theory than the theories of Wieser, Schumpeter,
+or von Mises. If the utility theory at large were valid, the application
+here would be valid. To Dean Kinley's conception of a marginal utility
+of the money service, I offer simply the objections which I offer to the
+utility theory at large--objections indicated in what has gone before,
+and in my _Social Value_. The application of the capitalization theory
+to the value of money I have already discussed in a previous chapter,
+and shall again consider in the chapter on "The Functions of Money."
+
+I conclude that the marginal utility theory has not solved the problem
+of the value of money. The reason, however, is simply that it has not
+solved the general problem of value. The marginal utility theory, in so
+far as it seeks to make marginal utility the _cause_ of value, is
+circular. The effect of a given man's wants upon the value of the goods
+he wants depends, not on the marginal intensity of those wants alone--a
+penniless prisoner may desire a marble palace ever so intensely without
+affecting its value--but also upon the value of the wealth possessed by
+the individual who experiences the wants. But this is to explain value,
+not by marginal utility alone, but by value as well--a circle. Or, if we
+leave the standpoint of absolute values, and look at the matter in terms
+of prices, the same situation presents itself. The price which an
+individual is willing to pay for a good depends on his income,--which
+commonly rests on prices--and on the prices he has to pay for other
+goods which enter into his budget. His price-offer, expressive of the
+marginal utility of a horse to him, is made with consideration of the
+price of a buggy, of harness, of feed, of the wages of the servant who
+cares for the horse, the price of a barn, and of the other things that
+the possession of the horse involves. And not these alone: less
+immediately, but still vitally, his whole budget enters. Higher prices
+for theatre tickets or for food or for clothing will reduce his
+price-offer for a horse. Further, his price-offer for the horse will be
+tremendously influenced by his opinion as to the permanent market price
+of horses. He will not be willing to pay a price for the horse which he
+cannot expect to get back if he should decide later to sell the horse.
+The direct influence of market price on individual demand-price is very
+great indeed. Marginal utility (subjective use-value) very frequently
+gives place to subjective value-in-exchange in the determination of an
+individual's marginal demand-price--which means that the market controls
+the individual instead of the individual controlling the market. With
+sellers, it is _generally_ subjective-exchange-value, rather than
+marginal utility, that determines supply-price-offer. The sellers, in so
+far as they are producers, have little need for the great mass of their
+stocks. They will sell them, rather than keep them, at almost any price.
+The reason they ask high prices is simply that they think the market
+will give them the high prices. The individual price-offers, in the
+aggregate therefore, presuppose the whole market situation--presuppose a
+general value and price system already fixed and determined. Each
+individual price offer presupposes many other prices, though not, of
+course, the whole market. Since, then, much of the market situation is
+assumed in the determination of each particular price, by the Austrian
+method, it is obviously circular reasoning to think that the
+determination of each price separately by this method will supply data
+for a summary of the market situation as a whole. In the one form in
+which the utility theory avoids a circle,--that presented by Schumpeter,
+and discussed in an earlier part of this chapter--it is not a causal
+theory. Marginal utility is not a cause of market prices, but rather,
+marginal utilities and market prices are alike resultants, effects, of
+more fundamental factors. No writer[104] who has presented the utility
+theory in this form has tried to apply it to the value of money, and
+even if it could be so applied, it would not give a causal explanation
+of the value of money in terms of marginal utility. In most of the
+efforts to apply the utility theory to money, the circle becomes so
+obvious that one marvels that able theorists should for a moment fail to
+see it.
+
+
+
+
+
+PART II. THE QUANTITY THEORY
+
+
+
+
+CHAPTER VI
+
+THE QUANTITY THEORY OF PRICES. INTRODUCTION
+
+
+The quantity theory, in its usual formulations, is a theory, not of the
+value of money, in the absolute sense of value, but of the general
+price-level, the average price of goods exchanged for money. It is not a
+psychological theory. It does not deal with psychological quantities, or
+psychological forces. It is a mechanical theory, concerned simply with
+quantities, and the relations between them. The essence of the quantity
+theory comes out in the following brief statement: given a number of
+units of money; given a number of units of goods to be exchanged; assume
+these two numbers to be independent[105] of each other; assume all the
+goods to be exchanged for all the money; then the average price will be
+a simple function of the quantities of goods and of money respectively,
+such that an increase in the amount of money will increase the average
+price per unit of goods proportionately, if goods remain unchanged in
+amount, or an increase in goods will lower the price per unit
+proportionately, money being assumed to remain unchanged in amount. The
+qualification is commonly added that if goods have to be exchanged more
+than once, the effect is the same on prices as if there were an added
+number of goods equal to the added number of exchanges, and that if
+money is used more than once in exchanging a given number of goods, the
+effect is the same as if there were proportionately more money. Both
+quantity of goods and quantity of money are commonly defined as actual
+quantity multiplied by "rapidity of circulation." Rapidity of
+circulation, however, for both money and goods, is commonly thought of
+as a constant, so that the original formula remains unaffected by the
+qualification, so far as a prediction as to the effect of increase or
+decrease of money or goods on prices is concerned. Involved in the
+quantity theory, and explicitly stated by many writers, is the doctrine
+that the substance of which money is made is irrelevant, that it is the
+number, and not the quality or size of the money-units that counts. "In
+short, the quantity theory asserts that (provided velocity of
+circulation and volume of trade are unchanged) if we increase the
+_number_ of dollars, whether by renaming coins, or by debasing coins, or
+by increasing coinage, or by any other means, prices will be increased
+in the same proportion. It is the number, and not the weight, that is
+essential. This fact needs great emphasis. It is a fact which
+differentiates money from all other goods and explains the peculiar
+manner in which its purchasing power is related to other goods. Sugar,
+for instance, has a specific desirability dependent on its quantity in
+pounds. Money has no such quality. The value of sugar depends on its
+_actual quantity_. If the quantity of sugar is changed from 1,000,000
+pounds to 1,000,000 hundredweight, it does not follow that a
+hundredweight will have the value previously possessed by a pound. But
+if money in circulation is changed from 1,000,000 units of one weight to
+1,000,000 units of another weight, the value of each unit will remain
+unchanged." (Irving Fisher, _Purchasing Power of Money_, pp. 31-32.) To
+the same effect is Nicholson's exposition, in which the money is assumed
+to consist of dodo-bones, the most useless substance that Nicholson
+could think of. For the quantity theory, prices are determined by the
+_numbers_ of goods and dollars that are to be exchanged for one another,
+and not by the _values_ of the goods and dollars;--indeed, for the
+quantity theory, "value" commonly has no meaning apart from the prices
+which are supposed to be adequately explained by the mechanical
+relations of numbers.
+
+In the critical study which follows, virtually every doctrine and every
+assumption of this preliminary statement will be challenged. I shall
+deny, first, that the quantity of goods to be exchanged and the quantity
+of money to be exchanged for the goods, are independent quantities,
+maintaining, rather, that an increase in either of them tends normally
+to be accompanied by an increase in the other. Quantity of goods and
+quantity of money _exchanged_ are not simple physical stocks, given
+data. Rather, they are consequences of human choices and human
+relationships, and vary from a large number of highly complex
+psychological causes, many of which are common to both. I shall deny,
+second, that "rapidity of circulation," either of goods or of money, is
+a simple constant, independent of quantity of goods or of quantity of
+money. I shall maintain, rather, that rapidity of circulation of money
+is a phenomenon which calls for psychological explanation: that the
+rapidity of money really means the _activities of men_; that these
+activities are complex, and obey no simple law; that instead of being an
+independent factor, constant, in the situation, the rapidity of
+circulation of money is bound up with the quantity of money, the
+quantity of goods to be exchanged, the rapidity of circulation of goods,
+and the prices of the goods, and that the rapidity of circulation of
+goods is likewise causally dependent on the factors named--or better, on
+the causes which control them; that rapidity of circulation, whether of
+money or of goods, is not a causal factor independent of prices, but
+rather in part depends on prices. In the third place, I deny the
+doctrine that the question as to _what_ the money-unit is made of is
+irrelevant. On the contrary, I shall maintain that the _quality_ of
+money, rather than its quantity, is the determining factor. I shall not
+maintain that only money made of or redeemable in valuable bullion can
+circulate, nor shall I maintain that the value of money depends wholly
+on the value of its bullion content when money is made of valuable
+metal. I recognize that value can come from other sources. But I shall
+maintain that value from some source other than the monetary employment
+is an essential precondition of the monetary employment, even though
+recognizing that that monetary employment may, in a way later to be
+analyzed, add to the original value of the money. The doctrine that only
+physical quantities, or abstract numbers, of goods are relevant I shall
+challenge especially, maintaining, on the contrary, that the
+psychological significances, the values, of goods are the really
+important thing, so that an increase in the number of one sort of goods
+may have a very different effect on the average of prices from an
+increase of the same number of units of some other good, and so that an
+increase in the number of goods exchanged under one set of conditions
+may have a very different effect on prices--or may be accompanied by a
+very different movement in prices, for the question of causal relations
+is a complicated one--from the change in prices that might accompany the
+same increase in the amount exchanged of same goods under other
+circumstances. Finally, the doctrine of the quantity theory that the
+price-level is a passive result of the other factors named: quantities
+of goods and money, and their respective velocities; that prices cannot
+initiate a change in the situation, will also be challenged. I shall
+undertake to show that the first change in the situation may appear in
+prices themselves, and that the quantities of goods exchanged, and of
+money, and their velocities, may then be altered to correspond with the
+change in prices.
+
+I shall further maintain, as against the whole spirit of the quantity
+theory, that it does not seize hold of essentials in the causes lying
+behind prices. I shall contend that the factors with which it deals,
+instead of being independent _foci_ to which converge the causes
+governing the price-level, and through which causation flows in one
+direction, are really not true "factors" at all, but rather are blanket
+names for highly complex and heterogeneous groups of facts concerning
+which few general statements are possible. Quantity of goods exchanged,
+for example, may be in some of its parts caused by rising prices, in
+others of its parts may be causing falling prices and is chiefly caused
+by _fluctuating_ prices. The net change in prices in this case is not
+the result of any one movement from "quantity of goods" as a whole.
+Changes in the price-level are not one result, but rather, are the
+mathematician's average of many changes, due to a host of causes, in
+many individual prices. The quantity theory is an effort to simplify
+phenomena highly complex. Of course, the simplification of complex
+phenomena in thought is a laudable scientific goal, but when the
+simplification goes so far as to group things only superficially
+related, and to leave out the really vital elements, it is worthless.
+Value theory, with all the value left out, is like Hamlet with no actor
+for the title rôle. Simplification in the explanation of general prices
+has gone as far as we can legitimately take it when we seek to summarize
+all the factors involved in the _foci_ of, on the one hand, the value of
+money, and, on the other hand, the values of the particular goods. The
+general price-level is an average of many concrete prices. Each of these
+individual prices has a concrete causal explanation. The _general_
+price-level has, not a few simple causes, but an infinite host of
+causes. Indeed, the general price-level has no real existence. It is a
+convenient mathematical concept, by means of which we may summarize the
+multitude of concrete facts. It is useful as a device for measuring
+changes in the value of money, on the assumption that changes in the
+values of goods neutralize one another. This assumption is never
+strictly true, and often is demonstrably false. The general price-level
+is neither a cause nor a result. Particular prices, in general, are
+results of two causes, namely, the value of money and the value of the
+good in question, and particular prices may then become causes, changing
+the quantity of money involved in a given set of exchanges. Neither
+quantity of money, nor quantity of goods exchanged, nor rapidity of
+circulation, nor general price-level is a simple, homogeneous quantity,
+obeying definite laws.
+
+I shall also undertake to show that in many important cases the quantity
+theory leads to conclusions regarding the price-level which contradict
+other laws of prices, notably the capitalization theory, the cost of
+production doctrine, and the law of supply and demand. I have previously
+pointed out that these three doctrines are inapplicable to the problem
+of the value of money itself. On the assumption of a value of money,
+however,--using value in the absolute sense--they are applicable to the
+problem of prices, and, since the price-level is merely an average of
+particular prices, they should be applicable to the problem of the
+price-level also. It will be shown, in the course of the criticism which
+follows, first that the quantity theory contradicts each of these
+doctrines, in certain situations, and second, that in these cases, the
+conclusions based on the cost theory, the supply and demand theory, and
+the capitalization theory are right, and the conclusions based on the
+quantity theory are wrong. It has been maintained by certain writers, as
+Knut Wicksell[106] and Irving Fisher,[107] that cost of production and
+supply and demand are inapplicable to the problem of the general
+price-level. I shall maintain the contrary, holding that while these
+doctrines are inapplicable to the problem of the _value_ of money, they
+_are_ applicable to the problem of general prices, on the assumption of
+a fixed value of money. By the value of money I mean its absolute[108]
+value, and not--what the quantity theorists commonly mean--its
+"purchasing power," or the "reciprocal of the price-level."
+
+I shall undertake to show that no sound conclusion reached on the basis
+of quantity theory reasoning is the peculiar property of the quantity
+theory school; that every valid conclusion which may be based on the
+quantity theory may also be deduced from the theory maintained in this
+book, and, indeed, that most of them may be deduced from several other
+theories of money, notably the commodity or bullionist theory. I shall
+show a number of false and misleading doctrines which logically spring
+from the quantity theory, and shall undertake to show that the quantity
+theory fails to give an adequate basis for several important parts of
+the theory of money, among them Gresham's Law, the theory of
+international gold movements, and the theory of elastic bank-notes and
+deposit-currency.
+
+So much for the theses to be maintained. The detailed proof of these
+contentions will best be given in connection with a critical account of
+various versions of quantity theory doctrine. Attention will be given in
+this summary to the expositions of Nicholson, Mill, Taussig, and
+Kemmerer, and very special attention to I. Fisher, though some other
+writers will also be taken into account.
+
+
+
+
+CHAPTER VII
+
+DODO-BONES
+
+
+Must money have value from some source outside its money-functions? It
+is a part of the quantity theory that this is unnecessary. I have cited,
+in the preceding chapter, Irving Fisher and J. S. Nicholson to this
+effect. Nicholson's statement is interesting and picturesque, exhibiting
+the quantity theory in all the nakedness of its poverty, and I shall
+present it at some length. "For simplicity," to isolate his phenomenon,
+he assumes a hypothetical market, in which the following conditions
+obtain: (1) No exchanges are to be made unless money (which he assumes
+to consist of counters of a certain size made of dodo-bones) actually
+passes from hand to hand. No credit or barter. (2) The money is to be
+regarded as of no use whatever except to effect exchanges, so that it
+will not be withheld for hoarding, _i. e._, will be actually in
+circulation. (3) There are ten traders in the market, each with one kind
+of commodity and no money, and one trader with all the money (one
+hundred pieces), and no commodities. Further, let this moneyed man put
+an equal estimation on all the commodities. Now let the market be opened
+according to the rules laid down; then all the money will be offered
+against all the goods, and, every article being assumed of equal value,
+the price given for each article will be ten pieces, and the general
+level of prices will be ten. It is perfectly clear that, under these
+suppositions, if the amount of money had been one thousand pieces, the
+price-level would have been one hundred per article, etc. Under these
+very rigid assumptions, then, it is obvious that the value of money
+varies exactly and inversely with the amount put into circulation.--The
+rapidity of circulation he regards as coördinate, in fixing the
+price-level, with the volume of money. To illustrate this, he assumes
+again his hypothetical market, and "dodo-bones," assuming as before that
+one merchant has all the money (one hundred pieces), and that ten have
+commodities of equal value. Instead, however, of the merchant with the
+money desiring all the commodities equally, he is made to desire only
+the whole of that of trader one, who in turn desires the whole of number
+two's stock; and so on to the ninth merchant, who wants the commodity of
+number ten, _who wants the dodo-bones_. In this case, each article will
+be exchanged only once, as formerly, but the money will change hands ten
+times, and the price of each article will be one hundred instead of ten.
+"We now see that, under these circumstances, with the same quantity of
+money, and the same volume of transactions, the level of prices is ten
+times as great as before, and the reason is that every piece of money is
+used ten times instead of once." Whence he concludes: "The effect on
+prices must be the same when, in effecting transactions, one piece of
+money is used ten times as when ten pieces of money are used once."[109]
+
+Ricardo, too, expresses the dodo-bone theory very explicitly. "If the
+state charges a seigniorage for coinage, the coined piece will generally
+exceed the value of the uncoined piece of metal by the whole
+seigniorage, because it will require a greater quantity of labour, or,
+which is the same thing, the value of the produce of a greater quantity
+of labour, to procure it.
+
+"While the state alone coins, there can be no limit to this charge of
+seigniorage; for, by limiting the quantity of the coin, it can be raised
+to any conceivable value. It is on this principle that paper money
+circulates; the whole charge for paper money may be considered a
+seigniorage. Though it has no intrinsic value, yet, by limiting its
+quantity, its value is as great as an equal denomination of coin, or of
+bullion in that coin."[110]
+
+Would the dodo-bones circulate? Nicholson chose the illustration to
+throw into the sharpest relief the absence of any value from a
+non-monetary employment. Nobody has any use for them as dodo-bones. What
+economic force is there, then, to make them circulate? Nicholson says
+nothing about an _agreement_ among the traders, _assigning_ a
+significance[111] to the dodo-bones, so that they might function in the
+same way that poker chips do--indeed, any such notion would vitiate his
+illustration, for he proposes to explain an adjustment of prices by
+natural economic laws. Why then, will any of the traders give up his
+valuable commodities for the worthless dodo-bones? Will you say that he
+will take them, not because he wants them himself, but because he knows
+that others will take them from him? But why would the others want them?
+Because they in turn can unload them on still others? But this seems a
+plain case of the vicious circle. It is, in effect, saying that the
+dodo-bones will circulate because they will circulate. A will take them
+because B will take them; B will take them because C will take them, C
+because ... N will take them; N takes them because A will take
+them.[112] I do not deny that if the traders used the dodo-bones as
+counters, agreeing that such dodo-bones should represent some other
+commodity chosen as a standard of values, that the dodo-bones would
+circulate. But, in that case, they would be, not primary,
+self-sustaining money, but merely representative, or token money. And
+just here let me lay down two general propositions[113] respecting the
+two main functions of money: to serve as a standard, or common measure,
+of values, the article chosen must, as such, be valuable. The thing
+measured must be either a fraction or a multiple of the unit of
+measurement. But this quantitative relation can exist only between
+_homogeneous_ things. The standard, or measure, of values, then, must be
+like the commodities whose values it is to measure, at least to the
+extent of having _value_.[114] The second proposition is respecting the
+medium of exchange. The medium of exchange must also have value, or else
+be a representative of something which has value. There can be no
+exchange, in the economic sense--I abstract from disguised benevolences,
+accidents, and frauds--without a _quid pro quo_, without value balancing
+value, at least roughly, in the process. Now when it is remembered that
+the intervention of the medium of exchange, taking the place of barter,
+really breaks up a single exchange under the barter system into two or
+more independent exchanges, and that the medium of exchange is actually
+received in exchange for valuable commodities, it follows clearly that
+the medium of exchange must either have value itself, or else represent
+that which has value. These two propositions seem almost too obvious to
+require the statement, but they contradict the quantity theory, and they
+are not, on the surface, reconcilable with certain facts in the history
+of inconvertible paper money. It is necessary, therefore, to state
+them, and to examine further some of the phenomena which seem to
+contradict them. If they are true, Nicholson's dodo-bones will perform
+neither of the primary functions of money. They have no value,
+_per se_--they cannot, then, measure values; they are neither valuable
+nor titles to valuable things--they are not _quid pro quo_ in exchange,
+and will not circulate.
+
+I shall not pause long to discuss the doctrine that money needs no value
+itself, because it is really a sort of title to, or claim on, or
+representative of, goods in general. The notion, first, would not pass a
+lawyer's scrutiny. There are no such indefinite legal rights. A system
+of legally fixed prices, with a socialistic organization of society,
+would be necessary to give it definiteness--and in such a situation
+there would be no room for a quantity theory of prices! Economic goods,
+as distinct from money, are not generally "fungible" to the extent that
+would make them indifferent objects of legal rights. Besides, whether or
+not the thing is logically thinkable, it is legally false. Legal factors
+enter into the economic value of money, as will later be shown, but it
+is economic, and not legal, value, which makes money circulate.
+Helfferich has taken the trouble to give the notion of money as a mere
+title to things in general a somewhat more fundamental analysis, and I
+would refer the reader who is not satisfied by the foregoing on this
+point to his discussion.[115]
+
+I wish to make very clear precisely how much I mean by the foregoing
+argument that circular reasoning is involved in saying that A will take
+the dodo-bones because B will take them. The same question arises for B,
+and for the others. The real question is as to the cause for any general
+practice of the sort. Why should A _suppose_ that B will take them?
+What could bring about such a system of social relations that a general
+expectation of this sort could arise?
+
+Kemmerer undertakes to give an answer in a hypothetical case by the
+following ingenious assumption (_Money and Credit Instruments_, p. 11):
+the money consists of an article which formerly had a high commodity
+value, which has lately entirely disappeared, but the money continues to
+circulate, through the influence of custom, and because of the demand
+for a medium of exchange.
+
+In this illustration Kemmerer recognizes the historical fact that money
+has originated from some commodity which had value because of its
+significance as a commodity. Historically, a great many different
+commodities have served, and gold and silver finally emerged victors for
+reasons which need not just now concern us. These historical facts,
+coupled with the idea that value is, essentially, "something
+physical,"[116] or coupled with the notion that value arises only from
+marginal utility, or from labor, have been accepted by the Commodity or
+Metallist School as sufficient proof that standard money is only
+possible when made of some valuable commodity. Professor Laughlin seems
+to think of the whole thing as depending on the value of gold bullion,
+and to recognize the money-employment as a factor in affecting the value
+of money only in so far as it draws gold away from the arts, and so
+raises its value there by lessening the supply.[117] If money originated
+in a commodity, how is it possible for the commodity value to be
+withdrawn, and for money still to retain its value?
+
+This brings us to a question I have raised before, namely, whether the
+genetic, or historical account of a social situation, and the
+cross-section analysis of the same situation, necessarily agree.[118] Is
+it possible that when a commodity basis was necessary to start the
+thing, and when even in the modern world gold bullion, interconvertible
+with gold coin, remains the ultimate basis of the money-systems of all
+great commercial peoples, that you could withdraw the commodity support
+and keep money unchanged in value? Or could you even have any value left
+at all? Now in answer, I propose to admit the possibility of so doing.
+The forces which a cross-section analysis reveals are not necessarily
+identical with those which a theory of origins sets forth. Once the
+thing is set going, the forces of inertia favor it. A new theory, fixed
+in the minds of the people, say the quantity theory itself, might give
+them such confidence in their money that its value might be maintained.
+A fiat of the government, making the money legal tender, supplemented by
+the loyalty of the people, might keep up its value. I think there is
+reason to believe that this is a source of no little importance of value
+for the German paper money to-day, and, to a less extent, of the notes
+of the _Banque de France_. All these possibilities I admit. Value is not
+physical, but psychological. And the form of value with which we are
+here concerned, economic value _par excellence_, is a phenomenon of
+social, rather than individual psychology. Many and complex are the
+psychical factors lying behind it. Belief, custom, law, patriotism,
+particularly a network of legal relationships growing out of contracts
+expressed in terms of the money in question, the policy of the state as
+to receiving the money for public dues, the influence of a set of
+customary or legally prescribed prices, which tie the value of money to
+a certain extent to the values of goods--factors of this character can
+add to the value of money, and can, conceivably, even sustain it when
+the original source of value is gone. Social economic value does not
+rest on marginal utility. In general, utility is essential, as one of
+many conditions, before value can exist, even though the intensity of
+the marginal want served by a good bears no definite relation to its
+value. But in the case of the value of a money of the sort here
+considered, marginal utility is in no sense a cause of the value.
+Rather, the marginal utility[119] of such money to an individual is
+wholly a reflection of its social value, and changes when that social
+value changes. It is quite consistent with the general theory of
+economic value which I have set forth in _Social Value_, for me to admit
+possibilities of this kind. The value of money in such a case has become
+divorced from its original presuppositions. The paper, originally
+resting on a commodity basis, or the coins originally valued because
+they could be transformed into non-monetary objects of value, have
+become objects of value in themselves. Analogous phenomena are common
+enough in the general field of values, and are less common in the field
+of economic values proper than one might suppose. Thus, most moral
+values tend to become independent of their presuppositions. Moral values
+of modes of conduct have commonly arisen because those modes of conduct
+were, or were supposed to be, advantageous in furthering other ends.
+Morality, in its essence, is _teleogical_. Yet so far have the moral
+ideals become ends in themselves that it is possible to have great
+thinkers, like Kant and Fichte, setting them up as eternal and
+unchangeable categorical imperatives, regardless of consequences. Thus
+Fichte declares, "I would not tell a lie to save the universe from
+destruction." Older still is the dictum, "_Fiat justitia, ruat coelum._"
+Yet truth and justice, in the history of morals, and, in the view of
+most moral thinkers to-day, are of value primarily because they tend to
+preserve the universe from destruction, and would never have become
+morally valuable had they had the other tendency! Legal values manifest
+this tendency even more--one needs only to point to our vast body of
+technical rules of procedure in criminal cases, which persist long after
+their original function is gone, and after they have become highly
+pernicious from the standpoint of the ends originally aimed at. In the
+sphere of the individual psychology the phenomenon is very common. The
+miser's love for money is a classical example. The housewife who so
+exalts the cleanliness of her home that the home becomes an unhappy
+place in which to live, is an often-described type. The man who retires
+from business that he may enjoy the gains for the sake of which he
+entered business often finds that the business has become a thing of
+value in itself, and longs to be back in the harness, while many men,
+long after economic activity is no longer necessary, continue the
+struggle for its own sake. Activities arise to realize values. The value
+of the activity is derived from the value aimed at. But consciousness is
+economical, and memory is short. The activities become habits. The
+habits gather about themselves new psychological reactions. The
+interruption of habitual activities is distasteful. Life in all its
+phases tends to go on of its own momentum. The activities tend to become
+objects of value in themselves, whether or not their original _raison
+d'être_ persist. In both the social and the individual sphere, apart
+from blind inertia and mechanical habit, active interests tend to
+perpetuate the old activities, whose _raison d'être_ is gone. The judge
+who continues to apply the outgrown absurdities of adjective law may do
+it from timidity or from being too lazy to think out the new problems
+whose solution must precede readjustment to present social needs, but
+the criminal lawyer who can free his guilty client by means of these
+technicalities has an active interest in their perpetuation. The
+individual who would readjust his conduct in the light of changed
+interests finds that active opposition is met in the emotional
+accompaniment of the old habits. The economic society may wish to be
+free from a money whose original value is gone, but there is a powerful
+debtor interest which approves of that money, and whose support tends to
+maintain its value.
+
+All these possibilities I admit. My own theory of value, which finds the
+roots of economic value ramifying through the total social psychological
+situation, rather than in utility or labor-pain alone, involves
+possibilities like these. But--and this is a point I wish especially to
+stress--we are out of the field of mechanics, and in the field of social
+psychology, when we undertake to explain the value of money that way. No
+longer is there any mathematical necessity about the matter. There is no
+such _a priori_ simplicity as the quantity theory deals with. Factors
+like these might maintain the value of money for a time, and then wane.
+These factors might vary in intensity from day to day, with changing
+political or other events, leading the value of money to change from day
+to day, quite irrespective of changes in its quantity.[120] In so far as
+you have a people ignorant of the nature of money and of monetary
+problems, a people in the bonds of custom, with slightly developed
+commercial life, whose economic activities run in familiar grooves
+unreflectively, you will most nearly approximate a situation like that
+which Professor Kemmerer assumes. But that means that what might be true
+in India, or to a less degree in Austria--countries to which the
+quantity theorists are accustomed to refer--need not at all be true in
+the United States. Here everybody was talking about the theory of money
+in 1896--not necessarily very intelligently!--and here, moreover, such
+phrases as "good as gold," and propositions like that which came from
+Mr. J. P. Morgan in his testimony before the Pujo Committee that "gold
+is money, and nothing else," would seem to indicate that a very great
+part of our people might utterly distrust such a money as Professor
+Kemmerer describes. The banker's tendency to look behind for the
+security, to test things out, to seek to get to bed-rock in business
+affairs, holds with a great many people. An overemphasis on this is
+responsible for the doctrine of Scott[121] and Laughlin[122] that the
+sole source of the value of inconvertible paper money is the prospect of
+redemption, and that inconvertible paper money differs from gold in
+value by an amount which exactly equals the discount at the prevailing
+rate of interest, with allowance for risk, for the period during which
+people expect the paper money to remain unredeemed. We have not the
+banker's psychology to any such extent as that. Apart from the fact that
+the money function adds to the value of money, under certain
+circumstances,--a point to be elaborated shortly--other, non-rational
+factors, contagions of depression and enthusiasm, patriotic support,
+"gold market" manipulations, etc., entered to break the working of the
+credit theory of paper money as applied to the American Greenbacks. I
+may here express the opinion that the credit theory is the fundamental
+principle in the explanation of the value of the Greenbacks, however.
+But we have not the banker's psychology to any such extent as the
+extreme forms of that theory would assume. "Uncle Sam's money is good
+enough for me," is a phrase I have heard from the Populists,--who, by
+the way, were pretty good quantity theorists! "The government is behind
+it." There are plenty of men for whom that assurance would be enough.
+Indeed, the general notion that in some way, not specified, perhaps not
+yet known to anybody, the government will do what is necessary to
+maintain the value of its money is a ground which might well influence
+even the most sophisticated banker. I think such a general confidence in
+the English government has clearly been a factor in the price of
+Sterling exchange since the balance of trade turned so overwhelmingly
+against England in the present War.[123] Our monetary history, I may
+add, has been in considerable measure a struggle between these two
+opposing psychological reactions on that point. The utter breakdown of
+the _fiat_ theory came in Rhode Island, and in connection with the
+Continental Currency, in the days before the Constitution was adopted.
+On the other hand, I do not believe that those who put a banker inside
+every one of us can prove that their principle has been a complete
+explanation at any stage of our monetary history. But clearly
+considerations like these take away all mathematical certainty from the
+matter.
+
+The foregoing analysis makes clear, I trust, that the notion that the
+money function alone can make an otherwise valueless money circulate is
+untenable. There must be value from other sources as well. All that is
+conceded is that there need not be a physical commodity as the basis of
+the money. Value is not necessarily connected with a physical commodity.
+
+There is a disposition on the part of many quantity theorists to beg the
+question at the outset, to assume money as circulating, without
+realizing how much this assumption involves. The assumption involves the
+further assumption that there are _causes_ for the circulation of money.
+But the same causes which make money circulate will also be factors in
+the determination of the _terms_ on which it circulates, _i. e._, the
+prices. To seek then, by a new principle, the quantity theory, to
+explain these prices without reference to these causes, is a remarkable
+procedure. There is sometimes a disposition to do the thing quite simply
+indeed: define money as the circulating medium, and, _by definition_,
+you have it circulating! A rather striking case of this, which is either
+tautology or circular reasoning, appears in Fisher's _Purchasing Power
+of Money_ (p. 129): "Take the case, for instance, of paper money. So
+long as it has the _distinctive characteristic of money,--general
+acceptability at its legal value_,--and is limited in quantity, its
+value will ordinarily be equal to that of its legal equivalent in gold."
+(Italics mine.)
+
+It is not quite easy to construct, even ideally, a social psychology
+which would perfectly fit the quantity theory. One would have to assume
+that money circulates purely from habit, without any present _reason_ at
+all. The assumption must be that the economic life runs in steady
+grooves, so that quantity of goods exchanged will always be the same, or
+at least, that it will always be the same proportion of the goods
+produced--there must be no option of speculative holding out of the
+market allowed the holder of exchangeable goods. The individuals must
+have constant habits as to the _proportions_ of the money they receive
+to be spent and to be held for emergencies. All the factors affecting
+"velocity" of both money and goods must be constant--Professor Fisher
+maintains very explicitly that velocities, both of money and of
+bank-deposits are fixed by habit (_loc. cit._, p. 152),--and, in any
+case, the assumption is necessary. A thoroughly mechanical situation
+must be assumed, where there is the rule of blind habit. Given such a
+mechanism, you pour in money at one end, and it grinds out prices at the
+other end, automatically. But, strangely enough, in this social
+situation where blind habit rules, prices are perfectly fluid! In India,
+or in other countries where the assumptions of the quantity theorist
+come most nearly to realization, so far as the general rule of habit is
+concerned, one finds also many customary prices. In a country completely
+under the rule of habit, the prices would, as a matter of
+_psychological_ necessity, be also fixed. What might then be expected to
+happen in such a country, if an economic experimenter should disturb
+them in their habitual quantity of money? Which habits would give way,
+those relating to prices, or those to velocities, or those relating to
+quantities of goods exchanged?[124] I shall not trouble to solve this
+problem, as it seems to me not the most useful way to approach the
+problem of the value of money, but I submit it to the consideration of
+advocates of the quantity theory. My present purpose is accomplished in
+pointing out the psychological assumptions which the quantity theory
+makes: a psychology of blind habit, in a situation where the price-level
+is free from control by customary prices.
+
+Now at another point I wish to mediate between the quantity theorists
+and their extreme opponents. Representatives of the Metallist of
+Commodity School--like Professor Laughlin, and Professor Scott in his
+earlier writings--seem to deny that the money-employment has any direct
+effect in increasing the value of money. The money-employment affects
+the value of money only indirectly, by withdrawing the money metal from
+the arts, so raising the value of the money metal, and consequently
+raising the value of the coined metal. The quantity theory, on the other
+hand, would utterly divorce the value of money from causal dependence on
+the stuff of which the money is made. Both these views seem to me
+extreme. Unless money has value from some source other than the money
+employment, it cannot be used as money at all. Nobody will want it. On
+the other hand, the money use is a valuable use. Exchange is a
+productive process. Money, as a tool of exchange, enables men to create
+values. And you can measure the value of the money service very easily
+at a given time if you look at the short time "money-rates," _i. e._,
+rates of discount on prime short term paper. These are properly to be
+considered, not interest on abstract capital, but the rent of a
+particular capital-good, namely, money. The money is hired for a
+specific service, namely, to enable a man to get a specific profit in a
+commercial transaction. Money is not the only good which can be thus
+employed, and which is paid for for this purpose. Ordinarily a man will
+pay for money for this purpose. Sometimes, however, one needs the
+temporary use of something else more than one needs money, and the
+holder of money pays a premium for the privilege of temporarily holding
+the other thing. I refer especially here to the practice of "borrowing
+and carrying" on the stock exchange. The "bear" sells stock which he
+does not possess, and must deliver the stock before he is ready to close
+his transaction by buying to "cover." He goes to a "bull" who has more
+stock than he can easily "carry," and who is glad to "lend" the stock in
+return for a "loan" of its equivalent in money. Ordinarily the bull is
+glad to pay a price for the money, as it is of service to him.
+Sometimes, however, the situation is reversed, and the service which the
+temporary loan of the stock performs for the hard-pressed bears is
+greater than the service which the money performs for the bulls, and the
+payment is reversed. When the bull pays a premium to the bear, for the
+use of the money, the amount paid is called "carrying charge," "interest
+charge for carrying," "contango," (London) or (in Germany) "_Report_."
+This is the usual case. But sometimes the bear pays the bull a premium
+for the use of the stock, and the charge is then called "premium for
+use," "backwardation," (London) or "_Deport_" (Germany).[125] Money is,
+thus, not the only thing which has a "use" in addition to the ordinary
+"uses" which are the primary source of its value.[126] In the case of
+other things, however, this kind of "use" is unusual. In the case of
+money it is the primary use. The essence of this use is to be found in
+the employment of a quantum of _value_ in highly saleable form in
+facilitating commercial transactions. Commercial transactions, in this
+sense, are not limited to ordinary buying and selling. I think it best
+to defer further analysis of the money service to a later chapter, on
+the functions of money, which will best be preceded by a consideration
+of the origin of money. For the present, it is enough to note that money
+has certain characteristics which enable it to facilitate exchanges, and
+to pay debts, better than anything else, and that this fact makes an
+addition to its value. It is possible, I think, to measure this addition
+to value rather precisely in certain cases. Thus, in the case of the
+American Greenbacks, we find them at a discount, say from the beginning
+of 1877 on, as compared with the gold dollar in which they were to be
+redeemed in Jan. 1879. I think it safe to contend that the country was
+practically free from doubt as to their redemption after the early part
+of 1877. The discount steadily diminished as the time of redemption
+approached. Laughlin's theory is thus far beautifully vindicated. The
+central fact governing the value of the Greenbacks during this period
+was the prospect of redemption. But, and here I think we see the
+influence of the money-use, the discount was not as great as would have
+been called for by the prevailing rate of interest, as measured by the
+yield on other obligations of the Federal Government, at this time. And
+the discount completely disappeared some little time before the actual
+redemption. I see no cause for the absence of a discount in the later
+months of 1878 except the additional value which came from the money
+use. This additional value is, ordinarily, not very great. And money is
+not alone in possessing it. In extraordinary circumstances it may become
+quite large. Thus, in 1873, in the midst of the panic, the gold premium
+fell sharply. At this time the significance of the Greenbacks as a legal
+tender, a means of final payment of obligations (_Zahlungs_- or
+_Solutions-mittel_), as distinguished from medium of exchange
+(_Tauschmittel_), attained an unusual significance. In ordinary times,
+the marginal value of this function of money sinks to zero, but in
+emergencies it may become very great. In ordinary times, during the
+Greenback period, uncoined gold bullion, or gold coin used, not as
+money, but simply by weight in exchanges, played an important rôle,
+competing with the Greenbacks in various employments, particularly as
+bank reserves, and as secondary bank reserves, and so reducing the
+marginal value of the money-employment of the Greenbacks themselves.
+Gold bullion is not the only thing which can thus serve, however.
+To-day, and generally, securities with a wide market, capable of being
+turned quickly into cash, without loss, or capable of serving as the
+basis of collateral loans, up to a high percentage of their value, have
+a much higher value, for a given yield, than have other securities,
+equally safe, but less well-known and less easily saleable. The
+"one-house bond" (_i. e._, the bond for which only one banking house
+offers a ready market) must yield a great deal more to sell at a given
+price than the bond of equal security which is listed on the exchanges,
+and has a wide market. Part of this is in illustration of another
+function of money, the "bearer of options" function, which enables the
+holder to preserve his wealth, and at the same time keep options for
+increasing its amount when bargains appear in the market. Foreign
+exchange performs many of these functions of money in European
+countries, particularly Austria-Hungary.[127]
+
+The notion that the whole value of gold coin rests on its bullion
+content arises most easily in a situation where free coinage has long
+been practiced, and where there are no legal obstacles to the melting
+down of coin for other uses. Where free coinage is suspended, the
+peculiar services which only money can perform--or rather, the services
+which money has a differential advantage in performing--may easily lead
+to an agio for coined over uncoined metal. The mere fact that coined
+metal is of a definite fineness well known and attested is often of some
+consequence, though the attestation of well-known jewelers may give this
+advantage to metal bars as well, for large transactions. But for smaller
+transactions, nothing can easily take the place of money. A high premium
+on small coins, apart from redemption in standard money, may easily
+arise from the money-use alone. And standard coin may well attain, in
+greater or less degree, a premium. If it is scarce, as compared with the
+amount of business to be done, this premium may well be greater than if
+it is abundant. But that an indefinite premium is possible, or that this
+premium varies exactly and inversely with the quantity, I see no reason
+at all for supposing. If the premium be great enough, men, especially in
+large transactions, will make use of the uncoined metal--just as they
+did use gold in this country during the Greenback period. The advantages
+of money are not absolute. Money is simply more convenient for many
+purposes than other things. The possibility of a premium is limited by
+the possibility of substitutes. It is further limited by the fact that a
+high premium would awaken a distrust which would bring the premium to
+destruction, by destroying trade, and so destroying the money-use on
+which the premium is based.
+
+A detailed discussion of the Indian Rupee since 1893 lies outside the
+scope of this chapter. I think it may be well, however, to recognize at
+this point that the limitation in the quantity of the rupee, through
+abrogation of free coinage, was a factor in the subsequent rise in its
+value. It was not the only factor, by any means. But it was a factor. It
+may be also recognized as a factor in the value of Austrian paper money.
+
+The doctrine just laid down, as to the influence of the money-use in
+adding to the value of money, is in no sense the same as the quantity
+theory. For one thing, it is easily demonstrated that the value-curve
+for the uses of money is not described by the equation, _xy_ = _c_. This
+curve expresses, in terms of value, the idea of proportionality which is
+an essential part of the quantity theory. Put in terms of the money
+market, we have a demand-curve for money, not for the long-time
+possession of money, but for its temporary use--a rental, rather than a
+capital value, is expressed in the price which this curve helps to
+determine. This curve is highly elastic. When money-rates are low,
+transactions will be undertaken which will not be undertaken when the
+rate is a little higher. In the second place, the method of approach is
+very different. It is not the whole volume of transactions which must
+employ money, but only a flexible part. In the third place, the
+money-use is here conceived of as a source, not of the whole value of
+money, but only of a differential portion of that value. In the fourth
+place, the argument runs in terms of the absolute value of money, and
+not in terms of the level of prices.
+
+It is not the legal peculiarity of money, as legal tender, which is
+necessarily responsible for this agio when it appears. In the first
+place, not all money is legal tender. In the second place, we find the
+same phenomenon in connection with "bank-money" at times--I would refer
+especially to the premium on the _marc banko_ of the Hamburg Girobank.
+(_Cf._ Knapp, _Staatliche Theorie des Geldes_, p. 136.) The legal tender
+peculiarity may, however, in special circumstances be a source of a very
+considerable temporary agio.
+
+It is possible, however, to frame a hypothetical case in which, barring
+temporary emergencies, the money-use will add nothing to the value of
+money, and in which the whole value of money will come from the value of
+the commodity chosen as the standard of values. Assume that the standard
+of value is defined as a dollar, which is further defined as 23.22
+grains of pure gold. Assume, however, that no gold is coined. Let the
+circulating money be made of paper. Let this paper be redeemable, not in
+gold, but in silver, at the market ratio, on the day of redemption, of
+silver to gold. This will mean that varying quantities of silver will be
+given by the redeeming agencies for paper, but always just that amount
+required to procure 23.22 grains of gold. Let us assume, further, that
+the government issues paper money freely on receipt of the same amount
+of silver. Assume, further, that the government bears the charges which
+the friction of such a system would entail, by opening numerous centres
+of issue and redemption, by providing insurance against fluctuations in
+the ratio of silver to gold for a reasonable time before issue and after
+redemption, meeting transportation charges, brokerage fees, etc. In such
+a case, the standard of value would not be used as money at all. It
+would have no greater value than it would if it were not the standard of
+value--abstracting from the fact that in the one case it might be used
+in its uncoined form as a substitute for money more freely than in the
+other. In any case, it would form no part of the quantity of money. Its
+whole value would come from its commodity significance. The value of the
+paper money, however, would be tied absolutely to the value of gold. As
+gold rose in value, the paper money would rise in value, and vice versa.
+The quantity of money would be absolutely irrelevant as affecting its
+value. The quantity of silver would be likewise irrelevant. The
+causation as between quantity of money and value of money would be
+exactly the reverse of that asserted by the quantity theory. A high
+value of money would mean lower prices. With lower prices, less money
+would be needed to carry on the business of the country. Paper would
+then be superabundant. But in that case, paper would rapidly be sent in
+for redemption, and the quantity of money would be reduced.[128] The
+value of money would control the quantity of money. The standard of
+value, which was not the medium of exchange, would control the value of
+money, and so the level of prices, in so far as the level of prices is
+controlled from the money side.
+
+In this hypothetical illustration, we have the extreme case of what the
+Commodity or Metallist School seems to assert. In this case, barring
+temporary emergencies too acute to admit of increasing the money-supply
+by the method described, their theory that the value of money comes
+wholly from the commodity value of the standard, would offer a complete
+explanation. I offer this illustration as the antithesis of the
+dodo-bone illustration of Nicholson. That illustration sets forth the
+extreme claims of the quantity theory, and purports to be a case in
+which the quantity theory would work perfectly. The case illustrative of
+the commodity theory clearly brings out the fact that that theory rests
+on exclusive attention to the standard of value function of money. The
+dodo-bone theory gives exclusive attention to, but very imperfect
+analysis of, the medium of exchange function. But I submit that the
+extreme case of the commodity theory, in the illustration I have given,
+is a thinkable and consistent system. It would work--even though not
+conveniently. Indeed, it resembles in essentials the plan actually
+proposed by Aneurin Williams, and later by Professor Irving Fisher[129]
+for stabilizing the value of money. Substitute a composite commodity for
+gold, and gold for silver, in the illustration, and you have the
+essentials of that plan. The dodo-bone hypothesis, however, as I have
+been at elaborate pains to show in the foregoing, is unthinkable. It
+would not work. It is, thus, possible to construct a system for which
+the commodity theory would offer a complete explanation. It is not
+possible to do this for the quantity theory.
+
+But the limiting case for the commodity theory is not the actual case.
+Standard money is also commonly a medium of exchange. Standard money is
+particularly desirable in bank and government reserves. Its employment
+in these and other ways is a valuable employment, and adds directly to
+its value both as money and in the arts. There is a marginal equilibrium
+between its values in the two employments. The notion that the only way
+in which the money employment adds to the value of money is an indirect
+one, by withdrawing gold from the arts, so lessening its supply and
+raising its value there, may be proved erroneous by this consideration:
+what, in that case, would determine the margin between the two
+employments? What force would there be to withdraw gold from the arts at
+all? Why should more rather than less be withdrawn? There must be
+ascending curves on both sides of the margin. Gold money in small amount
+has a high significance per unit in the money employment. A greater
+amount has a smaller significance per unit. The marginal amount of gold
+put to work as money has a comparatively low significance in that
+employment--a significance just great enough to secure it from the
+competing employments in the arts.
+
+ * * * * *
+
+We conclude, then, that money must have value to start with, from some
+source other than the money function, and that there must always be some
+source of value apart from the money function, if money is to circulate,
+or to serve as money in other ways. But this is not to assert the
+doctrine of the commodity school, that its value must arise from the
+metal of which it is made, or in which it is expected to be redeemed.
+Nor is it to deny that the money function may add to the original value.
+On the contrary, the services which money performs are valuable
+services, and add directly, under conditions which we shall analyze more
+fully in a later chapter on the functions of money, to the value derived
+from non-pecuniary sources. Value is not physical, but psychical. And
+value is not bound up inseparably with labor-pain or marginal utility.
+
+
+
+
+CHAPTER VIII
+
+THE "EQUATION OF EXCHANGE"
+
+
+In Professor Irving Fisher's _Purchasing Power of Money_[130] we have
+the most uncompromising and rigorous statement of the quantity theory to
+be found in modern economic literature. We have, too, a book which
+follows the logic of the quantity theory more consistently than any
+other work with which I am acquainted. The book deals with the theory
+more elaborately and with more detail than any other single volume, and
+sums up most of what other writers have had to say in defence of the
+quantity theory. Professor Fisher's book has, moreover, received such
+enthusiastic recognition from reviewers and others as to justify one in
+treating it as the "official" exposition of the quantity theory. Thus,
+Sir David Barbour cites Professor Fisher as the authority on whom he
+relies for such justification of the theory as may be needed,[131] while
+Professor A. C. Whitaker declares that he adopts "without qualification
+the whole body of general monetary theory" for which Professor Fisher
+stands.[132] Professor J. H. Hollander has recently referred to
+Professor Fisher's work on money and prices as a model of that
+combination of theory and inductive verification which constitutes real
+science.[133] The _American Economic Review_ presents as an annual
+feature Professor Fisher's "Equation of Exchange."
+
+Not all, by any means, of those who would call themselves quantity
+theorists would concur in Professor Fisher's version of the
+doctrine--Professor Taussig, notably, introduces so many qualifications,
+and admits so many exceptions, that his doctrine seems to the present
+writer like Professor Fisher's chiefly in name. But there is no other
+one book which could be chosen which would serve nearly as well for the
+"platform" of present-day quantity theorists as _The Purchasing Power of
+Money_. Partly for that reason, and partly because the book lends itself
+well to critical analysis, I shall follow the outline of the book in my
+further statement and criticism of the quantity theory, indicating
+Professor Fisher's views, and indicating the points at which other
+expositions of the quantity theory diverge from his, setting his views
+in contrast with those of other writers. We shall find that this method
+of discussion will furnish a convenient outline on which to present our
+final criticisms of the quantity theory, and parts of the constructive
+doctrine of the present book.
+
+First, Professor Fisher presents in the baldest possible form the
+dodo-bone doctrine. The quality of money is irrelevant. The sole
+question of importance is as to its quantity--the number of
+money-units.[134] I shall not here discuss this point, as a previous
+chapter has given it extended analysis, except to repeat that it is in
+fact an essential part of the quantity theory. If the _quality_ of money
+is a factor, a necessary factor, to consider, then obviously we have
+something which will disturb the mechanical certainty of the quantity
+theory. Professor Fisher is thoroughly consistent with the spirit of his
+general doctrine on this point.
+
+Second, Professor Fisher has no absolute value in his scheme. By the
+value of money he means merely its purchasing power, and by its
+purchasing power he means nothing more than the fact that it does
+purchase: the purchasing power of money is defined as the reciprocal of
+the level of prices, "so that the study of the purchasing power of money
+is identical with the study of price levels." (_Loc. cit._, p. 14.) In
+this, again, Professor Fisher is absolutely true to the spirit and logic
+of the quantity theory doctrine. The equilibration of numbers of goods,
+and numbers of dollars, in a mechanical scheme, gives prices--an average
+of prices, and nothing else. Any psychological values of goods or of
+dollars would upset the mechanism, and mess things up. They are properly
+left out, if one is to be happy with the quantity theory. Fisher, in
+discussion of Kemmerer's _Money and Credit Instruments_, has criticised
+the exposition of the utility theory of value with which Kemmerer
+prefaces his exposition of the quantity theory, as "fifth wheel." I
+agree thoroughly with Fisher's view in this, and would add that the only
+reason that it has made Kemmerer little trouble in the development of
+his quantity theory is that he has made virtually no use of it there!
+The two bodies of doctrine, in Kemmerer's exposition, are kept, on the
+whole, in separate chapters, well insulated. Coupled with this purely
+relative conception of the value of money, however, there is, in
+Fisher's scheme, an effort to get an absolute out of it: the general
+price-level is declared to be independent of, and causally prior
+to,[135] the particular prices of which it is an average. I mention this
+remarkable doctrine here, reserving its discussion for a later
+chapter.[136]
+
+A further feature of Professor Fisher's system, to which especial
+attention must be given, is the large rôle played in it by the "equation
+of exchange." This device has been used by other writers before him,
+notably by Newcomb, Hadley, and Kemmerer, receiving at the hands of the
+last named an elaborate analysis. But Fisher, basing his work on
+Kemmerer's, has made even more extensive use of the "equation of
+exchange," and has given it a form which calls for special
+consideration.[137] The "equation of exchange," on the face of it, makes
+an exceedingly simple and obvious statement. Properly interpreted, it is
+a perfectly harmless--and, in the present writer's opinion,
+useless--statement. It gives rise to complications, however, as to the
+meaning of the algebraic terms employed, which we shall have to study
+with care. The starting point is a single exchange: a person buys 10
+pounds of sugar at seven cents a pound. "This is an exchange transaction
+in which 10 pounds of sugar have been regarded as equal to 70 cents, and
+this fact may be expressed thus: 70 cents = 10 pounds of sugar
+multiplied by 7 cents a pound. Every other sale and purchase may be
+expressed similarly, and by adding them all together we get the equation
+of exchange _for a certain period in a given community_."[138] The money
+employed in these transactions usually serves several times, and hence
+the money side of the equation is greater than the total amount of money
+in circulation. In the preliminary statement of the equation of
+exchange, foreign trade, and the use of anything but money in exchanges
+are ignored, but later formulations of the equations are made to allow
+for them. "The equation of exchange is simply the sum of the equations
+involved in all individual exchanges in a year.... And in the grand
+total of all exchanges for a year, the total money paid is equal in
+value to the total value of the goods bought. The equation thus has a
+money side and a goods side. The money side is the total money paid,
+and may be considered as the product of the quantity of money multiplied
+by its rapidity of circulation. The goods side is made up of the
+products of quantities of goods exchanged multiplied by their respective
+prices."
+
+Letting M represent quantity of money, and V its velocity or rapidity
+of circulation, p, p´, p´´, etc., the average prices for the period of
+different kinds of goods, and Q, Q´, Q´´, etc., the quantities of
+different kinds of goods, we get the following equation:
+
+ MV = pQ + p´Q´ + p´´Q´´ + etc.[139]
+
+"The right-hand side of this equation is the sum of terms of the form
+pQ--a price multiplied by the quantity bought."[140] The equation may
+then be written,
+
+MV = [Greek: S] pQ (Sigma being the symbol of summation).
+
+The equation is further simplified[141] by rewriting the right-hand
+side as PT, where P is the weighted _average_ of all the
+p's, and T is the _sum_ of all the Q's. "P then represents in
+one magnitude the level of prices, and T represents in one
+magnitude the volume of trade."
+
+It may seem like captious triviality to raise questions and objections
+thus early in the exposition of Professor Fisher's doctrine. And yet,
+serious questions are to be raised. First, in what sense is there an
+equality between the ten pounds of sugar and the seventy cents? Equality
+exists only between _homogeneous_ things. In what sense are money and
+sugar homogeneous? From my own standpoint, the answer is easy: money and
+sugar are alike in that both are _valuable_, both possess the attribute
+of economic social value, an absolute quality and quantity. The degree
+in which each possesses this quality determines the exchange relation
+between them. And the degree in which each other good possesses this
+quality, taken in conjunction with the value of money, determines every
+other particular price. Finally, an average of these particular prices,
+each determined in this way, gives us the general price-level. The value
+of the money, on the one hand, and the values of the goods on the other
+hand, are both to be explained as complex social psychological forces.
+But when this method of approach is used, when prices are conceived of
+as the results of organic social psychological forces, there is no room
+for, or occasion for, a further explanation in terms of the mechanical
+equilibration of goods and money. Professor Fisher, as just shown, very
+carefully excludes this and all other psychological approaches to his
+problem of general prices, and has no place in his system for an
+absolute value. In what sense, then, are the sugar and the money equal?
+Professor Fisher says (p. 17), that the equation is an equation of
+values. But what does he mean by values in this connection? Perhaps a
+further question may show what he _must_ mean, if his equation is to be
+intelligible. That question is regarding the meaning of T.
+
+T, in Professor Fisher's equation, is defined as the sum of all the Q's.
+But how does one sum up _pounds_ of _sugar_, _loaves_ of _bread_, _tons_
+of _coal_, _yards_ of _cloth_, etc.? I find at only one place in
+Professor Fisher's book an effort to answer that question, and there it
+is not clear that he means to give a general answer. He needs units of Q
+which shall be homogeneous when he undertakes to put concrete figures
+into his equation for the purpose of comparing index numbers and
+equations for successive years. "If we now add together these tons,
+pounds, bushels, etc., and call this grand total so many 'units' of
+commodity, we shall have a very arbitrary summation. It will make a
+difference, for instance, whether we measure coal by tons or
+hundred-weights. The system becomes less arbitrary if we use, as the
+unit for measuring any goods, not the unit in which it is commonly sold,
+but the amount which constitutes a 'dollar's worth' at some particular
+year called the base year" (p. 196). If this be merely a device for the
+purpose of handling index numbers, a convention to aid mensuration, we
+need not, perhaps, challenge it. The unit chosen is, in that case, after
+all a fixed physical quantity of goods, the amount bought with a dollar
+in a given year, and remains fixed as the prices vary in subsequent
+years. That it is more "philosophical" or less "arbitrary" than the more
+common units is not clear, but, if it be an answer, designed merely for
+the particular purpose, and not a general answer, it is aside from my
+purpose to criticise it here. If, however, this is Professor Fisher's
+_general_ answer to the question of the method of summing up T, if it is
+to be employed in his equation when the question of _causation_, as
+distinguished from _mensuration_, is involved, then it represents a
+vicious circle. If T involves the price-level in its definition, then T
+cannot be used as a causal factor to explain the price-level. I shall
+not undertake to give an answer, where Professor Fisher himself fails to
+give one, as to his meaning. I simply point out that he himself
+recognizes that the summation of the Q's is arbitrary without a common
+unit, and that the only common unit suggested in his book, if applied
+generally, involves a vicious circle.
+
+What, then, is T? Perhaps another question will aid us in answering
+this. What does it mean to _multiply_ ten pounds of sugar by seven
+cents? What sort of product results? Is the answer seventy pounds of
+sugar, or seventy cents, or some new two-dimensional hybrid? One
+multiplies feet by feet to get _square_ feet, and square feet by feet to
+get cubic feet. But in general, the multiplication of _concrete_
+quantities by _concrete_ quantities is meaningless.[142] One of the
+generalizations of elementary arithmetic is that concrete quantities may
+usually be multiplied, not by other concrete quantities, but rather by
+_abstract_ quantities, pure numbers. Then the product has meaning: it is
+a concrete quantity of the same denomination as the multiplicand. If the
+Q's, then, are to be multiplied by their respective p's, the Q's must be
+interpreted, not as bushels or pounds or yards of concrete goods, but
+merely as abstract numbers. And T must be, not a sum of concrete goods,
+but a sum of abstract numbers, and so itself an abstract number. Thus
+interpreted, T is equally increased by adding a hundred papers of
+pins,[143] a hundred diamonds, a hundred tons of copper, or a hundred
+newspapers. This is not Professor Fisher's rendering of T, but it is the
+only rendering which makes an intelligible equation.
+
+We return, then, to the question with which we set out: in what sense is
+there an equality between the two sides of Professor Fisher's equation?
+The answer is as follows: on one side of the equation we have M, a
+quantity of money, multiplied by V, an abstract number; on the other
+side of the equation, we have P, a quantity of money, multiplied by T,
+an abstract number. The product, on each side, is a _sum of money_.
+These sums are equal. They are equal because they are _identical_. The
+equation asserts merely that what is _paid_ is equal to what is
+_received_. This proposition may require algebraic formulation, but to
+the present writer it does not seem to require any formulation at all.
+The contrast between the "money side" and the "goods side" of the
+equation is a false one. There is no goods side. Both sides of the
+equation are money sides. I repeat that this is not Professor Fisher's
+interpretation of his equation. But it seems the only interpretation
+which is defensible.
+
+A further point must be made: Sigma pQ, where the Q's are interpreted as
+abstract numbers, is a summary of concrete money payments, each of which
+has a causal explanation, and each of which has effected a concrete
+exchange. Mathematically, PT is equal to [Greek: S] pQ, just as 3 times
+4 is equal to 2 times 6. But from the standpoint of the theory of
+causation, a vast difference is made. Three children four feet high
+equal in aggregate height two men six feet high. But the assertion of
+equality between the three children and the two men represents a high
+degree of abstraction, and need not be significant for any given
+purpose. Similarly, the restatement of [Greek: S] pQ as PT. One might
+restate [Greek: S] pQ as PT, defining P as the _sum_ (instead of the
+average) of the p's, and T as the weighted average (instead of the sum)
+of the Q's. Such a substitution would be equally legitimate,
+mathematically, and the equation, MV = PT equally true. [Greek: S] pQ
+might be factorized in an indefinite number of ways. But it is important
+to note that in PT, as defined by Professor Fisher,[144] we are at three
+removes from the concrete exchanges in which actual concrete causation
+is focused: we have first taken, for each commodity, an average, for a
+period, say a year, of the concrete prices paid for a unit of that
+commodity, and multiplied that average by the abstract number of units
+of that commodity sold in that year; we have then summed up all these
+products into a giant aggregate, in which we have mingled hopelessly a
+mass of concrete causes which actually affected the particular prices;
+then, finally, we have factorized this giant composite into two numbers
+which have no concrete reality, namely, an average of the averages of
+the prices, and a sum of the abstract numbers of the sums of the goods
+of each kind sold in a given year--a sum which exists only as a pure
+number, and which, consequently, is unlikely to be a causal factor! It
+may turn out that there is reason for all this, but if a _causal_ theory
+is the object for which the equation of exchange is designed, a strong
+presumption against its usefulness is raised. Both P and T are so highly
+abstract that it is improbable that any significant statements can be
+made of either of them. As concepts gain in generality and abstractness,
+they lose in content; as they gain in "extension" they lose (as a rule)
+in "intension." On the other side of the equation, we also look in vain
+for a truly concrete factor. V, the average velocity of money for the
+year, is highly abstract. It is a mathematical summary of a host of
+complex activities of men. Professor Fisher thinks that V obeys fairly
+simple laws, as we shall later see, but at least that point must be
+demonstrated. Even M is not concrete. At a given moment, the money in
+circulation is a concrete quantity, but the average for the year is
+abstract, and cannot claim to be a direct causal factor, with one
+uniform tendency. Of course Professor Fisher himself recognizes that his
+central problem is, not to state and justify, mathematically, his
+equation[145]--that is a work of supererogation, and the statistical
+chapters devoted to it seem to me to be largely wasted labor. Professor
+Fisher recognizes that his central problem is to establish _causal_
+relations among the factors in his equation of exchange. It is from the
+standpoint of its adaptability as a tool in a theory of causation that I
+have been considering it. It should be noted that "volume of trade," as
+frequently used, means not numbers of goods sold, but the money-price of
+all the goods exchanged, or PT. It is in this sense of "trade" that
+bank-clearings are supposed to be an index of volume of trade. The
+sundering of the p's and Q's really is a big assumption of many of the
+points at issue. Indeed, it is absolutely impossible to sunder PT. It is
+always the p aspect of the thing that is significant, Fisher himself
+finally interprets T, statistically, as billions of _dollars_.[146] As a
+matter of mathematical necessity, either P must be defined in terms of T
+or T defined in terms of P. The V's and M and M´ may be independently
+defined, and arbitrary numbers may be assigned for them limited only by
+the necessity that MV + M´V´ be a fixed sum.[147] But P and T cannot,
+with respect to each other, be thus independently defined. The highly
+artificial character of T has been pointed out by Professor E. B.
+Wilson, of the Massachusetts Institute of Technology, in his review of
+Fisher's _Purchasing Power of Money_ in the _Bulletin of the American
+Mathematical Society_, April, 1914, pp. 377-381. "Various consequences
+are readily obtained from the equation of exchange, but the
+determination of the equation itself is not so easy as it might look to
+a careless thinker. The difficulties lie in the fact that P and T
+individually are quite indeterminate. An average price-level P means
+nothing till the rules for obtaining the average are specified, and
+independent rules for evaluating P and T may not satisfy [the equation.]
+For instance, suppose sugar is 5c. a pound, bacon 20c. a pound, coffee
+35c. a pound. The average price is 20c. If a person buys 10 lbs. of
+sugar, 3 lbs. of bacon, and 1 lb. of coffee, the total trading is in 14
+lbs. of goods. The total expenditure is $1.45; the product of the
+average price by the total trade is $2.80; the equation is very far from
+satisfied." Wilson thinks it necessary, to make the matter straight, to
+define T, arbitrarily as (MV + M´V´)/P in which case, the equation is
+true, but so obviously a truism that no one would see any point in
+stating it. T no longer has any independent standing. Fisher has,
+however, an escape from this status for T, but only by reducing P to the
+same position. He defines P as the _weighted_ average of the p's (27),
+and fails, I think, to see how completely this ties it up with T. The
+only method of weighting the p's that will leave the equation straight
+is to weight the different prices by the number of units of each kind of
+good sold, namely, T. Thus, in Wilson's illustration, we would define P
+as [(5c.×10) + (20c.×3) + (35c.×1)]/14 P is then 10-5/14 c., while T is
+14. PT is, then, equal to $1.45, which is the total expenditure, or MV +
+M´V´. Be it noted, here, that P is defined in terms of T, _i. e._, P is
+defined as a fraction, the denominator of which is T. No other
+definition of P will serve, if T is to be defined independently.
+
+But notice the corollary. P must be differently defined each year, for
+each new equation, as T changes in total magnitude, and as the elements
+in T are changed. The equation cannot be kept straight otherwise.
+Suppose that the prices remain unchanged in the next year, but that one
+more pound of coffee, and two less pounds of sugar are sold. P, as
+defined for the equation of the preceding year would no longer fit the
+equation. P, as previously defined, would be unaltered, since none of
+the prices in it had changed. P, defined as a weighted average with the
+weights of the first year, would, then, still be 10-5/14 cents. The T in
+the new equation is 13. The product of P and T is $1.34-9/14. But the
+total expenditure, (MV + M´V´) is $1.70. The equation is not fulfilled.
+To fulfill the equation, it is necessary to get a new set of weights for
+P, in terms of the new T of the new equation. From the standpoint of a
+_causal_ theory, this is delightful. P is the _problem_. But you are
+not allowed to _define_ the problem until you know what the
+_explanation_ is! Then you define the problem as that which the
+explanation will explain!
+
+Fisher, however, appears unaware of this. At all events, he does not
+mention it. And he ignores it in filling out his equation statistically,
+for he assigns one set of weights to the particular prices in his P
+throughout.[148]
+
+The causal theory with which the equation of exchange is associated is
+as follows: P is passive. A change in the equation cannot be initiated
+by P. If P should change without a prior change in one of the other
+factors, forces would be set in operation which would force it back to
+its original magnitude. M and T are independent magnitudes. A change in
+one does not occasion a change in the other. An increase or decrease in
+M will not cause a change in V. Therefore, an increase in M must lead to
+a proportionate increase in P, and a decrease in M to a proportionate
+decrease in P, if the equation is to be kept straight. Changes in T have
+opposite proportional effects on P.
+
+Before examining the validity of the causal theory, and the arguments by
+which it is supported, it will be best to state the more complex formula
+which Professor Fisher advances as expressing the facts of to-day. The
+original formula ignored credit, and ignored the possibility of resort
+to barter. It also failed to reckon with certain complications which
+Fisher deals with as "transitional" rather than "normal."
+
+The formula which includes credit is as follows:
+
+ MV + M´V´ = PT
+
+Here, MV and PT have the same significance as before. M´ is the average
+amount of bank-deposits in the given region for the given period, and
+V´ is the velocity of circulation of those deposits. M, money, consists
+of all the media of exchange in circulation which are _generally_
+acceptable, as distinguished from those which are acceptable under
+particular conditions, as by endorsement. M excludes money in bank
+reserves and government vaults. Money, specifically, includes gold and
+silver coin, minor coins, government paper money, and bank-notes; M´
+consists of deposits transferable by check. This version would not
+satisfy such a writer as Nicholson,[149] who would limit money to gold
+coin, and would include in M´ not only deposits, but also bank-notes,
+and other credit instruments. I may suggest here, what I shall later
+emphasize, that Fisher's "money," though he doubtless is using the most
+common definition of money, is really a pretty heterogeneous group of
+things, concerning which it is possible to make few general statements
+safely. In economic essence, _e. g._, bank-notes are much more like
+deposits than like gold, and if one wishes to separate money and credit,
+bank-notes belong with M´ rather than with M. But we must take the
+theory as we find it! Again, credit is by no means exhausted when
+bank-deposits are named. Why should not book-credits, and bills of
+exchange be included? Why not postal money-orders, why not deposits
+subject to transfer by the giro-system? M´ is defined[150] as "the total
+deposits subject to transfer by check," and would, thus, exclude the
+giro-system of Germany. It is surely a very provincial equation of
+exchange, with which Fisher and Kemmerer seek to set forth the universal
+laws of money! Fisher's reason for excluding book-credits is that
+book-credits merely postpone, and do not dispense with, the use of money
+and checks.[151] Book-credits, unlike deposits, have no _direct_ effect
+on prices (_Ibid._, 82, n.; 370), but only an indirect effect, by
+increasing the velocity of money. (_Ibid._, 81-82; 370-371.)
+Book-credit, indeed "time-credit" in general thus has no direct effect
+on prices, and is properly excluded from the equation of exchange. These
+distinctions seem to me highly artificial. In the first place, the use
+of checks, in part, merely postpones the use of money: money is moved
+back and forth from one part of the country to another, and from one
+bank to another, to the extent that checks fail to offset one another,
+and in the case of book-credit, while there is less of this offsetting,
+there is a good deal of it, especially between stockbrokers in different
+cities, and in small towns and at country stores, and particularly in
+the South, where the country storekeeper and "factor" are also dealers
+in cotton, etc., and where they advance provisions during the year to
+the small farmers, receiving their pay, in considerable degree, not in
+money, but in cotton, which they credit on the books in terms of money
+to the customer--a point which Fisher mentions in an appendix. (_Ibid._,
+p. 371.) The difference on this point is a difference in degree
+merely.[152] Further, Fisher makes the same point with reference to
+deposits subject to check that he makes with reference to book-credits,
+namely, that their use increases the velocity of money. To say that one
+has a _direct_ effect on prices, and the other only an indirect effect
+is absolutely arbitrary. If buying and selling are what count, if prices
+are forced up by the offer of money or credit for goods, and forced down
+as the amount of money and credit offered for goods is reduced, then one
+exchange must count for as much as any other of like magnitude in fixing
+prices. The same is true of transactions in which bills of exchange or
+other credit devices serve as media of exchange. Of course these
+considerations do not render the equation of exchange, as presented by
+Fisher, untrue. The equation simply states that the money and
+bank-deposits used in paying for goods in a given period are equal to
+the amount paid for those goods in a given period. It makes no assertion
+concerning payments for other goods, and makes no assertion as to the
+amount of other transactions which are paid for in other ways. General
+Walker, presented with the problem of credit phenomena, simplifies the
+thing even more.[153] He rules out all exchanges which are effected by
+credit devices, counting only those performed by coin, bank-notes and
+government paper money, and insists that the general price-level is
+determined in those exchanges in which money alone (as thus defined) is
+employed. His equation--if he had considered it worth while to use
+one--would then have been simply
+
+ MV = PT
+
+where T would be merely the number of goods exchanged by means of money.
+One could make a similar equation, equally true, by defining money as
+gold coin, and reducing T correspondingly. Is there any reason for
+limiting the equation at all?[154] Is there any reason for supposing
+that any one set of exchanges is more significant for the determination
+of the price-level than any other set of exchanges? Does not the logic
+of the quantity theory require us to include all exchanges which run in
+terms of money?--If one wishes a complete picture of the exchanges, some
+such equation as this would be necessary:
+
+ MV + M´V´ + BV´´ + EV´´´ + OV´´´´ = PT,
+
+where B represents book-credit, V´´ the number of times a given average
+amount of book-credit is used in the period, E bills of exchange, and
+V´´´ their velocity of circulation, and O all other substitutes for
+money, with V´´´´ as their velocity of circulation. Even then we have
+not a complete picture, if direct barter or the equivalents of barter
+can be shown to be important.
+
+For the present, I waive a discussion of the comparative importance of
+these different methods of conducting exchanges. The situation varies
+greatly with different countries. Fisher's and Kemmerer's equations are
+at best plausible when presented as describing American conditions, are
+much less plausible when applied to Canada and England, and are
+caricatures when applied to Germany and France.
+
+So much for the statement of the equation of exchange, except that it is
+important to add that the period of time chosen for the equation is one
+year. Just why a year, rather than a month or two years or a decade
+should be chosen, may await full discussion till later. I shall venture
+here the opinion that the yearly period is not the period that should
+have been chosen from the standpoint of Fisher's causal theory, and
+that it probably was chosen, if for any conscious reason at all, because
+of the fact that statistical data which Fisher wished to put into it are
+commonly presented as annual averages. The question now is, however, as
+to the use to be made of the equation in the development of a causal
+theory.
+
+
+
+
+CHAPTER IX
+
+THE VOLUME OF MONEY AND THE VOLUME OF CREDIT
+
+
+John Stuart Mill, who first among the great figures in economics gives a
+realistic analysis of modern credit phenomena, thought that credit acts
+on prices in the same way that money itself does[155] and that this
+reduces the significance of the quantity theory tendency greatly, and to
+an indeterminate degree. The quantity theory is largely whittled away in
+Mill's exposition of the influence of credit. In Fisher we have a much
+more rigorous doctrine. The quantity of money still governs the
+price-level, because M governs M´. The volume of bank-deposits depends
+on the volume of money, and bears a pretty definitely fixed ratio to it.
+Just how close the relation is, Professor Fisher does not say, but the
+greater part of his argument, especially in ch. 8,[156] rests on the
+assumption that the ratio is very constant and definite indeed. At all
+events, the importance of the theory, as an explanation of concrete
+price-levels, will vary with the closeness of this connection, and the
+invariability of this ratio. It is not too much to say _that the book
+falls with this proposition_, to wit, that M controls M´, and that there
+is a fixed ratio between them. We would expect, therefore, a very
+careful and full demonstration of the proposition, a care and fullness
+commensurate with its importance in the scheme. But the reader will
+search in vain for any proof, and will find only two propositions which
+purport to be proof. These are: (1) that bank reserves are kept in a
+more or less definite ratio to bank deposits; (2) that individuals,
+firms and corporations preserve more or less definite ratios between
+their cash transactions and their check transactions, and between their
+cash on hand and their deposit balances.[157]
+
+If these be granted, what follows: the money in bank-_reserves_ is no
+part of M! M is the money in circulation, being exchanged against goods,
+not the money lying in bank-vaults![158] The money in bank-vaults does
+not figure in the equation of exchange. As to the second part of the
+argument, if it be granted, it proves nothing. The money in the hands of
+individual and corporate depositors is by no means all of M. It is not
+necessarily the greatest part. The money in circulation is largely used
+in small retail trade, by those who have no bank-accounts. A good many
+of the smallest merchants in a city like New York have no bank-accounts,
+since banks require larger balances there than they can maintain.
+Enormous quantities of money are carried in this country by laborers,
+particularly foreign laborers. "The Chief of the Department of Mines of
+a Western State points out that when an Italian, Hungarian, Slav or Pole
+is injured, a large sum of money, ranging from fifty dollars to five
+hundred or one thousand, is almost always to be found on his person. A
+prominent Italian banker says that the average Italian workman saves two
+hundred dollars a year, and that there are enough Italian workmen in
+this country, without considering other nationalities, to account for
+three hundred million dollars of hoarded money."[159] I do not wish to
+attach too great importance to these figures, taken from a popular
+article in a popular periodical. It is proper to point out, too, that
+these figures relate to hoarded money, rather than to M, the money in
+circulation. But in part these figures represent, not money absolutely
+out of circulation, but rather, money with a sluggish circulation. And
+they are figures of the money in the hands of poor and ignorant elements
+of the population. Outside that portion of the population--larger in
+this country than in any other by far[160]--which keeps checking
+accounts, are a large body of people, the masses of the big cities, the
+bulk of rural laborers, especially negroes, the majority of tenant
+farmers, a large proportion of small farm owners, especially nominal
+owners, and not a few small merchants in the largest cities, who have no
+checking accounts at all. A very high percentage of their buying and
+selling is by means of money. Kinley's results[161] show that 70% of the
+wages in the United States are paid in cash, and, of course, the
+laborers who receive cash pay cash for what they buy. (Not necessarily
+at the _time_ they buy!) Money for payrolls is one of the serious
+problems in times of financial panics.[162] To fix the proportion
+between money in the hands of bank depositors and non-depositors is not
+necessary for my purposes--_a priori_ I should anticipate that there is
+no fixed proportion. But it is enough to point out that money in the
+hands of depositors is not the whole of Fisher's M. Of what relevance is
+it, then, to point out, even if it were true, that an unascertainable
+portion of M tends to keep a definite ratio to M´, when the thing to be
+proved is that the _whole_ of M tends to keep a definite ratio to M´?
+Fisher's argument is a clear _non-sequitur_. If it proves anything, it
+proves that a sum of money,[163] not part of M, and another sum of
+money, an unknown fraction of M, each independently, for reasons
+peculiar to each sum, tends to keep a constant ratio to M´. This gives
+us _l'embarras des richesses_ from the standpoint of a theory of
+causation! Two independent factors, bank-reserves and money in the hands
+of depositors, each tending to hold bank-deposits in a fixed ratio, and
+yet each moved by independent causes! By what happy coincidence will
+these two tendencies work together? Or what is the causal relation
+between them? And if, for some yet to be discovered reason, Professor
+Fisher should prove to be right, and there should be a fixed ratio
+between M as a whole and bank-deposits, would it not indeed be a miracle
+if all three "fixed ratios" kept together? Bank-deposits, indissolubly
+wedded to three independent variables[164] (independent, at least, so
+far as anything Professor Fisher has said would show, and independent
+in large degree, certainly, so far as any reason the present writer can
+discover), must find their treble life extremely perplexing. May it not
+be that Professor Fisher has pointed the way to the real fact, namely,
+that bank-deposits are subjected to a multitude of influences, no one of
+which is dominant, which prevent any fixed ratio between bank-deposits
+and any other one thing? At a later point, I shall maintain that this
+is, indeed, the case.
+
+Be it noted further, however, that even if we grant a fixed ratio, on
+the basis of Fisher's argument, between M and M´, Fisher has offered no
+jot of proof that the causation runs from M to M´. He simply assumes
+that point outright. "Any change in M, the quantity of money in
+circulation, _requiring as it normally does a proportional change in
+M´_, the volume of deposits subject to check." (_Ibid._, p. 52, Italics
+mine.) For this, no argument at all is offered. A fixed ratio, so far as
+causation is concerned, might mean any one of three things: (a) that M
+controls M´; (b) that M´ controls M; (c) that a common cause controls
+both. Fisher does not at all consider these alternative possibilities. I
+shall myself avoid a sweeping statement as to the causal relations among
+the factors in the equation, because I do not think that any of the
+factors is homogenous enough, as an aggregate, to be either cause or
+effect of anything. But if a generalization concerning these magnitudes
+were required, I should be disposed to assert that the third alternative
+is the most defensible, and that to the extent that M and M´ vary
+together it is under the influence of a common cause, namely, PT! That
+is to say, that the volume of bank-deposits and the volume of money tend
+to increase or decrease in a given market--and Fisher's theory is a
+theory of the market even of a single city[165]--_because of_ increases
+or decreases in PT (considered as a unitary cause rather than as two
+separate factors) in that market. But I shall not put my proposition in
+quite that form, as I find the factors in the equation of exchange too
+indefinite for satisfactory causal theory.
+
+So much for the validity of Fisher's argument, assuming the facts to be
+as he states them. Are the statements correct? Do banks tend to keep
+fixed ratios between deposits and reserves? Do individuals, firms, and
+corporations tend to keep fixed ratios between their cash on hand and
+their balances in bank? Regarding this last tendency, Professor Fisher
+says in a footnote on p. 50, "This fact is apparently overlooked by
+Laughlin." I think it has been generally overlooked. I have found no one
+who has discovered it except Professor Fisher. Certainly no depositor
+whom I have consulted can find it in his own practice--and I have put
+the question to "individuals, firms, and corporations." The further
+statement which Professor Fisher adduces in its support does not prove
+it, namely, that cash is used for small payments, and checks for large
+payments.[166] It would be necessary to go further and prove that large
+and small payments bear a constant ratio to one another, and further,
+that velocities of money and of bank-deposits employed in these ways
+bear a constant relation. If Fisher has any concrete data, of a
+statistical nature, to support the doctrine of a constant ratio between
+bank-balance and cash on hand in the case of individual depositors, he
+has failed to put them into his book. Nor is there any statistical
+evidence offered in the case of banks. It should be noted here that
+finding a general average for a whole country or community would not
+prove Fisher's point. General averages give no concrete causal
+relations. Fisher's argument, moreover, starts with individual banks and
+individual deposit-accounts (pp. 46 and 50) and generalizes the
+individual practice into a community practice. He would have to offer
+data as to individual cases.
+
+While general averages could not _prove_ the contention of a constant
+ratio between reserves and deposits for individual banks, general
+averages can _disprove_ the contention. A constant general average would
+be consistent with wide variation in individual practices, on the
+principle of the "inertia of large numbers." But if the general average
+is _inconstant_, it is impossible that the individual factors making it
+up should be constant. This disproof is readily at hand, both for the
+ratio of deposits to reserves in the United States, and for the ratio of
+demand obligations to reserves among European banks (most of which do
+not make large use of the check and deposit system).
+
+For the United States, from 1890 to 1911, taking yearly averages, we
+have a variation in the ratio of reserves to deposits of over 73% of the
+minimum ratio. The ratio was 26% in 1894, and 15% in 1906. "The
+juxtaposition of these extreme variations shows how inaccurate is the
+assumption that the deposit currency may be treated as a substantially
+constant multiple of the quantity of money in banks."[167] For New York
+City, the annual average percentage of reserves of Clearing House banks
+to net deposits varies from 24.89% in 1907 to 37.59% in 1894.[168] The
+extreme variations[169] in weekly averages are (for the sixteen years,
+1885-1900) 20.6% in August, 1893 and 45.2% in February, 1894. These
+figures are extreme, since the number of occurrences is small for them,
+but there are numerous occurrences of deviations from the mean as wide
+apart as 24% and 42%.[170] The yearly fluctuation in all these ratios is
+very great.
+
+The ratio of money held by the banks and money held by the people also
+shows wide variation, and considerable yearly fluctuation. There is a
+further complication, for the United States, of varying proportions of
+the total monetary stock held by the Federal Treasury. As between the
+banks and the public, the banks held about a third in 1893 (average for
+the year), and nearly half in 1911.[171] Whatever may be the relations
+between money in the hands of the people, money in banks, and volume of
+deposits, in "the static state," there is no statistical evidence
+whatever to justify the notion of fixed relations among them in real
+life.[172] We shall later show that there can be no static laws whatever
+governing the relations of credit and reserves.[173]
+
+For European banks, the case is equally clear. European bankers deny
+any intention of keeping any definite reserve ratio. This appeared very
+clearly in the "Interviews" obtained for the Monetary Commission with
+leading European bankers.[174] The Banque de France increased its gold
+reserves, between 1899 and 1910, by 75%, but increased its discounts and
+advances during the same period by only 5%.[175] J. M. Keynes[176]
+points out that the reserves of the great banks of the world, and of
+Treasuries which act as central banks, have absorbed an enormous part of
+the gold produced in the fifteen years before the War, increasing their
+holdings from about five hundred million pounds sterling in 1900 to one
+billion pounds sterling at the outbreak of the War. "The object of these
+accumulations has been only dimly conceived by the owners of them. They
+have been piled up partly as the result of blind fashion, partly as the
+almost _automatic consequence_, in an era of abundant gold supply, of
+the particular currency arrangements which it has been orthodox to
+introduce.... The ratios of gold to liabilities vary very extremely from
+one country to another, without always being explicable by reference to
+the varying circumstances of those countries.... The contingencies,
+against which a gold reserve is held, are necessarily so vague that the
+problem of assessing the proper ratio must be, within wide limits,
+indeterminate. It is natural, therefore, that bankers, who must act one
+way or the other, should often fall back on mere usage or accept _that
+amount of gold as sufficient_ which, _if they are chiefly passive, the
+tides of gold bring them_. [Italics mine.] At any rate, the management
+of gold reserves is not yet a science in most countries. There is no
+ideal virtue in the present level of these reserves. Countries have got
+on in the past with much less, and under force of circumstances could do
+so again."
+
+It will be noticed that Keynes, in the passage cited, is speaking of
+_gold_ reserves, while Fisher's contention relates to all kinds of money
+available for reserves, which in this country would include gold, silver
+dollars, greenbacks, and, for many State banks, the notes of national
+banks. He is also talking of the relation of reserves to demand
+_liabilities_, which for most great European banks are primarily notes,
+rather than of reserves to deposits. But as an exposition of the theory
+of the ratio of reserves to deposits (the chief liability of American
+banks), it is applicable to American conditions, and as a statement of
+the facts, it of course gives a basis for testing Fisher's doctrine
+generally. I do not think that Fisher's fixed ratio, as between reserves
+and deposits, or even the ratio which more moderate quantity theorists
+might seek to find between gold and demand liabilities, will find any
+justification in the facts of banking history.[177]
+
+A factor which has developed on a grand scale in recent years has tended
+still further to weaken any tendency that may be supposed to exist
+toward a fixed ratio between money-reserves and demand-liabilities. I
+refer to the gold exchange-standard, in India, the Philippines, and
+elsewhere, and to the practice of the great banks of the continental
+countries of Europe, particularly the Bank of Austria-Hungary, of
+holding foreign gold bills, rather than gold exclusively, as reserve to
+cover note issue. In the case of the Austro-Hungarian Bank, which has
+carried this practice to the extreme, all possibility of a fixed ratio
+between gold reserves and demand-liabilities has vanished. The ratio is
+highly flexible. When bills are cheap, _i. e._, when the exchange is "in
+favor" of Austria-Hungary, the Bank buys bills with gold; when bills
+are high, when the exchanges have turned "against" Austria-Hungary, the
+Bank sells bills for gold. Commonly, the holder of a note of the
+Austro-Hungarian Bank does not ask for it to be redeemed in gold, but in
+foreign exchange. The reason for this practice on the part of the Bank
+is primarily economy. A large holding of gold would represent idle
+capital--a heavy burden for the Bank of a debt-ridden and poorly
+developed country. Foreign bills, however, serve equally well for
+maintaining the value of the bank-notes, and at the same time bear
+interest.[178] A similar practice has been employed by the Reichsbank,
+by the National Bank of Belgium,[179] by virtually all the debtor
+countries of Europe, and the great trading countries of Asia.
+
+Confidence in these conclusions is much increased by a study of the
+views of Professor Taussig.[180] Professor Taussig is, in his initial
+formulations of his doctrine, a quantity theorist. In a situation where
+only money is used, credit being excluded, in effecting exchanges, he
+would hold that the quantity theory correctly accounts for prices. He is
+fond of the old formulation, as a first approximation, even in dealing
+with the complex facts of modern banking. But he does not dodge the
+complex facts, and his theory becomes, substantially, first, a general
+formula, and second, an elaborate body of qualifications and exceptions,
+the latter making up the major part of the theory. His doctrine
+regarding the relation of money and credit is as follows: there is, in
+the long run, a real _limitation_ on elastic credit instruments in the
+quantity of _specie_. (This is very different from the assertion that
+there is a _fixed_ ratio between _deposits_ and _money_ in circulation,
+including paper, bank-notes, etc., in money. The present writer has no
+quarrel with the doctrine that the gold supply of the _world_ imposes
+_outside_ limitations on the _possible_ expansion of credit.) The
+limitation, Taussig holds, comes in two ways: (1), in the connection
+between prices in any one country, and prices in the world at large;
+(2), in various links of connection between the volume of deposits (and
+of notes elastic like deposits) and the quantity of specie. I shall
+consider at a later point the relation between prices in different
+countries.[181] I shall there maintain that the quantity theory, which
+explains gold movements on the basis of price-_levels_ in different
+countries, is inadequate; that not price-levels, but particular prices,
+of goods most available for international trade, are of primary
+importance, and that of these particular prices, one, namely the "price
+of money," or the short time money-rate, is most significant of all. For
+the present, I wish to analyze the linkages which Taussig finds between
+elastic credit instruments and specie, and to see how far they would go,
+not in proving Taussig's point (with which I have little quarrel) but in
+proving Fisher's contentions. The points involved are: (a) _Direct
+necessity_ constrains the bankers to keep _some_ cash on hand.[182] This
+fixes a _minimum limit_ (Taussig's contention), but does not at all
+suggest a "normal ratio" (Fisher's contention). (b) _Binding custom_, as
+to the proper amount of reserve that banks should carry, particularly
+important in connection with the Bank of England, but also in evidence
+in the Banque de France and the Reichsbank. Here again, however,
+minimal, rather than fixed, ratios are suggested. Limitations on the
+_expansion_ of credit these customs may impose, but they by no means
+determine a normal, or average amount of credit expansion--in England
+least of all, since there is so large a flexible element in the deposits
+of the Joint Stock Banks, whose reserves are largely secret. The
+statement _supra_ quoted from Keynes, together with the testimony of
+European bankers, may be considered in connection with this point, also,
+as to the factors determining the reserve policies of the great European
+banks. The extent to which custom really binds is doubtful. (c) _Direct
+regulation by law_, peculiar to the United States. Here again, a
+minimum, rather than a fixed ratio, is indicated. Some _limitation_ on
+credit expansion by the banks is caused by this at times, but Fisher's
+argument would require vastly more. (d) _The interaction in the use of
+deposits, notes, and other constituents in the circulating medium._ The
+point involved here is that different kinds of business call for
+different kind of media. Small retail business is not done with hundred
+dollar bills, nor are stocks and bonds bought with pennies. Limiting the
+size of bank-notes to five pounds in England compels the use of a large
+amount of gold for smaller transactions, and keeps a larger amount of
+gold in use than would otherwise be the case. Expanding business draws
+cash from the banks for circulation, trenching on reserves. That
+Professor Taussig has a point here is not to be doubted, but how closely
+it limits the expansion of credit will depend on the degree to which
+different kinds of media of exchange really _are_ thus specialized. In a
+country like the United States, where checks may be used for virtually
+any transaction of over a dollar, and where small change for less than a
+dollar will be increased by the Government to meet the demands of trade,
+the point would not seem to involve a practically serious limitation.
+
+Finally, Professor Taussig recognizes a coefficient with the quantity of
+specie in the _temper of the business community_. Whether or not
+deposits are to expand, depends not only on reserves, but also on the
+attitude of borrowers.
+
+Taussig concludes: "Thus there is only a rough and uncertain
+correspondence of bank expansion with bank reserves; much play for ups
+and downs which have no close relation to the amount of cash in bank
+vaults, _and still less direct relation to the amount of money afloat in
+the community at large_. Where bank media, whether in the form of
+deposits or notes, are an important part of total purchasing power, the
+connection between general prices and quantity of 'money' is irregular
+and uncertain." (Italics mine.)
+
+This conclusion would be of little service in supporting Fisher's
+rigorous contentions! Our constructive theory concerning the relations
+of reserves and deposits, or reserves and demand liabilities, must wait
+for later discussion, in the chapter on "Bank Assets and Bank Reserves"
+in Part III. It will there be maintained that there are no "normal" or
+"static" laws governing the percentage of reserves to demand
+liabilities, or to deposits, that the reserve function of money is a
+_dynamic_ function, and that its whole explanation must be found in
+dynamic considerations. For the present, I am content to have analyzed
+two widely divergent views, one the extreme view of Professor Fisher,
+representing the quantity theory in its utmost rigor, and the other, the
+view of Professor Taussig, who virtually surrenders the quantity theory
+in complex modern conditions.
+
+In between these two writers, verging more toward Fisher than toward
+Taussig, will be found, with great individual variation, the rest of the
+quantity theorists. The quantity theory, as an instrument of prediction,
+becomes important only to the extent that Fisher's view is maintained.
+
+
+
+
+CHAPTER X
+
+"NORMAL" VS. "TRANSITIONAL" TENDENCIES
+
+
+The Quantity Theory, as a causal theory, is, then, little altered by the
+passage from a hypothetical, creditless economy to the actual world,
+where a vast deal of credit is used,--particularly in Professor Fisher's
+hands. Of the different kinds of credit, only deposits subject to check
+are recognized as directly influencing prices, and deposits subject to
+check are controlled by the volume of money. The causal theory[183]
+remains, then, as follows: if M be increased, it will increase M´
+proportionately; it will not change the V's; it cannot increase T; to
+keep the equation straight, therefore, P must rise in proportion to the
+rise in M. A decrease of M, reducing M´ proportionately, leaving V's and
+T unchanged, must proportionately reduce P. P is passive. A change in P
+cannot sustain itself, unless it be due to a prior change in T, the V's,
+M or M´.
+
+This theory is set forth with the qualification that these effects are
+the "normal" effects of the changes in question. The proportion between
+quantity of money and price-level is not strictly maintained during
+"transition periods." I now approach the most difficult question which I
+shall have to answer as to the meaning of Fisher's terms. The same
+problem arises for all quantity theorists. Precisely what is the
+distinction between "transition periods" and "normal periods"? What
+limitations and qualifications does he admit to the rigorous statement
+of his theory so far given? I may first express the opinion that the
+line shifts greatly in his own mind, or at least shifts greatly in the
+exposition. I do not find an explicit statement in which definitions are
+given. The matter is chiefly discussed by Fisher in ch. 4,[184] which is
+called "Disturbance of Equation and of Purchasing Power during
+Transition Periods." There we find, as I have stated, no definitions,
+but the initial statements would suggest the following: a transition
+period is the period following a change in any one of the factors in the
+equation during which a readjustment among all the others is taking
+place; the normal period is the period preceding such a change, or
+following the transition after such a change, and is characterized by
+the fact that all the factors are at rest, in stable equilibrium.
+Equilibria during transition periods are unstable. During the
+transition, the relations among the factors vary: M and M´ need not keep
+their fixed ratio; P need not be wholly passive; M and P need not keep
+the same proportion. But until M and M´ get back into the normal ratio,
+until P becomes proportional to M (in the proportion prior to the
+initial disturbance), there is no rest; the equilibrium is unstable. How
+long is a transition period? How realistic is the notion of a transition
+period? Is the transition period a theoretical device, to aid in
+isolating causes, or is it supposed to be a real period in time? Is the
+normal period a real period in time, or is it merely a theoretical
+hypothesis? It is not easy to answer these questions. Thus (p. 72) the
+seasonal fluctuations are declared to be "normal and expected," and, at
+the same time, one gets the impression that Fisher considers them
+illustrations of his "transitions," in which the normal theory does not
+strictly hold (pp. 72, 169). What is described chiefly in the chapter on
+transition periods is the business cycle--a theory of the business
+cycle, based primarily on the notion that the failure of interest to
+rise as fast as prices rise causes the "boom," and that the draining of
+bank reserves precipitates the crisis. I shall not discuss this theory,
+as a theory of business cycles, further than to say that Wesley
+Mitchell's study would indicate that the interest rate is a minor
+factor, and that, while as a theoretical possibility, the drains on bank
+reserves may check prosperity if something else doesn't do it first,
+practically something else always does come in ahead, so far as his
+studies have gone.[185] My interest here is primarily in seeing the
+limitations Fisher imposes on his theory, and the qualifications he
+admits. If the business cycle is the typical transition period, during
+which his normal theory doesn't hold, when does the normal theory hold?
+When are the "normal periods"? There is no concrete period during which
+prices are neither rising nor falling, during which no important changes
+are taking place among the factors.[186] At times, Fisher seems to
+indicate that the normal period is imaginary (pp. 56, 159). Is, then,
+the contrast between a realistic "transition period" and a hypothetical
+"normal period" or are both hypothetical? Is the equation of exchange,
+too, a mere hypothesis? It should be, if it is to set forth a merely
+hypothetical theory. But no, Fisher insists on putting concrete data
+into it, and, indeed, gives an elaborate statistical "proof" of the
+equation. It, at least, is realistic. I confess that my certainty as to
+Fisher's meaning grows less, as I study his book with greater care. If
+the typical transition period be the business cycle, then the normal
+period could come only once, say, in ten years--or whatever period,
+regular, or irregular, one chooses to assign to the business cycle. The
+concrete price-levels for the greater part of the time are then
+surrendered to other causes. And the one-year cycle described in the
+equation of exchange is quite irrelevant. The equation of exchange
+should cover the whole business cycle, to fit in with the theory.
+Indeed, a realistic equation of exchange would then have no meaning at
+all, as the average price-level during the business cycle, played upon
+by a host of causes other than the factors described in the quantity
+theory, would not be the same as the average price-level which _would
+have_ obtained had only the "normal" causes been in operation.[187]
+
+The distinction between "normal" and "transition" _periods_ suggests a
+dangerous fallacy: namely, that during one period one sort of causation
+is working, with the other in abeyance. In fact, whatever causes there
+are are working all the time. The only legitimate thing is to abstract
+from one set of causes, and see what the other set, if left to
+themselves, will bring about. But this sort of abstraction has many
+dangers, one of which is that the causes abstracted from are frequently
+thought of as non-existent. The chemist, in his laboratory, can in
+actual physical fact abstract impurities from his chemicals, and see
+what they will do. He can even perform experiments in what is
+practically a vacuum. But the economist has no right to _think in
+vacuo_! All that he has a right to do is to assume the factors which he
+does not wish to study _constant_. And even that he must not do if (1)
+changes in the factors which he wishes to study do in fact lead to
+changes in the factors abstracted from, or (2) if the factors which he
+wishes to study can only change _because_ of prior or concomitant
+changes in the factors from which he is abstracting. Is it, for example,
+legitimate to assume an increase in M´ apart from its usual
+accompaniment, an increase in PT?
+
+The notion, too, that causation can be seen in a state of stable
+equilibrium should be critically analyzed. Causation is only _revealed_
+by a _course of events_, when mechanical causation is involved. The
+relation of cause and effect may be a contemporaneous relation in fact,
+and it is possible, where conscious, psychological phenomena are
+involved, to discern causal relations among the elements in a mental
+state by direct introspection. It is the not uncommon practice, also, in
+the theory of mechanics, or in theoretical economics, where the method
+of investigation is deductive rather than inductive, to abstract from
+the temporal sequence, and to construe causal relations as timeless,
+logical relations. But even here, the cause of a _change_ in the general
+situation precedes the change in time, and it is only by abstraction
+that the time element is left out. If there is no question as to the
+causal relations, this abstraction is legitimate, but if all that one
+knows about the situation be that in a stable equilibrium certain
+constant ratios obtain, then the question as to which term in the ratio
+is cause and which is effect remains unanswered. In Fisher's situation,
+then, assuming that it be true--which I shall deny--that the only stable
+equilibrium is that which the normal theory requires, it still remains
+true that the causal relations among the factors can only be revealed by
+a study of the transitions, by seeing the temporal sequence of changes
+in the factors of the equation. Even if it be granted that M, M´ and P
+tend to keep a constant relation to one another, the quantity theory
+falls if, for instance, it can be shown that a change may first occur in
+P, spread to M´, and finally reach M last of all, leading to a new
+normal equilibrium which is stable. I shall later show cases of this
+sort.[188]
+
+The abstract formulation of Fisher's contrast will not, I believe, give
+us an answer as to the extent to which he thinks his quantity theory
+realistic. I find myself particularly in genuine uncertainty as to the
+point mentioned above: would an actual equation of exchange for the
+whole business cycle, made up of the averages of M, M´, V, V´, P and T
+for the whole period, exhibit the "normal" relations among these
+factors? Or would this "normal" relation only emerge concretely at some
+moment of time in the course of the cycle when the abnormal causes
+affecting the price-level happened to offset one another? Or is it true
+that no actual figures which might be found, either for a moment of
+time, or as averages for any given period, will exhibit the relations
+required, and that only a hypothetical equation, based on the figures
+for M, M´, V, V´, P and T that _would have been realized_ had there been
+no "disturbing" causes, will show these "normal" relations? If, as
+Fisher at times indicates--as in his reference to Boyle's Law (p.
+296)--he is stating only an abstract tendency, which may be neutralized
+by other tendencies in the situation, so far as concrete results are
+concerned, then it is this last doctrine which we must take, and the
+concrete equation of exchange has little if any relevance. If, moreover,
+this last interpretation be given, then the whole of Fisher's elaborate
+statistical "proof" is pointless. The only sort of statistical proof
+which would be relevant would be of a much subtler sort, not a mere
+filling out of the equation of exchange by means of annual figures, but
+an effort to disentangle and measure the _importance_ of his tendency,
+as compared with other tendencies. But we have the other tendencies
+merely mentioned in qualitative terms, and we never find any definite
+statement, of mathematical character, as to how important they are.
+
+It seems pretty clear, however, that on the whole, despite occasional
+suggestions that his theory is abstract, Fisher means his theory to be
+the overwhelmingly important point in the explanation of actual
+price-levels. He is particularly insistent on the high degree of the
+generality of his contention that P is passive. Thus: "So far as I can
+discover, _except to a_ LIMITED _extent during transition periods, or
+during a passing season_, (_e. g._, _the fall_) (capitals mine, italics
+Fisher's), there is no truth whatever in the idea that the price-level
+is an independent cause of changes in any of the other magnitudes, M,
+M´, V, V´, or the Q's."[189] On p. 182 he enumerates in a series of
+propositions his general normal theory, and adds, as the first sentence
+of proposition 9: "Some of the foregoing propositions _are subject to_
+SLIGHT _modification during transition periods_." (Italics and capitals
+mine.) And the general drift of the argument, particularly in chapter 8,
+where the heart of Fisher's causal theory is presented, would indicate
+that the concessions he is disposed to make are very slight, indeed.
+
+The question as to how long a _time_ is required, in Fisher's view, for
+a transition to occur, and for his normal tendencies to dominate, is
+nowhere made clear. The quantity theory, in the hands of some writers,
+is a very long run theory, for others, it is a short run theory. Thus,
+Taussig would make the "run" exceedingly long.[190] Mill makes it a
+short run theory. "It is not, however, with ultimate or average, but
+with immediate and temporary prices, that we are now concerned. These,
+as we have seen, may deviate widely from the standard of cost of
+production. Among other causes of fluctuation, one we have found to be,
+the quantity of money in circulation. Other things being the same, an
+increase of the money in circulation raises prices, a diminution lowers
+them. If more money is thrown into circulation than the quantity which
+can circulate at a value conformable to its cost of production, the
+value of money, so long as the excess lasts, will remain below the
+standard of cost of production, and general prices will be sustained
+above the natural rate."[191] I pause to note that it is really strange
+that a single name should describe theories so different, resting on
+such essentially different logic. Long run or short run theories, all
+are "quantity theories," whether "money" be defined as gold, or as all
+manner of media of exchange, or as only those media of exchange which
+pass from hand to hand without endorsement. Fisher would doubtless call
+his theory a long run theory. From the standpoint of the notion that
+"prices ... lag behind their full adjustment and have to be pushed up,
+so to speak, by increased purchases,"[192] however, we get a short run
+quantity theory doctrine. The logic of these two is very different. The
+short run doctrine seeks to explain the actual process of price-making
+in the market. Money is offered against goods, and the actual quantities
+on each side determine the momentary price-level, concretely. Or, when
+credit is considered, money and credit offered against goods, at a given
+time, or in a given short period, determine the actual price-level
+reached. This is the logic of the equation of exchange--actual money
+paid is necessarily equal to actual money received. The long run
+doctrine is fundamentally based on a different notion. Surrendering the
+actual or average of price-levels to other causes, in part, it still
+asserts that, given time enough, and barring new disturbing tendencies,
+a price-level will ultimately be reached which will bear it out. I find
+no recognition, on Fisher's part, of the fact that these two doctrines
+are different, and, in fact, I find them blended and confused in the
+course of his argument. He would doubtless maintain that his is a long
+run doctrine. But how long is the "run"? Sometimes it seems to be, as
+already shown, a whole business cycle. Sometimes a passing season, as
+the fall. When he undertakes to apply his theory to a practical proposal
+for regulating the value of money, he relies on the quantity theory
+tendency to bring about adjustments so quickly that it is worth while to
+make _monthly_ adjustments in anticipation of it.[193] When discussing
+the changes in gold premium on the Greenbacks during the exciting times
+of the Civil War, he relies so thoroughly on his theory that he will not
+allow even the rapid change of four per cent in a single day following
+Chickamauga to occur except in conformity with the quantity theory. This
+last statement is so remarkable that I must quote Fisher himself: "It
+would be a grave mistake to reason, because the losses at Chickamauga
+caused greenbacks to fall 4% in a single day, that their value had no
+relation to their volume. This fall indicated a slight acceleration in
+the velocity of circulation, and a slight retardation in the volume of
+trade" (263). It would be indeed remarkable if the changes in the gold
+market, which got war news before the newspapers got it, and where
+changes in gold premium occurred before the rest of the country could
+possibly react to the war news, should be controlled by V and T! I had
+not supposed that the most rigorous of short run quantity theorists
+would make any such demands on his theory as that. Indeed, I had not
+supposed that the quantity theory would feel called on to explain the
+gold premium, as such, except in so far as the gold premium is an index
+of general prices.
+
+Finding it impossible to limit Fisher to any single statement of the
+quantitative importance of his normal theory as compared with the other
+tendencies at work, but concluding that, on the whole, he considers it
+of high importance, I shall now proceed to an analysis of the reasoning
+by which he seeks to justify it as a _qualitative_ tendency. I shall
+maintain that, however long or short the period required, however strong
+or weak the tendency he defends, the reasoning by which he seeks to
+justify it is unsound, and that even as a qualitative tendency, the
+quantity theory is invalid. At a later part of the book, as in an
+earlier part,[194] I shall undertake to find the modicum of truth which
+the quantity theory contains, and shall show that no quantity theory is
+needed to exhibit this modicum of truth.
+
+
+
+
+CHAPTER XI
+
+BARTER
+
+
+In the statement of the quantity theory, the proviso is commonly made
+that all exchanges must be made by means of money, or of money and
+bank-credit. Barter is excluded by hypothesis. If resort to barter were
+possible, then people might avert the fall in prices due to scarcity of
+money, or increase in trade, by dispensing with money in part of their
+transactions, and the proportional decrease in prices which the quantity
+theory calls for would be lacking. Is this assumption true? Is barter
+banished from the modern world, or does it remain reasonably possible,
+and, to a considerable degree, actual?
+
+Fisher maintains the thesis--the failure of which he admits would spoil
+the quantity theory[195]--that barter is practically impossible, and
+negligible in modern business life. "Practically, however, in the world
+to-day, even such temporary resort to barter is trifling. The
+convenience of exchange by money is so much greater than the convenience
+of barter, that the price adjustment would be made almost at once. If
+barter needs to be seriously considered as a relief from money
+stringency, we shall be doing it full justice if we picture it as a
+safety valve, working against a resistance so great as almost never to
+come into operation, and then only for brief transition intervals. For
+all practical purposes and all normal cases, we may assume that money
+and checks are necessities for modern trade."[196]
+
+This contention seems to me untenable. I think it can easily be shown
+that barter remains an important factor in modern business life,
+especially if one extends the term barter, a little, to cover various
+flexible substitutes for the use of money and checks in effecting
+exchanges. Clearly from the standpoint of the present issue, such an
+extension of the meaning of barter is legitimate, as any such
+substitutes would equally spoil the proportionality in the supposed
+relation between prices and money, or prices and trade.
+
+Where does one find barter? Well, not to be ignored would be the
+advertisements which fill many columns of such a paper as the New York
+_Telegram_ in the course of a week; "Wanted: to trade a well-trained
+parrot for a violin"--a trade that might, or might not, be a wise one!
+There is a good deal of such simple barter among the people. Then,
+perhaps more important, is the regular practice of sewing machine,
+piano, automobile, and other similar companies of taking part of the
+payment for a new machine, piano,[197] or automobile in the similar
+thing which the owner is discarding. The old machine, piano, etc., are
+then repaired, repainted, and sold again. This is a very extensive
+practice. Again, there are companies which combine the business of
+wrecking old houses and building new ones, who regularly take the old
+materials as part of their pay. This is a highly important feature of
+the organized building trade in great cities, and is frequently done in
+small towns. The building trade is no negligible matter. The
+"horse-trade" still thrives in rural regions, and barter of various
+kinds, of live stock, of grain and hay, of fresh and cured meat, and of
+labor, is an important feature in rural life in many sections. Much of
+agricultural rent in the South is still paid in kind, under the "share
+system." Much labor, especially farm and domestic labor, is still paid
+for partly in kind. Where payments for labor are made in orders on
+company stores, we have again what is virtually barter, from the
+standpoint of the point at issue. _Real estate_ transactions make large
+use of barter. Farms are exchanged for one another, with some cash (or
+more usually, a promissory note) "to boot." The writer has repeatedly
+heard real estate men say to customers: "I can't sell it for you very
+easily, but I can trade it off, and maybe you can sell what you trade it
+for." This is perhaps more frequent in rural real estate transactions,
+and in the smaller cities, than in large cities, but it is very
+extensive in New York City.[198]
+
+Again, when corporations are to be combined, various plans are possible.
+There may be a merger; there may be a holding corporation; there may be
+a lease. If the money market is easy, one of the former methods will be
+used,--most frequently, for legal reasons, the holding corporation, if
+there are any valuable franchises involved. But mergers and holding
+corporations commonly involve buying out the interests which are to be
+absorbed, and call for the use of checks. If the money market is tight,
+therefore, the promoter of the combination may frequently find the lease
+the more advantageous form of consolidation.[199] The great advantage of
+the lease is that, when the money market is tight, it involves no
+_financial plan_, no underwriting, no outlay of "cash." This is,
+therefore, an equivalent of barter, so far as the point at issue is
+concerned. Even where a holding corporation is formed, however, there
+may be considerable barter: the stockholders of the corporation which is
+absorbed may receive payment for their stocks, in whole or in part, in
+the securities of the holding company, rather than in checks. An era of
+financial consolidation, such as we have been passing through, and
+through which we have not by any means gone, though the movement toward
+_monopoly_ has been in great degree checked, presents a great deal of
+this sort of barter, or equivalents of barter.[200] A striking thing to
+notice here, moreover, is the flexible margin between use of bank-credit
+and barter, a margin depending primarily upon the condition of the money
+market, and particularly upon the money-rates.
+
+Not yet has the most important element in modern barter been mentioned.
+I refer to the "clearing-house" arrangements of the stock and produce
+exchanges. Under these arrangements, brokers who have sold ten thousand
+shares of Westinghouse El. and M. Common during the day, and bought
+seven thousand shares, buying and selling being in smaller lots, with a
+number of different houses, no longer are obliged to deliver ten
+thousand shares, receiving therefor $700,000, and to receive seven
+thousand shares, paying therefor $490,000. Instead, they deliver three
+thousand shares only to the clearing house, and receive from the
+clearing house only $210,000 when the transaction is, from the
+standpoint of the particular broker involved, completed. This is a far
+remove, in technical perfection, from primitive barter, but it is
+barter, and it saves the using of a vast deal of bank-credit as between
+brokers. How important it is, from the standpoint of the stock exchange,
+may be judged from the following statement in Sprague's _Crises Under
+the National Banking System_: "A much more fundamental change in the
+organization in the New York money market came with the establishment of
+the stock exchange clearing house in May, 1892. It led to a very
+considerable reduction in the _clearing-house exchanges of the banks_
+and also, and more important, in the volume of certified checks.
+[Italics mine.] Overcertification of checks ceased to be a factor of the
+first magnitude in the banking methods of the city. Had not this
+arrangement for stock-exchange dealings been set up, it is probable that
+it would have been necessary to close the stock exchange in 1893 and in
+1907, and it is also probable that the volume of business transacted in
+the years after 1897 could not have been handled." (P. 152.)
+
+The same arrangements have been widely introduced in other stock
+exchanges, and in the produce exchanges.[201]
+
+In general, with reference to barter, this point is significant. The
+money economy has made barter _easier_ rather than harder. It has made
+possible a host of refinements in barter, which make it at many points
+more convenient and cheaper than check or money exchanges. It is common
+to find our present methods of conducting foreign trade described as a
+"system of refined barter," which indeed, from the standpoint of the
+present issue, it is: bills of exchange are neither money nor
+bank-credit! Where bills of exchange are used in internal trade
+extensively--as in Germany, where they pass from hand to hand in several
+transactions before being discounted at banks[202]--we have a highly
+important substitute for money and deposits, which functions as
+barter,--flexibility of substitutes for money and deposits is strikingly
+evident. The feature of the money economy which has thus refined and
+improved barter is the _standard of value_ (_common measure of value_)
+function of money.[203] This standard of value function, be it noted,
+makes no call on money itself, necessarily. The _medium of exchange_ and
+"_bearer of options_" functions of money are the chief sources of such
+additions to the value of money as come from the money-use. But the fact
+that goods have money-prices, which can be compared with one another
+easily, in objective terms, makes barter, and barter-equivalents, a
+highly convenient and very important feature of the most developed
+commercial system. And so we reject another essential assumption of the
+quantity theory.[204]
+
+
+
+
+
+CHAPTER XII
+
+VELOCITY OF CIRCULATION
+
+
+For the quantity theory, it is important to treat velocity of
+circulation of money and of deposits, as self-contained entities, really
+independent factors. This is true of Fisher's theory. It is particularly
+necessary that V and V´ should vary from causes unconnected with M and
+M´. The V's are to be a sort of inflexible channel, through which M and
+M´ run in their influence on the passive P, which is to rise or fall
+proportionately with them. If an increase of M or M´ should lead to a
+reduction in the V's, if people, having more money available, should be
+less assiduous in using every bit of it in effecting exchanges, then P
+would not rise in proportion to the increase in M. Complete
+demonstration of Fisher's thesis, therefore, requires the proof of the
+negative proposition that V does not change as a consequence of changes
+in M or M´. This proof Fisher finds in the contention that the V's are
+fixed by the habits and conveniences of individuals, whence they are not
+influenced by such a cause as a change in the amount of money.[205]
+
+V is defined,[206] not as the number of times a given dollar is
+exchanged in a given year (the "coin-transfer" notion), but as a social
+average based on the average number of coins which pass through _each
+man's_ hands, divided by the average amount held by him (the
+"person-turnover" concept of velocity.) V´ is similarly defined. Fisher
+asserts that both concepts, if correctly employed, lead to the same
+result. I would point out one important difference between them here:
+if money is _short-circuited_, if, _i. e._, a part of the economic
+community loses its incomes, or finds its incomes reduced, then the
+"velocity of money," on the "coin-transfer" basis is reduced, provided
+the "person-turnover" average remains the same, while on the
+"person-turnover" basis the velocity will remain unchanged. It is
+clearly the "coin-transfer" concept which is fundamental, from the
+standpoint of the equation of exchange, and Fisher feels justified in
+using the other method only because he considers it an equivalent of the
+"coin-transfer" concept. I shall later show cases where the distinction
+between the two concepts is all-important, particularly in the case
+where T is reduced by the elimination of _middlemen_.[207]
+
+The conception of velocity of circulation as a real, unitary entity, a
+_cause_, in the process of price-determination, is, I suppose, almost as
+old as the quantity theory itself. It is an essential part of the
+quantity theory. To me "velocity of circulation" seems to be a mere
+name, denoting, not any simple cause or small set of causes, which can
+exert a specific influence, but rather a meaningless abstract number,
+which is the non-essential by-product of a highly heterogeneous lot of
+_activities of men_, some of which work one way, and others of which
+work in another way, in affecting prices. It is at best a passive
+_resultant_ of conflicting and divergent tendencies, and has, to my
+mind, no more _causal_ significance than the average of the abstract
+numbers of yards gained by both sides, heights and weights of players,
+kick-offs, and minutes taken out for injuries, would have on the result
+of the Yale-Harvard game. The real causes of changes in prices lie
+deeper! I should expect V and V´ to be the most highly flexible factors
+in the equation of exchange, and should expect to be able to keep the
+equation straight, in a great variety of situations, by allowing the V's
+to vary.
+
+Before undertaking detailed analysis of the causes governing V, I shall
+discuss Fisher's specific argument, typical of the quantity theory, that
+an increase of money cannot change the V's. "As a matter of fact, the
+velocities of circulation of money and deposits depend, as we have seen,
+on technical conditions, and bear no discoverable relation to the
+quantity of money in circulation. Velocity of circulation is the average
+rate of 'turnover,' and depends on countless individual rates of
+turnover. These, as we have seen, depend on individual _habits_. Each
+person regulates his turnover to suit his individual _convenience_....
+In the long run, and for a large number of people, the average rate of
+turnover, or what amounts to the same thing, the average time money
+remains in the same hands, will be closely determined. It will depend on
+density of population, commercial _customs_, rapidity of transport, and
+other technical conditions, but not on the quantity of money and
+deposits nor on the price-level." (Italics mine.[208]) He proceeds to
+assume that money is doubled with a _halving_ of the V's, instead of a
+_doubling_ of P. Everybody now has on hand twice as much money _and
+deposits_ as his convenience has taught him to keep on hand. He will
+then try to get rid of this surplus, and he can only do it by buying
+goods. But this will increase somebody else's surplus, and he will
+likewise try to get rid of it. This will raise prices. "_Obviously_ this
+tendency will continue until there if found another adjustment of
+quantities to expenditures, and the _V's are the same as
+originally_."[209] The foregoing argument rests in part, it will be
+seen, on the assumption that a fixed ratio between M and M´ obtains,
+else the increase of _money_ in everybody's hands would not mean a
+corresponding increase in their _deposits_. I have already criticised
+this doctrine. For the contention that the V's will finally be _just the
+same_ as before, I find no specific argument at all--"_obviously_"
+presumably making that unnecessary.
+
+As the point immediately at issue is that V's will be _unchanged_ by the
+increase in M (otherwise P would not increase _proportionately_--let us
+see if considerations can be adduced which will make this a little less
+"obvious." First, it will be noticed that Fisher, in the foregoing, in
+one sentence speaks of the matter as resting on _habit_, and in the next
+sentence, on _convenience_. He speaks, also, of business _custom_. Now
+it is important to note that habit and custom, on the one hand, and
+considerations of convenience on the other, do not necessarily coincide.
+Many habits and customs are highly inconvenient. And it is not at all
+likely that habit and custom should govern so highly complex a thing as
+the ratio between cash on hand and the price-level. Rather, in so far as
+custom and habit rule, one would expect them to relate to a simpler
+matter, namely, the _amount of cash on hand_. If the amount of cash kept
+on hand should remain controlled by habit, while the amount of money is
+increased, then V, instead of remaining unchanged, would actually be
+increased, unless the habits should be broken in on. I shall show in a
+moment that considerations of convenience would probably lead to a
+reduced V, in so far as individual turnover is concerned. But which
+tendency will prevail? Well, that will depend on the degree to which
+custom and habit rule as compared with considerations of
+convenience--_i. e_., there would be no rule valid for all communities.
+That convenience would lead to a larger amount of money on hand--and I
+am following Fisher's temporary hypothesis that there has been no rise
+in prices prior to the movement to restore the V's to their old
+magnitudes--will appear from considerations like these. Few men have as
+much on hand as they would like to have, including both their cash in
+hand and their deposit balances. Most people have the tendency to hoard,
+though it is usually held in check by necessity. If money on hand be
+increased suddenly, without prices being increased, and without any
+prospect of increased incomes in the future--and there is nothing in
+Fisher's provisional hypothesis to call for increased incomes, as they
+could, in fact, come only from an increase in prices--why might not
+there be a considerable saving of money, with a corresponding reduction
+in V? If it be objected that people, in saving their money, will in
+considerable degree put it into the banks, and that the banks, with
+larger reserves, will increase loans and deposits, I would urge, that it
+is on the part of banks that this tendency to increase hoards in times
+of abundant money is particularly marked, and for proof would point to
+the figures quoted from Keynes[210] for the great banks and treasuries
+of Europe in the last fifteen years. It is not necessary for my purpose
+at this point to do more than show that there is reason to expect an
+increase in money to _change_ the V's. Fisher's argument rests on the
+contention that the V's will be neither increased or reduced--otherwise
+an increase in money will not _proportionately_ raise prices. The appeal
+to habit and custom in the matter is particularly unsatisfactory. Custom
+and habit could not possibly regulate things so complex as velocities of
+money and bank-deposits.
+
+Whatever be the ultimate effect of an increase in money, the immediate
+effect is commonly to reduce the money-rates. Banks have less inducement
+to pay interest on deposits, and charge lower rates for loans. Now
+merchants, especially small merchants, are often embarrassed in making
+change for customers. The man who has tried to make payment with a ten
+dollar bill in a country store has not infrequently put the storekeeper
+to much inconvenience. To offer a ten dollar bill, or even a five dollar
+bill, to a storekeeper on Amsterdam Avenue in New York City may well
+mean that the one clerk in the establishment, or the proprietor's wife
+will run out with the bill to three or four neighboring stores before
+finding change with which to break it. If money is more abundant, if
+money-rates are easier, for a time, it may easily happen that many small
+merchants will experience the superior convenience of having a more
+adequate amount of change in the till, and will, even after the
+money-rates have risen--if they do rise again to the old figure--find a
+new reason for keeping more cash on hand. There is a marginal
+equilibrium between the interest on the capital invested in cash in the
+till, and the wages of the clerk,[211] whose active legs assist the
+velocity of money. Not only banks and small dealers, however, find it
+advantageous to increase their supply of ready funds, held idle for
+special occasions. The United States Steel Corporation has kept as much
+as $50,000,000.00 to $75,000,000.00 in idle cash or idle deposits, as a
+means of being independent of banks in times of emergency.[212] The
+motive for accumulating reserves and hoards, either of cash or deposit
+accounts, is at all times strong. In times of financial ease, it may
+easily find the difficulties which ordinarily repress it give way, and,
+by being gratified, grow stronger.
+
+I conclude that there is positive reason for expecting an increase of
+money to reduce the velocity of money.
+
+Horace White, in his _Money and Banking_, in the earlier editions,
+speaks of the velocity of money, "_alias_ the state of trade." Is not
+this the truth? Is not money circulating rapidly, when business is
+active, and slowly when business is dull? Is not the velocity of
+circulation a highly flexible and variable average, a _cause_ of
+nothing, and an index of business activity? Or, better, perhaps, are not
+the V's and T both governed, in large degree, by more fundamental causes
+which are largely the same for both? Fisher would admit something of
+this for transition periods. Even for normal adjustments, he admits that
+an increase in T, unaccompanied by an increase in M, leads to some
+increase in the V's, though he doesn't say how much.[213] He denies,
+however, that an increase in the V's will increase T.[214] In general,
+it is clear that he regards the V's and T as governed by different
+causes. The control of the V's by T is not the only or the chief control
+of the V's. The V's can increase greatly without an increase of T, in
+his scheme. That this is so, will appear from a comparison of the list
+of causes which he gives as governing the V's and T respectively:
+
+Causes governing V's:
+
+ 1. Habits of the individual.
+ (a) As to thrift and hoarding.
+ (b) As to book credit.
+ (c) As to use of checks.
+
+ 2. Systems of payments in the community.
+ (a) As to frequency of receipts and disbursements.
+ (b) As to regularity of receipts and disbursements.
+ (c) As to correspondence between times and amounts
+ of receipts and disbursements.
+
+ 3. General causes.
+ (a) Density of population.
+ (b) Rapidity of transportation.
+
+Compare this list with the causes governing T:[215]
+
+ 1. Conditions affecting producers:
+ Geographical differences in Natural Resources; the
+ division of labor; knowledge of technique of production;
+ accumulation of capital.
+
+ 2. Conditions affecting consumers: the extent and
+ variety of human wants.
+
+ 3. Conditions connecting consumers and producers:
+ (a) Facilities for transportation.
+ (b) Relative freedom of trade.
+ (c) _Character_ of monetary and banking systems. (Not
+ their _extent_.)
+ (d) Business confidence.
+
+These two lists are quite different, and indicate that in Fisher's mind
+the magnitudes, T and the V's, in general obey different laws. The only
+factor in both lists is facilities for transportation ("rapidity of
+transportation," in the first list). Strangely enough, T, though later
+recognized as having influence on the V's[216] is not included in these
+lists in ch. 5. The "character of the monetary and banking systems" in
+the second list is evidently not the same as "use of checks" in the
+second list, though it will doubtless affect that factor, as also the
+"habits as to thrift and hoarding," in some degree. "Business
+confidence," which is, in the view I am maintaining, as in the view, I
+should take it, of Horace White, the great variable affecting both T and
+the V's, does not appear in the first list. Indeed, one wonders why
+business confidence appears in either list, if only "normal," and not
+merely "transitional" causes are to be considered, but it appears from
+the fuller discussion on p. 78 that Fisher is not thinking of business
+confidence as a _variable_ at all--his normal theory has nothing to do
+with _variables_--but as a thing which either is or is not present, a
+sort of Mendelian unit, not a thing of degrees.[217] It will be noted,
+further, that most of the causes which Fisher lists as affecting T are
+really causes affecting _production_--they would be just as important
+under a socialistic as under an exchange economy.
+
+Now I propose to show, on the basis of Fisher's own list of causes, that
+most, if not all, of the factors affecting the V's, will also affect T,
+_and in the same direction_. He admits this as to transportation
+facilities. It is surely true of thrift and hoarding. The miser neither
+circulates money nor buys goods. It is emphatically true--though
+Fisher's theory, as will later appear, is obliged to deny it,--of both
+book credit and banking facilities. Without the use of credit, much of
+the business now done simply would not be done at all. For Fisher, and
+the quantity theory in general, the contention would be simply that the
+same business would be done _on a lower price-level_. I reserve a full
+discussion of this fundamental point till later, noting here, in
+passing, that the function of banks is to assist in effecting transfers,
+that that is why, from the social standpoint, banks are encouraged, and
+that the extension of banking would be folly if they did not, in fact,
+do this. As to book credit, let us suppose that, for example, in the
+great cotton section of the South the stores should cease to give
+advances of supplies on credit to negroes and small white farmers,
+pending the "making" of the crop. The outcome would be starvation for
+many of them, and no cotton crop at all. Under a system of private
+enterprise, the very division of labor itself, including the
+specialization of the capitalist, involves credit, and it is difficult
+to conceive a form of credit which does not either dispense with the use
+of money, or increase its "velocity." Admittedly, the division of labor
+increases trade.
+
+The three factors listed under "Systems of payment in the community"
+also affect trade. To the extent that receipts are frequent, regular,
+and synchronous with outgo, we have a smoothly working economic system,
+which facilitates commerce.
+
+Finally, density of population enormously increases trade. The
+concentration of men in cities is essential for modern factory
+production, and the great cities have necessarily grown up about good
+harbors, or at strategic points for connecting lines of railroads. It
+seems almost trivial to insist on so obvious a point, but Fisher seems
+totally to ignore it, for he says: "We conclude, then, that density of
+population and rapidity of transportation have tended to increase prices
+by raising velocities. _Historically this concentration of population in
+cities has been an important factor in raising prices in the United
+States._"[218] (P. 88. Italics mine.)
+
+This is an astounding proposition. It is not merely that the
+concentration of population in cities has _tended_ to raise prices
+through raising velocities. It is a statement that this has been an
+important historical cause of the actual increase in prices. For
+Fisher's own theory, if the same cause had tended to increase T,[219]
+that would have offset the rising V's on the other side of the equation,
+and left prices little affected. But he sees in the V's an independent
+cause here, divorces them from their connection with T, and follows his
+logic fearlessly where it leads. I do not see how one could more
+strikingly illustrate the essential vice of erecting the V's into causal
+entities.
+
+In concluding the discussion of the rôle of velocity of circulation, I
+think it worth while to mention Fisher's own efforts to measure them. I
+examine his statistics in a later chapter. I do not regard the points at
+issue as points which can properly be handled by inductive methods,
+primarily. I do not accept his conclusions with reference to the
+magnitudes of V, the velocity of money, partly because I do not accept
+his doctrine that "banks are the home of money" (p. 287).[220] He finds
+for V a fairly constant magnitude during the thirteen years from 1896 to
+1909, the range being from 19 to 22, the figures for all the years
+except 1896 and 1909 being interpolations.[221] For V, however, which is
+much the more important magnitude, from the standpoint of his equation
+of exchange for the United States, since deposits do so much more
+exchanging than does money, he finds a wide range of variation, from 36
+to 54, and he states: "We note that the velocity of circulation has
+increased 50% in thirteen years and that it has been subject to great
+variation from year to year. In 1899 and 1906 it reached maxima,
+immediately preceding crises" (285). I think Fisher's own statistical
+results show that V´, at least, is a child of the "state of
+trade."[222] Critical analysis of these statistics show that they
+greatly underestimate the variability of the V's.[223]
+
+In summary: V and V´ are not, as Fisher contends, independent of the
+quantity of money. Instead of resting on "technical conditions," and
+having large elements of constancy and rigidity, they are highly
+flexible, and vary, on the whole, with the same highly complex and
+divergent sets of causes which govern the volume of trade. The biggest
+factor affecting the variations of the V's on the one hand, and volume
+of trade on the other is business confidence--a factor which Fisher's
+normal theory is not concerned with, so far as it is considered as a
+variable, but which, more than anything else, does affect the concrete
+figures which go into the equation of exchange, either for a single
+year, or for an average of a good many years. The V's are not true
+causal entities, but merely abstract summaries of a host of
+heterogeneous facts. I have indicated before, and shall later
+demonstrate more fully, that the same is true of T. Even the "normal"
+causes governing the V's, however, are factors which likewise affect T,
+and in the same direction.
+
+Among the factors affecting both V and T, there is one which sometimes
+makes them move in opposite directions, and that is the _value of money_
+itself. This is so well stated in Wicksteed's interesting criticism of
+the quantity theory that I content myself with a quotation:[224] "Again,
+the history of paper money abounds in instances of sudden changes,
+within the country itself, in the value of paper currency, caused by
+reports unfavorable to the country's credit. The value of the currency
+was lowered in these cases by a doubt as to whether the Government would
+be permanently stable and would be in a position to honor its drafts,
+that is to say, whether this day three months, the persons who have the
+power to take my goods for public purposes will accept a draft of the
+present Government in lieu of payment. It is not easy to see how, on the
+theory of the quantity law, such a report could affect very rapidly the
+magnitudes on which the value of the note is supposed to depend, viz.,
+the quantity of business to be transacted, and the amount of the
+currency. Nor is it easy to see why we should suppose that the frequency
+with which the notes pass from hand to hand, is independently fixed. On
+the other hand, the quantity of business done by the notes, as distinct
+from the quantity of business done altogether, and the rapidity of the
+circulation of the notes may obviously be affected by sinister rumors.
+Two of the quantities, then, supposed to determine the value of the unit
+of circulation, are themselves liable to be determined by it."
+
+
+
+
+CHAPTER XIII
+
+THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION
+
+
+In proving that an increase of money must proportionately increase
+prices, it is necessary to prove that the volume of trade is independent
+of the quantity of money and credit instruments by means of which trade
+is carried on. Money on the one hand, and quantity of goods to be
+exchanged on the other, are the two great independent magnitudes, whose
+equilibration mechanically fixes the average of prices. This notion, as
+to the essence of the quantity theory, finds expression in Taussig,[225]
+"The statement of a quantity theory in relation to prices assumes two
+independent variables: total money or purchasing power on the one hand,
+total supply of goods or volume of transactions on the other." Taussig,
+though he would maintain that this independence holds, so far as money
+and trade are concerned, admits that it breaks down so far as trade and
+elastic bank credit, bank-notes and deposits, are concerned. Trade and
+elastic bank-credit are largely _inter_dependent.[226] This concession
+on Taussig's part means virtually giving up the quantity theory for
+Western Europe and the United States and Canada, though Taussig still
+sees something left of the quantity theory tendency in view of the
+"irregular and uncertain" connection which he finds between money and
+bank-credit.[227] Fisher, however, makes no such surrender. He is quite
+as uncompromising as to the independence of _deposits_ and trade as he
+is with reference to the independence of _money_ and trade. He does,
+indeed, make the concession that increasing trade tends to increase
+deposits _indirectly_, by increasing the ratio of M´ to M, by modifying
+the habits of the people as to the use of checks as compared with cash
+(p. 165),[228] but he denies stoutly that there is any _direct_ relation
+between them. (P. 168.) Trade acts only _via_ a modification of the
+ratio between M and M´, and M still remains controlled, not by trade,
+but by quantity of money. As to any control over T by M´, he repudiates
+it explicitly, (P. 163.) Increasing M´, either through an increase of M,
+or through an increase in the normal ratio between M and M´, will have
+no effect on T,--or, for that matter, on the V's. The introduction of
+credit, therefore, leaves the quantity theory intact: an increase of M,
+increasing M´ proportionately, leaving the V's unchanged, and having no
+effect on T, must exhaust its influence on P, raising P proportionately,
+if the equation of exchange is to remain valid.
+
+The argument set forth to prove that T is not influenced by M or M´ is
+as follows: "An inflation of the currency cannot increase the products
+of farms or factories, nor the speed of freight trains or ships. The
+stream of business depends on natural resources and technical
+conditions, not on the quantity of money. The whole machinery of
+production, transportation and sale is a matter of _physical capacities
+and technique_, none of which depend on the quantity of money. The only
+way in which quantities of trade appear to be affected by the quantity
+of money is by influencing trades accessory to the creation of money and
+to the money metal.... From a practical or statistical point of view
+they amount to nothing, for they could not add to nor subtract one-tenth
+of 1% from the general aggregate of trade." (_Loc. cit._ p. 155. Italics
+mine.) Something similar is said on p. 62, where "transitional"
+influences of M on T are being discussed: "But the amount of trade is
+dependent, _almost entirely_, on other things than the quantity of
+currency, so that an increase of currency cannot, _even temporarily_,
+very greatly increase trade. In ordinarily good times practically the
+whole community is engaged in labor, producing, transporting, and
+exchanging goods. The increase of currency of a "boom" period cannot, of
+itself, increase the population, extend invention, or increase the
+efficiency of labor.[229] These factors pretty definitely limit the
+amount of trade that can reasonably be carried on. So, although the
+gains of the enterpriser-borrower may exert a psychological stimulus on
+trade, though a few unemployed may be employed, and some others in a few
+lines induced to work overtime, and although there may be some
+additional buying and selling which is speculative, _yet almost the
+entire effect_ of an increase in deposits must be seen in a change in
+prices. Normally the _entire_ effect would so express itself, but
+transitionally there will be also _some_ increase in the Q's." (Pp.
+62-63. Italics mine.)
+
+Fisher is here exceedingly uncompromising, even where transitional
+periods are concerned, and it is not necessary, in order to do his
+position full justice, to make much distinction between "normal" and
+"transitional" effects in my counter-argument. I shall, however, take
+account of the distinction as I proceed, in justice to other, more
+moderate, quantity theorists.
+
+It is a familiar doctrine that the quantity of money is irrelevant, that
+things go on in much the same way whether money is abundant or scarce,
+the only difference being that in the one case prices are high and in
+the other, low; that, in particular, it is a gross fallacy to connect
+the rate of interest with the amount of money, since (as many writers
+would put it) the rate of interest depends on the amount of _capital_
+rather than _money_. At the opposite extreme, we have writers like
+Brooks Adams (_Law of Civilization and Decay_), who see the fate of
+nations and the progress of civilization resting on the abundance or
+scarcity of money. Fisher takes the first position in its extremest
+form.[230]
+
+The truth, I think, is intermediate. The effects of the New World
+discoveries of gold and silver after the voyage of Columbus on trade and
+industry were tremendous. Trade was enormously increased. Walker, in his
+_Inter__national Bimetallism_,[231] asking, from the standpoint of a
+quantity theorist, why prices only increased 200% while money increased
+470%, admits that the chief reason was the increase in trade, due in
+large part to the very increase in money itself. Sombart, in his _Der
+Moderne Kapitalismus_,[232] finds in this influx of money a tremendous
+source of capitalistic accumulations, (a) for the Conquistadores, (b)
+for the handicraftsmen whose prices rose faster than their costs, (c)
+for tenants whose rents were fixed in money, (d) for landowners, whose
+rents were fixed in kind [a point not obviously true], and (e) for
+bankers, as the Fugger. An increase of capital, savings that would
+otherwise not have been made, must have profoundly modified the whole
+industrial system, and greatly increased both industry and commerce. If
+it be objected that effects of this sort are not usual, that they came
+in a world which had been starved for money, and which, by means of the
+enormous increase in money was able to pass from a "natural" to a money
+economy, I reply that the difference between such a case and the usual
+effects of an increase of money are in degree rather than in kind. The
+world of Columbus' day was in part on a money economy, and the world
+to-day, despite Professor Fisher's emphatic denial,[233] still employs a
+great deal of barter, or equivalents of barter. I shall revert to this
+point later. But even this consideration would not rob Sombart's points
+of their significance for modern conditions. Further, we have an even
+more striking case, on Walker's own showing, in the effects of the
+Californian and Australian[234] gold discoveries in the 19th Century on
+trade, industry, and speculation.[235]
+
+Nor is the tremendous agitation over bimetallism, involving a literature
+so great that no man could dream of reading it all, involving great
+political movements, Presidential campaigns, great Congressional
+debates, repeated legislation, international conferences, etc., for
+twenty years, to be explained on any other ground than that the world
+felt practical, important, and unpleasant effects on industry and trade
+from the inadequacy of the money supply.
+
+The view of Hartley Withers[236] is interesting here. He says: "any such
+great addition to currency and credit would have a great effect in
+stimulating production, and so would lead to a great addition to the
+number of real goods which humanity desires and consumes when it can get
+them.... Trade would be more active." On p. 23 he speaks of the enormous
+expansion of trade made possible by paper representatives of gold. On p.
+83 he speaks of the attitude of the money-market toward gold, which the
+orthodox economist is apt to think of as a survival of Mercantilism.
+Withers thinks that the money market is right in a large degree.
+
+As illustrating Withers' statement about the views of "practical men" on
+this point, the following extract from a recent address by Theodore
+Price, quoted with approval in a "market letter," written by Byron W.
+Holt,[237] is interesting: "The fact seems to be that the exigencies of
+war in Europe are leading to an extension of credit such as would not
+have been possible in peace, because the hesitant conservatism of
+bankers would have then prevented it, and we are finding that instead of
+working harm it is doing good, because huge masses of fixed capital are
+thereby made productive, and are circulating with the increased velocity
+that always quickens enterprise and accelerates the wheels of
+industry.... All the precedents of history indicate that accelerated
+activity will come with peace and continue until the exuberance of
+success has led men to build faster than the world has grown and to
+demand credit upon the basis of future rather than of present values."
+
+What is the essential causation in the matter? Well, viewed merely as a
+matter of mechanical equilibration, the quantity theory view is not
+strictly true, by any means. For a given country--and Fisher's quantity
+theory is always a theory for a given country, and, indeed, for any
+separate market, even a single city[238]--an increase of banking credit
+means an increase in non-monetary capital, because, to a greater or less
+extent it dispenses with the use of gold, which goes abroad, bringing
+back wealth in other forms in exchange. Adam Smith saw this clearly,
+and phrased it strikingly, likening gold and silver coins to the
+wagon-roads of Scotland, which are necessary for transportation, but
+which none the less prevent the use of the roadways for raising grain;
+whereas bank credit is like a wagon-road through the air, which restores
+the roadbeds to cultivation. Increased non-monetary capital, other
+things equal, should mean increased trade.
+
+But, more fundamentally, an increase in gold itself within the country,
+if not bought by the export of an equivalent amount of other goods, _is
+an increase of capital_. Not all capital is money, but standard coin is
+capital. Money is a tool of exchange, and exchange is part of the
+productive process. More money means more exchanging. That is what money
+is for. Part of the mechanism is in the money rates, which go down as
+money becomes more abundant, making it profitable to effect exchanges
+which would not have been profitable had the money rates been higher.
+Granted that the money-rates and the general rate of interest tend, in
+the long run, to keep--I will not say at the same figure[239]--a certain
+fairly definite relation to one another, it still does not follow that
+the new "normal" equilibrium will give us an interest rate which is the
+same as the general rate of interest was before the influx of gold. On
+the strictest static theory, this is not to be expected. Because the
+total amount of capital in the country is increased, and this means a
+lowered interest rate all around, in the marginal employment of capital.
+The margin of the use of capital will be lowered everywhere, including
+the margin for the use of money. This means permanently lowered money
+rates in the country, even though the permanent level be higher than the
+initial money rates immediately following the access of new gold. I
+have put the argument in terms that suggest the productivity theory of
+interest, because it is more simply stated that way. I do not accept the
+productivity theory, as a fundamental explanation of interest, but for
+many purposes, the results to be obtained by it coincide with the
+psychological time theories,--which also, in their present form, seem to
+me imperfectly developed. I need not try to construct a theory of
+interest here, however, as the familiar theories lead to no trouble at
+this point. It is enough to point out that the increased amount of
+capital, meaning better provision for present wants--wants concerned
+with gold in the arts and with money for productive exchanges, as well
+as goods generally since part of the new gold will be exported for other
+things--will lessen the pressure of present as compared with future
+wants, and so lessen the rate of interest on the time-preference theory.
+The final outcome will be an extension of the marginal use of money, and
+a greater volume of exchanges. Of course, the increase in the supply of
+any kind of capital good, apart from a prior increase in the demand for
+its services, will, on the mechanical view of economic causation,
+necessarily lead to some fall in its capital value. Gold money will be
+no exception to this rule. As to how much the increase in its quantity
+will lead its capital value to fall, however, we are unable to say. For
+the quantity theory, the fall will be in proportion to the increase. For
+the theory just outlined, the fall will depend on the elasticity of
+demand for gold in the arts, and on the elasticity of "demand" for
+money, meaning by demand for money simply the demand for the short-time
+use of money as a tool of exchange, a demand which governs _directly_,
+not the capital value of money, but rather the "money-rates." The
+relation between the money rates and the capital value of money will
+best be discussed at another point.[240] We have no reason at all to
+suppose that either of these demands[241] exhibits the tendency to obey
+the law of proportional variation which the quantity theory requires of
+money.
+
+It is further important to note that as a country gets more abundant
+capital, there seems to be a tendency to extend the use of money rather
+more than the use of many other capital goods. Where the interest rate
+is 10 and 12%, as in Arizona and New Mexico, money, even when brought
+in, tends to leave in large degree to bring in other forms of capital
+which the situation calls for more imperatively. The early American
+colonies, needing money pressingly, and making shift with a great
+variety of substitutes for good metallic money, thoroughly acquainted
+with the advantages of a money-economy from their European experience,
+and having "habits" as to the carrying and using of money which they had
+brought with them from Europe, still found it impossible to keep a great
+deal of metallic money, in view of the still greater importance of other
+forms of capital. It is in the most highly developed commercial
+communities, commercial centres, and _par excellence_, in the
+speculative centres, that the demand for the money-service is most
+elastic.[242] A country where the rate of interest is low, loses other
+forms of capital, and gains money, in the process of reëquilibration, as
+compared with a new and undeveloped section, although the new section
+also extends the margin of the money service, in effecting a greater
+number of exchanges, when money is increased.
+
+And this leads to a vital distinction, which quantity theorists almost
+always lose: the distinction between the volume of _production_, and
+the volume of _trade_. Even in the mechanical system of causation which
+they describe, it is true only of production and transportation that
+_technical_ and _physical_[243] factors are of primary significance, and
+that money is of minor significance. For trade and commerce, money is
+always highly important. To the extent that a region is primarily given
+over to the primary productive activities, mining, and agriculture, such
+trading as is necessary can be done by means of a small amount of money,
+supplemented by barter and long-time book-credit. A region or a city
+whose chief business is _commerce_, however, needs a large part of its
+capital in the form of money, and of banking capital, which is largely
+invested in money for banking reserves. _Trade_, as distinguished from
+industry (and it is after all trade that is under discussion), is helped
+or hindered as its tools are more or less abundant. These considerations
+would suggest that the elasticity of the demand for the use of money is
+greater than the elasticity of demand for the use of capital in almost
+any other form. Production is, indeed, limited by labor supply and
+natural resources, in considerable degree. _Trade_,[244] however, even
+from the standpoint of mechanical causation, is limited chiefly by the
+relation between the profits to be made in commercial transactions, and
+the "price" that must be paid for the money and credit that are required
+to put them through. There are enormous numbers of transfers that could
+be made to advantage if there were no cost at all involved. They are not
+made, because exchanging requires pecuniary capital. Let the pecuniary
+capital increase, however, and sub-marginal exchanges become worth
+while, the general margin is lowered. Commerce is the most highly
+flexible and elastic portion of the whole productive process. The
+elasticity of demand for commercial capital is, thus, greater than the
+elasticity of demand for any other form of capital.
+
+How widely the volume of trade differs from the volume of production,
+and how great is the element of speculative transactions in trade, will
+best appear, I think, from an analysis of the figures which Fisher
+gives[245] for the volume of trade in the United States. His figure for
+the volume of trade in the year 1909 is $387,000,000,000.00, three
+hundred and eighty-seven billions of dollars! This figure is reached by
+equating the figures he has reached for MV plus M´V´ to PT, and assuming
+P to be one dollar, by making the "unit" of T, arbitrarily, a dollar's
+worth of each sort of commodity, at the prices of 1909. I have already
+commented on the legitimacy of this method of summarizing T,[246] and
+need not say more here, beyond calling attention to the fact that
+"volume of trade," as commonly used, does in fact mean, not T alone, but
+PT. Fisher for years other than 1909, however, makes use of a different
+method of getting at T: he takes certain indicia of _relative_ amounts
+of trade, compares them with the same indicia for 1909, and estimates
+the trade for other years as being such a percentage of the trade for
+1909 as their indicia are of the indicia of 1909. The indicia chosen
+are: (1) quantities of certain commodities, cotton, fruit, cattle, etc.,
+_received at_ principal cities of the United States, taken as typical of
+the variations of the internal _commerce_ of the United States; (2)
+quantities of 23 articles of import and 25 articles of export, for each
+year, taken as typical of variations in the foreign trade of the United
+States; (3) sales of stocks. These three indicia, weighted in a manner
+to be described in a moment, are then averaged. There is a second
+element in the index, made up by taking the figures for railroad
+_tonnage_, and the figures for _receipts on first class mail_, which are
+averaged. The first average and the second average are then combined
+into a third average, which is the final index. The relation between
+this index for every year other than 1909 and the same index for the
+year 1909 determines the amount of T for each year--the two indicia,
+together with the figure, $387,000,000,000.00, giving the required
+amount by the "rule of three." I shall not go into details with the
+method of constructing these averages, but I wish to make clear the
+comparative _weight_ given to each element in the final index: The first
+three elements count _twice_ as heavily as the last two, and so
+constitute the biggest factor. In the first average, based on the first
+three elements, the item taken as typical of internal trade is _weighted
+by 20_, the item taken as typical of foreign trade is _weighted by 3_,
+and sale of stocks _by 1_. It appears from Fisher's figures (p. 479),
+that the one really big _variable_ among all the indicia is the sale of
+stocks, but the weight given it is so small that it makes virtually no
+difference in the final result. Thus, as between 1898 and 1899, stock
+sales increased over 50%, but total trade, as shown by Fisher, increased
+only 5%. In the following year, stock sales _decreased_ over 21%, but
+total trade, on Fisher's figures, _increased_. The following year, 1901,
+stock sales virtually doubled, but Fisher's final figure shows only an
+increase around 13%. Two years later, in 1903, stock sales fell off
+about 40%, from the figures for 1901, but again, as compared with 1901,
+total trade on Fisher's figures shows an appreciable gain. The influence
+of stock sales on Fisher's index is, virtually, negligible. The
+dominating factor is the _receipts_ of selected staples, cattle,
+cotton, rice, pig iron, etc., in the principal cities of the United
+States. There is not a _single year_ in which his final figure for T
+does not move in harmony with this factor (p. 479). He gets, thus, for
+the volume of trade through the fourteen years under consideration, a
+surprising steadiness, and a pretty uniform progressive development.
+
+In defence[247] of his method of weighting, Fisher says, simply: "These
+weights are, of course, merely matters of opinion, but, as is well
+known, _wide differences in systems of weighting make only slight
+differences in the final averages_." (Italics mine.)[248]
+
+Are these figures valid? Well, first one is struck with the absolute
+magnitude assigned to T. The figures seem vastly greater than would have
+been anticipated. The method of calculating it, for 1909, I shall
+discuss in detail in the chapter on "Statistical Demonstrations of the
+Quantity Theory." For the present, it is enough to note that the
+absolute magnitude is derived from figures collected by Dean David
+Kinley for the National Monetary Commission,[249] of deposits, exclusive
+of deposits made by one bank in another, made in about 12,000 banks (out
+of 25,000) on March 16, 1909. These deposits were classified as (1)
+money (with subdivisions) and (2) checks and other credit instruments. A
+cross-classification divided them into (1) retail deposits; (2)
+wholesale deposits; (3) all other deposits. Kinley's object was to
+determine the extent to which checks are used, as compared with money,
+in payments, particularly in wholesale and retail business. Fisher's
+total, briefly, was obtained as follows: Kinley's figures, for the one
+day, were increased to make an allowance for the non-reporting banks;
+they were further increased on the assumption that March 16 was below
+the average for the year; the figure finally obtained for the day was
+then multiplied by 303, assumed as the number of banking days in the
+year, and the product, 399 billions, was taken as representing the total
+circulation of money and checks in trade. For some reason not made
+clear, this total was subsequently reduced to 387 billions. Counting the
+average price, P, as $1, T was considered to be 387 billions.[250]
+
+In the statistical chapter to follow, it will be shown that this
+estimate is a very decided exaggeration. Deposits made in banks greatly
+overcount trade. Very many payments represent duplications, loans and
+repayments, taxes, etc., and are in no sense trade. This is true of all
+classes of deposits, wholesale and retail, as well as "all other." But
+for the present, I am concerned with the question, not of the absolute
+magnitude of the volume of trade, but rather, the questions of its
+character, of the elements that enter into it, and, above all, of the
+extent to which it is physically determined by technical conditions of
+production, and the extent to which it is flexible, a matter of
+speculation, etc.
+
+We may approach this question from the angle of several bodies of
+statistical information. First, the question may be raised: what is
+there in the country which could be bought and sold enough in the course
+of a year to give us anything like so great a total? The subtractions
+which we shall find it necessary to make will still leave us an enormous
+total.
+
+The United States Census Bureau[251] in 1904 reached the conclusion that
+the _total wealth_ of the country was only $107,000,000,000. Of this,
+over $62,000,000,000 was in real estate; $11,000,000,000 in railroads;
+street railways, over $2,000,000,000; telephone, telegraph, water and
+light, and similar enterprises total nearly $3,000,000,000 more. None of
+these things enter into ordinary wholesale and retail trade. The items
+that one would ordinarily think of are agricultural products,
+$1,900,000,000; manufactured products, $7,400,000,000; mining products,
+$400,000,000. Can these things be exchanged often enough in the course
+of a year to account for $387,000,000,000!
+
+These figures are for 1904,[252] whereas Fisher's figures are for 1909.
+If the Census Bureau had taken an inventory in 1909, the figures would
+doubtless be larger. The inventory for 1912 made by the Census Bureau
+does show a very considerable increase, the largest item being due to a
+rise in real estate values. The figures for agricultural, manufacturing,
+and mining products are, also, figures for a given time rather than for
+total production through the year. But, making all the allowance one
+pleases, it is quite incredible that one should reach a figure of
+$387,000,000,000 by taking only the exchanges necessary to bring raw
+materials through the various stages of production to the consumer. The
+greater part of the $387,000,000,000 is to be explained in another way!
+
+A detailed analysis of Kinley's figures, on which the estimate of total
+trade is based, leads clearly to the same conclusion. Kinley's figures
+for the banks that reported on March 16, 1909, are as follows:
+
+ Retail deposits 60 millions
+ Wholesale deposits 124 millions
+ "All other" deposits 502 millions
+
+The "all other deposits" are vastly greater than retail and wholesale
+deposits combined! Notice, too, with reference to the question as to how
+often goods need to be turned over in getting to the consumer: wholesale
+trade uses only about twice as much money and checks as does retail
+trade. Goods are not, if these figures are in any way typical of actual
+trade, turned over many times in the process of reaching the consumer.
+The "necessary," or "physically determined" number of exchanges, in the
+routine of trade, is small, per item.
+
+Retail deposits of 60 millions make up less than one-eleventh of the
+total. Retail and wholesale deposits together make up about
+three-elevenths. What is the other eight-elevenths, represented by the
+"all other deposits"? It will help if we see where these "all other"
+deposits are located. If we find them scattered evenly throughout the
+country, in rural regions as well as in cities, we might be at a loss.
+If, however, we find them bunched in the big speculative centres, we may
+conclude that speculation accounts for a large part of them. We do in
+fact find this.
+
+The following figures show the different classes of deposits (1) in the
+South Atlantic States; (2) in reserve cities; (3) in New York City
+alone:
+
+ _South Atlantic States:_ _Per Cent._
+
+ Retail deposits $ 3,300,000 19.0
+ Wholesale deposits 4,900,000 29.0
+ "All other" deposits 8,900,000 52.0
+
+ _Reserve Cities (including New York City):_
+
+ Retail deposits $ 24,000,000 5.6
+ Wholesale deposits 78,000,000 18.2
+ "All other" deposits 326,000,000 76.1
+
+ _New York City:_
+
+ Retail deposits 9,000,000 3.7
+ Wholesale deposits 34,000,000 14.0
+ "All other" deposits 198,000,000 82.2
+
+It is difficult, with Kinley's figures, to get figures which exclude
+returns from cities of substantial size, except for a State like Nevada,
+where the mining and divorce industries complicate the figures. As near
+an approach as can be made, perhaps, is to take the State of Louisiana,
+excluding New Orleans from the totals. Even here, however, we include
+five cities of over ten thousand, among them Shrevesport, with 28,000
+people. The following figures are for the State and national banks in
+Louisiana, exclusive of New Orleans:
+
+ Retail deposits $179,915 24.1
+ Wholesale deposits 246,647 33.1
+ "All other" deposits 318,915 42.8
+
+We cannot tell, in these figures for Louisiana, how many banks are
+represented, or what the average figures per bank are. For the whole
+State of Arkansas, however, including five cities of over 10,000, with
+two over 20,000, and one of 45,000, we can get an average for ninety
+reporting banks. Even here we do not know where these banks are located
+within the State; though it is probable that they are in the larger
+places, and so exceed the average deposits for the banks in the State as
+a whole, to say nothing of the average for the smaller places. The
+ninety banks are almost wholly State and national banks.
+
+ _Arkansas:_ _Per Cent._
+
+ Retail deposits $232,017 25+
+ Wholesale deposits 231,614 25+
+ "All other" deposits 456,544 49+
+
+The average for all deposits, per bank, in Arkansas is $10,224; the
+average for all the 11,492 banks reporting for the whole country is,
+approximately, $60,000; the average for the 659 banks reporting from New
+York State is $502,136; the average for the banks in New York City alone
+is doubtless much higher, but cannot be stated, as Kinley's figures do
+not tell how many banks reported by cities.[253]
+
+The "all other deposits" in Arkansas are 27.8% cash, and 72.2% checks;
+the "all other" deposits in the country as a whole are only 4.1% cash,
+with 95.9% checks; the "all other deposits" of New York City are only 1%
+cash, with 98.9% checks.
+
+Several facts are very clear from these comparisons: (1) the proportion
+of "all other deposits" increases very rapidly as we get closer to the
+great centres of speculation, and is lowest in rural regions; (2) the
+great bulk of all the deposits is in the cities. The average for
+Arkansas banks, for example, is only one-sixth the average of the whole
+country, and is only one-fiftieth the average for the banks of New York
+State. It is a much smaller fraction of the average for New York City,
+but we cannot give an exact figure. The totals reported from the rural
+regions are trifling, as compared with the totals reported from the big
+cities. This, as will be made clear in the chapter on "Statistical
+Demonstrations of the Quantity Theory," is not because the country
+reports were less complete that the city reports. New York was probably
+less complete than the country as a whole. It is simply because the
+activity of country accounts is small, the amount of trading in the
+country districts small, and (as shown) the _average_ for country banks
+is small. (3) The character of the "all other" deposits in Arkansas
+differs substantially from that of the "all other" deposits in New York
+City, as indicated by the fact that the proportion of cash is high in
+Arkansas--substantially higher, in fact, for the "all other" deposits in
+Arkansas than for all deposits, or even for retail deposits, in the
+country as a whole. The percentage of checks in total retail deposits in
+the United States, in Kinley's figures, was 73.2; the percentage of
+checks in the "all other" deposits in Arkansas was 72.2. We may count
+these Arkansas "all other" deposits as, in considerable degree, deposits
+made by farmers. What were the "all other deposits" made in New York
+City?
+
+Dean Kinley's list of the miscellaneous elements that enter into the
+"all other deposits," given on p. 151, contains only two that might be
+expected to bulk large in New York without appearing in Arkansas. These
+are: _brokers_, _and stock and bond financial corporations_. Of course,
+theatres, hotels, publishing houses, railroads, public funds, "those
+who have no specific business," and rich churches, will all be
+absolutely much larger in New York City than in Arkansas. But these
+things may be found in many places, scattered throughout the cities of
+the country, without making anything like such "all other" deposits as
+New York shows. It is not New York's foreign commerce that does it,
+because that is represented in New York's "wholesale deposits," which
+make up only 14% of New York City's total deposits for the day. It
+cannot be the supposed "clearing house" function of New York City,[254]
+whereby banks in different parts of the country pay their balances due
+one another in New York exchange, because such transactions would appear
+in New York chiefly in the figures for deposits made by one bank in
+another, and these figures are excluded from Kinley's totals. It cannot
+be the deposits of the "idle rich" for current expenses that swell New
+York's "all other deposits" so greatly--these could not equal the total
+retail deposits of the city, which are only 3.7% of the total in New
+York. Moreover, similar deposits are made in many other cities, without,
+in proportion to population, making any such totals. Figures, moreover,
+for the aggregate yearly income of the United States, and for the
+distribution of that income between rich and poor, make it clear that
+any such items must be bagatelles in comparison with these enormous
+figures. The only explanation that will really explain is the
+speculative and investment and financial transactions that centre in New
+York, and, in less degree, in the other great financial cities of the
+country.
+
+This is Dean Kinley's opinion. In the "all other" deposits he makes a
+50% allowance for speculative transactions. "A large proportion of
+deposits in this 'all others' class undoubtedly represents speculative
+transactions, all of which, or practically all of which, are settled
+with credit paper."[255] It is also the opinion of General Francis A.
+Walker, expressed concerning similar figures from earlier
+inquiries.[256]
+
+Various kinds of evidence converge toward this conclusion. Thus, the
+evidence of clearings, total items presented by banks to the clearing
+houses of the country. New York clearings are usually nearly twice as
+great as total clearings for the rest of the country. New York clearings
+fluctuate in general harmony with transactions on the New York Stock
+Exchange. This has been commented on many times. The extent to which it
+holds has recently been carefully measured by Mr. N. J. Silberling,
+whose results appear in the _Annalist_ for August 14, 1916, under the
+title, "The Mystery of Clearings." Mr. Silberling applies the
+"coefficient of correlation" to the problem, getting in one significant
+figure a measure of the extent to which two variables, as share sales on
+the New York Stock Exchange and New York clearings, vary together. This
+coefficient has been used enough by economists not to require detailed
+explanation here. It is a figure always between +1 and -1. +1 indicates
+that the two variables in question are perfectly correlated, whereas 0
+indicates no correlation whatever. -1 indicates an inverse correlation,
+such that two variables vary exactly and inversely with reference to one
+another.[257]
+
+Mr. Silberling's studies show the following correlations: New York share
+sales (numbers of shares, not values) to New York clearings, using
+weekly figures, for the years 1909-10, r = .628. This is a high
+correlation. Limiting the observations to the middle weeks of the month
+for the same period, he gets r = .731(46). The reason for taking only
+middle weeks in the month is that thereby the disturbing factor of
+monthly settlements is avoided. The monthly settlements may be for stock
+transactions, or may be for other things, but as they are not dependent
+on the stock transactions _of the week_ in which they occur, their
+effect is to lessen the evident degree of connection between stock
+sales and clearings. Thus the middle weeks show a closer correlation
+between the two variables than do all the weeks taken as they come. If
+figures for the month were taken, this complication would be smoothed
+out, and a fairer result might be expected to appear. The middle weeks,
+eliminating monthly settlements, probably eliminate more other things
+than they do share sales (which are in large degree paid for in 24
+hours[258]), and so exaggerate somewhat the relation between shares and
+clearings. Monthly figures avoid both complications, though they lose
+something of the concrete causation. An intermediate figure might be
+expected for the monthly correlation, and this we find: r = .718(23).
+
+A striking single fact in connection with these figures, giving them
+point as less extreme variations could not do, is found in the behavior
+of clearings when the Stock Exchange was closed, during the crisis of
+1914. At that time, New York clearings, which had been about twice as
+great as country clearings, fell suddenly _below_ country clearings.
+When the Stock Exchange was opened, the old proportions suddenly
+reappeared.
+
+That speculation spreads far beyond New York, New York being the centre
+for dealings in securities, etc., which involve the whole country, is,
+of course, well known. The extent of this Mr. Silberling seeks to
+measure by correlating clearings outside New York with New York share
+sales. His weekly correlation for these two variables for 1909-10 gives
+r = .368(103), and the correlation for the mid-weeks gives a higher
+figure, r = .424(46). The monthly correlation shows r = .257(23), a
+lower figure, "which is perhaps due in part to the fact that the bulk of
+the outside monthly clearings show relatively moderate fluctuations,
+because of their diverse composition, and are less sensitive than the
+periods of shorter length."
+
+Seeking an index of the variations of that trade which is, in Professor
+Fisher's phrase, governed by "physical capacities and technique"--a law
+which Professor Fisher,[259] as we have seen, would apply to the great
+total of 387 billions which he has constructed--Mr. Silberling chooses
+the gross earnings of the principal railways as the best available test.
+Railways deal with all manner of other enterprises. He correlates this
+with clearings outside New York. "The question might arise at once
+whether changes in traffic are strictly concomitant with changes in
+payments involved by it, and therefore with the clearings resulting. The
+preliminary hypothesis that a 'lag' ensued between traffic and the bulk
+of the payments was first tested by correlating the railway figures with
+clearings of one month[260] and two months later, but no correlation was
+obtained. The direct month-to-month correlation yielded, however, a
+result r = .524(23)." This suggests that outside clearings are, in
+substantial degree, an index of physical trade, but Mr. Silberling calls
+attention to certain chance agreements between railway traffic and
+speculation in cotton and produce and grain, speculation in the crops
+which are in current movement, and regularly recurring concomitances
+between traffic and speculation in March, when the railway traffic
+revives after the February lull, and when there is a large mass of
+dealing in Spring deliveries in Chicago. In view of the facts later to
+be developed, with reference to the small actual value of the necessary
+physical exchanges (partially covered already) as compared with
+clearings, this query is well put. We may easily have here a "spurious"
+correlation. Taking it at its face value, however, and taking the
+correlation as indicating the influence of physical trade on bank
+transactions, we get the following results, when _total clearings for
+the country_ are compared with (a) New York share sales, and (b) with
+railway gross earnings: (a) r = .607(23); (b) r = .356(23). "Physically
+determined trade" is at best a minor factor in that total "trade"
+represented by bank transactions!
+
+Mr. Silberling has buttressed his results with a consideration of
+various alternative possibilities which might give them a different
+interpretation. I need not, for present purposes, go further into his
+figures.[261] Taken in conjunction with the other data presented, and to
+be presented, together with the theoretical discussion of the nature of
+trade, and its relations to money and credit, which the present volume
+contains, they give the present writer abundant confidence in the thesis
+that the great bulk of trade in the United States is SPECULATION, rather
+than that sort of trade which is determined "by physical capacities and
+technique."
+
+The figures given above, of the inventory of wealth at a given moment of
+time, by the Bureau of the Census, show only trifling magnitudes, as
+compared with the estimated 387 billions of deposits made in 1909, of
+items which could enter into ordinary trade, as distinguished from
+speculation and dynamic readjustments. An effort to calculate ordinary
+trade on the basis of figures running through the year may throw further
+light on the problem. Railway, gross receipts for the year ending June
+30, 1909, were less than two and a half billions. This is six-tenths of
+1% of the total. Receipts of the Western Union Telegraph Company were
+$30,451,073--less than one-hundredth of 1%. The Post Office in the
+fiscal year ending in 1909 took in $203,562,383. This is something over
+one twentieth of 1%. These are gigantic sums. But they are insignificant
+indeed in this computation. Millions of smaller items simply do not
+count at all--ten million items of $387 each would give only 1%. The
+total net income of the United States, as estimated by W. I. King for
+1910, including all forms of income, dividends, interest, wages, rents,
+profits, salaries, etc., is $30,500,000,000[262]--around 7% of the 387
+billions.
+
+Let us sum up the major items of ordinary trade. From Kinley's figures,
+we may get some idea of the proportions of wholesale and retail trade to
+the total for 1909, assuming that the deposit figures indicate that
+total. Retail deposits make up less than one-eleventh of the total, and
+wholesale deposits about two-elevenths. The figures were: retail, 60
+millions, wholesale, 124 millions, and "all other," 502 millions. But
+the "all other" deposits were lower than normal. New York City was, in
+the first place, probably less complete than the rest of the country, in
+the figures returned, and, in the second place, New York City, as shown
+by the clearings of March 17 (the next day, when checks deposited in New
+York would get into the clearings) was 28% below normal. The rest of the
+country was within 3% of normal.[263] Not to refine matters too much, we
+shall, on the assumption that the variable element in New York deposits
+is connected with the Stock Exchange (as shown by Mr. Silberling's
+correlations and other considerations), and on the assumption that
+deposits connected with the stock market appear in the "all other"
+deposits, add a little over 20% of New York's total of 198 millions, or
+40 millions, to the "all other" deposits for the country, leaving the
+wholesale and retail deposits unchanged. What error there is in this is
+favorable to the wholesale and retail deposits. Our proportions, then,
+are: retail, 60, wholesale, 124, "all other," 542, total, 726. If the
+retail deposits correctly represented retail trade, we could then say
+that retail trade was a little less than one-twelfth of the whole, and
+wholesale trade about one-sixth. But there are many speculative
+transactions engaged in by wholesalers, and a good many by retailers.
+The writer knows a small delicatessen dealer on Amsterdam Avenue, in New
+York, who frequently speculates in eggs and canned goods. A colleague in
+the Harvard Graduate School of Business Administration is authority for
+the statement that speculation in canned goods and some other things is
+quite common among retailers, particularly "hedging" by the use of
+"futures," in canned goods. Speculation among wholesalers is very
+extensive. The same is true of manufacturers. The same authority cited
+some cotton manufacturers whose profits from cotton speculation are
+greater than their profits from manufacturing. We shall see reason to
+suppose that a very substantial part of manufacturers' deposits were
+included in the wholesale deposits. That the figures for retailers'
+deposits exaggerate the retail trade may appear from several
+considerations: (1) The proportion of checks to cash reported is too
+high: 73.2%. Dean Kinley allows 5% of the checks deposited to be
+"accommodation checks,"[264] cashed for customers, rather than taken in
+in trade. (2) If retail deposits are taken as exactly representative of
+retail trade, we should get a retail trade for the year of over 32
+billions (1/12 of 387 billions), which would exceed the total income of
+the country as calculated by King for 1910. Dean Kinley reached the
+conclusion that the retail deposits reported in 1896 also exceeded the
+probable retail expenditures.[265] Of course, not all of retail trade is
+in consumption goods. Hardware stores, lumber stores, and some other
+retail establishments sell, not only to householders for domestic use,
+but also things which enter into further production, and so do not come
+out of annual income. If we include in retail trade various items which
+were not included there in Kinley's figures, such as hotels, theatres,
+newspaper receipts from subscription and street sales, physicians' fees,
+etc.--all those items which enter into the domestic budget, including
+domestic service, we should still not be justified in reaching a total
+as great as the total income of society, since there would then be no
+allowance for savings, which we should not count in trade, or for life
+insurance, which we shall count separately. The items sold at retail
+which enter into further production cannot make a great total, since
+large producers buy such things at wholesale. Total retail trade,
+therefore, and, in addition all the other items in the domestic budget,
+must be held below the figure for total national income. Suppose, to be
+very liberal, we allow 29 billions[266] for all these items, under the
+general head of "retail trade."
+
+For wholesale trade, if we take the figures at face value, the estimate
+would be 65-3/4 billions (124/726 of 387 billions, or 17% of 387
+billions). But we have seen that there is a great deal of speculation
+among wholesalers. Not all of their deposits, by any means, represent
+receipts from ordinary business. Moreover, there is much overcounting
+here, several checks being used for one transaction, especially where
+wholesalers have branch houses, and checks connected with loans and
+repayments, and transfers of funds from one bank to another. How much we
+should subtract for this there is no way to tell. In the case of retail
+figures, we have the additional check of the figures for total net
+income, but there is no such check here. We shall, therefore, make no
+subtraction, but shall content ourselves with pointing out that we are
+allowing many billions[267] to "ordinary trade" to which it is not
+entitled, which will much more than offset errors in the opposite
+direction which the reader may find in our computations.
+
+Do manufacturers' receipts from first sales belong in the wholesale
+deposits, or must they be counted as a separate item? Dean Kinley does
+not say. In his list of items, as reported by banks, that go in the "all
+other" deposits,[268] he does not mention manufacturers, and the item is
+far too important not to have been mentioned by so careful a writer had
+he supposed that it belonged there. If manufacturers' first receipts
+belong, not in the wholesale deposits, but in the "all other" deposits,
+then we should expect manufacturing cities to show a high percentage of
+"all other" deposits as compared with wholesale deposits. The city of
+Pittsburg should be a good test case. The figures there, for State and
+national banks and trust companies, are:
+
+ _Per Cent._
+ Retail deposits $1,061,420 9.6
+ Wholesale deposits 3,368,004 29.7
+ "All other" deposits 6,672,378 60.6
+
+For Pittsburg, the percentage of "all other" deposits is lower decidedly
+than the percentage for the country as a whole (about 75%), much lower
+than for cities where there is active speculation, as Chicago and St.
+Louis, to say nothing of New York, and is closer to the percentage of
+the South Atlantic States, 52%, than to the average for the country. The
+wholesale deposits of Pittsburg, however, rise to 29.7%, as against an
+average for the country of 17%. There is nothing in these figures to
+suggest that manufacturers' first receipts are exclusively in the "all
+other" deposits. I should think it safe to hold that a substantial part
+of them were included in wholesale deposits, and so already accounted
+for in our estimate. The total value of products manufactured in 1909
+was $20,672,051,870. I shall allow $5,672,051,870 of this to have been
+already accounted for in our estimate of wholesale trade, and count 15
+billions of it as a separate item. If there is an error here, it is very
+much more than offset by our failure to subtract anything from the
+wholesale figures for speculation. I think it probable that much more of
+the figures for manufactures should be assigned to the wholesale figures
+than I have assigned.
+
+To these figures, we may add a number of other items, absolutely great,
+but insignificant, in comparison with the 387 billions not only, but
+also with the figures for retail and wholesale trade already reached.
+These are: total farm value of farm products (not nearly all of which is
+sold off the farm) $8,760,000,000; total mineral products,
+$1,886,772,843; total mill value of lumber, $684,479,859; total life
+insurance premiums (much of which is savings, and in no proper sense
+trade), $748,027,892; total fire, marine, casualty and miscellaneous
+insurance, $362,555,850; total wages and salaries, $14,303,000,000;
+total land rent, $2,673,000,000;[269] and the items for railway gross
+receipts, post office, telegraph, already mentioned. The total of these
+items, together with retail and wholesale trade and manufactures, is
+$141,860,618,000. This is only 36.6% of the total of 387 billions. It
+leaves over 245 billions unexplained. What can the 245 billions
+represent? There is really no way in which ordinary trade can make up
+more than a very few more billions, so far as I can see. There remain no
+items as big as 1% of the total, and, as we have seen, small items, of
+hundreds of dollars each, are like "infinitesimals of the second
+order"--they simply do not count at all when such staggering figures are
+involved.[270]
+
+There remains, then, a total of 245 billions of check and money payments
+which are for something other than the ordinary trade of the country.
+What do these payments represent? Much of this total represents
+overcounting and duplications of various kinds, which we shall consider
+in a later chapter. Much of it also represents speculation and dealings
+other than speculative in securities. When we seek to find actual
+figures of transactions in any field, retail, wholesale, or speculative
+markets, or anything else, it is exceedingly difficult to find anything
+that approaches the amounts indicated by the banking transactions
+connected. I do not think that a record of all sales would show retail
+sales or wholesale sales anything like so great as the figures as we
+have allowed for them on the basis of the retail and wholesale deposits.
+When we look at the recorded figures of transactions on the speculative
+exchanges (or at estimates which competent observers make when records
+are not available), the figures, though very large, do not begin to
+equal the banking figures with which we have to deal. The New York Stock
+Exchange in 1909 showed sales, recorded on the ticker, of nearly 215
+million shares of stock, with an approximate value of over 19
+billions[271] of dollars. This was not an extraordinary year. In 1901
+nearly 266 million shares were sold, in 1905, over 263 millions, in
+1906, over 284 millions. A number of other years have approached the
+figures for 1909. If stock sales be a good index of general speculation,
+1909 is a very satisfactory year from which to have got figures, as
+showing neither extreme speculation, nor extreme dullness--which latter
+was the case in 1896 when Kinley's other big investigation was made. The
+figures for shares sold, however, do not exhaust the business done at
+the New York Stock Exchange. "Odd lots," _i. e._, sales of less than 100
+shares, are not recorded on the ticker. Mr. Byron W. Holt estimates that
+from 25 to 30% would be added if they were counted. DeCoppet and
+Doremus, of New York, who handle at least as much of the "odd lot"
+business as any other New York house, have given me the following
+information about the "odd lot" business: (1) the volume of odd lot
+sales is, roughly, from 20 to 25% of the volume of hundred share sales;
+(2) the odd lot business fluctuates in conformity to the hundred share
+market; (3) the odd lot speculator is just as likely to be a "bear" as
+is the hundred share speculator, and, in general, odd lot business is
+like the hundred share business. If we take the figure on which these
+two estimates agree, 25%, we may add 53-3/4 million shares to our 215,
+getting 268-3/4 million shares for 1909, with a value of about 24
+billions. Bond sales recorded would add about 1 billion more. There are,
+further, some unrecorded sales, indeterminate in amount, but sometimes
+very substantial, when brokers have a number of "stop loss" orders. They
+match these before the market opens, and, if the prices are reached in
+the actual trading, these sales become effective automatically, without
+getting on the ticker. How extensive this is cannot be stated. It may
+sometimes add very substantially.[272] Thus, on the floor of the New
+York Stock Exchange we have dealings in excess of 25 billions for 1909.
+This is nearly as large as the figure we have assigned, on the basis of
+the bank figures, to total retail trade of the country, and it may well
+exceed the retail trade in fact. Recorded sales on other stock exchanges
+do not, in the aggregate for the country, bulk very large. For 1910,
+when New York shares reached 164 millions, the total for Boston,
+Philadelphia, Chicago, and Baltimore was something over 21 million
+shares.[273] The New York Curb has had "million share" days, but the
+average value of shares is low. But the dealings on the floors on the
+exchanges and "curbs" are far from all of the dealings in securities!
+Only securities which have been admitted by the authorities are dealt in
+on the exchanges. The volume of unlisted securities is enormous.
+Moreover, not all, by any means, of the sales of listed securities take
+place on the floors of the exchanges. The bond expert of a large banking
+house in Boston informs me that the "over-the-counter" business in
+Boston, both for stocks and for bonds, much exceeds the business in the
+Boston Stock Exchange, and others among Boston brokers have expressed
+the same opinion. The statement has been repeatedly made in the
+financial press that of the bonds listed on the New York Stock Exchange,
+ten are sold over the counter for one sold on the floor. Evidence on
+this point is not to be had in definite figures, of course, but I have
+found no one in Wall Street who regards it as extravagant. A single big
+bank in New York sold $550,000,000 in bonds in 1911--more than half the
+recorded bond sales on the Stock Exchange.[274] I should not know how
+to estimate the volume of outside dealings within many billions of
+"probable error." If ten billions of listed bonds are sold over the
+counter in New York alone, we may well suppose that the volume of
+over-the-counter sales of listed and unlisted securities at least is not
+smaller than the recorded sales on the floors of the exchanges. But this
+is all guess work. There are no definite data.
+
+For produce, cotton, and grain speculation we have, in general,
+estimates rather than records. For the Board of Trade, in Chicago, there
+is one quite striking piece of information. That is that the Federal War
+Tax of 1 cent per hundred dollars on grain and provision futures on the
+exchanges produced $2,000,000 in Chicago alone in 1915.[275] For the
+purposes of the tax, deliveries within thirty days were counted, not as
+futures, but as "spot" transactions. The tax was collected almost wholly
+on grain. If the above figure is correct, then it is clear that dealings
+in these futures of over thirty days aggregated 20 billions of dollars
+worth. This gives no estimate of spot transactions, which are, however,
+very great. All this trading involved less than 400,000,000 bushels of
+grain received at Chicago--a little over a billion bushels were received
+at all primary markets. The grain received at Chicago was, thus, (at
+80 c. per bushel), sold sixty-two times over in these futures, and an
+unknown number of times in spot transactions. There are further enormous
+spot transactions in provisions of various kinds at Chicago.
+
+Chicago is the great centre, of course, for this kind of speculation in
+the United States. It may well be the world's chief market, so far as
+futures are concerned, though evidence to establish such a thesis is not
+at hand. London and Liverpool are gigantic centres of commodity
+speculation. But we have numerous cities in the United States where such
+speculation is very great. St. Louis, Kansas City, Minneapolis, New
+Orleans, and other cities are active speculative centres. New York,
+while small in its volume of grain and produce speculation as compared
+with Chicago, is the world's centre for cotton speculation, and the
+world's centre for futures in coffee, though yielding precedence to
+Havre, Santos and Hamburg,[276] ordinarily, in the volume of spot coffee
+transactions, and though handling only a very small amount of spot
+cotton. The volume of cotton sold in an ordinary year in New York is
+50,000,000 bales,[277] though only about 160,000 bales are ordinarily
+received there, in a year.[278] In the five years preceding 1909, the
+sales on the New York Coffee Exchange averaged over 16 million bags of
+250 pounds each.[279] In 1915, 32 million dollars were deposited as
+margins in connection with this speculation in coffee, and in ordinary
+years this runs from 25 to 30 millions, according to the Treasurer of
+the Exchange. The relation between the margins put up and the total
+pecuniary volume of trading is not indicated, but in most exchanges the
+actual depositing of margins is a small fraction of the pecuniary
+magnitude of the turnovers. Both the Cotton and the Coffee Exchanges are
+international centres. The Coffee Exchange now handles large
+transactions in sugar, also.
+
+Contacts between the organized exchanges and ordinary business are very
+numerous. Producers in every line who can do so protect themselves by
+"hedging" in the exchanges which deal in their raw materials. This is a
+commonplace, so far as millers are concerned. The writer has found
+millers in a town off the main lines of the railroads in Missouri who
+regularly sell short a bushel of wheat on the St. Louis Merchants'
+Exchange for every bushel they buy to grind. The business man who does
+not sometime take a "flier" in the market for other than hedging
+purposes is rare! But, apart from the organized markets there is an
+immense volume of speculation. If a wholesaler buys only what he can
+sell to retailers, it is not speculation. But if he buys in excess of
+the anticipated demands of his retailers, expecting to sell the excess
+at an advance to other wholesalers, he is speculating. If a farmer buys
+cattle to feed, he is not speculating, but if he buys them thinking to
+sell them at an advance in a short time, and does so, the transactions
+are speculative. The line is not easy to draw, in practice. Intention is
+shifting and uncertain. There is chance in every industrial, commercial,
+and agricultural operation. But for the point at hand, the test is
+simple: do more exchanges take place than are necessary, under the
+existing division of labor, to advance the materials of industry through
+the stages of production, and get things finally to the consumer? If so,
+the excess of exchanges is speculative. Trading between men in the same
+stage of production is speculation. It represents trading to smooth out
+dynamic changes, to bring about readjustments which would have been
+unnecessary had conditions really been static, and had the initial plans
+of enterprisers been adequate. Trading in anticipation of further
+trading with men in the same stage of production is speculative. This
+sort of thing, in the wholesale business, especially, is exceedingly
+common. This has been noted by Professor Taussig, and made by him an
+important point in the theory of crises. Dean Kinley[280] called
+attention to it as a matter of importance in connection with his
+investigation in 1896. The coming of cold storage, and the development
+of the canning industry have, I am informed by a colleague in the
+Harvard Business School, enormously increased this speculation among
+both wholesalers and retailers, and it is very important in most
+wholesale lines. There is short-selling in materials for construction
+purposes, and in metals, apart from organized exchanges, and, where
+possible, contractors in the building trade often protect themselves by
+means of future contracts with speculators who are selling short.
+
+Land speculation, in varying volume, is found in every part of the
+country. There is speculation in leases, in options on real estate, and
+in options on leases.[281] It may be noticed, too, that sales of
+"rights," of puts and calls and straddles, and other contract rights,
+are regular factors in the organized exchanges. Wherever profits are to
+be made by leveling values as between different places or different
+times, speculation arises, and, with dynamic change, this means
+everywhere, in every business, and all the time! The shifting of labor
+and capital from industry to industry, leveling returns to capital and
+labor, involves an enormous amount of trading that would not occur in a
+"normal equilibrium." Much of this the Stock Exchange does. That is what
+it is for. But much of it has to do with unincorporated industry, and a
+vast deal of speculative exchanging takes place to this end apart from
+the organized exchanges.
+
+Speculation in bills and notes, by note-brokers and particularly by
+dealers in foreign exchange, occurs on a large scale, and accounts for a
+great deal of the banking figures. This has nothing to do with
+physically determined trade. From the standpoint of Professor Fisher's
+"equation of exchange," it must be barred, if the contention that
+"trade" is determined by "physical capacities and technique" is to be
+adhered to. Speculation in demand finance bills is barred in any case,
+since "money against checks," and "checks against checks," are excluded
+by his definition.[282] But as an explanation of no small part of our
+unexplained 245 billions of dollars, these items must be brought in.
+They are "double counting" from the standpoint of Professor Fisher's
+equation. They are, however, speculation. An official in a great New
+York banking house, in charge of the foreign exchange department, writes
+that in times when exchange rates are fluctuating, enormous quantities
+of drafts on Europe will be bought and sold, during a period of a couple
+of weeks or months, whereas under other conditions such transactions
+might amount to little with the same volume of imports and exports. The
+part of this which is between banks, a very big item, would not count in
+the 245 billions, but to the extent that foreign exchange brokers
+outside the banks participate, their activity helps to explain our 245
+billions.
+
+If it be true that speculation, including all manner of readjustment to
+dynamic changes, makes up the overwhelming bulk of trade in the country,
+then Fisher's _indicia_ of variation in trade, weighted as they are, are
+totally misleading. The same is true of Kemmerer's _indicia_ of "growth
+of business."[283] These are: population, tonnage entered and cleared,
+exports and imports of merchandise, postal revenues, gross earnings of
+railways, freights carried by railways, receipts of the Western Union
+Co., consumption of pig iron, bituminous coal retained for consumption,
+consumption of wheat, consumption of corn, consumption of cotton,
+consumption of wool, consumption of wines and liquors, market values of
+reported sales on the New York Stock Exchange. Only the last of these is
+in any sense an index of speculation. It is swallowed up by being put on
+a par with the other fourteen items. Its influence on the final index,
+made by averaging the others is, as inspection shows, virtually _nil_.
+Out of the twenty-six years his figures cover, the general index moves
+counter to the share sales 14 times! Utterly random figures would have
+come nearer to the facts in the case. It is particularly striking that
+Professor Kemmerer, whose total figures, as Professor Fisher's, rest for
+their absolute magnitude on Kinley's investigation,[284] should assign
+89% of his estimated trade (183 billions in 1890) to wholesale
+commodities,[285] (with 3% to wages, and 8% to securities), when
+Kinley's figures show that wholesale deposits are a minor fraction of
+the total!
+
+The constancy in the figures of these two writers for trade from year to
+year, a general steady, upward growth, does indeed suggest that trade is
+determined "by physical capacities and technique," and that it does
+stand as a great, independent, inflexible factor, independent of money
+and deposits, constituting a real causal coefficient with them in
+determining prices. If, however, speculation is as big a factor as our
+analysis would indicate, then trade is a highly flexible thing, varying
+enormously from year to year, moved by a multiplicity of causes, among
+them _fluctuations_ in particular prices, and the ease and tightness in
+the money market--the quantity of money and deposits.
+
+But quite apart from speculation, it is not true that trade is a mere
+matter of physical capacities and technique, a passive function of
+production. Rather, one would almost have to reverse the relation.
+Production waits on trade!
+
+Production, as now carried on, is primarily conducted in the expectation
+of _sale_, and of profitable sale. Trade does not go of itself,
+automatically. Rather, it is a highly difficult matter, calling for the
+highest order of ability, and the labor of innumerable men. In general,
+I think it safe to say that in ordinary times, the manufacturer loses
+vastly more sleep over the question of how he shall market his output,
+than he does over the question of how he shall produce it. A clerk in
+the Westinghouse Air Brake Company, engaged in the accounting
+department, spoke recently to the writer of the "productive end" of the
+business. On inquiry, it developed that he meant the selling department!
+He stated that the manufacturing department also, in the language of the
+employees, in that corporation, would also be termed "productive," but
+that the selling department was _the_ productive department.
+
+If one reflects a little as to the proportion of "costs" that go into
+selling, as compared with technical "production," I think my point will
+be clearer. Advertising has developed so enormously that it needs little
+discussion. It has been stated that the "Sapolio" people once tried,
+after their reputation seemed thoroughly established, to stop
+advertising, with such disastrous results that very extraordinary
+efforts were required to reëstablish the brand. Number 2 wheat is not
+advertised, in the great magazines, but innumerable brands of flour get
+newspaper and magazine advertising,--some of them in such a periodical
+as the _Saturday Evening Post_, and even those which are locally
+consumed are commonly advertised in the local press. Nor is it only
+finished products, of the sort that must be sold to the fickle public,
+that involve these heavy selling costs. The writer has in mind a
+corporation producing a high-grade type of glazed retort, in the
+production of which it has virtually a monopoly, since the clay with
+which it is made does not coexist with the skill to make it in any other
+place. The particular product is an indispensable part of many important
+technical processes. Substitutes made of other clays, and by other
+companies, are known by the trade to be unsatisfactory. The buyers are
+all highly trained business men. Here, if anywhere, selling costs should
+be slight. But the chief selling agent of the corporation has found it
+necessary, in order to keep the business going, to incur huge expenses
+for entertaining his customers, finds it necessary to incur great
+travelling expenses, to use only the most expensive hotels, and,
+incidentally, to drink a great deal more than his personal inclinations
+would call for, in keeping the business for his house. I waive
+discussion of the extraordinary fees which a trust promotor makes, in
+effecting a consolidation of big business units,--a process of exchange.
+I am speaking now of the ordinary costs involved in ordinary trade. The
+army of travelling salesmen, the body of stenographers, who write
+letters, with various "follow-ups," in the effort to get more business,
+the growing complexities of such letter writing, in which all suspicion
+of "circularizing" must be allayed, one-cent stamps being absolutely
+taboo!--these things are the commonplaces of business. They are in the
+primers in the "commercial colleges" and "schools of commerce." Only the
+orthodox economist, with his doctrine of the impossibility of general
+overproduction, is ignorant of them!
+
+This feature of modern business has been much elaborated in a recent
+book which has not received the attention it merits--though its strength
+is rather in criticism than in constructive doctrine. I refer to
+Dibblee, _The Laws of Supply and Demand_.[286] Dibblee makes an
+interesting contrast between commercial and manufacturing cities,
+maintaining that the former necessarily outgrow the latter--a contention
+which London, New York, Chicago and other places strikingly illustrate.
+He presents a truly remarkable fact about London:[287] a recent report
+of the Commission on London Traffic states that there were in London 638
+factories registered as coming under the Factory Acts, with an average
+horse-power of 54. The total power employed within the London area under
+the Factory Acts, chiefly used in newspaper printing, was 34,750
+horse-power--just one-half of what is required for the steamship,
+Mauretania! This is the greatest city in the world. What do its millions
+do for a living?[288] The town of Oldham,[289] he asserts, with 100,000
+inhabitants, has spindle capacity enough to supply more than the regular
+needs of the whole of Europe in the common counts of yarn. To _market_
+the output of Lancashire, "the merchants and warehousemen of Manchester
+and Liverpool, not to mention the marketing organization contained in
+other Lancashire towns, have a greater capital employed than that
+required in all the manufacturing industries of the cotton trade."
+Accurate estimates of the proportion of "selling costs" to costs of
+technical production are doubtless impossible, for the general field of
+trade, and precision is unnecessary for my purposes. Dibblee's
+conclusion, after contrasting retail and wholesale prices, and analyzing
+the expenses incurred in selling prior to the wholesale stage, is that
+the cost of marketing is at least equal to "real cost of production,"
+occasionally only slightly below it, and often far above it (62).[290]
+If one considers how large the item of "good will" often bulks in the
+value of "going concerns"[291]--good will being in large degree often
+just a capitalization of prior costs of this nature--Dibblee's estimate
+need not be exaggerated. Trade connections, trade-marks that have
+reputation, etc., often represent enormous output in thought, work, and
+expense. Selling costs may, like other costs, be divided into "prime"
+and "overhead" costs. Some of the latter lead to long-time consequences,
+pay for themselves only in the long run. These may be "capitalized" in
+"good will."[292] Of course, not all good will is got at a cost. Much of
+it is adventitious.
+
+In the light of the doctrine that trade is independent of money and
+credit, one wonders why it should be thought necessary to extend
+branches of American banks to the South American markets which we are
+now reaching out toward. And why have Americans, from the beginning,
+been constantly increasing commercial banks?[293] It is easy to sneer at
+the efforts of the successive frontiers in our history to provide
+themselves with banks of issue as based on a delusion, the delusion that
+bank-notes are "capital," and to say that their real need was, not more
+bank-credit, but more real capital. They needed more tools and
+live-stock, doubtless, but is that the whole story? And were their banks
+of no assistance in getting the additional capital of various sorts? And
+was it a matter of no consequence that they had an abundant medium of
+exchange? It seems almost childish to put such questions, but the
+quantity theory has as its logical corollary that to multiply banks is
+quite useless and wasteful, since the only result is to raise prices. If
+increasing bank-credit cannot increase trade or production, this
+corollary is inevitable. Indeed, the case may be more strongly stated.
+Quite apart from the wasted labor of bank-clerks and the waste of
+banking capital, the effect of increasing bank-development, on quantity
+theory reasoning, is harmful. If increasing bank-credit is to raise
+prices without increasing trade, then, on quantity theory reasoning, it
+must _depress_ business. The reason is that rising prices in a given
+region make that region a bad place to buy in, and so curtail its
+exports. This is, indeed, the quantity theory explanation of
+international trade, to which attention is later to be given. The
+country which is expanding its banking facilities most rapidly will
+suffer most in competition in the world markets. This is why the United
+States have so little foreign trade! It also explains the rapid strides
+that China and Central Africa have recently made in capturing the
+world's markets. I submit that there is no flaw in this argument, if the
+premise of the independence of volume of trade and volume of bank-credit
+be granted. It follows from the quantity theory. That it is no
+caricature of Fisher's argument will appear, I think, from the following
+quotation,[294] which very nearly states what I have just been saying,
+though it does not draw the conclusion that banking is a bad thing: "The
+invention of banking has made deposit currency possible, and its
+adoption has undoubtedly led to a great increase in deposits and
+consequent rise in prices. Even in the last decade the extension in the
+United States of deposit banking has been an exceedingly powerful
+influence in that direction. In Europe deposit banking is in its
+infancy."[295] Happy Europe, troubled only by war! It is greatly to be
+hoped, in the interests of American agriculture, that the efforts to
+increase agricultural credit facilities will fail!
+
+We are driven to one of the most fundamental contrasts in economic
+theory, which appears under various guises and in different forms:
+statics _vs._ dynamics; transition _vs._ equilibrium, theory of
+prosperity _vs._ theory of goods; normal tendency _vs._ "friction."[296]
+Perhaps Professor Fisher, and the quantity theorist in general, would
+dismiss many of these considerations as not applicable to the general
+principle, which is a "normal" or "static" or "long run" law, not
+subject to considerations of this sort. It is scarcely open to Fisher to
+defend himself this way, because of his exceedingly uncompromising
+statement regarding even "transitional" relations between volume of
+trade and money and credit. I shall not reply to anyone who offers such
+an objection by a general tirade against "static economics." I believe
+thoroughly in the method of economic abstraction, and in reaching
+general principles by ignoring, provisionally, in thought the "friction"
+and "disturbing tendencies" which often make the first approximations
+look somewhat unreal. But I raise this question: to what feature of our
+economic order do we chiefly owe it that we can make such abstractions?
+By virtue of what does friction disappear? What is it that makes our
+abstract picture of economic life, as a fluid equilibrium, with its nice
+marginal adjustments, its timeless logical relations, correspond as
+closely as it does to reality? The answer is: MONEY and CREDIT.[297]
+
+It is the _business_, the _function_, of money and credit, as
+instruments of exchange, to bring about the fluid market, to overcome
+friction, to effect rapid readjustments, to give verisimilitude to the
+static theory, to make the assumptions of the static theory come true.
+Where exchange is easy and friction slight, there will not be two prices
+for the same good in the same market. Speculators, seeking profits of
+fractions of a point, will prevent that. By multiplying exchanges, they
+will level off values and prices. Because money and credit have done
+their work so thoroughly in the "great market," it is possible for men
+to talk about static theory, and to work out economic laws in
+abstraction from friction, transitions, and the like.
+
+In the static state, all speculation is banished. There are no
+price-fluctuations to be smoothed out, no new prospects to be
+"discounted," no uncertainties to be guarded against by "hedging."
+Seasonal goods will, of course, have to be carried over from one season
+to the next, but this will involve merely warehousing and the use of
+capital--"time speculation," involving many sales, does not come in. One
+sale to the capitalist who carries the seasonal goods, with a sale by
+him to the man who means to use them, will suffice. It has been shown
+before that the great bulk of trade is speculation. But speculation is
+banished from the static state. Speculation is a function of dynamic
+change, waxing and waning with the degree of uncertainty that exists,
+the new conditions to which readjustments have to be made, the
+"transitions" that have to be effected. In other words, the laws
+governing the volume of trade are dynamic laws, laws of "transition
+periods," and so the whole notion which underlies the quantity theory,
+of "normal periods," "static" relations, etc., is here irrelevant.
+Volume of _trade_, as distinguished from volume of _production_, is
+controlled by the number and extent of the "transitions" that have to be
+made. The chief work of money and credit is done _in_, and _because of_,
+"transition periods." Assume a normal equilibrium accomplished, and you
+have little trading left to do. It will still be necessary, if you have
+the division of labor, and private enterprise, for goods to pass through
+as many different hands as there are different independent enterprisers
+in the stages of production, and on, through merchants, to the consumer.
+It will still be necessary to pay wages, rents, dividends and interest.
+But there will be no selling of lands, of houses, of factories, of
+railroads, or of securities representing these. By hypothesis these are
+already in the hands best qualified to hold them. The "static
+equilibrium" presents "mobility without motion, fluidity without
+flow."[298] The static picture is a picture of completed adjustment,
+where no one has an incentive to change his work, or his investments,
+because he has already done the best that he can for himself. It is,
+therefore, a picture of a situation where there is little incentive for
+those exchanges which make up the great bulk of the volume of trade in
+real life.
+
+Hence the curious phenomenon that very much of static theory has been
+developed in abstraction from _money_ and _credit_. Mill's theory of
+international values, for example, abstracts from money. "Since all
+trade is in reality barter, money being a mere instrument for exchanging
+things against one another, we will, for simplicity, begin by supposing
+the international trade to be in form, what it is in reality, an actual
+trucking of one commodity against another. So far as we have hitherto
+proceeded, we have found the laws of interchange to be essentially the
+same, whether money is used or not; money never governing, but always
+obeying, those general laws."[299] Other writers have similarly held
+that money is a mere cloak, covering up the reality of the economic
+process. Schumpeter, for example, holds that money is, in the static
+analysis, merely a "Schleier," and that "man nichts Wesentliches
+übersicht, wenn man davon abstrahiert."[300] _On the static
+assumptions_, of the fluid market, with friction, etc., banished, money
+is, indeed, anomalous and inexplicable. It is a cloak, a complication, a
+vexatious "epi-phenomenon." There is nothing for it to do, and there can
+be, consequently, no "functional theory" developed for it. Static theory
+may be ungracious in ignoring its own foundation. But static theory is
+grotesque when it seeks to support its own foundation! Static theory is
+possible only on the assumption that the work of money and credit has
+been done. What, then, shall we say of static theory which seeks to
+explain the work of money and credit? Yet precisely this is what is
+undertaken by the quantity theory, with its "normal" or "static" laws of
+money and credit. A functional theory of money and credit must be a
+dynamic theory. To talk about the laws of money, "after the transition
+is completed" is to talk about the work money will do after it has
+finished working. For a functional theory of money and credit, we must
+study the obstacles that exist to prevent the fluid market. We must
+study friction, transitions, dynamic phenomena.
+
+To this problem we shall come in Part III. For the present, I am content
+to have disproved the quantity theory contention that the volume of
+trade is independent of the quantity of money and credit.
+
+
+
+
+APPENDIX TO CHAPTER XIII
+
+THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES[301]
+
+
+The word, "trade," as used in connection with statistics of foreign and
+domestic trade has been irritatingly ambiguous. Few writers, in speaking
+of domestic trade, have meant the same thing by trade that they have
+meant by the word when speaking of foreign trade, and hence we have had
+many pointless efforts to institute comparisons between the two, and
+some very misleading statements about the matter. Thus, figures have
+been offered which would show that the foreign trade of the United
+States is only a fraction of 1% of the domestic trade. This conclusion
+is reached by taking the figures for banking transactions discussed in
+Chapters XIII and XIX as representative of domestic trade, and comparing
+them with the annual figures for exports and imports. This procedure is
+fallacious for several reasons:[302] the figures thus reached for
+domestic trade exceed even the total trading within the country, as
+shown in Chapter XIX. In the second place, as shown in Chapter XIII, the
+bulk even of these deposits which do represent real trading grow chiefly
+out of speculation. Even in ordinary trade, goods are counted several
+times before reaching the final consumer. It is clear, therefore, that
+even an accurate figure for total trading within the country would have
+little relevance when we are seeking a figure to compare with exports
+and imports. Nor, if a comparison of the actual trading in which
+foreigners participate with the trading exclusively between Americans is
+sought, can we take the export and import figures as representative of
+the foreign trading--they do not include a multitude of highly important
+transactions in which foreigners participate. Very much of the business
+of the New York Cotton Exchange, the New York Stock Exchange, the
+Chicago Board of Trade, and other speculative markets represents foreign
+buying and selling, especially arbitraging transactions, and the other
+"invisible items" of foreign trade need merely to be mentioned for the
+economist to recognize the fallacy of a comparison which omits them.
+
+What figures are relevant when we wish to compare foreign and domestic
+trade? First we must make clear the purpose for which the comparison is
+to be made. If we are concerned with the calls made by foreign and
+domestic trade on the money market, we should make use of a different
+method of comparison than that which will be here employed. The purpose
+of the comparison here undertaken is to determine how much of our
+American labor, land and capital is at work producing for the foreign
+consumer, as compared with the land, labor and capital in America
+producing for the American consumer. The comparison here undertaken is
+concerned with the question which is usually uppermost in the minds of
+those who undertake such a comparison, namely, _how important_ is our
+foreign market to us? Obviously, for such a comparison as this, we
+should not count a given case of eggs twelve times merely because it
+changed ownership twelve times in getting from farm to breakfast table.
+Items of export and import count only _once_ in the figures for export
+and import. We must find a figure for domestic "trade" in which items
+count only once, allowing no turnovers of the same goods to swell the
+total, if we wish to make our figures comparable.
+
+The method proposed for making this comparison, for a long series of
+years, is a modification of the method used by the writer in an article
+in the _Annalist_ of Feb. 7, 1916. A figure based on the bank deposits
+of _retail merchants_ in Kinley's 1909 investigation was there taken as
+properly comparable with the export and import figures. The final sale
+to consumer by retailer is "the one far off divine event" toward which
+the whole productive process moves. Everything else in production and
+exchange looks forward to this. Ultimately, from the demand of the final
+consumer comes all the demand that is directed toward the agencies of
+production, even though the laborer sees his immediate market in the
+person of the employer, and the capitalist or landlord sees his
+immediate market in the person of the active business man. The figure
+reached for retail trade by the method then employed was $34,500,000,000
+for 1909. This figure was too high, as shown in Chapter XIII above, and
+the figure reached now for retail _deposits_ by the same method is
+$32,000,000,000. Even this figure is too high, however, as I there
+concluded, to represent retail _trade_, and I shall use it only as a
+check on King's figure for _the total income of the United States in
+1910_, which I shall use as a base figure instead of my own. King's
+figure for the total income of the United States in 1910 is
+$30,500,000,000.[303] I take this figure as including all that the
+American people spend for consumption, with retailers, physicians,
+hotels, theatres, etc., and also their net savings for the year. Part of
+this they spent for foreign products. The rest they spent at home. This
+residue spent at home gives us a figure which we may properly compare
+with the amount the foreigner spends in America, as indicating the ratio
+of foreign to domestic trade for the purpose in hand. We subtract, in
+other words, from the figure for total income the figure for _imports_.
+Then we compare the residue with the figure for _exports_, and get our
+ratio of foreign to domestic trade. The export and import figures must
+first, however, be reduced to a _retail_ basis. That is, assuming that
+wholesale prices are two-thirds of retail prices, we add 50% to the
+figures for exports and imports (which are wholesale figures) before
+making the subtraction and the comparison. The ultimate consumer, both
+in Europe and America, pays for imports and exports on a _retail_
+basis.[304] This method, applied to the figures for 1910, gives us a
+ratio of about 10:1 for domestic to foreign trade--the lowest percentage
+for foreign trade which we shall find for any year in the period
+investigated, 1890-1916.
+
+This comparison is still unfavorable to foreign trade. Domestic trade,
+in our figures, includes savings and investments, including investments
+made by Americans abroad. Import figures are marred by undervaluations,
+exports are not all counted, and the figures for exports and imports do
+not include foreign investments in America. American investments abroad
+should not be counted as part of domestic trade. Moreover, our figures
+take no account of travellers' expenditures, or of services performed by
+professional men of one country for men in another, or of certain other
+"invisible items." But while this makes our percentage for foreign trade
+too low for all years, it probably does not greatly upset the results
+for yearly variations in the ratio except for the year 1916, when the
+figure for domestic trade is left decidedly too high, and the ratio for
+foreign trade is too low, as compared with previous years.
+
+For years other than 1910, indirect calculations must be resorted to for
+domestic trade. I have substantial confidence in the rough accuracy of
+the figure chosen for 1910 in view of the convergence of two widely
+different sets of data. My figure for retail deposits in 1909 is
+$32,000,000,000. King's figure for total income is $30,500,000,000 for
+1910. King's figure seems to me a better figure to use for the purpose
+in hand. I use my own merely as a rough check on his. For years other
+than 1910, the figure for net income is calculated as a percentage of
+King's figure for 1910, by means of an "index of variation." It is
+assumed that the net income of 1905, for example, bears the same
+relation to the index for 1905 that the absolute figure for net income
+of 1910 bears to the index for 1910, and net income for 1905 is then
+computed by "the rule of three." The index of variation chosen is
+_railway gross receipts_ weighted by _wholesale prices_. I think that
+railway gross receipts are, on the whole, the most dependable and easily
+manageable index of physical volume of production that we have, though
+recognizing difficulties, later to be discussed, in using them for the
+purpose in hand. Railroads touch virtually every kind of business in the
+country. Variations in the _pecuniary_ volume of production and
+consumption, however, if due to rising or falling _prices_, rather than
+to changing physical volume, would not be indicated by changes in
+railway gross receipts. The same volume of transportation might
+represent widely varying pecuniary values of goods transported. Railway
+rates do not vary from year to year with prices of goods, even though
+high-priced goods are normally charged higher rates than low-priced
+goods. The index, therefore, must include _prices_ as well as physical
+volume of transportation. For 1910, therefore, railway gross receipts
+and an index of prices are multiplied together, and counted as 100%. The
+same thing is done for railway gross receipts and prices for other
+years, and the results reduced to percentages of the result for 1910.
+The figure for net income in any other year is then readily computed as
+a percentage of the figure for 1910. The results, for the years
+1890-1916, appear in the tables below.[305]
+
+It may be noticed that my figures for net income in 1900 and 1890 do
+not correspond very closely with the figures for the same years as
+independently estimated by King. My figure for 1900 is $12,900,000,000,
+where his is $17,965,000,000; for 1890, my figure is $9,300,000,000,
+where his is $12,082,000,000. I am inclined to the view that the figures
+in my tables come closer to the facts for these years than do his
+figures, assuming that _his figure_ for 1910 is correct. It will be
+noticed that on his figures there was an increase of about 50% from 1890
+to 1900, and an increase of only about 66% in the decade following. This
+seems to be an unlikely relation. One would expect a much greater rate
+of increase for the decade 1900-10, as compared with the preceding
+decade, than King's figures show. The period from 1890 to 1900 included
+the terrible panic of 1893 and the prolonged depression ensuing. The
+panic in 1907 was trifling in comparison, and recovery, as shown by our
+index numbers in the tables below, was very much quicker. Moreover,
+falling prices characterized much of the earlier decade. The highest
+prices of the whole ten years were in 1891. The period from 1900 to 1910
+is a period of rapidly rising prices, on the whole. On the basis of our
+general knowledge of the two periods, one would expect a greater
+percentage gain by far for the second decade, and I therefore trust the
+results of the index of variation here chosen, which show that. Similar
+results are obtained by applying to the base figure for 1910 an index
+of variation derived from Kemmerer's and Fisher's figures for trade[306]
+and prices. My figure for 1890 may, moreover, be checked by comparison
+with the figure given by C. B. Spahr in _The Present Distribution of
+Wealth in the United States_ (p. 105) for the net income of the country
+for that year: $10,800,000,000. It may be that my figure for 1890 is too
+low, but I have not sought to "doctor" it by an arbitrary "correction
+factor" to make it correspond more closely than it does with the other
+estimates. It is striking enough that a figure derived from an index of
+variation, twenty years away from its base, should come as close as this
+to figures calculated from wholly different data.
+
+One brief comment may be made on the significance of these figures. It
+may be questioned if figures showing the proportions of our industry
+devoted to supplying goods for the foreign market correctly indicate the
+importance of the foreign market to us. It may be urged that if we
+should lose our foreign market, we should merely turn to producing more
+for the domestic market, and that the loss would not be the whole of our
+receipts from foreign trade, but merely the cost of transition, and the
+loss that comes from shifting to production to which we are less suited.
+This is, doubtless, true. But the loss reckoned this way may well be
+greater than the loss reckoned on the basis of my figures! It is equally
+true, moreover, that our domestic trade is not important to the extent
+indicated by my figures, since if we lose part of our domestic trade,
+our producers will turn to supplying more for the foreign market. But
+one must not regard the cost of transition as a negligible matter! The
+cost may easily be prolonged depression. Certain parts of our foreign
+trade are really vital to us, both on the import and (to a less degree)
+on the export side. The most important practical use to which the
+figures here given may be put are in connection with short-run problems.
+Foreign trade is so important to us that any sudden alteration in its
+amount may bring great adversity or great prosperity--as the course of
+the present War abundantly testifies.[307]
+
+An application of our method to the years 1850 and 1860 gives a
+percentage for foreign trade of 12.7 in 1850, and 16.0 in 1860.[308]
+
+Certain other cautions are needed in presenting these figures. For one
+thing, variations in railway rates will make a given volume of gross
+earnings mean different things in different years as to the physical
+volume of traffic. In the writer's opinion, which is confirmed by
+Professor W. Z. Ripley, there is no possible way of making allowance for
+this, as the cross-currents affecting railway rates are altogether too
+numerous and obscure. Nor has any effort been made to allow for
+variations in the proportions of freight and passenger receipts, or of
+different classes of freight traffic.
+
+Again, the proportions of railway traffic connected with foreign trade
+may vary greatly, and it may happen that a big increase in railway gross
+receipts is due to increasing foreign trade, primarily. There is reason
+to suppose that much of the increase of 1916 is to be explained that
+way. This makes our comparison for 1916 particularly adverse to foreign
+trade, since we count as domestic trade what is really foreign trade.
+The figures, however, are presented as they stand. Moreover, for 1916,
+the great increase in foreign trade is in _exports_. Merchandise imports
+are not much greater than in previous years.[309] Our exports have been
+chiefly paid for by "invisible items," gold and securities, and short
+term credits. These do not appear anywhere in our figures. A substantial
+source of error appears from this cause in our 1916 figure. I should
+think it safe to put the ratio for foreign trade to domestic trade for
+1916 at above 20%, instead of the 17.9% our table shows.
+
+The reader will wish to know for a given year how much of the increase
+or decrease is due to physical growth of business, as represented by
+railway gross receipts, and how much is due to changes in prices. To
+give this information, and to make it easy for a critic to check the
+results, a table showing the index numbers from which the figures for
+net income are computed is subjoined.[310]
+
+ TABLE I[311]
+
+ 1 2 3 4
+ Ratio of
+ Domestic Trade of Foreign Trade of Foreign
+ Calendar Net Income United States = United States = to
+ Years of the Net Income minus Exports at Retail Domestic
+ United Imports at Retail Prices Trade
+ States Prices
+
+ 1890 $ 9,300,000,000 $ 8,100,000,000 $1,300,000,000 16.1%
+ 1891 10,400,000,000 9,200,000,000 1,400,000,000 15.2%
+ 1892 10,000,000,000 8,700,000,000 1,400,000,000 16.1%
+ 1893 10,100,000,000 8,900,000,000 1,300,000,000 14.6%
+ 1894 8,300,000,000 7,300,000,000 1,200,000,000 16.5%
+ 1895 8,400,000,000 7,200,000,000 1,200,000,000 16.7%
+ 1896 7,900,000,000 6,900,000,000 1,500,000,000 21.8%
+ 1897 8,000,000,000 6,900,000,000 1,600,000,000 23.2%
+ 1898 9,100,000,000 8,200,000,000 1,900,000,000 23.2%
+ 1899 10,900,000,000 9,700,000,000 1,900,000,000 19.6%
+ 1900 12,900,000,000 11,700,000,000 2,200,000,000 18.8%
+ 1901 14,600,000,000 13,300,000,000 2,200,000,000 16.5%
+ 1902 15,600,000,000 14,200,000,000 2,000,000,000 14.1%
+ 1903 17,700,000,000 16,200,000,000 2,200,000,000 13.6%
+ 1904 18,000,000,000 16,500,000,000 2,200,000,000 13.3%
+ 1905 19,600,000,000 17,800,000,000 2,400,000,000 13.5%
+ 1906 21,500,000,000 19,500,000,000 2,700,000,000 13.8%
+ 1907 26,600,000,000 24,500,000,000 2,900,000,000 11.8%
+ 1908 23,000,000,000 21,300,000,000 2,600,000,000 12.2%
+ 1909 27,600,000,000 25,400,000,060 2,600,000,000 10.2%
+ 1910 30,500,000,000 28,200,000,060 2,800,000,000 9.9%
+ 1911 29,600,000,000 27,300,000,000 3,100,000,000 11.4%
+ 1912 33,800,000,000 31,100,000,000 3,600,000,000 11.6%
+ 1913 34,800,000,000 32,100,000,000 3,700,000,000 11.5%
+ 1914 32,600,000,000 29,900,000,000 3,200,000,000 10.7%
+ 1915 35,400,000,000 32,700,000,000 5,300,000,000 16.4%
+ 1916 49,200,000,000 45,800,000,000 8,200,000,000 17.9%
+
+
+ TABLE II. INDEX NUMBERS FROM WHICH THE FIGURES FOR
+ NET INCOME ARE DERIVED
+
+ 1 2 3 4
+ Composite Net Income[312]
+ Dun's Prices R. R. Gross Index, R. R. Gr. of the United
+ Calendar with base Receipts, Rcts. multiplied States in
+ Years in 1910 reduced to by Prices. billions of
+ base of (Column 1 × dollars:
+ 1910 column 2.) 100:30.5::(3):$
+
+ 1890 76.5 39.8 30.8 $ 9.3 billions
+ 1891 81.5 42.0 34.2 10.4
+ 1892 75.6 43.5 32.8 10.0
+ 1893 77.3 42.9 33.2 10.1
+ 1894 71.5 38.1 27.2 8.3
+ 1895 68.0 40.7 27.8 8.4
+ 1896 63.8 40.6 25.9 7.9
+ 1897 62.2 42.4 26.4 8.0
+ 1898 66.4 45.1 29.9 9.1
+ 1899 72.3 49.6 35.8 10.9
+ 1900 78.1 54.0 42.1 12.9
+ 1901 80.6 59.4 47.8 14.6
+ 1902 84.0 62.6 51.3 15.6
+ 1903 83.1 70.1 58.2 17.7
+ 1904 84.0 70.3 59.0 18.0
+ 1905 84.0 76.4 64.2 19.6
+ 1906 88.1 85.0 70.5 21.5
+ 1907 94.0 92.9 86.3 26.6
+ 1908 92.4 81.8 75.6 23.0
+ 1909 99.0 91.7 91.0 27.6
+ 1910 100.0 100.0 100.0 30.5
+ 1911 98.1 99.0 97.0 29.6
+ 1912 104.1 106.9 111.0 33.8
+ 1913 101.7 112.5 114.0 34.8
+ 1914 102.5 104.5 107.0 32.6
+ 1915 106.0 110.0 116.0 35.4
+ 1916 125.0 129.0 161.2 49.2
+
+
+
+
+CHAPTER XIV
+
+THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT
+
+
+In the argument so far I have said nothing of the reverse relationship,
+the dependence of the volume of money and the volume of credit on trade.
+The two are indeed _inter_dependent. Interdependence suggests circular
+theory, and is often a phrase to cover circular reasoning.[313] In the
+case of the relation under discussion, however, I have, I trust, already
+abundantly protected myself against the charge of circular reasoning by
+_denying_ that either volume of money and credit on the one hand, or
+volume of trade on the other hand, is a true cause at all. Both are mere
+abstract names, designating highly heterogeneous individual occurrences,
+which, _individually_ are cause or effect. In general, both volume of
+money and credit, on the one hand, and volume of trade on the other
+hand, are results of common causes, which are the _veræ causæ_ of
+economic phenomena--values, psychological phenomena. The whole thing is
+to be explained immediately and primarily in terms of social
+relationships and mental processes,--in terms of social values.
+
+To show that increasing trade tends to increase money and credit is not
+difficult. If one may venture a hypothetical illustration--and the sort
+of hypothetical illustrations, like the dodo-bone case, of which
+quantity theorists are fond make one hesitate to do so--let us assume a
+communistic community, isolated from other markets, with a developed
+system of production, including an extensive use of gold in the arts.
+Let the communistic régime gradually pass over to an individualistic
+régime. Assume that the inhabitants are acquainted with the use of gold
+as money, and that their government is willing to coin it freely. As
+individualism spreads, and trade grows, will not more and more gold be
+taken to the mints? I am not here concerned with the principles
+determining the apportionment of gold between the money employment and
+the arts. It is enough to show that expanding trade tends to increase
+the volume of money.
+
+Assume that the money supply meets difficulties in its expansion. Is
+there not at once an incentive to extend credit? The seller finds his
+customers unwilling to buy for cash, in amounts as great as before. In
+order to sell as much as before (assuming that the use of credit is
+known, to avoid trouble with historical origins), he extends
+credit,--which, when practiced generally, lightens the strain on the
+money supply.
+
+I have so far said nothing of the case where there are stocks of the
+money metal to be got from outside markets. But if a country is
+expanding its trade, does not money come in? The quantity theorists
+would, indeed, admit this, in general, though their reason is a bad one,
+namely: that expanding trade lowers prices, and lower prices make the
+market attractive to foreign buyers, who then send in money for the
+goods. I shall later discuss this aspect of the theory.[314] For the
+present, I merely interject the question as to the probability of an
+expansion of trade when prices are falling. Increasing _stocks_ of
+particular goods may well mean lower prices for these goods and if they
+be articles of export the lower prices may well increase the export
+trade, and bring money in. But this increase in _stocks_ of articles of
+_export_ is very different from total _trade_ within the country; and
+lower prices in articles of export are very different from a generally
+lower price-level.[315]
+
+Will expanding trade in a country increase credit? I come here to one of
+the striking features of Fisher's doctrine--a feature in which I think
+he is fundamentally true to the quantity theory. He finds no way in
+which expanding trade can directly increase credit. Expanding trade can
+increase credit, (a) only by changing the habits of the people, so as to
+alter the ratio, M to M´, or (b) by reducing the price-level, and so
+bringing in money from abroad, whence, as M is now increased, M´ rises
+proportionately. "An increase in the volume of trade in any one country,
+say the United States, ultimately increases the money in circulation
+(M). In no other way could there be avoided a depression in the
+price-level in the United States as compared with foreign countries. [He
+should say, from the standpoint of his theory, that increasing trade
+will cause a fall in the price-level, and so bring in more money.] _The
+increase in M brings about a proportionate increase in M´._[316] Besides
+this effect, the increase in trade undoubtedly has some effect in
+modifying the habits of the community with regard to the _proportion_ of
+check and cash transactions, and so tends somewhat to increase M´
+relatively to M; as a country grows more commercial the need for the use
+of checks is more strikingly felt."[317] In a footnote to this
+paragraph, he defines the issue still more sharply. "This is very far
+from asserting as Laughlin does that 'The limit to the increase in
+legitimate credit operations is always expansible with the increase in
+the actual movement of goods'; see _Principles of Money_,[318] New York
+(Scribner), 1903, p. 82. We have seen, in Chapter IV, that deposit
+currency is proportional to the amount of money; a change in trade may
+indirectly, _i. e._, by changing the _habits_ of the community,
+influence the proportion, but, except for transition periods, it cannot
+influence it directly."[319]
+
+My own explanation of the causal sequence whereby expanding trade brings
+money into a country would be radically different from that given by
+Fisher in the first quotation. I should expect, first, that rising
+_prices_ would encourage rising trade; I should then expect the rising
+volume of trade, with higher prices, to lead borrowers to need, and
+secure, larger loans from the banks, with, as loans and deposits rise in
+proportion to reserves, some slight increase in "money-rates," just
+enough to draw to the country the extra gold which bankers felt
+desirable to add to their reserves. I should expect the causal sequence
+to be the exact reverse of that which Fisher indicates. With falling
+prices, or waning volume of trade--which would usually come
+together,[320]--I should expect loans to be reduced, deposits to be
+reduced, money-rates to fall, and gold then to leave the country again.
+I should expect this sort of thing to happen normally, and not
+infrequently, and I should expect gold to come in and go out many times
+in the course of a business cycle. This would seem to be the sort of
+explanation which our modern theory of _elastic_ bank-credit would give
+in connection with this problem. I shall not here go into details with
+the theory of elastic bank-credit. The theory has been too well
+established in the debates between the "Currency School" and the
+"Banking School"[321] in regard to bank-notes to need elaboration and
+defence here, and the essential identity of deposits and elastic
+bank-notes from this angle is one of the commonplaces of the literature
+of banking. What I am here concerned with is the highly significant fact
+that Fisher's "normal" theory finds no place for this highly important
+phenomenon. The quantity theory has no explanation of elasticity to
+give. On the basis of the quantity theory, and for all that the quantity
+theory can say, the Currency School was right! Fisher offers us,
+virtually, a "currency theory" of deposits. "Suppose, as has actually
+been the case in recent years, that the ratio of M´ to M increases in
+the United States. If the magnitudes in the equations of exchange in
+other countries with which the United States is connected by trade are
+constant, the ultimate effect on M is to make it less than what it would
+otherwise have been, by increasing the exports of gold from the United
+States or reducing the imports. In no other way can the price-level of
+the United States be prevented from rising above that of other nations
+in which we have assumed this level and the other magnitudes in the
+equation of exchange to be quiescent." (P. 162.) If "bank-notes" be
+substituted for "M´", in this quotation, we have here a perfect
+statement of the position of the "Currency School" in that great debate.
+Must this old issue be fought all over again? And yet, I defy any
+consistent quantity theorist to find any flaw in Fisher's argument on
+this point. There is no place for a theory of elastic bank-credit
+within the confines of the quantity theory. Fisher's recognition of this
+seems full and complete. He relegates all mention of elastic bank-credit
+to "transitions." The footnote quoted above, in which Laughlin's
+(somewhat extreme) doctrine based on the theory of elasticity is stated,
+denies categorically that there is any validity in it, except for
+transition periods. There is nowhere in the book any explanation of the
+theory of elasticity.[322] The references to it are few and grudging,
+and _always_ in connection with the notion of transitions. The most
+important statement regarding elasticity (less than a page long) is on
+page 161, where again transitional influences are under discussion. What
+is a theory of money worth which can offer no explanation of so
+fundamental, important, and notorious a feature of modern money and
+banking?
+
+There is a further, related, feature of banking for which the quantity
+theory can find no explanation. Among the items in a bank's balance
+sheet, the quantity theorist seizes upon reserves on the assets side,
+and deposits on the liability side, and builds his theory on the
+supposed close relation between them. We have seen that this close
+relation does not, in fact, exist. The range of variation is
+enormous.[323] But there is one close relation in the balance sheet of
+the bank concerning which the quantity theory is silent, and that is the
+relation between deposits and _loans_. For individual banks and for
+banks in the aggregate, for long run periods and for short run periods,
+for reasons that are clear and inevitable, these two magnitudes (or for
+banks of issue on the Continent of Europe, _notes_ and loans), vary
+closely together. The relationship between them is the only relationship
+which does stand out as clearly beyond dispute, among all the items in
+the banking balance sheet. No assumptions of a "static state" are needed
+for its demonstration! The relation varies, of course. As banks increase
+or reduce their capital, as their reserve-percentages rise or fall, as
+they increase or decrease their holdings of bonds, we find reasons which
+alter the proportion between deposits and loans. But, despite this, the
+variation, as shown by figures for the United States, is slight. Assume,
+for example, a statement showing "loans and discounts" of $1,000,000,
+deposits, $1,000,000, cash reserve, $200,000. Reserves are then 20% of
+deposits, and loans are 100% of deposits. If reserves be increased by
+$100,000 and loans and discounts reduced, to compensate, by $100,000, we
+have a 50% variation in the ratio of reserves to deposits, with only a
+10% variation in the ratio of loans and discounts to deposits. Since
+cash reserve is much the smaller item, almost always, the same absolute
+variation in it will affect it, in percentage, vastly more than it will
+affect loans and discounts. It is strange that a theory should seize on
+this highly variable ratio of reserves to deposits, and ignore the much
+more constant ratio[324] of loans and discounts to deposits.
+
+That this close relation between deposits and loans should obtain
+follows naturally from the theory of elastic bank-credit. The two are
+built up together. When there are expanding business and rising prices,
+men borrow more from the banks; as they borrow, they receive deposit
+credits; the individual who receives the deposit credit may check
+against it, but it is redeposited by another man, and so, while the
+deposits of one bank need not grow out of its loans, still, for banks in
+general, deposits are large because loans are large. For a given bank,
+the relation holds closely, because the bank lends, in general, to
+active business men, who will have income as well as outgo, and whose
+income will, on the average, at least balance their outgo. Thus,
+_through loans_, deposits are linked with volume of trade and prices.
+Trade and deposits wax and wane together.[325] On the other hand, in the
+absence of rising prices and increasing trade, reserves may increase
+greatly without forcing an increase in deposits. Loans cannot increase
+without an increase in deposits. The linkage between deposits and trade
+is definite, causal, positive, statistically demonstrable. The linkage
+between reserves and deposits is, at most, negative--if reserves get too
+low, deposits and loans may be checked in their expansion. But this--to
+the extent that it is true, which we leave, for detailed analysis, for
+Part III--gives a very much looser relation indeed than the direct
+relation between loans and deposits.
+
+The quantity theory has offered no explanation of this relation between
+loans and deposits. What explanation could a theory offer, which rests
+in the notion that volume of trade on the one hand, and volume of money
+and bank-credit on the other hand, are independent magnitudes?[326] I do
+not mean that quantity _theorists_ are silent regarding the relation of
+loans and deposits. I mean that they do not attempt, in any discussion I
+have found, to apply the quantity _theory_ to the explanation of that
+relation. What shall we say of a theory which, ignoring these easily
+proved, easily explained, and vital facts regarding bank-credit, offers
+as its sole explanation of volume of bank-credit a theory so untenable
+as that of a fixed ratio between volume of bank-credit and volume of
+money _in circulation_, with causation running from money to deposits?
+
+Professor Fisher says little about bills of exchange. Here, surely, we
+have a credit instrument which grows directly out of trade, in general,
+and whose volume expands and contracts with trade. When banks discount
+bills of exchange, and issue notes, or grant deposit credits, against
+such discounted bills, the connection of bank-credit and volume of trade
+is obvious. The same thing holds largely, however, when promissory notes
+are discounted. Such notes are usually given by those who plan to use
+the credits granted in commercial or speculative transactions. The bill
+of exchange differs from the promissory note in practice, however, in
+that it itself is often a medium of exchange, without going into the
+bank's portfolio. "The bill of exchange, therefore, before it gets to
+the bank _usually_[327] performs a series of monetary transfers, for the
+small dealer naturally prefers to pass on the bill, if possible, in
+making a payment, instead of handing it over to his bank, which would
+either deduct a certain percentage in the way of discount, or else
+accept the bill at its face value, crediting the customer with the
+amount on the date of maturity, while business men (other than bankers)
+are in the habit of taking bills of exchange as they would cash."[328]
+This quotation describes conditions in Germany. The same authorities (p.
+176) give figures showing a rapid development in the volume of bills of
+exchange, rising from about 13 billions of marks in 1872 to about 31
+billions in 1907. These figures show that bills of exchange are a big
+factor in German business life,--a conclusion that is strengthened when
+they are compared with the figures for giro-transfers on pp. 188-189 of
+the same article, or with the figures for note issue on p. 209.[329] In
+the United States, of course, the use of bills of exchange has become
+comparatively unimportant in domestic commerce,[330] though there is a
+movement to revive them, since the new Federal Reserve system has come
+in. Their chief importance is in connection with foreign trade. Is it
+possible that Professor Fisher's reason for wishing to minimize foreign
+trade[331] is the unconscious desire to get rid of the annoying bills
+of exchange, which so obviously tend to make bank-credit and volume of
+trade interdependent, and which further spoil the quantity theory by
+serving as a flexible substitute for both money and deposits?
+
+I regret the necessity for this elementary exposition of familiar
+things. But Fisher's theory has no place for these familiar things--and
+Fisher has merely made very explicit the logic of the quantity theory!
+
+As applied to modern conditions, the quantity theory is obliged to
+assert--and Fisher does assert:
+
+ (a) that there is a causal dependence of bank-credit on money,
+ and "normally" a fixed ratio between them;
+
+ (b) that velocity of circulation of money and credit
+ instruments are independent of quantity of money and credit
+ instruments;
+
+ (c) that, in general, money and volume of credit (taken
+ together), velocities, and trade, are independent magnitudes,
+ each governed by separate laws, though Fisher concedes _some_
+ reaction of trade on velocities;
+
+ (d) in particular, that volume of money and credit has no
+ influence on trade, and that trade has no direct influence on
+ volume of credit.
+
+ All these doctrines are necessary if the contention that an
+ increase of money will proportionately raise prices is to be
+ maintained, or if it is to be maintained that a decrease in
+ trade will proportionately raise prices. I have analyzed each
+ of these contentions, and I find justification for none of
+ them.
+
+Not yet, however, have we reached the least tenable aspect of the
+quantity theory. There remains the contention that prices are passive,
+that a change, _originating_ in prices, and involving a change in the
+average price, or the general price-level, cannot maintain itself--that
+P is a passive function of the other five magnitudes of the equation of
+exchange. To this central fortress of the quantity theory we shall
+devote the next chapter.
+
+
+
+
+CHAPTER XV
+
+THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES"
+
+
+Is the price-level passive? Is it true that while change may occur from
+causes outside the equation of exchange in volume of money, volume of
+trade, and velocities of circulation, a change in the price-level from
+causes outside the equation is impossible? Must the average of prices be
+a passive function of M, the V's, M´ and T? Such is the general
+contention of the quantity theory, and such, very explicitly, is
+Fisher's contention. The price-level is always effect, and never cause
+(with slight modifications of the doctrine for transition periods) in
+its relations to the other magnitudes in the equation of exchange.
+
+Now in one sense, it is my own contention that the price-_level_ can
+never be a _cause_ of anything. The price-level is an _average_.
+Averages may be _indicia_ of causation, but they are not themselves
+causes. They are not, in reality, anything _at all_. Causation is a
+matter which pertains to the particulars of which the average is made.
+But this is not the doctrine of the quantity theory. The quantity theory
+does, in certain connections, assign causal influence to the level of
+prices, particularly in the theory of foreign exchange, where the
+explanation of international gold movements rests on the doctrine that a
+price-level in one country, higher than the price-level of another
+country, drives money away.[332] It will be seen, in a moment, that
+Fisher relies on this principle to prove that the price-level of a
+country cannot rise without an increase of money--if it did so rise, it
+would drive out the money, and so be forced down again. The point at
+issue may be stated in terms of particular prices. The quantity theory
+is that, while particular prices may rise from causes affecting them, as
+compared with other prices, without a change in money, velocities, etc.,
+still there cannot be a rise in the general average, because other
+prices will be obliged to go down to compensate. The issue is as to the
+possibility of a rise in particular prices, uncompensated by a
+corresponding fall in other particular prices, without a _prior_
+increase in money, or velocities, or decrease in trade. I take up the
+issue in this form. I shall maintain that particular prices can, and do,
+rise, without a _prior_ increase in money or bank-deposits, or change in
+the volume of trade, or in velocity of money or deposits and also
+without compensating fall in other particular prices. Putting it in
+terms of Fisher's equation, I shall maintain, as against Fisher, that P
+can rise through the direct action of factors _outside_ the equation of
+exchange, that as a _consequence of such rise_ the other factors
+readjust themselves, and that a new equilibrium is reached which, in the
+absence of new disturbances from causes outside the equation, tends to
+be as permanent and stable as the old equilibrium was.
+
+In the argument which follows, I shall respect thoroughly the
+distinction between "normal" and "transitional" effects. I do not think
+that this distinction is properly drawn by Fisher. In my discussion of
+the relation between the volume of bank-credit and the volume of trade,
+and in other connections, I have shown that Fisher leaves out of his
+normal theory most of the concrete factors which do affect both the
+concrete magnitudes, and the long run _averages_, of the factors in his
+own equation. But for the present, I shall meet him on his own ground,
+give his distinctions their fullest weight, and carry my argument
+through the "transition" to a point where no further change among the
+factors in the equation can be expected as a consequence of the initial
+change assumed.
+
+Fisher's argument to show the passiveness of prices takes the form of a
+_reductio ad absurdum_. "To show the untenability of such an idea let us
+grant for the sake of argument that--in some other way than as effect of
+changes in M, M´, V, V´, and the Q's--the prices in (say) the United
+States are changed to (say) double the original level, and let us see
+what effect this will produce on the other magnitudes in the
+equation."[333] Then, if the equation of exchange is to be maintained,
+either M or M´ or their velocities must be increased, or trade must be
+reduced. But he holds that none of these is possible. (1) Money will be
+reduced. High prices drive money away to other countries. Nor can gold
+come in via the mints. "No one will take bullion to the mints when he
+thereby loses half its value."[334] On the contrary, men will melt down
+coin. Nor will high prices stimulate mining. Rather, by raising the
+expenses of mining, they will discourage mining. (2) Bank-deposits
+cannot increase. Bank-deposits depend on the amount of money, and as
+that is reduced, they must be reduced, to keep their normal ratio to the
+volume of money. (3) The appeal to velocities is no more satisfactory.
+These have been already adjusted to individual convenience.[335] (4) Nor
+can trade be decreased. Since the average person will not only pay, but
+also receive, high prices, there is no reason why he should reduce his
+purchases. "_The price-level is normally the one absolutely passive
+element in the equation of exchange._"[336]
+
+"But though it is a fallacy to think that the price-level in one
+community can, in the long run, affect the money in _that_ community, it
+is true that the price-level in one community may affect the money in
+_another_ community. This proposition has been repeatedly made use of in
+our discussion, and should be clearly distinguished from the fallacy
+above mentioned. The price-level in an outside community is an influence
+outside the equation of exchange of that community, and operates by
+affecting its money in circulation and not by directly affecting its
+price-level. _The price-level outside New York City, for instance,
+affects the price-level in New York City only_ via _changes in the money
+in New York City_."[337]...
+
+"Were it not for the fanatical refusal of some economists to admit that
+the price-level is in ultimate analysis effect and not cause, we should
+not be at so great pains to prove it beyond cavil." To explain this
+"fanatical refusal," Fisher alludes to the "fallacious idea" that the
+equation of exchange cannot determine the price-level, because the
+price-level has already been determined by other causes, usually alluded
+to as "supply and demand." He urges, however, that supply and demand,
+cost of production, etc., relate, not to the price-level, but only to
+particular prices: that the price-level is a factor prior to, and
+independent of, the particular prices, and is presupposed by theories
+like supply and demand, cost of production, etc.[338]
+
+The _reductio ad absurdum_, at first blush, looks impressive. One
+obvious criticism suggests itself, however, and it will be found to give
+a clue to a much more fundamental criticism: is it reasonable to assume
+a doubling of _all_ prices? Above all, must the assumption involve the
+doubling of the price of gold bullion? Part of the argument to show that
+gold bullion would not be minted rests on that assumption. But, more
+fundamental, for such an all round doubling of prices, no _cause_ could
+be assigned. Of course the hypothesis of an increase in prices without
+any cause is absurd, and Fisher easily disposes of it. But suppose we
+assign some _concrete causes_, outside the equation of exchange, which
+might affect prices, and see how the thing works then!
+
+Fisher states on p. 95 that "other elements in the equation of exchange
+than money and commodities[339] cannot be transported from one place to
+another." And in the passage quoted above he maintains that price-levels
+in one country can influence price-levels in another country, or even
+price-levels in one city can influence price-levels in another city,
+only _via_ changes in money, in the second country or city. But other
+elements in the equation are _directly_ transferable, in fact.
+_Deposits_, _e. g._, in London, to the credit of New York bankers, may
+be transferred to Paris, directly, by _cable_ or by _letter_, and
+_prices_ are constantly being directly passed from one country or market
+to another by the same media. Let us suppose a strong case, to put our
+principle in relief. Assume an island, which produces a staple widely
+used, whose chief centre of production is outside the island. Assume
+that this staple, an agricultural product, rises greatly in price, owing
+to a blight, which promises to be permanent, in the main producing
+region. The blight does not affect the island, however. Let this product
+be the main product of our island, which we shall assume to be small.
+Let the island have communication with the outside world by boat only
+once in three months. Let it be, however, in constant communication by
+cable. Word comes by cable of the rise in the price in the staple. The
+staple at once rises in the island. No new money has come in to cause
+it. Will this be a rise in the price-level? Will there be compensating
+reductions in the prices of other things to leave the price-level
+unchanged? What prices can fall? Not the prices of goods that have been
+imported to the island, surely. They will rather tend to rise, because
+everybody on the island will feel richer than before, and will be
+disposed to buy more freely. Meanwhile, merchants and bankers on the
+island will be more ready to extend credit than before, so that they
+will be able to buy more freely. What else can fall? Not the prices of
+the land! Rather, the land will rise in price greatly, because the
+increased price of the staple, expected to be permanent, will promise
+bigger rents, and the price of the land, being a _capitalization_ of the
+annual rental, will rise very much more than anything else--it will rise
+to the extent of the capitalized price of the increase in the rents.
+Wages, likewise, will rise, since the price of the product of labor has
+risen. And the capital instruments in use in producing the staple will
+also rise, though not so much as land and wages, inasmuch as they can be
+brought in from outside at the end of three months. What is there that
+can fall--except, perhaps, such goods as are exclusively designed for
+the construction of poorhouses! A significant particular price
+rises--that is the first step; then, from causes familiar to all
+students of economics, other related prices rise; there is a general
+_sympathetic_ rise in prices, the _price-level_ has risen independently,
+from causes _outside the equation of exchange_. But now, can this rise
+sustain itself? Well, what can bring it down? When the ship comes, at
+the end of three months, it will bring in additional supplies of the
+articles of import, and they will go down to their old level. Will they
+go any lower than the old level? What is there to cause them to do so?
+The outside price-level should be higher now, rather than lower, since
+the _stock_ of the staple in question is reduced, and nothing else
+increased to compensate. Nor can any reason be assigned why other prices
+on the island: the staple in question, lands, wages, etc., should fall
+at all from the level they reached when the news first came.
+
+Incidentally, our ship may also bring in more gold. The bankers, finding
+their deposits expanding, may feel it well to cable orders for more gold
+to increase their reserves, especially as they have been subject to
+somewhat unusual calls for cash for hand to hand circulation--though
+this last need they might well have been meeting by expanding their note
+issue.
+
+Is there anything else to be said? Is not the new equilibrium stable?
+And is not the causal sequence precisely the reverse of that assigned by
+the quantity theory? _First_. a rise in prices; _second_, an expansion
+of credit, book-credit, notes and deposits; _third_, money comes in. If
+anyone is particularly anxious about the equation of exchange in this
+process, he may add to my expansion of credit an increase in velocities
+to keep it straight!
+
+I may add that I see nothing in the "transition" I have described to
+cause trade to be reduced. Rather, I should expect the rising prices to
+make trade more active--or better, I should expect the rising _values_
+of goods, etc., of which rising prices are the symptom, to make trade
+more active, particularly as there would be an increase in speculation
+to bring about readjustments, and to "discount" the prosperity. Nor can
+I find any reason why trade should be reduced below the old level in the
+new normal equilibrium. It would make no difference, however, if trade
+were reduced either transitionally or normally, since the point at issue
+is the possibility of a rise in prices originating from causes outside
+the equation of exchange, and compelling a readjustment of a permanent
+character in the other factors of the equation. The quantity theorist
+is at liberty to make this readjustment in any way he pleases. My point
+is made if he has to make the readjustment, and if the price-level stays
+up!
+
+I have put my illustration in an extreme form to throw the whole thing
+in relief, and to make the demonstration free from a host of
+complexities. But is not the causal process essentially the same if we
+substitute, say, the Southern States for our island, and cotton for our
+staple? So long as the telegraph bringing news of the ruin of cotton
+production in India and Egypt, with the higher price of cotton, can come
+in ahead of the money that the quantity theorist might imagine rushing
+in a race with it on the train to be offered for the cotton, my point is
+made. In point of fact, there would be a general rise in prices and
+wages in the South, which, leading to an expansion of credit, would only
+gradually and in no definite ratio lead to an increase in money drawn
+from outside. Buyers outside would pay, not with money, but with checks
+drawn on New York, and Southern bankers would use their discretion as to
+how much actual cash they would bring in. With the elastic note issue of
+our Federal Reserve system, I see no reason to anticipate that money
+would be drawn to the South in an amount proportionate to the increase
+in prices. Even if it were, the causation would not run from money to
+prices, and that is the point at issue. If _rising_ prices can cause
+increasing money, the whole quantity theory is upset, whatever the
+proportions involved.
+
+It will be noted that my illustration might be put partly in the form of
+the supply and demand argument. Increasing demand for cotton in the
+South leads to higher price of cotton; higher price of cotton makes
+cotton-growers richer, and enables them to increase their demand for
+imported goods, for land, and for labor. Supply and demand comes into
+conflict with the quantity theory, and does not suffer in the conflict!
+Supply and demand determine particular prices, and particular prices
+determine the price-level!
+
+Now I wish to generalize this point. I shall show that the quantity
+theory conflicts with most of our doctrines of prices, as worked out in
+our systems of economics. I shall show that, in important cases, the
+quantity theory conflicts with the law of supply and demand, with the
+doctrine of cost of production, with the capitalization theory, and with
+the doctrine of imputation as worked out by the Austrians, whereby the
+prices of labor, land, and other agents of production rise or fall with
+the prices of the consumption goods which they produce. I shall show the
+conflict in important cases, and shall show also, in those cases, that
+it is not the quantity theory which can be sustained.
+
+The general form of the conflict may be stated for all these theories.
+They are theories of the _relations_ of particular prices, concerned
+with showing that individual prices are so related that they tend to
+_vary together_. A rise in one price, according to these theories, tends
+to bring about _rises_ in others, and _vice versa_. The quantity theory,
+on the other hand, asserts a relation among individual prices such that
+a rise in one tends to bring about a _fall_ in others--it requires a
+_compensatory_ fall at one point, if there has been a rise somewhere
+else.
+
+Let us take some cases. I shall take, first, the conflict between the
+quantity theory and the capitalization theory, as I can use the
+illustration just given in connection with it. I have, in a preceding
+chapter, given a statement of the capitalization theory. It is a theory
+concerned with the prices of long-time goods and income-bearers, as
+lands, houses, capital goods of various sorts that give forth their
+services through a series of years, stocks, bonds, etc. The prices of
+things of this sort, according to the capitalization[340] theory, depend
+on two factors: one, the money income expected from the income-bearer,
+the other, the prevailing rate of interest. This money income, except in
+the case of bonds, commonly depends on the prices of the products of the
+income-bearer, or (in the case of stocks) of the products of the
+concrete capital-goods to which the income-bearer gives title. If we may
+follow the Austrian division of goods into higher and lower "orders," or
+"ranks," we may say that the prices of the goods of higher ranks are the
+capitalizations of the prices of the goods of lower ranks specifically
+produced by them. Thus, concretely, if the price of wheat rises, we may
+expect the prices of land to rise, if the rate of interest remains the
+same. If the price of steel rises, we may expect the stocks of the U. S.
+Steel corporation to rise, also. If the prices of smokeless powder, and
+other war munitions soar, we may expect the prices of the stocks of the
+corporations involved to do precisely what they have done in the recent
+course of the stock market. All this, on the assumption that the rate of
+interest does not change, and that the risk factor remains constant. If
+these factors vary, the results will not present the mathematical
+exactitude that the formula calls for, but the general tendency will
+remain the same. On the other hand, if the incomes remain unchanged,
+but the rate of interest rises, then we may expect the capitalized
+prices to fall, and if the rate of interest falls, we may expect the
+capitalized prices to rise. From the standpoint of the present
+discussion, I suppose it might be fairest and best to state the
+capitalization theory on this point as Fisher himself states it. In his
+_Elementary Principles of Economics_ (ed. 1912) after giving a table
+showing in figures the difference made in different capital prices by
+different rates of interest (p. 125) he states (126): "If the value of
+the benefits derivable from these various articles continues in each
+case uniform, but the rate of interest is suddenly cut down from 5% to
+2-1/2%, there will result a general increase in the capital values, but
+a very different increase for the different articles. The more enduring
+ones will be affected the most." And in his book, _The Rate of
+Interest_: "The orchard whose yield of apples should increase from
+$1,000 worth to $2,000 worth would itself correspondingly increase in
+value from, say, $20,000 to something like $40,000 and the ratio of the
+income to the capital value, would remain about as before, namely, 5%."
+(P. 15.) On the next page, he generalizes his notion: "One cannot escape
+this conclusion (as has sometimes been attempted) by supposing the
+increasing productivity to be universal. It has been asserted, in
+substance, that though an increase in the productivity of one orchard
+would not affect the total productivity of capital, and hence would not
+appreciably affect the rate of interest, yet, if the productivity of all
+the capital in the world could be doubled, the rate of interest would be
+doubled. It is true that doubling the productivity of the world's
+capital would not be entirely without effect upon the rate of interest;
+but this effect would not be in the simple direct ratio supposed.
+Indeed, an increase of the productivity of capital would probably result
+in a decrease, instead of an increase, of the rate of interest. _To
+double the productivity of capital might more than double the value of
+the capital._" (_Rate of Interest_, p. 16.)[341] Fisher reiterates this
+doctrine in his reply to Seager, in the _American Economic Review_,
+Sept. 1913, pp. 614-615.
+
+Now my concern here is not with the points at issue as between Fisher
+and Seager: the "impatience" vs. the "productivity" theories of
+interest. For the present, I shall accept Fisher's doctrine on that
+point as true.[342] I am here interested in Fisher's doctrine that a
+doubling of the general productivity of capital would double, or more
+than double, the prices of capital instruments, including land. How is
+such a general rise in prices possible, if the quantity theory be true?
+Is not this a rise in general prices from causes outside the equation of
+exchange? That Fisher means the _money-prices_ of capital goods when he
+speaks of capital-values is perfectly clear. In the second quotation, he
+speaks of "capital-value of $40,000", and in general, his definition of
+value runs in terms of _price_ (_e. g., Purchasing Power of Money,_ pp.
+3-4, and _Elementary Principles_, p. 17). Fisher has no absolute value
+concept in his system. We have in the passages cited two doctrines, both
+of which contradict the quantity theory: (1) that a reduction in the
+rate of interest will raise capital-prices (which are the largest factor
+by far in the price-level), and (2) that an increase in the product of
+capital goods means, not only more money paid for the products, but also
+more money paid for the production-goods. Incidentally, the general
+imputation theory would call for more money paid to laborers as well.
+How can all this be, on the quantity theory? And what can the poor
+equation of exchange do in such a case, if money does not increase, if
+bank-credit is limited by money, if velocities of circulation are fixed
+by individual habits and convenience, if trade _increases_ as a
+consequence of the increased number of goods produced, and if prices
+rise? It will not help much to assume that the productivity of gold
+mines is doubled also. The quantity of money does not depend very much
+on the annual production of gold. Besides, money need not, from the
+standpoint of the quantity theory, be made of gold. It might be
+irredeemable Greenbacks, fixed in quantity by law, or even dodo-bones!
+Would not the capitalization theory apply in the Greenback Period? I
+shall not try to solve the riddle. I am not responsible for it!
+
+The conflict between the capitalization theory and the quantity theory
+may be more simply stated. Assume that the prices of consumers' goods
+and services rise, quantity of money and volume of exchanges remaining
+unchanged. On the quantity theory, other prices, the prices of
+producers' goods and services, lands, and securities, would have to come
+down enough to compensate, in order that the price-level might remain
+unchanged. For the capitalization theory, however, the prices of lands,
+securities, and long time capital goods in general would have to rise,
+since the incomes on which they are based have risen. Wages of labor
+engaged in making consumers' goods would also have to rise, on the
+general imputation theory.
+
+The quantity theory conflicts with the capitalization theory. The
+quantity theory as presented by Fisher conflicts with the capitalization
+theory as presented by Fisher. Which theory is true? Would prices rise
+thus, or would they be held down in some way by the limitations on the
+quantity of money? I hold that I have already proved, in the reasoning
+given in connection with my hypothetical island, and in the case of the
+South with its cotton, that the capitalization theory tendency would
+prevail. The prices of products rise, and then the prices of the labor,
+land, and other capital goods which have produced them, rise, the rise
+in the prices of the capital goods behaving in accordance with the laws
+of the capitalization theory, and all of the rises after the initial
+rise in products being in accordance with the imputation theory of the
+Austrians.
+
+This conflict suggests an interesting point. Various elements in our
+economic theory, added from time to time by different writers, have
+necessarily come from different philosophical and sociological
+view-points, and have behind them different philosophical,
+psychological, and sociological assumptions. The quantity theory,
+developing, as shown in the chapter on "Supply and Demand and the Value
+of Money," largely in isolation from the general body of economic
+theory, has a background of psychological and sociological assumptions
+quite different from that of many other doctrines. In the chapter on
+"Dodo-Bones," I stated these assumptions. The quantity theory rests in a
+psychology of blind habit. It assumes a rigidity in the social system
+such that it might be likened to a machine, with a hopper into which
+money is poured, which grinds out prices at the other end. I set this in
+contrast with the psychological assumptions underlying the commodity
+theory of money. That theory rests on the "banker's psychology." It
+assumes a highly reflective and calculating attitude on the part of
+economic men, with the disposition to look behind appearances for the
+security, to test things out, to get to bedrock in business affairs. Now
+the capitalization theory likewise assumes this banker's psychology. In
+its refinements, as represented by the mathematical formulæ in the
+appendices of Fisher's _Rate of Interest_, it assumes a degree of
+precision in business calculation which few experts in bond departments
+apply, and which the highly fluid and alert dealers in Wall Street
+certainly have not time for, even if they had that degree of
+mathematical knowledge! In practice, it need not be said, particularly
+in the case of the prices of lands, the capitalization theory finds its
+predictions very imperfectly realized! But the two theories, resting in
+such divergent psychological assumptions, may be expected, _a priori_,
+to conflict. That they do conflict is not remarkable.
+
+I shall show a similar conflict between the quantity theory and the law
+of costs. In general, the quantity theorist thinks that he has
+reconciled his theory with cost theory by pointing out that reduced
+costs manifest themselves in increasing production, which means
+increasing trade, which should, on the quantity theory, mean lower
+prices.[343] I need not, for my purposes, analyze this doctrine in
+detail, though I am disposed to consider it an accident that the two
+theories converge at this point. For the present, I shall analyze a case
+where reducing costs actually come as a consequence of the _reduction_
+in the volume of trade, and inquire whether such a case will lead, as
+the cost theory would assert, to lowered general prices, or, as the
+quantity theory would assert, to _higher_ general prices. The case is
+that where by improved methods of handling goods, it is possible to
+dispense with middlemen. Concretely, assume that retailers of milk get
+in direct touch with dairymen, so that middlemen are eliminated, and
+that as a consequence the price of milk is reduced two cents a quart.
+What of the general price-level? T (trade) is reduced. There are less
+exchanges. Volume of trade does not mean volume of goods _produced_, but
+volume of _exchanges_. With a reduced trade, the quantity theory must
+assert that prices of commodities other than milk must, on the average,
+rise, not merely enough to compensate for the fall in milk, but more
+than that, enough to compensate for the reduced trade as well. But how
+can the other prices rise? Well, a point comes up obviously: the buyers
+of milk save two cents a quart. They can spend it for something else.
+This will raise the prices of other things. But, on the other hand, the
+middlemen now have less to spend. They have _exactly as much less_ as
+the others have _more_, the extra money that milk buyers have being, in
+fact, the money that the middlemen would otherwise have had. The one
+offsets the other. There is, then, no reason for the average of other
+prices to rise. Suppose we carry the process one step further. After a
+while, the middleman will find other work to do. Then they will have
+incomes again to spend. But in going to work again, they will be engaged
+in production, and so will, in general, be increasing the volume of
+trade. The quantity theorist could not expect a rise in prices from
+this!
+
+And here we are given a clue to a fundamental confusion in the quantity
+theory, a confusion which, accepted by the reader, gives the quantity
+theory much of its plausibility. I refer to the confusion between
+_volume of money_, and volume of _money-income_.[344] The two need not
+be the same. The two generally are not the same. In the case I have
+described, the one has changed without a change in the other. Now if one
+wishes to view the process of price-causation from the standpoint of
+money offered for goods,--an essentially superficial,[345] but
+frequently useful, view-point--it is clearly money-_income_, rather
+than mere quantity of money in the country that is important. Into the
+determination of volume of money-income, however, come factors of a high
+degree of complexity, among them, prices for which there is no possible
+place within the confines of so simple and mechanical a doctrine as the
+quantity theory.
+
+In passing, I notice a point to which I called attention in discussing
+Fisher's factors in the equation of exchange. I refer to his definition
+of velocity of circulation as the average of "person-turnovers" of
+money.[346] In the illustration given, there is no reason to suppose
+that this average is changed. The middlemen simply drop out of the
+average. They have no money to turn over! But velocity of circulation,
+defined as "coin-transfer," (_cf._ _supra_, p. 204) has clearly changed.
+The course of money has been short-circuited. It goes through fewer
+hands in the course of a given period. This last concept of velocity of
+circulation is clearly the one that must be used, if the equation of
+exchange is to be kept straight. But this fact should make it clear that
+velocity of circulation, instead of being the inflexible thing that
+Fisher has described, resting in individual habits and practices, a true
+causal factor in the price making process, is really a highly flexible
+thing, in large degree a passive function of trade and prices.
+
+With this distinction between volume of money and volume of
+money-income[347] clearly held, we are prepared to go further in our
+attack on the quantity theory, granting the quantity theorist all his
+most rigorous assumptions, and still demonstrating that prices can vary
+independently, without prior change in quantity of money, volume of
+trade, or velocity of money. Let us assume the extreme case of the
+quantity theory: a closed market; no credit; no barter; a fixed supply
+of money; a fixed volume of trade; a fixed set of habits affecting
+velocity, namely, that everyone spends, in the course of the month, all
+that he has accumulated by the first of the month. The quantity theorist
+could not ask a more iron-clad set of assumptions than this! If the
+quantity theory is not valid here, if the price-level is not absolutely
+fixed, helpless to change, with these assumptions, then the quantity
+theory, even as a minor tendency, must be surrendered, and the quantity
+theorist must admit that the whole line of thought has been fallacious.
+But is the price-level passive? Suppose we assume a combination of
+employers of maid-servants, which forces down the wages of maid-servants
+from $20 to $10 per month. Assume further that there is no alternative
+employment for the maid-servants, so that they all remain at work.[348]
+So far, we have made a change in _one_ price, the price of domestic
+service. What of the general average of prices, the price-_level_? Well,
+so far, the price-level is down. If nothing else takes place, we have
+reduced the price-level by reducing one price. What else can take place?
+Two things: (1) the masters now have $10 per month each more to spend
+for other things than before. That tends to raise prices in their other
+channels of expenditure. (2) The maid-servants now have $10 each less to
+spend,--the same ten dollars! That lessens prices in the lines of their
+expenditure. These last two changes exactly neutralize one another. The
+first change, in the price of domestic service, remains unneutralized.
+The general price-level is, then, lowered--by a cause acting from
+outside the equation of exchange, directly on prices. The first change
+comes in one price. In the final adjustment, that change remains
+unneutralized. How is this possible? Is the equation of exchange still
+valid? As a mathematical formula, yes. As expressing a causal theory, in
+which prices are effect, and money, trade, and velocity causes, no. The
+equation is kept straight by a reduction in velocity. _Because_ the
+wages of maid-servants are reduced, _less_ money goes through their
+_hands_; $10 per month per maid are short-circuited. But the _cause_ is
+with the _prices_. The price-level, even under these absolutely rigorous
+assumptions, is not passive.
+
+In general, I conclude that the price-level, under the laws governing
+particular prices, supply and demand, cost of production, the
+capitalization theory, the imputation theory, etc., can vary of its own
+initiative, independently of prior changes in the quantity of money, or
+of volume of trade, or other factors that the quantity theory stresses;
+and that these changes in the price-level (or in the particular prices
+which govern the price-level) can maintain themselves, and compel a
+readjustment in trade, credit, money and velocities, to correspond. This
+conclusion strikes at the very heart of the quantity theory, and, if
+valid, leaves the quantity theory disproved. More fundamentally, I
+should put it, prices can change because of changes in the psychological
+values of goods. These values are _social_ values, and are to be
+explained only by a social psychology. But for the present it has seemed
+best to me, as a means of attracting sympathetic attention from a wider
+circle of economists, to make use of the less debated doctrines of the
+science in attacking the quantity theory. It is not necessary to rest
+the case on my own special theory of value. Supply and demand, cost of
+production, the capitalization theory, the imputation theory--the
+general laws of the concatenations and interrelations of prices--are
+quite adequate for the confutation of the quantity theory. They are laws
+concerned with particular prices, and the price-level is nothing but the
+average of particular prices. Whatever explains, really explains, the
+particular prices, also explains the price-level.
+
+Fisher, as we have seen, is not of this opinion. Although he has defined
+the price-level as an average of particular prices[349] he none the less
+exalts this average into a causal entity, prior to and master of the
+particular prices out of which it is derived, of which it is a mere
+average.[350] This average, he maintains, is presupposed in the
+determination of all particular prices.[351] This seems to me a wholly
+untenable position. _Ex nihilo nihil fit._ There cannot be _more_ in the
+average than there is in the particulars from which it is derived. In
+point of fact, there is necessarily vastly less. All the concrete
+causation is lost. The average, in itself, is nothing but a _statement_,
+a summary of _results_. I know nothing more metaphysical in the history
+of economic theory than this hypostasis of an average.[352]
+
+I reject Fisher's notion that the average of prices is an independent
+entity. But I do not consider that the idea lying behind this untenable
+doctrine is absurd. Cost of production, supply and demand, and the other
+price theories _do_ presuppose something more fundamental. They do
+presuppose _money_, and the _value_ of money, as has been shown at
+length in Part I. The trouble with Fisher's notion comes in his
+definition of the value of money in purely relative terms as the
+_reciprocal of the price-level_, and his contention that the study of
+the value of money is identical with the study of price-levels.[353]
+Value is not a mere exchange relation.[354] Rather, every exchange
+relation involves _two_ values, the values of the two objects exchanged.
+These two values _causally_ determine that exchange relation. In the
+case of particular prices, then, we must consider not only the value of
+goods, but also the value of money. And the causes determining the
+general price-level will therefore include not alone the values of
+goods, but also the value of money. In the foregoing arguments by which
+I have shown that the price-level can vary independently of the other
+factors in the quantity theory scheme, I have been concerned only with
+changes in the values of goods, measured by a constant unit of value. If
+the value of money should also be varying, the concrete results on the
+price-level would have been different. On the face of things, there was
+nothing in the cases I discussed to require us to suppose that the value
+of money would also vary. The argument ran on the assumption of a fixed
+value of money. I have shown, in earlier chapters, that the assumption
+of a fixed value of money is fundamental to the laws of supply and
+demand, cost of production, and the capitalization theory. In point of
+fact, this assumption is rarely true--never strictly true. For causes
+which are in considerable degree independent of the causes governing the
+values of goods (as the causes governing their values are in
+considerable degree independent of one another), the value of money
+varies, now in the same direction as the values of goods in general, now
+in an opposite direction. Further, money itself does not escape the
+general laws of concatenation of values. The value of money has causes
+which are bound up with the values of other goods. Thus, when prices are
+rising and trade expanding, there is a tendency--commonly a minor
+tendency--for money also to rise in value, and so prices do not go
+quite as high as they would have gone had money remained constant. This
+tendency arises from the fact that there is more work for money to do in
+a period of active trade and rising prices. Gold also tends to rise in
+value in the arts, with prosperity. The reverse tendency manifests
+itself when prices are falling: money tends, in some measure, to fall in
+value with the goods,[355] and so prices do not fall as far as they
+would fall if money remained constant. But in general, the causes
+governing the values of goods, and the causes governing the value of
+money, are sufficiently independent to justify us in studying each
+separately, in abstraction, on the assumption that the other is
+unchanged. Hence, supply and demand, cost of production, and the other
+price theories, which assume a fixed value of money, are proper tools of
+thought for the study of the prices of goods.
+
+
+
+
+CHAPTER XVI
+
+THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS
+
+
+The quantity theory explanation of international gold movements is as
+follows: if money comes into a country, it raises prices. If the
+price-level of the country is raised more rapidly than the price-levels
+of other countries are rising, then the country becomes a bad place in
+which to buy and a good place in which to sell; its exports fall off,
+its imports increase, and finally the inflow of money is checked, and,
+perhaps, money flows out again. The equilibrium of the gold supplies of
+different countries is thus dependent on the price-levels of the
+countries involved. The quantity of gold in a country determines its
+price-level, and no more gold can stay in a country, on this theory,
+than that amount which keeps its price-level in proper relation to the
+price-levels of other countries. It is not necessarily asserted that the
+price-levels of all countries must be equal--the facts too obviously
+contradict that. But when this precise statement is not made, the
+substitute statement of some "normal" relation between the price-level
+of one country and that of another becomes a very vague one, and the
+theory becomes pretty indefinite.
+
+I am here concerned chiefly with one contention: the price-_level_, the
+average of prices, is not a _cause_ of anything--not of gold movements
+or anything else. It is a mere summary of many concrete prices. Some of
+these concrete prices have highly important influence on international
+gold movements, tending, if they are low, to bring gold in, and if they
+are high, to repel gold. Others work in the opposite direction, tending
+if they are low to attract less gold than if they are high. Finally,
+among all the prices affecting international gold movements, the one
+which is most significant is commonly not included in the price-level at
+all: I refer to the "price of money," the short-time interest rate.
+
+Let me elaborate each point. First, it is true that high prices of
+articles which enter easily into international trade tend to repel gold
+from the country--meaning by "high prices" prices that are higher than
+the prices of the same goods abroad. This relates, however, not to the
+general price-level, but only to a comparatively small set of prices.
+Most prices in a country are not prices of articles of international
+trade. High wages may, indeed, draw in immigrants. But high land rents,
+and high prices of land cannot bring in land. Nor do high land prices
+send away much gold to other countries for the purchase of land there.
+Indeed, within a single country, the differences in the relation between
+land yield and capital value of land are enormous. The following figures
+are taken from an article by J. E. Pope:[356] In Yazoo Co., Mississippi,
+farm lands are sold at $10 to $25 per acre. The average gross income per
+acre is $28. In Cass Co., Iowa, the land prices are from $100 to $125
+per acre while the gross income amounts to only $11 per acre, if only
+crops and dairy products are taken into account, and to $20 if the sales
+of live stock are included. In Oglethorpe Co., Georgia, the average
+price is from $10 to $25 per acre, and the average income $10. In
+Paulding Co., Ohio, land is sold at from $75 to $100 per acre, and the
+average income per acre, including returns from live stock sold, is $15.
+Why should not landowners in Cass County, Iowa, sell their comparatively
+unproductive land, at a high price, and go, with their money, to Yazoo
+County, Mississippi? The answer is simply, that they would have to go
+_with_ their money, and they prefer to stay at home! Absentee
+landlordism is not generally popular with men who are seeking paying
+investments. Land stands at one extreme. But then land is the very
+biggest item in an inventory of wealth, and, while not _as land_,
+actively bought and sold,[357] it is a big element in the values of many
+active securities. The principle holds in less degree of many other
+things, however. The securities of a local corporation, say a gas plant,
+find their best market at home, as a rule, unless the city be large. If
+they are held by foreign capitalists, they still find a very restricted
+market in the foreign country. Only those who have investigated at first
+hand will feel free in buying them--unless, indeed, they are guaranteed
+in some way by a big and well-known house. Prices of personal and
+professional services vary enormously in different sections of the same
+country, to say nothing of variations between different countries, and
+there is a very slow movement indeed toward bringing about higher
+salaries for rural preachers in Kansas because the salaries of London
+preachers have risen, or because of increased demand for preachers in
+Germany. Great numbers of commodities are too bulky to move far. Their
+prices vary with little relation to similar prices elsewhere. But the
+principle needs no more elaboration. If the reasoning be simply that men
+tend to buy where things are cheap, and to sell where things are dear,
+it is clear that that establishes a very loose relation indeed between
+the price-levels of different countries.
+
+The second point is that some prices, by rising, actually bring in gold
+from abroad, while by falling they tend to release gold. I am not here
+referring to the case discussed in the chapter on "Supply and Demand,"
+where a commodity, cotton, with an inelastic demand, is doubled, the
+doubled quantity selling for a less aggregate price, and so bringing in
+less money from abroad. That case would bear considerable
+generalization. I am referring here to the case where _credit_ is built
+on the value of long time goods, as lands, or railroads. Concretely, let
+us suppose an increase in railroad rates allowed by the Public Service
+Commission of Missouri. This is, in itself a rise in prices. It will,
+further, on the capitalization theory, make the prices of stocks of the
+roads operating in the State rise also, and give a margin of additional
+security for bond-issues. This will make it possible for these roads to
+float foreign loans (or would have done so before the War), and so will
+tend to turn the exchanges in our favor. Gold will tend to come in, not
+to go out. Similarly if the prices of dairy products, or truck gardens,
+or orchards, or orange groves rise, leading to a rise in the prices of
+the lands involved, foreign capital will tend to come in as loans--_i.
+e._, the exchanges will turn more favorable to us, and the gold movement
+tend to turn our way. I suppose, by the way, that something of a point
+could be made against the Single Tax at this point: destroying land
+values would lessen the security which a community could offer outside
+lenders. The Single Tax would, thus, hamper the development of countries
+which need capital from outside. Men who wish to use their own capital,
+under their own management, might, as the Single Taxers claim, be
+tempted to come in, if they could be free from taxation on the capital
+they bring with them; but _lenders_, who wish a good margin of security,
+would find less inducement to lend.[358] This is a digression, but one
+feature of it is pertinent: though the foreigner does not care to
+migrate from his high-priced land to _low_-priced land elsewhere, he is
+often willing to trust a _loan_ to the owner of _high_-priced land
+elsewhere. I will not venture the generalization that high-priced land
+necessarily attracts loans, and tends to turn the gold movements in
+favor of the country where prices are high. The point has been made that
+if lands are being exchanged frequently, the new buyer tends to exhaust
+his credit resources in paying for the land: _i. e._, puts so large a
+mortgage on it that he has little margin of security to offer for
+working capital.[359] I shall not here undertake to determine how far as
+a matter of fact, in different places, the one tendency outweighs the
+other. It is enough to point out that in many cases, where this factor
+is absent (as in the case of the railroads cited), rising prices
+attract, and do not repel, foreign gold, and that for none of these
+cases is the consequence of rising prices for the gold movements to be
+explained in the simple way that the quantity theory doctrine would
+require.
+
+Finally, the international movements of gold[360] are enormously moved
+by the short-time rate of interest. The raising of the Bank Rate in
+England, supplemented, when necessary, by "borrowing from the market" by
+the Bank of England, as a means of making the Bank Rate effective,
+quickly turns the course of the exchanges. This is, as has been pointed
+out, a more effective device when used by the English money-market than
+when used by borrowing countries, since the borrower, by offering higher
+rates, is not always able to borrow more, whereas the lender, by
+demanding higher rates, is usually able to reduce his loans. But the
+difference is one of degree, and in point of fact a rise in the short
+time rates in New York City is commonly an effective means of bringing
+in gold from abroad. It is true that this is not the only factor. I have
+been at pains to point out how other factors work. I am as far as
+possible from denying the powerful influence of the "balance of trade"
+as treated by the older economists on international gold movements, when
+both visible and invisible items are included. But my point is, first,
+that these invisible items are numerous and flexible, and that a big
+factor in their determination is the short time rate of interest; and
+second, that the balance of physical items, even, depends, not on the
+price-level as a whole, but merely on the prices of those particular
+goods which enter into foreign trade. It is perfectly possible, and,
+indeed, is very common, for rising prices in a country to lead to
+expanding trade and expanding bank-credit, which causes bankers to wish
+to expand their reserves, which leads them to raise their rates on short
+time loans, which leads gold to come in from abroad. More simply still,
+the bankers may merely offer an attractive rate to the foreign bankers,
+and establish credits abroad, against which they draw "finance bills,"
+which influence the gold movements in the desired manner.
+
+
+
+
+CHAPTER XVII
+
+THE QUANTITY THEORY _vs._ GRESHAM'S LAW
+
+
+There is a pretty obvious conflict between the quantity theory and
+Gresham's Law. The latter is, essentially, a "_quality_" theory of
+money. For the quantity theory, dodo-bones, or anything else will do.
+"It is the number, and not the weight, that is essential"![361] For
+Gresham's Law, the weight makes all the difference in the world, if it
+is a question as between full weight and light weight coins, and, in
+general, the _value_ of the thing of which money is made, considered in
+its commodity aspect, is the starting point of that doctrine.
+
+The quantity theorist seeks, indeed, to harmonize the two. His theory is
+that Gresham's Law manifests itself only when there is a _redundancy_ of
+the currency due to the issue of paper money, or overvalued metal. In
+such a case, prices rise, he holds, and then the undervalued metal, or
+the metallic currency, which count no more than the paper or the
+overvalued metal in circulation, tend to leave the country, to another
+country where prices are lower, or tend to leave the money use for the
+arts. But the quantity theorist must maintain that it is only _via_
+increased issue, with consequent rising prices, that Gresham's Law comes
+into operation. If there are a million dollars of gold in circulation,
+and a half million of irredeemable paper is added, then only half a
+million of the gold (or rather a little less than half) will leave. If
+more than that left, prices would fall, because of the scarcity of
+money, and then the gold would come back, because it would be worth
+more in concurrent circulation with the paper than it would be worth as
+money abroad, or in the arts. On the quantity theory, there can be no
+difference in the value of gold and paper, in such a case, after enough
+gold has left to balance the paper that has been issued. Falling prices
+would prevent it.
+
+But Gresham's Law is not held by any such fetters! And the facts of
+monetary history, in important cases, show Gresham's Law controlling,
+despite the quantity theory. I will refer briefly to two such cases.
+
+The first centres about the suspension of specie payments by the
+Northern banks and the Federal Treasury on January 1, 1862. This
+suspension was not accompanied by any increase of money. Rather, there
+was a _decrease_,[362] shortly following, in the amount of paper money.
+The banks in New York, and certain other States, were bound so strictly
+by their charters, and by the State laws, that they dared not leave
+their notes unredeemed. Speculators, buying notes at a discount--for
+virtually all bank-notes fell to a discount--were able to present them
+to the banks in these States and demand gold, which led to a very
+profitable business. The banks protected their gold by ceasing to issue
+notes, or by reducing the volume of note issue. Certified checks were
+used to a considerable extent instead. There was certainly no increase,
+and probably a reduction, a considerable reduction, in the volume of
+bank-notes in circulation. The only other paper money in circulation was
+the Demand Notes of the Federal Government, which were not increased
+after the date of the suspension, and which were in any case small in
+volume as compared with the total amount of money. On the quantity
+theory version of Gresham's Law, there was nothing to drive gold out.
+Gold was _not pushed out_ by redundant currency. Rather, it _left_,
+leaving a monetary vacuum behind. Coincidently, strangely enough, prices
+_rose_. The vacuum in the money supply was so serious, that the
+subsequent first issue of the Greenbacks brought a welcome relief.
+Throughout the whole of the first year of the suspension, the volume of
+money was less than it had been in the preceding year. None the less,
+the gold stayed out of general circulation. It did not come back from
+abroad. And prices _rose_.[363]
+
+A similar episode, the obverse of this, occurred when the Bank of
+England _resumed_ specie payments in the early '20's. Then gold came
+back, the currency was increased, and, coincidently, _prices fell_.[364]
+
+I conclude that the conflict between Gresham's Law and the quantity
+theory is real and fundamental, and that in cases where different
+_qualities_ of money are in concurrent circulation, the undervalued
+money will leave, regardless of the question of quantity.
+
+
+
+
+CHAPTER XVII
+
+THE QUANTITY THEORY AND "WORLD PRICES"
+
+
+Some writers, who would call themselves quantity theorists, would
+repudiate many of the doctrines for which Fisher stands, and which the
+historical quantity theory involves. The recognition which Fisher's book
+has received from quantity theorists generally, justifies me in treating
+his book as the "official" exposition of the modern quantity theory,
+and, indeed, it is easy to show that Fisher is fundamentally true to the
+quantity theory tradition. With many writers, the disagreement with
+Fisher would be a mere matter of degree; they would hold that Fisher has
+set forth the central principle, that his qualitative reasoning is
+correct, but that the relations among the factors in his equation are
+less rigid than he maintains. As I reject even the qualitative reasoning
+by which Fisher defends his doctrine, and reject even the qualitative
+tendency which he maintains, my criticisms will apply as well to the
+position of this group of writers, though I should have less practical
+differences with them, to the extent that they admit qualifications and
+exceptions to Fisher's doctrine.
+
+There is, however, a group of writers who seem to feel that the quantity
+theory remains sufficiently vindicated if it can be shown that an
+increase in _gold production_ tends to raise prices throughout the
+world, while a check on gold production tends to lower prices, and who
+rest their case on the necessity which bankers find of keeping reserves
+in some sort of relation to the expansions of bank-credit.
+
+A view of this sort is presented by J. S. Nicholson, whose statement of
+the application of the quantity theory to the modern world differs
+almost _toto coelo_ from his original statement in the dodo-bone
+illustration already discussed. Nicholson[365] declares that in our
+modern society "the quantity of _standard_ money, other things remaining
+the same, determines the general level of prices, whilst, on the other
+hand, the quantity of _token_ money is determined by the general level
+of prices." Nicholson's reasoning is, substantially, as follows:
+Although the bulk of exchanging is carried on by means of credit
+devices, there is still a certain part of exchanging, especially in the
+matter of paying balances, for which standard money only can be used. He
+regards the whole credit system as based on standard money, and says
+that for any given level of prices there is a minimum amount of standard
+money, absolutely demanded. If the volume of standard money falls below
+this minimum, the price-level will fall to such a point that the volume
+of standard money is again adequate. He takes, moreover, a world-wide
+view, declaring that it is the relation between the volume of gold money
+throughout the world and the demand for standard money throughout the
+world which determines the relative values of money and commodities.
+"The measure of values or the general level of prices throughout the
+world will be so adjusted that the metals used as currency, or as the
+basis of substitutes for currency, will be just sufficient for the
+purpose. We see then, that the value of gold is determined in precisely
+the same manner as that of any other commodity, according to the
+equation between supply and demand."
+
+In the consideration of this doctrine, let us note several points in
+which it differs fundamentally from the quantity theory proper, and from
+the situation assumed in the dodo-bone illustration. First, it is not a
+quantity theory of _money_. Money is not regarded as a homogeneous
+thing, each element having the same influence on prices. Rather, _token_
+money is the child of prices. This doctrine would in no way fit in with
+the logic of the equation of exchange, as presented by Fisher. Further,
+the dodo-bone idea is entirely gone. _Gold_, a commodity with value in
+non-monetary employments, is under discussion, and it is the quantity of
+gold that is counted significant. This recognizes, if not the need, at
+least the _existence_, of a commodity standard. Nicholson definitely
+avows the necessity for the _redemption_ of representative money, even
+going so far as to say that "all credit rests on a gold basis,"[366]
+that all instruments of exchange derive their value from the volume of
+standard money which supports them, and that if this basis were cut away
+the whole structure would fall. Nicholson recognizes, further, that gold
+has value independent of its use as money.[367]
+
+In evaluating Nicholson's doctrine, I wish to point out, first, the
+inaccuracy of the statement that all credit rests on a gold basis. It is
+true that credit instruments are commonly drawn in terms of standard
+money, which is commonly gold. International credit instruments may even
+specify gold, and the same thing happens at times within a country. But
+commonly, in this connection, gold functions, not as the value basis
+lying behind the credit instrument, the existence of which justifies the
+extension of the credit, but rather as the _standard of deferred
+payments_, by means of which the credit instrument may be made definite.
+The real basis of the value of a mortgage is not a particular sum of
+gold, but rather the value of the farm, expressed in terms of gold. The
+basis of a bill of exchange is not a particular sum of gold, but rather
+is the value of the goods which changed hands when the bill of exchange
+was drawn,[368] supplemented by the other possessions of drawer, drawee,
+and the endorsers through whose hands it has gone. Even a note unsecured
+by a mortgage, or not given in payment for a particular purchase, is
+based, in general, on the value of the general property of the man who
+gives it, and on the value of his anticipated income.[369] So
+throughout. Credit transactions, for the most part, originate in
+exchanges, and carry their own basis of security in the goods and
+securities which change hands, not in that small fraction of the world's
+wealth, the stock of gold, which could, Coin Harvey asserted in the
+middle '90's, be put in the Chicago grain-pit! And now let me extend
+this idea. Although coin made from the standard of value is a great
+convenience, there is yet no vital need, in theory, for a single dollar,
+pound or franc made from the standard of value. If gold should cease
+entirely to be used as a medium of exchange, or in bank or government
+reserves, if the gold dollar should become a mere formula, so many
+grains of gold, without there being any coins made of it, still, so long
+as that number of grains had a definite, ascertainable value,
+commensurate with the value of some other commodity which could be used
+as a means of paying balances and redeeming representative money, the
+gold dollar could still serve as a measure and standard of values. In
+the situation I have assumed, silver bullion, at the market ratio, could
+perform all the exchange and reserve functions now performed by gold,
+even though not so conveniently.[370] Nicholson's description of the use
+of gold as a reserve, while calling attention to an important fact, has
+led him into the error of supposing that what may be true of gold, the
+_medium of exchange_, and _reserve for credit operations_ is necessarily
+true of the _standard of value as such_.
+
+Nicholson is correct, however, in looking to the standard of value for
+part of the explanation of changes in prices. And, _since it so happens_
+that a considerable part of the value of the standard of value comes
+from its employment as medium of exchange and reserve, he is correct in
+looking to its use as money as part of the explanation of its value. His
+error comes, however, in failing to see that independent changes in the
+values of goods may also change the price-level, and that variations in
+the demand for gold as a commodity may also change the value of gold,
+and so change the price-level.
+
+Further, in so far as Nicholson clings to the notion of prices as
+depending on a mechanical equilibration of physical quantities, he is
+subject to the criticisms given before of the general quantity theory,
+and in so far as he clings to the identity of the value of gold with the
+reciprocal of the price-level,--the relative conception of value--he is
+subject to the criticisms already urged.
+
+Again, even for a single country, the connection between volume of
+reserves and volume of credit is very loose and shifting. A thousand
+factors besides volume of standard money in a country determine the
+expansions and contractions of credit, and the long run average of
+credit. For the whole world, this connection is even looser. To assume a
+fixed ratio between them for the whole world, one would have to assume
+that all the world was simultaneously, and normally, straining its
+possibility of credit expansion to the utmost, so that the minimum
+ratio--a notion which is far from precise[371]--should also be the
+normal maximum, and so that no country, in expanding its credit, could
+draw in new reserves from other countries which had more quiescent
+business conditions.
+
+Nicholson's notion of the world price-level, moreover, is subject to the
+criticisms I have made in the chapter on "The Quantity Theory and
+International Gold Movements." How can the world level have a close
+connection with the volume of gold, if different elements in the world
+price-level, the price-levels of different countries, can vary so widely
+and divergently as compared with one another? Even granting--which I do
+not grant, and which I maintain I have disproved--that the price-level
+in one country has a close connection with its stock of gold, would it
+not be true that the average price-level for the world would vary
+greatly, with the same world stock of gold, depending on which countries
+had the gold?
+
+There is nothing in Nicholson's doctrine which seems to me to justify in
+any degree the doctrine that prices, in a single country, or in the
+world at large, show any tendency to _proportional_ variation with the
+quantity of money, or with the world's stock of gold.
+
+Is it not true, then, that there is _some_ sort of relation between gold
+production and world prices? It is. Gold is like other commodities. Its
+value tends to sink as its quantity is increased. As its value sinks,
+prices tend to rise. As to the elasticity in the value-curve for gold, I
+think it will be best to reserve discussion till a later chapter,[372]
+in Part III. We shall there find reason for thinking that gold has much
+greater elasticity in this respect than most other commodities. That its
+value should fall _proportionately_ with an increase in its quantity, I
+should not at all conclude. Even if its value did sink proportionately
+with an increase, prices would rise proportionately only if the values
+of goods remained unchanged.
+
+But why do we need a _quantity theory_ of _money_, with all its
+artificial assumptions, and its law of strict proportionality, to enable
+us to assert the simple fact that gold, like other commodities, has a
+value not independent of its quantity? What theory of money would deny
+it? Surely not the commodity or bullionist theory. For that theory,
+which seeks the explanation of the value of money in the value of gold
+in the arts, it would go without saying that an increase in the supply
+of gold for the arts would lower its value there and consequently, its
+value as money. Surely the theory which I shall maintain in Part III of
+this book will not deny that increased gold production tends to lower
+the value of money, and consequently to raise prices. With the "quantity
+theorist" who is content with this conclusion, I have no quarrel--unless
+he claims this obvious truth as the unique possession of the quantity
+theory!
+
+
+
+
+CHAPTER XIX
+
+STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY OF A
+BURIED CITY
+
+
+In the following chapter, as in most of the preceding chapters,
+constructive doctrine is aimed at, even though the discussion takes, in
+considerable part, the form of critical analysis of opposing views. We
+shall seek to set forth the facts, as far as may be, regarding the
+relations of banking transactions to trade, the relations of clearings
+to amounts deposited in banks, the relation of New York City clearings
+to country clearings, and of New York bank transactions to bank
+transactions in the rest of the country. We shall seek to ascertain the
+extent of variability in that highly elusive magnitude, "velocity of
+circulation," particularly "V´." We shall indicate something of the
+bearing of index numbers of prices on the theory of the value of money
+as here presented. In reaching conclusions on these and related matters,
+we shall build on the investigations of Dean Kinley, on the very
+interesting statistical studies of Kemmerer and Fisher based on Kinley's
+figures, on investigations more recently made by the American Bankers'
+Association regarding the relation of bank transactions and bank
+clearings, on figures from reports by the Comptroller of the Currency,
+as well as on other sources. One purpose of the chapter is to criticise
+the statistics which purport to prove the quantity theory. The bulk of
+the chapter is given to this. But the work of Fisher and Kemmerer thus
+criticised yields rich rewards for the study. The conclusions they have
+drawn from their figures are, in the judgment of the writer, untenable,
+but the figures themselves are of immense interest and importance.
+
+The controversy over the quantity theory has been waged with many
+weapons. Theory, history, and statistics--to say nothing of
+invective!--have been freely employed. In large measure, the statistical
+studies have been concerned with the direct comparison of quantity of
+money and prices, in their variations from year to year. One of the best
+of these studies, that of Professor Wesley C. Mitchell, in his _History
+of the Greenbacks_ (followed by his _Gold, Prices and Wages under the
+Greenback Standard_), has, to the minds of many students, including the
+present writer, put it beyond the pale of controversy that the
+fluctuations in the gold premium, and in the level of prices, in the
+United States during the Greenback period, both for long periods and for
+daily changes, were not occasioned by changes in the quantity of
+money,[373] but rather, primarily, by military and political events, and
+other things affecting the credit of the Federal Government, together
+with changes affecting the values of gold and of goods. Professor
+Mitchell's discussion is so detailed and thorough, that what controversy
+remains relates, not to his facts, but rather to the possibility of
+interpreting those facts in harmony with the quantity theory, by
+repudiating the notion that the direct comparison of gold premiums or of
+prices with quantity of money gives a valid test.[374]
+
+Recent defenders of the quantity theory have undertaken the examination
+of more complex statistics than those concerned with the simple
+concomitance of quantity of money and prices. Two of these studies, the
+first by Professor Kemmerer[375] and the second by Professor Fisher,
+are so elaborate, have commanded such general attention, and have been
+accepted by so many students as conclusive demonstrations, that I feel
+it proper to give them detailed examination. I do this especially
+because highly important facts for our construction argument emerge from
+this critical examination. Kemmerer's and Fisher's studies reach
+high-water mark in the effort to give statistical demonstrations of the
+quantity theory. If they are invalid, then I know no other attempts
+which many students would suppose to be possible substitutes. The theory
+involved in both these studies is clearly stated by Professor Kemmerer:
+"A study of this kind, to be of any value, must cover the monetary
+demand as well as the monetary supply. Any test of the validity of the
+quantity theory consisting merely of a comparison of the amount of money
+in circulation with the general price-level is as worthless as would be
+a test of the power of a locomotive by a simple reference to its speed
+without taking into account the load it was carrying or the grade it was
+moving over." This criticism of many previous studies is, in general, I
+think, valid, though I should except from this list such detailed
+studies as that of W. C. Mitchell, who takes account, as far as may be,
+of all the variables involved, and who considers day by day and week by
+week changes. I think the older studies of Tooke,[376] may also be
+excepted. In point of fact, if one wishes to know how much reliance may
+be placed in the quantity theory as a basis for prediction, when one
+knows that money is increasing, the simple comparison of money and
+prices is a fair test. If the "other things" which must be "equal" are
+so numerous and complex that the quantity theory cannot manifest itself
+in a direct comparison, much of its significance _as a basis of
+prediction_ is gone.
+
+It is perfectly true, however, that studies running through long
+periods, which give simply figures for general prices and figures for
+quantity of money, omitting volume of trade, are not very relevant
+either for proof or disproof.[377] And the conception underlying the
+studies of Kemmerer and Fisher, that not merely money and prices, but
+also volume of bank-credit, volume of trade, velocity of monetary
+circulation, and velocity of bank-credit, must be measured, undoubtedly
+represents a big advance in the conception of the statistical problem
+involved. The mere stating of the problem is an intellectual achievement
+of no mean order, and the ingenuity and scholarship involved in seeking
+data for concrete measurement of these highly elusive elements must
+command the admiration of every student of monetary problems. Volume of
+trade, velocity of money and velocity of bank-credit had been generally
+supposed, until these studies were undertaken, to be beyond the reach of
+the statistician. There can be no doubt at all that the efforts to
+measure them, or to measure variations in them, by Kemmerer and Fisher,
+have greatly advanced our general knowledge of the phenomena of money
+and credit.
+
+With great admiration for the magnificence of the problem undertaken,
+and for the industry, ingenuity and scholarship which have been devoted
+to its solution, I have nevertheless reached the conclusion that the
+figures assigned by these writers to the magnitudes of their "equations
+of exchange" are, with the exceptions of the figures for money and
+deposits, widely at variance from the real facts in the case, and
+second, that if they were correct, they could in no sense be said to
+constitute proof of the quantity theory.
+
+In the critical analysis which follows, chief attention will be devoted
+to Fisher's statistics. His is the later study, and it follows, in main
+outlines, the methods laid down by Kemmerer. He has employed Kemmerer's
+statistics in considerable part, amplifying them for later years, using
+some data not available when Kemmerer wrote, and undertaking a fuller
+solution of certain problems than Kemmerer did. I shall, however, from
+time to time make reference to Kemmerer's figures, and show points of
+difference between the two studies.
+
+Let me first briefly state the second point of my criticism of these
+studies: namely, that even if the statistics are correct, they do not
+constitute proof of the quantity theory. The statistics purport to be
+concrete data filling out for different years the equation of
+exchange.[378] But the equation of exchange, as we have seen, does not
+prove the quantity theory. The quantity theory is a _causal_ theory, and
+causation involves an order _in time_. The concrete figures for the
+equation do not prove that. Even Kemmerer's concluding chart on p. 148,
+showing a rough concomitance between "relative circulation" and general
+prices does not show that changes in relative circulation are _causes_
+of changes in general prices. The causation might be the reverse for
+anything his figures tell us. Fisher himself recognizes this, in
+considerable degree: "As previously remarked, to establish the equation
+of exchange is not completely to establish the quantity theory of money,
+for the equation does not reveal which factors are causes and which are
+effects."[379] Again: "But, to a candid mind, the quantity theory, in
+the sense in which we have taken it, ought to appear sufficiently
+secure without such checking. Its best proof must be _a priori_."[380]
+
+The main criticism here, however, relates to the figures themselves,
+rather than to their meaning. The figures given by Professor Fisher are
+concrete magnitudes to fill out his equation of exchange, MV + M´V´ =
+PT[381] for the years since 1896. Thus, for 1909, the figures are: M =
+1.61 billions; M´ = 6.68 billions; V = 21.1; V´ = 52.8; P = $1; T = 387
+billions.[382]
+
+Now in what follows, I shall challenge all these estimates except P for
+1909, V for 1896 and 1909, and M and M´ for all years. The figures for M
+and M´, being the results of fairly simple computations based on
+Governmental statistics, need not be questioned. P for 1909 is
+arbitrarily placed at $1.00. V for 1896 and 1909, for reasons which will
+later appear, is better based than for other years, though Kemmerer and
+Fisher have differed greatly in their estimates for V, the former
+placing it at 47 and the latter at 18 or 20.[383] My criticisms with
+reference to V, however, will relate to the years other than 1909 and
+1896.
+
+The sources from which these absolute magnitudes are drawn are,
+primarily, two investigations by Dean David Kinley, one in 1896 and the
+other in 1909, in coöperation with the Comptroller of the Currency.[384]
+The purpose of these investigations was to ascertain the proportions of
+checks and money in payments in the United States. Banks of all kinds,
+national and State banks, trust companies, private banks, etc., were
+requested by the Comptroller to supply data for a given day (March 16 in
+1909) showing what their customers deposited on that day. They were
+asked to classify these deposits as cash, on the one hand, and as
+checks, drafts, etc. on the other. They were also asked to give a cross
+classification of the same deposits, as "retail deposits," "wholesale
+deposits," and "all other deposits." In 1909, over 12,000 banks of all
+kinds, out of about 25,000 banks, replied, and of these replies 11,492
+were in available form. These replies showed a total of deposits of over
+688 millions of dollars. Of this total, 647 millions were in checks, so
+that checks made up 94.1% of the whole. About 60 millions of this total
+were retail deposits, about 125 millions were wholesale deposits, and
+the rest, about 503 millions, were classed in the "all other" category.
+Kinley's use of these figures, _for his purpose_, seems to me in every
+way conclusive and safe. He was interested merely in the question of the
+_proportions_ of checks and money in _payments_, retail, wholesale, and
+"_all other_." The absolute magnitudes of the elements in the equation
+of exchange he was not trying to measure. Professor Fisher's use of the
+figures presents a different problem.[385]
+
+Let us consider, first, Professor Fisher's estimate of M´V´, taken
+together. M´V´ is considered to be equal to the total amount (in
+dollars) of checks deposited during the year.[386] To get this, for
+1909, Kinley's figure, above, for checks deposited in 11,492 banks on
+March 16, 1909, is used. This figure is 647 millions. As half the banks
+had not reported, an estimate for the non-reporting banks was obtained
+from Professor Weston, who had aided Dean Kinley in the investigation,
+and who had access to the original data. Professor Weston estimated the
+total checks deposited during the day at 1.02 billions.[387] The
+question then arose as to whether this day was typical for the year.
+Professor Fisher found New York City bank clearings of March 17 (the day
+after, on which these checks would get into the clearings) to be 28%
+below the average for the year. He assumed the rest of the country to be
+half as abnormal as New York City, and increased the 1.02 billions to
+1.20 billions, getting what he conceived to be the daily average of
+checks deposited in the United States in 1909. Multiplying this figure
+by 303, the number of banking days in New York City (and so, presumably,
+a fair average for the number of banking days in the country), he
+obtained 364 billions for the checks deposited in 1909. This figure he
+considered to be M´V´, the volume of bank deposits,[388] multiplied by
+its velocity of circulation. To obtain V´, therefore, his problem was
+simple: he divided the figure for M´V´ by the figure for M´ previously
+obtained from government statistics, and obtained V´.
+
+Now I wish to call attention to three important errors involved in this
+calculation of M´V´ for 1909. (1) The assumption that the total check
+circulation is the same as the volume of checks actually used in _trade_
+is a violent one. _Payments_ may be tax payments, loans and repayments,
+gifts, what not. Many checks may be used in a single transaction. Surely
+not all of this is properly to be counted in the M´V´ of the equation of
+exchange. But this topic is better discussed in connection with the
+estimate for T, and I reserve its fuller discussion till then. (2) The
+assumption that the rest of the country was abnormal in its clearings on
+March 17, 1909, is a pure assumption, which investigation does not
+verify. The rest of the country was, in fact, nearly normal! The error
+that comes for the year from increasing the total on this assumption
+amounts to at least 31 billions! The total for the year, on Professor
+Fisher's method of computation, with the correction to make the
+assumption regarding outside clearings correspond with the facts, is 333
+billions, instead of 364 billions! As the figure for 1909 is a basic
+figure, on which figures for other years are calculated, this error is
+extremely significant.[389]
+
+(3) A yet more serious error in this computation is the assumption that
+New York City was complete in Kinley's figures, while the rest of the
+country was incomplete. This error, as we shall see, largely neutralizes
+the error above, so far as the "finally adjusted" figure for 1909 is
+concerned, but it makes a vital difference in the figures for other
+years, as will appear, since it affects the "weighting" of New York
+clearings and outside clearings in the index of variation by means of
+which M´V´ for years other than 1909 is determined. The assumption that
+New York is complete, in Kinley's figures, and that all of the extra
+hundreds of millions added by Professor Weston in his estimate for the
+non-reporting banks belongs to the country outside New York, is made by
+Professor Fisher both on pp. 444-445, in estimating M´V´ for 1909, and
+on p. 446, in finding an index of variation for M´V´. The only reason
+given, so far as I can find, is the following: "This figure, _being for
+New York_, [Italics mine], is probably nearly complete." (_Loc. cit._,
+p. 446.) With this as a basis, Professor Fisher proceeds in his
+calculations to treat the figure for New York, 239 millions, as
+absolutely complete, and gives the rest of Professor Weston's 1.02
+billions for the day, or 786 millions, to the country outside. The error
+above mentioned, of assuming the rest of the country to be abnormally
+low on March 17 in its clearings, still further increases the amount
+assigned to the rest of the country in the total figures for the
+year.[390] The conclusion finally is that New York had deposits of 93
+billions in checks for the year, while the rest of the country had
+deposits of 271 billions in checks. As New York clearings for the year
+were 104 billions, while clearings for the rest of the country were only
+62 billions, Professor Fisher concludes that New York clearings
+overcount New York check deposits, and outside clearings greatly
+undercount outside check deposits, so that, in the index of variation of
+check deposits, for years other than 1909 and 1896, New York clearings
+should be given a weight of only 1, while outside clearings should be
+weighted by 5. "That is, on the basis of 1909 figures, five times the
+outside clearings plus once the New York clearings should be a good
+barometer of check transactions." (P. 447.) All this rests on the
+assumption that New York figures for March 16, 1909, were complete, and
+the only reason assigned is, "being from New York!"
+
+Now the figures from New York were not complete. And New York clearings
+do not overcount New York check deposits. Outside clearings do not
+undercount outside check deposits nearly to the extent that Professor
+Fisher assumes. For each of these three statements I shall offer what
+would seem to be conclusive evidence, and I shall attempt to get an
+estimate of the real relation between New York check transactions and
+check transactions for the rest of the country.
+
+First, the figures for New York were far from complete. It may be noted
+that Dean Kinley, in his volume for 1909,[391] is very careful to
+repudiate the assumption that the cities were complete more than the
+country: "Moreover, it is a mere assumption that the non-reporting banks
+are mainly the small banks in the country districts. _A great many city
+banks also did not report._" (Italics mine.) That this is true for New
+York is abundantly evident from figures there given for the private
+banks and the trust companies, not to consider at all the State and
+national banks. New York shows only $1,751 in checks deposited in the
+"all other deposits" in private banks! This is a city which includes
+among its private bankers J. P. Morgan & Co., Kuhn, Loeb and Co., J. &
+W. Seligman & Co., and others! Figures from these banks appear nowhere
+in Kinley's totals, since deposits made _by_ these banks in other banks
+are also excluded from Kinley's figures.[392] Of course, exact figures
+cannot be given to show how much New York would be increased had the
+private banks made full reports. We have no reports of any kind from
+these institutions. Every feature of their business is kept from the
+lime light, as far as possible--a practice which is much to be
+regretted, since it arouses hostility and suspicion, where a statement
+of the facts in the case would frequently entirely dispel them. We have,
+however, some information regarding the magnitude of their deposits,
+meaning by deposits, not what Kinley means in this investigation,
+namely, checks, etc., _deposited_ on a given day, but rather, deposits
+in the balance sheet sense of demand obligations to depositors. In Nov.
+1912, J. P. Morgan and Co. held deposits of $114,000,000, exclusive of
+49 millions on deposit with their Philadelphia branch of Drexel & Co.
+About half of these were deposits of interstate corporations. Kuhn-Loeb
+held, on the average, for the six years preceding 1913 over 17 millions
+of deposits of interstate corporations. What their aggregate deposits
+were, we do not know. These figures are obtained from the report of the
+Pujo Committee.[393] Morgan's deposits were equalled by only three banks
+and two trust companies in New York (as of April 3, 1915), and
+Kuhn-Loeb's deposits for interstate corporations alone exceeded the
+total deposits of any one of the great majority of the New York Clearing
+House banks and trust companies. Of course, large deposits in the
+balance sheet sense need not mean large deposits made on a given day.
+Private bankers' deposits may be inactive. But we know, first, that half
+of these figures for Morgan, and the whole of the figures given for
+Kuhn-Loeb, represent the deposits of active business corporations,
+engaged in interstate business. They are not mere trust funds lying
+idle, or awaiting investment in securities. What the rest are we can
+only conjecture. That they are deposits of men and firms connected with
+the Stock Exchange in some way is highly probable. The whole drift of
+the statistics presented in this book, and of the argument developed in
+this book, would serve to show that such deposits are likely to be more
+than ordinarily active.[394] I refrain from assigning any figures as to
+the amount of checks deposited in private banks in New York on March
+16, 1909. It must have run high into the millions.[395] It certainly
+exceeded the two thousands, or less, reported to Kinley! The figures for
+New York were, thus, incomplete.
+
+But the trust companies were also incomplete. The national banks in New
+York reported checks totaling 186.5 millions, for all three classes of
+deposits; the State banks reported only 38.1 millions; the trust
+companies only 14.2 millions. With aggregate deposits, as shown by their
+balance sheets, exceeding the deposits of national banks[396] the New
+York City trust companies reported, as deposited on March 16, 1909, less
+than half as much as the State banks, less than a tenth as much as the
+national banks, and only 6.8% of the two combined--5.9% of the total
+from all three classes of institutions!
+
+These figures are hard to reconcile with the assumption that the trust
+companies in New York were complete on that date.
+
+It is, of course, possible that the trust companies, though having large
+deposits, have inactive deposits. This is sometimes held to be the case.
+But that the difference is so great in activity of deposit accounts
+between banks and trust companies is hardly credible. I have looked into
+this matter with considerable care, and have secured information and
+opinions from men intimately acquainted with the trust companies of New
+York from the inside. The only available quantitative measure of the
+activity of deposits would seem to be the volume of a bank's clearings.
+This is not perfectly accurate, by any means, but it is the best
+available test. Through the courtesy of a Vice President of one of the
+largest New York trust companies, I have obtained figures from an
+official of the Clearing House, which show that in New York trust
+company clearings run from 20 to 25% of the whole. On this basis, the
+trust company figures for 1909 were incomplete to the extent of from 33
+millions to 46 millions, on the day in question. These clearings
+figures, however, are for the year, 1915, and not for the period before
+May, 1911, when the trust companies were admitted to the Clearing House.
+Prior to that time they did not deal directly with the Clearing House,
+but _through_ the member banks. Do these figures, therefore, represent
+the situation as it existed in 1909? The possibility was entertained
+that entering the Clearing House had made a difference in the reserve
+policy of the trust companies, and so had made them change the character
+of their business, in such a way as to bring about greater activity of
+accounts. This question was put to the official of the trust company
+before mentioned, and his reply is that the State law regarding reserves
+(passed after the Panic of 1907) had already brought about this change
+in reserve policy, and so no difference was made upon entering the
+Clearing House.
+
+The same gentleman, by the way, replying to a question regarding the
+deposits in private banks in New York, and the influence of such
+deposits on clearings, writes: "The actual figures could not be obtained
+from the Clearing House..., consequently can only say that deposits made
+with these houses add to the Clearing House totals very large sums."
+
+There is one piece of evidence which would seem to negative these
+conclusions regarding the trust companies. In the Report of the New York
+State Superintendent of Banks, for Dec. 31, 1907, p. xxxv, is a
+statement that during the two years, 1903-05, the trust companies of New
+York cleared only 7% as much as the banks. The statement relates,
+however, to a period during which the trust companies not only had no
+Clearing House membership, which of course was true up to 1911, but also
+had largely withdrawn from the privilege of clearing _through_ member
+banks.[397] Under these circumstances, even 7% would seem quite high.
+Inquiry was made of the Honorable Clark Williams, who was State
+Superintendent of Banks at the time the report was made, as to the
+source of the figures.[398] Mr. Williams, in reply, defends the figures
+as correct for that period, but authorizes the writer to quote him as in
+no way surprised at the percentages given above, 20 to 25% of the total
+clearings, in view of developments and changes in trust company
+business.
+
+I conclude that the trust company figures for March 16, 1909, were
+exceedingly incomplete. The national bank figures were probably more
+nearly complete than any others, first because they are large, and
+second, because national banks would feel more obligation than other
+banks to reply to questions from the Comptroller. The State bank
+figures, 38.1 millions, as against national bank figures of 186.5
+millions, were probably incomplete also, to a considerable extent,
+though State banks are not dominating factors in New York City. That
+they should exceed the figures for trust companies is surely evidence of
+the incompleteness of the trust company figures. The private banks are
+incomplete, with absolute certainty, since they are virtually not
+represented at all.
+
+Further evidence that the New York figures were incomplete, however,
+will appear in the data regarding our second thesis, namely, that New
+York clearings do not overcount New York check deposits. The aggregate
+check deposits reported from New York, on the date in question, is 239
+millions. Clearings for that day were 268 millions,[399] substantially
+exceeding the reported check deposits. Now do clearings exceed check
+deposits in New York City?
+
+Evidence with reference to outside clearings, in connection with bank
+transactions, we now have in very definite and abundant form, and it
+will be convenient to approach the question of New York clearings,
+first, indirectly, _via_ country clearings. We shall, therefore, take up
+first the thesis that clearings outside New York do not undercount bank
+deposits outside New York nearly as much as Professor Fisher thinks.
+According to his estimate, checks deposited during the year in banks
+outside New York (exclusive of checks deposited by one bank in another)
+were 271 billions. (_Loc. cit._, 446.) Outside clearings were only 62
+billions, and his conclusion is that the ratio of deposits to clearings
+is 4.4 to 1, or, in other words, that outside clearings amount to less
+than 22.8% of outside check deposits.
+
+Now an extensive investigation, covering the period from June, 1913, to
+Oct. 1914, inclusive, has been made by the American Bankers'
+Association, through Mr. O. Howard Wolfe, Secretary of the Clearing
+House Section. This investigation covered cities of various sizes, in
+various parts of the country. Its results are immensely more trustworthy
+than any results based on a single day, as Professor Fisher's results
+are, could be, even had Professor Fisher's method been otherwise
+correct. An account of this investigation is to be found in the
+_Annalist_ of Dec. 7, 1914.[400] This investigation involves, for the
+period in question, a comparison of "total bank transactions" in each
+city with the clearings of that city, together with a summary covering
+all the cities. "Total bank transactions" consist of all debits against
+deposit liabilities of each member of the Clearing House, whether they
+come through the Clearing House or over the counter. They include
+payrolls, for example, which, of course, never get into clearings. They
+include drafts on deposits of one bank in another. In a letter to the
+Editor of the _Annalist_, Mr. Wolfe states that "total bank transactions
+include all debits against deposit liabilities, whether by check, draft
+or charge ticket. The only exceptions are certified checks and certain
+cashier's checks, both of which to an extent represent a duplication."
+For the period in question, clearings amounted, on the average, for all
+cities, to 40% of "total transactions." The cities did not include New
+York City, as stated.
+
+Now we cannot apply this 40% at once to the question in hand. Professor
+Fisher's 22.8% relates to the relation between clearings and checks and
+drafts _deposited_, _excluding_ items deposited by banks, and excluding,
+of course, cash deposited. What is the relation between Kinley's
+"deposits" and Wolfe's "total transactions"?
+
+It is clear that "total transactions" must, in a period of time,
+_exceed_ Kinley's "deposits" very considerably. In a general way, what
+goes out of a bank, and what comes into a bank, must approximately equal
+one another in a period of time. In a general way, a depositor finds his
+income and his outgo balancing. Of course, some accumulate, paying in
+more than they withdrew, but in general such accounts are made with
+savings banks. The business man borrows from his bank, getting a
+"deposit credit" (without "depositing" in Kinley's sense), then checks
+against his "deposit," then receives checks in payments to himself,
+"deposits" them, building up his deposit balance again, and then checks
+against his deposit balance, in favor of the bank, to pay off his loan.
+What comes in and what goes out--abstracting from the growth of a
+rapidly expanding bank--balance. But notice, in the case cited above,
+that "total transactions" include more items than Kinley's "deposits"
+show. When the bank makes a loan, and gives a deposit credit, this does
+not, usually, show in Kinley's deposits. When, however, the loan is paid
+off by a check to the bank, it does show in "total transactions."
+Moreover, when a man deposits cash in the bank, it does not show in
+Kinley's figures for checks deposited. When, however, he withdraws cash
+from the bank, or his check to another is "cashed," it does appear in
+"total transactions." Further, checks deposited to the credit of one
+bank in another do not appear in Kinley's figures. Checks drawn,
+however, by one bank on another do appear in total transactions. How
+great the difference is between "total transactions" and "deposits" in
+the banks outside New York we cannot say precisely. The cash items
+alone, on the basis of Kinley's figures, would make a difference of
+about 9%.[401] To allow 11% excess to "total transactions" over
+"deposits" for the other reasons listed, is surely not to make an
+exaggerated allowance. We thus count "deposits" in Kinley's sense, for
+the banks outside New York City, as 80% of "total transactions." Since,
+then, clearings are 40% of "total transactions," they will be 50% of
+"deposits." This figure is more than twice as great as Professor
+Fisher's figure of 22.8%. Even if we counted deposits as equalling total
+transactions, Professor Fisher's estimate would be clearly very much too
+low.
+
+How, then, do we stand? On Professor Fisher's showing, the overwhelming
+bulk of checks deposited were in the country outside New York--271
+billions for the year, outside, as against 93 billions in New York City.
+If the ratio (50%) for outside clearings to deposits was the same for
+1909 that it was in 1913-14 for the outside banks, we shall have to
+revise this radically. We have 62 billions of country clearings in 1909;
+we would have, then, 124 billions[402] of country check deposits! If
+Fisher's total figure for the country is correct, 353 billions as
+"finally adjusted," the balance, or 229 billions, would belong to New
+York! New York clearings, 104 billions, would thus be less than half of
+New York deposits! If we count outside clearings for 1909 as only 40% of
+outside check deposits, outside deposits would be, for 1909, only 155
+billions, as against Professor Fisher's 271 billions, _a difference of
+116 billions_! I am sure that his error in estimating outside check
+deposits is at least as great as that, and that we cannot assign to New
+York City less than a major part of the total check deposits of the
+whole country.
+
+This result fits in with the figures actually reported to Dean Kinley,
+corrected to fit the known facts about March 17 clearings, better than
+Professor Fisher's estimate, by a good margin. According to Professor
+Fisher's estimate, New York City checks deposited are only 25.5% of the
+total. Kinley's actual figures give 239 millions to New York City, and
+408 millions to the country outside. But New York clearings were 28%
+below normal on March 17, while country clearings were only 2.45% below
+normal. Adding 28% to the figure for New York checks, we get 306
+millions. Adding 2.45% to the outside checks, we get 418 millions. Of
+the total, 724 millions, New York checks would be, then, 42.3%. We have
+shown reasons for considering New York deposits to be very incomplete
+for March 16, particularly as regards the private banks and trust
+companies. Comparison of the New York figures with the results indicated
+by the ratio of country clearings to country deposits would thus
+indicate that New York was much less complete than the country as a
+whole. Even so, I need to add but 7.3% of the total to Kinley's actual
+figures for New York, corrected in the light of next day clearings, to
+give New York half of the check deposits. Professor Fisher must subtract
+16.8% of the total from the actual figures for New York, as corrected in
+the light of next day's clearings, in order to get his figure of 25.5%.
+To vary as widely from the actually reported figures as Professor Fisher
+does, I should have to assign 59.1% of total check deposits to New York
+City. I refrain from making an exact estimate. I am content with the
+conclusion that something more than half of the checks deposited in 1909
+were in New York. This seems to be too clear for serious controversy.
+
+The indirect approach to the relation between New York clearings and New
+York deposits, _via_ the study of outside clearings in 1913 and 1914,
+taken in conjunction with the figures for check deposits in 1909, would
+seem to make it quite clear that New York clearings do not exceed New
+York deposits, or, indeed, constitute a substantially higher percentage
+of them than is the case with country clearings and deposits.[403]
+Logically, assuming the correctness of the estimate for checks
+deposited, the case is complete: we have a simple problem in arithmetic:
+given country clearings for 1909, 62 billions; given the ratio of
+country clearings to country deposits (and a minimum for this ratio is
+clearly given, in the 40% which country clearings are of "total
+transactions"), we can fix a maximum for country deposits, which is 155
+billions. Then, given our estimate of 353 billions for total check
+deposits, we subtract the maximum possible for country deposits from it,
+and get a minimum possible for New York City of 198 billions of check
+deposits. Comparing this with the known clearings of 104 billions in New
+York, we find that New York clearings constitute, as a maximum possible,
+52.5% of New York check deposits. If the reasons given for holding check
+deposits in the country to be less than total transactions are accepted,
+the ratio of clearings to deposits in New York City is lower.
+
+Indirect calculations, however, even when logically complete, ought to
+be checked up by other methods, when possible. We have some further
+data, drawn from an earlier period, 1890-91-92, which suggest the same
+conclusion.
+
+The reason commonly offered for holding that New York clearings
+exaggerate local New York transactions, as compared with country
+clearings and country transactions, is that New York is the clearing
+house for the country. Country banks send their idle cash there; country
+banks pay other banks by drafts on their New York balances; country
+banks send out of town checks to New York for collection; business men
+in St. Louis pay business men in Chicago with New York exchange, etc.
+These items are supposed greatly to swell New York clearings.
+
+Now several of these reasons are not at all valid. Cash shipped back and
+forth between New York and the interior does not get into clearings.
+Secondly, New York, because of the charges made for collecting out of
+town checks, has tended to lose much of the collection business. Chicago
+probably does a great deal more of it than New York does.[404] However,
+even if checks on out of town banks were sent largely to New York for
+collection, they would not get into the clearings. New York banks send
+checks on country banks directly to country correspondents. Checks on
+out of town banks sent in for collection do swell clearings in Boston
+and Kansas City, where arrangements have been made, to the advantage of
+all concerned, to have the clearing houses handle this business. But New
+York has not made provision for it.[405] The only checks that get into
+New York clearings will be checks drawn on New York banks.[406]
+
+These checks will be of two kinds: (1) checks drawn by individuals and
+firms on New York banks. These checks will commonly be drawn by people
+in New York, and, in so far as they come from out of town, will
+represent business between New York and other places, hence, New York
+business. (2) Drafts by banks on their New York balances. These will be
+of three kinds: (a) drafts sold, especially by country banks, to their
+customers who need to make payments in other cities. Many of these will
+represent payments to New Yorkers for transactions between New York and
+the country, hence New York business, and will appear in the check
+deposits of individuals, firms, and corporations in New York, (b) There
+will also be drafts from one country bank, on New York, to another
+country bank, in which New York is truly being used as a clearing
+house, New York exchange taking the place of an intercity shipment of
+cash.[407] (c) Drafts by New York banks on New York banks, to avoid
+deficits at the Clearing House, or--especially in the case of private
+bankers, between whom and brokers the line is hard to draw,--for general
+purposes.
+
+Now, fortunately, we have some data, trustworthy, even though old, for
+the volume of bank-drafts on New York, and, more important, for the
+proportion of drafts on New York to drafts on banks in other cities.
+These figures are, as stated, from the three years, 1890, 1891, and
+1892. For the purpose in hand, however, they are relevant, since then,
+as now, New York clearings were nearly twice as great, on the whole, as
+country clearings, and if this excess of New York clearings is due to
+that cause, it should have manifested itself in these figures. If the
+proportion of these drafts on New York to the total of bank-drafts was
+greater than the proportion of New York clearings of total clearings, we
+might find reason for supposing that New York clearings were unduly
+swelled by this fact. But in fact, drafts on New York are not out of
+proportion. The figures are virtually complete for drafts drawn by all
+the national banks on national and other banks for the years in
+question. They will be found in the Comptroller's _Reports_ for the
+three years, under the caption, "Domestic Exchanges." For 1890 the
+figures are:
+
+ Drafts on (000,000 omitted)
+ New York $ 7,284 (63.07%)
+ Chicago 1,084 ( 9.30%)
+ St. Louis 188 ( 1.64%)
+ Other reserve cities 2,537 (21.88%)
+ Other cities 464 ( 4.02%)
+ Total 11,550 ( 100%)
+
+The Comptroller (_Report_ of 1890, p. 19) gives an estimate for drafts
+drawn by State and private banks of an additional 6,089 millions. He
+does not try to apportion these among New York and the other cities.
+There is no reason to suppose that the percentage for these banks of
+drafts drawn on New York would be higher than for national banks, and
+there is some reason for supposing that they would be lower: namely,
+that these institutions would lack the incentive supplied by the
+National Bank Act for depositing reserves in a Central Reserve City. The
+Comptroller's figures probably do not include the great private banks in
+New York, which deposit in New York commercial banks, and draw huge
+checks against their deposits. These checks, probably, however, chiefly
+represent stock exchange collateral loans to brokers, and so appear in
+brokers' deposits as well as in New York clearings--represent New York
+deposits. I do not use this estimate in my computations. If I did, the
+results, so far as proportions are concerned, would be the same, since I
+could do nothing but assign the same proportions to them. It will be
+seen that my argument rests on the proportions, chiefly.
+
+Now what difference would be made if we wiped out all these draft
+transactions, and reduced clearings to correspond? New York clearings in
+1890 were 37,660 millions; country clearings were 21,184 millions. Let
+us subtract the drafts on New York from New York clearings, and the
+drafts on other places from the country clearings. The result is: New
+York clearings, 30,376 millions; country clearings, 16,918 millions. New
+York clearings still retain their former status! New York clearings are
+still nearly twice as great as country clearings! It is not the bank
+drafts used in making New York the "clearing house" for the country that
+swell New York clearings as compared with the rest of the country! It is
+something else! The main explanation, as we have in part seen, and shall
+further see, is a mass of speculative transactions, chiefly Stock
+Exchange transactions, and loan transactions connected therewith! New
+York clearings grow out of New York business, primarily.
+
+The figures for the other two years vary little from those of 1890. What
+variation there is shows a growth of drafts on interior cities, and a
+decline of drafts on New York. New York showed 63.07% of these drafts in
+1890, 61% in 1891, and 60.77% in 1892.[408]
+
+As we have seen, the only checks or drafts that get into New York
+clearings are those drawn on New York banks. The checks on New York
+banks probably almost all represent business in which one party is a New
+York individual, firm, or corporation. The drafts by out-of-town banks
+will contain all the items, virtually, that represent "clearings"
+through New York. Not all of these, by any means, will represent such
+clearings. A very substantial part of them will represent exchange sold
+to customers to make payments in New York. We exaggerate the "clearing
+through New York" when we subtract all these drafts from New York
+clearings. Since, however, we treat country clearings in the same way,
+no error results, so far as the proportions between them are concerned.
+
+The two sets of data converge. Both from the figures of 1913-14, in
+conjunction with estimated check circulation in 1909, and from the
+figures of 1890-92, can we conclude that New York clearings do not
+overcount New York transactions. The conclusion would seem to be
+inevitable that New York is really as important in our volume of banking
+transactions as its clearings would indicate. This may be qualified by a
+recognition of the possibility that New York clearings are more
+efficient in handling check deposits than are clearings in other cities.
+Some scattering data from national banks for single days at a time
+indicate that a higher percentage of checks is cleared in New York than
+elsewhere in the country,[409] and one observation for five national
+banks for a ten-day period shows 67% of checks deposited cleared.[410]
+These checks include deposits made by other banks, as do the figures of
+Kemmerer's observations. But there are no direct observations covering
+New York for a long enough period, or for enough institutions, to
+warrant any definite conclusions.[411]
+
+The error of assuming clearings of March 17 in the country outside New
+York to be abnormally low, swelled Professor Fisher's total figure for
+check circulation by 31 billions, as we have seen. On the other hand,
+the error of assuming New York City to be complete in Kinley's figures
+tended to make the total smaller than it would have been, since New York
+City was 28% below normal, and an increase of 28% applied to half of
+Professor Weston's figure of 1.02 billions, gives about 70 millions more
+for the day, or 21 billions more for the year, than when the 28%
+increase is applied to only a quarter of Professor Weston's figure.
+These two errors roughly neutralize one another, and we may accept
+Professor Fisher's "finally adjusted" estimate of 353 billions[412] for
+the year as roughly approximating the amount of checks deposited.[413]
+How "rough" an estimate one gets by taking a single day as the basis for
+a year need not be here discussed. I should be disposed to think that an
+indirect calculation, _via_ clearings, in view of our more extensive
+knowledge of the relation of clearings to "total transactions," might
+well be worth more, so far as deposits outside New York are concerned.
+Since, however, we lack any extended figures for the relation of
+transactions and clearings in New York, and since even for the country
+we are obliged to make guesses as to the relation of "checks deposited"
+to "total transactions," I refrain from trying to improve further on
+Professor Fisher's estimate for checks deposited in 1909--even though
+questioning that "check deposits" and M´V´ are identical.
+
+What, however, shall we say of M´V´ for other years? In the calculation
+of this, Professor Fisher relies on the absolute figures for 1909 (and
+1896, similarly calculated), together with an "index" based on New York
+and country clearings. In this index he weights country clearings by
+5,[414] and New York clearings by 1. The result is, of course, that
+country clearings dominate the index. But New York clearings are much
+more variable than country clearings. The range of variation in New York
+clearings for the years 1897 to 1908, inclusive, is from 33.4 billions
+in 1897, to 104.7 billions, in 1906; the latter figure being more than
+three times as great as the former. The range in country clearings is
+from 23.8 billions, in 1897, to 57.8 billions, in 1907, the latter
+figure being 2-10/23 as great as the former. But more significant is the
+degree of _year by year_ variability. The country clearings, with the
+exception of 1908, always rise,--a steady, if not quite symmetrical,
+increase. New York clearings, however, go up and down, 42 billions in
+1898, 60.8 billions in 1899, 52.6 billions in 1900, 79.4 billions in
+1901, 66.0 billions in 1903, 104.7 billions in 1906, 87.2 billions in
+1907, 79.3 billions in 1908. New York clearings are highly variable in
+both directions, while country clearings vary almost wholly in one
+direction, with a maximum difference of 6.4 billions between any two
+consecutive years, and with an average yearly variation of only 3.5
+billions.[415] When country clearings are weighted by 5, almost all of
+the high degree of variability of New York clearings is covered up, and
+volume of checks deposited for years other than 1909 and 1896 is thrown
+hopelessly away from the facts. It is too large by far in most years. In
+1905, 1906 and probably 1901 it is too small. It does not vary nearly
+enough. As V´ for years other than 1909 and 1896 is determined, for
+Professor Fisher's equation, by dividing the M´V´ thus estimated by the
+M´ for the year, it is clear that V´ as estimated by Professor Fisher is
+very much less variable than it is in fact. It is pretty variable even
+in his figures, but his figures do not nearly show how variable it
+is.[416]
+
+Again, this undue weighting of country clearings, swallowing up New
+York, vitiates Professor Fisher's estimates for V, the velocity of
+money, for years other than 1909 and 1896. One of the elements in the
+calculation of V is the estimated V´.[417] Since V´ is wrong, V will
+also be wrong. V is probably much more variable than Professor Fisher's
+figures would indicate. With great admiration for the ingenuity of
+Professor Fisher's speculations regarding V, I find too many elements of
+conjecture, and too many arbitrary assumptions, to give me confidence in
+the figure for any year. I refrain from going into any general criticism
+of his method of calculating V, however, contenting myself with the one
+clear point that, to the extent that the values of V for years other
+than 1909 and 1896 depend on the estimated M´V´ for those years, they
+are less variable than they ought to be.[418]
+
+The same conclusion regarding Professor Fisher's estimates for V´ have
+been reached, by a different method, by Professor Wesley C. Mitchell.
+He, too, concludes that V´ is, in fact, more variable than Professor
+Fisher would indicate.[419]
+
+I conclude, therefore, that neither V´ nor V has been correctly
+calculated, for years other than 1909 and 1896. I pass now to a
+consideration of T, the volume of trade, after which I shall consider P,
+the price-level, in the equation of exchange.
+
+Let us first recall the point made in the chapter on "The Equation of
+Exchange," that P and T, the price-level and the volume of trade, are
+not independent even in idea. If one is given an independent definition,
+the other cannot be given an independent definition. If the equation is
+to be true, then P must be weighted by the numbers of each item (as
+hats) exchanged. P is not a mere average, but is a _weighted_ average,
+and T is always the denominator in the formula for P. In developing
+statistics for P and T, therefore, this fact must be kept in mind, and
+the elements entering into each must coincide, and vary together year by
+year.
+
+In our chapter on "The Volume of Money and the Volume of Trade," we
+showed that the great bulk of trade is speculation. We showed that the
+_indicia_ of variation which Fisher[420] and Kemmerer have constructed
+for trade, dominated by inflexible physical items of consumption and
+production, give wholly misleading results for every year except the
+base year. They give a steadily growing, inflexible figure, with little
+variation from its steady path. Trade, if chiefly speculation, is highly
+flexible, varies enormously from year to year, waxes and wanes. This
+point need not be further developed. At best Fisher's figure for trade
+can be accepted only for one year, 1909.
+
+Is, however, the figure for 1909, 387 billions, an acceptable figure? Is
+it not decidedly too large? It is made up, it will be recalled, by
+taking the figures for MV and M´V´, adding them together to get one side
+of the equation, and declaring them equal to PT. P is then declared to
+be $1, by the arbitrary device of taking as the unit of T one dollar's
+worth of every sort of good at the prices of 1909. T is, then, 387
+billions, since MV plus M´V´ equals 387 billions. The theory underlying
+this is that deposits made in banks correctly represent trade.[421] Our
+criticisms as to the absolute magnitude assigned to T (and hence to MV
+plus M´V´) will rest in large measure in challenging this assumption. It
+is our contention[422] that deposits made in banks very greatly
+overcount trade.
+
+Deposits made in banks include taxes and other public revenues; they
+include loans and repayments, and interest-payments; they include gifts
+and benevolences, money sent by parents to children away from home,
+pensions, payments of insurance losses, annuities, dividends on stocks,
+payments to and from savings and loan associations, fines, contributions
+to churches, and other non-commercial organizations, etc., etc. None of
+this represents trade.
+
+But further, whether payments are in trade or not, many times indeed
+does it happen that several checks are drawn in connection with the same
+transaction. Professor Kemmerer, entertaining this possibility, thought
+it might be neutralized by cases where the same check passes through
+several hands, making payments in several different transactions. He
+calls this, however, a "gratuitous assumption of unverifiable
+accuracy,"[423] and makes no claim to have given the matter careful
+study.
+
+In general, I think it safe to hold that the case where a single check
+passes through several hands is not important.[424] It will happen
+chiefly with small checks in small places, or with small checks paid to
+laborers. It is the pecuniary magnitude of checks, rather than their
+number, that counts here. I am informed by several bankers that large
+checks are almost universally deposited at once. This is for several
+reasons: (1) The recipient of the check wishes to make sure that it is
+good. (2) It is unlikely that the check is of the right size for another
+transaction, unless the recipient is a mere agent for a third party, in
+which case he should (but commonly does not) pass it on to his
+principal, if double counting is to be avoided. (3) Every person who
+handles sums of any size wishes a record of the transaction, and his own
+canceled check is a receipt which he would not have if he passed on the
+check of another.
+
+This last point will go far toward explaining why bank transactions may
+multiply without a corresponding multiplication of trade. The banks do
+the bookkeeping for modern business in increasing degree. Checks are
+records, of high legal value. A colleague recently told me that he, in
+his own capacity, had just drawn a check to himself, as trustee,
+transferring a sum from one account to another. Another colleague, with
+eight different bank accounts, estimates that over 50% of the deposits
+in three of them represent transfers from other accounts. This kind of
+duplication, where trust relations are involved, is enormous.
+Intercorporate relations and separate bank accounts within a corporation
+complicate it still further.
+
+A check is drawn by a subsidiary corporation to its dividend account,
+and deposited; a check on this dividend account[425] is then deposited
+in the general account of the parent corporation; a third deposit, of
+the same funds, is then made in the dividend account of the parent
+corporation; a fourth deposit of the same funds is made in a trust fund
+which holds stock in the parent corporation; a fifth deposit in the
+personal account of the beneficiary of the trust fund; a sixth deposit
+may be made of a check on this fund in the personal account of the
+beneficiary's wife. The first three of these deposits, at least, will be
+made of the total dividend of the subsidiary corporation. _Not one_ of
+these six deposits represents _trade_. Payments of wages and rents
+should count as trade, but payments of interest and dividends stand on a
+separate footing. When a man has bought a stock or a bond, he has
+already bought all the income which is to come from them, and to count
+the interest and dividends as separate items is double counting. They
+are _payments_, but not _trade_. Even if the dividend payment be counted
+as trade, however, it is counted _six_ times.
+
+There is enormous overcounting as a consequence of the combinations of
+corporations, each of which retains its own numerous bank accounts. The
+Interstate Commerce Commission calls attention to great duplications
+from this cause in connection with railway income accounts.[426] Even
+within single corporations the duplications[427] are very great. Thus,
+the local agent of a railroad deposits his receipts in a local bank. His
+check, or, more usually, the draft of the bank, is subsequently
+deposited in a bank at headquarters. Subsequent disbursements, in places
+away from headquarters, particularly of wages, will frequently be
+preceded by deposits in other local banks. This duplication will be true
+of telegraph, telephone, insurance and other companies which have
+scattered agencies, including the wholesale trade. Advertising agencies
+will illustrate it. _All_ checks between agent and principal, customer
+and broker, etc., will illustrate it. There is a great deal of double
+counting in stock transactions from this source. Thus, a Boston broker
+takes orders, with a check for margin, for execution in New York. The
+order is executed by a New York broker, who deals with another New York
+broker, who represents a Louisville broker, who represents a Louisville
+client. Now to the extent that any checks at all pass between the Boston
+broker and his client, the Boston broker and the New York broker, the
+other New York broker and the Louisville broker, or the Louisville
+broker and his client, we have overcounting. Only the check between the
+two New York brokers is properly counted. It is, of course, well known
+that a small percentage of the dealings of a customer of a brokerage
+house is represented by checks between broker and customer. Professor
+Fisher states this to be about 5%.[428] It is, however, 5% of
+overcounting! Moreover, through keeping "open accounts," with irregular
+settlements of "margins" only, the Boston broker and the New York broker
+reduce markedly the checks passing between them. There is a back and
+forth flow of items which in large degree cancel one another, since the
+Boston broker sells in New York as well as buys there, and the New York
+broker, to a less degree, both buys and sells Boston securities, through
+his Boston correspondent. But not all by any means is canceled, and
+_all_ the checks that pass in this way represent double counting. The
+total is large.
+
+_Public funds_ are included in the deposits reported to Kinley. Taxes
+are not _trade_. Double, triple and multiple counting comes as revenues
+are received by local authorities, transferred to State accounts,
+subsequently redistributed to local accounts, or to the treasurers of
+State institutions, transferred from one bank to another, etc. The State
+of Massachusetts scatters its deposits in banks all over the State, and
+makes transfers from one account to another. The City of Boston has many
+bank accounts. The Federal Treasury deals largely with banks over the
+country.
+
+Whenever a retail store has branches, duplications are likely to occur.
+"Chain stores" make great overcounting. "Kiting" swells bank deposits.
+
+Replying to these contentions, Professor Fisher has urged that there is
+large _undercounting_, also, and that the undercounting balances the
+overcounting. I have myself called attention to a good deal of
+undercounting in the chapter on "Barter." A substantial amount of
+ordinary trade is carried on by means of partially offsetting
+book-credit, time bills of exchange, simple barter, etc. The amount
+might even run high, as compared with ordinary trade, when the clearing
+arrangements in the stock and produce exchanges are taken into account.
+But it is impossible to figure out anything at all in this line which is
+to be compared with the great gap between the 141 billions of trade we
+were able to find,[429] and the 387 billions Professor Fisher assigns to
+trade. The gap of over 245 billions is much too great. Besides, in our
+141 billions, we have counted barter items, book-credit items, time-bill
+of exchange items, etc., already.
+
+The main item of undercounting must be in connection with the clearing
+arrangements in the speculative exchanges. This would seem to be
+Professor Fisher's view, as well.[430] Data are at hand for the two
+great exchanges of the country which enable us to measure, with some
+precision, the amount of the undercounting--_i. e._, to tell the extent
+to which checks are dispensed with in the trading of these two great
+exchanges. The two exchanges are the Chicago Board of Trade and the New
+York Stock Exchange.
+
+For the New York Stock Exchange, figures are taken from Pratt's _Work of
+Wall Street_, 1912 ed., pp. 166-167, 180, 273. The figures are for the
+big year, 1901, when 266 million shares were sold, more than in 1909 by
+51 millions of shares, and when the Stock Exchange Clearing House should
+have done better, in the magnitude of the undercounting, than it did in
+1909. Figures since 1901 are, Pratt states,[431] not available. Pratt
+also gives figures for 1893, but does not give data as to the percentage
+of stocks handled by the Clearing House, so that comparison with the
+1901 figures cannot be made.
+
+In 1901, 265,944,659 shares were sold. Of these, 15% were "X-Clearing
+House," _i. e._, not on the list of stocks handled through the Stock
+Exchange Clearing House. This 15% was paid for in full by check. The
+bond sales are not cleared, and so another billion dollars of checks is
+required for this item.[432] If we assume (on the basis of the estimates
+given to the writer by DeCoppet & Doremus, and Mr. Byron W. Holt, for
+recent years) that 25% of the 100 share sales would be added if "odd
+lots" were counted, we have another large item that does not go to the
+Clearing House. "Private clearings" reduce the number of checks in
+connection with odd lots, but not so effectively as is the case with
+hundred share sales put through the Clearing House. So far the Clearing
+House has done nothing. What did it do with the 85% of the stocks in
+hundred share lots offered for clearing?
+
+The figures are perfectly definite. The 85% of the 266 million shares
+sold was 226 million shares. The "share balance" remaining after the
+Clearing House had done its best was 134 million shares.[433] The number
+of shares sold, then, for which checks did not have to pass as a result
+of the clearing process was 93 millions. In terms of dollars, we may put
+the same figures. The estimated money-value of the 266 million shares
+sold was 20.5 billions;[434] 85% of this is 17,425 millions. The
+certifications required to pay for the 134 million share balance was
+10,930 millions. The saving in checks was, thus, 6,495 millions of
+dollars. This is the full extent to which the Stock Exchange Clearing
+House undercounts recorded share sales. This is less than 1.7% of
+Professor Fisher's 387 billions! To offset this, however, we have
+_over_counting in the 5% of checks for all dealings on the Exchange
+which pass between brokers and customers, as shown, and all the checks
+between brokers and out-of-town brokers. We shall also find items of
+_over_counting which vastly more than offset this undercounting, in
+_loan_ transactions between brokers, and between banks and brokers, to
+which we shall shortly give attention.
+
+This six and a half billions in checks saved on account of sales of
+stocks is no small matter, absolutely. But this, though measuring the
+extent of undercounted _sales_, by no means measures the services of the
+Clearing House to the Stock Exchange. Not merely stocks _sold_ have to
+be cleared. Stocks _borrowed_ are also cleared. Borrowing of stocks is
+not _trade_, but borrowing of stocks requires the passage of money and
+checks. When stocks are borrowed, money is _loaned_. A bear sells short.
+He has to deliver next day. He accomplishes this by having his broker
+"borrow" the stock he needs from a broker representing a bull, who is
+long on the stocks, and who needs money to "carry" them. The bull, who
+lends the stock, receives dividends from the bear, as they accrue, and
+pays the bear interest on the money lent. An enormous lot of this takes
+place. Moreover, to some extent, these transactions are increased
+artificially, in order that the broker may make his "clearing sheet"
+misleading, and avoid revealing his position with reference to the
+market.[435] Loans of stock and sales of stock appear alike in the
+transactions of the Clearing House. Moreover, apart from the necessities
+of the bears for stocks to deliver, we have the necessities of the
+bulls for money to carry their stocks. If a broker who has borrowed
+largely from the banks finds his customers turning to the bear side of
+the market, he has an excess of funds. He may repay his loans, but they
+may be, in part, time loans, and in any case, he may find it just as
+well, if he can make a small fraction of 1% in interest, to lend to
+another broker, among whose customers the bulls are increasing. A vast
+deal of money is thus transferred, on collateral security, by means of
+"loaning stocks." Brokers prefer to borrow money from one another in
+this manner, since no margins are required, in general, whereas banks
+would require margins. These various reasons make a vast deal of
+"borrowing and carrying" transactions, and a regular place is set aside
+for them on the Floor--Post 4, commonly called the "Money Post." At this
+post, also, the banks, through brokers, lend on call, and the published
+call rates are established there. Of this, however, we shall have more
+to say later.
+
+The extent to which this loaning of stocks takes place at the "Money
+Post," as compared with the loaning done privately, varies. It makes no
+difference, however, from the standpoint of the volume of these
+transactions that go to the Clearing House whether they are put through
+at the "Money Post" or outside. The loans made by the _banks_ at the
+"Money Post" do not affect the Stock Exchange Clearing House
+totals.[436] Formerly the "Money Post" was a place where the position of
+the bears could be gauged in a given stock. If the demand for a stock
+was great, the bulls could take heart, and increase the pressure. To
+avoid giving away this information, however, borrowing is done on a
+large scale privately, at present.[437] Of course, if the pressure gets
+too strong, it will manifest itself at the money post anyhow, since
+bears borrowing particular stocks will forego all or part of the
+interest, or even pay a premium for the stock.[438]
+
+Now it is possible, from the figures given for the total clearings of
+the Stock Exchange Clearing House, in conjunction with the figures of
+recorded sales, and the percentage of "X-Clearing House" sales, to get a
+fairly accurate idea of the magnitude of these stock borrowing
+operations between brokers. The total number of shares offered for
+clearing by "both sides" in 1901 was 926,347,300! This is double the
+actual amount, since both buyer and seller report the same transaction
+to the Clearing House, the former with a "receive from" sheet, and the
+latter with a "deliver to" sheet. Half this amount, or 463,173,650
+shares, represents the actual number of shares to be handled. As we have
+seen, 226 millions of this (85% of the recorded sales of 266 millions)
+represents sales. The rest, or 237,173,650, represents borrowing of
+stocks.[439] Borrowing exceeds actual sales, if the figures for 1901--a
+year of enormous sales--are representative. We have, now, an
+explanation of the prevailing opinion among brokers that the Stock
+Exchange Clearing House dispenses with the major part of the checks that
+would otherwise be required. _For their purposes_, it does make a vast
+difference. Pratt's figures[440] show that, without the Clearing House,
+certifications of $27,995,896,400 would have been required; that
+certifications of $17,065,042,800 were obviated[441] by the Clearing
+House, leaving the balance of $10,930,853,600 of certifications which
+had to be used. This balance, as we have seen, is the major portion of
+what would have had to be paid anyhow for the stocks actually sold and
+offered for clearing. The saving on the actual sales is only 6.5
+billions. But the saving to the brokers was, of course, much greater.
+Even six and a half billions is no slight matter for any purpose except
+the explanation of our 245 surplus billions! Pratt gives an estimate at
+another place of the certifications required by the Stock Exchange
+sales, reaching virtually the same conclusion that we have reached by a
+somewhat different combination of his figures. He indicates that 14
+billions of certifications were required, counting in the bonds, in
+1901.[442] This compares with the 20.5 billions estimated value of
+stocks sold, and approximately one billion of bonds. This leaves 7.5
+billions of certifications obviated on sales. This takes no account of
+the "odd lots." If they run to an additional 25%, we have five billions
+more which are not put through the Clearing House. My information is,
+however, that "private clearings" reduce the checks in connection with
+these, though not so efficiently as is the case with the big Clearing
+House.
+
+Do the figures that get into the "all other" deposits from those
+connected with the Stock Exchange undercount sales made there? Not yet
+have we taken account of an item which swamps all that we have
+considered. I refer to loan transactions by the banks, particularly call
+loans. The volume of these is enormous. At the "Money Post" alone, the
+figures average between 20 millions and 25 millions a day.[443] The
+range is from 10 to 50 millions. The major part of these loans are not
+made on the Floor of the Exchange, however, but privately, between banks
+and brokers. Even on the Floor, no records of the loans are kept, and
+only estimates are available. For the loans made privately, no figures
+are attainable at all. The total must be enormous. One authority writes,
+in a letter, "The total amount of money loaned at the post varies
+considerably, depending upon the rate. For instance, when money is under
+3%, loans are largely made directly between the banks and the brokers,
+but when it gets over 3% and gets strong, more loans are made at the
+post. Some national banks make all their loans there right along, so I
+understand." My information from an officer of the National City Bank is
+that it lends the major part of its demand money on the floor of the
+Exchange. The other chief lenders, according to the Pujo Report,[444]
+are the National Bank of Commerce, The Chase National, the Hanover
+National, J. P. Morgan and Co., and Kuhn-Loeb. The same report states
+that the bulk of such loans are made directly between banks and brokers,
+and not at the "Money Post."
+
+How do these transactions affect Kinley's figures for deposits, and so
+Fisher's total of 387 billions? The small dealer deals, usually, with
+one bank. When he borrows, he gets a "credit" on his deposit account,
+but makes no "deposit" that would get into Kinley's figures. But
+stockbrokers deal with many banks. They have one bank which "certifies"
+for them, and with which they regularly keep a "balance." But for their
+loans, they deal with whatever bank gives them the best rate, or has the
+funds to spare. In time of tight money, they shift their loans with
+great frequency. They borrow also from one another. "Money" is "worth
+money" in New York, and idle funds will be lent by whomever has them for
+whatever the market will pay, on collateral security on call. When a
+broker deposits money in his bank borrowed from another bank or another
+broker, he gets a deposit credit which does get into Kinley's
+figures--he deposits a certified check, or a bank draft. The following
+has been described as a typical transaction by the bond expert of a
+Boston banking house, and has been amplified by several Wall Street men
+with whom I have discussed it. A, whose home bank is Bank W, has
+borrowed, on call, $500,000 from Bank X. Bank X calls the loan. A finds
+Bank Y willing to lend him enough to pay it off. Before he can get the
+new loan from Bank Y, however, he must get his collateral released by
+Bank X. Before he can do that, he must pay off the loan at Bank X. His
+recourse, then, is to Bank W, his regular bank, which certifies for him,
+and with which he keeps his balance. Bank W gives him a certified check
+(either an overcertification, or a "morning loan" transaction), for
+$500,000, with which he pays off the loan at Bank X. He then takes the
+collateral from Bank X to Bank Y, and makes a new loan. He gets a draft
+from Bank Y, which he deposits with Bank W, and then draws another check
+against his deposit with Bank W to pay off the "morning loan," in case
+the transaction took that form. Here are three checks for this loan
+transaction, two of which get into clearings, and one of which gets into
+"all other deposits." But the checks may be multiplied. A, instead of
+getting a new loan at Bank Y, may call a loan from broker B, who may
+then call a loan from broker C, who may go to Bank Y to get the funds he
+needs to pay B. Here are two new checks in the series, both of which get
+into the "all other" deposits. Checks fly about recklessly in Wall
+Street, and men will turn over money many times, if an eighth of 1%, or
+less, can stick by the way, on a good sum, for a few days! This is
+strikingly illustrated by a fact which caught my attention in the
+monthly bank statement of a brokerage house which I was allowed to
+examine. The deposits made during the month, and the checks drawn during
+the month, balanced to within five hundred and fifty dollars out of
+several millions. The broker said of this: "It would be true even for a
+single day, and it would be true for a year. The bank requires us to
+keep a minimum balance; it is to our interest not to keep more than
+that. If we have more at the end of the day, we lend it out; if we have
+less, we borrow to make up the deficiency. We try to have just that
+balance, and no more, to our credit at the bank at the end of every
+day." The handling of funds by a brokerage house is a fine art,
+involving both technical skill and a philosophic grasp of the factors of
+the "money market." Are rates going up? Then it is well to reduce call
+loans, and borrow more on time. If lower rates are anticipated, more
+call money will be employed--with the possibility of a "squeeze" if too
+much is taken that way. Hidden dangers must be foreseen. The sums
+borrowed are enormous, and brokers' profits depend in very substantial
+degree on their skill in borrowing as cheaply as possible, and in
+utilizing their funds to the utmost.
+
+It is here, I think, in loan transactions between banks and brokers and
+between brokers, that we have a major part of the explanation of the
+huge deposit figures for New York City, and for the tremendous influence
+of stock sales on clearings, which Mr. Silberling's[445] figures show.
+This is the opinion of Professor O. M. W. Sprague, who first called my
+attention to the volume of call loans, and rapid shifting of call loans,
+in New York, and it is the opinion of every Wall Street man with whom I
+have discussed the matter. The actual pecuniary magnitude of the share
+sales and bond sales is not enough to do it. The mass of connected loan
+transactions, however, substantially greater in volume than the actual
+sales of securities, is, with the security sales, enough to do it.
+
+When the call rate is high, which will particularly happen when bank
+reserves are low, the shifting in loans will be much increased. One bank
+will have money to lend one day, but the next day will have to call it,
+to meet heavy demands at the Clearing House, while some other bank will
+have the surplus funds to lend. The brokers, by bidding up the rate,
+will tempt the temporary lending even of small surpluses, if their
+necessities are great. The volume of "all other deposits" and of bank
+clearings will be swelled by this much beyond ordinary. That this should
+not be revealed to ordinary statistical tests is due to the fact that
+speculation tends to fall off at such a time, so that the other factors
+in the stock exchange operations tend to reduce daily deposits and bank
+clearings. Mr. Silberling has applied to this problem the technique of
+a refinement of the correlation method, the method of partial
+correlation, with the result of confirming this view.[446]
+
+I conclude, therefore, that stock exchange transactions, instead of
+being undercounted in bank deposits, are very greatly overcounted.[447]
+The big item that does it is loan transactions between brokers and
+brokers and between brokers and banks.
+
+The evidence from the Chicago Board of Trade, with reference to the
+extent of clearings within the exchange there, comes in a letter from
+the Secretary of the Board of Trade to Professor Taussig. The only
+clearing house transactions are in connection with "futures." All
+"spot" transactions are paid in full by check. All futures other than
+those offset by clearing are paid in full by check. The total amount put
+through the Clearing House in 1915 was 118 millions, of which the
+balances paid were 41 millions (saving checks to the extent of 77
+millions). This 77 millions is a trifle indeed as compared with the gap
+of 245 billions we are trying to fill! It is a trifle also as compared
+with the business done on the Board of Trade. The Secretary estimates
+that commodities to the value of $375,000,000 actually arrived on the
+exchange in 1915. On the average, the figure would be $350,000,000. For
+the Stock Yards "it is approximately the same--last year was
+$375,000,000. Of fruits, vegetables, poultry, butter, eggs, etc., sold
+in South Water Street, it is claimed by their statisticians, the value
+is $350,000,000, or a total of about eleven hundred millions _arriving_
+[Italics mine] yearly at this great market place, all of which is paid
+for by checks, and when the ownership changes, the change of ownership
+is always paid by check." How many times the goods change hands, cannot
+be stated on the basis of records of the Board of Trade. The Secretary
+contents himself with saying that they are "sold and resold many times."
+We have discussed this, on the basis of reputed figures of the Federal
+tax on grain futures in 1915, in our chapter on "Volume of Money and
+Volume of Trade." In any case, it is clear that the 77 millions of
+checks economized, though absolutely great, is relatively a bagatelle.
+It is, moreover, more than compensated for by loan transactions. The
+Secretary estimates that for a sixty-day period, when grain is coming
+in, from two to four millions will be lent by the banks daily on
+_arriving_ grain. How great the loan transactions on subsequent sales
+will be we can only conjecture.
+
+While able to find, then, important cases of trade and speculation
+which dispense with the use of checks, I cannot find anything of
+magnitude sufficient to aid Professor Fisher's case, and I find, on the
+other hand, enormous overcounting in every field where business and
+banks meet, as well as in the relations of banks to non-commercial
+depositors.
+
+I conclude, therefore, with reference to the figures of Fisher and
+Kemmerer[448] for volume of trade, that they are much exaggerated for
+the base year, and that for every other year they are wholly wrong, both
+because of their excessive magnitude, and because the index of variation
+has been wrongly chosen.
+
+The discussion of P, the price-level, in the statistics of Kemmerer and
+Fisher need not be extended. P, for the equation of exchange, and for
+the quantity theory, is a _weighted_ average, each price that goes into
+it being weighted by the number of exchanges involving the commodity of
+which it is the price. The weighting of P should correspond to the
+elements in T, the volume of trade, and should vary from year to year,
+as the elements in T change.[449] Now Kemmerer's P is weighted as
+follows: wages, 3, security prices, 8, wholesale prices, 89.[450] If our
+conclusions with reference to the composition of the volume of trade, as
+developed in the chapter on "Volume of Money and Volume of Trade," are
+valid, this weighting gives us a P which has no relevance to the
+equation of exchange. The wholesale items should have a weight of not
+more than one-sixth of the total for 1909. Certain commodities, as wheat
+and cotton, in which there is heavy speculation, should be given great
+weight, and securities should have, probably, the greatest weight of
+all. If "trade" is to be extended to cover transactions in bills of
+exchange and loan transactions (as it is by Kemmerer),[451] then P
+should contain these things, weighted more than all else put together,
+particularly if call loans are included. The weights should be radically
+altered from year to year. We should then get a P which would fit the
+"equation of exchange"--though what else it would be good for is hard to
+say! The same criticism applies to Fisher's P. It is dominated by
+wholesale prices.[452] It therefore has no relevance to an equation of
+exchange in which only one-sixth at the very most of the items are
+wholesale items. Neither Fisher nor Kemmerer alter their weights in P at
+all, to correspond to yearly alterations in the composition of T.
+
+As _indicia_ of changes in the _absolute value_ of money, Kemmerer's and
+Fisher's index numbers, or other index numbers of numerous wholesale
+prices, with a substantial weighting of wages, are probably better than
+an index dominated by stocks. Stocks fluctuate more widely than
+wholesale prices and wages, their values are more affected by variations
+in business confidence, and by variations in the rate of interest. For
+measuring _the value of money_, the index numbers here criticised are
+very good. But for the purpose for which they are chosen, namely, to
+fill the equation of exchange, and to measure variations in a
+_price-level_ of the sort the quantity theory and the equation of
+exchange are concerned with, they are simply irrelevant. If it were
+really true that such an index number varied with the quantity of money,
+then the quantity theory would be effectively disproved!
+
+Now, in general summary of our criticisms of the figures of Kemmerer
+and Fisher: they have systematically buried New York City, and
+systematically covered up speculation. All the errors converge in this
+direction. The _indicia_ of trade cover up speculation and the other
+things that go on in New York, and other financial centers. The
+_indicia_ of prices do likewise. Fisher weights New York clearings only
+1, while weighting country clearings 5, in his index of variation of
+check transactions. He also counts New York returns for March 16, 1909,
+as complete, and gives all of his estimate for non-reporting banks to
+the country. Kemmerer does not do this, but he does exaggerate the
+importance of money, as compared with checks, and does not allow the
+velocity of money to vary at all in his figures, thus getting a much
+greater constancy in the figure for total circulation of money and
+checks than is proper, and covering up the flexibility and variability
+which New York gives to our system.[453] In general, our task in this
+chapter has been an archæological excavation--we have rediscovered a
+buried city.
+
+
+
+
+PART III. THE VALUE OF MONEY
+
+
+
+
+CHAPTER XX
+
+RECAPITULATION OF POSITIVE DOCTRINE
+
+
+The chapters which have gone before have been, in considerable degree,
+concerned with the analysis of unsuccessful efforts to solve the problem
+of the value of money, as the quantity theory, or the attempts to apply
+the notions of supply and demand, marginal utility, and cost of
+production, to the problem. Not all that has gone before has been, even
+in form, primarily critical. The chapter on "Economic Value" lays the
+foundation for the main constructive theory of the book, and in
+virtually every chapter some portion of our positive doctrine has been
+developed. In the doctrines criticised, elements of truth have been
+noted, and in showing the errors of the doctrines considered,
+constructive doctrine has been presented by way of contrast. The
+theories criticised, moreover, even where they have gone astray in
+solving problems, have at least the merit of _stating_ problems, and so
+have aided in clearing the way for theories better based.
+
+It is the task of the present chapter to present, in a series of theses,
+the main constructive results so far attained. No effort will be made to
+follow the order of the exposition which has preceded. A summary of that
+will be found in the detailed analytical table of contents. Rather, we
+shall seek to draw from what has preceded the positive doctrine which is
+scattered through the preceding chapters, and to present it by itself,
+as a basis for the more systematic formulation of constructive theory
+which the following chapters are to contain.
+
+1. The theory of the value of money is a special case of the general
+theory of value.
+
+2. Value is a phenomenon of psychological nature. Not physical
+quantities, but psychological significances, are relevant when the
+problem of value and price causation is involved.
+
+3. Value is not a ratio of exchange, or "purchasing power," but is an
+absolute quantity, prior to exchange. It is the fundamental and
+essential attribute or quality of wealth, the common or homogeneous
+element present amidst the diversities of the physical forms of wealth,
+by virtue of which comparisons may be instituted among different kinds
+of wealth, and different items of wealth may be added to make a sum, put
+into ratios of exchange, and so on.
+
+4. Economic value is a _species_ of the _genus_, _social value_,
+coördinate with legal value, and moral value. It is part of a system of
+social motivation and control.[454] Psychological in character, it none
+the less presents itself to an individual as an objective, external
+force, to which he must adapt himself.
+
+5. Individual prices have two coöperating causes: (a) the social
+economic value of the money-unit, and (b) the social economic value of
+the unit of the good in question.
+
+6. The average of prices, or the "price-level," is a mere mathematical
+summary of the particular prices. The causation involved in the average
+of prices is nothing more than the causation involved in the particular
+prices.
+
+7. The value of money is to be distinguished from the "reciprocal of the
+price-level," or the "purchasing power of money." The value of money is
+an absolute quantity, one of the factors, determining each particular
+price. Particular prices and general prices may change because of
+changes in the values of goods, with no change in the value of money.
+Or, particular prices and general prices may change because of changes
+in the value of money, with goods remaining constant in value.
+
+8. The absolute value of money, assumed constant, is presupposed by the
+great body of present day price theory, as supply and demand, cost of
+production, and the capitalization theory. These theories are,
+therefore, inapplicable to the problem of the value of money.
+
+9. But supply and demand, cost of production, the capitalization theory,
+and other laws concerned with the concatenation and interrelations of
+prices, being applicable to the problem of particular prices, are also
+applicable to the problem of general prices. (Chapter on "The
+Passiveness of Prices.")
+
+10. The general price-level, as a consequence of changes in particular
+prices, growing out of changes in the values of goods, may rise or fall,
+without antecedent changes in the value of money, or the quantity of
+money, or the volume of credit, or the volume of trade, or in the
+"velocities of circulation" of money or credit. (Chapter on "The
+Passiveness of Prices.")
+
+11. The general laws of prices, supply and demand, cost of production,
+the capitalization doctrine, the imputation doctrine, etc., conflict
+with the quantity theory. In the cases where they conflict, the first
+named doctrines are correct, and the quantity theory is wrong. (Chapter
+on "The Passiveness of Prices.")
+
+12. The value of money, being a special case of economic value, is
+subject to the same general laws. This means, from the standpoint of my
+theory, that the theory of social value is applicable to the problem of
+the value of money.
+
+13. This is not the same as saying that the whole value of money is to
+be explained by the social value of gold bullion, conceived of as a mere
+commodity. A hypothetical case was constructed in the chapter on
+"Dodo-Bones," in which gold is the standard of value, but is not
+employed as a medium of exchange or in reserves, where the whole value
+of money is to be explained by the value of gold bullion, conceived of
+as a commodity.
+
+14. But, in general, money gets part of its value from its monetary
+employments. (Chapter on "Dodo-Bones.")
+
+15. The additional value which comes to gold bullion as a consequence of
+its employment as money, is itself to be explained on social value
+principles. It grows out of the social value of the services which money
+performs.
+
+16. The functions of money remain to be examined in detail. And the
+relation between the value of particular services of money and the
+capital value of money, has not yet been analyzed. There is a relation
+between the two--a relation which varies under different
+conditions--even though it has been shown in the chapter on the
+"Capitalization Theory" that the relation is not the simple one which
+holds between the values of services and the capital value of ordinary
+income-bearers. There must be an increment to the value of gold bullion
+as a consequence of its being coined, however, since otherwise there
+would be no force leading it to be coined.
+
+17. This increment in value to bullion, as a consequence of coinage,
+becomes evident when free coinage is suspended. An agio of coin over
+uncoined bullion may easily appear.
+
+18. But this is not to assert the doctrine of the quantity theory.
+Because
+
+19. The money service presupposes the existence of value for money from
+some source other than the monetary employment (chapter on
+"Dodo-Bones"); and
+
+20. Hence the monetary employment can explain only a differential
+portion of the value of money.
+
+21. The proposition that money must have value from some source other
+than the monetary employment does not mean, necessarily, that money must
+be made of precious metals, or be convertible into precious metals. The
+value of money is, indeed, most stable and best sustained when such is
+the case. But it is possible for money made of paper to have value apart
+from the prospect of redemption--though no clear case has been made, in
+the writer's opinion, for the view that this has historically occurred.
+But as a hypothetical possibility, my theory holds that paper money may
+attain a value of its own, growing out of various factors which a social
+psychology can explain, including law, patriotism, and custom. Social
+values in every sphere are imperfectly rationalized. Values which in
+their origin are secondary and derived may become substantial and
+independent of their "presuppositions." This is true of legal and moral
+values. It is true of the capital value of land. It may be true of paper
+money. This matter has been discussed in the chapters on "Economic
+Value" and on "Dodo-Bones." The social value theory has not the
+limitations of the utility theory in dealing with such cases, nor is it
+tied to a metallist or bullionist interpretation. Legal, moral, and
+patriotic factors, and the influence of social custom, all fall readily
+into the social value doctrine.
+
+22. The "measure of values" function, and the "standard of deferred
+payments" function, need not require the actual use of money, and need
+not add to the value of money. The function of "medium of exchange," and
+other functions to be analyzed in a later chapter on that topic, do
+involve the actual employment of money, and are sources of value for
+money.
+
+23. The quantity of money and credit are matters of high importance in
+economic life. They affect vitally the smooth functioning of production
+and exchange. While not accepting the extreme view of those writers who
+see in scarcity or abundance of money the primary cause of the ebb and
+flow of civilization, I maintain that the quantity of money and credit
+does make a vast difference, and that the quantity theory contention
+that, after a transition is effected, the only consequence of a change
+in the quantity of money is a proportional change in the price-level, is
+wholly indefensible. (Chapter on "Volume of Money and Volume of Trade.")
+
+24. Very much of economic theory has been developed in abstraction from
+money. For economic statics, with its delicate marginal adjustments, on
+the assumption that friction is banished, that the market is fluid, that
+labor and capital and goods are mobile, etc., money does appear a
+needless complication. But the static assumptions are only possible
+because money and credit have smoothed the way. It is the business, the
+function, of money and credit to overcome "friction," to effect
+"transitions," to make it possible for "normal" tendencies to manifest
+themselves. (Chapter on "Volume of Money and Volume of Trade.")
+
+25. The main work of money and credit is in effecting "transitions,"
+bringing about readjustments, enabling society, with little shock, to
+adapt itself to dynamic change. The great bulk of the actual exchanging
+that takes place is speculation, and would not occur if economic life
+were in static equilibrium. This is true both as a matter of theory and
+as a matter of statistics. More than half of the checks deposited in the
+United States are deposited in New York City, where "wholesale" and
+"retail" deposits are a small factor. Bank clearings fluctuate in close
+conformity with stock exchange transactions. Great banks, and the bulk
+of banking transactions, are everywhere found in the speculative
+centres. (Chapters on "Volume of Money and Volume of Trade," and "The
+Rediscovery of a Buried City.")
+
+26. Hence a functional theory of money must be essentially a dynamic
+theory: must rest in a study of "friction," "transitions," and the like.
+And,
+
+27. Hence a theory of money like the quantity theory, concerned with
+"long run tendencies" and "normal equilibria" and "static adjustments"
+touches the real problem of the value of money not at all.
+
+28. An increase of money tends to increase trade. (Chapter on "Volume of
+Money and Volume of Trade.")
+
+29. An increase of credit tends to increase trade. (Same chapter.)
+
+30. An increase of trade tends to increase the volume of credit, and,
+where the money supply is flexible, tends to increase the money supply
+also. (Chapter on the "Volume of Trade and the Volume of Money and
+Credit.")
+
+31. Production waits on trade. The problem of marketing in the modern
+world is often more important than the problems of production in the
+narrower sense. Selling costs are probably greater than strict "costs of
+production." "Volume of trade," far from being dependent on "physical
+capacities and technique," is almost indefinitely flexible, with
+changing tone of the market, with changing values, and with other
+changes, including changes in the volume of money and credit. (Chapter
+on "Volume of Money and Volume of Trade.")
+
+32. The relation between the volume of money and the volume of credit is
+exceedingly flexible. The relation between the world's volume of credit
+and the world's volume of gold is likewise exceedingly loose, uncertain,
+and flexible. (Chapters on "Volume of Money and Volume of Credit," and
+"The Quantity Theory and World Prices.")
+
+33. "Velocity of circulation" is a blanket name for a complex and
+heterogenous set of activities of men. It is a passive resultant of many
+causes, and is itself a cause of nothing. The safest generalization
+possible concerning it is that it varies with the volume of trade and
+with prices.
+
+34. Barter remains an important factor in modern economic life, and is a
+flexible substitute for the use of checks and money, increasing when the
+money market "tightens." It is greatly facilitated by the "common
+measure of values" function of money.
+
+35. The general criticism of the mechanistic scheme of causation
+involved in the quantity theory has, as its positive corollary, the
+doctrine that psychological explanations must be given--that the
+phenomena are intricate and complex, as intricate and complex as the
+play of human ideas and emotions, and the network of social
+relationships.
+
+36. This means that the theory of value, and of the value of money, as
+here presented, cannot assume the simple form, or the mathematical
+precision, which have made the quantity theory so alluring. It means,
+further, that the present study, as in part pioneer work, will lack
+finish and definiteness in many places, will contain errors and gaps,
+and will leave many problems unsolved, and many distinctions undrawn. At
+many points, the analysis is confessedly incomplete, and the problems
+imperfectly thought through--often inadequately _stated_, if seen at
+all.
+
+In what follows, these theses, with doctrines yet to be developed, will
+be woven together into a systematic theory of money and credit.
+
+The study of the functions of money, in relation to its value, will best
+be approached, I think, through a study of the origin of money. In this,
+I shall base my conclusions chiefly on the work of Karl Menger and W. W.
+Carlile, who seem to me to have done most in this field.
+
+On the basis of the general theory of value developed in the first
+chapter, and the results of the two chapters which are to follow on the
+origin and functions of money, I shall reach my main conclusions as to
+the laws of the value of money. On the basis of this theory of value,
+and of the theory of the functions of money, I shall also try to develop
+a psychological theory of credit, and to assimilate credit phenomena to
+the general phenomena of value. The development which the theory of
+credit has had, at the hands of men whose chief interest was that of the
+jurist or accountant, is valuable and important. I do not wish to
+discredit what has been done. Many important doctrines concerning credit
+have been developed. The general theory of elastic bank-credit, worked
+out in the controversy between the "Currency" and the "Banking" Schools,
+is of the highest importance. This theory I have discussed in the
+chapter on "The Volume of Trade and the Volume of Money and Credit." I
+still feel, however, that there are gaps in the prevailing ideas on
+credit which only a social psychology can fill. I shall undertake to
+construe credit as a part of the social system of motivation and
+control, and to differentiate it from other parts of that system by an
+analysis of its functions. I think, too, that the theory of the relation
+of credit and money is in especially unsatisfactory shape, particularly
+with reference to the factors governing reserves.
+
+A final chapter, in Part IV, will undertake to bring together the
+various points in our discussion which deal with the theory of
+prosperity, and will seek to bring the notions of "theory of prosperity
+_vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._
+transitional tendencies," and certain other similar contrasts, into a
+higher synthesis, which will, to be sure, not rob these contrasts of
+their significance, but will rather find certain generic principles
+which they share, and so make it possible to measure considerations in
+one sphere in terms of considerations in the other sphere. In very large
+degree, students of dynamics and students of statics have been talking
+at cross-purposes, missing the force of one another's arguments, and
+have been quite unable, even when understanding one another, to come to
+agreement, precisely because they have lacked principles by means of
+which they could compare in any quantitative way the forces which each
+studies. A higher synthesis, which would give static and dynamic
+theories common ground, would seem to be a desideratum of high
+importance. Such a synthesis would go far toward unifying the science of
+economics. I believe that the theory of money and credit, approached
+from the angle of the social value theory, will meet this need.
+
+
+
+
+CHAPTER XXI
+
+THE ORIGIN OF MONEY, AND THE VALUE OF GOLD
+
+
+This chapter is not concerned with history or anthropology for their own
+sake. The present writer has made no independent historical or
+anthropological researches, in connection with the question of the
+origin of money. The chapter is primarily concerned with giving an
+exposition of the theories of two writers, Karl Menger and W. W.
+Carlile.[455] It is not important, for my purposes, whether either
+writer has presented a theory which anthropology will accept as a
+correct account of actual origins. The theories do throw light on
+present functioning, and seem to me to be correct as analytical
+theories, whether historically adequate or not. There are two main
+questions with which the chapter is concerned:
+
+(1) How did money come to be?
+
+(2) Why should gold and silver have passed all rival commodities in the
+competition for employment as money?
+
+Viewing these questions from the standpoint of present functioning,
+rather than from the standpoint of historical origins, we may restate
+them as follows:
+
+(1) Why should men accept small disks of metal, or paper representatives
+of these metal disks, for which, _as_ metal, they have no use, or at all
+events far in excess of the amount which they can make use of as metal,
+in return for economic commodities which they can use? The social
+utility of a money economy may well be granted, without giving an answer
+to this question. Granting that social economic life works better by
+far when men do accept these disks of metal in payments, the question
+still remains not merely as to why the practice started, but also as to
+why it continues. Granted that it is to the individual, as well as to
+the social advantage, that each individual should accept these metal
+disks in excess of his personal need for the metal, _if he is assured
+that he can pass them on to others at will_ in return for the goods he
+wishes to consume, the question still remains as to why the individual
+should have this assurance, as to why the general practice should
+continue. Menger quotes Savigny as holding that the thing is downright
+"mysterious," and the Aristotelian answer of social convention
+(sometimes interpreted as "social contract") is, in effect, a confession
+that the thing does baffle explanation on the ordinarily understood laws
+of exchange. The convergence of individual and social advantage, which
+English economic theory has done so much to emphasize, is less clear by
+far in connection with money than with the case where A trades a sheep
+(of which he has a surplus) to B for a quantity of grain (of which B has
+a surplus), while A has not enough grain, and B has not enough sheep.
+This exchange is clearly to the advantage of both A and B, and the
+practice of making such exchanges is clearly to the general advantage.
+But in the case of money, A trades sheep (of which he may not have an
+excess, so far as his capacity to consume is concerned) for disks of
+metal which he probably does not intend to consume at all. The social
+advantage of a general practice of the sort is easily established, but
+it is not clear that it is to A's advantage, _unless we assume the
+practice general_. But there are many practices which could be shown to
+be socially advantageous if all men practiced them, and, indeed,
+individually advantageous, if generally practiced, which can, none the
+less, not be made a general practice. If thieves would cease stealing,
+we could dispense with a vast expense now incurred in police and safe
+deposit vaults and heavy locks, etc., and with a small fraction of the
+savings could give pensions to the thieves which would surpass by far
+their present incomes! Individual and social advantage would converge.
+But for many reasons the practice could not be instituted, and would
+break down quickly if instituted. Very powerful social pressure indeed
+is needed to make an advantageous social institution--like
+morality--work, so long as individuals sometimes find advantage in
+breaking the general practice, even though the general practice, _on the
+part of other people_, is of advantage to every individual. Now it is
+clear that the institution of money is to the social advantage. It is
+clear that it is to the advantage of every individual who has money that
+everyone else should be ready to accept it in unlimited amount, in
+return for his goods and services. But it is not clear, on the surface,
+why everyone should be ready to take metal disks in unlimited amount in
+return for goods and services. People will not take coal or horses or
+hay or land or white elephants in unlimited amount in return for goods
+and services. Why should there be such a general practice regarding
+metal disks or pieces of paper?
+
+This question, to one who has always lived in a money economy, may seem
+childish. Such questions regarding anything to which we have grown
+accustomed seem childish to those who have not been used to raising
+them. Why does the sun rise? Why does seed-corn sprout? But these also
+are proper scientific questions, the answer to which is of high
+practical importance! The answer to the question just raised regarding
+money will go far toward explaining the functions of money, and the
+theory of the functions of money, together with the general theory of
+social value, will give an answer to the question as to _how the money
+function adds to the value of money_. The answer which I shall give on
+the first question will in large measure follow the lines laid down by
+Menger.
+
+(2) The second question needs little revision, when stated from the
+standpoint of present functioning, rather than of historical origin. We
+have more recent history to deal with in connection with this question,
+and Carlile, in his answer, offers substantial historical and
+anthropological proofs. It is still, however, present functioning that
+is important, and the question may be restated thus:
+
+Why are gold and silver, and particularly gold, the standard money of
+the great part of the world to-day? The principles of social psychology
+which Carlile employs in explaining the historical development, are also
+important in explaining the present attitude of mankind toward gold and
+silver, and will serve, together with the general theory of social
+value, to answer the question as to the value which money receives from
+the employment of the money metal _as a commodity_.
+
+It is worthy of note that neither of these questions has been seriously
+raised or discussed by most recent writers of the quantity theory type.
+Professors Kemmerer[456] and Fisher give no attention to them at all.
+Both assume money as circulating, as the starting point of the argument,
+without noticing how much is involved in the assumption. Neither,
+moreover, gives an _analysis_ of the functions of money. Considerations
+drawn from the question as to the origin and functions of money are hard
+to bring into the quantity theory scheme. If money circulates, there are
+causes for it. Fully to understand those causes, would be to understand
+also the _terms_ on which money circulates, that is to say, the
+_prices_. But then a quantity theory would be superfluous! And if the
+quantity theory answer should not be obviously in harmony with the
+answer already given by the theory of origin and functions, then doubt
+would be cast on the quantity theory explanation. The quantity theorists
+do well to avoid mixing up with their discussion considerations drawn
+from the general theory of value, and from the theory of the origin and
+functions of money.
+
+The answer to the first question rests primarily in the fact that there
+are differences in the _saleability_ of goods. Value and saleability are
+not the same thing. A copper cent has high saleability; a farm has low
+saleability.[457] Some valuable things cannot be exchanged at all. The
+Capitol at Washington cannot be exchanged, yet has value. Under a
+communistic or socialistic régime, exchange, as we now know it, would
+largely or wholly cease. An entailed estate cannot be sold, yet has
+value. If society should really come to the stable equilibrium of the
+"static state," most of the exchanges of lands,[458] securities, and
+other long-time income-bearers would cease, but they would still be
+valuable. I have developed these notions in my article on "Value" in
+the _Quarterly Journal of Economics_, Aug. 1915, and have referred to
+them again in the chapter on "Value" in the present book, and so need
+not expand the discussion here. Exchangeability and value are different
+characteristics of goods. Value is an essential precondition of
+exchangeability, but can exist without it. Value is, however, commonly
+increased by exchangeability. But the theory of exchangeability is a
+separate matter, and cannot be deduced from the theory of value alone.
+
+Menger points out the difference between "buying price" and "selling
+price." You can buy a piano for $400. If you try the next minute to sell
+it for $375 you will probably fail. You may pay ten thousand dollars for
+a farm. The income of the farm may increase. The tax assessment may
+increase. The capital value of the farm may increase. And yet, you may
+have to wait for a long time before you find a buyer who will pay you
+ten thousand dollars for it. One buys pianos or farms, as a rule, only
+when one wishes to use them, or when one has such special knowledge of
+the market that one knows pretty definitely where purchasers can be
+found for a resale, at a profit. Even in such highly organized markets
+as the stock and produce exchanges, one cannot usually buy in quantity
+and sell immediately without some loss. "Buying price" and "selling
+price" of such a stock as Industrial Alcohol Preferred are sometimes
+five points apart, at a given time. The forced sale of land in
+bankruptcies, or for taxes, notoriously often bring prices far below the
+price which would correctly express the value of the land. It is only in
+the ideal fluid market assumed by static theory, where adjustments are
+instantaneous, where causal-temporal relations have become timeless
+logical relations, that values are perfectly expressed in prices.[459]
+
+All these difficulties were enormously greater in days of primitive
+barter, before money and organized markets had been evolved. The
+difficulties of barter have been much elaborated in the literature of
+money. I shall recur to the topic in my chapter on the "Functions of
+Money." Part of the trouble arises from the "want of coincidence" in
+barter--the failure to find the man who has what you want, and who at
+the same time wants what you have. Goods have high or low saleability,
+depending, in considerable degree, on the _universality_ of the desire
+for them. They may have high _value_ if only a few rich men desire them,
+provided they be scarce. The paintings of old masters would be a case in
+point. Incidentally, the difference between buying price and selling
+price is often enormous in this case, and the making of a sale may well
+involve long and expensive negotiations. The difficulties of exchange
+here arise not alone from the limited market, however, but also from the
+fact that each painting is a unique, and a unique of high value. A good
+might have high saleability despite the fact that the ultimate demand
+for it comes from only a few rich men, if it could be easily subdivided
+and standardized.
+
+Menger enumerates a number of circumstances connected with a good which
+increase its saleability. Among them are the following:
+
+1. Widespread and intense desire for the thing (to which should be
+added, adequate wealth on the part of those who desire it).
+
+2. Scarcity of the commodity in question.
+
+3. Divisibility of the commodity.
+
+4. Considerable development of the market.
+
+5. That the demand for the article should be more than local.
+
+6. That it be cheaply transportable.
+
+7. That commerce between localities in the article be unrestricted.
+
+8. That demand for the article be constant, not fluctuating, in time.
+
+9. That the article be durable.
+
+10. That it be uniform in quality, so that standardization is easy.
+
+In general, Menger's list meets the requirements often laid down for a
+good _medium of exchange_. In general, to the extent that any commodity
+meets these tests, it will be _saleable_. Commodities will vary
+indefinitely in the extent of their saleability.
+
+Starting with the distinction between value and saleability, and with
+the analysis of the circumstances affecting saleability, we may now
+undertake to see how money tends to develop out of a barter economy.
+Suppose that a man, in a barter economy, has a good of low saleability,
+which he wishes to trade for some other specified commodity. He finds no
+one who possesses the commodity he wants who is willing to trade with
+him. But if he can trade his article of low saleability for some other
+commodity of higher saleability, _still not the thing he wants_, he has
+yet made progress, he has got _one step nearer_ the object which he does
+want. It will be possible now, perhaps, to trade the new article, of
+higher saleability, for the commodity he wants. If not, he can trade it
+for some article of still higher saleability, which he can finally
+trade for the article he wants. By several indirect exchanges, he
+finally reaches his object. Incidentally, it is erroneous to distinguish
+money and barter economies as economies based on direct and indirect
+exchange. The barter economy may well involve much more indirection than
+the money economy, in many cases.
+
+If there be in the market some one commodity which has a conspicuously
+higher degree of saleability than any other, the more sagacious men in
+the market will make it a point to get hold of it and accumulate it in
+excess of their anticipated consumption of it. They will do this,
+because they will see that they can thereby get other things which they
+do need more easily than in other ways. With the accumulation of a given
+kind of highly saleable goods, in excess, by a few men in the group, in
+the expectation that the surplus will subsequently be used to buy other
+goods,--as yet perhaps not specifically determined--we have, not money,
+but a big step toward money. At first only a few grasp the great idea.
+They succeed and become wealthy. Then others see the advantage of the
+thing, and imitate them. The prestige of the wealthy and successful men
+would induce imitation even if the advantage were not clearly seen. Then
+a tradition and a custom grows up. With the growth of tradition and
+custom, picking out one or a small number of things as particularly
+desirable objects to accumulate because of their saleability, with the
+practice of accumulating these articles in excess of intended
+consumption, money becomes an accomplished fact. There is no need for
+agreement or legislation. Money is not, in its origin, certainly, a
+matter of law or conscious public planning.
+
+With the development of a highly saleable article into money, moreover,
+we have further a great increase in that saleability itself. The
+quality which made the practice possible becomes greatly enhanced by the
+practice. Menger thinks that this leads to an absolute difference
+between money and goods, the money article, which formerly was merely
+superior to other goods in saleability, now becomes absolutely saleable.
+The absoluteness of this distinction, which would make it a distinction
+in kind, rather than in degree, seems to me not to be sound. I think
+that the distinction remains a distinction of degree. For one thing, the
+development of money, while it adds to the saleability of the
+money-commodity, _also adds to the saleability of other goods_. _Two_
+things must be exchanged, in order that _one_ may be! It is the business
+of money to facilitate exchange, to overcome the difficulties of barter,
+to bring about the fluid market. And it does this not merely by acting
+as a medium of exchange. The fact that goods can be _priced_ in terms of
+money, can have a common measure of value, makes barter itself easier,
+as I have shown in my chapter on "Barter" in Part II. There are many
+articles in trade at the present time whose saleability is not much less
+than that of money, in ordinary times. Wheat in the grain pit is surely
+highly saleable. Stocks and bonds are. If it be objected that in the
+wheat market there is always some difference between buying price and
+selling price, if considerable quantities are involved, it may be
+answered that the same is true in the "money market" The man who has
+just negotiated a three months' loan of five hundred thousand dollars at
+3-1/2% may well have trouble in turning that loan over to someone else
+immediately without shaving 1/4% from the money-rate! Besides, it is not
+true that values remain unchanged when a big buyer shifts from the bull
+to the bear side of the market. Buying price is higher than selling
+price in that case partly because _his economic power_ has ceased to
+sustain the value of the wheat, and the price would not correctly
+express the value if it remained uninfluenced by that fact.
+
+Further, as we shall see when we come to the analysis of credit, one
+chief function of modern credit is to increase the _saleability of
+goods_, and to enable men to use the value of their goods in effecting
+exchanges without actually alienating their property in the goods. It
+seems to me that the drift of modern systems of exchange is toward
+closing up the gap between money and goods, in respect of saleability,
+rather than to widen it.[460] But this is to anticipate later
+discussion.
+
+It is not necessary, in answering our second question, as to the reasons
+why gold and silver have become the standard money of the world, to go
+far in the study of primitive moneys. Wheat has almost never been money.
+The value of wheat sinks rapidly with increase in supply, and is very
+unstable. Wheat meets some other tests that fit it for money, as easy
+divisibility, ease in standardization, and even has some degree of
+durability, though subject to deterioration and waste with keeping, and
+involving expense in keeping. Carlile and Ridgeway think that wheat was
+used to some extent among the Greeks in Southern Italy as money, at one
+time.[461] But this was possible because there was a regular export
+trade in wheat--the same thing that made tobacco available as money in
+Virginia. In general, however, commodities which minister to easily
+satiable wants are ill-adapted for money. And that is especially true of
+current stocks of goods currently consumed.
+
+The accumulation of money, moreover, implies a stage of human
+development where the accumulation of _capital_ is possible. It implies
+foresight, the suppression of present wants in the interest of future
+wants, and almost always money has been a commodity well suited to serve
+as provision against future contingencies. Cattle, slaves, knives,
+fish-hooks, cooking implements, and similar things have been money. The
+"store of value" function manifests itself early.
+
+But very early a different sort of commodity comes in. Articles of
+_ornament_ early begin to take the place of articles that minister to
+more animal wants. It seems strange that articles meeting wants which
+are commonly counted frivolous and fanciful should distance those
+obviously necessary in the race for a place as money. It seems strange
+that the nations now at war should seem more concerned about their gold
+supplies than about their wheat supplies.[462] But it is none the less a
+fact that men in all ages have been enormously concerned about ornament.
+In warm regions, ornament has commonly preceded clothing. Very early,
+necklaces, bracelets, rings, earrings, nose-pendants, etc., became
+objects of exceedingly great desire. And very early, gold and silver
+were used for such purposes, and men made long expeditions for them and
+fought wars for them in very early times, before the money economy was
+developed far. Other ornaments than those made of gold and silver have
+also become money. Wampum, polished shells, iron ornaments, etc., have
+all been money. The Karoks of California were accustomed to use strings
+of shell ornaments as money. When this was supplanted by American
+silver, they used strings of silver coins as ornaments, dressing their
+women lavishly with rows of silver dimes, quarters, and half-dollars!
+Ornament and money are freely _inter_changeable in primitive life.
+To-day, in the Western world, the thing is more specialized and
+differentiated, and the interchange of money and ornament is largely
+confined to jewelers, bankers, especially international bankers, gold
+brokers, and the mints, _through_ whom the rest of society make the
+interchange. In India, however, the peasant's hoard takes the form of
+bracelets, bangles, and earrings for his wife and daughters, and the
+peasant himself seems to regard them in the double light of provision
+for future needs, and as conferring social distinction. They are both
+ornament and savings bank, and are superior to a savings bank from the
+standpoint of effective saving, since the natives would spend what they
+put in the bank, but only famine can make them dispose of the ornaments
+of their women.[463] Saving is a practice not easily started. There are
+powerful motives in human life making for prodigality. Social prestige
+comes to the man whose hospitality is lavish. Social expectation, which
+is the most powerful steady motive power in human life, makes powerfully
+for prodigality. Thrift is a virtue little esteemed among primitive men,
+and none too highly esteemed among the masses in most countries. The
+grudging person, the tightwad, the man who fails to do his share of the
+treating, the woman who entertains her guests with inadequate fare--none
+of these enjoy high social esteem. To offset this, a motive equally
+powerful must manifest itself. It would be considered mean and
+contemptible for the Hindu to put money away instead of spending it on
+feasts at marriages and funerals, and in hospitality on other festive
+occasions. But he gains, instead of losing, in social esteem and
+prestige, if he decorates his women with gold and silver. Later, the
+advantage of such a practice as a matter of provision against future
+wants would get into men's minds, and would become an added incentive to
+maintain and increase the practice. Thus the frivolous and fanciful side
+of men's nature furnishes a powerful lever for the development of both
+money and capital. In the store of value function we find one of the
+earliest and most significant functions of money. Carlile offers a
+wealth of evidence to show this interchangeability of money and ornament
+among many peoples, at different stages of culture.
+
+Three powerful elements of human nature work together in sustaining the
+value of the metals which become widely used as ornament:
+
+(1) love of approbation;
+
+(2) the sex impulse;
+
+(3) the spirit of rivalry, or competition.
+
+In these three we have, perhaps, the firmest basis which it is possible
+to construct for the value of anything! When religion is added, as has
+often been the case with the precious metals, the basis becomes solid
+indeed! Modern social psychology has increasingly made clear the power
+of the first. Social expectation can take the raw stuff of human nature,
+and mold it into almost any form it pleases. Original, hereditary
+differences remain. Some raw stuff is so inferior that no high social
+organization can be built out of it. Some stuff cannot respond very
+effectively to the social stimuli. But _qualitatively_, the tendency is
+for men to become what society expects. Individuals succeed more or less
+in meeting social expectation. But the very elements of individual
+aspiration and ambition, the very self of the individual, are molded to
+the social pattern, and, with the same racial stock, vary almost
+indefinitely from time to time and from place to place, with the
+_mores_. If ornament confers distinction,--and almost everywhere it
+does--men will seek to possess ornaments.
+
+Commonly it is for the sake of the other sex that men seek ornaments.
+Ornaments are an aid in wooing! Men gain wives by being able to give
+them ornaments.--Not that this is the whole story!--And social
+expectation, almost everywhere, requires that men decorate the wives
+that they have won. Wives usually reinforce social expectation in this
+matter.
+
+Further, the desire for ornament is competitive. One's women must be
+_better_ ornamented than the women of one's neighbors, if _distinction_
+is to be gained thereby. But this sets a faster pace for the neighbors,
+and the standard of social expectation is raised as to the necessary
+amount of ornament. It is the same sort of competition that arises among
+armed nations. A new battle-ship for one requires that all increase
+their naval strength. New armies in Germany call for new armies in
+France. A vicious circle is created. The desire for ornament, unlike the
+desire for food, becomes insatiable. And hence, the value-curve for the
+metal used as ornament sinks very slowly, being reduced, not by
+satiation of want, but by limitation of economic resources. I need not
+elaborate these notions further. They are of the same sort that Veblen
+has developed in his _Theory of the Leisure Class_. They rest on
+fundamentals in human nature, however much they differ from the
+psychology of the "economic man." They give assurance, I think, that,
+unless radical change in tastes and fashions come in, which displace
+gold and silver from their position as ornaments and as means of
+display, we may expect the value of gold to maintain itself at a high
+level regardless of great increase in quantity. I do not share the view
+which Carlile himself seems, at times, to express[464] that gold does
+not sink in value with the increase in quantity. It seems to me easily
+demonstrable that it has sunk, and does sink. But I should expect the
+value of gold to survive the shock that might come if gold were entirely
+displaced from monetary use vastly better than any commodity which
+serves wants of a different character could stand a similar shock. The
+demonetization of silver has, of course, not entirely displaced silver
+from the monetary employment. It has, however, made it necessary for the
+arts to absorb a greatly increased proportion of the new silver,[465]
+and not a little of the old silver. The demonetization of silver,
+moreover, was accompanied and followed by a great increase in silver
+production. But silver has stood the shock amazingly well.[466]
+
+It is, of course, thinkable that the attitude of mankind, under new
+social conditions, and with new tastes and fashions, may change, with
+reference to gold and silver. Love of approbation and distinction, the
+sex impulse, and the spirit of rivalry, are eternal elements in human
+nature. But their manifestations may change. There have been times when
+love of distinction gratified itself in poverty and filth and
+asceticism. Almost anything may be exalted into a social ideal. Society
+may even reach ideals of such a sort that a man may gain social approval
+and the love of woman in high competition with his fellows in the
+service of mankind! But even here gold and silver may have a place. They
+are beautiful, as we now see beauty, and beauty itself is good! The
+world is better if it has beauty in it.
+
+It is just as well to conclude at this point what I shall have to say
+regarding the value of gold as a commodity.[467] The same quantity of
+gold and silver may have widely varying values, depending on the
+distribution of wealth and power. It is not alone intensity of
+individual desire that controls values, but also the social weight of
+those who manifest the desire. And this depends on the legal and other
+institutional values concerned with social organization. The point is
+strikingly illustrated by Walker's[468] account--designed for another
+purpose--of the effect on the values of gold and silver of the conquests
+of the great Eastern empires by Alexander the Great and the Romans. The
+production of gold and silver, for the great Eastern empires, was like
+the rearing of the pyramids in Egypt. All power was centered in the
+hands of a few despots. Control of vast masses of laborers was in their
+hands. The social values--it is difficult to classify them as legal,
+economic and religious, since all three are blended--gave little weight
+indeed to the desires of the masses, and tremendous weight to the
+slightest whims of the despot. Thus, since the love of gold and silver
+was intense in these despots, and since religious considerations also
+called for the accumulation of great treasuries of gold and silver,
+enormous numbers of laborers, living miserably, toiled in the mines to
+produce them, and amazing stores of gold and silver were accumulated.
+The precious metals had, in these Eastern empires, a high value per
+unit, since so large a portion of the social energy of motivation
+attached itself to them. With the conquests by Greeks and Romans,
+however, a great change came. The old, gold-loving despots lost their
+power. The conquerors had vastly less love for gold and silver for their
+own sake. Moreover, the leaders among the conquerors had very much less
+power in their own social systems than had the oriental despots. Their
+soldiers were in considerable degree free mercenaries, who had a right
+to a share in the spoils, and who cared much less for hoards of precious
+metals than for many other things. In the new régime, the social centre
+of gravity was changed. There remained few who loved great stores of
+precious metals who had power enough to accumulate them. Mining on the
+old basis was impossible. Though slavery persisted, more and more of
+the labor of slaves went into the production of things that the masses
+of men could consume. Gold and silver sank enormously in value.
+
+Radical readjustments in the distribution of wealth in our own day,
+might well make substantial changes in the value of gold, without any
+change in its quantity. That a more equal distribution of wealth and
+power, however, would lower the value of gold now, as in the case just
+discussed, is not so clear. The masses in the Western countries are
+already fed and clothed, as a rule, even in times of adversity, and
+usually increasing income for them means increasing expenditure to
+satisfy less pressing wants, and particularly to satisfy wants connected
+with social esteem. The laborer's wife gets an expensive cab for her
+baby when she can afford it. The negroes have gold fillings put in their
+front teeth--sometimes when the teeth are sound! The practice of giving
+wedding rings, and even engagement rings, is spreading among the poor.
+Our American rural poor, of pioneer stock, have had less concern for
+gold and silver ornament than the masses of the Asiatics and recent
+European immigrants. But among the rural poor in America, as city
+standards spread, the tendency to use gold and silver ornaments seems to
+be increasing, while we may with considerable confidence expect, I
+think, that the rise of the immigrant to better economic conditions will
+mean a larger use of gold and silver on his part. Gold leaf on ceilings
+and radiators would cease, doubtless, except for public buildings, if
+great fortunes disappeared, and the use of gold, at least, for plate,
+would be impossible in an economic democracy.[469] Silver might well
+gain in value at the expense of gold if there were radical changes in
+the distribution of wealth. It is notorious that prosperity among the
+agricultural masses of India is promptly followed by absorption of gold
+in that country. I venture no concrete conclusions on this point, beyond
+the general conclusion that a redistribution of wealth, with no change
+in the quantity of gold, might well be expected to alter the value of
+gold.
+
+It may be added that the general impoverishment of Europe, growing out
+of the present World War, will probably lower the marginal value of gold
+in the arts (and hence as money) in considerable degree. From this cause
+alone, to say nothing of causes growing out of the money-employment of
+gold, and growing out of the values of goods other than gold, we might
+expect higher prices after the War than before the War, for articles of
+consumption.[470]
+
+
+
+
+CHAPTER XXII
+
+THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY
+
+
+In preceding chapters, I have spoken of the "money-service" as a source
+of additional value of money, under certain conditions. Before money can
+function as money at all, it must have value from some non-monetary
+source.[471] But, given this prior value, money performs valuable
+services. These valuable services, in certain cases, add to the value of
+money. Moreover, the fact that money, when made of a metal used in the
+arts, lessens the amount available for use in the arts, raises the
+marginal value of that metal there, and consequently raises its value in
+monetary form as well. It is now necessary to analyze the money-service,
+and to see in precisely what ways it does affect the value of money. And
+first, we must notice that the money-service is not simple, but
+compound; that in fact there are several services of money, in many ways
+distinct from one another; that not all money can perform all of these
+services; that most of them may be performed by things other than money,
+that these services are not all equally important as sources of the
+value of money, and that the same service varies, from time to time and
+from place to place, in its significance from this angle; and finally,
+that one of these services which is of the greatest social importance,
+namely, the "common measure of values" function, does not add to the
+value of money at all.
+
+I shall not now undertake a history of theories of the functions of
+money. Many of the points which follow are common property of many
+writers.[472] The nature of some functions has been more clearly
+explained than that of others. I have not found in the literature of the
+subject any very clear statements, moreover, as to the relations of
+different functions to the value of money. I shall try in what follows,
+by a series of hypothetical cases, to isolate each function of money, as
+far as may be, and shall try, by varying my hypotheses, to indicate
+variations in the influence of the different functions on the value of
+money.
+
+The functions of money have been variously described and named. The
+following list seems most satisfactory to me:
+
+1. Common measure of values (standard of value).
+
+2. Medium of exchange.
+
+3. Legal tender for debts (_Zahlungs-_ or _Solutions-mittel_).
+
+4. Standard of deferred payments.
+
+5. Reserve for credit instruments, including reserve for government
+paper money.
+
+6. Store of value.
+
+7. Bearer of options.
+
+The common measure of value function rests in the intellectual needs of
+man. It grows out of the necessity for calculation, for bookkeeping, for
+understanding what is going on. Any object of value may be used to
+measure the value of anything else, just as any object of weight--say
+an irregular mass of iron--may be put in the balance against some other
+object, and the relation between the absolute weights of the two objects
+thus more or less definitely ascertained.[473] But it helps little, in
+getting at the aggregate weight of a collection of objects, to know that
+A among them is heavier than B, while D is lighter than F. To get a
+knowledge of the situation adequate for quantitative manipulation, it is
+best to compare all of the objects with some _one_ object, chosen as the
+standard of weight, or common measure of weights. Thought is thus
+immensely simplified. If we may imagine the calculations of a dealer in
+a rural region, where no common measure of values is used, it will help
+to make clear the nature of this function. Let us suppose that he deals
+in nails, wire, cotton cloth, eggs, butter, hams, sugar, and moonshine
+whiskey, and that his customers also make and use most of these things,
+using him as a central clearing house in their rude division of labor.
+Without a common measure of values, it is necessary for him to keep in
+mind the price of every commodity in terms of every other commodity. If
+there are twelve commodities, this means 66 ratios which he must
+remember, according to the formula for permutations and combinations. In
+general, in such a situation, there would be the following ratios: (n -
+1) + (n - 2) + (n - 3) + ... (n - (n - 1)). Let him choose, however, one
+of his commodities, say eggs, as the common measure of values, and he
+needs to bear in mind only eleven prices, namely, the prices of each of
+the other eleven articles in eggs. Thinking is immensely simplified. In
+general, with a common measure of values, dealers need bear in mind only
+(n - 1) prices. Suppose that at the end of the day, after considerable
+trading, our dealer finds the following changes in his stock:
+
+ _He has gained_ _He has lost_
+ 8 doz. eggs 12 lbs. nails
+ 3 gallons whiskey 8 lbs. wire
+ 4 hams 13 lbs. butter
+ 5 yards cloth 10 lbs. sugar
+
+Has his trading been profitable? How can he tell? Reduce all the items
+in both columns to their equivalents in eggs, however, and the answer is
+very easy. No complicated business is possible without this common
+measure, and common language, of values.
+
+Be it noted that this common measure of values does not necessarily
+involve the use of a medium of exchange. The practice of _thinking_ in a
+common measure is what is involved. If the article chosen be eggs, which
+all are accustomed to use, the service of a common measure might easily
+be performed without the practice of indirect exchange, assuming that
+other physical difficulties of barter to which I shall shortly refer,
+were absent. Indeed, as I have pointed out in the chapter on "Barter" in
+Part II, a great deal of barter goes on in modern life, made very much
+easier by the fact that we have a common language of values, a common
+measure of values. For the easy working of the system, it is important
+that the common measure of value be an article with whose value the
+group is well acquainted. The frequent testing of this value in actual
+exchanges vastly facilitates this. But actual exchange is not necessary
+for the performance of the measure of value function. We have cases
+where the measure of values and the medium of exchange are different.
+Thus, in the Homeric poems, we find indications that cattle served as a
+measure of values, even though payments were made in gold. The
+Virginians commonly _thought_ in pounds, shillings and pence, even when
+using tobacco as a medium of exchange. The need for a common measure of
+values would manifest itself in any complex socialistic society, even
+though exchange were largely dispensed with. No systematic plans for
+utilizing the resources of such a society would be possible, no
+bookkeeping would be possible, without some such device.
+
+For this function, I prefer the term, "common measure of values," to the
+term often used instead, "standard of values." The latter term, as used
+in connection with the expression "standard money," sometimes carries
+the connotation of "money of ultimate redemption," and its main function
+is thought of as serving in reserves. The reserve function is a separate
+function, however. It is common to have money made of the standard metal
+in reserves. But this need not be the case. I would refer once more to
+the hypothetical illustration developed in the chapter on "Dodo-Bones":
+gold, not coined, as the "standard of value"; paper as the medium of
+exchange; silver bullion, at the market ratio with gold, as the reserve
+for redemption of the paper. This may suggest that a distinction may
+properly be drawn between measure of values, and ultimate standard
+money. The paper money, in this case, would be the thing of which the
+masses would ordinarily _think_, so long as the system worked smoothly.
+And the paper could serve as a measure of values. The case is not unlike
+the case where a "standard yard," or "standard pound" is kept for
+ultimate reference in a government bureau, while yardsticks or pound
+weights in the shops and warehouses do the actual measuring. The cases
+do not, indeed, run on all fours. The measurement of weights and lengths
+involves physical manipulation; the measurement of values is an
+intellectual operation, made by comparing two objects of value. The
+comparison may be made in actual exchanges; it may be made by an
+accountant's estimate; it may be made by comparing the results of
+several exchanges, in sorites form, only one of which involves the
+ultimate standard measure. The yardsticks actually used may vary more or
+less, by accident or design, by variations of temperature, etc., from
+the standard yard. The paper dollars, under a smooth working of the
+system described, would be held closely to the ultimate standard, and
+would, in any case, not vary as compared with one another at the same
+time and place.
+
+When the medium of exchange diverges in value from the ultimate
+standard, as in the case of the American Greenbacks during the period
+from 1862 to 1879, we have, sometimes, shifting relations among the
+functions. The Greenbacks were the measure of value most commonly in
+use. They were legal tender for debts, except where gold was specified
+in the contract. They were commonly the standard of deferred payments.
+To a considerable extent, however, gold was used in reserves, and even
+as a medium of exchange. People _thought_ in both standards. And
+finally, gold remained an ultimate standard to which the Greenbacks were
+referred, and by which variations in their value were measured. The
+terms, "primary standard" (gold) and "secondary standard" (Greenbacks),
+have been employed to aid in straightening out this confusion.[474] I
+think, on the whole, that the term, "common measure of values" describes
+the function which I wish to emphasize more clearly than the term,
+standard of values, and I shall, in general, employ it for that
+purpose.[475]
+
+The medium of exchange function grows out of the physical difficulties
+of barter, rather than out of intellectual needs. The discussion in the
+preceding chapter of the origin of money has emphasized the nature of
+the difficulties which a medium of exchange meets. A has an ox, which he
+wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor
+nor grocer cares to take the ox, however, and, besides, no one of them
+could supply A with all three of the things he wishes to get. Moreover,
+even if A should meet a man who had all three things, he would not care
+to give up the ox for them, since the ox is worth more than all three.
+If there be a medium of exchange, however, A may sell his ox to the
+butcher, and take his pay in that medium, which will be something easily
+and minutely divisible, buy coat and sugar and shoes, and take the
+surplus of his medium of exchange home, waiting for another occasion.
+The medium of exchange function overcomes the difficulties arising from
+low saleability of many goods, due to limited number of possible buyers,
+lack of divisibility, etc., etc.
+
+The common measure of values aids greatly in determining the prices, the
+terms, at which exchanges may be made; the medium of exchange makes
+possible exchanges which could not be made at all in its absence.
+
+The measure of value function does not add to the value of money. The
+medium of exchange function is commonly a cause of additional value for
+money. The source of this extra value is the gains that come from
+exchange.
+
+Exchange is an essential part of the productive process, where you have
+division of labor with private ownership of the instruments of
+production, and private enterprise. Values[476] may be created by
+changing the forms, the time, the place, or the ownership of goods. All
+these operations are necessary in an economic system like our own. Those
+who possess money are in a position to take toll, in values, from those
+who wish to get rid of the goods which they have produced, and to get
+hold of the goods which they wish to consume. The holders of money do
+this by means of the money, and under the laws of economic imputation,
+these gains are attributed to the money itself, first in the form of a
+rental value, and sometimes, under conditions later to be discussed, as
+increments to capital value.
+
+Before giving full discussion to this topic, it will be well to consider
+certain other functions, which are, or may be, sources of value for
+money.
+
+The reserve for credit instruments function cannot be fully discussed
+till we take up credit. Provisionally, it may be said that it is a
+source of absolute value for money, _per se_, even though the effect on
+prices may be that, owing to a rise in the values of goods, the prices
+rise. The fact of credit may even tend to lessen the absolute value of
+money itself, by lessening the value that comes to money from the medium
+of exchange function. On the other hand, credit increases exchanges,
+making possible a vast mass of transactions which without it would not
+occur at all. Of course, in our hypothetical case above, where the
+reserve for credit instruments is silver bullion, the reserve for credit
+instruments function does not add to the value of money at all.
+
+The "bearer of options" function of money is also a source of value for
+money. It is a valuable service. The man who holds money, waiting his
+chance in a fluctuating market, anticipates a gain which justifies him
+in holding his capital without return upon it. Money is not alone in
+performing this service. High grade bonds also perform it. They bear a
+lower yield per annum to compensate. The service of bearing options is
+itself a part of the yield, and is itself capitalized, in their case.
+Two 5% bonds, each equally secure, but one of which has a wide market,
+while the other has a restricted market, will have a very unequal value.
+
+This "bearer of options" function is often identified with the "store of
+value" function. The two are properly distinguished. If a man has in
+mind a definite contingency, at a definite future time, for which he
+wishes to hold a store of value, he may well find that a high yield
+bond, or a loan upon real estate, or many other productive investments,
+will serve him better than money or bonds with wide market. So far as
+money is concerned, the "bearer of options" function is much more
+important than the "store of value" function to-day. The reserve of
+value in liquid form, for undated emergencies (like the War Chest at
+Spandau, or the big reserve accumulated between 1900 and 1913 by the
+_Banque de France_), would, from the point of view of this distinction,
+come under the "bearer of option" function, rather than the "store of
+value" function. The important thing about the distinction is that for
+one purpose a high degree of saleability in the thing chosen is
+necessary, while in the other, such is not the case. The most common
+case of the "bearer of options" function arises when men hold money,
+liquid securities of low yield and stable value, short loans, call
+loans, or bank-deposits, waiting for special opportunities in the
+market.
+
+The medium of exchange function would exist in a society where business
+goes always in accustomed grooves, where uncertainty is banished, and
+where most of the assumptions of static economic theory are realized.
+If we push static assumptions to the limit, and assume "friction" of all
+sort gone, assume that all goods can flow without trouble or expense to
+the places and persons where their values are highest, etc., even the
+medium of exchange function would disappear. But if we make our static
+assumptions a bit more realistic, leaving the "friction" of barter, but
+banishing the need for readjustment, and the uncertainties that grow out
+of dynamic changes (whether caused by growth of population, or changes
+in laws and morals, or in fashions and tastes, or in technical methods,
+or by accidents of various kinds), then the medium of exchange function
+will still remain. Given dynamic changes, we have need for a vast deal
+more of readjustment, and a vast deal more of speculation. I have shown
+in the chapter on "The Volume of Money and the Volume of Trade" that the
+great bulk of trading in the United States to-day is speculation, which
+increases or decreases with the amount of dynamic change, with its
+accompanying uncertainty and need for readjustment. The major part of
+the medium of exchange function arises from this. The whole of it arises
+from factors which purest static theory is accustomed to abstract from.
+The _whole_ of the "bearer of options" functions arises from dynamic
+change. _This is the dynamic function_ of money _par excellence_. It is
+commonly treated by economists as an unusual and unimportant function.
+Merged with the store of value function, it is frequently treated as of
+historical, rather than present, importance. In my own view, it is of
+high present importance.[477] I should count it as in considerable
+degree a _function_ (using function in the mathematician's sense) of
+"business distrust"[478] waxing and waning in importance as business
+distrust increases and decreases. In past ages, this function was
+primarily concerned with consumption, money and other goods being held,
+at the loss of interest, as a safeguard against personal danger and as a
+means of subsistence in emergency. Increasingly to-day, it is concerned
+with _acquisition_ of wealth in _commercial_ transactions. When war and
+domestic violence were the main cause of social disturbance, the
+consumption aspect was most prominent. That aspect came strongly to the
+fore at the outbreak of the present war. The heavy selling of
+securities, which closed the bourses of the world, grew out of men's
+efforts to get money and bank-credit as a "bearer of options" for the
+old reasons. The old reasons explain in large measure the accumulation
+of gold by the _Banque de France_, and by the German Government,
+referred to above. But to-day, in general, the main purpose of those who
+use money, or other things, as a "bearer of options" is to make gains,
+or avoid losses, in industry and trade. The man who, in a given state of
+the market, is afraid to lend, or afraid to invest, foregoes the income
+which lending and investing promise, and holds his money. The man who
+sees uncertainty and fluctuation in the market, and expects them to give
+him bargains in time, foregoes income for a time, and holds his money.
+The man who has investments of whose future he is uncertain, and who
+fears to try any other investment for a time, sells what he has,
+foregoes income, and holds his money. It is not always possible, in
+discussing the money functions, to preserve the distinctions between
+money and credit, or money and "money" in the money-market sense. How
+much difference is made by these distinctions will best be discussed in
+our chapter on "Credit."
+
+The significance of the "bearer of options" function is especially
+manifest, I think, in connection with call loans. The "call rate" is
+commonly well below the regular "discount rate," or rate for thirty-day,
+sixty-day, or ninety-day paper. The explanation is to be found, I think,
+in the fact that the lender of call money does not entirely dispense
+with its service. He reserves a part of the "bearer of options"
+function. To be sure, he will, in practice, have to wait an hour or two,
+or even more for it,[479] and this may well mean that he cannot take
+full advantage of an option. But the right to demand money on even
+twenty-four hours' notice is more available than a high-grade bond, as a
+means of meeting rapidly changing situations. This principle will
+explain, too, I think, why money-rates in general, including even
+ninety-day paper, are usually lower than the long-time interest rate on
+safe farm mortgages, or on real estate mortgages in a city. The
+thirty-day rate will commonly be lower than the sixty- or ninety-day
+rate--though exceptions can easily be found, if the thirty-day period is
+to cover a time of active business, which is expected to grow less
+active during the second or third month. The influence of the bearer of
+options functions is not the only influence at work on the rates. If it
+be objected that the long-time interest rate on high grade railroad
+bonds or government securities is sometimes lower than current
+money-rates, or just as low, the answer is that these bonds also share
+the "bearer of options" function, and that the interest rate on them is,
+like the money-rate, lower than the "pure rate" of interest.
+Writers[480] have been accustomed to look for the "pure rate" of
+interest, _i. e._, an interest unmixed with insurance for risk, in the
+highest grade of government securities. I think that this is a mistake.
+I think that the "pure rate" should be sought in long-time loans, of
+assured safety, which lack a general market. Such loans, _at the time
+they are made_, should represent the "pure rate" _for that time_.[481]
+
+I shall recur to the question of the money-rates, and the question of
+the relation of the money-rates to the general rate of interest, in the
+chapter on "Credit."
+
+For the present I would call attention to the interesting case of
+Austria, where the money-rates are normally very low, because the volume
+of commerce and speculation is small, and the volume of banking capital,
+politically fostered, is large; and where, on the other hand, the
+general rate of interest on long-time loans is high, owing to the
+scarcity of capital in industry and agriculture, as distinguished from
+commerce.[482] This case may illustrate, incidentally, that even as a
+"long run" or "normal" tendency, an excess of currency in a country may
+lead, not, as the quantity theorists contend, to high prices, but rather
+to low money-rates. Austria presents simply a striking case of what I
+should regard as the general tendency. The money-rates and the
+interest-rates tend to approach one another to the extent that paper
+representatives of many different industries get into the "money
+market"--to the extent that industrial investments in general become
+saleable enough for it to be safe to finance them by means of short-time
+banking credit. When banks lend on collateral security of corporation
+stocks to the buyers of those stocks, they are, in effect, financing the
+corporation itself.[483] Industries differ widely in the extent to which
+they depend on the money market for their finances. The difference
+depends often less on the nature of the industry than on the type of the
+industrial organization. An individual farmer cannot get the bulk of his
+credit that way! But there is no reason why a well-organized
+corporation, assuming it successful in agriculture, might not draw on
+the money market, even if not so freely as a manufacturing corporation
+does.
+
+For the contention that the money-rates for short periods are lower on
+the average than the rates on longer loans, and that the call rates are,
+on the average, well below all time rates, there is abundant statistical
+evidence. From 1890 to 1899 in New York City, the average rate on 4- to
+6-month paper was 5.99%; the average rate on 60- to 90-day paper was
+4.58%; the average call rate was 3.29%. In the same city, for the period
+from 1900 to 1909, the averages were: 4- to 6-month paper, 5.61%; 60- to
+90-day paper, 4.78%; call rate, 4.05%.[484] This last figure for call
+loans represents an average of quotations at the "Money Post" at the
+Stock Exchange. While normally the call rates are well below this,
+occasional high figures, like those in 1907, pull this average up. The
+high rates at the "Money Post," however, are not always representative.
+Banks frequently do not charge their regular customers as much as the
+quoted rates.
+
+Even more detailed evidence for our thesis is to be found in W. A.
+Scott's investigation of New York money-rates, for the period,
+1896-1906.[485] He studies _two_ sets of quotations for call loans,
+those at the Stock Exchange "Money Post" and those at the banks and
+trust companies; _seven_ sets of quotations (five of which appear
+regularly) under the head of "time loans," namely, 30-, 60-, 90-day, and
+4-, 5-, 6-, and 7-month; and _three_ under the head of "commercial
+paper," namely, double name choice 60- to 90-days, and two varieties of
+single name paper.
+
+He finds a clear tendency for the rate to vary with the length of the
+loan, although noting many exceptions. "The difference between these
+quotations rarely exceeds one-half of one percent, and the general rule
+seems to be that the influence of time in raising the rate grows less as
+the length of the loan increases. For example, there is apt to be a
+greater difference between the quotations of 60-and 90-day paper than
+between 90-day and four months. Likewise there is a greater difference
+between 90-day and four months than between 4-months and 5-months
+paper."
+
+The call rate, though much more variable than all time rates, and
+sometimes high above them, is, on the average, well below them. For the
+period, 1901-06, the averages are: call loans, 3.3%; time loans, 4.5%.
+
+The declining influence of differences in time as the length of the
+loans increases, is what our theory would require. If the "bearer of
+options" functions of short loans is the explanation of the lower rate
+on them, it is a factor which would count for less and less as the
+length of the loan increases. A month's difference is all-important,
+when the month involved is proximate, say the difference between 10 and
+40 days. But it is of virtually no importance, from the standpoint of
+the man who wishes to meet sudden and indeterminate emergencies,
+whether the note he holds matures in eleven months or twelve months. The
+difference between a one-year loan and a five-year loan might, on the
+other hand, still be important from the angle of bearing options. The
+factor should cease to have any meaning at all, or at least any
+appreciable meaning, when the difference is between, say, twenty and
+twenty-five years.
+
+I have no statistical evidence that the one-year loan can normally
+expect a lower rate than the five-year loan. At times, short time
+financing may be even more expensive than long time financing. But such
+study as I have given to quotations of short-term notes of corporations,
+as compared with the longer term bonds of the same corporations, would
+leave the distinct impression that short-term notes fare better in the
+security market, and yield less return. A complication arises, here, of
+course, that the short-term note may often lack the safety which a first
+mortgage bond of the same corporation would have.
+
+The legal tender for debts function calls for a brief discussion.
+Whatever gives legal quittance from contract obligation, or from legal
+obligation as for taxes, performs this function. "Legal tender" money,
+in the strict sense, is not alone in performing this function. Usually a
+government will by law or administrative practice with the force of law,
+bind itself to accept forms of money which it will not compel other
+creditors to accept. Thus, silver certificates, without being "legal
+tender," are a means of legal quittance from obligations to the Federal
+Government. Sometimes governments will receive only gold at the customs
+house. This was true in the Greenback period, when Greenbacks were
+"legal tender," but not good for payments of customs duties. The reader
+who is interested in refinements of the legal distinctions among
+different kinds of money will find the thing elaborately worked out by
+G. F. Knapp, in his _Staatliche Theorie des Geldes_.[486] But "legal
+tender" money is not always an adequate means of quittance. If the
+contract calls for corn, or wheat, or Northern Pacific stock, the best
+legal tender money is a poor substitute! Witness the "Corner" in
+Northern Pacific in 1901. It is doubtless true, as Davenport[487] points
+out, that all contracts, whatever they call for, may be ultimately met,
+under the common law, by money damages, but that does not mean that a
+man can maintain his solvency or position in business by offering money
+when Northern Pacific is designated in his contract. Doubtless even
+there money will free him, _at a price_, but Northern Pacific stock is
+at least more convenient for the purpose! A man does not need money to
+get free from debts, even when money is required by the contract. He can
+turn in whatever he has in an assignment for the benefit of his
+creditors, and get free _via_ the bankruptcy court. In other words, the
+legal tender function of money, while it does distinguish money from
+other goods as a matter of _degree_, does not erect an absolute
+difference of _kind_.
+
+Under a smoothly working monetary system, where all forms of money are
+kept at a parity by constant and ready redemption, and where people have
+no doubt that this redemption will occur, the legal tender quality which
+attaches to part of the money is a matter of no consequence. It adds
+nothing to the value of the money. In times of stress, the legal tender
+quality may be a source of a considerable temporary value. This is
+especially likely to be true of an inconvertible money. The legal tender
+quality of the Greenbacks led to a very considerable fall in the gold
+premium in the Panic of 1873. I have mentioned this point in the chapter
+on "Dodo-Bones," where part of this discussion has been anticipated. In
+general, the legal tender quality may be recognized as a factor in
+sustaining the value of money, if as a consequence of this quality men
+take the money when they would not otherwise take it, or take it on
+terms which they would otherwise not agree to. Where, however, the money
+is money which they are glad to get in any case, the legal tender
+quality is a matter of supererogation.
+
+The standard of deferred payments function, as distinguished from the
+legal tender function and the medium of exchange function, does not add
+to the value of money. Of course, if the standard of deferred payments
+is actually used in making the deferred payment, then it finally becomes
+assimilated to the other two functions. But it is quite possible to
+divorce them completely. Suppose, for example, that the standard named
+in a contract in the Greenback Period was gold, but that payment was
+made in Greenbacks at the market ratio. Or, suppose that the standard of
+deferred payments should be a composite of commodities, the tabular
+standard, with the understanding that the index number on the day of
+payment should determine the amount of money to be paid. In neither of
+these cases does the standard of deferred payments function supply any
+reason for an increase in the value of the thing which serves as the
+standard.
+
+In general, the standard of deferred payments and the measure of value
+functions do not, _per se_, add to the value of money. The legal tender
+function may or may not do so. The medium of exchange function, the
+store of value function, the reserve for credit function, and the bearer
+of options function, normally do occasion an added value which is to be
+attributed to money, either as a capital increment, or as a rental.
+
+The question remains, however, as to the relation of the rental value,
+and the capital value, of money. This question is not easy to answer.
+As I have already shown, in the chapter on "Capitalization" and
+elsewhere, various complications present themselves in the case of
+money. (1) In the case of money, the rental, and the prevailing rate of
+interest at which rentals are discounted to make a capital value, are
+not independent variables, but tend to vary together. Thus, whereas
+increased rentals would in the case of most income-bearers tend to give
+a higher capital value, this is offset, in the case of money, by the
+fact that rentals are subject to a higher discount. (2) In the case of
+income-bearers generally, the magnitude of the income, or rental, is
+causally prior to the capital value. The capital value, in our
+illustration of the candle, the disk and the shadow on the wall, is the
+shadow, while the rental is the disk. This is the general relation
+insisted upon by the Böhm-Bawerk-Fetter-Fisher line of capital and
+interest theory. Productivity theories of capital have been criticised
+on the ground that capital value is not productive, that only concrete
+capital-instruments are productive, and that they produce, not value,
+but goods, that these goods receive value from the market, which is
+reflected back, but discounted, to the capital instruments which
+produced them, so that, in value-causation the line of causation is
+precisely the reverse of the line of technological causation. Capital
+instruments produce consumption goods, but the value of the consumption
+goods is the cause of the value of the capital instruments. In the case
+of money, however, this is not true. It is the _value_ of the money, the
+capital value, which does the work that makes a rental value. The value
+of the money is a precondition of the money-function. So far as money is
+concerned, both "productivity theories" and "use theories" seem
+vindicated. There is a "use," an "enduring use" in addition to the
+"uses."[488] (3) The capitalization theory, as hitherto formulated,
+assumes money and a value of money. It is a part of the general body of
+price theory for which this assumption has been shown to be needed.
+
+With reference to the second, at least of these points, however, it has
+been shown that money is not unique. Diamonds, and all other goods which
+have as part of their function the conspicuous display of wealth,
+likewise perform this function _because_ they have value. This gives
+them an additional value. Diamonds are bought for this purpose, when
+they would not otherwise be bought, or when they would not otherwise be
+bought in such quantity. This additional value makes diamonds still more
+effective as a means of displaying wealth, with a further increment in
+their value, etc. We seem, here, to have an endless, and vicious, circle
+in value causation, the value mounting indefinitely, building upon
+itself, a sort of "pyramiding" process. But the limitation comes from
+several angles. In the first place, _as_ diamonds rise in value, from
+whatever cause, a smaller and smaller number of diamonds is required to
+display a given amount of wealth! The increase in the value makes each
+diamond so much more effective for the purpose in hand that it tends to
+cut under the cause of the increase. These two tendencies come into some
+sort of equilibrium. I suppose that by making strict enough assumptions,
+and limiting the problem rigidly, it would be possible for the
+mathematician to work out a formula for this equilibrium, letting the
+increment in value grow feebler with each rebound, till at last it is
+dissipated in infinitesimals. In the second place, diamonds are not
+alone in performing this service. They must compete with other precious
+stones, with the precious metals, with limousines and Turkish rugs,
+with servants and livery, with houses and lots in restricted
+neighborhoods, with opera boxes and memberships in clubs which confer
+prestige, with a very wide range of goods, for the detailed discussion
+of which I would refer again to Veblen's _Theory of the Leisure Class_.
+The _differential_ advantage of diamonds, when it is borne in mind that
+the conspicuous display of wealth is not the _only_ purpose, as a rule,
+for which any of these things are bought, that the concrete diamond, or
+other good bought, is a _bundle_ of valuable services,[489] of which the
+displaying of wealth is only one, is not, necessarily very great. For
+many people, other forms of wealth do better. And, as a rule, diamonds
+would not perform that service satisfactorily alone. A large number of
+diamonds, without proper "setting," in clothing, servants, house, opera
+box, etc., would excite ridicule, and fail[490] in their purpose of
+gaining social prestige. They must be part of a complex of goods of the
+same sort, to accomplish their purpose.
+
+Now it is the _differential_ advantage of diamonds which makes possible
+the extra value, in this use. If all wealth were equally serviceable in
+conspicuous display, if cattle and barns and shares in a coal mine or
+slaughter-house or glue factory could display themselves as well as
+diamonds can, and if possession of these things conferred prestige as
+much as possession of diamonds does, this differential advantage of
+diamonds would disappear, and with it all extra value from that cause.
+Diamonds are members of a _class_ of goods, a restricted, but still
+large class, which possess this advantage. We may apply the old
+Ricardian rent analysis here, arranging goods in a series from the
+standpoint of their capacity to perform this additional service. Bread
+would, for the purpose in hand, be a "no-rent" good. Ford automobiles
+are probably nearly no-rent goods now! That the differential factor is a
+_cause_ of value in land, as the Ricardian doctrine seems to hold, is
+not, I think, true. If all land were of equal quality, and of equal
+accessibility to the market, all land would still bear a rent, if it
+produced goods which had value, and if the land were sufficiently
+restricted in quantity.[491] But here is a case where the differential
+factor is an actual _cause_ of value. If all wealth were equally
+effective in displaying itself, no form of wealth could gain in value as
+a means of display.
+
+This proposition calls for one important qualification. The fact that
+wealth, in general, confers prestige is, undoubtedly, a source of
+stimulus in wealth creation and acquisition, and a big source of the
+value[492] of total wealth. It is probable, however, that it is so great
+a stimulus to production that it defeats itself so far as the values of
+_units_ of goods are concerned. It stimulates production, which reduces
+the marginal values that arise from other causes. Thus, while a source
+of additional value to the _aggregate_ of wealth, it probably reduces
+the values of given items.
+
+I have dwelt at length on the case of diamonds, because principles
+applying there will give us important clues to the case of the value of
+money.
+
+Money, by being valuable, is so far equipped to perform the money
+service. But its _differential_ advantage over other valuable things
+comes from its superior _saleability_. Its original value comes from
+non-monetary causes, and has been sufficiently explained in the chapter
+on "Dodo-Bones" and in the chapter on the "Origin of Money." The extra
+value which comes from the money functions rests chiefly in its superior
+_saleability_. Saleability is itself a cause of additional value. But
+here again we may arrange goods in a series, starting with the least
+saleable, and ending in money. Money has an advantage, but its advantage
+is not absolute. Under a system of free coinage, gold bullion is
+virtually on a par with coin, and even without free coinage, bullion is
+for many purposes as good, and for foreign exchange may be better.
+Modern credit, moreover, as has been indicated before, tends to add to
+the saleability of all goods, and so to lessen the differential
+advantage of money.
+
+Here, again we may see the principle that the extra value that comes
+from the differential advantage tends to limit itself. As the money-use
+adds to the value of money, a smaller amount of money is required to do
+the money work, and hence the source of the increment of value is cut
+under. This principle will partly explain why the rental of money cannot
+be capitalized in the same way that the rental of land can be.
+Increasing the capital value of land is not the same as increasing the
+productive power of land. But increasing the capital value of money does
+mean an addition to the power of a dollar to do money work. It tends,
+moreover, to lessen the work that there is for money to do, both by
+reducing the total amount of trading, and by increasing the incentive to
+the use of substitutes for money. Only a part of the value of the
+services of money, thus, can be added to the capital value of money.
+There is a further point which is important, as differentiating money
+from diamonds: much more of the value of the services resting on the
+value of diamonds can be added to the capital value of the diamonds than
+is the case with money. The reason is that diamonds may give forth a
+continuous flow, _in the same hands_, of the service of conspicuous
+display of wealth. Money, however, can perform most of its services for
+a given owner _only once_. For a given owner, it can serve only once as
+a medium of exchange. For one owner, it can serve only once as legal
+tender for debts. It can serve indefinitely as a store of value, or as
+"bearer of options." In these cases, however, the relation between value
+of service and capital value does work out in accordance with the
+capitalization theory. The money thus held brings in no money income. It
+is held thus only if the services which it performs are equivalent to
+the income which would come if it were alienated, and something which
+would bring in a money income were purchased in its place. Money may
+have added to its capital value the value that is created by _one_
+marginal exchange, but the whole series of values which a dollar may
+create in exchanges cannot be capitalized, if only because the same
+owner cannot get them all. This holds strictly true only so long as no
+credit arrangements exist. If loans of money can be made, then the
+lender can take toll on successive exchanges, and get an income which
+may be capitalized in part, subject to the limitation already discussed,
+that increasing capital value of money cuts into the rental, and so, in
+large measure, destroys its own source.
+
+Where money is not freely coined, there may be an increment, growing out
+of the capitalization of the money-services, in the value of the coin.
+The coin may be worth more than the uncoined bullion. This need not be
+true. If the amount of money work to be done is not increasing, it will
+not be true, unless the value of the bullion declines, and need not be
+true then. But an agio on coined over uncoined metal is quite possible,
+and has frequently occurred. Such an agio has limits, however. In the
+first place, the bullion may be used as a substitute for coin, so
+lessening the amount of work there is for coin to do, and lessening the
+source of the agio. Bullion would tend to rise in value from being thus
+employed, and coined money would lose in value from a reduction in the
+services it performed. Further, _anything_ which has more than ordinary
+saleability may be used as a substitute, in one or another capacity.
+Again, the agio, if it appeared in a country where men are accustomed to
+thinking about money, might well arouse distrust, lessen the scope of
+the coin still further, and so cut into its own source. But such agios
+have appeared, and while a pure case, where the sole source of the agio
+is the values created in the money-functioning, is hard to find, I think
+it is not to be questioned that cases where this is part of the
+explanation have arisen. I should be disposed to find part of the
+explanation of the rise of the rupee in India after the closing of the
+mints in 1893 in this factor. There seems to be evidence, however, that
+Laughlin is right, in part, in ascribing the rise to an expectation of
+the adoption of the gold standard.[493]
+
+Modern money, in general, however, rests on a system of free, even
+where not strictly gratuitous, coinage. Coined metal thus rarely gets,
+save to a limited extent or temporarily, an agio over uncoined bullion.
+Uncoined bullion is acceptable in a host of places where coin would
+otherwise be used, particularly in reserves for credit instruments.
+Bullion is even superior in international trade as a medium of exchange.
+Credit paper (particularly bills of exchange), is superior to both in
+international exchange, as a medium of exchange, because of various
+reasons of economy. Such paper is even used in reserves in many places,
+particularly by the Austro-Hungarian Bank.
+
+The fact of free coinage means, substantially, that the state has made
+the money form a free good. How much value is thereby destroyed we may
+best see if we ask precisely how much the money form could mean _at the
+limit_. Initially, the money form means simply the certification of
+weight and fineness by a trusted authority. It saves, therefore, the
+delay and expense of testing the weight and fineness by assay, etc. It
+saves the trouble and delay of subdivision of a formless metal. It
+averts many difficulties. For small retail transactions, indeed for
+retail transactions in general, the conveniences of coined over uncoined
+metal are very great. Small transactions do not justify the trouble and
+expense of assaying and weighing and subdividing gold! In a country,
+therefore, where the bulk of the money work is in effecting small
+transactions, we might expect a considerable agio for coined over
+uncoined metal. This would be especially true if that country had few
+facilities for credit substitutes for the coin, particularly for small
+transactions. In a country like the United States, however, where checks
+are often drawn for amounts less than a dollar, and where the bulk of
+the gold, or standard money, is to be found, not in circulation but in
+reserves, one need not anticipate that the medium of exchange function
+would give a big agio to gold coin, even if free coinage ceased. So long
+as coinage means merely a certification of weight and fineness, this
+conclusion will hold. For purposes of large transactions, the item of
+weighing and assaying would not be serious. Indeed, American banks are
+accustomed to weigh even gold coin, in quantity. It goes by weight,
+rather than by tale, and if light-weight, it counts for less than its
+nominal value. The writer knows a bank which has a considerable store of
+light-weight gold coin that has been in its vaults for over twenty
+years. Such coin may be counted at par in reports by the bank to the
+Government.[494] It might be paid out through the window to customers,
+who would not weigh it, in case of a "run" on the bank. But it cannot be
+used in dealings with other banks without loss.
+
+Does the legal tender aspect of coin count for more? Under a smoothly
+working system of free coinage, where moreover, all forms of money are
+kept at a parity by ready redemption, we have seen that the legal tender
+feature makes no difference. Would it make a difference where coinage is
+restricted? If we assume that the use of checks for small payments, and
+the use of bullion in reserves, in a given case, prevents the existence
+of an agio growing out of the other functions of money, I think it clear
+that the legal tender feature alone will not create one. But suppose
+that there is an agio from other causes, will not the legal tender
+aspect of money tend to increase it? Will not men demand coin, which
+bears an agio, rather than bullion, when they have the right to demand
+either? And will not the agio then, in a way, grow out of itself, a
+bigger agio appearing, because an agio has already appeared? It does not
+seem to me that this need follow. If there be an agio, then creditors
+will demand either coin, or bullion _on a different basis from coin_.
+But so long as they get the benefit of the agio, either in the form of
+coin, or of a larger amount of bullion, particular circumstances, rather
+than a general rule, will determine which they will demand. The banker
+might well prefer bullion. The international banker would prefer
+bullion. The man who wishes money for retail transactions will take
+coin. Men will use the legal tender quality of money as a means of
+getting the benefit of what agio there is (though contract right, where
+the contract calls for coin, would accomplish all that a legal tender
+law would accomplish), but whether they take 23.22 grains of coined
+gold, or 25.5 grains of gold bullion, will depend on which they prefer
+in the circumstances. I do not see that the legal tender feature adds
+anything to the case of restricted coinage that it does not add to the
+case of free coinage.[495] In either case, there will be temporary
+emergencies, when panics arise, when legal tender money gets an agio
+over any possible substitute. Solvency may depend on it. This might
+arise under free coinage, if the panic were acute, and if settlements
+had to be made immediately. But as long as there is time for men to
+work things out, I should not expect the legal tender feature, _per se_,
+to add to the agio of coined metal even under restricted coinage.
+
+In general, the possibility of an agio for coined metal, under
+restricted coinage, rests on the extent to which coin has a unique
+function. In so far as substitution is possible, there is no room for an
+agio. For many purposes, bullion may be substituted. To the extent that
+credit is developed, and is flexible, various other substitutes are
+possible. To the extent that barter can be used, still other substitutes
+are possible.
+
+Among an ignorant people, little accustomed to developing new
+expedients, having an economic life that is not flexible, having an
+economy based on petty economic units, having little development of
+credit, accustomed to the use of money in most transactions, money might
+well be, in many connections, highly important if not indispensable. In
+England, before the War, where no bank-notes under five pounds were in
+circulation, and where small checks were little used, an agio on coin
+might appear if coin got so scarce as to be inadequate for retail trade,
+but for bank reserves bullion would have served virtually as well as
+coin, and with the stock of coin she had at the time England could have
+gone on for a long time indeed with no more agio than just enough to
+prevent the melting down of the coin. In the United States, where checks
+can be used for very small transactions, and where a high percentage
+(very conservatively estimated by Kinley at from 50 to 60%) of retail
+business is done with checks, the agio on coins of a dollar or over
+growing out of retail trade might be expected to be very slight. On the
+other hand, the legal requirements for reserves in specified types[496]
+of money might, in time, lead to some agio. I do not think that the
+reserve function in England would ever do so. If we could combine our
+use of checks in retail trade with England's absence of legal reserve
+requirements, I should think that the agio would have little chance
+indeed of growing great! If to this could be added Canada's extensive
+use of small elastic bank-notes, the chance would be still less. If
+bank-notes of one dollar could be issued, the agio would be less still.
+
+It is in the case of coins of very small denomination that the agio
+might appear most readily. Such coins, if limited in amount, and if
+given the usual restricted legal tender,[497] do not need redemption to
+circulate at face value, even when made of baser metals. It is quite
+thinkable that such coins should, even when redeemable, circulate at an
+agio over the redemption money. In small retail transactions the need
+for money to do business is most imperative. Even here, however, there
+is large flexibility. The present writer, during the period of money
+stringency in the Panic of 1907, made much larger use of checks in very
+small payments than was his usual practice, and the same was true of
+various of his acquaintances.
+
+I think that the quantity theorist, with his doctrine of an unlimited
+agio through the restriction of coinage proportionate to the
+restriction, is best understood if we say that he has taken an
+exaggerated estimate of the imperativeness of the need for formed money
+in the smallest retail transactions as typical of the whole
+situation.[498] I have elsewhere shown, however, that, in so far as
+Kinley's figures for 1909 give us a clue,[499] the total retail trade of
+the United States is less than one-eleventh of the total of all
+transactions calling for the use of money and checks. Of that total
+retail trade, the part in which money is actually used is, on Kinley's
+high estimate, between 40 and 50%,[500] and the part in which money is
+imperative is much lower still. Small retail transactions do not give
+the type for the pecuniary transactions in the United States! They more
+nearly do so in India, and the possibility of agio is, doubtless,
+greater there. For our larger transactions, there is an almost
+indefinite possibility of substitutes for coined money, if profits can
+be made by making the substitutions. Beating the agio would be a source
+of profits.
+
+I repeat what was said in the chapter on "Dodo-Bones" differentiating
+this doctrine of the agio from the quantity theory doctrine: (1) This
+doctrine presupposes value for the money article from some non-monetary
+source. It relates only to a differential portion of the value of money.
+(2) This doctrine denies the law of proportionality even for this
+differential portion. (3) This doctrine is concerned, not with the
+general level of prices, but with the absolute value of money measured
+in the ratio of coin to bullion.
+
+Under the system of free and gratuitous coinage, no agio of coined over
+uncoined bullion is possible. Where small brassage charges are made, as
+in France (or as in England, where the interest lost during the period
+of coinage is charged to the man who exchanges bullion for coin at the
+Bank of England) there may be an agio of this amount, though it often
+happens that this agio disappears, particularly in England. So perfectly
+is bullion a substitute for coin in England, that the Bank of England
+will often forego its privilege of taking the slight toll in interest,
+and will credit men depositing bullion with as much as if they had
+deposited coin. From what has gone before, as to the possibility of an
+agio, I conclude that the United States, England, Canada, and possibly
+France, would be unable to make large brassage charges. If the brassage
+charge were much larger than the charges made by reputable and
+well-known jewelers for assaying and weighing, etc., there would be a
+large substitution of bars for coins, and the mints would have little to
+do. However, it needs no arguing that with free coinage, and either very
+low or no brassage charges, the value of bullion and of coin will,
+quality for quality and weight for weight, be virtually identical,
+within a narrow range of variation.
+
+What, then, shall we say of the way in which the forces drawing gold
+from the arts into money manifest themselves?
+
+How describe the equilibrium between the value of gold as money and the
+value of gold in the arts? How construct intersecting curves, presenting
+a marginal equilibrium? The problem is baffling, and I frankly confess
+that what I shall have to say does not satisfy me. I hope that some
+critic may solve the problem better. I can point out the difficulties of
+the situation, and can indicate reasons why the sort of solution which
+the economist's training in marginal analysis leads him to desire are
+not easily found. But I fear that I shall fail to satisfy the demand
+for an application of curves to the problem!
+
+The first difficulty is that we are barred from the use of our
+yardstick. Money is the measure of all things in economic theory--except
+money and gold bullion! Of course there are economic values other than
+those of gold which do not actually come into the market, but even there
+we can commonly, by the accountant's methods, make use of the money
+measure. In very high degree, our conventional curves of all sorts run
+in money terms, and assume a fixed value of money. Clearly the money
+curve of diminishing value for gold would tell us nothing. The value of
+gold might sink as its quantity increased, but then the value of the
+money-unit would sink _pari passu_, and so the curve, with ordinates
+expressed in numbers of dollars per ounce, would not sink. The
+value-curve of gold, expressed in money, is a straight line, parallel to
+the X axis. Possible substitutes in the form of abstract units of
+value,[501] or of composite units of goods, of an assumed fixed value,
+will have to be used if anything is used, but they are less satisfactory
+in the application, and leave the analysis a good deal less realistic.
+
+If this were all, the problem would be easy! But there is a second
+difficulty. We find the factors requiring gold as money, if summed up in
+a curve, presenting themselves as a call for the temporary rental of the
+gold. The money functions are performed, in general, not by keeping
+gold, and getting an endless series of uses from it, as in the arts, but
+by passing it on, sooner or later. Even in the case of the reserve
+function, the bearer of options function, and the store of value
+functions, it is not expected to hold the gold indefinitely--always
+there is the anticipation of some time when it will be passed on again.
+A curve for gold in the monetary employments, therefore, would be a
+curve showing the diminishing values of rents, or particular services
+rather than a curve for capital values. The curve for gold in the arts,
+however, would be a curve showing the diminishing _capital values_ of
+units of gold, as the supply in the arts is increased. The two curves do
+not run in common terms. But another and more fundamental difficulty. In
+the case of wheat, we may construct our curve free from complications,
+in idea, at least. On the base line, we lay out quantities of wheat. For
+each quantity of wheat, we erect an ordinate, a sum of money, or a
+number of abstract units of value, as the case may be. Connecting these
+ordinates, we have a curve, showing how the value (or the money-price)
+of wheat descends as the quantity of wheat increases. Given the shape of
+the curve, and given the number of bushels of wheat, the marginal value
+of the wheat is given. In idea, at least, it does not matter, for the
+shape of the curve, whether the amount of the wheat is great or small,
+whether the marginal value of the wheat is low or high. If there are ten
+thousand bushels only in the market, wheat will be worth $5 per bushel.
+With 100,000 bushels, it is worth 40c. The fact that there are 100,000
+bushels does not lessen the magnitudes on the higher portions of the
+curve. The nature of the services which wheat performs is not affected
+by its value. This is _not true of gold_, either in the arts or as
+money. In the arts, I have already shown that one function of gold is as
+a means of conspicuously displaying wealth. Gold is like diamonds in
+this. _Because gold is a valuable_, it gets an additional valuable
+service. This additional valuable service enhances its value. The thing
+is checked, however, before an endless circle is created, by the fact
+that as gold rises in value a smaller amount of gold will display a
+given amount of wealth. The value-curve for gold in the arts,
+therefore, is not a simple thing like the curve for wheat. It turns upon
+itself, in ways that I see no graphic device for presenting. This is
+even truer for money. Men wish to have, when they seek money, a quantum
+of _value_ in highly saleable form.[502] The curve for the value of the
+services of money presupposes a fixed capital value of money. It is the
+capital value of money which does the money work. Given a value of
+money, and given the values of goods, we may see how much money is
+required to effect a given exchange or perform some other money service.
+Then, knowing how much value will be created by each exchange, or other
+money service, we may arrange the services in a series, a scale of
+descending importance, and get a curve. This curve is, in fact, the
+curve which presents itself in the money market. There we find a curve,
+running in terms of money itself, so much money for the use of money for
+such a length of time. But this is a curve of demand for money funds,
+rather than for gold as such. The "supply" that corresponds to this
+"demand" is, not gold, but all manner of credit instruments, chiefly
+bank-deposits, expressed in terms of gold. Such a curve is clearly not
+to be put into equilibrium with the value-curve for gold in the arts,
+(1) because it assumes a fixed value for money (2) because it is
+concerned with temporary rentals, and not capital values, and (3)
+because the demand it expresses is not for the use of gold alone.
+
+We may get some aid in reducing these complexities to familiar terms if
+we employ the device of assuming an equilibrium between gold in money
+and gold in the arts, without trying to explain in quantitative terms
+how that equilibrium is arrived at, and then see what causes will lead
+that equilibrium to shift. In getting the laws of _change_, we may get
+closer to the causes of the phenomenon itself. The effort to reduce the
+thing to precise mathematical form requires a degree of simplification
+which seems to me likely to rob an answer of much significance.
+
+Assuming that the equilibrium is reached, we may see what factors would
+tend to cause gold to go into the money-use, and what factors would tend
+to draw gold into the arts use. We may also see how these changes from
+one side or the other would modify the value of gold.
+
+Assume that a manufacturing jeweler has extra demand for his products.
+His products, of course, are composites of gold, labor, and other raw
+materials, etc., but part of the extra value that comes to his products
+attaches itself to the gold that is in them. He now has an incentive,
+which was lacking before, to melt down full weight gold coin in his
+possession, or to buy gold bars which might otherwise have been coined.
+To buy the gold bars, however, probably means that he must have
+accommodation at the bank. He borrows from the bank the amount he needs,
+giving a short-time note, since he expects to make up his gold and
+market it in a fairly short time. The paper of manufacturers of gold
+will commonly stand well in the "money market," and this is especially
+true of those in whose hands the gold is not worked up into such
+specialized forms that the value of the bullion is a minor matter. (I
+find it necessary to refer frequently to the money market, though a full
+analysis of money-market phenomena cannot come till after our discussion
+of credit.) If he must borrow to get the gold, _then the money-rates
+will come into comparison with the profits he expects to make from
+working up the gold_. This will usually be true even if he melts down
+gold coin already in his possession. He might deposit that gold, and so
+reduce his expenses at the bank, either buying back his own discounted
+paper, or getting interest on daily checking account. If he has to
+borrow to get the gold, he may get it either by drawing gold from the
+bank directly, or by giving a check on the bank to a bullion dealer,
+which may ultimately lead to a diminution in the bank's supply of gold.
+However he gets the gold, there is bound to be some reaction, (1) on the
+bank's supply of gold, (2) on the supply of loanable funds in the money
+market, and hence (3) on the money-rates themselves. If he borrows from
+the money market, he affects the money-rates directly (even though
+probably, in a given case, not noticeably); if he melts down coin,
+instead of depositing it (or paying it out to others who may ultimately
+deposit it) there tends also to be less gold in the bank's vaults; if he
+buys gold with his own funds in the bullion market, the supply of
+current bullion for which the banks also compete is reduced. In any of
+these cases, the banks have less gold than would otherwise be the case.
+The relation between gold reserves and the supply of money-funds has
+been partly discussed already. We have seen that there is no
+proportional relation, as Fisher, and other quantity theorists contend.
+Loanable funds, on a given gold reserve, are highly elastic. But the
+elasticity calls for higher money-rates, and higher money-rates tend to
+reduce the volume of trading, and check the demand. Borrowings from the
+money market by workers in gold, therefore, are much more significant
+than borrowings by other manufacturers or merchants, because the latter
+are content with credit devices, for the most part, while the workers in
+gold withdraw gold itself from the money market. It is, moreover, harder
+for the money market to resist extra demand from the jewelers than from
+many other interests. The assets of the jewelers, especially from those
+who do not work the gold up in highly specialized forms, are exceedingly
+liquid. Their paper, therefore, is exceptionally good in the discount
+market. Usually, too, the larger jewelry houses have specially good
+general credit and high reputation. There is, then, less disposition for
+the market to look askance at an unusual supply of their paper than
+would be the case with many other sorts of paper. They tend to get about
+as low rates as anyone else in the market. A money market under
+centralized control seeking to protect its gold, might tend to raise
+discount rates on jewelers' paper, but a competitive money market is
+very unlikely to do so.
+
+An increase in the value of gold in the arts would, thus, reflect itself
+pretty quickly in the money market, first in the form of added value for
+the services of money, and then, secondly, in an increase in the capital
+value of money. Indeed, an increase in the value of a single rental is
+an increase in the capital value also, since the value of the single
+rental is one portion of the capital value. Not only does it mean a
+higher capital value for gold, but it consequently tends to mean a
+higher "price." It does mean a higher "price" for present money as
+compared with future money. It tends, also, to mean a higher "price" of
+money in terms of other goods. Meeting higher money-rates, all borrowers
+tend to borrow less, and to buy less, to offer less money for goods. It
+need not follow, however, that the rising value of gold reduces prices.
+The rise in the value of gold in the arts may well be a manifestation of
+a general rise of values. General prosperity, rather than causes
+affecting the value of gold in the arts alone, may have occasioned the
+increasing demand for gold in the arts. This would mean rising values
+for goods at large. It might well be, therefore, that the rise in the
+values of goods would offset the rise in the value of money, and that
+prices of goods would rise at the same time that gold is being withdrawn
+from the money market to the arts.
+
+Business in general, as well as the jewelers, may be making increased
+demands on the money market. This would tend still further to raise the
+money-rates. It would also, however, tend to increase the supply of
+money-funds. Commercial and industrial paper, in a time of buoyancy and
+expansion, is particularly acceptable to the banks, and they are likely
+to expand their loans despite the failure of gold reserves to keep pace.
+They simply get along with smaller reserves. Higher money-rates in such
+a case tend to reduce the volume of business, but need not actually
+reduce it, if there are bigger profits than before anticipated in
+business transactions. Not absolute money-rates, but money-rates in
+relation to anticipated profits from the use of money, are significant.
+There is large room here for flexibility, elasticity, etc. There is much
+slack to be taken up by the money-rates, much slack in the fluid
+substitutes for money in various functions, and much slack to be taken
+up by the volume of trade. But all this will best appear after our
+discussion of the money market.
+
+I have said enough to indicate the character of the factors immediately
+determining the equilibrium between gold in the arts and gold in the
+money employments. In the preceding discussion, also, I have discussed
+the more fundamental factors governing the value of gold in both
+employments. The problem of translating the fundamental theory of value
+into money market terms, and of translating the phenomena of the money
+market into terms of fundamental values is not easy. Most of our value
+theory in the past has been concerned with individual psychology, Crusoe
+economics, trading in small markets with a few buyers, barter
+transactions, etc. It has been abstract and unrealistic. The practical
+students of the money market, who are immersed in the facts of modern
+money, have got little help from it, and have often been scornful of it.
+I hope to be able to contribute something to bringing the two methods
+of approach to common terms. They are correlative aspects of the same
+problem. Each gives highly important clues to the understanding of the
+other. Neither can be understood without some understanding of the
+other. A theory of value which cannot be applied in the money market,
+the stock exchange, and the great field of modern business generally,
+has small _raison d'être_.
+
+In the next chapter I shall take up the problems of credit, and the
+money market.
+
+
+
+
+CHAPTER XXIII
+
+CREDIT
+
+
+Analysis and description are much more important than definition.
+Definition at the beginning of a study is frequently a fetter, rather
+than an aid to thought. This is especially true in a field where
+phenomena overlap and interlace, and where the "pure principle,"
+"essence" or "_Wesen_" of the thing defined never presents itself, but
+is only to be reached by violent abstraction. To pick out one
+element--as "futurity"[503]--as marking off credit from other things
+would be an illustration of this. Or to take the notion of _promise_, or
+contract obligation, in connection with futurity, is likewise to limit
+the field unduly, on the one hand, and to include things which do not
+belong there on the other. Thus, a contract whereby A is to build a
+house for B by the end of a year, receiving at that time, or in
+instalments as the work proceeds, a sum of money, is not a credit
+transaction. We have, however, promise, futurity, and a future payment
+of money all called for in the contract. On the other hand, if A sends B
+a telegraphic order for money, which B receives three minutes after the
+money is entrusted by A to the telegraph company, we have a credit
+transaction, with no element of futurity in it. Certainly there is less
+of futurity there than in the case where a laborer, working all day, is
+paid only at night for work done in the morning. Futurity enters into
+the values of all goods which are not destined for immediate
+consumption--capital values of long-time goods are discounted present
+worths of _future_ values. Contracts, promises, and beliefs in promises
+run through the whole range of economic life,--the domestic servant,
+paid weekly, illustrates all three. Yet only a special class of these
+economic activities are commonly counted as credit transactions. Credit
+is really a part of the system of economic value relations not easily
+marked off in economic nature from the rest. Its clearest _differentiæ_
+are juridical rather than economic. It will be the purpose of the
+present chapter, in part, to blur, rather than to make precise, the line
+between credit and non-credit in economic phenomena, and to assimilate
+the laws of credit to the general laws of value.
+
+This will involve, however, a careful analysis and precisioning of
+certain phenomena commonly counted as credit phenomena. Buying and
+selling on the one hand; borrowing and lending on the other: the
+distinction seems clear. It is in law. But what is it in economic
+nature? When a merchant discounts his own note at the bank, it is
+borrowing. When he discounts the note of another, his debtor, it is
+selling. If he writes before his endorsement of the note, "without
+recourse," (unusual at a bank, but common enough with real estate
+mortgage-notes) he has made a perfect sale, and is entirely out of the
+transaction. Is it, however, in economic nature a different transaction
+from the original one in which he got the note from a borrower? Legally
+bonds are credit instruments, and stocks are not. Stocks represent
+_ownership_. But practically, as an economic matter, both represent the
+alienation of control, on faith, to a small group of men, and
+practically, too, the difference between preferred stocks and bonds is
+often very slight. Whatever the legal rights of a bondholder, under the
+terms of his contract, the legal fact itself often is, under the growing
+practice of receiverships, that he cannot exercise his right to
+foreclose without such difficulty that it doesn't pay to do it. Very
+frequently indeed the junior bondholder will come out of a
+reorganization as simply a preferred stockholder--which is what he
+practically was all the time. He couldn't vote as a bondholder, but his
+voting rights as a stockholder commonly mean little! As a bondholder, if
+he held enough bonds, he might even have more influence on the affairs
+of the corporation than as a stockholder. The market is moved by other
+forces than the legal distinctions in corporate contracts! And market
+facts are not necessarily correctly told by the accountant's categories
+either. I shall trouble myself little, in what follows, with the
+juridical and accountancy problems of credit, save in so far as these
+bear directly on the more pertinent economic aspects of the matter. I am
+interested in the question of credit as a part of the problem of value
+and prices--and particularly from the standpoint of the problem of the
+value of money.
+
+What difference is made in values and prices by lending and borrowing?
+What kinds of lending and borrowing are there? What shall we say of
+bank-notes, of bank-deposits, of bills of exchange? What difference is
+made by the money market? Behind the legal forms and the technical
+methods, what are the psychological forces at work? How are these
+psychological forces modified by the technical forms and methods? What
+are the economic differences between long and short time loans? How
+shall we draw the distinction between the "money-rates" and the long
+time interest rate on "capital?" Why can some things serve as collateral
+in the money market when others cannot? What sorts of credit are
+appropriate to commerce, to manufacturing, to agriculture? Is credit
+capital? Is an increase in credit an increase in values? The last two of
+these questions imply that we have a definition of credit. Perhaps the
+answers to some of the other questions may have given us such a
+definition. But analysis and description will precede definition.
+
+The etymology of "credit" has sometimes been taken as the clue to the
+meaning of the word for economics, and the idea of confidence, or
+belief, has been made the heart of the matter. A man has good credit
+when others have confidence in his integrity, etc. Men lend to others
+when they can trust them to repay. Doubtless something of this sort was
+responsible for the original choice of the word. But when loans are made
+on good mortgage security, or on collateral security, the personality of
+the borrower may count for little or nothing. Confidence there is, but
+not confidence in the intentions of the borrower. The confidence is in
+the "goodness" (_i. e._, the value and marketability) of the collateral.
+The same questions are raised by the lender here which he would raise if
+he were going to buy the thing, instead of lending with it as security.
+None the less, I think that in the etymology of the word we have an
+important clue. We must generalize the notion, however, beyond the
+limits of confidence in personal intentions. It involves confidence in
+the general economic situation, in the future of business, in the
+permanence of values, in the certainty of future incomes, etc. Thus
+viewed, the element of confidence, though important in highest degree,
+is not peculiar to the phenomena which we call credit phenomena in
+economics. It appears wherever there are values which depend on future
+events. One does not need much confidence in buying potatoes or apples
+or meat--though in the case of meat quite a lot of confidence may be
+involved--and misplaced! But whenever the future is involved, whenever
+capital values of any kind are involved--lands, stocks, bonds, houses,
+horses, manufacturing equipment, etc.--the element of belief,
+confidence, hopeful attitude toward the future, is quite as much present
+as in the case of a loan. Nor is the element of personal confidence
+less present, often, in these things than in the case of a loan. Very
+often the value of a horse may depend in considerable degree on the
+integrity of the man who offers it for sale; the value of a piece of
+land may be much enhanced if a trustworthy owner makes certain
+statements as to the yields he has got from it; the values of stocks
+(really credit instruments, from the angle of economic analysis) may
+depend very much on the personality of the organizers and managers of a
+corporation. Personal prestiges may count for much more in these cases
+than in the case of a collateral loan.
+
+Further, in connection with the element of belief, or confidence.
+Borrowing is expensive, and men do not borrow for amusement. That
+borrowing and lending may increase, it is not enough that lenders have
+confidence in the ability of borrowers to repay. Borrowers must also
+have confidence in the future of their businesses, in their ability to
+make enough out of the loan to pay the expense involved, and have a
+surplus left over. I abstract here from consumption loans. They play a
+very minor rôle.[504] The analysis in an earlier chapter, based on
+Kinley's figures, showing that retail trade is less than one-eleventh of
+the total pecuniary transactions in 1909, and that the percentage of
+credit instruments used in retail trade is much lower than in other
+transactions, will justify us, when quantitative questions are involved,
+in abstracting from consumption loans. Since such loans will be chiefly
+employed in retail buying, and since we know that most retail buying
+does not result from loans for consumption purposes, we may conclude
+that modern credit is overwhelmingly of a different sort. Most of it
+arises from business activities of one kind or another, and rests on
+expectation of profit and loss.[505] Such loans are not made when
+borrowers, as well as lenders, have not confidence in the transactions
+they mean to put through.
+
+So far the thing has run in terms of individual calculation of profit
+and loss. But even the most sagacious business men do not play a lone
+hand. No one is uninfluenced by the expectations and feelings of others.
+In general, business confidence is in large degree a matter of social
+psychology, resting on suggestion, contagion, etc., as well as on cool
+calculation of profit and loss. Even where men are able in considerable
+degree to free themselves from the prevailing optimism or pessimism,
+they must take it into account. The man who extends his business when
+nobody is in the mood to buy, when no one will make contracts with him,
+runs a very fair chance of bankruptcy, even though there be, in the
+technical facts of industry, no reason for the prevailing pessimism. A
+man with large resources, which are not fully employed, seeing that the
+prevailing "bad business" is "largely psychological" may, indeed, take
+advantage of the fact, get his labor and raw materials cheaply, and
+produce some staple in advance of his market. If he can afford to hold
+his surplus, he may make large profits by so doing. But usually business
+men will not, in such a situation, have the surplus resources to enable
+them to put through such an undertaking, and hence, even though they may
+recognize that the rest of the business world is irrational, they must,
+perforce, conform to its irrationality, and their sober estimate of the
+prospects of a given undertaking may be just as much adverse as if they
+shared the feeling of gloom which all about them feel. They meet it
+from the banker from whom they wish to borrow. Even if able to borrow,
+they meet it from the dealers to whom they are accustomed to sell their
+products. The prevailing gloom is as much a fact with which they must
+reckon as is the price of their raw materials, or the technical
+qualities of those raw materials.
+
+Further, business confidence is not a matter in which each man counts
+one! There are centers of prestige, men and institutions whose attitude
+toward the future counts heavily indeed in determining the attitudes of
+others. These prestiges may arise from various causes. Recognized wisdom
+and probity may give a man great prestige in economic matters. There are
+financial writers and students of the market, not necessarily men of
+great wealth, whose opinions are exceedingly influential in making
+business confidence. The wisdom without the probity is not enough. Some
+men, known to be sagacious students of the market, have been known to
+succeed in their plans by telling the truth, with the result that
+everybody else did the wrong thing! They made business confidence, but
+not the sort that was complimentary to them. Other men have prestige,
+influence in making business confidence, by virtue of possession of
+large wealth. They are, first, in position to lend largely. Their
+decisions count directly for more than the decisions of thousands of
+other men. The very fact that they have confidence in the future, apart
+from anything else, means a tremendous increase in _effective_ business
+confidence--which we are here concerned with. The optimism of a man who
+can neither buy nor sell nor borrow nor lend, because he himself has no
+economic resources, and no prestige, is like the desire of a penniless
+beggar for an economic good--its effect on the market is not great! But
+further, the fact that a rich man is lending makes possible activities
+which would not otherwise be possible, and so justifies confidence on
+the part of those who wish to deal with those to whom he lends. Such a
+man may, on the other hand, borrow. His borrowing, for business
+activity, justifies confidence on the part of those who would deal with
+him. Quite apart, therefore, from any influence on the opinions of
+others growing out of respect for his judgment, or less rational
+reaction to him, he can do much to make or unmake business confidence.
+But commonly, also, such a man is a center of prestige, as well as a
+controller of economic power by virtue of his wealth. Men look to him
+for their cue. If _he_ has confidence enough in the future to risk his
+great wealth, surely smaller men with smaller interests need not be
+afraid. Vitally important centres for the making and controlling of
+business confidence are the banks. Having intimate knowledge of the
+affairs of many business men, of business men in many different lines,
+they are in a position to judge wisely of business prospects. Having
+great power to make or refuse loans, they can encourage or chill the
+enthusiasm which business men may independently develop. The whispered
+word of a banker may well count for more than the half-page
+advertisement of a promoter. But the banker is not all powerful. His
+influence is much greater, often, in restraining than in evoking
+business confidence. Bankers may during long periods be quite unable to
+increase their loans, though they tempt borrowing by easy rates.
+
+Business confidence is a fact of social psychology. It is an organic
+phenomenon, with radiant points of control. It is a matter of
+inter-mental activity, rather than a thing in which each man makes an
+independent choice.
+
+But this is to say nothing of credit phenomena that is not true of all
+value phenomena. All economic values are social values. The values of
+wheat or sugar or bicycles are social values. There are centers of power
+and prestige, growing out of the distribution of wealth, or various
+other social factors, which have a dominating influence on economic
+values, as a rule. Credit phenomena are merely part and parcel of the
+general system of economic motivation and control.
+
+In _Social Value_ (pp. 102-103) I have denied the doctrine of Meinong
+and Tarde that explicit belief, existential judgments, are essential to
+the existence of values, taking value in the generic sense, which
+includes æsthetic value, religious and patriotic value, legal, moral,
+and other values. I have pointed out that we do, at times, value ideal
+objects, the creatures of our imaginations. The dead sweetheart, or the
+Beatrice that never was (or that never was what she was imagined to be)
+may have tremendous value. Not merely things hoped for, but things
+hopelessly gone, as "The Lost Cause" to the Southerner, may be objects
+of value so high that other things, known to be real, may sink into
+insignificance beside them. Even in these cases, however, there must be
+a "reality-_feeling_" an unconscious presumption or assumption that the
+object valued is real. Indeed, belief, as distinguished from mere
+ideation, is an emotional "tang," an essentially emotional, rather than
+intellectual, fact. If it be present, the ideation and explicit judgment
+may be dispensed with.
+
+It is, however, characteristic of economic values, particularly of the
+values of instrumental goods and of the goods with which business men
+make profits, that the tendency to raise the question of reality, to
+require explicit judgment, is strong. The successful business man is
+necessarily the man who does this, who does not too highly value the
+creatures of his imagination, when he imagines a vain thing. One need
+not, perhaps, seriously raise the question as to the reality of the loaf
+of bread he buys. Explicit judgment there would be superfluous. But
+very serious questionings come in whenever lands or houses or
+securities or bills of exchange come in. One needs to know what the
+facts are, and to make judgments based upon them. Hence, for all values
+of capital goods and income-bearers, for the values which pass in
+wholesale and speculative trading in general, the matter of _belief_ is
+vitally important. Here, again, then, we have nothing in the
+psychological principles underlying credit phenomena to mark them off
+from the general field of value phenomena.
+
+The general laws of value, then, apply in the case of credit phenomena.
+We find nothing unique in essence in them. The juridical relations,
+also, in so far as they have economic significance, shade into one
+another. To buy a bond from a bondholder is purchase and sale. To pay a
+borrower money for his personal note is lending. But from the standpoint
+of the theory of value and prices this distinction may be ignored. We
+may extend the idea of buying, selling, and price to cover all contracts
+where values are balanced against values, and expressed in terms of each
+other. Future money has its price in present money, just as much as
+present wheat has its price in present money. Really it is not future
+money against present money. It is a case of _rights_, which involve the
+payment of money in the future, sold for money, and priced in money. In
+general, it is _rights_, rather than _things_, which pass in economic
+exchange. Physical delivery does not constitute selling. Delivering a
+load of wheat to a railroad does not constitute sale of the wheat to the
+railroad; selling a farm does not involve any physical moving of the
+farm. Rights, _in personam_ or _in rem_, are objects of economic value,
+and the exchange of these rights makes up the bulk, if not the whole, of
+economic exchange. (Exchange may be limited to the transfers of juristic
+rights, without value being so limited. I have discussed the relations
+of value and exchange in the chapter on "Value," above.) Property rights
+are commonly conceived of as the proper objects of buying and sale.
+Contracts involving the future services of free men stand legally on a
+different footing from contracts regarding physical goods. But economic
+analysis is not greatly concerned with these distinctions, except in so
+far as they affect the values of the things exchanged, and so the terms
+of the exchanges. I do not believe that the legal distinctions can be
+made to run on all fours with any significant economic distinctions, and
+shall not undertake to make them do so. In the phenomena we have simply
+cases of buying and selling (in a generalized sense of those terms) of
+_rights_, at _prices_ (by a very slight extension of the term, price, to
+which the market is well accustomed). The terms of these exchanges, the
+prices, are governed by values, social economic values, in no wise
+different from the values which govern the prices in exchanges which we
+do not class as credit transactions. I say that credit phenomena are
+exchanges of rights. This is true of all exchanges. We do not exchange
+rights for money. We exchange rights to other things for rights to
+money. The mere physical transfer, even of money, does not give rights
+to the money. I may merely be giving you the money for safe keeping, or
+for use for my purposes. While the law makes the rights to money that
+has left the hands of its owner less lasting, as against innocent third
+parties, than in the case of other objects, and while the right to money
+is always, or almost always, met by returning other money of equal
+amount, even in the case of money it is a right, and not a mere physical
+transfer, that is significant.
+
+Our problem regarding credit is, then, much simplified. We have simply
+to pick out certain economic exchanges to which the name of credit
+transactions has been applied,--a various and heterogeneous set of
+exchanges, in many ways--and study them, to find their peculiarities.
+These peculiarities will not make them exceptions to the general laws of
+value. They will make them merely special cases. To find essential
+principles marking off credit transactions, at large, from non-credit
+transactions is an exceedingly difficult thing. There are more
+differences among credit transactions themselves, than there are between
+the genus, credit transactions, and the class of things not called by
+that name.
+
+Thus, monthly payments of rent, of wages, of college professors'
+salaries, are not commonly called credit transactions. The monthly
+payment of grocery bills, or of telephone bills, involves credit. Where
+is a real difference to be found? On the other hand, between book credit
+between grocer and patron on the one hand, and a bank-note or deposit
+credit on the other, the difference is large, in many practically
+important ways. Between a call loan and a ten year agricultural
+mortgage-note, the differences are even greater.
+
+One may be disposed to find the differences between credit transactions
+and non-credit transactions in the fact that the former stipulate a
+definite sum of money, due at definite times. This would partly
+differentiate a bond, say, from a stock. The bond not merely calls for
+stipulated yearly payments, but also calls for a definite payment at the
+end. This would, however, exclude British Consols from the list of
+credit instruments! British Consols differ from safe preferred stocks in
+legal, rather than in economic, ways. Legally they are alike in that no
+terminal payment is called for. Practically they are alike in that
+annual regular sums may be expected. It may at least be said of credit
+transactions that stipulated money payments, either at a different time
+or a different _place_, are called for. This would include the
+telegraphic transfers of funds, and would exclude the case where A, a
+farmer, does a day's work for B, a neighbor, for the promise of a day's
+work in return at a later season. The latter transaction involves many
+of the elements that definitions of credit have included, but I think
+that we may at least limit our conception of credit transactions to
+transactions within a money economy, where money, as a measure of
+values, functions in the calculations. Shall we, however, limit credit
+transactions to cases where a stipulated _amount_ of money is named in
+the contract, for a stipulated time?
+
+Shall we exclude contracts where the payment of money is made contingent
+on anything? By contingency here I mean legal contingency. This test
+would exclude the highest grade preferred stock. It would include the
+shakiest bonds that contained, in the terms of the contract, no
+contingency. But where, then, would one place such an instrument as the
+Seaboard Airline Adjustment 5% Bonds, which may default in a given year
+half of the interest, if it is not earned,[506] and which yet call for
+the payment of the principal at a stipulated time?
+
+What shall we say of "borrowing and carrying" transactions on the stock
+exchange? Is not the loan of stocks a real credit transaction?
+Ordinarily, when stocks are put up as collateral, one thinks of the
+money as being lent, and the stock merely as a pledge. But in the case
+of borrowing stocks by a bear to deliver next day, the transaction is
+definitely thought of as a loan of stock. It is sometimes paid for, the
+bear paying the bull a premium, instead of receiving interest on the
+money he has turned over to the bull as a "pledge." The more usual
+thing, is, of course, for the bull to pay the bear interest. But in a
+contract like this, there are many contingencies. As the stock rises in
+value, the bear must lend more money to the bull; if the stock falls,
+the bull must return part of the money to the bear. Both times and
+amounts are here contingent, even though in the end the amounts lent and
+repaid balance. Call loans, of course, do not call for payment at a
+stipulated time, and the same is true of bank-deposits and bank-notes,
+and of many other forms of credit. Interest on deposits in mutual
+savings banks is contingent, legally, as to amount. Are insurance
+policies credit instruments? What of endowment policies?
+
+It is easy to draw legal distinctions in all these cases, but to show
+that definite and uniform economic consequences flow from these legal
+distinctions is quite impossible. Rather, it is easily possible to show
+that uniform or certain economic consequences do not, in general, flow
+from them.
+
+I shall refrain from the effort to give a general, fundamental
+definition of credit. I shall rather discuss certain of the more
+important types of what have been called credit, with a view to seeing
+what bearing they have on the problems with which this book is
+concerned; the value of money, and prices. The general class of
+transactions to which the name, credit transactions, has been applied
+may be roughly designated as transactions in which the consideration on
+one side, at least, is the assumption of a debt, running in terms of
+money (though not necessarily to be paid in actual money), payable
+either at a future time or at another place. Objections can be found to
+this definition. It does not meet the fundamental test of a definition
+that, for the purpose in hand, it should seize upon the essential and
+unique characteristic of the things marked off. I am not sure that it
+meets the tests of inclusiveness and exclusiveness even for those
+transactions which we call credit transactions. Thus, if A and B go to
+the bank together, and A there buys B's horse, standing in front of the
+bank, giving B in return a check, which B immediately cashes in the same
+room where the check is drawn, the idea of different time or different
+place is not realized in any but a technical sense. A, in drawing the
+check is, of course, assuming a debt. The check, if repudiated by the
+bank, becomes a note, which A must pay. A, moreover, is paying B, not
+with money, but with the transfer of a claim on the bank, and the fact
+that his check, if unpaid, becomes a note is not the main fact about the
+check. Understanding our definition of credit to cover this case also,
+however, and attaching no fundamental importance to the definition save
+as a means of marking off a class of more or less related phenomena
+which we mean to discuss, the definition will serve.
+
+Thus defined, we have in credit a concept susceptible to quantitative
+treatment. Debts, in terms of money, can be summed up, and we may have
+the concept of the "volume of credit" as the sum of such debts at a
+given time, or through a given period of time, or as an average through
+a period of time. We may distinguish credit transactions from credit,
+defining credit as the volume of debts, and credit transactions as
+transactions in which the debts are passed in exchange. This would be to
+broaden the notion of credit transactions beyond the usual conception,
+since it would include transactions in which A sells ("without
+recourse") B's note to C. It would also include cases where bonds are
+sold. It would exclude cases where stocks are sold, since they are not
+legally debts. Some would prefer to limit the notion of credit
+transaction to transactions in which there remains some contingent
+responsibility on the part of the one who uses the credit instrument,
+but this would be to deny the name, credit transaction, to cases where
+bank-notes or government paper are used in payments, as well as to deny
+it to the case where bonds are sold. It is not important, for my
+purposes, to draw a sharp line about the concept, credit transaction,
+however. And about the concept credit itself I have drawn a line resting
+on a legal, rather than an economic, distinction.
+
+Within the field of credit, thus defined, we may single out for especial
+consideration certain forms of demand or short time credit, particularly
+bills of exchange, bank-notes and bank-deposits, and merchants'
+book-credit. We shall also have something to say regarding long-time
+credit, including bonds, and mortgage-notes that have no general market.
+
+All these debts in terms of money, to which, in the aggregate, we have
+given the name, volume of credit, have grown out of _exchanges_.
+Exchange is here used in a wide sense, and is not confined to the case
+where goods or services are bought and sold. It is an exchange, if a man
+gives his note to a banker in return for a deposit credit. But, on the
+assumption that exchanges are made only when gains are to be realized,
+it follows that all debts, and so all credit, have been created in view
+of anticipated gains (or to avert anticipated losses). In a society
+where everything is in equilibrium, a "static state," where there are no
+"transitions" to be effected, where there is no occasion for
+speculation, and where exchanges of lands, etc., are negligible, the
+volume of all exchanges, including those where debts are passed in
+exchange, would be small. The occasion for the creation of the debts
+which make up the volume of credit would not be nearly so numerous as
+under dynamic conditions. The _volume_ of credit, in other words, is
+largely a function of dynamic conditions, even though credit would exist
+in a static condition of economic life. The bulk of credit, as the bulk
+of exchanging, grows out of dynamic conditions, transitional changes,
+and the like.
+
+This will be clearer when we raise the question as to _why_ debts are
+created, as to what function debts perform in economic life. Why should
+a man borrow? Let us suppose that a farmer has 600 acres of land. He
+wishes to sell 100 acres, and use the proceeds in buying equipment for
+his farm. But he finds it difficult to sell the 100 acres. There is no
+ready market. He can sell it immediately only at a great sacrifice. By
+waiting, and looking industriously for a customer, or by engaging a real
+estate dealer to do so, he could finally find a buyer, but the thing is
+slow and uncertain, and he wishes to get the equipment at once. He
+borrows, therefore, giving his farm as security, or a part of the farm
+as security. He exchanges a claim on the future income of the farm for
+present money, and with this he can buy the equipment he needs. The net
+result has been that the credit transaction has transformed his
+unmarketable quantum of value into a marketable form of value. He has
+been able, by an indirect step, to do what he could not do directly--to
+trade a part of the farm (which in its economic essence is a prospect of
+future income) for the equipment. In this illustration, _credit has
+functioned as a means of increasing the marketability or saleability of
+non-pecuniary forms of wealth_. Credit is primarily a device for
+effecting exchanges that could not otherwise be effected, or for
+effecting exchanges more easily than they could otherwise be effected.
+This means that credit transactions are a part of the productive
+process, and that they increase values. It is the function of credit to
+universalize the characteristic of money, high saleability. It is the
+function of credit to "coin," so to speak, rights to goods on shelves,
+lands, etc., etc., into liquid rights, bearing the dollar mark, which
+are much more highly saleable than the rights in their original form
+were, and which often become as saleable as money itself, functioning
+perfectly as money.
+
+Credit thus tends to universalize that characteristic which Menger[507]
+considers the unique characteristic of money. By means of credit
+transactions, a man borrows up to 50% of the value of the farm, makes
+his farm in effect, 50% saleable or fluid. The man who owns livestock
+may not be able, on a given day, to market them without loss, but he can
+use their value in the market, up, say, to 75%, by a loan. The man who
+owns a hundred shares of United States Steel may not be able, at a given
+time, to market them to his satisfaction--though in the case of articles
+and stocks dealt in the speculative markets saleability is very high
+indeed, and in the case of United States Steel, in particular, the
+"spread" between "buying price" and "selling price" is very narrow--but
+he can borrow, with the stock as security, up to 80% of its value. On a
+bond of the United States government, he may borrow up to 100%.[508] The
+process of creating credit is a process of transforming rights from
+unsaleable to saleable form. Often this means the subdivision of rights,
+preferential rights to a _portion_ of the value of a piece of wealth
+being more saleable, because of greater certainty, than the total right
+to the whole. Another reason why partial rights may be more saleable is
+that the value represented by each partial right is smaller. It is
+easier to market things worth a thousand dollars than things worth fifty
+thousand, as a rule. In any case, a chief economic function of credit
+is,--_the_ chief function for our purposes--to make fluid and saleable
+articles of wealth other than money; to universalize the quality of
+saleability.
+
+This justifies us in our contention made before that _all_ corporate
+securities, whether stocks or bonds,[509] are, in economic nature,
+alike. Driven to a legal concept for a definition of credit, we were
+obliged to exclude stocks from our rough definition. But corporate
+organization does precisely what the various other transactions that we
+have called credit transactions do. Lands and buildings and machinery,
+or the roadbed and rolling stock of a railroad, are highly specialized,
+often unfit for use in any form other than that in which they now
+appear. As concrete instruments of production, they would be highly
+unsaleable. In their totality, as a going concern, they are highly
+unsaleable, because in the aggregate so very valuable. Grouped together,
+however, but still subdivided, the objects of many thousands of partial
+rights, represented by stocks and bonds, they become saleable in high
+degree.
+
+As objects other than money gain in saleability, they tend to gain in
+value, also. This is not necessarily true, always. If wealth is already
+in the best place, at the proper time, and in the proper hands, no point
+is involved in further exchanges. Additional saleability--or an increase
+in the qualities that make for saleability--could make no difference.
+But when objects could be employed to greater advantage if in different
+hands, if, in other words, there is occasion for exchange, then whatever
+adds to the saleability of a good adds to its value. What would
+otherwise have gone into the trouble and expense of marketing now is
+saved. In general, items of wealth tend to gain in value as they gain in
+saleability--though not in any definite proportion.
+
+Further, as objects of value other than money gain in saleability, money
+tends to lose its _differential advantage_ in this respect, and so
+tends to lose that part of its value which comes from the money-uses. If
+all things, including gold, were equally saleable, there would be no
+_raison d'être_ for money, and gold would have only the value that comes
+from its commodity functions. In so far as credit-arrangements give to
+partial rights to wealth the capacity to serve as a medium of exchange
+or for other money purposes--and this is true to a high degree of
+bank-credit--this tends to cut under the sources of value of money.
+Credit thus, from two angles, tends to raise prices; it raises the
+values of goods; and it tends to lower the value of money. The limits on
+this, however, are reached when gold ceases entirely to function as
+money, and when all items of value are perfectly saleable. Then credit
+has done its perfect work for prices, and can do no more. No incentive
+remains for further borrowing, if all items of value that need to be
+exchanged are perfectly saleable.
+
+These theses will meet objection, particularly from those who are
+accustomed to quantity theory reasoning, and who look upon the volume of
+credit as something independent of the volume of trade. On the logic of
+the quantity theory there is no reason why prices might not mount
+indefinitely, if only credit could increase indefinitely. The causes
+controlling the volume of credit are, on this view, quite independent of
+the volume of trade. I have given this line of thought sufficient
+criticism, perhaps, in Part II, but shall find occasion to recur to it
+at a later point in this chapter. However, writers not bound by quantity
+theory ideas, may still find reason to question these theses, and it is
+necessary that I should take account of various complications, and make
+what may well be called substantial qualifications and modifications,
+before the theses are acceptable.
+
+First, objection will be offered to the doctrine that all credit is
+merely rights to wealth, that credit rests on wealth. It will be urged
+that many loans are made without collateral, or mortgage security, that
+the "personal credit" of the borrower is the only security, and the only
+basis of the loan. This objection is not serious. There are, doubtless,
+loans which are disguised benevolences, where the lender gets nothing
+good in return for his loan. I abstract from such cases. Quantitatively
+they are not important, and qualitatively they are not really commercial
+transactions. In general, when a good merchant borrows at the bank on
+his personal note, the bank knows very well what goods he has in stock,
+what prospects he has for marketing them, what other debts he has, what
+his "net worth" is. And the bank knows that it has legal claims, even
+though not preferred claims, on his wealth. When a young business man
+borrows capital from a neighbor, giving no security because he has no
+marketable wealth which would serve as security, he is, none the less,
+exchanging a valuable right for the loan. He is giving the lender a
+right to a preferential share in his future income. The lender has
+considered the young man's abilities as sources of income, in
+conjunction with the capital lent. Incidentally, the lender retains
+rights, preferential rights as against the young man himself, in the
+quantum of value he has turned over to him. If a young man borrows the
+resources with which he buys a farm, the lender takes a mortgage on the
+farm itself. Transactions of this sort frequently have in them the
+element of benevolence, and the considerations are not always strictly
+commercial. In the case of a young man of unusual ability, however, who
+insures his life for the benefit of the lender, such transactions may be
+perfectly good commercial transactions, value balancing value in the
+exchange. The thing traded is commonly present money (or its equivalent)
+for rights to future money income.
+
+Public loans present no exception to our rule. They represent the
+transfer of present wealth for the future income which the government,
+by virtue of its public domain, or, more commonly, its taxing power, may
+expect to receive. With a strong government, this future income may be a
+very substantial part of the total income of the people. Public loans
+may often be for commercial purposes, as when municipalities borrow to
+build or extend municipal enterprises. In cases of this sort, the market
+frequently will consider the prospects of commercial success of the
+enterprises in fixing the value of the municipal bonds. Where the
+proceeds of the loan are for non-commercial purposes, as war, the
+question of the future income of the government will still, ordinarily,
+be a dominant factor in determining the value of the securities. Often,
+however, there is the direct action of patriotic fervor, etc., enhancing
+the values of government securities. We have seen this in the case of
+government money. It is no part of our theory to maintain that men's
+calculations are always rational, or that the whole of the value of a
+long-time income-bearer rests on the anticipated income. But this is no
+peculiarity of credit phenomena. The same thing is true of lands, for
+example. Capital values often get independent in part of their
+"presuppositions," as we have seen in the chapter, _supra_, on "Economic
+Value." War security issues often represent the effort of the
+government--as at the present time--to bring into the present every
+possible bit of future values, as a means of increasing their power in a
+desperate struggle. The high prices of goods in such a situation
+represent the concentration of future values into the present, an
+increase in the motivating power which stimulates the people to unwonted
+exertions. In war time, moreover, many _ideal_ values,--those whose fate
+is dependent on the outcome of the war--enter into and increase the
+values of those goods which are needed for carrying on the war. This
+leads to larger sacrifices of future income than would ordinarily be
+tolerated. It is not so much a case of present goods rising because of
+extra credit, as of extra credit because present goods are more
+valuable.
+
+A second objection would be raised that in many cases, the values
+pledged by the borrower could not exist if the lender did not make the
+loan. This would be particularly the case with credit granted for the
+starting of a new or novel enterprise, which as yet exists only in idea.
+The established merchant, with goods on his shelves, or with a bill of
+lading for goods which he has sold, has a very tangible, concrete basis
+for a loan, whose value is independent of the decision of any given
+banker. If my doctrine is to be taken as holding that all credit rests
+on concrete physical goods, very many exceptions indeed could be found.
+But this is not my doctrine. It is that credit rests on valuable
+_rights_. These rights may be rights to existing concrete goods; they
+may be rights to future incomes. In any case, it is the values, rather
+than the physical quantities, that are significant. Witness cotton
+before and after the outbreak of the World War. Ultimately, in
+general,[510] economic values come from the "primary values" or "first
+order" values of consumption goods and services. These values are
+reflected back, by the imputation processes, to the various "factors of
+production" which have made the existence of the goods and services
+possible, in accordance with well-known laws which need not be here
+elaborated. But the category of "factors of production" is far from
+exhausted when we have named land, labor, and produced instruments of
+production! Some writers have rejected the notion of "factors of
+production" largely or altogether, and prefer such a term as "agents of
+acquisition."[511] I certainly have no intention to give to the term,
+factor of production, any ethical connotation. Even though a factor of
+production be, like land or labor, a _sine qua non_ of production, it
+does not follow that the owner of that factor gets his proper, or
+ethically just share, under the laws of economic imputation. Many of the
+"factors of production," in the sense of factor which derives a value
+from the economic laws of imputation, may well be parasitic from the
+angle of ultimate social welfare. The only test is as to whether, under
+existing social arrangements, a portion of the income _of a given
+establishment_ would cease to exist if that factor should disappear, or
+be reduced. From the angle of this test, monopoly power, trade-marks,
+established trade connections, the big idea of an entrepreneur, a
+dynamic personality, capacity for winning other men's confidence and
+good will, and sometimes that brutal selfishness which makes other men
+shrink from conflict, or the reputation of being a dangerous and
+vindictive man, may be equally "factors of production" with land, labor,
+and produced instruments of production. In Part IV of this book, "The
+Reconciliation of Statics and Dynamics," we have discussed the
+"intangible capital items" of this class, and have indicated that many
+of them perform really important and necessary social functions. Others
+are doubtless pernicious. Production involves leadership, organization,
+the making and maintaining of "interstitial connections," as well as the
+technology of muscle and machine. But credit is based on values, rather
+than on concrete goods as such, and if these "intangibles" have value,
+they may have credits based upon them.[512]
+
+That some of these values exist only by virtue of the fact that credit
+is granted is no marked peculiarity. The granting of credit is an
+exchange of the rights of the creditor for rights to the future income
+of the borrower. If the exchange were not made, in certain cases, the
+borrower would have no future income to which he could give rights. The
+entrepreneur with a big idea cannot actualize that big idea unless he
+can bring it into conjunction with land, labor, capital, and a market
+for the products. The exchange of rights to the value of the products
+for the banker's deposit-currency, or the private lender's money is
+merely one of many necessary exchanges required to bring about the
+combination which will create the products. If there were no possibility
+of marketing the products, he would be equally helpless, and his idea be
+equally valueless. The general range of values, under our present system
+of division of labor, private property, private enterprise, etc., depend
+on the possibility of exchange. Men produce for the market, rather than
+for their own consumption, or for the consumption of a communist
+society. Without exchange, many values would persist, but most values
+would at least be diminished. Exchange is part of the productive
+process. The only peculiarity in the case under discussion is that the
+man getting credit for the exploitation of a big new idea commonly has a
+very limited market--is dependent on the decision of one bank or lender,
+or at most of one out of a few possibilities. The narrower the market,
+the more dependent are the values of things that must be exchanged upon
+the decisions of a few men. Wheat is free, virtually, from individual
+caprices, though even there a big operator may organize a pool and
+temporarily affect the value very greatly. But the immediate power of a
+few men on values is increasingly great as we get closer to those things
+which are unique, which are capable of only specialized employment, and
+which call for the coöperation of elaborate and expensive systems. And,
+of course, the influence of individual caprice, or individual decisions,
+on all values grows greater as wealth and power are concentrated.
+Economic social value is an institutional value, specially weighted and
+controlled by individuals, classes and institutions.[513]
+
+Joseph Schumpeter, in his _Theorie der wirtschaftlichen Entwicklung_,
+has made much of the rôle of the banker in economic evolution. He sees
+in the banker a creator of "_Kaufkraft_," by means of which an
+entrepreneur, a dynamic man who has a new idea which he wishes to
+actualize, is able to wrest from the unwilling "static economic
+subjects" their land, labor and instrumental goods for the purpose of
+putting his new plan through. This new _Kaufkraft_ is the true _Kapital_
+which the new enterprise requires. Capital, thus defined, is not an
+accumulation of goods, is not embodied in goods. It is an _agent_, a
+_power_, which the banker creates. It makes dynamic change possible.
+Schumpeter is particularly anxious, in clearing the way for his new
+theory of interest, to get rid of all the notions of saving,
+accumulations of stocks of goods, etc., which have commonly been made
+prominent in the discussion of capital and interest. We need not here
+discuss his theory of interest.[514] He maintains that the new dynamic
+credit, credit granted by a banker for a really new enterprise, as yet
+not concretely in existence, represents something new in the world,
+anomolous from the angle of static values, and static credit. Indeed, he
+regards credit as unessential for the static analysis, and banishes it
+from the "_Wesen_" of his static state. But this new credit is different
+from such credit as there may be in the static state, because, he holds,
+the new credit does not rest on goods, and has no _Deckung_. Schumpeter
+himself calls these doctrines "heresies." They become less dangerous,
+however, when we learn that by "saving" Schumpeter means mere trenching
+upon accustomed expenditure, so that the entrepreneur who saves part of
+unusual profits is really not saving at all, and when one discovers that
+his contention that there need be no accumulation of goods prior to the
+starting of a new enterprise means merely that there need be no special
+accumulation of goods _ad hoc_. Of course if saving means trenching upon
+accustomed expenditure, it is banished by hypothesis from the static
+state, but there may still be plenty of capital (in the ordinary sense
+of accumulated produced means of production) for Schumpeter's
+entrepreneur to get hold of by means of his new _Kapital_. His
+contentions that the new credit does not rest on goods, that it has no
+_Deckung_, and that we have a new thing in the world since in dynamic
+credit we have a case of temporal discrepancy between the making of
+obligations and the ability to pay them, calls for further analysis.
+
+It is true that there is a time during which the new credit has no basis
+in concrete goods. Very speedily, however, the new credit is exchanged
+for concrete goods, and the enterprise is started. Further, the banker
+commonly insists on a margin at the start. Further, the claims of the
+borrower on the banker are themselves, prior to their expenditure for
+the things needed in the enterprise, assets to which the banker may look
+as a basis for his confidence in the goodness of the entrepreneur's
+promise to pay him. There is never a moment when the new credit does not
+rest on _values_. The loan by the banker to the borrower is,
+essentially, like the case of the purchase of any bearer of future
+incomes, say a machine, or a factory. The machine is, after all, in
+economic nature, merely a "promise" of future goods and future values,
+as an Austrian economist should be quick to recognize, and machines are
+almost as frequently poor performers as borrowers--indeed, most
+commonly, the borrower's inability to repay comes from the failure in
+the value of the goods which his physical equipment produces. The
+_raison d'être_ of the new credit is the new values which have come into
+existence: the new plan of the entrepreneur, _validated by the banker_,
+attains a value equal to the present worth of the extra products which
+it promises. I repeat that it is values which are significant as the
+basis of loans, that values are not all embodied in physical goods, and
+that value is essentially a psychological thing.
+
+The banker's validation of the plan may be an essential factor in its
+value. _Belief_ is often an essential factor in values. The new value,
+and the new credit, have a large element of belief in them. The value of
+the new plan rests proximately in the belief of the banker, manifested
+by his granting of credit. But the value of the _bank-credit_ rests
+ultimately in the _prestige_ of the banker, which is a fact of social
+psychology, resting in a massing of belief on the part of the public in
+him, in the validity of his bank-notes and deposit-currency, coupled
+with support from legal and other institutions. But this is to
+anticipate the discussion of the nature of bank-credit. The point
+involved is sufficiently illustrated by the case where a man who is not
+a banker lends his money to an entrepreneur of a new undertaking. Here
+again the enterprise is impossible without the loan. Here the loan is
+made on the basis of an anticipated income. Here again the anticipated
+income is made possible only by the loan; one of the values that enters
+into the exchange exists only because the exchange is possible. None the
+less, the credit rests on value. It is a right to an anticipated income.
+The man who has made the loan has his security in the value which he has
+lent, plus the present worth of the extra income which the new idea is
+expected to create.
+
+Now a great practical difference is made in the course of economic life
+by the decisions of lenders to lend to men who plan new things, instead
+of to men who plan old things. It makes an enormous difference whether
+or not new plans appeal to the imaginations of those who control the
+economic resources of society. It makes a great difference whether
+static values (the capital values of incomes to be created in familiar
+ways) or dynamic values (capital values of incomes to be created in
+novel ways) win out in the competition for loans from those who have
+loans to make. But _as values_, the two are of the same psychological
+stuff and substance: futurity and belief are essential elements in both
+of them.
+
+Stable belief, and strong belief, are easier to evoke in the case of the
+established and the familiar. New ways of creating wealth must promise
+larger returns, and make more dramatic appeals to the imagination, than
+old ways. Schumpeter indicates that it is the essential function of the
+banker to give preference to the new ways, that the mass of men are
+"static" in their attitude, and that, for some reason which he does not
+clearly indicate, the banker is not. This has not been our American
+experience, on the whole. The contrast which Schumpeter makes between
+the timid, static masses, and the few highly important dynamic
+entrepreneurs, holds very much less true in America than in Continental
+Europe. There it is doubtless true that new industrial enterprises have
+had their main encouragement from bankers. Here, such enterprises have
+appealed largely to the mass of men, to the investing and speculative
+public. Our commercial banks have lent largely upon stock exchange
+collateral, which means that, indirectly, bank-loans have gone to
+finance industry. The extent of this is enormous, as will later appear.
+However, the banks, as banks, have not been large _buyers_ of stocks.
+They have guarded themselves by requiring "margins" from those to whom
+they have lent on such collateral. Seasoned bonds have been bought in
+great volume by our commercial banks, but few stocks. Even the
+underwriters and investment bankers have been primarily intermediaries,
+expecting to pass on to private buyers the securities they hold
+temporarily. My point here is, merely, that there is nothing in the
+distinction between static and dynamic credit, when by that is meant the
+distinction between credit for new enterprises and credit for old
+enterprises, to mark off a peculiar or essential province for
+bank-credit. The need for bank-credit does arise out of dynamic
+conditions, primarily, but it is not the need for credit to _start_
+dynamic changes, even though bank-credit may do, and does do, that. The
+chief reason for bank-credit is to enable economic society to readjust
+itself quickly and readily to dynamic changes, by putting through
+without friction the necessary exchanges that such readjustment
+requires, and by holding in liquid form a fund of rights which can meet
+the emergencies and unexpected occurrences which dynamic conditions
+involve. To this we now turn.
+
+Bank-credit is the debt of responsible institutions, payable on demand
+in money. It may take the form of notes, or of the right to draw checks.
+Long evolution has begot a system of legal relationships, and of banking
+technique which makes these promises easily performed. The same process
+of development has led to social reactions toward banks and bankers
+which give them enormous prestige. Legal regulation, in the case of many
+banks, requiring adequate capital, and, in this country, requiring
+minimum cash reserves, have added to that prestige. The promise of the
+bank is commonly so liquid and saleable that the banks are not called
+upon to fulfill it by the actual payment of money--the promise alone is
+an object of value which is perfectly saleable, which runs in terms of
+money, and which functions as a perfect substitute for money in almost
+every use except for very small retail transactions. Even there, it is
+very much used.
+
+Among the features of banking technique to which we must give especial
+attention are the following: (1) the banker has substantial resources of
+his own, his "capital," which constitutes the "margin" of protection
+which he offers to those who give him valuable things in return for his
+promises to pay money on demand; (2) the banker exchanges his promises
+to pay on demand, as far as possible, for those things which have a high
+degree of "liquidity," _i. e._, for those things which he can quickly
+dispose of for cash, or for the promises of other bankers which are the
+equivalent of cash. Farm mortgages are not good assets for a banker to
+hold in large amount. They are long-term obligations, with a very
+limited market, and they will not help him in emergencies to meet his
+obligations to pay on demand. Agricultural loans, and other mortgage
+loans are made in considerable volume by our State banks and trust
+companies. All classes of commercial banks make many non-liquid loans,
+as we shall later see. But all of them get as high a proportion of
+liquid loans as they can. Bills of exchange, running ten, thirty, sixty
+or ninety days, growing out of commercial transactions which
+automatically terminate themselves in the payment of cash or the
+promises of other bankers, constitute admirable assets. In return for
+these, the banker may give his promises freely. This is especially true
+where there is, in the banking practice, a wide "rediscount market," in
+which he can sell these bills before maturity if he wishes to get even
+more liquid assets. Promissory notes, for short periods, thirty, sixty,
+or ninety days, growing again out of commercial transactions, which,
+like those for which the bills of exchange were drawn, automatically
+bring in cash or the promises of other banks, are in many respects like
+the bills of exchange, even though the rediscount market for such notes
+has not been so highly developed as the market for bills of exchange in
+Europe. Whether such notes are as available for rediscount as bills of
+exchange is a question of technical banking which we need not here
+discuss in detail, though I venture the opinion that bills of exchange
+are superior decidedly for this purpose, especially "documentary" bills.
+The element of personal credit is commonly larger in the promissory
+note, and that limits the market. Banking organization, and particularly
+our new Federal Reserve System, may greatly reduce the disadvantages of
+the promissory note from this angle, but it seems not unlikely that the
+bill of exchange may be a factor of increasing importance in our
+internal banking arrangements. The general test, however, of what is
+available for a banker's assets depends on varying conditions, and is
+not to be answered by a simple formula. A bank in a rural region which
+loads up heavily with the safest local bonds is little better off than
+with farm mortgages. For neither is there a quick market in an
+emergency. A city bank, near the stock exchange, may very safely buy in
+large amounts highly saleable as a profitable substitute for part of its
+cash reserve. Even country banks may, and do, safely own such bonds.
+Short loans on stock and bond security, constitute the most important
+single type of bank-loan in the United States, as we shall later see.
+(3) The third feature of banking technique to which attention must be
+given is the reserve policy. The banker must keep some actual money on
+hand (how much we have in part considered in Part II, and shall again
+discuss).
+
+I shall give attention to these points in what follows. The first point
+needs little discussion. Large "capital" for a bank gives prestige and
+security. Some capital is a _sine qua non_ for a bank which expects its
+notes or deposit currency to have general acceptability.
+
+It will be well to consider further the circumstances determining the
+form which a bank's assets shall take. Though commercial banks own
+enormous quantities of high grade bonds, it is rare for commercial banks
+in America to buy stocks of corporations.[515] They will often lend to
+owners of such stocks with the stocks as collateral, up to a high
+percentage of the value of the stocks, but they will rarely trade their
+demand obligations for the stocks directly. In general, a bank wishes
+to have its assets in the form of obligations of other people, expressed
+in terms of dollars, and having a definite term to run (or callable on
+demand).
+
+One reason for this is a bookkeeping reason. "Par value" of stocks has
+little meaning any more. Market-prices of stocks, even the best stocks,
+are not absolutely fixed. They fluctuate, even though within narrow
+limits. This fact presents complications to the bookkeeper! Of course,
+the bank's buildings and fixtures, listed among its assets, fluctuate
+also, in value, and in the price that could be obtained on a given day,
+but the bookkeeper can abstract from that, since the bank has no
+intention of selling its buildings and fixtures. The notes and bills
+held in the bank's portfolios also in fact fluctuate in value, and in
+the price at which they might be sold on a given day, but they are
+expressed in terms of dollars, and the bookkeeper commonly has no need
+to look beyond the figures written on them. At irregular intervals, a
+small percentage of them may be marked off the books as "bad," but
+usually the minor fluctuations are abstracted from. The bank does not
+like to have assets whose published prices fluctuate. But this is, I
+suppose, not the main objection which banks have to stocks as assets
+since it does not prevent their buying bonds. I abstract from the legal
+restrictions that prevent many banks from buying stocks. The fundamental
+reason is to be found elsewhere. The point is to be found here: the
+transaction whereby property rights in roadbed, rolling stock, etc.,
+were collected into property rights in a going, organic whole increased
+the saleability of all these rights; the further subdivision of these
+rights into many thousands of equal parts enormously increased the
+saleability of these rights, especially when coupled with listing in an
+organized market; the further transaction, by which a preferential claim
+upon these subdivisions of rights is embodied in a collateral note
+still further increases the saleability of the value of these rights.
+The whole of the value embodied in a share of stock has not the
+certainty and saleability which a banker wishes for his assets. It might
+not be possible to market the stock on a given day without loss. But a
+collateral note, embodying 80% of that value, with provision for
+additional collateral in case the margin is reduced, is highly liquid
+and the banker has no doubt that, with watchfulness, he can always
+realize the full face value of such a note. It becomes saleable enough
+for his purposes. The transaction by which this note is exchanged for
+the banker's demand obligation gives the drawer of the collateral note a
+perfectly saleable form of value with an almost universal market, which
+he can convert without loss into practically anything that money can
+buy. We have here a series, a scale, saleability of rights growing
+steadily greater, through a series of transformations and exchanges,
+till at last the virtually perfect saleability is reached. Again we are
+reminded of Menger's analysis[516] of the methods of primitive barter,
+whereby the man who possesses a good of low saleability, through
+successive exchanges, gradually gets goods of higher and higher
+saleability, until he finally reaches his goal. Bank-credit, this most
+highly saleable of all forms of rights except the rights to actual money
+in hand, and in general not inferior to money, cannot usually be had by
+direct offer to the bank of crude property rights. These must be refined
+and distilled, till a central core of highly saleable value emerges, and
+then they may enter the bank's assets in return for bank-credit. The
+best bonds likewise offer such a central core of highly saleable value.
+
+A further point is to be noticed about this scale of saleabilities. At
+each stage of the exchanges of less saleable for more saleable rights,
+the holder of the less saleable rights must make concessions to the
+holder of the more saleable rights. And the degree of his concession is,
+in general, correlated with the lack of saleability of what he offers.
+Commonly this takes the form of giving up a right which has a higher
+yield for one which has a lower yield. Or, viewed more fundamentally,
+from the angle of the capitalization theory, income-bearers of low
+saleability are capitalized at a higher discount rate than
+income-bearers of higher saleability, with the same yield. Farm lands
+may be capitalized on a 10% basis. (There will be great differences
+between regions in this, depending in considerable measure, often, on
+the activity of farm sales. I would refer here to the facts mentioned in
+my chapter on "The Quantity Theory and International Gold Movements,"
+contrasting Cass Co., Iowa, with Yazoo Co., Mississippi. Of course, the
+risks of agriculture count heavily, also, and the prestige of owning
+land as compared with other forms of property.) The farmer's mortgage
+note may bear 7%. A merchant who holds that note may use it as
+collateral, with a margin, backing his own note, and get accommodation
+for three months at 6%. The bank may rediscount the note of the
+merchant, giving it its own endorsement, on a 4-1/2% basis. The coal
+mine owned by a small company may yield 12%; sold to a large iron
+company, which combines mining and smelting and manufacturing, that mine
+may be represented by 7% stock; a collateral loan, for sixty days, based
+on 80% of the value of the stock may be had for 4%; the demand liability
+of the bank given in exchange for the collateral note will either yield
+nothing at all, or else yield a low per cent, one, one and a half, or
+2%, on large checking accounts. If the collateral note be a call note,
+the rate will be lower, in general, than on a time note. I here refer to
+what was said in the chapter on the functions of money with reference to
+the relation of short loans, especially call loans, to the "bearer of
+options" function of money. Part of the yields of these loans is in the
+bearing of options. This function grows out of the uncertainties of a
+dynamic market. It would disappear if uncertainties, "friction," and
+dangers disappeared.
+
+The importance of liquidity and saleability in the assets of a banker
+needs little discussion. It has been reiterated by virtually every
+writer on the subject. Its connection with the need for meeting demand
+obligations is obvious. The point that I would here emphasize is,
+however, that this, too, grows out of dynamic changes, uncertainties,
+etc. An economic life in "normal equilibrium," in static balance, with
+all things going smoothly, in anticipated ways, could dispense in large
+measure, or wholly, with such liquidity. Obligations which matured at
+the time that the holders of the obligations had maturing obligations,
+would serve their purpose perfectly. Again I would emphasize the fact
+that the theory of money and bank-credit is essentially a dynamic
+theory, and that the notion of "normal equilibrium" which underlies the
+quantity theory has no bearing whatever on these fundamental matters.
+
+The market where fluid bank-credit is exchanged for less fluid rights
+has been given the name, "the money market." The prices fixed in this
+market are "money-rates," figured as percentages on the amounts of
+bank-credit exchanged for the less fluid rights. It is, of course,
+strictly speaking, not a money market. Money, as the term has been used
+in this book, has been taken to mean gold coin, subsidiary coin,
+government paper, and for the United States, bank-notes. In a country
+where much bank-credit is elastic bank-notes, it is better to
+distinguish money from bank-notes. The term, money, is not one easily
+defined in a logical manner. A good logical definition should seize on
+some essential characteristic of the object defined, should include all
+the objects of that class, and should exclude all others. We can meet
+the tests of inclusiveness and exclusiveness in a definition of money,
+but we can hardly meet the first test. The differences between gold
+money, for example, and gold bullion are less than the differences
+between gold money and government paper. The differences between
+bank-notes and bank-deposits are less than the differences between
+bank-notes and government paper, or bank-notes and gold. The term,
+money, covers a group of more or less miscellaneous things, concerning
+all of which few general laws are possible. Gold, or other standard
+money, in particular, may obey different laws from other forms of money.
+I have been careful, in the foregoing, to avoid the danger of letting
+the argument rest on any ambiguity in the meaning of the term, however,
+and for the present shall not attempt further definition. For the
+present, we shall use the term, "money market," in its familiar sense,
+as meaning that market in which bank-credit is exchanged for less fluid
+rights. An organized money market commonly appears only in larger
+cities. In smaller places, relationships between banks and customers are
+much more personal, and indeed, even in larger cities, regular business
+houses have particularly intimate relations with special banks. A fluid,
+impersonal market, to which men may repair without reference to anything
+but the marketability of the collateral they have to offer, is a
+distinctively metropolitan affair. Only large dealers commonly have
+relations with more than one or two banks. Larger houses in the big
+cities often do sell their "commercial paper" through brokers, and some
+of the big New York mercantile houses have had their paper scattered a
+good deal throughout the country. The lack of protection which houses
+which sought such credit faced during the Panic of 1907 tended to check
+the practice in some measure, but it has revived, and even
+increased.[517] In the matter of a wide market for commercial paper,
+however, an impersonal market, with great fluidity, we are well behind
+not only England, but also Continental Europe. The London acceptance
+house has especially contributed to an impersonal market. The American
+money market is _par excellence_ a New York market, and the primary type
+of paper discounted in the American money market is stock exchange
+paper, and foreign bills of exchange. For commercial paper, however,
+there are innumerable more personal, more restricted, markets, and
+commercial paper constitutes a very considerable part of banking assets,
+though much less than is often supposed. But this we shall discuss in
+the next chapter.
+
+
+
+
+CHAPTER XXIV
+
+CREDIT--BANK ASSETS AND BANK RESERVES
+
+
+In traditional discussions of banking, the impression is given that
+commercial paper is the normal and dominant type of banking assets.[518]
+To one accustomed to this view, the figures of the Comptroller of the
+Currency for banking investments in the United States for 22,491 banks
+of all kinds (State, national, private, and savings banks, and trust
+companies) in 1909,[519] will occasion dismay:
+
+ (000,000 omitted)
+ Loans on real estate $ 2,505
+ Loans on other collateral security 3,975
+ Other loans and discounts 4,821
+ Overdrafts 69
+ United States bonds 792
+ State, county and municipal bonds 1,091
+ Railroad bonds and stocks 1,560
+ Bonds of other public service corporations 466
+ Other stocks, bonds, etc 703
+ Due from other banks and bankers 2,562
+ Real estate, furniture, etc 544
+ Checks and other cash items 437
+ Cash on hand 1,452
+ Other resources 111
+ --------
+ Total Resources $21,095
+
+These figures, however, call for further analysis. They include figures
+from institutions which should not be counted with commercial banks. The
+percentage of real estate loans, especially, is too high to represent
+the workings of commercial banks, a very high percentage of real estate
+loans being held by stock and mutual savings banks. The other items,
+however, are not much changed by the inclusion of savings banks and
+private banks. It will be well to draw some conclusions from these
+aggregate figures for all classes of institutions, before taking up a
+more detailed analysis of State and national banks, and trust companies.
+
+Where, among these items, does one find "commercial paper"? In the
+reports of the metropolitan papers, giving daily variations in interest
+rates, it is usual to find "commercial paper" listed as a separate
+category, coördinate with "sixty day paper," "ninety day paper," etc.
+Recent periodical discussion has gone elaborately into the question as
+to what should be called "commercial paper," from the standpoint of the
+policy of the Federal Reserve Banks. I think it safe to say that no two
+markets, at present, in the United States will use the term in precisely
+the same way, and that all would restrict the term to a small portion of
+the "other loans and discounts" listed above. The most general
+definition of "commercial paper" would be paper bought through
+note-brokers. Despite the decided increase in loans and discounts which
+our war prosperity has involved, there has been very frequent complaint
+of the scarcity of "commercial paper." I shall use the term, "commercial
+paper" in a much more liberal sense than the American money market does,
+and shall mean by it all loans of a really liquid character, made by
+banks to merchants and others to pay for the purchase of goods in
+anticipation of a resale within the term of the loan which will enable
+the loan to be repaid at maturity. From this should be excluded,
+however, loans made to speculators. With this liberal, and not very
+precise, definition of commercial paper, we raise again the question as
+to where it may be found in the items above given.
+
+Virtually all of it, I think, must be found in the item, "other loans
+and discounts"--an item which, in all, is slightly less than 23% of
+total banking assets.[520] But not all of this "other loans and
+discounts" is commercial paper. Very much indeed represents loans of a
+non-liquid character, regularly renewed, which manufacturers and others
+have put, not into moveable goods, but into fixed forms of
+capital-goods, as machinery, and even buildings. One case in New York,
+which the writer is informed by a business man well acquainted with both
+banking and business in many sections of the country is typical of many
+cases, is as follows: a New York bank is at present lending to a small
+manufacturer of automobile supplies about $30,000. Of this, about
+$10,000 is liquid, periodically covered by "bills receivable," and if
+the bills receivable should fail, in the period in question, to cover
+the $10,000, the bank would insist on a reduction of the loan. The
+remaining $20,000, however, is not liquid. It was spent for non-moveable
+equipment; the bank expects to renew the notes for this loan
+periodically, and is well aware that it could not force collection
+without bringing the business to a close--or else forcing the factory to
+get accommodation elsewhere. The $10,000 that is liquid is by no means
+all spent for goods, but is spent, in part, for wages. _None_ of the
+$10,000 is spent for goods which are to be resold without being
+transformed by manufacture. None of the $30,000, therefore, is, in the
+strict sense, "commercial paper." It is manufacturer's paper. Part of it
+is virtually as liquid as commercial paper; two-thirds of it is not
+liquid.
+
+A very large part indeed of bank-loans are of this character. A large
+part of the loans made to farmers are in no sense liquid: when the loan
+is made, for, say, six months,[521] it is perfectly understood by both
+bank and borrower that a renewal will be asked for and granted. It is
+impossible to say what fraction of this $4,821,000,000 of "other loans
+and discounts" is really liquid commercial paper, or liquid paper of any
+kind, in the sense that it can be automatically paid off at maturity. I
+venture the statement with entire confidence, however, that the
+proportion of liquid paper is not one-half of the amount. I should
+question if more than one-fourth of it is truly liquid, in the sense in
+which that term is commonly used: meaning that the loan is made to put
+through a transaction which will be completed during the term of the
+loan, and permit the loan automatically to be paid off. I do not mean by
+this merely that the banks could not reduce this item by one-fourth
+suddenly. Even in a market made up wholly of highly liquid paper, an
+arbitrary refusal to renew one-fourth of the loans, with the effort to
+reduce loans and discounts by one-fourth, would occasion great
+embarrassment and even disaster. The test of liquidity here applied
+relates to the items separately, on the assumption that other things are
+not radically changed. Even in this sense, however, viewing each loan
+transaction separately, it may well be questioned if the banks in the
+United States could find among their "other loans and discounts" items
+exceeding a fourth of the total (in value) which they could refuse to
+renew, at least in large part, without disappointing reasonable
+expectations, and embarrassing good business men.[522]
+
+Of this paper, not truly liquid, no doubt a good deal is advanced to
+wholesale and retail merchants, and is, in this sense, commercial paper.
+The terms, "liquid paper" and "commercial paper" by no means run on all
+fours! As will later appear, the bulk of liquid banking assets are not
+commercial paper at all. And only that part of a bank's loans to a
+merchant may be called "liquid" which can be paid off by the merchant
+without disappointing his reasonable expectations,--causing him to seek
+other banking connections.
+
+There is, however, another item in which we may find some commercial
+paper, and this is the item, "loans on other collateral security." This
+has commonly been supposed to be virtually all stock exchange loans.
+Thus, Conant[523] cites the growth in this item in New York as evidence
+of the growth of loans on stocks and bonds. For New York, loans on
+stocks and bonds do make up the great bulk of this item. Even in New
+York, however, there are other factors in it, absolutely, even though
+not relatively, important, and in the country outside, the other
+elements are not at all negligible, even though for the outside country
+the part secured by stocks and bonds is the major part, and even though
+the growth of this item in our total banking assets is, in general,
+fairly indicative of the growth of loans secured by stocks and bonds.
+Figures for the other items are not available for State banks, trust
+companies or savings and private banks. They are not till very recently
+available for national banks. In 1915,[524] however, the Comptroller
+separates the item, "loans on other collateral security," for national
+banks, into two parts, (1) loans "secured by stocks and bonds"
+($1,750,597,273), and (2) loans "secured by other personal securities,
+including merchandise, warehouse receipts, etc." ($882,749,812). Is
+there any commercial paper in this last, not inconsiderable, item?
+
+Let us locate the item, in the effort to find out. The percentage runs
+highest in Chicago, where this class of collateral loan exceeds the
+loans on stocks and bonds. The inference is strongly suggested,
+therefore, that much of it, there, at least, represents advances to
+live-stock, grain and produce traders and speculators on the Board of
+Trade, at the stock yards, etc. The inference is strengthened by the
+fact that St. Louis, where there is a good deal of grain and commodity
+speculation, shows more than twice as much of this kind of paper as does
+Boston, where this kind of speculation is unimportant--despite the fact
+that Boston's aggregate collateral loans of all kinds greatly exceed
+such loans in St. Louis. In New York, where there is a great deal of
+coffee and cotton speculation, and some other commodity speculation, the
+amount of this paper, though relatively small, is absolutely greater
+than in any other city. No doubt, in New York, which is the country's
+centre for foreign commerce, a fair amount of the paper secured by
+"other personal securities, including merchandise, warehouse receipts,
+etc.," is really commercial paper, representing advances to importers
+and exporters--though the difficulties of giving this kind of security
+where goods are in transit would prevent most of our foreign trade being
+financed in this manner. The total of this kind of paper in New
+York--all these figures are for national banks alone--was only 113
+millions on June 23, 1915.[525] It may be doubted if very much of this
+paper, in the great cities, represents goods in transit. With the
+caution that the view here expressed is based on inference, and not on
+actual knowledge of what the large city banks are doing, the writer
+concludes that probably the bulk of this paper, in large cities,
+represents loans to speculators rather than to merchants. It is liquid,
+but it is not commercial paper.
+
+What of such paper in the country districts? Nearly
+one-half--$436,000,000 out of $882,000,000--of these national bank-loans
+on "other personal security, including merchandise, warehouse receipts,
+etc.," are in the country, outside the Reserve and Central Reserve
+Cities. Much of it is in the South. Much of it in the grain and
+live-stock producing regions. What do such loans mean?[526] Much of it
+is loans to farmers and planters. In the South, much of it is on crop
+liens. The loans on cotton warehouse receipts, at least in the country
+parts of the South, are not as great as is commonly supposed. In the
+North and West, there are a great mass of farmers' chattel mortgage
+loans, including loans on horses, grain in cribs, hogs, sheep, cattle,
+mules, etc. The use of this type of paper for financing the breeding and
+feeding of live-stock, particularly hogs, cattle and sheep, is very
+extensive. Virtually all loans to farmers and feeders for these purposes
+are secured by such chattel mortgages. It seems improbable that a great
+deal of this paper could represent ordinary commerce. Neither
+wholesalers nor retailers can easily handle merchandise on which chattel
+mortgages have been given. The usual method of granting credit to them
+is to advance loans on one and two name paper, unsecured. Not many
+loans to retailers and wholesalers will fall in the category under
+discussion.
+
+To what extent are the loans of this type to farmers liquid? Well, the
+crop lien loans in the South have a natural term, and, though commonly
+longer loans than bankers have in mind when speaking of liquid paper,
+are liquid in the sense that they are automatically paid off at
+maturity. Loans on work-animals need not have a natural term. Loans on
+animals being fed for the market have such a natural term, and are truly
+liquid. Loans, however, on breeding animals are not thus liquid, such
+loans are commonly regularly renewed at maturity, and the banks do not
+count on them in emergencies. It is the opinion of Dr. J. E. Pope that
+fully two-thirds of the aggregate loans on live-stock chattel mortgage
+security are to breeders rather than to feeders, and hence are not
+liquid. Of course, none of these loans are commercial paper.
+
+I conclude, therefore, that the thesis with which we started that the
+overwhelming bulk of commercial paper is to be found in the item, "other
+loans and discounts" is correct. I see no reason to suppose that an
+analysis of the loans of State banks and trust companies would show a
+different conclusion. We lack the figures for breaking up the collateral
+loans of State banks and trust companies into the two classes, "secured
+by stocks and bonds" and "secured by other personal securities,
+including warehouse receipts, merchandise, etc." We have merely the
+gross figures for collateral loans. As the State banks are in large
+degree country banks, it is probable that the percentage of commodity
+collateral as compared with stock exchange collateral for State banks
+would be larger than for national banks. However, the total of
+collateral loans for State banks is relatively small--559 millions, for
+1909, as against "other loans and discounts" for State banks in that
+year of 1,112 millions, and as against a total of collateral loans of
+all banks reporting in that year of 3,975 millions. On the other hand,
+the collateral loans of the trust companies are very large: 1,222
+millions for 1909, as against "other loans and discounts" for the trust
+companies in the same year of 460 millions. As the trust companies are
+chiefly city institutions, and as the concentration of trust company
+loans and capital in New York City is relatively very great, it would
+seem pretty clear that taking both State banks and trust companies into
+account would substantially lessen the percentage of loans "secured by
+other personal security, including merchandise, warehouse receipts,
+etc.," to total collateral loans. As the amount of commercial paper in
+this class of loans for national banks is probably small, it may be
+expected to be still smaller in the aggregate of collateral loans.
+
+The following figures, for State and national banks, and trust
+companies, only, will, in the light of the foregoing, give us basis for
+some further conclusions regarding the character of banking assets in
+the United States. As before, the year 1909 is chosen:
+
+ (000,000 omitted)[527]
+
+ _State _National _Trust _Aggre-
+ _Resources_ Banks_ Banks_ Companies_ gate_
+
+ Real estate loans 414 57 377 848
+ Collateral loans 559 1,939 1,222 3,720
+ All other loans 1,112 2,966 460 4,538
+ U. S. bonds 5 740 3 748
+ State, county and municipal
+ bonds 65 156 155 376
+ Railway stocks and bonds 75 351 362 788
+ Bonds of other public service
+ corporations 50 148 168 366
+ Other bonds, stocks, etc 95 208 769 1,072
+ Total of items here listed 2,375 6,565 3,516 12,456
+ ----- ----- ----- ------
+ Total Resources 3,338 9,368 4,068 16,774
+
+This table makes clear that the figures for real estate loans given in
+the table for all banks, a few pages preceding, were much too high. It
+leaves the relations among the other items, however, not greatly
+changed. "All other loans" increase from slightly less than 23% of total
+assets to 27%. If we concede that one-half of the "all other loans"
+represents liquid "commercial paper"--a very liberal estimate, as we
+have previously concluded--we get about 13-1/2% of the assets of these
+institutions in the form of "commercial paper," an increase over the
+11-1/2% to be assigned on the basis of the other table. The figure is
+the roughest sort of approximation. I attach little importance to the
+exact percentage, and the argument which follows is not dependent on any
+exact figure here. The proportion of collateral loans to total resources
+is changed also, and even more: collateral loans are 18% of total bank
+resources when all kinds of banks are included, and are over 22% of
+total bank resources when only State and national banks and trust
+companies are counted. If the foregoing is correct within very wide
+limits of error as to the amount of commercial paper, collateral loans
+very substantially exceed commercial paper. If all the "all other loans"
+should be counted as commercial paper, collateral loans are still not
+far behind them--22% as against 27-1/2%.
+
+What is the significance of this? We have seen that for national banks,
+the great bulk (over 66%) of the collateral loans were secured by stocks
+and bonds in June, 1915. We saw reasons for supposing that a higher
+percentage of stock exchange collateral would be found when State banks
+and trust companies are included. Suppose we assume that 75% of the
+collateral loans of all three classes of institutions here in question
+are based on stock exchange collateral.[528] This would mean 16-1/2% of
+the total resources of these institutions in stock exchange loans--still
+well above the 13-1/2% we have assigned to "commercial paper." In any
+case, it is at least justifiable to contend that loans on stock exchange
+collateral are as great in volume as commercial loans. I think that they
+very substantially exceed them. But further, we have another large
+percentage of bank resources invested in stock exchange securities
+outright--chiefly in bonds. The aggregate for those investments in the
+institutions under consideration is 3,250 millions. This is something
+over 19% of the total assets of these institutions. Combining this with
+the loans on stock exchange collateral, we get nearly 36% of bank and
+trust company assets invested, directly or indirectly, in stock exchange
+securities, as against an assumed 13-1/2% in commercial paper. Conceding
+that all the "all other loans" are commercial loans, the stock exchange
+assets still exceed them in the ratio of 36 to 27-1/2.
+
+In our second table, we have listed items which aggregate only 12,456
+millions of the total resources for these institutions of 16,774
+millions. The items listed, however, represent virtually all the credit
+extended by banks to industry, commerce, agriculture, the stock market,
+other speculation, and the State. The excluded items of main importance
+are: Due from other banks and bankers, 2,302 millions; checks and other
+cash items, 432 millions; and cash on hand, 1,411 millions--the three
+items aggregating 4,146 millions, which virtually closes the gap. These
+three items are of immense importance as making for liquidity in
+banking assets, and as making possible extensions of credit to the
+business world, but it is not proper to count them when an estimate of
+the extent of bank-credits is in question. Our second table contains,
+for the three classes of institutions, all the items properly counted
+there, except overdrafts (small in amount) and one other big item which
+does not get into bank statements at all, namely, _overcertifications_
+and "_morning loans_." Of this last item, more later. We may, then,
+recalculate our percentages on the basis of the credit extended by the
+three classes of institutions, instead of on the basis of total
+resources. On this basis, the percentages are:
+
+ Real estate loans, 7.4%;
+
+ Collateral loans, 30%, of which we assign to stock exchange
+ collateral, 22-1/2%, and to other collateral, 7-1/2%;
+
+ All other loans, 36.4%, of which we assign to "Commercial
+ paper" 18.2%;
+
+ Total stocks and bonds, 26%.
+
+Adding the percentages for stock exchange collateral loans and for
+stocks and bonds owned, we get 48-1/2% of all extensions of bank-credit
+for these three classes of institutions in the form of credits extended
+to the security market. If everything else except the real estate loans
+should be counted as "commercial loans" the stock exchange credit would
+still exceed the commercial credit. If my estimate of 18.2% of
+bank-credit based on commercial paper is high enough,[529] the banks and
+trust companies have extended over two and a half times as much credit,
+at a given time, to the security market as they have to commerce. This
+on the face of the record. But there is, as above indicated, a further
+item which does not get into the record, namely, overcertifications and
+"morning loans." Every day in the great speculative centres, and very
+especially in Wall Street, enormous advances are made to brokers, which
+are canceled during the day, but which, during their short life, are a
+real addition to bank-credit. To attempt to estimate this with any
+accuracy is hopeless, but the total on any ordinary day is enormous, and
+most of it is extended in connection with stock market transactions.
+
+A final comparison,[530] which will conclude this perhaps too wearisome
+analysis of these figures, will consider the loans alone, neglecting the
+securities owned:
+
+ Of total loans:
+
+ Real estate loans, 9.3%;
+
+ Collateral loans, 40.8%, of which we assign to stock exchange
+ collateral, 30.6%, and to other collateral, 10.2%;
+
+ All other loans, 49.6%, of which we assign to "Commercial
+ paper," 24.8%.
+
+The development of bank loans on stock exchange collateral is a
+remarkable feature of the three or four decades preceding 1909. The
+following figures, of national bank loans in New York City,[531]
+illustrate the tendency:
+
+ (000,000 omitted)
+
+ _Loans on _Advances on
+ _Date_ Commercial Paper_[532] Securities_
+
+ 1886 146 107
+ 1890 151 145
+ 1892 160 183
+ 1894 168 192
+ 1896 151 162
+ 1898 181 260
+ 1900 185 384
+ 1902 210 396
+ 1903 239 391
+ 1904 268 538
+
+The tendency is not peculiar to America, however. The following table
+gives a classification of the loans and discounts of all the great
+European banks[533] in selected years from 1875 to 1903:
+
+ (Figures in francs, 000,000 omitted)
+
+ _Note _Commercial _Advances on
+ _Date_ Circulation_ Loans_ Securities_
+ 1875 9,699 4,027 828
+ 1880 10,482 3,384 1,112
+ 1885 11,662 4,050 1,231
+ 1890 13,194 5,192 1,549
+ 1895 15,896 5,328 3,669
+ 1899 14,992 8,352 4,037
+ 1900 15,906 8,514 4,171
+ 1902 16,215 6,939 4,178
+ 1903 16,539 6,147 4,129
+
+We conclude, therefore, that the great bulk of banking credit in the
+United States, even of "commercial banks," is not commercial credit.
+Much of it, in the smaller places, especially, represents in fact,
+whatever the form, long time advances to agriculture and industry. Most
+of it, in the great cities, and to a large extent in even the smaller
+places, represents advances to the permanent financing of corporate
+industry. Excluding real estate loans, more than half of bank-credit
+represents either ownership of bonds (with some stocks) or else advances
+on stocks and bonds. Another important part of bank-credit, which I
+shall not even attempt to measure, is employed in financing commodity
+speculation.
+
+It is worth while to compare our figures concerning bank loans with
+Kinley's figures, which we have previously considered, for deposits made
+on March 16 of 1909, the year we have chosen for the bank loans figures.
+It is important to remember that "deposits," as used by Kinley in this
+investigation, does not mean what the term means in a bank balance
+sheet. Kinley's figures relate to the actual items deposited on the day
+in question, and not to the net balance after deposits and withdrawals
+have been compared when the bank has closed for the day. A large deposit
+in the balance sheet sense might show no "deposits" in Kinley's sense,
+in a given day; while enormous "deposits" in Kinley's sense might be so
+offset by incoming checks that virtually nothing is left on the balance
+sheet at the end of the day, for a given depositor. Kinley's figures
+thus give us a means of getting at the degree of _activity_ of different
+classes of deposits in the balance sheet sense, and so, indirectly, of
+different classes of _loans_.
+
+Loans and deposits (in the balance sheet sense) are, as we know, closely
+correlated. This is true for banks in the aggregate, and for banks
+individually at a moment of time. It is not generally true of a given
+individual deposit account at a moment of time, but through a period of
+time, for business deposits, it tends to be true that the items
+deposited offset the amounts borrowed.[534] If the items deposited are
+numerous, if the depositor has an "active" deposit account, receiving a
+large flow of banking funds, as compared with his net deposit balances,
+we may infer that his loans are also active, that he pays off loans
+frequently, that his paper, in the assets of the bank, is "liquid."
+
+I need not give the details of Kinley's figures again, as they have been
+elaborately analyzed in connection with the estimate of the "volume of
+trade."[535] The figures show that retail and wholesale deposits between
+them make up about 25% of the total deposits. This would serve to show
+that "commercial paper," which we have allowed to be about 24.8 of total
+loans, is slightly more active (and hence "liquid") than the average of
+loans.[536] It will also suggest, however, that our figure for
+"commercial paper," truly liquid, is too high, since we should expect
+this kind of paper to be more active than the average--unless, indeed,
+stock exchange collateral loans are so exceedingly active as to make a
+tremendously high average. I refrain from trying to get a definite
+answer on this point, since there are many indeterminate elements: among
+others, uncertainty as to the extent to which wholesale deposits and
+retail deposits _include_ all commercial deposits, and uncertainty as
+to the extent to which they _exclude_ manufacturer's deposits. The great
+bulk of Kinley's deposits, however, fall into the "all other" class, and
+the great bulk of the "all other deposits" are located in the great
+financial and speculative centres, particularly New York. We have
+concluded that they represent chiefly (a) transactions in securities;
+(b) other speculation; (c) loan and other financial transactions,
+particularly the shifting of call loans on stock exchange collateral. It
+is, then, the deposits of those connected with the great financial and
+speculative markets, particularly the stock market, whose deposits are
+most active, and whose loans are most liquid. Stock market collateral
+loans thus constitute the most perfectly satisfactory sort of bank loan,
+from the standpoint of liquidity. Though such loans do not make up the
+bulk of bank loans (we have concluded that they constitute 30.6% of the
+loans of State and national banks and trust companies in 1909), they do
+account for the bulk of banking activity, and supply the greatest part
+of the liquidity of total bank loans.
+
+When we consider further the item of securities (chiefly bonds) in
+banking assets, we find another highly important source of liquidity.
+The sales of bonds in the great banking centres are enormous. The
+figures of bond sales on the exchanges do not begin to tell the story.
+One big bank in New York in 1911 sold more than half as many bonds as
+were sold in that year on the floor of the Stock Exchange.[537] It has
+been frequently stated that ten bonds, of those listed on the Exchange
+are sold over the counter for one on the floor. This is truer of Boston
+than New York. The "outside market" for unlisted bonds is a very
+important matter. Dealings among banks in these items and in foreign
+exchange are exceedingly important. This is especially true of the
+business of the great private bankers, as Morgan, Kuhn-Loeb and others.
+Much of this does not appear in Kinley's figures, since neither the
+deposits of the great private banks in other banks, nor the deposits
+made in the private banks themselves (so far as New York City is
+concerned) figure in his totals.[538] Had they been included, the
+percentage of the "all other deposits" would have grown, and we should
+have had still more impressive evidence of the fact that modern banking
+in the United States is largely bound up with the security market, and
+that modern bank-credit gets its liquidity chiefly from that source.
+
+The story is even more impressively told by the figures for bank
+clearings, which include the transactions between banks, and the
+transactions of the private bankers. In New York, in 1909, total
+clearings for the year were 104 billions, as against 62 billions for the
+whole country outside New York.[539] That bank clearings are closely
+correlated with stock exchange transactions, has been demonstrated fully
+by N. J. Silberling, who has shown the following correlations: New York
+Stock Exchange share sales with New York clearings, r = .718; total
+clearings for the country with New York share sales, r = .607; total
+clearings for the country with railway gross receipts (as representative
+of ordinary trade), r = .356.[540] The active deposits and the liquid
+loans are chiefly connected with activities in finance and speculation.
+
+Now two important practical conclusions are suggested by this analysis.
+The first is that the complaint of many farmers, merchants, politicians,
+and even scientific writers that too much money and bank-credit are at
+the disposal of Wall Street and other speculators rests on a
+misunderstanding of causal relations. Wall Street does not, by using a
+large amount of bank-credit, take just that much away from ordinary
+business. Rather, it increases the amount available for ordinary
+business! Wall Street, and the other financial and speculative centres,
+supply the _liquidity_ for bank assets, and so make possible loans on
+non-liquid paper. Banks do not need to have all their assets liquid. If
+they did, American banks would have long since gone under! The foregoing
+discussion of loans to farmers, and manufacturers and even merchants
+should have made that clear. But banks do need a substantial margin of
+liquidity, to protect the rest. They get it from stock exchange
+collateral loans, and from ownership of listed and easily marketable
+bonds, primarily. They get part of it from true commercial paper. Thus,
+the director of a country bank in Iowa told the writer that banks in his
+section--where banks owned in large measure by farmers, and dealing
+largely with farmers, are very numerous and important--make a regular
+practice of buying, through brokers, a considerable amount of notes of
+outside merchants. They do this to protect themselves. Their other
+loans, to farmers, while good, are slow. If pressed themselves, they
+cannot press their depositors. These notes bought through note-brokers,
+however, are impersonal. They can refuse to renew them. They can sell
+them again. They thus buttress the rest of their assets. They can thus
+lend more, rather than less, to local customers. They can safely get
+along with much smaller cash reserves. Similarly with the practice of
+country banks of sending a large part of their cash to Wall Street banks
+to be lent on call, for which the country banks get, say, 2% from the
+Wall Street banks. Their country customers would pay 6% or more for
+that money in some cases, but the banks dare not tie up more of their
+assets in non-liquid local paper. They lend more, rather than less, at
+home, because they send part away. Wall Street is not "draining our
+commerce of its life blood"![541] Wall Street is rather preventing that
+life blood from coagulating!
+
+A second important practical conclusion relates to the provision in the
+Federal Reserve Act which forbids Federal Reserve Banks to rediscount
+stock exchange paper. This provision was intended to keep funds from
+being diverted from commerce to stock speculation, and doubtless met the
+approval of many very good students of the subject. If the foregoing be
+true, however, that provision is a mistake. It is a mistake, first,
+because it will lessen, rather than increase, the power of the Reserve
+Banks to provide relief to commerce through aiding in making bank assets
+liquid _via_ the stock market. It will limit the liquid assets of the
+Federal Reserve Banks in too great a degree to gold. It is a mistake, in
+the second place, because it prevents the Reserve Banks, particularly in
+New York and Boston, from making satisfactory profits--which is one
+important purpose of a bank! Even more important, however, is the third
+objection: it prevents, in large degree, the Federal Reserve Banks from
+being effective weapons against the "Money Trust." How far we have a
+"Money Trust" need not be here argued. The Pujo Committee, relying in
+considerable degree on admissions of prominent financiers that
+"concentration had gone far enough," and on the inability of Mr. Baker
+to find more than one issue of securities of over $10,000,000 within ten
+years, without the coöperation or participation of one of the members of
+a small group, concluded that we have a "Money Trust" in the sense that
+there is "an established and well-defined identity and community of
+interests between a few leaders of finance ... which has resulted in a
+vast and growing concentration of control of money and credit in the
+hands of a comparatively few men."[542] How far this conclusion is
+justified is, of course, a matter that would require elaborate
+discussion. There seems to be evidence that there is, since the death of
+the elder Morgan, a decided loosening of ties. One feels the need,
+moreover, of discounting very considerably many of the conclusions of
+the Pujo Committee. The present writer feels that the case has been
+made, however, that there has been, and probably continues, a much
+greater concentration of such control than is desirable. Whether or not
+there is at present such a "Money Trust," it seems pretty clear that
+temporary, if not permanent, alignments, may give effective monopoly
+control when the issue of very big blocks of securities is involved. For
+present purposes, however, it is enough to note that _if_ there is, or
+should come to be, a "Money Trust," it is a trust concerned with
+_financing industry, through handling security issues_, and not a trust
+_in the granting of ordinary commercial credit._[543] If, therefore, the
+Federal Reserve Banks are to compete with it, and break its monopoly,
+they must do it by entering the market with funds for the financing of
+corporate industry. Power to rediscount commercial paper seems a feeble
+and hardly relevant weapon against a combination concerned with
+purchasing securities, and making collateral loans! No doubt, this power
+is worth something. If an independent investment banker wishes to
+compete with a "Money Trust" in financing a new enterprise, he can go to
+his commercial banker, and offer collateral security for a loan; if the
+commercial banker wishes to aid him, but is short of lending power, he
+may, if he has plenty of commercial paper available for rediscount,
+rediscount it with the Federal Reserve Bank, and so get the additional
+funds. But a New York bank, or trust company, with the bulk of its
+assets in stock exchange investments, may well not have enough
+commercial paper eligible for rediscount, and the Federal Reserve Bank
+could help very much more effectively if it could take collateral loans
+directly. A fourth, and even more important objection to the restriction
+on stock exchange collateral loans for Federal Reserve Banks relates to
+the power of these banks to aid in a crisis. Crises first hit the stock
+market. Financial panics are most acute there. The need for immediate
+and drastic relief is greatest there. If stock exchange loans lose their
+liquidity, what of the rest of bank loans? Power to lend on stock
+exchange collateral, in the hands of the Federal Reserve Banks, may well
+prove, in crises, an essential, if we wish to make our system definitely
+"panic proof."[544]
+
+And now for a vital theoretical conclusion from this lengthy analysis of
+bank loans. For the quantity theory, and the "equation of exchange," all
+exchanges stand on a par. If one exchange takes place, that lessens the
+money and credit available for another exchange. The more exchanges
+there are, the less money and credit there are per exchange, and the
+lower prices must be, as a consequence. Nothing could be more false.
+Exchanges are not on a par.[545] Some classes of exchanges increase,
+rather than decrease the funds available for handling others. The
+activity of the speculative markets, making loans fluid, enormously
+increases the lending power of the banks for all purposes. Exchanges of
+securities, especially, instead of lowering prices, make it easier for
+prices to rise.[546] The years of extraordinary stock sales have always
+been "bull" years. There have been big "bear" days,[547] but never big
+bear years, in the record of New York Stock Exchange share sales. The
+selling and reselling of speculative goods of securities, and of notes
+and bills are especially important as making it easier for banks to
+expand loans. To list all manner of items, as Professor Fisher
+does,[548] "real estate, commodities, stocks, bonds, mortgages, private
+notes, time bills of exchange, rented real estate, rented commodities,
+hired workers," and count them all as "actual sales," all part of the
+"goods"[549] which make up the "volume of trade," is to put the theory
+utterly beyond the pale. Seasonal calls on an inelastic money supply for
+actual cash to move crops and pay agricultural wages may make a real
+difference in the value of money; scarcity of money of the right
+denominations for retail trade may give an agio to such money,[550] but
+the money and credit used by speculators, bill brokers, dealers in
+foreign exchange, investment bankers, etc., increases, rather than
+decreases, the funds available for ordinary industry and commerce.
+
+I have made clear the distinction between the direct and indirect
+financing of industry by banks. Great banks in Continental Europe often
+_buy_ the stocks of new corporations, hold them permanently, put bank
+officers on the boards of directors, and supervise closely the
+operations of the companies. In America, while officers of
+commercial[551] banks often are members of boards of directors of the
+companies which borrow heavily from the banks, the practice is to make
+short-time loans to such companies (in form, if not in fact), and to
+lend on their securities, rather than to buy them. Our banks own
+securities in enormous amount, but they are chiefly seasoned bonds,
+rather than stocks of new or even well-proved, enterprises.
+
+It is commonly supposed, too, that collateral loans are chiefly or
+almost wholly made to speculators, who buy securities in the expectation
+of holding them only till investors take them off their hands, and that
+investors buy them, not with bank-credit derived from loans, but with
+money or bank-credit which they accumulate by saving out of current
+income. It is particularly true of the higher grade securities, which
+savings banks and insurance companies can buy, that this is the case.
+The bank-credit thus serves for temporary, rather than for permanent
+financing, to the extent that this is true. I think, however, that the
+extent to which bank-credit serves for permanently financing industry is
+underrated. A good many investors have learned that the short-time
+money-rates are, on the long time average, lower than the yield on
+long-time securities.[552] They have learned, too, that high-yield
+securities--securities high in yield as compared with the long-time
+average of money-rates--can be obtained which can safely be carried on
+margins of thirty, forty and fifty points, without danger that even such
+catastrophes as the slump in security prices at the outbreak of the War
+will wipe the margins out. The old distinction between investors and
+speculators, the former those who buy for the yield, and the latter
+those who buy for an anticipated rise in capital value, no longer
+corresponds to the distinction between those who buy outright and those
+who buy on a margin. The investor, buying a 6 or 7% preferred stock,
+carrying it on a forty point margin, with money from his bank or broker
+at 4 or 5%, is making 6 or 7% on his own forty dollars, and is making
+the difference between 6 or 7% and 4 or 5% on the sixty dollars lent him
+by his banker or broker. He substantially increases his yield thereby,
+and his risks, if he chooses his stocks carefully, and scatters them
+among a number of issues, are not great. For the banker or broker, such
+a loan is perfectly satisfactory. The margin of security is wider than
+that demanded on more speculative securities. Such a borrower will
+receive consideration when more speculative loans are being called, or
+not renewed. The investor of this type is, in effect, engaging in a form
+of banking business. He is lending to the corporation funds which he has
+borrowed from others; he has put up his own capital for the same purpose
+that the bank uses its capital--to supply a margin of safety to those
+who have taken his short-term promises to pay. Like the bank, too, he
+converts rights to payments at a later date into rights to payment at an
+earlier date. He is one of the links in the chain whereby the wealth of
+low saleability employed in industry becomes distilled and refined till
+it enters the money market. His profits come in the difference in the
+yield as between more saleable and less saleable forms of rights.
+
+The extent of this practice cannot be stated, so far as any data to
+which the present writer has access are concerned. The writer has met
+the practice in a good many cases. One brokerage house, with whose
+operations the writer has considerable acquaintance, makes a practice of
+advising its more conservative customers to do this. A good many
+brokerage houses sell investment securities on the "instalment plan,"
+which often means, in practice, that the initial margin put up by the
+investor is his only payment, and that the security is gradually paid
+for by letting the yield increase the margin. During the extremely easy
+money of the present War period, occasional reference has been made in
+the financial papers to the practice of buying even the highest grade
+bonds on this basis--the yield of the bonds being very substantially
+higher than the money-rates, giving a comfortable profit to those who
+hold the bonds on a margin.
+
+That the practice is not wider spread is due primarily, probably, to the
+temperamental qualities required. The investor, proper, is commonly a
+very conservative person, who has an unreasoning distrust of
+speculation, and to whom the word, "margin," necessarily suggests
+speculation. That buying a stock on a margin is the same sort of thing
+as buying the equity in a mortgaged farm, does not occur to him. On the
+other hand, the man who knows the market well enough to be willing to
+deal on margins, frequently is not content with the slow process of
+accumulation which comes from annual yields, and prefers to take larger
+chances in speculation on capital values. But there is an intermediate
+class, who buy investment securities, with narrow range of fluctuation
+in capital values, for the sake of the yield, and who buy them on
+margins, margins ample to enable them to sleep at night, and to neglect
+the daily market reports. I think that there are indications that this
+class is growing larger, and more important. Doubtless much more
+important than individual "bankers" of this sort, however, is the
+enormous number of houses dealing in securities, "wholesalers" and
+"retailers," who find profit on their "wares" even while on their
+"shelves," through the differential between the yield and the charge
+made by commercial banks on collateral loans. A very large percentage of
+collateral loans is made to institutions of this type. As this practice
+becomes more important, the result must be to widen the money market, to
+increase the proportion of banking capital that goes permanently into
+financing industry, and to reduce the difference in yield between
+short-time paper and long-time securities--in other words, to bring the
+"money-rates" closer and closer to the long-time interest rates.
+
+This would have seemed very strange and weird to Adam Smith. It means,
+in effect, that the bulk of our banking credit is, directly or
+indirectly, financing our industry rather than our commerce. Adam Smith
+thought that a bank could safely lend to its customers only so much as
+they would otherwise keep by them in the form of money. Perhaps this
+notion, as growing out of some speculations regarding the general theory
+of money, should not be taken as the statement of Smith's practical
+attitude on the matter, but that practical attitude, as clearly
+expressed in the paragraph[553] following, is that a bank can afford to
+lend only for mercantile operations that are carried through in a very
+moderate time, that the bank can afford to supply only the minor part of
+the circulating capital, and no part of the fixed capital, of a
+merchant, or manufacturer, no part of his forge and smelting house, etc.
+Such loans lack the liquidity which the bank must insist upon. Only
+those persons who have withdrawn from active business, and are content
+with the income upon their capital, can afford to lend for such
+purposes. The theory is sound, on the basis of the facts as Smith knew
+them. But modern corporate organization and modern stock markets have
+changed all that. Anything that is highly saleable can come into the
+money market, and the modern corporation organization of business,
+coupled with organized stock exchanges and a large and active body of
+speculators, has made the forge and the smelting house as saleable as
+the finished product.
+
+This is not to accept Schumpeter's doctrine,[554] so far as the United
+States are concerned, that it is primarily the bankers, the
+manufacturers of bank-credit, who make the decisions that turn industry
+from old to new lines. They do not, on the whole. In Continental Europe,
+particularly Germany, they do to a much greater extent. Criticism has
+been made of our American commercial bankers, as contrasted with German
+bankers, that the former are parasites, who insist on sure things, and
+refuse to take chances with other business men in the development of
+industry. To the present writer, our banking system seems to be rather a
+more developed system than that of Germany, in that the "division of
+labor" has gone further with us, and risk-bearing and the manufacturing
+of bank-credit have been more sharply differentiated. We have bankers
+enough who are "risk-bearers." But they are, on the whole, "private
+bankers," "investment bankers," and the like, who do not manufacture a
+great deal of deposit credit, but rather borrow heavily from the
+commercial banks, which are the great manufacturers of bank-credit.
+Under our system, the decisions which divert industry from old to new
+lines are more democratically made, by speculators and investors under
+the leadership of private bankers, and sometimes without that
+leadership. These constitute the important intermediary which transforms
+stock exchange securities into the basis of bank-loans. The commercial
+banker buys, in general, not the stocks, but the note of the private
+banker, broker, speculator, or investor, with the stocks as collateral.
+If investment bankers, speculators and investors decide to support old
+ways of doing things, the banks lend on the securities of the old kinds
+of businesses; if investment bankers, speculators and investors turn to
+new things, the commercial banks follow suit. Commercial banks can and
+do discourage certain types of enterprises by refusing loans with their
+securities as collateral, or by requiring very heavy margins with such
+loans, but even these may be developed, and are with us on a large scale
+developed, on banking credit, advanced by the speculators and private
+bankers who borrowed it from the commercial banks with other securities
+as collateral. The commercial banks of the United States may to a very
+considerable degree check dynamic tendencies, but in general, they do
+not lead and direct them. Bank-credit, directed by others than
+commercial bankers, does, however, enormously facilitate both the
+starting of new enterprises and social readjustment to them.
+
+How far can the total wealth of the country, agricultural as well as
+industrial, be brought into the circle of the money market? The full
+answer to the question would go far beyond the limits of this book. If
+agriculture can be brought under the control of large corporations,
+there is little reason for supposing that it, too, might not come in.
+There are some peculiarities of agriculture, special dangers of drought
+and flood, dangers of over-production and low prices, wide seasonal
+fluctuations in conditions, which make it hard to standardize in any
+case. But mining and even the manufacturing of such things as primary
+steel products have wide variations in prosperity too. So long, however,
+as agriculture remains a matter of families on a homestead--and for
+social and political reasons, we may hope that this will always be the
+case--it is difficult to bring it in. Bonds of agricultural associations
+or of agricultural banks have had limited sale on the bourses of Europe.
+The present writer, for example, found it impossible to find in four
+great libraries in New York and Boston any quotation of the bonds of the
+_Bayerische Landwirtschaftsbank_. Apparently, in general, such
+securities have not high saleability. While this remains true,
+agriculture may expect to remain under a handicap of higher interest
+rates than industry and commerce.
+
+If, however, all forms of wealth could be made equally saleable, we
+should find interest rates rising for those loans and securities which
+now have the highest saleability. They would lose the peculiarity which
+now enables them to perform a service as bearer of options. Money-rates
+and long-time rates of interest would tend to come together. Long-time
+rates on formerly unsaleable loans would fall, and rates on highly
+saleable loans would rise. The present low rates in the "money market"
+grow out of _differential_ advantages.
+
+We turn now to the third important aspect of the technique of banking,
+namely, the matter of cash reserves. First I would point out that this
+is merely a part of the more general problem of liquid assets. The
+difference between cash and liquid paper is a matter of degree. There is
+large possibility of substitution of the one for the other, as it
+becomes more profitable to use one or the other. When money-rates are
+low, it may well be worth while to carry large reserves; when
+money-rates are higher, the gains to be made by substituting paper for
+cash in the bank's assets are much greater. I have pointed out the use
+which great European banks, notably the Austro-Hungarian Bank, make of
+foreign bills of exchange as "reserve," selling bills when money is
+"easy," and the yield on bills is small, buying bills when money is
+"tight," and the yield on bills is large.[555] The great Joint Stock
+Banks of England, the chief sources of bank-credit in the great banking
+country of the world, also make use chiefly of deposits with the Bank of
+England as their "reserves." Some cash they keep, but it is "till
+money," rather than reserve. They carry, also, "secondary reserves" in
+highly liquid paper, stock exchange loans and commercial bills. The
+differences are differences in degree. The Bank of England does keep a
+large reserve in cash (including notes of the Issue Department and gold
+bullion) but it denies that it has any definite ratio in mind,[556] and
+it protects its reserves, when they are low, not by ceasing to loan, but
+by raising its discount-rate. The whole thing is highly flexible.
+
+This is, in general, true throughout the world,[557] where banking is
+highly developed. A country which has expanding business, based on
+rising values of goods and rising capital values of anticipated incomes,
+which in turn grow out of increasing business confidence, etc., and out
+of the development of new enterprises which make readjustment necessary,
+expands its bank-credit to meet the situation. Expanding bank-credits in
+time grow so large that bankers feel larger cash reserves to be
+desirable. Their reserves may be also, in some measure, drawn upon by
+the growing retail trade and wage-payments, which call for more money
+in circulation. They meet the situation by raising money-rates. This
+tends to prevent the exportation of gold, and tends to encourage the
+importation of gold, which finds its way into bank reserves. Banks may
+even borrow directly from banks in other countries, to get the gold they
+need, or to prevent the exportation of the gold they have. The higher
+money-rates, also, tend to check marginal borrowing--the borrowing by
+those who see only very small profits to be made by the use of the
+bank-credit they borrow. If the rising values of goods, however, and the
+profits to be made by effecting exchanges, speculative and other, are
+large, the volume of bank-credit will, none the less, grow. If the tide
+of rising business confidence is strong, the banks will be disposed to
+accept securities and rights as collateral which they would distrust at
+other times. A very big difference indeed may appear between bank
+reserves in active times and bank reserves in dull times. The banks need
+less reserves in proportion to deposits in active times, because the
+very activity itself increases the liquidity, the saleability, of their
+paper assets, and so makes actual cash less necessary. Even in this
+country, the practice of counting deposits in other banks as reserve is
+well developed. This is not only true of country banks, or banks outside
+the reserve cities. It has been, in considerable degree, the practice of
+the big trust companies in New York City. It is the practice of private
+bankers connected with the stock exchanges, and the practice of brokers,
+who are, for many purposes, bankers, especially those who allow their
+customers to check on their accounts. Such houses may carry no cash at
+all. One, with whose workings the writer is somewhat familiar, makes the
+rule--"We pay by check and receive only checks." None the less, this
+house allows its customers to check upon it, and checks drawn on it
+perform all the functions of checks drawn on banks which keep a cash
+reserve. Of course, our new Federal Reserve system is built, in part, on
+the principle of collecting reserves in central reservoirs, and our
+banks will doubtless increase the practice of counting deposits with
+other banks as reserve.[558] They will feel the need for less reserves,
+also, with a wider rediscount market.
+
+_Within a given country_, I think that we may safely generalize the
+doctrine that the causal relation between reserves and deposits is
+exactly the reverse of that asserted by the quantity theory, within very
+wide limits indeed. That is to say, increasing reserves are a _result_,
+and not a _cause_, of increasing loans and deposits. We shall further
+hold that the relation between them instead of being definite, is highly
+flexible. This is not to assert that reserves may not increase without a
+prior increase in loans and deposits. That has happened in the United
+States during the present War. It does mean, however, that increasing
+loans and deposits will pull gold into a country, and that increasing
+reserves do not force increasing deposits and loans.[559] If a country's
+business is growing, if that business is soundly based, so that
+expectations are being met, obligations being paid out of the income
+which arrives, on schedule time, to meet anticipations, there need be no
+effective check to the amount of gold that will come into the country to
+serve as reserves, within limits that are rarely reached. It is
+miscalculation, maladjustment of costs and prices in particular
+enterprises, failure of "interstitial adjustments," especially failure
+of particular crucial links in the business chain, as the businesses
+engaged in producing iron and steel, to respond to the needs of other
+expanding businesses, that check movements of expansion in business, not
+inadequacies of bank reserves.[560] As long as only wise plans are made,
+as long as they meet no mishaps, as long as the carrying out of the new
+plans does not itself so change the facts on which the calculations of
+business men have been based as to cut under anticipated profits, so
+long may business, within a given country, expand without danger from
+inadequate reserves. Of course, if the whole world is simultaneously
+expanding, the competition for gold in the international money markets
+may be so severe that all may be hampered.
+
+That reserves will increase, as expanding credit, due to increasing
+business or rising prices, requires increased reserves, can hardly be
+disputed, I think, if we look at a country of small size, or (what is
+the same thing from the angle of economic analysis, so far as the
+present problem is concerned) if we take a particular part of a country.
+Seasonal movements of cash for reserves in this country have been
+obviously determined by the movements of credit, rather than the
+reverse. Expanding business at crop moving seasons, requiring advances
+of credit by country banks, and an unusual drain on the cash resources
+of the country banks, has regularly meant that the country banks draw
+cash from the New York banks. When the need for such cash in the country
+banks passes, when they can no longer employ it to advantage at home,
+they send it back to New York. New York, to meet the emergency caused by
+the withdrawal of cash, draws to a considerable extent on Europe for
+gold. It is not as easy for New York to get gold quickly from Europe as
+it is for France to get gold in an emergency from England. More time is
+required. Inelasticity, too, in the forms of currency most needed for
+small transactions, has made very real difficulties for us. But that,
+within the country, the sections whose business and credit were
+expanding take cash reserves from those sections where credit is less
+urgently demanded, needs no debating. This is seasonal. But the same
+thing is true in the long run. As business and bank-credit have
+expanded, year by year, in Oklahoma, Oklahoma's cash reserves have
+grown. Bank-credit in a country cannot go on indefinitely mounting, if
+bankers are making unsound loans, if the values on which the loans rest
+are based on vain imaginings, if anticipated profits are not realized.
+But if a country have rich resources and intelligent entrepreneurs, with
+sagacious bankers who can discriminate between sound and unsound
+business, it may, within very wide limits indeed, expand its bank-credit
+without check from inadequate reserves, as its business expands, and as
+prices, particularly prices of lands and securities, rise.[561]
+
+If the country in question be a very large country, however,--large in
+the sense that its business and volume of bank-credit are very large,
+and particularly in the sense that bankers' assets are of such character
+that a large volume of reserves is desirable--restraints on the process
+of expansion may come. Reserves will come in, but the resistance in
+stiffer money-rates will be felt. Bankers in other countries will
+compete with the bankers in the country in question for reserves. Rising
+money-rates will put an end to many marginal exchanges. They will lessen
+the saleability of many rights which might otherwise be available as
+banking collateral. The extension of bank-credit will feel a drag. There
+is large flexibility here. But, in a long run period of many years, the
+volume of gold in the world will impose a maximum limit upon the
+possibility of expansion of bank-credit in the world as a whole. This
+limit is doubtless never reached. Within the limit, the variations in
+the volume of the world's credit are primarily determined by the other
+concrete factors we have been discussing. Proportionality between the
+world's gold and the world's volume of credit does not at all obtain.
+Under certain conditions, much higher proportions of reserves to
+bank-credit will be found in a given country than at other times, and
+the same will be true in the world at large.
+
+I would refer again to the discussion by J. M. Keynes, quoted in Part
+II.[562] Reserves have absorbed enormous quantities of gold, easily
+obtained as a consequence of abundant gold production, in the past
+fifteen years. Proportions of gold reserves to bank-credit have grown.
+In the preceding period, when gold production went on less rapidly than
+business development, percentages of reserves were lower. Most bankers
+feel better with large reserves. When they can get gold, they prefer
+gold to other substitutes. When they cannot easily get gold, they use
+other substitutes, of the various kinds of paper, particularly, which
+have been described. Gold differs from other things, in bankers' assets,
+in degree, rather than in kind. Instead, therefore, of the law of the
+proportionality of reserves to volume of bank-credit, I venture the
+generalization[563] that, as gold production increases rapidly, the
+tendency is for the proportion of gold reserves to volume of bank-credit
+to rise; with diminished gold production, the tendency is for the
+proportion of reserves to fall, assuming that the factors other than
+volume of gold production which make for expansion of business maintain
+themselves.
+
+Increasing volume of gold tends to increase the volume of trade. But
+there are other causes for the increase or decrease of trade as well.
+These causes, working in harmony with rapidly expanding volume of gold,
+lead to a very rapid growth of trade.[564] Working in the face of a drag
+from less rapidly growing gold supply, they strain the possibilities of
+bank-credit expansion. Various substitutes for gold in bank reserves are
+employed. Substitutes in the form of other forms of credit are employed.
+Barter is resorted to increasingly. Methods of employing other things
+than gold in the retail trade of a country are resorted to.
+"Gold-exchange" standards are devised. Countries "wait their turns " to
+come on the gold standard. Coöperation, not only within countries, but
+among countries, seeks to economize the scanty stock of the precious
+metal. Very large slack is thus revealed. But the expansion of business
+is checked, the volume of business confidence is reduced, the values of
+future incomes in enterprises is lowered, production is checked, and
+prices are reduced, (a) because the value of money rises; and (b)
+because the values of goods and income-bearers is reduced. The exchange
+side of production is hampered. Substitutes for gold, through increased
+activities of bankers and other agents of exchange, are costly. Greater
+tolls on values are taken by those who handle the mechanism of exchange.
+It does make a difference whether or not the world's gold is abundant!
+But the difference is not made solely, or even mainly, in the
+price-level.[565]
+
+The reserve function of money is essentially a _dynamic_ function. The
+reserve function is merely a phase of the bearer of options
+function.[566] It is the practice of quantity theorists to speak of
+"normal" ratios between reserves and deposits (or reserves and demand
+liabilities), and to speak of the "static" laws governing this relation.
+This in true of Kemmerer, of Fisher, of A. P. Andrew, and, in general,
+of contemporary quantity theorists. Kemmerer very explicitly puts it as
+a matter of static theory, "If we divide the money of the country into
+two parts; one, that used directly in daily cash transactions, and the
+other, that kept in banks as reserves, it may be said that, _under
+perfectly static conditions_ [italics mine], the proportion of the total
+represented by each of these parts would be constant. Each banker would
+find from experience what proportion of reserve to liabilities it was
+advisable for him to maintain, and would order his business, as far as
+possible, so that his reserve would neither exceed nor fall below that
+most desirable proportion."[567] Kemmerer quotes the following passage
+from A. P. Andrew: "In the long run, _as apart from cyclic
+oscillations_, the quantity of bank-credit is governed by the quantity
+of money."[568] Fisher's view we have considered at length in Part II.
+It is essentially the same. He is working with the statics of the
+problem of money and credit. These different writers differ greatly in
+the extent to which they would insist on the validity of their static
+tendency in real life. Professor Fisher, as we have seen, is exceedingly
+uncompromising, holding tenaciously to his principle as subject only to
+slight modification during transition periods. Professor Kemmerer, in
+the chapter from which the quotation just given is taken, gives an
+important realistic analysis of dynamic conditions and makes liberal
+concessions to the view that the ratio is no constant in real life.[569]
+Professor Taussig, whose view was summarized at length in chapter IX,
+finds, in real life, so many exceptions to the doctrine of
+proportionality of reserves and deposits that he virtually abandons that
+doctrine. What I wish to insist on here, however, is that there are no
+static laws _possible_ in this connection. The reserve function is a
+dynamic function. The theory of reserves must rest in an analysis of
+friction, of transitions, of dynamic uncertainty and dynamic change. It
+is a part of the general theory of liquidity of bank assets, of
+saleability of rights, and the like. If one can find a "normal" amount
+of dynamic change, a "normal" amount of uncertainty, a norm for the
+coming of technical inventions, a normal prospect of war, a normal rate
+of gold production, a normal rate of growth for population, a normal
+amount of Jew-baiting in Russia, with a norm for migration, and if one
+can hold these norms, and a multitude of similar norms, in fixed
+relation to one another, one might have justification for speaking of a
+"normal ratio" of bank reserves to bank demand liabilities!
+
+Apart from dynamic changes, from frictional elements which create
+uncertainties, in general, apart from uncertainty and irregularity and
+lack of "normality," there would be no occasion for bank reserves at
+all! To the extent that static conditions are realized, bank cash
+reserves may be, and _are_, dispensed with. It is well known that
+England gets along with surprisingly little gold. The total stock in the
+country has been smaller than the gold reserve of the Banque de France,
+and much of the gold in England was in use among the people, since small
+paper money (before the War) was not in use in England. The gold reserve
+of the Bank of England has been usually only a fraction of that of the
+Banque de France. Some years since, the distribution of gold as between
+England and the United States, was, roughly, England six hundred million
+dollars, the United States, one billion, six hundred million. A larger
+proportion of gold was in reserves in the United States than in England.
+Yet England was doing the banking business of the world, while we had
+trouble in doing our own! The Bank of England carries virtually the only
+reserve in the country. The Joint Stock Banks, with demand liabilities
+vastly in excess of the demand liabilities of the Bank of England, carry
+only "till money" in cash or Bank of England notes, and for the rest,
+carry as their "reserve" their deposit credits with the Bank. A great
+deal of criticism, from Bagehot down (to go no further back) has been
+directed at the "inadequacy" of English banking reserves, and many dire
+predictions have been made as to the dangers that impended unless the
+reserves were increased. We shall probably hear less of this after the
+War! The Bank of England still stands! It has never failed to pay out
+gold over its counters, even though it has, with the aid of the
+government, doubtless restricted and controlled foreign shipments of
+gold. But it has met the unprecedented emergency better than any other
+bank in Europe, and to-day (Sept. 1916) is in exceedingly good shape.
+Sterling exchange at New York seems "pegged" at the "lower gold point,"
+and apprehensions regarding the stability of the English financial
+system seem definitely allayed. It is aside from our present purpose to
+discuss war time conditions. I am rather interested in analyzing the
+features of the English money market which have made it possible, in the
+period preceding the War, for English bankers to get on with so little
+gold. As will appear, it is because English business and financial
+affairs have been more nearly "static," have come nearer to realizing
+the assumptions of static economic theory, than is true of any other
+country on earth.
+
+The very fact, for one thing, that England is the great _international_
+banker has meant a scattering of risks. Acute panics do not come in all
+countries on the same date. Bad business in one country may be offset by
+good business in another; drains of gold to one country may be met with
+gold flowing in from others. The same considerations which tend to
+stabilize the railroad business, as compared with, say, cotton-growing,
+apply to the international banker as compared with the banks of a single
+country or section. But further, the London market has developed
+coöperating agencies for smoothing out friction and eliminating
+uncertainties to a degree unknown anywhere else. An anonymous writer in
+_The Americas_ for April, 1916,[570] has given an exceedingly
+interesting account of this organization of the London market,--the
+product of the development of generations. Let us enumerate some of the
+points: There is nowhere in the world so much expert judgment in the
+grading and evaluating of hundreds of commodities from all parts of the
+world. There is, coupled with this, a worldwide reputation for the
+experts of absolute integrity, so that producers in remote countries
+regularly ship ("consign") to London cargoes without definite
+arrangements, knowing that there are in London organized facilities by
+which the commodities are warehoused, expertly and fairly judged, and
+either sold at once or else made the basis of a collateral loan against
+which they can draw immediately. The institutions which make this
+possible are (a) the system of warehousing, with its certificates or
+warrants which give absolute title to the goods, and which are easily
+negotiable; (b) the organized arrangements in connection with the
+warehouses by which commodities are received and either graded as they
+are, or separated and mixed with others to form standard blends readily
+marketable--this with rigid integrity and expertness which the whole
+world trusts; (c) a speculative community which has unlimited banking
+credit, ready to buy at a concession in price virtually any
+commodity--honey in the comb, sealing wax, pianos, farm machinery, what
+not; (d) the organized markets or periodical auctions which speculation
+and final purchase together support; (e) the banks, which, relying on
+the standardization of the commodities and the readiness of the
+speculative community, can without hesitation lend the money on which
+the distant shipper is relying to conduct his business.
+
+What comes to London is fluid. Everything comes to London! The
+multiplicity of items dealt in gives stability to that business which
+deals with all--the banking business. The London Stock Exchange is no
+provincial affair, easily demoralized by an adverse rate decision!
+Securities of every country on earth are listed there, and speculated
+in. It must be a world catastrophe which really demoralizes the London
+stock market!
+
+It will doubtless seem strange to many to say that New York cannot
+displace London as the centre of world finance, that the dollar cannot
+displace the pound sterling in financing international trade, because
+New Yorkers do not speculate enough! They do speculate enormously, but
+not in many things. A restricted list of stock exchange
+securities--almost wholly American; cotton--in which New York is the
+world centre; coffee, in which New York has the largest volume of
+speculative futures, though yielding precedence, ordinarily, to Havre,
+Hamburg and Santos[571] in spot transactions. There is extensive sugar
+speculation at the New York Coffee Exchange, which has, indeed, recently
+changed its name to indicate the fact. There is a produce exchange in
+New York, but it is a very small affair as compared with the Chicago
+Board of Trade, and its operations and scope are infinitesimal when
+compared with the produce speculation in London. Of course, there is a
+vast deal of _unorganized_ speculation in many things in New York, as in
+business everywhere, particularly in America. But, while the pecuniary
+magnitudes of organized speculation in New York are very great, the
+range of items dealt in is restricted. New York banks cannot possibly
+get such a variety of collateral, based on standardized and readily
+marketable goods and securities, as can London. New York, consequently,
+cannot finance international trade, save as an auxiliary to London--and
+New York banks must have vastly more gold in their vaults than London
+bankers need! As goods and securities become _more_ marketable,
+gold--whose services are needed because of its _superior_
+marketability--becomes _less_ necessary.
+
+The whole story of London's organization would be a long one. London
+financial institutions have a degree of expertness, growing out of
+specialization, in large part, which makes all manner of paper fluid in
+the London money market which would lack fluidity in New York. The
+Acceptance Houses are a sort of international Bradstreet and Dun. They
+know intimately the standing and business of houses all over the world.
+They do not give out their information, but they do put their stamp on
+the paper of business houses, thus standardizing it, lending, not money,
+but "pure credit," while the other banks, relieved of the necessity of
+investigating the paper, can buy it as a miller might buy No. 1 wheat.
+There is the extraordinary extension of insurance, so that virtually any
+kind of risk may be shifted to those well able to bear it. All this
+makes for liquidity, for "static" conditions in the money market, and
+dispenses with the need for gold.
+
+As we approach static conditions, we need less and less gold reserve
+behind bank demand liabilities. _The static law of bank reserves is that
+none are needed!_ I think we have here the real reason why writers who
+have sought to give us the law for a "normal" ratio have given us such
+vague phrases as "shown by experience to be necessary," and the like.
+When irregularity of income and outgo in a bank's business, non-liquid
+assets, business cycles, uncertainties, legislative changes affecting
+business, crop failures, changes in demand, new inventions, wars, are
+abstracted from, no reason can be given why a banker should keep any
+reserve at all! But these things are dynamic things. And it is
+characteristic of irregularities that they are irregular. To get a
+"normal" ratio out of them is not easy.
+
+On the static assumptions, an "ideal credit economy" is perfectly
+possible. If everything that needs to be marketed is perfectly
+marketable, if the stream of business flows regularly and without
+friction in the same channels, if all contingencies are foreseen and
+dated in advance, a bank needs no cash reserve. All payments can be made
+by bank-credit. Banks bookkeeping becomes merely a refinement of barter,
+with _money_ remaining as a measure of values, a unit for reckoning, but
+not being used as a medium of exchange, or as a bearer of options, or in
+reserves. The measure of values function is the great static function of
+money.
+
+To the extent that static assumptions are not realized, we need money in
+bank reserves. This extent is a thing that varies from time to time, and
+from place to place. It is not the same for a given place from time to
+time, nor is it the same at all places at a given time. It is not the
+same for the whole world from time to time.
+
+Since friction, preventing the free marketing of goods and securities
+and services, exists, since there are dynamic changes which require
+readjustments through exchanges, we need the work of the banker and he
+needs cash. But there are other things than money which make for the
+"statification" of the market. The speculator does it. And the other
+agencies of the sort represented in the London market do it. They are
+substitutes for gold. Gold has no monopoly. The services performed by
+gold can be performed in many other ways, and by many other agencies.
+There is enormous flexibility in the matter.
+
+
+
+
+PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS
+
+
+
+
+CHAPTER XXV
+
+THE RECONCILIATION OF STATICS AND DYNAMICS
+
+
+In the foregoing discussion of the value of money it has appeared that
+the value of money is not an isolated problem! Not only have we found it
+necessary to consider it as part of the general theory of value, but it
+has been advisable to bring it into relation with a large number of the
+special theorems of economics, including the law of supply and demand,
+cost of production, the capitalization theory, the doctrine of
+appreciation and interest, the theory of international gold movements,
+Gresham's Law, the theory of elastic bank-credit, and the general theory
+of prosperity. The book has thus become a book on general economic
+theory, viewed from the standpoint of the theory of money. It has been
+as contributing to the problem of the value of money that these other
+doctrines have been discussed, but I trust that they, too, have gained
+something of clarification from being considered in this relation, and
+that the emphasis on the rôle of money in general economic theory has
+helped in bringing the various elements in our current theory into a
+closer-knit interdependence.
+
+The present chapter seeks to carry the conclusions so far reached toward
+a further unification of economic doctrine, by finding for certain
+contrasts, like that between statics and dynamics, a higher synthesis,
+so that it may be possible for students of dynamics and students of
+statics to speak a common language, to use common measures, to find that
+their phenomena are not, after all, of essentially different nature, and
+to come to agreement as to the relative importance of "static" and
+"dynamic" tendencies. It will appear that the theory of money and
+exchange plays an important rôle in effecting that higher synthesis, and
+is itself clarified by it.
+
+The "theory of goods vs. the theory of prosperity," "statics vs.
+dynamics," "normal vs. transitional tendencies," "long run vs. short
+run" laws, "market vs. normal price," "abstract theory vs. concrete
+description," "historical or evolutionary study vs. cross-section
+analysis," "temporal vs. logical priority," "causation as a temporal
+sequence vs. causation as timeless logical relationships"--these, and
+similar contrasts have appeared frequently in the history of social
+thought, and have been especially refined and elaborated in the history
+of economics. We have even compounding of the notions into more
+complicated distinctions, as by Seligman,[572] in his two statements of
+the law of costs: in the short run, normal price tends to be the maximum
+cost of production; in the long run, normal price tends to be minimum
+cost of production. Seligman has illustrated his notion by an adaptation
+of the familiar figure of the sea-level and the waves: for short-run
+purposes, we may contrast the surface waves, the market prices, with the
+sea-level, the normal price; for longer run purposes we may see the
+level of the sea itself changing, under the influence of the tide, and
+may have a dynamic normal, which is still to be distinguished from the
+fluctuations due to the play of winds on the surface.
+
+We have further an increasing recognition of the up and down play of
+forces accelerating and retarding the processes of industry and trade.
+For earlier writers, panics and crises were anomalies; since Mill's
+_Principles of Economics_, to go back no further, we have had increasing
+recognition of such occurrences as more or less periodic and
+inevitable, bound up in the very nature of economic life itself, and of
+late there has been a fairly general acceptance of the notion of the
+business cycle, of an alternating rhythm of prosperity and depression.
+The explanation of this alternation has been attempted by numerous
+theories, one of which, that of Joseph Schumpeter,[573] rests the whole
+case definitely in the distinction between static and dynamic
+tendencies, and in the conflict between the opposing sets of forces
+which statics and dynamics undertake to describe.
+
+We are told by the orthodox economist that war is wasteful, destroying
+laborers and goods, and lessening the wealth and productive power of
+society. We are told that it diverts labor from productive employments,
+that it turns huge masses of capital and labor to the production of
+goods which men cannot enjoy, that it burdens the people with taxes,
+etc. Static theory can see nothing but evil in war, from the standpoint
+of minimizing human sacrifices, and maximizing human enjoyments. None
+the less we see many war periods--notably that of our Spanish-American
+War, and the present World War, so far as the United States are
+concerned--periods of marked prosperity, growing out of the new
+expenditures which war itself involves. Mules and other farm products
+rose in price with the Spanish-American War, as the Federal Government
+bought them for the army; various factories concerned particularly with
+war munitions increased their activity, the gains of factory owners and
+farmers led them to increase their purchases, wages rose, and rose in
+part because part of the labor force was in the army. The Civil War did
+spell demoralization and economic ruin for the South, but for the North
+it gave a great dynamic impetus to trade, transportation and
+industry--an impetus, strangely enough, that was so great that the new
+industries and enterprises which had grown up were able to absorb with
+little shock the million men set free from the Northern armies when the
+great struggle was over.[574]
+
+For static theory, scarcity is an evil. A general overproduction is
+impossible. For the practical business man, confronted with the
+momentous problem of marketing his output, overproduction is a vital
+reality, and there are few times indeed when much more could not be
+produced if only a satisfactory market could be found for it. Static
+theory would see the whole explanation of this in maladjustment, too
+much of some things being produced, too little of others. This simple
+statement does explain much of the phenomenon, but it is far from
+telling the whole story, and even if it were a complete explanation, it
+would by no means dispose of the reality of overproduction as a constant
+menace, even when not a dire reality, facing almost every business man.
+Static theory at best tells what a completed adjustment would be; it
+does not touch the problem of how adjustment is brought about, and
+maladjustment overcome. Yet just that problem is the vital concern of
+the business man.
+
+For static theory, high or low prices are matters of no concern. And
+abundance or scarcity of money and credit make no real difference in the
+economic process. Abundant money and credit exhaust themselves in
+raising prices, and the rest of economic life goes on unchanged. This
+doctrine of the quantity theory is, as I have undertaken to show in Part
+II, bad even as a matter of static theory. But it is only as a matter of
+static theory that it is even thinkable.
+
+The economic theory of the 19th Century, following the lead of Adam
+Smith and Ricardo, has been accustomed to dismiss as utter folly the
+notions of the Mercantilists as to the balance of trade, and the
+importance of an inflow of gold, and has conclusively proved that
+protective tariffs tend to divert the labor, capital and land of a
+country from those lines of production they are best adapted to to lines
+for which they are less well suited. Critics have pointed out, as in the
+"infant industries" argument, that we cannot treat the labor capacity
+and technical knowledge of a country as constants, that the temporary
+encouragement of one line of industry by a tariff may so modify the data
+of the situation that the country may in time become better adapted to
+the protected industry than to other lines. And I think that we may well
+go further, and make substantial concessions to the doctrines of the
+Mercantilists as they themselves stated them, seeing in a favorable
+balance of trade, and in expanding exports and diminishing imports
+sources of impetus which are not subsequently neutralized by the static
+process of equilibration. I do not conclude from this that protective
+tariffs are commendable, any more than I conclude that war is
+commendable. Both may give dynamic impetus, and lead to economic
+development. Both may lead to political corruption, to iniquities in the
+distribution of wealth, to waste and suffering of various kinds, in
+which honest and patriotic men suffer, and cunning and unworthy men
+gain. The point here is simply that static theory does not tell the
+whole story regarding either tariffs or wars. It may well be true--I
+think it is true--that static theory offers the more important
+principles for judging the results of wars and tariffs.[575] It is the
+central problem which I have set myself at the outset of this discussion
+to find a way to bring static and dynamic considerations _under a common
+measure_, to reduce them to homogeneity so that comparisons may be
+instituted, and so that the student of statics and the student of
+dynamics need not talk merely at cross-purposes. But we do not achieve
+this result by ignoring considerations in either sphere.
+
+Bastiat, with a fine show of logic, has sought to rule out of court the
+doctrines that extravagance and tariffs, etc., are sources of prosperity
+by his emphasis on the "Unseen," as opposed to the "Seen." The
+prosperity growing out of the extravagant expenditures of one brother is
+open to all eyes. The consequences of the savings of the frugal brother
+men do not see so easily, and do not attribute to his frugality.
+Doubtless Bastiat is right in his main theses. But one point needs
+emphasis: that which is "Seen" stirs the imagination of men. And
+imagination energizes human activity. The motivation of economic life is
+a psychological matter.
+
+And so at a host of points the contrast may be drawn, in one or another
+form. The pure, abstract, static theory gives one conclusion; the other
+approach suggests one different.[576]
+
+How is it possible to give proper weight to considerations drawn from
+such divergent spheres of thought? Indeed, how shall we weigh the
+dynamic considerations at all? Static theory presents itself in
+quasi-mathematical form. At times, it parades itself in equations, and
+it readily enough, without arousing a feeling of incongruity, expresses
+itself in mathematical curves, with ordinates and abscissæ. One static
+tendency finds itself in marginal equilibrium with another, and the
+margin is expressed in quantitative units, commonly sums of money.
+Static doctrine does, indeed, lay claim to precision and exactness, and
+static tendencies may be weighed against one another. But how shall one
+undertake to give quantitative measure to such a thing as the
+educational influence of a tariff on silk manufacture? How measure the
+dynamic impetus of a new chain of banks on the industry and trade of the
+region affected? How gauge the importance of a new advertising scheme,
+or a new invention? Dynamic considerations are commonly presented in
+vaguer, looser form than static theories. Usually we have merely a
+statement of a qualitative tendency, without effort to make the
+importance of the tendency quantitative. Indeed, I think it safe to say
+that one chief difference between statics and dynamics is that those
+tendencies which can be most easily formulated have been recognized by
+statics, while those which are less understood, and less precisely
+formulated, are left to dynamics! A big part of the difference is
+methodological, rather than inherent in the nature of the phenomena
+themselves.
+
+I think that it needs little argument to show that all the contrasts
+listed at the beginning of this chapter do not run on all fours.
+Compare, let us say, the contrast between "statics and dynamics" with
+that between "historical and cross-section" study. Concrete, realistic
+history is not dynamic theory. A realistic description of society viewed
+at a given short period of time is not static theory. Both statics and
+dynamics are _abstract_. _Laws_ are not the same thing as description
+and narration. The assertions of both statics and dynamics are commonly
+made on the assumption, "_cæteris paribus_." A new bank will stimulate
+business in a western town if bank-robberies do not come into fashion! A
+tariff on wool will tend to educate the farmers in sheep-raising if the
+habit of relying on governmental assistance does not develop, and make
+them more, rather than less, inert,--or sharpen their political rather
+than their economic acumen. Concrete history need not always verify
+dynamic laws![577] It is, above all, important to insist that the
+distinction between statics and dynamics is not the same as the
+distinction between theory and description, or between the abstract and
+the concrete. Evolutionary study may result either in concrete history,
+or generalized laws; cross-section study may be either concrete
+description or abstract formulæ concerning forces in equilibrium. And
+there may be varying degrees of abstractness in both cases.
+
+The contrast between long-run and short-run tendencies is not
+necessarily the same as that between statics and dynamics. This former
+distinction does recognize one factor which is sometimes classed as
+"dynamic," namely, "friction."--"Friction," by the way, is a blanket
+term which covers a multitude of sins of imperfect analysis and lazy
+thinking! It is far from a simple, unitary thing. Sometimes it seems to
+mean the action of the whole social order, other than the economic
+values!--But dynamic, as used by the two writers who have used the term
+most precisely, J. B. Clark[578] and J. Schumpeter,[579] is reserved for
+those factors in economic life which make for constructive _change_.
+Neither writer would call mere habit and inertia, which make
+readjustments slow, or the necessities of physical nature, which retard
+readjustment, by the name, "dynamic." It may be noted, in passing, that
+both writers limit the term quite strictly to changes _in_ economic life
+growing _out of_[580] economic causes. Schumpeter narrows the dynamic
+factors to one, namely, _enterprise_, while Clark gives five general
+classes of dynamic factors, all of which are primarily economic in
+character. Neither extends his study to cover forces which are not
+primarily economic in character, but which none the less lead to
+economic changes.
+
+Again, the "theory of prosperity" is not identical with "economic
+dynamics," though the two in large measure overlap. For one thing, while
+some writers, as Schumpeter, find the business cycle to be a necessary
+consequence of dynamic changes, and would maintain that no business
+cycle, no up and down of tempo in production, no panics or crises, are
+necessary if changed methods of industry, etc., did not come in, not all
+writers would so explain the business cycle. Some writers would find the
+explanation in the inherent instability of a money and credit economy,
+some in the inherent weakness of a capitalistic system, quite apart from
+necessary dynamic change. Irving Fisher makes no use of changed methods
+of production in his explanation of business cycles, though he does
+mention invention as one possible cause of a disturbance in normal
+equilibrium.[581] But further, dynamics is largely concerned with
+problems, like invention, changes in the economic habits of a people,
+methods of organizing industry, etc., which, while they may well bear on
+the problems of prosperity and depression, yet have interest for their
+own sake, and would be studied if there were no business cycles.
+Further, the notion of statics, the other term in the static-dynamic
+contrast, is not identical with the "theory of wealth," or "theory of
+goods," or "theory of the wealth of nations" which such a writer as
+Veblen[582] would put in contrast with his "theory of prosperity." There
+is a normative, or practical, and polemical coloring in the body of
+doctrine growing out of Adam Smith, which Veblen would term, the "theory
+of the wealth of nations," which is lacking in the more colorless
+"statics" of to-day.
+
+I do not find any of the contrasts thus far discussed quite
+satisfactory. I have been using the terms, statics and dynamics, as
+general terms to cover all these contrasts. I shall try to formulate a
+general contrast which includes most of the ideas passed in review, from
+a somewhat different angle, and then try to show that the contrast,
+while useful, is not absolute, and that it is possible to measure
+considerations drawn from one viewpoint in terms of considerations drawn
+from the other.
+
+Let us take as our starting point the notion of a cross-section picture
+of society. I have set forth this notion in ch. 13 of my _Social Value_,
+and have elaborated it in the discussion of von Mises' theory in the
+chapter on "Marginal Utility" in this book. A cross-section picture may
+be made more or less concrete and descriptive, or abstract and
+analytical. If one looks at the picture of society in cross-section as
+given by Giddings in his _Principles of Sociology_ (Bk. II, chapters on
+"The Social Population," "The Social Mind," "The Social Composition,"
+and "The Social Constitution"), one finds a picture in which
+organization and system are made clear, but in which vivid description
+of concrete social facts is the primary concern. The account given is
+largely qualitative rather than quantitative. It is a picture of flesh
+and blood, as well as an account of functioning. It is, perhaps, not
+easy to realize that Giddings is doing the same general sort of thing
+that the pure economic theorist is doing, with his picture of a static
+equilibrium of economic values. But what economic theory is concerned
+with is, after all, to be found in Giddings' scheme. The pure theorist
+takes for granted the physiographic environment, whose influence
+Giddings takes into account. The theorist abstracts from biological and
+racial factors. He assumes a social population, a social order, a
+political system. He has not taken into his purview the social mind as a
+whole, in his static theory. Rather, he has been concerned with only one
+part of the social mind, namely, the economic values. Economic values,
+and the objects of economic value, have been the data of the static
+theorist. Given scales of economic value, such that for one quantity of
+goods of a given kind, a given value per unit will obtain, given all of
+these value-scales, and given the quantities of goods and services whose
+values are in question, and static theory will furnish an equilibrium
+picture, in which the price relations of different kinds of goods are
+made clear, and their values are measured. The value-scales, and the
+absolute magnitudes of value at different points on the scale, are
+assumed, are data. Further, in order that the notions may be made
+mathematically precise, a unit of value is needed, and this is commonly
+the value of the money-unit, which is assumed to be constant. The
+picture then becomes systematic. There is a system of values, expressed
+in prices, which is stable, so long as the data do not change. It is
+mechanically conceived, and illustrated by various mechanical symbols,
+as balls in a bowl, or connecting reservoirs, or, best of all, by
+intersecting curves. It is an abstraction from the living, pulsing,
+organic whole of the social mind--the inter-mental life of men in
+society. It squeezes much of the life out of the phenomena it
+describes. It makes them exact, only by making them mechanical. It thus
+becomes exact by becoming, in considerable degree, superficial and
+abstract.[583] This is not to condemn static theory. Static theory has
+proved its usefulness by solving too many problems for such a statement
+of its limitations to involve a condemnation. But the statement of its
+limitations will aid us in seeing its relation to that vaguer body of
+doctrine which we call dynamics, or the theory of prosperity, etc.
+
+Now this means that static theory is not _value_ theory. It assumes a
+theory of value. It assumes the value-scales as data. It assumes the
+value of money as a datum. Static theories of supply and demand, cost of
+production, capitalization, etc., assume the value of money, as has been
+shown in Part I, and static theory, resting in the notion of
+accomplished transition, normal equilibrium, abstracting from the
+difficulties of readjustment, abstracting from friction, etc., misses
+the whole point as to the functions of money, as shown in Part II.
+Static theory proceeds by assuming a change in one of the elements of
+its situation, say one of the value-scales, and then tells what the new
+equilibrium will be after readjustment takes place, assuming that other
+value-scales remain constant, and that quantities of the objects of
+value do not change. Or, it assumes a change in the quantity of one of
+the objects of value, and then predicts the new equilibrium. The new
+equilibrium will often involve changed values and prices all around, and
+will often involve altered quantities of other objects of value. But the
+initial change comes from an alteration _from outside_ the system in one
+or more of the data of the system.[584]
+
+Now dynamics, theory of prosperity, etc., are concerned with the causes
+of changes in the data with which statics works, in large measure. Among
+the problems with which statics has not adequately dealt, and in large
+measure cannot deal, are (1) the nature of value itself, and the laws
+governing changes in the value-scales; (2) the problems of readjustment,
+including the problems of money, credit and exchange; (3) the psychology
+of invention, of enterprise, and the like. (4) The reactions of economic
+values and economic organization on the non-economic phases of social
+life. (5) The reaction of the non-economic factors, as law, morals, art,
+religion, etc., on economic life. (6) The problem of prosperity and
+depression. I say that statics has not dealt adequately with these
+problems. Statics in its present narrow form cannot deal with them. But
+in considerable degree, I am convinced, statics can be made to deal more
+adequately with them, if its scope be broadened, and its limitations be
+made less rigid. Schematically, at least, the central ideas of statics
+can be applied to a large part of these problems. I may add that my list
+of six classes of problems with which statics has not adequately dealt
+is not meant as a system of categories. The list is incomplete, and the
+classes are not mutually exclusive. Rather, they overlap in large
+measure. In a large way, it might be said that statics is concerned with
+the laws of the equilibration of values, and that dynamics, theory of
+prosperity, etc., are concerned with the nature and causes of variations
+in the values themselves. The contrast may be put, in general, as the
+contrast between the _theory of value_, and the _theory of price_,
+statics being price-theory, and dynamics being value-theory. But this is
+a thesis which calls for much elaboration and qualification before its
+significance is made clear, to say nothing of its justification being
+established.
+
+ * * * * *
+
+We may approach the problem of bringing the two terms of the contrast
+together from either of two angles: (1) we may show that dynamic factors
+tend, in large degree, to submit themselves to measurement in terms of
+money-prices, which obey the laws of static marginal equilibrium. (2) We
+may show that all static prices presuppose values whose explanation is
+in terms of the same phenomena with which dynamics, the theory of
+prosperity, etc., have busied themselves, namely, considerations drawn
+from the study of social psychology, including the psychology of
+suggestion, imitation, mob-mind, the functional organization of minds
+into a social mind, social beliefs, social values of other than economic
+nature, and social institutions. (1) The evidence on the first point is
+already in considerable measure worked out, particularly by Veblen, in
+his _Theory of Business Enterprise_, and in his other writings on the
+nature of capital, etc. Something more in this direction I have done in
+my _Social Value_, and other writers have elaborated the notion. (2) The
+case for the second contention has been made in detail in my _Social
+Value_, and in what follows I shall rely chiefly on the discussion
+presented there, and in the chapter on "Value" in this book.
+
+I take up first the thesis that dynamic factors may come under the
+static measure. Veblen has made much of the contention that modern
+"capital" is not, as Smith thought, and as orthodox economists in
+general have contended, a matter of physical accumulations of goods. The
+volume of business capital is a pecuniary concept, and may wax and wane
+with little variation in the physical stocks. "Under modern conditions
+the magnitude of the business capital and its mutations from day to day
+are in great measure a question of folk psychology rather than of
+material fact." (_Theory of Business Enterprise_, p. 149.) And in large
+measure Veblen's work is given to showing how factors of legal and
+social psychological nature get a money-measure. The actual capital of a
+business enterprise does not rest chiefly on the physical equipment,
+stocks of raw materials, etc., etc., which it possesses. To be added is
+"good will," and this includes (p. 139) established customary business
+relations, reputation for fair dealing, franchises, privileges,
+trade-marks, brands, patent rights, copyrights, exclusive use of
+processes guarded by law or secrecy, exclusive control of particular
+sources of materials, etc. Veblen contrasts things of this nature
+sharply with the concrete equipment, saying that the former are
+serviceable only to the owners, while the latter are serviceable to the
+community at large as well. The physical, tangible, and ethically
+commendable character of the physical equipment is everywhere stressed,
+while the pathological, anomolous, and sinister character of the less
+tangible and more recent "capital items" is always set before us--all
+the more effectively because Veblen maintains a satirical attitude of
+moral indifference, and presents the case with Olympian aloofness. I am
+not here concerned with the social welfare aspect of the matter, though
+I shall later speak of that. My present purpose is to make clear two
+points in Veblen's doctrine: (1) that he does bring these intangible
+things, which are the variables involved in his theory of prosperity,
+under the price measure; and (2) that he considers these prices as
+anomalies from the standpoint of the general laws governing the values
+and prices of concrete goods. To this last point I shall later take
+sharp exception. For the present, I wish to develop further the extent
+to which such factors may be brought under the general static measure.
+
+The feature of static theory which Veblen chiefly employs in giving a
+money-measure to his "intangible capital" is the capitalization
+theory.[585] The capital magnitude of the items of good will previously
+mentioned is a capitalization of the _income_ which they are expected to
+bring in. And it may be said that a large part of Veblen's doctrine of
+the causes of the ups and downs of business rests on the complaint that
+this capitalization process is not rationally carried through--that
+incomes are overestimated, and that business men are tenacious of
+capital magnitudes once built up, and refuse to mark them down properly
+when the facts in the situation have changed. His theory of prosperity
+thus rests on non-rational enthusiasm on the one hand, and a certain
+kind of "friction" on the other hand, and apparently the difficulties in
+the situation as he sees it would largely disappear if these two
+elements could be rationalized, and the static theory work more
+perfectly. The elements involved in the capitalization theory, as shown
+in the chapter on that topic, are three: the anticipated income, the
+prevailing rate of discount, and the capital value, the last named being
+the child of the first two. The capital magnitude is a shadow, where the
+income is the substance. Veblen seems to find the trouble arising in
+that the capital magnitude takes on a substantial character, and refuses
+to play the passive rôle of shadow. It is interesting, in passing, to
+compare this theory of Veblen's with the theory of crises developed by
+Irving Fisher, from the standpoint of a body of doctrine which is purely
+static, and which Veblen has criticised as "taxonomic" in a high degree.
+For Fisher[586] the trouble arises from friction in connection with
+another element in the capitalization problem, namely, the interest
+rate. Business men think that "a dollar's a dollar," and refuse
+to let the interest rate be marked up in accordance with the
+doctrine of "appreciation and interest." This, likewise, leads to
+overcapitalization, leaves the passive shadow too big. I must confess
+that it seems to me that one theory is about as "taxonomic" as the
+other--that both rest on pointing out divergences from a static,
+"taxonomic" norm. In general, Veblen's work in this field consists in
+assimilating the "intangible" capital to the class of land, and other
+long time concrete income-bearers, but that is after all classification,
+systematization, "taxonomy." In saying all this, I am as far as possible
+from questioning the value of Veblen's work. Rather I rate it as of
+extreme significance. "Taxonomy" does not appear to me so dreadful a
+word as it does to Veblen. I should rather say that some taxonomy is
+good and some is bad, depending on whether or not it leads to fruitful
+generalizations, and deeper insights.
+
+It is, as I have said, chiefly the capitalization theory which Veblen
+applies to these newly important intangible "capital-items." The
+phenomena of the stock-market, where such things are most actively
+bought and sold, and where they appear as differential portions of the
+capital values of securities, doubtless first called attention to
+them--though the item of "good will" as a business asset, for which a
+money-price is paid when businesses change hands, is doubtless older and
+wider than modern corporation finance. The capitalization theory applies
+to them most readily and obviously, as compared with other elements in
+the static theory of prices.
+
+But as we become better used to the large rôle which these phenomena
+play,--not that the phenomena are new, but that their present importance
+is new, and hence our serious study of them is new--we are increasingly
+able to see that other elements of static theory also apply. _Static
+theory applies increasingly as understanding increases!_ The vaguely
+discerned, the novel, the imperfectly analyzed, can be stated only in
+qualitative terms. As things are better understood, the mind seeks
+system, taxonomy, quantitative measurement. Business men to-day are well
+accustomed to applying _cost_ concepts to many of these intangible
+magnitudes. Advertising, for example, is being worked out with
+increasing exactness, and business men are increasingly applying
+accounting processes to the determination of the question of _how much_
+advertising "pays." Well-known brands are capital items. Well-known
+brands have cost money! Business men contemplating the marketing problem
+may well balance the cost of creating a new brand against the cost of
+buying an old one, and may balance the cost of creating a new brand
+against the profit to be made from allowing an old one to deteriorate,
+through cheapening its process of manufacture. Trade-connections are
+capital items. They are also items which have been created by patient
+thought and labor and expense. Franchises, since the days when the
+public awoke to their value, have cost money to the corporations that
+possess them, and figure in corporate bookkeeping often. Even in the old
+days, they often had a cost, which commonly stayed _out_ of the
+corporations' books, at least in that form,--bribes, entertainments to
+legislators and members of councils, and so on. In Part II of this
+book,[587] I have discussed "selling costs" as contrasted with costs of
+production in the narrow sense, and have pointed out how high a
+proportion of total costs these selling costs are. I have also indicated
+how many of these costs tend to be "capitalized." These selling costs
+are static measures of the elements of "friction" which interfere with
+the smooth working of static laws! An extension of statics, however,
+can in considerable degree take account of them. It is, of course, far
+from true that cost doctrine will explain all of these intangible
+capital magnitudes. But this is likewise true of the prices of many
+tangible items. Cost doctrine does not hold universal sway even in the
+confines of the strictest static theory.
+
+I have said that dynamic factors tend to come under the rules of static
+taxonomy to the extent that they become more accurately understood. The
+understanding here referred to is not merely on the part of the
+scientific theorist! The subject-matter of economic science is itself
+psychological. It includes the psychology of the business man, as well
+as the psychology of purchasers and laborers, and the general field of
+social-mental life that bears on economic processes. It includes the
+theories of the business men, as well as their aspirations and
+"motives." It includes their methods of computation, and the accuracy or
+inaccuracy of their prognostications. It has been pointed out recently
+that at the current price of copper (22c. per pound in Jan. 1916) the
+prices of copper stocks are very much lower than they were when copper
+reached the same price some years ago. Calumet and Hecla stands some two
+or three hundred points lower than it did then, and the same percentage
+difference is manifest in the case of many other stocks. But the
+explanation which the broker and market writer offer is that people have
+awakened to the fact that mining stocks are stocks with wasting assets,
+that the incomes from copper stocks cannot, therefore, be capitalized on
+so high a basis as similar incomes from other securities; that people
+to-day realize this fact as they did not some years ago; that the
+earlier capital-prices of copper stocks were vastly exaggerated on the
+basis of a careful estimate of probable total future income, etc. Japan,
+little used to the great prosperity growing out of sudden great
+increases of special kinds of business, found herself in such an orgy
+of war stock speculation that it was necessary to close the stock
+exchange in 1915. The United States, better familiar with the phenomena
+of boom and depression, seasoned by many experiences of similar nature,
+have found that on the whole,--at least in the opinion of many competent
+judges in January of 1916,--war stock speculation has been kept in
+reasonable bounds, thanks in large part to the conservatism and caution
+of bankers and brokers, and that the general economic situation is in
+fairly stable equilibrium, with most of the probable sources of disaster
+foreseen and "discounted." To "discount" is to make "static"![588]
+Whatever the business man can reduce to bookkeeping terms, and whatever
+he can measure by money in the market, the economist should be able to
+bring within the "orderly sequences of economic law."
+
+In _Social Value_, I have pointed out how wide is the scope of the money
+measure. Waves of public opinion, of waning or waxing hope and belief,
+of patriotic fervor, of religious exaltation, of political movements of
+one or another kind--all these find some sort of money measure in the
+market. In the gold market in the early '60's in New York, the "bulls"
+sang "Dixie," and the bears sang "John Brown's Body"! It was patriotic
+to be a bear, and unpatriotic to be a bull. These considerations
+affected the prices very appreciably, at times, especially at the
+beginning of the speculation in Greenbacks. Waning and waxing belief in
+the triumph of the Northern armies manifested itself very strikingly in
+the prices in the gold market, as W. C. Mitchell has conclusively
+proved, with a wealth of detailed evidence, in his _History of the
+Greenbacks_. But in less systematic markets, in less organized and
+regular ways, many things besides are given a money measure: "Against
+what, indeed, shall wealth be measured? Where are the markets which
+measure its fluctuations?
+
+"But such markets exist, always have existed. Are there not streets
+where woman's virtue is sold? Are there not commonwealths where there is
+a ruling price for votes? Do not the comparative rewards of occupations
+indicate what inducements will overcome the love of independence, of
+safety, of good repute? We see men sacrificing health, or leisure, or
+family life, or offspring, or friends, or liberty, or honor, or truth,
+for gain. The volume of such spiritual goods Mammon can lure into the
+market measures the power of money.... When gold cannot shake the
+nobleman's pride of caste, the statesman's patriotism, the soldier's
+honor, the wife's fidelity, the official's sense of duty, or the
+artist's devotion to his ideal, wealth is cheap. But when maidens yield
+themselves to senile moneybags, youths swarm about the unattractive
+heiress, judges take bribes, experts sell their opinions to the highest
+bidder, and genius champions the cause it does not believe in, wealth is
+rated high." (Ross, _Foundations of Sociology_, pp. 171-172.) Ross is
+here interested chiefly in the problem of measuring the varying
+significance of wealth, symbolized by money, in terms of other and
+non-economic, goods. But it is equally true that money measures these
+goods. The range of the money measure is very wide. Nor is it confined
+to the exchanging process. Gabriel Tarde[589] has pointed out that money
+may function as a measure of non-material goods through gifts, public
+subscriptions, etc.
+
+It is surely no extravagant claim to make that the methods of static
+economics may be extended at least as far as the money measure goes! We
+shall later see reason for believing that fruitful results may come from
+an even wider extension of the static notion, at least as a schematic
+device.
+
+In reducing static and dynamic considerations to common terms, we have
+now gone far. We have shown that a wide range indeed of the phenomena
+deemed dynamic, and largely ignored by current static theory, left to
+the discussion of such innovating students of the "theory of prosperity"
+as Veblen, are really in the actual practice of the business world
+treated in the same way as are the "static" phenomena of the values of
+physical goods and concrete services. And we have further shown how wide
+indeed is the scope of the static yardstick, the dollar. But this is
+only a part of the story. We have generalized statics. Can we similarly
+generalize dynamics? Or has our generalization of statics merely
+narrowed the field of dynamic considerations?
+
+To this I reply that we may view the whole field likewise from the angle
+of what we have called dynamics, or theory of prosperity, or similar
+name. These terms are not satisfactory, in my view, and I have already
+used terms that appear to me better. My exposition on this point will be
+briefer than in the generalization of statics, since I may refer to what
+I have said elsewhere. In stating Veblen's contrast between "business
+capital" and "the wealth of nations," I quoted him as follows: "Under
+modern conditions the magnitude of the business capital and its
+mutations from day to day are in great measure a question of folk
+psychology rather than of material fact." The capital, or the wealth in
+general, of older and simpler days was a material matter, concrete goods
+and services, in his view. The newer items of capital are anomalies,
+presenting something strange and novel, and sinister. I should maintain
+that, whether sinister or no, they are in principle at least not _novel_
+or _anomalous_. _All economic values are matters of folk-psychology!_
+All economic values are social values. All are to be explained on the
+same general principles that explain the values of the most complicated
+stock-market phenomena--except of course, that the application of the
+principles involves less complication in the case of such values as that
+of a loaf of bread. But value is always a matter of psychological
+significance, and never a matter of mere material fact. And these
+psychological significances are not explained by such simple individual
+phenomena as labor-pain, or marginal utility, but always by reference to
+the total social-mental system, including its laws, its mores, its
+institutions, its centres of power and prestige, its modes and fashions,
+etc. If Veblen has in mind the contrast between goods whose values rest
+in labor-pain or marginal utility, on the one hand, and values which
+rest in a folk-psychology on the other hand, the contrast is a false
+one. The first class does not exist. I shall not elaborate this point. I
+have developed it at length in _Social Value_, and in the chapter on
+"Economic Value" in this book. I should make the contrast, then, which
+seems to me to gather up the central significance of most of the
+contrasts we have been discussing, as follows: on the one hand, we may
+view the matter mechanically and abstractly, in terms of the
+equilibration of values conceived of like physical forces, expressed in
+prices; on the other hand, we may view the economic situation more
+fundamentally and realistically, seeing the interplay of men's minds,
+viewing economic values as parts of a social mind, a functional unity of
+many minds. We may treat society as a mechanism, or we may treat it as a
+living, pulsing, psychological organization. In short terms, our
+contrast may be between the theory of value, and the theory of price.
+And here we are back to our thesis set forth on p. 559 of this chapter.
+
+The theory of value, as thus marked out, is still an abstraction from
+the totality of our cross-section picture of social, or even of
+economic, life. The essence of society is indeed psychological. But men
+have bodies, and live in a material world, and have an elaborate
+technology. Many of the factors which students of dynamics are concerned
+with grow out of biological and technological relationships, and are
+connected with physiographic influences. Can we bring all these into our
+scheme? Giddings and Spencer would answer affirmatively. For Giddings
+(_Principles of Sociology_, ed. 1905, p. 363): "All social energy is
+transmuted physical energy." Giddings guards himself (pp. 365-366)
+against a thoroughgoing monism, which would leave no distinction between
+mind and matter, but in general he would hold to the scientific goal of
+reducing the physical and psychical phenomena in society to a
+parallelism, so that concomitant percentage variation could be
+predicated of them, and so that considerations in one sphere could be
+expressed by considerations in the other. In the hands of Giddings and
+Spencer, such notions are handled with caution and discrimination, and
+command respectful consideration. One feels, however, that the starting
+point is a monistic metaphysics, and that the philosophical doctrine
+does not justify itself in its scientific application. In the hands of
+such a writer as Winiarski, however (_Rev. Philosophique_, vol. XLV, pp.
+351-386; vol. XLIX, pp. 113-134; summarized by Ross, _Foundations of
+Sociology_, pp. 156-157), who makes all mental states mere forms of
+physical energy, and applies to mental processes the laws of mechanics,
+the doctrine becomes merely bad poetry! From the standpoint of
+the needs of social science, and from the standpoint of our present
+knowledge of social facts--to say nothing of general philosophical
+considerations--it seems clearly best to me to assume the common-sense
+doctrine of dualism as a premise: mind and matter are two different
+things; mind acts on matter, and matter acts on mind. We are then at
+this position, when it comes to bringing technological and physiographic
+factors into our scheme: on the one hand, the values control
+technological applications, and control the course of industry. New
+technological devices will be employed when the present worth of their
+anticipated products is great enough to overcome the values that compete
+with them. Land will be employed on that crop which gives the largest
+rent, etc. Men's physical activities, and their employment of their
+physical resources, are _motivated_ by values. That is the _function_ of
+values. On the other hand, physiographic and technological factors
+modify the lives and characters of men and peoples. _Values_ are in part
+controlled by physiographic and technological conditions of life. But
+these technological and physiographic factors, in order to influence
+economic _conduct_, must first influence the value system. This they do,
+(1) by affecting the quantities of _objects_ of value, and so modifying
+the marginal relations among the value-scales and the marginal values;
+(2) by affecting the lives of the people directly, and so modifying the
+value-scales themselves. Similarly I see no way of bringing the vitally
+important factor of heredity into our scheme in a direct manner, _in
+propriore persona_, but only mediately, as it (1) affects the character
+of the society, and so changes its value-system or its technological
+activity and volume of products, or (2) as heredity becomes a matter of
+concern to the society, and so an object of value, with its own place in
+the value-system.
+
+There remains, therefore, in the field of technological, biological, and
+physiographic features affecting economic life a considerable residuum
+of economic problems for which, so far as I can see, no extension of the
+static method can be devised. I propose no scheme of static price
+analysis for balancing the effects of poor land and good heredity on the
+character of a society.[590] The problem must be approached by other
+methods specially suited to it, which we need not here discuss. But,
+given the values that rule in that society, we may be sure that our
+static picture of that value system will sum up much of the influence of
+the bad land and the good heredity, mingled with the other factors which
+have determined that set of values.
+
+Once a factor has been introduced into the value system, once it has
+modified the value-scales, we may treat it by the methods of static
+price theory. The analysis of the factors controlling the value-scales
+is the problem of value theory. And here is, indeed, the central problem
+of the "theory of prosperity." What are the causes controlling the
+_mutations_ of values? What factors cause values to rise, intensifying
+economic activity, stimulating trade, spreading prosperity? What brings
+about the crash in economic values (and consequently in prices), in
+panics and crises? Why the low values of the period of depression,
+giving slight stimulus to industry and trade, leaving economic life
+lethargic, inert? Increasingly it is recognized that the problems are
+problems of values and prices. It is no part of my plan to give answers
+in specific terms to these questions. That were the task of a large
+book! And very much of it has already been done. It is my purpose here,
+simply, to show that price theory, as developed on the basis of static
+notions, may be extended, and has in considerable measure been extended,
+to cover these problems, and that for the same reason that price theory
+is unable to give really fundamental answers to them, often, it is
+likewise unable to give fundamental answers to the value problem
+anywhere--that the phenomena of value are of the same stuff and
+substance as the phenomena treated by "dynamics" and "the theory of
+prosperity," and that static theory has been busied chiefly with a
+limited portion of the field only because the problems were easier
+there. Much has been made, especially in such a book as W. C. Mitchell's
+_Business Cycles_, of technological factors, and of factors in the
+psychology of the business man and of the laborer in the ups and downs
+of business, and particularly of certain elements of scarcity or
+overabundance of productive resources at critical parts of the economic
+system, which raise values and prices unduly at certain points,
+compelling radical readjustments of values and prices elsewhere.
+Virtually all of these considerations will fit into the scheme here
+outlined. They work _through_ modifications of the system of values and
+prices. H. L. Moore's recent _Economic Cycles_ lays heavy emphasis on
+physiographic factors, particularly variations in rainfall. But these,
+too, act on the economic situation through affecting the quantities of
+objects of value, and so through modification of the marginal values of
+goods. The psychological theory of economic value by no means excludes
+any amount of influence one can find in physiographic or technological
+factors.
+
+One of the most important factors in the minds of many writers who would
+treat business cycles, and a factor to which virtually all writers give
+attention, is the waxing and waning of business confidence, and of the
+volume of credit. I have given an extended analysis of the psychology of
+confidence, and of the psychological nature of credit, in my chapters on
+that topic. It is enough to say here that we have in credit phenomena
+things which are of the very stuff of economic values in general.
+Beliefs and hopes are factors in economic values, and values wax and
+wane with them. There is little indeed in the psychological and
+institutional aspects of the theory of prosperity which an adequate
+theory of value would not contain.
+
+The theory of _prices_, as an abstract formula of description, is of
+primary interest to the scientist, who has nothing to do with the
+manipulation of concrete values, and who has no interests at stake in
+the behavior of particular values at a particular time. His purposes are
+ultimately practical, no doubt, but the practical ends he has in view
+are, after all, only to lay down general rules of public policy, of a
+high degree of generality, and he consequently may abstract from a great
+deal of the concrete causal process. The theory of _value_, in its
+concrete fulness, is the special interest of the active business man,
+and especially of the business man who wishes, not merely to _adapt
+himself_ to changes in values, but also in part, to _control_ and
+_manipulate_ those values. _He_ must study every factor which does, in
+fact, bring about changes in the value system. We do not find the
+market-letter of a brokerage house, or the calculations of a captain of
+industry, or trust promoter, troubling themselves about marginal
+utilities or labor-pains! Notions of supply and demand, and the
+relations of the prevailing interest rate to the capital values of
+securities, they do employ. Notions of money-costs of production they
+make use of. But they also give very close attention to questions of
+governmental policy, to court decisions, to movements in the field of
+labor organization, to money-market phenomena, and particularly to gold
+movements and the state of the exchanges, to political campaigns, to the
+strength of the prohibition movement, to changing fashions and modes,
+and, above all, to the general _tone_, the _consensus_, so far as it is
+ascertainable, as to whether business is good or bad, whether men are
+buoyant or depressed, to the ups and downs of business confidence. They
+pay marked attention to the opinions expressed by certain men, great
+bankers or industrial leaders, not merely because they think these men
+good judges, but also, and in part primarily, because these men are
+centres of power, "radiant points of social control," whose opinions
+make the opinions of others, and whose statements that times are good
+tend to make them good, and that times are bad tend to make them bad.
+For static theory, nothing is more contemptible than the view which
+"demagogues" often express in Congress that great men in Wall Street
+make and unmake prosperity, bring about and check panics. For static
+theory, the only way that big men can lower prices is by selling, and
+the only way they can raise prices is by buying.[591] Their power to
+raise and lower prices is thus limited by the amount of their wealth
+which they are willing to employ in this way. As it is not likely to be
+profitable to be a bull when the general condition of the "fundamentals"
+calls for falling prices, and as bear operations, contrary to the
+fundamentals, are likewise usually costly, the inference would be that
+the big men will not, even if they could, alter the course of the
+market. Their wealth is, after all, not so tremendous, as compared with
+the aggregate wealth of the rest of the community. But the market takes
+the big men more seriously! When they are selling heavily, other men are
+often _afraid_ to buy, such is their prestige. When they give out
+opinions, these opinions _become_ the opinions of a host of others,
+almost automatically. When Morgan stepped into the breach in the Panic
+of 1907 with $25,000,000, it was quite as much the fact that _Morgan_
+had acted, as it was the millions themselves, which relieved the
+situation. Indeed, it was in no small degree the prestige of Morgan
+which relieved the _disorganization_, which restored the discipline, and
+made it possible for the elements in the market to work in harmony and
+coöperation again. Society is a functional unity, and the "tone of
+business," the ups and downs of prosperity, depend in large measure
+indeed on the degree to which the lines of communication between the
+different parts are kept open, on the question of whether each part does
+its expected task at the right time and in the right way, on the
+all-together-functioning, the _integration_, of the elements. These are
+phases of the matter from which static theory abstracts. They are
+organic problems, not mechanistic problems. Of course, mechanisms get
+out of order too. But tightening a bolt is a very different thing from
+restoring confidence and discipline to a market!
+
+Those who wish to control values have their own technology. There
+is a technology of industry, a mechanical technology, running in
+terms of pistons and levers and soil-fertility-equivalents, and
+butter-fat-content, and ton-miles, which is governed by the values.
+But there is also a technology of _controlling_ values which involves
+advertising, making sentiment, keeping up social discipline, effecting
+the equilibration of values by exchange, keeping "interstitial"
+adjustments smooth, which involves a different kind of activity,
+thought, and ability, and which employs different instrumentalities. Its
+problems are problems of human nature and social relationships, its laws
+are psychological laws, particularly the laws of suggestion, imitation,
+and the like, its tools are the newspaper, the sign-board, the whispered
+word, the cigar and the dinner with wine, sound logic, money and credit
+instruments, the prestiges of men and institutions. For men whose work
+lies in controlling and making values, rather than in making passive
+technical adjustments to existing values, the theory of value, as I have
+defined it, is of supreme importance.
+
+This, I may say for the critic who may consider the social value theory
+a highly speculative and theoretical notion, does not mean that the
+active business man or the advertising writer, has formulated the social
+value theory in terms of a social mind, conceived of, in the light of
+modern functional psychology, as a functional unity of individual minds!
+The advertising writer is a student of modern psychology, and reads
+books on the psychology of advertising, which discuss the psychology of
+suggestion, and the like. But long before such books were written for
+him, he studied the phenomena involved in his own way. It is not his
+business to construct a theoretical economics! It is his business to
+make a market for his wares. He is interested in the scientific theories
+of modern social psychology only in so far as they help him in that
+task. He has no occasion to construct a vast conspectus, which shall
+summarize the whole economic situation, in its social setting. But my
+point is, simply, that the kind of phenomena which he does study are
+indicated and stressed and brought into a system in the theory of social
+value which I have tried to elaborate. As his purposes are different
+from those of the economist, his method of approach, and his range of
+investigation, will necessarily be different.
+
+The notion of dynamics has been in a way connected with the idea of
+evolution, of historical process in time, while the notion of statics
+has been essentially connected with the notion of a cross-section, a
+stage, an equilibrium of contemporary forces. How, then, bring the two
+together? Of course, we may conceive the evolutionary process itself as
+a series of stages, and the mind does tend almost inevitably to do that.
+The fact is, of course, a perpetual flow, with unceasing change. The
+mind grasps such a notion with difficulty, if at all. Logic is
+mechanical and mathematical, and mathematics and mechanics are
+static.[592] But further, we may in large measure bring the historical
+considerations into a cross-section picture, when it is a value system
+that is involved. _Past_ facts exert their influence through _present_
+values; and _future_ facts, which may be expected to modify future
+values, come into the present equilibrium as discounted _present_
+worths.
+
+When we view the situation realistically, moreover,--which means, when
+we view it as a living organic, psychological process,--our
+cross-section does not need to be narrowed to a moment of time. We may
+see the values not yet in stable equilibrium, but in process of
+equilibration, with marginal values and prices fluctuating, tending
+toward a static goal, but hindered by various cross-currents, of
+"friction," of uncertainty, of momentary values which rest on beliefs
+regarding the process of transition itself--as when a "bull" on the
+war-stocks turns bear temporarily, because he thinks that prices may
+fall before recovering themselves, and going higher. We may see
+obstacles in the way of readjustment whose importance is itself subject
+to static measure--labor temporarily out of work, and labor-time lost,
+at so much per day; uncertainties which give rise to speculation, which
+calls for the employment of extra banking credit, at such and such per
+cent; capital-instruments which have to be "scrapped," representing the
+loss of so many dollars. We may see the process of building up new
+trade connections, at such and such a cost, to replace others which
+formerly functioned, but which no longer serve, which were once worth so
+much, and which now are valueless. Watching the realistic process of
+transition, through a period of time, we may still apply our static
+yardstick to many of its features.
+
+Above all, do we get in this connection a realization of the fact that
+the "immaterial capital" of which Veblen speaks is true social
+wealth.[593] Whatever is necessary for the carrying on of economic life,
+whatever, if destroyed, must be replaced, before the economic process
+can go on, and will be replaced by the expenditure of labor and thought
+and money, is capital. The sales-force is as truly a part of the
+labor-force of a corporation as are the mechanics. The trade connections
+which the sales-force has built up is as truly a part of the capital of
+the business as the machines which the mechanics have made. The static
+theory which abstracts from this easily leads to dangerous conclusions.
+Removing a tariff may well, _after the transition is completed_, give a
+greater productive efficiency to a country. But what of the cost of
+transition? May not the values destroyed, and to be recreated, in the
+form of trade connections, social organization, accomplished
+adjustments, and the like, be greater than the new values to be gained
+by better adaptation of industry to the physical resources or the
+capacities of the labor supply, of the country? In large measure, this
+question, in a given case, is susceptible to a quantitative answer. The
+statesman who reckons only the gains which the final static adjustment
+will bring, and neglects the costs of reaching it, costs not alone in
+"scrapped" machines, but also, in "scrapped" social organization, has
+missed a substantial part of his problem.
+
+The theory of prosperity, and the theory of value, are largely concerned
+with just this system of social control, by means of which value scales
+are altered, and by means of which altered values are brought into a new
+equilibrium. It is a complicated fabric of psychological relationships,
+partly institutionalized, partly non-institutional. The institutions--as
+banks, big corporations, speculative exchanges, and the like, are the
+nuclei, about which centre much that is temporary, shifting, and
+flexible. Given time, the whole system is highly flexible--it is
+organic, and not mechanical.
+
+The serious injury of this system in a country may well be a greater
+disaster than the destruction of physical items. Let unscrupulous
+men--or misguided men--bring about a legal repudiation of debts, and the
+disaster may be greater than the destruction of a city by an earthquake.
+That creditors have been robbed is a minor matter, but that credit has
+been shaken, so that men will fear to lend again or to sell except for
+cash, may well mean industrial paralysis.
+
+Considerations like these enable us, in substantial degree, to reduce
+"transitional" considerations to common terms with "normal"
+considerations. We can apply the static measure to the "transitional
+considerations," and we find the values which come into equilibrium in
+the "normal" period to be generically like those whose variations
+interest us in the period of transition. Indeed, the "normal
+equilibrium," if it were ever reached, would also contain these
+intangible capital items, though many of them would be much reduced,
+since the work that they have to do would be largely gone, if the normal
+equilibrium were persistent.
+
+It does not follow from the foregoing that many of the elements in
+"modern business capital" are not, as Veblen's analysis suggests,
+sinister and anti-social. To say that their values are true social
+economic values, generically the same as the values of wheat or corn or
+whiskey or opium or Sanatogen or milk or tickets to burlesque shows, or
+silver sacramental sets, or Ford automobiles, is not necessarily to give
+them a good moral character! Some of these intangible capital goods are
+thoroughly anti-social, and should be destroyed. This is particularly
+true of monopoly power, and of popular brands whose value rests in
+popular delusion. But even here, caution is needed. Is it socially wise
+to destroy a wine cellar, containing an hundred thousand dollars worth
+of fine wines, even assuming that Demon Rum is as black as he is
+painted, and that Veuve Cliquot is his favorite daughter? Will not the
+economic values which have been destroyed in this moral fervor be
+recreated? And will not this tend to divert labor and capital from the
+creation of a corresponding amount of more wholesome economic goods?
+Might it not be wiser from the standpoint of the temperance movement
+itself, to sell the wine cellar--at private sale, of course!--and use
+the proceeds in the campaign fund of the prohibition party? Of course,
+there is more still to the story. The destruction of the wine cellar may
+be done so dramatically, and may be so well advertised, that it will
+arrest public attention, and tend to create new social values, of a
+moral and legal sort, which will prevent the recreating of that wine, by
+changing the direction of demand, and by lessening the sources of
+supply. Similarly with trade connections, and other intangible capital
+items. If destroying one means merely that labor and capital will be
+employed in making others no better, the social gain is very doubtful.
+And some sort of system of control of interstitial adjustment, of
+overcoming friction, etc., there must be.
+
+I wish to contrast the view I have been here presenting with that
+developed by Schumpeter, in his _Theorie der Wirtschaftlichen
+Entwicklung_. In Schumpeter's view, the division between statics and
+dynamics is much more than methodological. The phenomena of statics and
+dynamics are different phenomena. Statics is concerned with the
+influence of individual utility-scales, or utility-scales and psychic
+cost-scales, hedonistic phenomena. Dynamics is concerned with the
+influence of "_energisch_" (as distinguished from "_hedonisch_")
+factors. (_Loc. cit._, 128.) Most men are moved by hedonic
+considerations. Their economic activity tends toward the equilibrium
+described in static theory. Seeking to maximize satisfactions, and to
+minimize pains, they tend to get into the "best-possible" situation
+("best-possible" under the "given conditions") and stay there. The
+"energetic" type of men, moved by motives like love of activity for its
+own sake, love of creative activity, love of distinction, love of
+victory over others, love of the game, etc., undertake activities which
+tend to alter the "given conditions" themselves, to alter the structure
+and technique of economic society, to introduce new ways of doing
+things, and so to break the static equilibrium. This last type of men is
+small in number, but tremendously important. Schumpeter's theory of
+value rests solely in an analysis of the hedonic factors mentioned,
+conceived of as individual psychological magnitudes. I have discussed
+his theory of value in the chapter on "Marginal Utility" in this book,
+and would refer to that discussion here. He makes virtually no use of
+the value concept there developed in explaining the causation of dynamic
+change, but instead, as I have pointed out in that chapter, invents new
+concepts, which do the work of the value concept, which he calls
+"_Kaufkraft_," "_Kapital_," and "_Kredit_," which do not rest on
+marginal utility, but rather on the activities of certain centres of
+economic power, particularly of banks.[594] His picture of economic
+evolution is that of a conflict between these static and dynamic forces,
+between "utility-curves" and the psychological factors of the
+"energetic" type, the former represented in a set of static
+price-ratios, the latter in a set of dynamic "powers," conceived of, not
+as sums of money (even though expressed in money-terms), but as
+"abstract power," which grows, not merely out of the individual
+psychologies of the entrepreneurs, but also, and primarily, out of the
+social influence centered in the banker. This power which the banker
+to-day supplies was in earlier periods supplied by the political power
+of the despot, and is distinctly a matter of social organization, and
+social control, an over-individual, social phenomenon, analogous to the
+"social value" which I have sought to put behind all prices, whether
+"static" or "dynamic." The dynamic man needs "power," either political
+or financial, to "force" the "static" men out of their accustomed ways
+of activity. They fear and resist him. He must coerce them. The contrast
+is thus sharply made between abstract price-ratios, resting on
+individual feeling-scales, and quantitative "powers," measured in money,
+resting on a social basis. Between the factors underlying static prices,
+and those underlying dynamic prices there is, thus, nothing in common.
+Statics and dynamics are concerned with fundamentally different
+phenomena.[595]
+
+If my criticisms of the utility theory of value are sound, and if what
+has gone before in this chapter holds good, we must restate Schumpeter's
+contrast.[596] The static tendencies do not rest on any peculiarities of
+the psychological "stuff" from which static values are derived. They
+rest rather in the universal tendencies of all values, whatever the
+psychological factors behind them, to come to an equilibrium. The reason
+that values, whether they be the values of new and novel things, or the
+values of old and familiar things, tend to come to an equilibrium is
+that gains come from equilibrating them. When some values are too low,
+and some are too high, the opportunities for speculative gain are
+evident. Arbitraging transactions, as between different places,
+time-speculation, transferring labor and capital from one enterprise to
+another, increasing the supplies of some goods and reducing the supplies
+of other, changing land from wheat to corn, etc., etc.,--all these
+things are sources of gain, and they will be done, whatever the origin
+of the values involved. The new, dynamic enterprise, before it becomes
+actualized in concrete machinery, factory building, etc., and long
+before its income is actualized in money-receipts from the goods it is
+destined to produce, becomes an _object of value_. The value is a
+_future_ value. But it comes into the present as a discounted present
+worth. As such it functions like any other value, tending to attract in
+its own direction the land, labor and capital necessary for its
+realization. It does not differ in its functioning from the present
+worths of future goods of familiar sorts.[597] It tends, after a process
+of reëquilibration--which Schumpeter, with his theory of crises, has
+done much to elucidate--to come into equilibrium with the older,
+"static" values, becomes itself a static value. Indeed, from its
+inception, it comes under the static, money measure. It enters at once
+into the scheme of static values and prices, even though it causes
+readjustment there.
+
+The preëxisting static values are themselves to be explained, not as
+growing out of individual feeling-scales, but as growing out of a
+complex social psychology, in which some men and groups of men have
+vastly greater social "power" than others. The preëxisting static values
+are of the same stuff as the dynamic values. But this has already been
+made clear.
+
+ * * * * *
+
+The possibility of presenting an equilibrium picture of social forces,
+to the extent that those social forces submit themselves to the money
+measure, the possibility of applying the methods of static price-theory
+wherever pecuniary concepts may be carried, does not exhaust the
+possibilities of the static notion, at least as a schematic device.
+There are many social values, particularly in the legal and moral
+sphere, which do not readily come under the money measure, and where
+such measurements as may be made in money terms seem obviously
+inadequate. Of these values, as of all values, however, the law of
+equilibration holds. _All_ tend to come into adjustment of a sort that
+will allow the maximum of values to be realized. Something of the
+exactness of the static method has recently appeared in a decision by a
+famous jurist, confronted with the fact of the conflict of two legal
+principles. Most judges would go on the legal theory that there can be
+no conflict in the laws of a single sovereign. Of course, we have
+courses in "Conflicts of Laws" in our law schools, but the subjects
+treated in such courses relate to conflicts, say, between the laws of
+New York and the laws of New Jersey. When a judge is presented with a
+case of conflict between two laws of New York, he will commonly feel it
+to be his duty to "remove" the conflict, by making distinctions, till
+the conflict is whittled away. Not a little bad law has thus originated!
+The law is "absolute." It knows no exceptions. It does not obey the law
+of diminishing significance. Of course, "_de minimis non curat lex_,"
+but that means, not that there is a delicate margin, where the law
+ceases to apply, but merely that the law disregards trifles too
+insignificant to attract its attention at all. They are, in mathematical
+phrase, "infinitesimals of the second order," discontinuous with the
+interests of magnitude great enough to attract the attention of the law.
+There is little room in such a legal theory for notions of the sort
+discussed in this chapter to find place! But a different theory of the
+law is implied, and partly expressed, in a recent decision by Mr.
+Justice Holmes: "All rights tend to declare themselves absolute to their
+logical extreme. Yet all in fact are limited by the neighborhood of
+principles of policy which are other than those on which the particular
+right is founded, and which become strong enough to hold their own when
+a certain point is reached. The limits set to property by other public
+interests present themselves as a branch of what is called the police
+power of the State. The boundary at which the conflicting interests
+balance cannot be determined by any general formula in advance, but
+points along the line, or helping to establish it, are fixed by
+decisions that this or that concrete case falls on the nearer or farther
+side.... It constantly is necessary to reconcile and adjust different
+constitutional principles, each of which would be entitled to possession
+of the disputed ground but for the presence of the others." (Hudson
+County Water Co. vs. McCarter, 209 U. S., 349, 1908.) Here we have a
+scheme very like that of static economic theory! "The boundary at which
+the conflicting interests balance"--the _margin_ where the curves of
+diminishing value of the two legal principles intersect! A plurality of
+legal values, in marginal equilibrium! Lacking a tool of thought so
+convenient as money has proved for the economist, the jurist finds
+trouble in making his margins precise. He is dealing with quantities for
+which he has found no common measure. There is no "standard or common
+measure" of legal values. Hence, most lawyers content themselves with
+qualitative reasoning, seeking to avoid the necessity of quantitative
+weighing and comparison of the factors in their problem by making
+distinctions of _kind_. Mr. Justice Holmes recognizes the necessity and
+the existence of legal _quantities_, and of making quantitative
+distinctions, _i. e._, distinctions of _degree_. He sees a generic
+essence common to the whole body of laws, such that marginal equilibria
+are possible and actual.
+
+So far we have a static system of laws. But the same writer, in a later
+decision, has said: "And yet again the extent to which legislation may
+modify and restrict the uses of property consistently with the
+constitution is not a question for pure abstract theory alone. Tradition
+and the habits of a community count for more than logic." (Laurel Hill
+Cemetery _vs._ San Francisco, 216 U. S. 358, 1910.) As these traditions
+and habits of a community may change, so may the legal values change,
+and new equilibria need to be reached in a process of readjustment.
+
+But further, in this view, and in the view of the best students of
+jurisprudence in general, the legal values are not an insulated,
+self-contained system. In the sentence last quoted, Justice Holmes sees
+their root in a total social situation. And it is easy to show that
+economic values, in particular, are part of that social situation out of
+which legal values derive their power. Legal values enter into economic
+values. Economic values enter into legal values. And between legal
+values and economic values are marginal equilibria. There is a vast
+social system of values, legal, economic, moral, religious, etc., in
+constant dynamic change, but tending also to static equilibrium. Changes
+at any part of the system compel readjustments throughout. The process
+of equilibration is often slow, but slow or rapid, smooth or violent, it
+is in constant process. For the further elaboration of notions like
+these, I refer again to my _Social Value_. Here, as in the narrower
+economic sphere, we have men and institutions whose chief activity is
+concerned with the manipulation and control of these values, with
+effecting the readjustments, and bringing about the reëquilibrations.
+They have their appropriate tools and technology. Money and credit are
+merely part of a much wider system concerned with social control and
+social adjustment!
+
+ * * * * *
+
+To summarize: The problem of this chapter has been to harmonize statics
+and dynamics, the "theory of wealth" and the "theory of prosperity,"
+"normal" and "transitional," and similar notions, commonly held to
+belong to different spheres, and to be incapable of reduction to common
+terms. A number of such contrasts have been passed in review, and
+numerous illustrations of the various types of contrast have been given.
+It is the contention of the present chapter that the most fundamental of
+these contrasts, and the one which gathers up the meaning of most of
+them, is that between the theory of value, and the theory of price. The
+theory of value is dynamic, is concerned with the phenomena of
+prosperity and depression, is realistic enough to deal with transitions
+and readjustments; the theory of price is static, and rests in the
+notion of accomplished equilibrium, abstracting from the problems of
+friction and transition. The reconciliation comes from two angles: on
+the one hand we have generalized price theory, showing that in large
+measure the phenomena with which value theory, theory of prosperity,
+dynamics, deal come under the money measure, are made "static" by
+"discounting," and by the application of accounting principles; that
+this tends to be more and more true as knowledge grows more accurate;
+that "statics" means especially quantitative, as opposed to merely
+qualitative, thinking. We have shown further that the static schema is
+applicable even where the money measure is inapplicable, and even beyond
+the economic sphere, as illustrated by a recent decision of Justice
+Holmes. The other angle of approach was to universalize value theory,
+dynamics, theory of prosperity, by showing that all prices, whether
+"static" or "dynamic" have the same fundamental sort of explanation,
+that value is always a matter of social psychology, and never a matter
+of mere individual psychical magnitudes, or of "material fact." This is
+not to deny that physical facts have their bearing in the scheme: (a)
+they are among the objects of value, even though not the only objects,
+and (b) material facts, technological, physiographic, and biological,
+are the basis on which human nature rests, out of which it has
+developed, even though human culture including social values has
+increasingly emancipated itself from immediate dependence on them, and
+has acquired a partially independent movement of its own. The effort was
+not made to reduce mind and matter to common terms, but the case was
+rested in an irreducible dualism, and the causal influence of
+non-mental factors on the value-scales themselves cannot be measured by
+the static scheme. The static scheme, assuming the value-scales, gives a
+precise answer as to the influence of the quantities of physical objects
+on the marginal values. The significant fact about the values with which
+dynamics, theory of prosperity, etc., deal is that they are the values
+of immaterial social relationships and institutions, in large part,
+which are concerned with the problems of social adjustment and control,
+with affecting equilibria in the economic sphere, with overcoming the
+friction and effecting the transitions from which static theory
+abstracts. This is a phase of production quite as important as the
+physical activities of laborers or machines. It has its own technology,
+appropriate to its problems. In particular, money and credit are part of
+its tools. Since its problems are to control men's minds, it uses
+psychological forces. Where the mechanic uses a storage battery, charged
+with electricity, to move material things, the technologist of economic
+readjustment employs a dollar, charged with social value, which is power
+over the action of men. It is as a bearer of value, in form adapted to
+the problem, that is in highly saleable form, that the dollar functions.
+It is the psychological significance of the dollar, and not its physical
+qualities _per se_, that enables it to do its work. The physical weight
+in gold, which itself is an object of social value, is commonly the
+immediate basis of the value of the dollar to-day, but money may get its
+primary value from other sources than valuable bullion. Given this
+primary value, the dollar may get an enhancement in that value from the
+services which it performs in the social technology of adjustment.
+
+ * * * * *
+
+
+
+
+INDEX
+
+
+A
+
+ Aborn, W. H., 252, n.
+
+ Absolute _vs._ relative conceptions of value.
+ See VALUE, ABSOLUTE _vs._ RELATIVE.
+
+ Abstinence, 67ff., 484-85.
+ See COST OF PRODUCTION, INTEREST.
+
+ Abstraction, legitimate and illegitimate, 189-90, 553-54.
+
+ Acceptance house, 497, 542.
+
+ Acquisition _vs._ production, 482.
+
+ Adams, Brooks, 219.
+
+ Adams, T. S., 13.
+
+ "Adaptation," 573, n.
+
+ Advertising, 257-58, 367, 565.
+
+ Agger, E. E., 140, n.
+
+ Agio, 148-50, 390, 442-50.
+ See PREMIUM.
+
+ Agricultural credit, 262, 318-19, 430, 492, 504-05, 528-29.
+
+ "All other deposits," see "DEPOSITS" in KINLEY'S FIGURES.
+
+ _Americas, The_, 540.
+
+ Analytical _vs._ historical theories, 397-400.
+ See also HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS, STATICS,
+ DYNAMICS, ETC.
+
+ Andrew, A. P., 170, n., 179, n., 537.
+
+ Animism, social explanation of, 16-17.
+
+ Ansiaux, M., 4, n.
+
+ "Appreciation and interest," 76ff., 333, n.
+ See INTEREST.
+
+ Aquinas, Thomas, 30.
+
+ Arbitrage, 268, 585.
+
+ Aristotle, 118, n.
+
+ Ashley, W. J., 181, n.
+
+ Assets of banks, 285, 489-97, Ch. XXIV;
+ bonds in, 250, 488, 498, 506, 508, 523;
+ stocks in, 491-93, 498, 506, 523;
+ stock exchange items chief factor in, Ch. XXIV, especially 523ff.
+ See Loans, "COMMERCIAL PAPER," COLLATERAL LOANS, RESERVES, ETC.
+
+ Atwood, A. W., 173, n.
+
+ Auspitz and Lieben, 91, n.
+
+ Austrian School, 56, 70, 94, 300, 486, 562, n.
+
+ Austria, paper money in, 140, 434, n.;
+ foreign exchange policy of, 181-82, 434, n., 444, 530;
+ money rates and interest rates in, 429.
+
+ Averages, meaning of, 178, 292, 312-13, 315.
+ See CAUSATION.
+ Weighted. See WEIGHTING.
+
+
+B
+
+ Babson and May, 501, n.
+
+ Backwardation, 146.
+
+ Bagehot, W., 18, 37, 540, n., 580.
+
+ Baker, G. F., 518, 519, n.
+
+ Balances, required by banks, 173, 377.
+
+ Balance of trade, 320, 551.
+
+ Baldwin, J. M., 18, 37.
+
+ Balkan Crisis, hoarding of bank-notes in Austria in, 140, n.
+
+ Banks. See ENGLAND, BANK OF, STATE BANKS, PRIVATE BANKS, ETC.
+ As book-keepers for business, 365;
+ correspondent relations of, 355, n.;
+ bank capital, 489, 491, 524;
+ bank-credit, Ch. IX, 261, 484ff., 489-97, Ch. XXIV;
+ elasticity of, 129, 183, 216, 281-88, 299, 320;
+ relation of, to trade, 260ff., 281.
+ See Trade. Functions of, 484-89, 492-95.
+ See CREDIT, FUNCTIONS OF.
+ Technique of, 489-97, Ch. XXIV;
+ bank-drafts, 355-58, 367;
+ on New York and other centers, 356-58;
+ bank-notes, 129, 139, n., 289, 322-23, 447, 448, 472, 473, 487, 495,
+ 496, 511, 530, 539;
+ as "capital," 261, 484-88;
+ elasticity of, 129, 298, 448.
+
+ Banking School, 283ff., 395.
+ See CURRENCY SCHOOL.
+
+ Banker as centre of power, 32, 466, 484ff., 577, 583.
+
+ Banker's psychology, 141, 304.
+
+ Barbour, David, 154, 218, n.
+
+ Barnett, G. E., 347, n.
+
+ Barter, 99, 100, 130, 133, Ch. XI, 220, 226, 265, 369, 394, 404-07,
+ 419-21, 493, 536;
+ highly important in modern life, Ch. XI, 394;
+ made easier by money as a measure of values, 201, 394, 421;
+ intellectual difficulties of, 418-20;
+ physical difficulties of, 423.
+
+ Bastiat, F., 552.
+
+ Bears. See BULLS AND BEARS.
+
+ "Bearer of options" function of money, 148, 201, 314, n., 418, 424-32,
+ 436, 442, 451, 495, 536, 543;
+ distinguished from store of value, 425;
+ dynamic function of money _par excellence_, 426, 495, 536;
+ reserve function a special case of, 426, n., 536ff.
+
+ Belgium, National Bank of, 182.
+
+ Belief, as element in values, 40, 136, 462-68, 486ff., 574-75;
+ relation of, to credit, 262, n., 462-68, 486ff., 581.
+ See CREDIT.
+
+ Bendixen, F., 435, n.
+
+ Bergson, H., 579, n.
+
+ Bilgram, H., 3, n.
+
+ Bills of exchange, 167, 181-82, 201, 254-55, 288-90, 369, 444, 490-91,
+ 530;
+ speculation in, 254-55, 514, 515, n.;
+ as reserves, 181-82, 444, 530.
+ See also FOREIGN BILLS, AND GOLD MOVEMENTS, INTERNATIONAL.
+
+ Bimetallism, 219, n., 221;
+ not logically related to quantity theory, 219, n.
+
+ Biological factors in social life, 571-73, 590.
+
+ Böhm-Bawerk, E. von, 9, n., 44, 48, 51, 70, 78, n., 91, 94, 96, n.,
+ 113, n., 146, n., 301, n., 303, n., 437, 563, n.
+
+ Bonds, as bearers of options, 147-48, 425, 428;
+ listed, sold "over the counter," 250, 514;
+ bonds sold on Stock Exchange, not "cleared," 370;
+ held by banks.
+ See ASSETS OF BANKS.
+ "One house bond," 147.
+
+ Book-credit See CREDIT.
+
+ "Borrowing and carrying," See STOCKS.
+
+ Bosanquet, B., 18, n.
+
+ Boston, 289, n., 354, 368, 429 n., 503.
+
+ Brassage, 450.
+
+ Brokers, 168, 199, 235, 287, n., 367-68, 371, 372, 374-79, 409,
+ 496-97, 429, n., 521, n., 531, 575.
+
+ Brown, H. G., 301, n.
+
+ Business, speculation in, 252ff.
+
+ "Business capital" vs. capital-goods, 482, 484ff., 560-61, 569,
+ 580-82.
+ See also "GOOD WILL," STATICS, DYNAMICS, FRICTION, ETC.
+
+ Business confidence, 40-41, 97, 118, 185, 210-11, 214, 463-68, 530-31,
+ 536, 574-75, 577.
+
+ Business cycle, 187-89, 254, 548-49, 555, 573-75.
+
+ "Business distrust," 426, 427, n.
+
+ Business man _vs._ economist, as value theorist, 573-78.
+
+ Bulls and bears, 145, 371-73, 406, 471-72, 522, 576, 579.
+
+ "Buying price" _vs._ "selling price," 402-04, 406-07, 476.
+
+
+C
+
+ Cairnes, J. E., 47, 50, 55, n., 57-59, 62, 64, 67-69, 220, n., 428, n.
+
+ Call loans, 73, n., 375-78, 382, 425, 428ff.;
+ as "bearers of options," 425, 428ff.
+
+ Call rates, why low, 428ff.
+ See MONEY RATES, INTEREST.
+
+ Canada, 216, 284, n., 448, 450.
+
+ Cannon, J. G., 347, n.
+
+ Capital, Ch. IV, 98-99, 220, 222-23, 408, 410, 425, 429, 461, 484ff.,
+ 526, 551, n, 560-62, 564-66, 569-70, 580-82;
+ circulating _vs._ fixed, 526.
+
+ Capital goods. See GOODS, INSTRUMENTAL.
+
+ Capitalist, 264.
+
+ Capitalization theory, Ch. IV, 260, 297, 300ff., 316, 318, 389,
+ 416, n., 436-42, 459-60, 494, 562-64, 575;
+ assumes "banker's psychology," 305-06;
+ assumes fixed absolute value of money, 76ff., 313-14, 389, 438;
+ limitations of, 305-06,316-17, 481, n., 562, n.;
+ applied to value of money, Ch. IV, 111, 424, 436-42, 456;
+ conflicts with quantity theory, 300ff., 310-11, 389.
+ See also INTEREST, CAPITAL, RENT.
+
+ Capital value, Ch. IV, 149, 224, 318-19, 402, 424, 436ff., 452, 459.
+
+ Carey, H. C., 106.
+
+ Carlile, W. W., 37, n., 397, 400, 407, 411, n.
+
+ Carver, T. N., 4, n., 419, n., 453, n., 573, n.
+
+ Causation, 142-43, 190, 204, 224, 279, 292, 312, 315, 336, 403,
+ 433, n., 437, 438, 454, 548;
+ exhibited by _change_, 190, 454-55.
+
+ Causal theory of value, 14ff., 90ff., 96, 114, n., 163, 165-66,
+ 176-77, 186, 192, 204, 296, Ch. XV, 310, 336, 400-01,
+ 433, n, 437-38.
+
+ Cause, a definition as, 143, 400-01.
+
+ Checks, 167, 168, 184, 281, 339ff., 354ff., 364-81, 499;
+ "accommodation checks," 243;
+ certified, 200, 322, 349, 370, 376;
+ cashier's, 349;
+ collection of, 354ff.;
+ proportions of checks and money in payments, 174, 338, 447, 449,
+ 463.
+
+ Checking accounts, 173-74.
+ See DEPOSITS.
+
+ Chen-Huang-Chang, 407, n.
+
+ Chicago, 246, 259, 289, n., 354, 379-80, 503, 542;
+ chief centre for check collections, 354;
+ Board of Trade, 252-52, 268, 327, 379-80, 503, 542;
+ Board of Trade clearing house, 369, 379-80.
+
+ Circular reasoning in value theory, 15, 88, 89, 92, 100-01, 105, 112,
+ 113, 115, 117, 132, 135, 143, 279, 438, 452.
+
+ Clark, J. B., 12-13, 48, 96, n., 264, n., 439, n., 440, n., 554-55.
+
+ Clark's Law, 439.
+
+ Clark, J. M., 3, n., 11, n., 14, n., 98, n., 413, n.
+
+ Classical School, 69.
+ See COST OF PRODUCTION, CAIRNES, SENIOR, RICARDO, JAS. MILL,
+ J. S. MILL, LABOR THEORY OF VALUE, ETC.
+
+ Clearing houses in speculative exchanges.
+ See STOCK EXCHANGE.
+
+ Clearing houses, bank.
+ See CLEARINGS.
+ New York Clearing House, 346, 354;
+ New York Clearing House banks, 179, 344.
+
+ Clearings, 200, 237-41, 345-46, 378, 392;
+ as index of "ordinary trade," 240-41, 516;
+ as index of speculation, 237ff., 378, 392, 516;
+ in New York City, 237-41, 339, 341-42, 345-47, 357-59, 360, 516;
+ of New York City trust companies, 345-47;
+ outside New York City, 239-41, 339, 340, 342, 348-53, 357-59,
+ 516, n.;
+ ratio of, to "deposits," 341-42, 348-59, 516, n.;
+ ratio of, to "total transactions," 348-51, 353, 359, n.
+
+ Clow, F. R., 135, n., 144, n.
+
+ Coin, 139, n., 167, 443-50;
+ coinage, 443-50;
+ statistics of, 412, n.
+
+ Collateral loans, 461, 462, 463, 493, 494, 497, 502-06, 513, 523-26;
+ percentages of, on stocks and bonds, and on "other collateral
+ security," 502-09;
+ on "other collateral security" analyzed, 502ff.
+
+ Collection of out of town checks, 354-55.
+ See CHECKS.
+
+ Commerce. See TRADE.
+
+ Commercial banks, 357, 488, 490, 498-99, 519-20, 523-29;
+ financing commerce no longer the chief function of, Ch. XXIV,
+ esp. 523ff.
+
+ Commercial cities, outgrow manufacturing cities, 259.
+
+ "Commercial paper," 431, 457, 490, 496-97, 498-520.
+
+ _Commercial and Financial Chronicle_, 272.
+
+ Commodity theory (Metallist theory, Bullionist theory), 81, 85, 129,
+ 135, 144, 151-53, 330, 390, 391, 435, n.;
+ hypothetical case illustrating, 151-53, 327-28, 390, 421;
+ contrasted with quantity theory, 151-53.
+
+ Competitive display, relation of, to value, 410-11, 438-42, 452.
+
+ Conant, C. A., 73, n., 182, n., 323, n., 347, n., 412, n., 418, n.,
+ 428, n., 502, 510, n., 511, n., 535, n.
+
+ Conant, L. Jr., 252, n.
+
+ Concatenation of values and prices.
+ See VALUES, PRICES.
+
+ Consols, 470.
+
+ Contango, 145.
+
+ Cooley, C. H., 3, 4, n., 19, 21, n., 30, 37, 484, n.
+
+ Corporations. See STOCKS, BONDS, STOCK EXCHANGE.
+ Consolidations of, 198-258, 366-67;
+ lead to duplications of "deposits," 366-67;
+ corporation finance, 198-99, 201, n. 3, 432, 460-61, 476-77;
+ corporation securities as credit instruments, 460-61, 476-77,
+ 492-93, 527.
+
+ Correlation, coefficient of, 237, 237, n.
+
+ Cost of production, Ch. III, 193, 221, n., 257ff., 295, 300, 306-07,
+ 309, n., 389, 562, n., 565-66;
+ inapplicable to value of money, Ch. III, 389, 451;
+ relation of, to supply and demand, 50, Ch. III;
+ not related to quantity theory, 46ff.;
+ conflicts with quantity theory, 300, 306-07, 310-11, 389;
+ assumes fixed absolute value of money, Ch. III, 313-14, 389, 451;
+ "real costs," 44-45, 64ff., 96, 117, n. See LABOR THEORY OF VALUE.
+ Money costs, Ch. III, 90, 95;
+ Austrian cost theory, 56, Ch. III, 90, 95, 116, n.
+ See also SELLING COSTS.
+
+ Cotton speculation. See NEW YORK COTTON EXCHANGE, AND SPECULATION.
+
+ Credit, 42, 98-99, 130, 143-44, 166ff., Ch. IX, Ch. XIII,
+ Ch. XIV, 318, Ch. XVIII, 392-393, 395, 427, 441, 447,
+ Ch. XXIII, Ch. XXIV, 581;
+ not based on money, 326-27;
+ based on values, 326-27, 478-86, 485-86, 528-29;
+ part of general system of values, 40-41, 460, 462-68, 480, 486ff.,
+ 574-75;
+ definition of, 459-60, 472-74, 489;
+ distinguished from credit transaction, 473;
+ juridical aspects of, 395, 460-61, 468-73; relation of, to belief.
+ See BELIEF.
+ Functions of, 263-66, 391-92, 395, 407, 441, 475-78, 484ff., 511-12,
+ 523-29;
+ relation of, to money, Ch. IX, Ch. XVIII, 393, 395. See also
+ RESERVES.
+ Relation of, to trade, Ch. XIII, Ch. XIV, 391-92, 393;
+ volume of, a function of dynamic change, 474;
+ elastic. See BANK CREDIT.
+ As "capital," 261, 461, 484ff.;
+ in "equation of exchange," 166ff.;
+ book-credit, 167ff., 226, 369; time-credit, 168.
+ See LOANS, INTEREST.
+ See also BANK-CREDIT, DEPOSITS, LOANS, COLLATERAL LOANS, CALL LOANS,
+ ASSETS OF BANKS, BELIEF, BUSINESS CONFIDENCE, etc.
+
+ _Crédit Lyonnais_, 530, n.
+
+ Credit theory of paper money. See PAPER MONEY and GREENBACKS.
+
+ Crises, 213, 254, 520, 548-49, 555.
+ See PANICS, BUSINESS CYCLES, BUSINESS CONFIDENCE, THEORY OF
+ PROSPERITY.
+
+ Cross-section analysis. See HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS.
+
+ Curb, 250.
+
+ Currency School, 283ff., 395;
+ "currency theory of deposits," 283.
+
+ Curves applied to money, 451-53.
+ See MARGINAL ANALYSIS.
+
+ Custom, 36, 109, 135, 136, 183-84, 205ff., 391, 405, 562, n., 589.
+ See HABIT.
+
+
+D
+
+ Davenport, H. J., 12, n., 14, n., 21, n., 25, 65, n., 67, 78, n., 80,
+ 91, n., 94, 103, n., 113-15, n., 218, n., 314, 418, n.,
+ 419, n., 426, n., 429, n., 434, 447, n., 482, n.
+
+ Davidson, T., 18, n.
+
+ Dean, Rodney, 354, n.
+
+ Debtor Class, 139.
+
+ Debts, 433, n. ff., 472-75, 489;
+ repudiation of, 581.
+
+ DeCoppet and Doremus, 249, 370.
+
+ Definition, a, as cause for the circulation of money, 143, 400-01.
+
+ DeLaunay, L., 412, n., 415, n.
+
+ Demand. See SUPPLY AND DEMAND.
+ Increase of, 53;
+ nominal increase of, 54;
+ elasticity of, 55, 224-27, 411-13;
+ for money, in what sense used, 62;
+ elasticity of, 224-27;
+ demand curves, 51;
+ applied to gold, 451ff.;
+ social value explanation of, 42, Ch. II, 93;
+ distinguished from utility curves, 49, 52, 70, 80, 113, n.,
+ 115, n., 116.
+
+ "Demand Notes," 322, 448, n.
+
+ Deposits, 129, 143, Ch. IX, 186, 296, 344, 345-47, 453, 472, 487;
+ by one bank in another, 358, n., 349, 355, n., 357, 365, n.,
+ 367, n., 500, n., 508, 515, n., 530-32;
+ relations of, to "money in circulation," Ch. IX, 185, 294;
+ relation of, to reserves, Ch. IX, 286-87, 298-99;
+ activity of, 345-47, 512-16;
+ in Europe 262.
+ SEE GIRO-SYSTEM.
+ Deposits as "bearers of options," 425;
+ relation of, to loans, 285ff., 512;
+ relation of, to trade and prices, Ch. XIII, Ch. XIV, 287;
+ of private banks, 344;
+ deposits distinguished from "deposits," 339, n., 343-44, 512;
+ relation of, to "deposits," 512ff.
+
+ "Deposits" in Kinley's studies of payments, 230, 232-36, 242-43,
+ 338ff., 392, 512-16;
+ retail "deposits," 232, 243, 269, 338, 367, n., 368, 392, 513;
+ wholesale "deposits," 232, 243, 338, 392, 513;
+ "all other deposits," 232, 235-37, 243, 338, 514;
+ relation of, to trade, 230, 243-45, 248, 339-40.
+ See OVERCOUNTING AND UNDERCOUNTING.
+ New York City, 233, 234, 242, 246, 340ff.;
+ country, 246;
+ in Pittsburg, 245-46;
+ check "deposits," volume of, 339, 360-62, 392.
+
+ _Deutsche Bank_, 530, n.
+
+ Dewey, John, 17, n., 22, 579, n.
+
+ Dibblee, G. B., 259-60.
+
+ Differential principle, and theory of rent, 430-41;
+ applied to money, 439-41, 529.
+
+ Director of the Mint, statistics of gold consumption, 413, n.
+
+ Discount. See TIME-DISCOUNT and CAPITALIZATION THEORY;
+ rate of, see INTEREST;
+ rate of, _vs._ money rates, see INTEREST;
+ on Greenbacks, see GREENBACKS, PREMIUM, AGIO.
+
+ "Discounting," 298, 597.
+
+ Distribution of wealth, 15, 31, 33, 37, 38, 97, 102-03, 246, 247, n.,
+ 413-16, 465-67.
+ See also INTEREST, CAPITAL, CAPITALIZATION THEORY, RENT, IMPUTATION
+ THEORY.
+
+ Division of labor in banking, America and Germany contrasted, 527;
+ extent of in England, 530, 540-41, 542.
+
+ Dodo-Bones, 82, CL VII, 155, 280, 304, 321, 325.
+
+ "Dollar exchange," 541.
+
+ "Domestic trade" _vs._ foreign trade, appendix to Ch. XIII.
+ See TRADE.
+
+ Double counting in estimating volume of trade. See OVERCOUNTING.
+
+ Dualism, most useful metaphysics for social sciences, 571-72.
+
+ _Dun's Review_, 272, n., 273, n.
+
+ Dynamics, 42, 106, 178, n., Ch. X, 254, 262-66, 392-93, 395-96, 426,
+ 474, 484-89, 495, 527-28, Ch. XXV;
+ dynamics and statics, reconciliation of, 42, 395-96, Ch. XXV;
+ "dynamic credit," 484-89.
+ See TRANSITION PERIODS, PROSPERITY, THEORY OF, STATICS, "NORMAL,"
+ FRICTION, FLUIDITY, LIQUIDITY, SALEABILITY, EQUILIBRIUM,
+ BUSINESS CAPITAL, INTANGIBLE CAPITAL, etc.
+
+
+E
+
+ Elasticity. See DEMAND, ELASTICITY OF, AND BANK-CREDIT, ELASTICITY OF.
+
+ Ellwood, C. A., 4, n., 21, n.
+
+ Emery, H. C, 146, n., 371, n., 576, n.
+
+ England, 142, 184, 447-48, 450, 530, 534, 536-43.
+ See LONDON, and LIVERPOOL.
+ Bank of England, 183, 319, 323, 350, 538ff.;
+ "Bank Restriction" in, 323, n.
+
+ English School, 96.
+ See CLASSICAL SCHOOL.
+
+ Entrepreneur, 67, 485ff., 539, 583-85.
+
+ "Epi-phenomenon," money as, 266.
+
+ "Equation of Exchange," Ch. VIII, 186, 188, 191, 204, 283,
+ Ch. XV, 326, 363, 520-22, 527, n., 528, n.;
+ as equation of "values," 159;
+ mathematical analysis of, 158-66;
+ factors in, highly abstract, 162-63, 176-77;
+ "equation of exchange" _vs._ causal theory, 163, 165-66, 186,
+ 189, n.
+ See CAUSAL THEORY OF VALUE.
+ Statistics of, Ch. XIX.
+ See QUANTITY THEORY, DEPOSITS, VELOCITY, TRADE, VOLUME OF,
+ PRICE-LEVEL, etc.
+
+ Equation of supply and demand, 51.
+ See SUPPLY AND DEMAND.
+
+ Equilibrium, 91ff., 105, 115, n., 116, 117, 119, 156, 187, 190, 222,
+ 225, 254, 262-66, 293, 298-99, 328, 333, n., 392-93, 401,
+ 451-57, 557, 570-73, 583, 586-89.
+
+ European Banking, 262, 497, 511, 523, 527, 530.
+ See ENGLAND, GERMANY, FRANCE, AUSTRIA-HUNGARY, BELGIUM, etc.
+
+ Exchange, 9-11, 133, 224ff., 398ff., 468-69, 520-23;
+ creates _values_,
+ not _utilities_, 111, n., 145, 423-24, 424, n.;
+ in static state, 262-66, 401-02;
+ relation of, to value, 9-11, 401ff., 468-69.
+ See TRADE, GOLD MOVEMENTS, INTERNATIONAL, ETC.
+
+ Exchangeability. See SALEABILITY.
+
+
+F
+
+ Fashion. See SUGGESTION.
+
+ Federal Government, 147, 322, 332, 368, 432, 476, 549;
+ Federal war tax as index of grain speculation, 251.
+
+ Federal Reserve System, 299, 490, 499, 518-20;
+ should rediscount stock collateral loans, 518-20;
+ "money trust" and, 518-20.
+
+ Fetter, F. A., 7, n., 48, 78, n., 301, n., 303, n., 437, 440, n.,
+ 562, n.
+
+ Fiat theory, 136, 142.
+ See also LEGAL THEORY, _Staatliche Theorie_.
+
+ Fichte, J. G., 22, 137.
+
+ Fisher, I., 47, 56, 81, 91, n., 99, 117, n., 124, 128, 130, 143, 152,
+ 154ff., 172ff., 186ff., 196, 200, n., 203ff., 209ff., 216ff.,
+ 222, 226-29, 231, 240, 247, 248, n., 254, 256, 261, 262, 274,
+ 281ff., 291ff., 301, n., 302-04, 306, 308, 311, 312, 324,
+ 326, 331, 333, n., 335ff., 348-49, 351-52, 360ff., 371, 376,
+ 381-83, 400, 437, 455, 522, 537, 555, 559, 563.
+
+ Fite, W., 21, n.
+
+ Fluidity, 143, 403, 456, 476, 542, 563, n.
+ See also LIQUIDITY, SALEABILITY, STATIC THEORY, ETC.
+
+ Flux, W. A., 49.
+
+ Foreign bills of exchange, in reserves, 181-82.
+ See BILLS OF EXCHANGE AND GOLD MOVEMENTS, INTERNATIONAL.
+
+ Foreign trade, 261, 265, 503;
+ ratio of, to "domestic trade," appendix to Ch. XIII.
+ See TRADE, BILLS OF EXCHANGE, GOLD MOVEMENTS, INTERNATIONAL.
+
+ France, 136, 139, n., 450, 530, n., 533;
+ _Banque de_, 136, 183, 425, 538-39.
+
+ Friction, 11, 94, 262-66, 392, 426, 543-44, 554-55, 563.
+ See also STATICS, DYNAMICS, SALEABILITY.
+
+ Functions of money, 76, 81, 83, 93-94, 110-11, 144-48, 151-53, 201,
+ 263-66, 313-14, 327-28, 390-91, 394, 399, Ch. XXII, 536ff.,
+ 543;
+ in relation to value of money, 144ff., 390-91, 309-400, Ch. XXII.
+
+ Functions of value. See VALUE, FUNCTIONS OF.
+
+ "Futures," 243, 251.
+ See STOCKS, "BORROWING AND CARRYING" OF.
+
+ Future values, 40, 107, 459-60, 480, 486, 585.
+ See CREDIT, PART OF GENERAL SYSTEM OF VALUES.
+
+ Futurity, not peculiar to credit, 459-60, 475.
+
+
+G
+
+ George, Henry, 78, n., 301, n.
+
+ Germany, 136, 139, n., 145-46, 167, 425, 433, n., 435, n., 527,
+ 530, n.;
+ giro-system in, 150, 167, 289;
+ great use of domestic bills of exchange in, 288-89;
+ limited division of labor in banking in, 527;
+ Reichsbank, 182, 183.
+
+ Giddings, F. H., 87, n., 556-57, 571, 573, n.
+
+ Giro-system. See GERMANY.
+
+ Gold, 84, 143, Ch. XXI, 422, 432, 436, 441-43, 443-44, n., 530,
+ 535-56, 538-39, 567, 591;
+ in arts, 84, 135, 151-53, 224, 314, 330, 390, 400, Ch. XXI, 451-57;
+ as money, 84, 135, 141, 146, 224, 304, 322-23, 390, 408-16, 441-43,
+ 445, 451-57, 495-96, 530, 535-56, 538-39;
+ value of, 84, Ch. XXI, esp. 408-16, 451-57;
+ in reserves, 147, 180-81, 324-28.
+
+ Gold mining camps, high prices in, 220, n.
+
+ Gold movements, international, 60-61, 129, 142, 181-82, 183, 261,
+ 280, 292, Ch. XVI, 434, n., 531, 533-34.
+
+ Gold production and prices, Ch. XVIII, 535-36;
+ new world discoveries, 219ff.;
+ Californian and Australian discoveries, 220-21, 221, n.
+
+ Goods, consumers', 34ff., 82, 96, 481;
+ ranks or orders of. See RANKS.
+ Instrumental, 38, 81, 297, 482, 484, 500, 569, 579.
+
+ "Goods side" of "equation of exchange," no, 159.
+
+ "Good will," 260, 482-83, 561, 564.
+ See BUSINESS CAPITAL, INTANGIBLE CAPITAL, SELLING COSTS, ETC.
+
+ Grain speculation. See SPECULATION, COMMODITY.
+
+ Greenbacks, 141, 146, 147, 194, 304, 322-23, 332-33, 422, 432, 435,
+ 436, 567-68.
+
+ Gresham's Law, 129, 140, n., Ch. XVII;
+ conflicts with quantity theory, Ch. XVII;
+ quantity theory version of, 321-22.
+
+
+H
+
+ Habit, 104, 109, 138, 225, 554-55, 589.
+ See also CUSTOM.
+
+ Hadley, A. T., 157.
+
+ Haig, R. M., 552, n.
+
+ Hamburg, coffee speculation in, 252;
+ Giro-Bank, 150.
+
+ Haney, L. H., 3, n.
+
+ Harvey, "Coin," 327.
+
+ Havre, coffee speculation in, 252.
+
+ "Hedging," 243, 253, 264.
+
+ Hegel, G. W. F., 18, n.
+
+ Helfferich, Karl, 14, 82, n., 110, n., 134, 418, n., 419, n.
+
+ Heredity, 571-73.
+
+ Hermann, F. B. W. von, 438, n.
+
+ History, economic interpretation of, 33.
+
+ Historical vs. cross-section viewpoints, 101ff., 119-20, 135-39,
+ 397-400, 548, 553-54, 578-81.
+ See also STATICS, DYNAMICS.
+
+ Hoarding, 140, n., 174, 207, 208, 211, 333, n.
+
+ Hobson, J. A., 73, n., 308, n.
+
+ Hollander, J. H., 154, 250, n.
+
+ Holmes, Justice O. W., 24, 587-90.
+
+ Holt, Byron W., 222, 249, 370.
+
+ Hubbard, Guy C., 260, n.
+
+ Hughes Commission, 252, n.
+
+ Hume, David, 21, 47.
+
+
+I
+
+ Ideal credit economy, 543.
+
+ Ideal values, 467, 480.
+
+ Imitation. See SUGGESTION.
+
+ Imputation theory, 28, 38-40, 99, 300, 389, 424, 481;
+ conflicts with quantity theory, 300, 303-04, 310-11, 389.
+
+ Income, money. See MONEY INCOME.
+
+ Income, net, of the United States, appendix to Ch. XIII.
+
+ Index numbers, of check circulation, 361-62, 383;
+ of net income of the United States, 278;
+ of prices, 278, 381-82, 383, 436;
+ of railway gross receipts, 278;
+ of trade, 227-29, 255-56, 278, 363, 381, 383.
+ See STATISTICS.
+
+ India, 140, 143, 149, 181, 443, 444, n., 449;
+ a liability, rather than an asset, to quantity theory, 444, n.
+
+ Individual interest and social advantage, 397-99.
+
+ Individual values, 19, 43-45.
+ See also VALUE, SUBJECTIVE, PERSONAL, SUBJECTIVE EXCHANGE.
+
+ Individualistic theories, 14-16, 20, 21, 22ff.
+
+ Individuality, a social product, 16-19.
+
+ Industry, rather than commerce, chiefly financed by modern banks,
+ Ch. XXIV, esp. 523-29.
+ See ASSETS OF BANKS, BANK CREDIT, FUNCTIONS OF.
+
+ Inertia. See HABIT, CUSTOM.
+
+ Institutional values, 29-30, 413, 484.
+
+ Institutions, 19, 27, 484, 487, 562, n., 570.
+
+ Insurance policies as credit instruments, 472.
+
+ Intangible "capital" _vs._ capital goods, 482-83, Ch. XXV.
+ See also GOOD WILL, BUSINESS CAPITAL, ETC.
+
+ Interest, 146, 219, 223-24, 225, 301ff., 333, n., 416, n., 428-32,
+ 437, 471, 472;
+ "appreciation and," 76-78;
+ productivity theory of, 224, 302-03, 437;
+ "use" theory of, 437, 438, n.;
+ "pure rate" of, 75, 76, 77, 428-29;
+ _vs._ "money rates," Ch. IV, 224, 428-32, 461, 521, n., 523-24,
+ 526, 529.
+ See also MONEY RATES, CALL RATES, CAPITALIZATION, TIME DISCOUNT.
+
+ International banker, 409, 446, 539ff.
+ See GOLD MOVEMENTS, INTERNATIONAL.
+
+ International trade. See FOREIGN TRADE.
+
+ Investment, 270, 523ff., 528;
+ _vs._ speculation, 521, n., 523-26;
+ banker, 489, 519, 523, n., 527-28.
+
+ "Invisible items" in foreign trade, 268, 270, 320.
+
+
+J
+
+ James, William, 579, n.
+
+ Jenks, J. W., 260, n.
+
+ Jevons, W. S., 25, 48, 91, n., 107, 522, n.
+
+ Jewelers, 409, 454-57;
+ paper of, in the money market, 454-57.
+
+ Johnson, A. S., 4, n., 13, 105, 115, n., 265, n., 403, n., 440, n.,
+ 563, n.
+
+ Johnson, J. F., 73, n., 333, n., 418, n.
+
+ Joint Stock Banks, 184, 530, 539.
+ See LONDON, ENGLAND.
+
+ Jurisprudence, 23-24, 588.
+ See LAW, LEGAL VALUES.
+
+ Juristic thinking, 24-25, 29, 433, n., 586-88;
+ contrasted with economic thinking, 433, n.
+
+
+K
+
+ Kant, I., 22, 137.
+
+ Kemmerer, E. W., 48, 129, 135, 140, 141, 156, 157, 167, 170, 175, n.,
+ 220, n., 226, 240, n., 254, 256, 274, 312, n., 321, 334-37,
+ 359, n., 361, n., 363-65, 381-83, 400, 426, n., 443, n.,
+ 444, n., 522, n., 537, 538, n.
+
+ Keynes, J. M., 180, 181, 182, n., 184, 207, 443, n., 535.
+
+ King, W. I., 242, 243, 246, n., 247, n., 248, n., 269, 271-72, 275, n.
+
+ Kinley, D., 13, 48, 78, n., 80, 110-11, 174, 208, n., 230, 233-36,
+ 237, n., 242-45, 249, 254, 256, 269, 321, 337-45, 349,
+ 350-52, 360, 365, n., 368, 376, 383, n., 419, n., 447, 449,
+ 463, 498, n., 512-15.
+
+ Kirkbride and Sterret, 347, n.
+
+ "Kiting," 368.
+
+ Knapp, G. F., 49, 150, 418, n., 433-5, n.
+
+ Knies, Carl, 12, 133, 323, n., 418, n., 419, n.
+
+ Kuhn, Loeb & Co., 343-44, 515, 515, n.
+
+
+L
+
+ Labor theory of value, 12, 44-45, 64ff., 139, 570.
+ See VALUE, COST OF PRODUCTION, ADAM SMITH, RICARDO, MARX, CAIRNES.
+
+ Land speculation, 254, 264, 317.
+ See SPECULATION.
+
+ Laughlin, J. L., 48, 135, 141, 144, 146, 177, 219, n., 281, 282, n.,
+ 283, n., 284, 312, n., 319, n., 327, n., 418, n., 419, n.,
+ 443, n., 444, n., 459.
+
+ Law, theories of, 23ff., 586-89;
+ statics and dynamics of, 586-88.
+
+ LeBon, G., 37.
+
+ Legal tender, 147, 418, 422, 432-36, 442, 445-47, 448, n.
+ See FUNCTIONS OF MONEY.
+
+ Legal theory of money, 134, 136, 405, 433n., ff.
+ See _Staatliche Theorie_.
+
+ Legal thinking. See JURISTIC THINKING.
+
+ Legal values, 23-29, 40, 138-39, 413, 414, 435, n., 562, n., 586-89.
+
+ Lewes, G. H., 87, n.
+
+ Liabilities of banks, 285;
+ relation of, to loans, 286.
+ See DEPOSITS, BANK-NOTES, ETC.
+
+ Liquid paper, 455, 489-91, 499ff., 513-18.
+
+ Liquidity, 455, 475, 489, 495, 499ff., 508, 513-18, 526-27, 529-44.
+ See SALEABILITY, STATICS, FRICTION.
+
+ Liverpool, 252, 259.
+
+ Loans, on call. See CALL LOANS.
+ On cotton, 481, 504, 508, n.;
+ on grain, 380, 503, 508, n.;
+ to stock market, 375ff., 379, n., 430, 488, 502-03, 507-12,
+ 518-20, 523-28;
+ to wholesalers and retailers, 504-05;
+ consumption, 463;
+ war, see WAR LOANS.
+ Collateral, see COLLATERAL LOANS.
+ Activity of, 512-14;
+ relation of, to deposits, 285ff.;
+ relation of to "deposits," 375-81, 512-14;
+ relation of, to trade, 287, 287, n.;
+ relation of, to international gold movements, 318-19;
+ short loans as bearers of options, 425, 428-32.
+ See also ASSETS OF BANKS, "COMMERCIAL PAPER," "MORNING LOANS,"
+ "OVERCERTIFICATIONS."
+
+ Locke, John, 47.
+
+ London, 145, 251, 259, 259, n., 497, 522, n., 539ff.;
+ stock exchange, 451;
+ money market, illustrates assumptions of static theory, 539ff.
+
+
+M
+
+ "Manipulation," of values and prices, 575ff., 589.
+
+ Manufacturers' "paper," 454, 457, 500, 513, n.
+
+ "Margins," 372, 488, 489, 493, 521, n., 523-26, 528;
+ "margin operator" as "banker," 524-26.
+
+ Marginal analysis, 24, 51, 440, Ch. XXV;
+ applied to law, 586-89;
+ applied to money, 152-53, 199, 208, 225, 227, 451-57, 534.
+
+ Marginal utility, 13, 14-15, 30, 34-35, 38, 40, 42, 44, 46, 49,
+ Ch. V, 137, 440, n., 562, n., 570, 583-86;
+ applied to value of money, Ch. V, 137;
+ essentially static theory, 106ff.;
+ Schumpeter's version of, 44, 90ff., 113, n., ff., 583-86;
+ limitations of, 92ff.;
+ "relative marginal utility," 113-114, n., 115, n., 440, n.;
+ quantity theory and, 46.
+
+ "Market letter," 222, 575.
+
+ Marshall, A., 48, 105, 265, n.
+
+ Marx, Karl, 12.
+
+ Mathematical economics, 91, n., 117, 139, 142, Ch. VIII, 310, 438,
+ 553.
+
+ McCulloch, J. R., 66.
+
+ Mead, G. H., 4, n.
+
+ Meade, E. S., 198, n., 202, n., 477, n.
+
+ Measure of values, 133, 150-53, 201, 265, n., 325, 327-28, 391, 417,
+ 418-23, 436, 451, 543, 567-69, 538;
+ must have value, 133, 326;
+ relation of, to commodity theory, 151-53;
+ applied to non-economic values, 567-69.
+ See also FUNCTIONS OF MONEY.
+
+ Medium of exchange, 133, 201, 327-28, 391, 404, 418, 420-24, 425-26,
+ 433, n., 434, n., 436, 442, 543;
+ must have value, 133.
+ See FUNCTIONS OF MONEY.
+
+ Meinong, A., 467.
+
+ Menger, Karl, 14, 48, 82, n., 88, 96, n., 110, 397, 398, 400, 401, n.,
+ 402-04, 406, 407, n., 418, 476, 493.
+
+ Mercantilism, 225, 551.
+
+ Merriam, L. S., 13, 419, n.
+
+ Metallist theory. See COMMODITY THEORY.
+
+ Middlemen, effect of eliminating, on price level, 306-07.
+
+ Mill, James, 66.
+
+ Mill, J. S., 46, 47, 50-52, 55, n., 58, 59, 61, 67, 69, 94, 129, 132,
+ 161, n., 172, 192, 193, n., 265, 285, n., 319, n., 333, n.,
+ 548.
+
+ Minneapolis, bills of exchange in, 289, n.
+
+ Mises, L. von, 14, 48, 49, 80, 83, 88, 100, 109-11, 120, n., 182, n.,
+ 418, n., 429, n., 434, n., 556.
+
+ Mitchell, W. C., 91, n., 179, n., 188, 213, n., 265, n., 286, n.,
+ 323, n., 329, n., 332-34, 363, 412, n., 430, n., 448, n.,
+ 449, n., 522, n., 533, 536, 568, 574.
+
+ Mode. See SUGGESTION.
+
+ Money, abstracted from by static theory, 99, 265-66, 392;
+ definitions of, 167, 169, 325-26, 495-96;
+ functions of, see FUNCTIONS OF MONEY;
+ must have value from non-pecuniary source, Ch. VII, 326, 390-91,
+ 417, 440, 449, 591;
+ origin of, 394, Ch. XXI;
+ money not unique, 82-83, 85, 137, 145, 147, 148, 325, 329-30, 389,
+ 406-07, 417, 425, 437-50, 477-78, 535, 542, 544;
+ peculiarities of, 3, 57-58, 64, 69, 71, 74ff., 78-79, 81-83, 85,
+ 88, 91, 101, 124, Ch. VII, 132, n., 134, 144-45, 153, 392-93,
+ Ch. XXI, Ch. XXII, 406, 437ff.;
+ tool or instrumental good, Ch. IV, 82-83, 224, Ch. XXII, 591;
+ theory of, developed in isolation, 46ff.;
+ theory of, must be dynamic, 262-66, 393.
+ See also STATICS, DYNAMICS.
+ Value of, _vs._ "reciprocal of price-level," 8, 56-57, 77, 100,
+ 123, 128-29, 155-56, 312-13, 382, 388-89, 433, n., 449.
+ See VALUE, ABSOLUTE _vs._ RELATIVE.
+ Relation of, to credit. See CREDIT, RESERVES, RATIO, FIXED, M:M´.
+ Relation of, to trade, Ch. XIII, Ch. XIV.
+ See TRADE.
+ See ANALYTICAL TABLE OF CONTENTS.
+
+ "Money in circulation," Ch. VIII, 173, 175, n., 179, 185.
+
+ Money economy, 90, 220, 225, 265, n., 397, 399, Ch. XXI,
+ Ch. XXII, 555.
+
+ "Money-funds," distinguished from money, 63, 427, 453, 495-96.
+
+ Money income, distinguished from real income, 89;
+ distinguished from quantity of money, 90, 307-310.
+
+ Money market, 32, 62, 221, 222, 319, 406, 427, 430, 453-58, 461,
+ 495-97, 516-20, 522, n., 524, 529-44, 575-76.
+
+ "Money Post," on New York Stock Exchange, 372, 375, 430-31.
+
+ Money rates, Ch. V, 145, 149, 183, 223, 224-26, 316, 319-20, 378,
+ 406, 428-32, 453-57, 461, 495, 523-24, 526, 529-30, 534;
+ _vs._ interest rates. See INTEREST.
+ Relation of, to bank reserves, 378;
+ to clearings, 378;
+ to international gold movements, 316, 318-20;
+ to dividend and interest payments, 522, n.;
+ to plans for corporate consolidations, 198;
+ to jewelers' profits, 454;
+ to trade, 223, 224, 226;
+ to volume of speculation, 378, 522, n.
+
+ "Money Trust," 518-20.
+
+ Monism, unsatisfactory metaphysics for social sciences, 571-72.
+
+ Moore, H. L., 237, n., 238, n., 574.
+
+ Morality, theories of, 22-23.
+
+ Moral values, 22-29, 40, 137-38, 480, 562, n., 567-69, 582, 589.
+
+ Morgan, J. P., 140, 519, n., 577;
+ J. P. Morgan & Co., 343-44, 375, 515, n.
+
+ "Morning loans," 376, 377, 509, 510.
+ See "OVERCERTIFICATIONS."
+
+
+N
+
+ National banks, 234, 338, 342, n., 343, 345, 347, 355, n., 359, 375,
+ 498-99, 502-03.
+
+ National City Bank, 375, 521, n., 540, n.
+
+ Negative values, as "real costs," 71, n.
+
+ New York City, 233-35, 259, 259, n., 340ff., 383, 392, 430-31,
+ 439, n., 502, 503, 506, 511, 514-16, 520, 541-42;
+ as "clearing house" for country, 236, 353ff.;
+ contrasted with London, 541-42;
+ "deposits" in, 233, 340ff., 392, 515;
+ "all other deposits" in, 235-37;
+ Cotton Exchange, 252, 503, 541;
+ Coffee Exchange, 252, 268, 503, 541;
+ Stock Exchange. See STOCK EXCHANGE.
+ Money market. See MONEY MARKET.
+ Clearings. See CLEARINGS.
+
+ Newcomb, Simon, 156.
+
+ Nicholson, J. S., 81-82, 124, 129-32, 134, 151, 167, 325-29.
+
+ "Nominalism" in monetary theory, 433, n., ff.
+ See _Staatliche Theorie_.
+
+ "Normal tendency," 176, 218, 254, 262-66, 293, 298-99, 315, 392-93,
+ 395, 536ff.;
+ "normal _vs._ transitional."
+ See "TRANSITION PERIODS," STATICS, DYNAMICS.
+
+ Norton, J. P., 179, n., 287, n.
+
+ Note-brokers, 496-97, 499.
+
+
+O
+
+ "Odd lot" dealings in securities, 249, 370.
+
+ "One house bonds," 147.
+
+ Origin of money, 394, Ch. XXI.
+
+ Ornament, and origin of money, 408ff.
+
+ Orthodox economist, 258, 549, 560.
+
+ "Other collateral security," analyzed, 502ff.
+
+ "Other loans and discounts," analyzed, 500ff.
+
+ "Overcertification," 200, 376, 509, 510.
+ See "MORNING LOANS."
+
+ Overcounting in estimates of volume of trade, 168, n., 200, n.,
+ 230, 243-45, 247, n., 255, 339-40, 364-81.
+ See UNDERCOUNTING.
+
+ Overproduction, 258, 550.
+
+ "Over the counter" dealings in securities, 249, 370.
+
+
+P
+
+ Panics, 174, 273, 435, 446, 448, 520, 548-49, 555.
+ See CRISES, BUSINESS CYCLES.
+
+ Paper money, 143, 150, 151, 418, 421, 473, 495, 496, 538;
+ inconvertible, 57, 84, 108, 132, 134, 136, 140, n., 141, 321-23,
+ 391;
+ credit theory of, 141, 146.
+ See GREENBACKS, AUSTRIA.
+
+ Parasitic occupations, 482;
+ gold mining as, 262, n.;
+ American banking as, 527.
+
+ Patten, S. N., 558, n.
+
+ Paulsen, F., 22.
+
+ Payments, 177-78, 338, 367, n.;
+ proportions of money and checks in, 174, 338, 383, 447, 449, 463;
+ wage, 174, 531;
+ relation of, to volume of trade.
+ See OVERCOUNTING, UNDERCOUNTING, BARTER.
+
+ Pay rolls, money for, 174, 349.
+
+ Pearson, Karl, 237, n.
+
+ Perry, R. B., 3, n., 16, n., 21, n., 25, n., 97, n., 117, n., 118, n.,
+ 119, n.
+
+ Persons, W. M., 241, n., 276, n.
+
+ Phillips, C. A., 174, n.
+
+ Phillips, Osmund, 272, n., 353, n., 354, n.
+
+ Physiographic factors in social life, 571-73, 574, 590.
+
+ Pierson, N. G., 221, n.
+
+ Pittsburg, "deposits" in, 245-46.
+
+ "Platform" of quantity theorists, 155.
+
+ Poker chips, 132.
+
+ Pope, J. E., 316, 317, 319, n., 502, n., 504, n., 505.
+
+ Populists, and quantity theory, 141.
+
+ Positive doctrine, in Parts I and II, summarized, Ch. XX.
+
+ "Power in exchange," 9-10, 388.
+
+ Pragmatism in economic theory, 41-42, 93, 96-97, 98-99, 553, 571-72.
+
+ Pratt, S. S., 248, n., 251, n., 252, n., 369, 370, 374, 476, n.
+
+ Premium, 146, 194, 322, 332, 390, 442-50, 471.
+ See AGIO.
+ Gold, _vs._ general price level as index of value of money, 194.
+
+ Prestige as economic power, 33, 37, 41, 405, 409, 411, 438-42, 463,
+ 465-66, 487, 489, 570;
+ prestige values.
+ See VALUES.
+
+ Price, Theodore, 222.
+
+ Price, 7ff., 388, 440, n.;
+ and value, 8ff., 298.
+ See VALUE.
+ "Buying price" _vs._ "selling price," 402-04, 406-07, 476;
+ "just price," 24.
+
+ Price level, 56, 86, 87, Ch. VI, Ch. VIII, 188-89, Ch. XV, 315-17,
+ 328, 381-82, 388-89, 416, 416, n., 456, 520-23;
+ relation of, to particular prices, 156, 183, 295, 311-12, 315-17,
+ 388-89;
+ _weighted_ average, tied to T, 163ff., 363, 381-82;
+ supposed "passiveness" of, 126, 186, 187, 192, 290, Ch. XV, 389;
+ "reciprocal of," _vs._ value of money.
+ See MONEY, VALUE OF.
+
+ Price-theory _vs._ value-theory, 49, 78, 389, 558-59, 570-77, 589-90.
+ See SUPPLY AND DEMAND, COST OF PRODUCTION, CAPITALIZATION THEORY,
+ IMPUTATION THEORY.
+
+ Prices, concatenations of, 112-13, 300, 310, 313-14;
+ customary, 144;
+ fluid, 143;
+ world prices, and gold production, Ch. XVIII.
+
+ Private banks, 338, 343-45, 348, 355, n., 357, 488, 498-99, 514-16,
+ 527-28, 531;
+ deposits in, in New York City, 344, 515;
+ "deposits" in, in New York City, 343-45, 515-16.
+
+ Produce exchanges, 200, 251ff., 406, 541.
+ See SPECULATION, COMMODITY, CHICAGO BOARD OF TRADE, LONDON MONEY
+ MARKET, NEW YORK COTTON EXCHANGE, ETC.
+
+ Production, confused with trade. See TRADE.
+ Relation of, to trade, 257ff., 269, 393;
+ exchange as.
+ See EXCHANGE.
+ Factors of, 268, 481-82; index of, 278;
+ money as instrument of.
+ See MONEY.
+
+ "Productive," meaning of, 257, 591.
+
+ Prosperity, theory of, 262, 395, 548, 555, 556, 569, 573ff.
+ See STATICS, DYNAMICS.
+
+ Protective tariffs, 550-52, 553, 580-81.
+
+ Pujo Committee, 344, 373, n., 375, 491, n., 515, n., 518-19.
+
+ "Purchasing power," 9-10, 88, 98-99, 484;
+ of money, 86, 88, 155-56, 388, 583-86.
+
+
+Q
+
+ Qualitative _vs._ quantitative thinking, 191-92, 195, 324, 433, n.,
+ 553, 586-88, 590.
+ See JURISTIC _vs._ ECONOMIC THINKING.
+
+ Quantity theory, 42, 79, 81, 99, 110, Pt. II, esp. Ch. XV, 435, n.,
+ 444, n., 448-49, 478, 520-23, 537ff., 550, 558, n.;
+ modicum of truth in, 195, 330, 448-49;
+ as basis of prediction, 334-35;
+ doctrine of, that quantity of money is of no importance, 219,
+ 219, n., Ch. XIII, _passim_, 265, 391-92;
+ conflicts with other theories, see SUPPLY AND DEMAND, COST OF
+ PRODUCTION, CAPITALIZATION THEORY, IMPUTATION THEORY,
+ GRESHAM'S LAW.
+ "Long run" _vs._ "short run" versions of, 170-71, 188-89, 192ff.,
+ 262, 393;
+ not a functional theory, 262-66, 400-401;
+ not logically related to bimetallism, 219, n.;
+ applied to international trade, 61, 129, 183, 280-81, 292,
+ Ch. XVI;
+ not related to general theory of value, 46ff., 305;
+ psychological assumptions of, 143-44, 305, 444;
+ relation to medium of exchange function, 152, 266;
+ contrasted with commodity theory, Ch. VII, esp. 151-53;
+ types of, Ch. VII, Ch. VIII, 172, 177, n., 182-85, 192-94,
+ 210, n., 216-17, 218, n., 219, n., 220, Ch. XVIII, 521, n.,
+ 522, n., 537, 538, n.
+ See RICARDO, MILL, J. S., TAUSSIG, NICHOLSON, FISHER, WALKER,
+ F. A., JOHNSON, J. F., JEVONS, BARBOUR, ANDREW,
+ DAVENPORT (p. 218, n.), KEMMERER.
+
+
+R
+
+ Railway gross receipts, 240-41, 278, 516;
+ relation of, to clearings, 240-41.
+
+ "Ranks" or "orders" of goods, 34, 38, 96, 481, 562, n.
+ See IMPUTATION THEORY, AUSTRIAN SCHOOL, CAPITALIZATION THEORY.
+
+ Ratio of exchange, 6ff., 25, 92, 388, 584;
+ abstract, as value, 25, 92.
+ See VALUE, ABSOLUTE _vs._ RELATIVE, PRICE, "PURCHASING POWER."
+
+ Ratio, fixed, M:M´, Ch. IX, 187, 206, 281, 288, 290, 294, 328-29,
+ 529-44.
+ See RESERVES, DEPOSITS, "MONEY IN CIRCULATION."
+
+ Real estate trade. See TRADE.
+
+ Rediscounting, 490, 494, 518-20.
+
+ _Reichsbank._ See GERMANY.
+
+ Religious values, 414.
+
+ Rent, 316, 439-41;
+ as cost, 70;
+ of money, as "money rates," Ch. IV, 145, 149, 424, 438-42, 451-57;
+ capitalization of. See CAPITALIZATION.
+
+ Reserve cities, 233, 343, n., 357, 359, n.
+
+ Reserve function of money, Ch. XVIII, 418, 421, 424, 436, 536-44;
+ special case of "bearer of options" function, 426, n., 536ff.
+ See FUNCTIONS OF MONEY.
+
+ Reserves, Ch. IX, Ch. XVIII, 393, 395, 447, 451, 491, 517, 529-44;
+ bills of exchange as, 181-82, 444;
+ legal reserve requirements, 175, n., 184, 447, 448, 449;
+ ratio of, to deposits, 175, n., 179, 286-87, 298, 324ff., 529-44;
+ ratio of, to "money in circulation," 175, n.;
+ relation of, to money rates, 378;
+ "secondary reserves," 530.
+
+ Resumption of specie payments, 146, 323.
+
+ Retail "deposits," see "DEPOSITS."
+
+ Retail trade. See TRADE.
+
+ Ricardo, David, 47, 50, 51, 64, 65, 66, 106, 131, 550.
+
+ Ridgeway, W., 407, n.
+
+ Ripley, W. Z., 275.
+
+ Risk, 67, 527, 542-43.
+ See DYNAMICS, "BEARER OF OPTIONS."
+
+ Ross, E. A., 37, 568, 571.
+
+ Royce, J., 18, n.
+
+ Rupee. See INDIA.
+
+ Rural banks, 232-35, 491, 517-18;
+ "all other deposits" in, 233-35;
+ loans by, in Wall Street, 517-18;
+ small volume of transactions of, 235, 342, n.
+
+
+S
+
+ Saleability, 10, 94, 99, 401-07, 430, 440-41, 453, 475-78, 489,
+ 493ff., 524-25, 526-27, 529, 540ff., 591.
+
+ Santos, coffee speculation in, 252.
+
+ Savings banks, 342, n., 409, 472, 498-99, 523.
+
+ Savigny, F. C., von, 24, 398.
+
+ Schumpeter, J., 44, 49, n., 80, 83, 90-100, 111, 113, n., ff.,
+ 264, n., 265, 401, 429, n., 484-85, 488, 526, 549, 554-55,
+ 558, n., 583-86.
+
+ Scott, DR, 78, n.
+
+ Scott, W. A., 13, 48, 81, 132, 141, 144, 327, n., 418, n., 419, n.,
+ 422, n., 431, n., 498, n., 501, n.
+
+ Seager, H. R., 301, n., 303.
+
+ Sea Board Air Line Adjustment 5's, 471.
+
+ Seasonal changes, 187, 192, 533.
+
+ Seignorage, 131.
+
+ Self, the, 19.
+
+ Seligman, E. R. A., 73, n., 301, n., 418, n., 548.
+
+ Selling costs, 257ff., 393, 565.
+
+ "Selling price" _vs._ "buying price." See "BUYING PRICE."
+
+ Senior, N. W., 14, n., 67.
+
+ Sex, social transformation of, 35-36;
+ rôle of, in origin of money, 409-13.
+
+ Shakspere, 25.
+
+ Share sales. See STOCK EXCHANGE, CLEARINGS.
+
+ Shaw, A. W., 259, n.
+
+ Silver, 139, n., 150, 151, 152, 219, 221, n., 327, 397, 412, 414,
+ 415, 421, 434;
+ certificates, 432.
+
+ Simmel, G., 101, 418, n.
+
+ Single tax, 318-19, 552, n.
+
+ Smith, Adam, 12, 50, 64, 65, 222, 526-27, 550, 556.
+
+ Smith, B. F., 366, n.
+
+ Smith, Munroe, 24.
+
+ Social control, Ch. I, 395, 409, 435. n., 482, 584;
+ technology of, 577ff., 589, 591;
+ "radiant points of," 37, 576.
+
+ Social psychology, 17, 36-37, 143-44, 560, 569-70, 577-78, 586.
+
+ Social value theory, Ch. I, 87, n., 98-99, 137ff., 158, 279, 310-11,
+ Ch. XX, 402, n., 408-16, 433, n., 435, n., 438-42, 464-67,
+ 469, 480, 560, 569-82, 586-89;
+ pragmatic character of, 40-42;
+ applied to law, 24, 586-89;
+ applied to morals, 22-24, 589.
+
+ Social advantage, relation of, to individual interest, 397-99.
+
+ Social "consciousness," 16;
+ social expectation, 409;
+ social forces, 26;
+ "social marginal utility," 12;
+ social mind, 7, 12, 34, 87, n., 557, 560, 570, 578;
+ social objectivity, theories of, 20ff.;
+ social organism, 16, 577;
+ social "oversoul," 16;
+ "social use-value," 12;
+ social _vs._ individual values, 43-45.
+
+ "Socially necessary labor-time," 12, 15.
+
+ Society and individual, 16-26, 118.
+
+ Soetbeer, A., 413, n.
+
+ Sombart, W., 220.
+
+ South Atlantic States, "deposits" in, 233, 246.
+
+ Spahr, C. B., 274.
+
+ Specie, 182.
+
+ Speculation, 60, n., 85, 143, Ch. XIII, 221, 225, 231, 233-41, 248ff.,
+ 267, 298, 363-64, 382, 392, 503, 514-28, 540ff., 566-67, 579,
+ 585;
+ by manufacturers, wholesalers, and retailers, 243-44, 252-54;
+ commodity, 251ff., 379-80, 406, 503, 540-42;
+ influence of, on bank clearings, 237-41;
+ land, 254;
+ in London, 540ff.;
+ "odd lot," 249, 370.
+
+ Speculators, 31, 249, 263, 322, 488, 499, 523-27, 529, 544;
+ _vs._ investors. See INVESTMENT.
+
+ Spencer, Herbert, 571.
+
+ "Spot" transactions, 251.
+
+ Sprague, O. M. W., 174, n., 200, 354, n., 378, 502, n.
+
+ _Staatliche Theorie_, 433, n., ff.
+
+ Stabilizing the value of money, 152, 194.
+
+ Standard, of deferred payments, 326, 391, 418, 436;
+ of value, 133, 201, 390, 418-23.
+ See MEASURE OF VALUES.
+ Money, 135, 325-26, 421, 445;
+ "primary" and "secondary," 422;
+ tabular, 152, 436.
+
+ State banks, 234, 322, 338, 342, n., 343, 345, 347, 498-99, 505-09;
+ collateral loans in, 505-06, 507.
+
+ Static theory, 11, 42, 93, 106ff., 176, n., 177, n., Ch. X, 219, n.,
+ 223, 254, 262-66, 292-93, 395-96, 403, 426, 433, n., 474,
+ 481, n., 485, 487, 488, 536-44, Ch. XXV;
+ abstracts from money, 99, 265-66, 392;
+ relation of, to speculation, 263ff., 392, 474;
+ dynamics and, reconciliation of, Ch. XXV.
+ See also, SALEABILITY, LIQUIDITY, FLUIDITY, "NORMAL TENDENCY,"
+ EQUILIBRIUM, "WEALTH OF NATIONS, THEORY OF," DYNAMICS,
+ TRANSITION PERIOD, PROSPERITY, THEORY OF, GOOD WILL,
+ "BUSINESS CAPITAL," FRICTION, HISTORICAL _vs._ CROSS-SECTION
+ VIEWPOINTS.
+
+ Statistics, 237, n., 272, n., Ch. XIX;
+ of banking assets, 498, 503-04, 506, 509-11;
+ of bank-drafts on New York and other centres, 357;
+ of "equation of exchange," 191, 213, Ch. XIX;
+ of foreign and domestic trade, appendix to Ch. XIII;
+ of gold consumption, 412, n.;
+ of money in banks, _vs._ money in circulation, 179;
+ of money-rates, 430-31;
+ of net income of the United States, 246, 247, n., 278;
+ of prices, 278;
+ of quantity theory, 285, n., Ch. XIX;
+ ratio, loans to deposits, 286-87, n.;
+ reserves, 178-79, 286-87, n.;
+ of speculation, 248ff.;
+ of trade, 227ff., Ch. XIII, 363-81;
+ "ordinary trade," 240-47;
+ of velocity, 339, 361-63.
+ See WEIGHTING IN STATISTICS.
+
+ Stevens, W. S., 199, n.
+
+ St. Louis, 246, 252, 289, n., 503; Merchants' Exchange, 253.
+
+ Stock exchange, 31, 145, 254, 282, n., 369ff., 406, 458, 491, 520,
+ 521-23, 527, 541, 564;
+ New York Stock Exchange, 242, 248ff., 268, 344, 430-31, 514, 521-23,
+ 541;
+ clearing house in, 199-200, 369-75;
+ share sales on, volume of, 248ff., 521, n., 522, n., 541;
+ share sales on, correlated with bank clearings, 237ff., 516;
+ bond sales on, 249, 370;
+ "odd lot" dealings on, 249, 370, 374;
+ security dealings outside, 250-51, 514;
+ compared with other exchanges, 250, 541.
+
+ Stocks and bonds, essential identity of, 460-61, 476-77;
+ "borrowing" of, 145-46, 371-74, 471-72; value of.
+ See VALUE.
+
+ "Stop loss" orders, 249, 373, n.
+
+ Store of value, 314, n., 408, 418, 424, 426, 451.
+ Sec FUNCTIONS OF MONEY.
+
+ Substitutes for money. See MONEY, NOT UNIQUE.
+
+ Suess, Eduard, 413, n.
+
+ Suggestion, 18, 36-37, 97, 118, 405, 410, 411, 464-66, 560, 570,
+ 577-78.
+
+ Supply and demand, Ch. II, 80, 295, 299-300, 311, n., 389, 453;
+ applicable to general price level, 299-300, 389;
+ assumes fixed absolute value of money, 52ff., 313-14, 389;
+ conflicts with quantity theory, 299-300, 310-11, 389;
+ not related to quantity theory, 46-47, 59-61, 295;
+ inapplicable to money, Ch. II, 389;
+ applied to money, 59-62, 325, 453, n.;
+ in "money market," 62-63, 224, 453;
+ relation of, to cost of production, 50, 69-70;
+ relation of, to marginal utility, Ch. II, Ch. V, esp. 94-95,
+ and 114, n.
+
+
+T
+
+ Tabular standard, 152, 436, 451.
+
+ Tarde, G., 18, 37, 466, 568.
+
+ Tariff. See PROTECTIVE TARIFF.
+
+ Taussig, F. W., 48, 49, 107, 123, n., 129, 151, n., 155, 182-85, 192,
+ 216, 254, 276, n., 379, 532, n., 537.
+
+ "Taxonomy" in economic theory, 563-64, 565, 566.
+
+ Taylor, Jas. H., 252, n.
+
+ Taylor, W. G. L., 13.
+
+ Technology, 571-74, 576, 590-91;
+ "technology of social control." See SOCIAL CONTROL.
+
+ Temporal _regressus_. See HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS.
+
+ Thompson, Burton, on barter in New York City real estate dealings,
+ 198, n.
+
+ Ticker, 248-49, 373, n.
+
+ "Till money," 183, 530, 539.
+
+ Time credit. See CREDIT, FUTURITY, BOOK-CREDIT, BILLS OF EXCHANGE.
+
+ Time discount, Ch. IV, 92, 93, 224.
+ See INTEREST, CAPITALIZATION.
+
+ Time, influence of, of money-rates, 428-32.
+
+ Timeless-logical _vs._ causal-temporal, relationships, 403, 548.
+ See CAUSATION, STATICS.
+
+ Token money, 325, 326.
+
+ Touzet, A., 412, n.
+
+ Trade, various meanings of, 267ff.;
+ "domestic" _vs._ foreign, appendix to Ch. XIII;
+ "ordinary," volume of, 241-47, 369.
+
+ Trade, volume of, 59-61, 117, Ch. VI, 144, 149, 159ff., 194, 215,
+ Ch. XIII, 332, n., 339-40, 363-81, 521-23;
+ an abstract number, distinguished from concrete goods, 161;
+ a pecuniary magnitude, 16-64, 271, 277-78;
+ confusions of, with production, or with stock, 225ff., 281,
+ 296, n., 306-07, 363, n., 521, n.;
+ governed by dynamic causes, 262-66, 392, 474;
+ quantity theory doctrine of causes governing, 217-18, 218, n.,
+ 240, 255, 256, 257, 294, 522, n.;
+ real estate trade in, 198, 254, 264, 317;
+ relation of, to money and credit, Ch. XII, Ch. XIV, 391-92,
+ 532-36;
+ relation of, to price level, 160-66, 363, 381-82, 536;
+ retail trade in, 173, 184, 232, 242-44, 369, n., 444-45, 447,
+ 448-49, 463, 489, 531;
+ speculation chief factor in, Ch. XIII.
+ See SPECULATION.
+ Wholesale trade in, 232, 243, 244-46, 253-54, 369, n., 381.
+ See also BARTER, TRANSACTIONS, PAYMENTS, OVERCOUNTING,
+ UNDERCOUNTING.
+
+ "Transactions, total," relation of, to bank clearings, 348-51, 353,
+ 359, n., 360;
+ relation of, to "deposits," 349-51, 353.
+
+ "Transition periods," Ch. X, 196, 218, 262-66, 293, 298-99, 392-93,
+ 537ff., 548, 578-81, 589.
+ See "NORMAL TENDENCY," STATICS, DYNAMICS.
+
+ Trosien, 319, n.
+
+ Trust companies, 338, 342, n., 343, 345-48, 498-99, 505-09, 516, n.;
+ New York City, "deposits" in, 345-48;
+ clearings of, 345-47;
+ deposits of, 345, 516, n.;
+ collateral loans of, 505-07;
+ reserves of, 346-47, 531
+
+ Turgot, 78, n., 301, n.
+
+
+U
+
+ Undercounting in estimates of volume of trade, 168, n., 200, n.,
+ 231, n., 364-65, 369-81.
+ See OVERCOUNTING, BARTER.
+
+ Underwriters, 32, 488, 523, n.
+
+ Urban, W. M., 29, n.
+
+ "Use theory." See INTEREST.
+
+ Utility. See MARGINAL UTILITY.
+
+
+V
+
+ Vacuum, monetary, 323.
+
+ Value, Part I, 388-89 and _passim_;
+ absolute _vs._ relative, 7ff., 56-57, 77-78, 81, 86ff., 109-110,
+ 123, 156, 158-59, 303, 312, 328, 388-89, 402, n., 440, n.,
+ 449;
+ abstract units of, 451;
+ exchange and, 9-11, 401ff., 483-84;
+ wealth and, 5, 41, 388;
+ as generic, 26, 288, 467;
+ _differentiæ_ of species of, 26ff.;
+ as quality, 5, 41, 97-98, 388;
+ as quantity, 5, 41, 97, 98, 388;
+ control over, 575ff.;
+ causal theory of. See CAUSAL THEORY.
+ Definition of, 5-7, 388;
+ derived, becomes independent, 40, 137ff., 391, 480, 481, n.,
+ 562, n., 563, n.
+ See also IMPUTATION THEORY, CAPITALIZATION THEORY, RANKS OR ORDERS
+ OF GOODS.
+ Formal and logical aspects of, 5ff., 41, 86, 98, 388-89, 401-02, n.;
+ functions of, 10, 27, 43, 57, 87, n., 388, 440, 487, 552, 562, n.,
+ 572, 585-86;
+ "human nature," 30, n.;
+ "inner objective," 13, 88, 110, 402, n.;
+ institutional. See INSTITUTIONAL VALUES.
+ "Intrinsic," 24;
+ "intrinsic causes of," 14, n.;
+ objective, 85, 87, 100;
+ of consumers' goods, 34ff., 300;
+ of diamonds, 438-42;
+ of gold. See GOLD.
+ Of instrumental goods, 38ff., 297, 300ff., 304, 467;
+ of money. See MONEY and ANALYTICAL TABLE OF CONTENTS.
+ Of stocks and bonds, 30-31, 32, 36-41, 300ff., 462;
+ "participation," 29, 30, n.;
+ "personal," 19, 86, 88, 89;
+ "prestige," 410-11, 438-42, 452-53;
+ "public economic," 13, 86, 88, 89;
+ "something physical," 135;
+ subjective, 85, 86, 88, 99, 100, 401-02, n.;
+ subjective, in exchange, 88, 89, 91, 99, 100, 101, 112-119,
+ 137, n.
+ See MONEY, VALUE OF, SOCIAL VALUE, PRICE, RATIO OF EXCHANGE,
+ "PURCHASING POWER," "POWER IN EXCHANGE," MARGINAL UTILITY,
+ COST OF PRODUCTION, SUPPLY AND DEMAND, ETC.
+
+ Value theory _vs._ price theory. See PRICE THEORY.
+
+ Values, concatenation of, 313-14;
+ simultaneous rise or fall of, 8.
+
+ Van Antwerp, W. C., 372, n., 374, n.
+
+ Van Hise, C. R., 208, n.
+
+ Variables and constants, 97, 119, 143-44, 204-05, 256-57.
+
+ Veblen, T. B., 37, n., 411, 439, 477, n., 556, 560-64, 569, 570, 580,
+ 582, 585.
+
+ Velocity of circulation, 85, Ch. VI, 117, 131, 143, 194, Ch. XII, 290,
+ 292, 298, 309, 310, 333, n., 339, 361-63, 394;
+ "coin transfer" _vs._ "person-turnover" concepts of, 203-04, 308;
+ as causal entity, 204, 209, 213-13, 214;
+ quantity theory analysis of causes governing, 143, 203, 205ff., 309;
+ most highly flexible factor in "equation of exchange," 205;
+ varies with trade, 209ff., 306-08, 394;
+ varies with prices, 308-10, 394;
+ varies with value of money, 215;
+ meaningless abstract number, 204.
+
+
+W
+
+ Wagner, A., 25, n.
+
+ Walker, Amasa, 401, n.
+
+ Walker, F. A., 46, 62, 169, 170, n., 219, 220, n., 237, 414, n.,
+ 419, n., 521, n.
+
+ Wall Street. See NEW YORK CITY, STOCK EXCHANGE, NEW YORK CITY CLEARING
+ HOUSE, SPECULATION, MONEY MARKET, "MONEY TRUST," ETC.
+
+ Walras, L., 91, n.
+
+ Walsh, C. M., 188, n.
+
+ Wants, social nature of, 35ff.;
+ competitive. See COMPETITIVE DISPLAY.
+
+ War, 108, 140, n., 194, 427, 549-51;
+ World War, 136, 139, n., 142, 416, 427, 481, 521, 539, 550, n.;
+ American securities returned during, 521, n.
+
+ War loans, 463, n., 464, n., 480-81.
+
+ Wealth, 440;
+ definitions of, 5, n.;
+ relation of, to value, 5;
+ distribution of. See DISTRIBUTION OF WEALTH.
+
+ "Wealth of nations," theory of, 262, 395, 556, 569.
+
+ Weighting, in statistics, 163ff., 229, 229, n., 272, n., 341, 361,
+ 383.
+
+ Weston, N. A., 339, 341, 342, n., 360.
+
+ Wheat as money, 407.
+
+ Whitaker, A. C., 65, 154, 319, n.
+
+ White, Horace, 209, 211, 345, n., 401, n.
+
+ Wholesale "deposits." See "DEPOSITS."
+ Trade. See TRADE, VOLUME OF.
+
+ Wicksell, Knut, 128.
+
+ Wicksteed, P. A., 91, n., 115, n., 116, 117, 214.
+
+ Wieser, F. von, 14, 48, 49, 70, 80, 83-90, 99, 100, 101, 102, 106,
+ 109, 111, 308, n.
+
+ Williams, A., 152.
+
+ Williams, Clark, 347.
+
+ Willoughby, W. W., 18, n.
+
+ Wilson, E. B., 164, 165.
+
+ Withers, Hartley, 221, 222, 540, n.
+
+ Wittner, Max, 289, n.
+
+ Wolfe, O. Howard, 349, 353, n., 359, n.
+
+ Wolff, S., 289, n.
+
+
+X
+
+ _xy = c_, 149.
+
+
+Y
+
+ Yule, G. U., 237, n.
+
+
+Printed in the United States of America
+
+ * * * * *
+
+
+
+
+FOOTNOTES
+
+
+[1] _Social Value_, Houghton Mifflin, Boston, 1911.
+
+[2] Cooley, C. H., "Valuation as a Social Process," _Psych. Bull._, Dec.
+15, 1912; "The Institutional Character of Pecuniary Valuation,"
+_American Journal of Sociology_, Jan. 1913; "The Sphere of Pecuniary
+Valuation," _Ibid._, Sept. 1913; "The Progress of Pecuniary Valuation,"
+_Quart. Jour. of Econ._, Nov. 1915. Clark, J. M., "The Concept of
+Value," and "A Rejoinder," _Quart. Jour. of Econ._, Aug. 1915. Anderson,
+B. M., Jr., "The Concept of Value Further Considered," _Ibid._;
+"Schumpeter's Dynamic Economics," _Pol. Sci. Quart._, Dec. 1915. Perry,
+R. B., "Economic Value and Moral Value," _Quart. Jour. of Econ._, May,
+1916. Bilgram, Hugo, "The Equivalent Concept of Value," _Ibid._, Nov.
+1915. Haney, L. H., "The Social Point of View in Economics," _Ibid._,
+Nov. 1913 and Feb. 1914. Johnson, A. S., in _American Economic Review_,
+June, 1912, pp. 320 _et seq._ Carver, T. N., in _Jour. of Pol. Econ._,
+June, 1912. Mead, G. H., in _Psych. Bull._, Dec. 1911. Ellwood, C. A.,
+in _American Jour. of Sociology_, 1913. Ansiaux, M., in _Archives
+Sociologiques, Bulletin de l'Institut de Sociologie Solvay_, May 25,
+1912, pp. 949-55.
+
+Professor Cooley's articles, which I have listed first in this note,
+have in certain important particulars shifted the emphasis and changed
+the method of approach. He is more interested in the general
+sociological aspects of the value problem than in the technical economic
+aspects. In considering economic value, he is more interested in its
+general social functions than in its function as a tool of thought for
+the economic theorist. He has, therefore, been less bound by schemata
+than I have in the discussion. This different method of approach,
+coupled with a singular charm in exposition which characterizes
+everything Professor Cooley writes, makes it seem probable to me that
+readers who may find the doctrine as I set it forth unconvincing, will
+be convinced by Professor Cooley's exposition. I hope, too, that
+Professor Cooley's articles, which have been scattered among three
+periodicals, may soon appear together under one cover.
+
+[3] Including many whose formal definitions are quite different, and who
+would repudiate the contentions here advanced! _Cf._ my article, "The
+Concept of Value Further Considered," _Quarterly Journal of Economics_,
+Aug. 1915, and _Social Value_, chs. 2 and 11.
+
+[4] Definitions of wealth differ, and there are few if any definitions
+of wealth broad enough to make it true that only items of wealth have
+value. All wealth has value, but not all value is embodied in wealth.
+Thus, stocks and bonds, and "good will" have value. Few writers would
+classify them as wealth. The distinction between wealth and property is
+employed by many writers to meet the difficulty here presented, and it
+is held that these intangibles have only the value of the wealth to
+which they give title. In a logical schema, on the assumption of a
+fluid, static equilibrium, this may serve. It is true in fact, however,
+that many of these intangibles have value apart from the wealth to which
+they give title. But these are complications which I reserve for a later
+part of this chapter, for the chapter on "Statics and Dynamics," and (in
+the case of irredeemable paper money) for the chapter on "Dodo Bones."
+
+[5] The notion of ratio of exchange as a ratio between values is
+strictly accurate only under static assumptions. Goods, in actual life,
+are not always exchanged strictly in accordance with their values. _Cf._
+my article, "The Concept of Value Further Considered," _Q. J. E._, Aug.
+1915, pp. 698-702. In cases where prices, or exchange relations, are not
+in accord with values, the term "ratio of exchange" is inapplicable,
+since there are no quantities to be terms of the ratio--except the pure
+abstract numbers of the commodities, each measured in its own unit,
+exchanged.
+
+[6] In chapter 17 of _Social Value_, I have followed the German usage in
+broadening the term, price, to cover all exchange relations. This has
+led to misunderstanding on the part of some readers, and it has seemed
+best to me to return to what appears to be the more familiar usage. It
+is purely a question of convenience. Practically, ratios of exchange
+which are not money-prices rarely come in for discussion, outside the
+preliminary chapter on definition! Professor Fetter, in his article on
+the "Definition of Price," in the _American Economic Review_, Dec. 1912,
+proposes to broaden the term price in the manner which I am here
+abandoning, and his count of economists would seem to leave usage about
+equally divided between the broader and narrower uses of the term. It
+does not seem to me to be a point worth arguing about, however, and
+since I am practically convinced that cause of misunderstanding will be
+removed by using price to mean "money-price," I shall so use the term in
+this book, using ratio of exchange, or exchange relation, to express the
+broader concept.
+
+[7] E. g., Böhm-Bawerk, _Grundzüge der Theorie des wirtschaftlichen
+Güterwerts_, Conrad's _Jahrbücher_, 1886, p. 478, n.; Carver, "Concept
+of an Economic Quantity," _Quarterly Journal of Economics_, 1907.
+
+[8] This distinction is elaborated _infra_, in the chapter on the
+"Origin of Money."
+
+[9] It is a matter of high importance that the value notion should be
+extended beyond exchange, if the economist is to be able to apply his
+theory to such highly important economic problems as socialism. _Cf._
+Schäffle, _Quintessence of Socialism_, and Clark, J. M., _Quart. Jour.
+of Econ._, Aug. 1915, p. 710.
+
+[10] As shown, _infra_, in the chapters on "Supply and Demand," "Cost of
+Production," "Capitalization Theory," etc.
+
+[11] _Vide Social Value_, p. 176, n. _Cf._ Davenport, _Value and
+Distribution_, chapter on "Ricardo."
+
+[12] Knies, _Das Geld_, vol. I of _Geld und Credit_, Berlin, 1873, pp.
+113-125, esp. 124.
+
+[13] Chapter on "Value" in the _Philosophy of Wealth_, and ch. 24 of the
+_Distribution of Wealth_.
+
+[14] _Social Value_, ch. 7.
+
+[15] T. S. Adams, "Index Numbers and the Standard of Value," _Jour. of
+Pol. Econ._, vol. x, 1901-02, pp. 11 and 18-19; Kinley, "Money", p. 62;
+W. G. L. Taylor, "Values, Relative and Positive," _Annals of the Amer.
+Acad._, vol. ix; Merriam, L. S., "The Theory of Final Utility in its
+Relation to Money and the Standard of Deferred Payments," _Annals of the
+American Acad._, vol. iii. and "Money as a Measure of Value," _Ibid._,
+vol. iv; Scott, W. A., "Money and Banking", 1903 ed., ch. III. Professor
+Scott, in a letter to the writer, expresses the opinion that a value
+concept which makes the value of a good a quantity, socially valid,
+regardless of the particular holder of the coin or commodity in
+question, and regardless of the particular exchange ratio into which the
+value quantity enters as a term, "is absolutely essential to the working
+out of economic problems." Johnson, A. S., "Davenport's Economics and
+the Present Problems of Theory," _Quarterly Journal of Economics_, May,
+1914, and _American Econ. Rev._, June, 1912, p. 320.
+
+[16] Cf. also Wieser's _Natural Value_, p. 53, n. Senior's "intrinsic
+causes of value" comes to the same thing.
+
+[17] Cf. _Quarterly Journal of Economics_, Aug. 1915, pp. 681-82, esp.
+681, n.
+
+[18] Among the leading figures in economics to whom this doctrine is
+unacceptable, I would mention especially Professor H. J. Davenport,
+_Value and Distribution_ and _The Economics of Enterprise_. A writer who
+seeks to minimize the importance of the issue between the relative and
+the absolute conceptions of value is Professor J. M. Clark, in
+_Quarterly Journal of Economics_, Aug. 1915. Professor Clark seems to
+agree with much of what has been said here, and the present writer would
+agree with Professor Clark, as indicated above, that for many purposes
+we do not need to look behind prices--entering a _caveat_ that this is
+true only so long as we can assume a fixed absolute value of money.
+
+[19] The psychology of this statement, which involves hedonism, needs
+improvement, but the issue need not be discussed here. _Cf. Social
+Value_, ch. 10.
+
+[20] As Professor R. B. Perry, _Quart. Jour. of Econ._, May, 1916.
+
+[21] In this I am following a line of thought developed by Professor
+John Dewey in a lecture delivered before the Harvard Philosophical Club
+in 1913-14.
+
+[22] For the elaboration of these ideas, cf. Hegel, _Philosophy of
+History_, _passim_; Willoughby, _The Nature of the State_, _passim;_
+Davidson, T., _History of Education_, New York, 1900, _passim_;
+Bosanquet, B., _Philosophical Theory of the State_; Royce, J., _The
+World and the Individual_.
+
+[23] Tarde, _Laws of Imitation_; Baldwin, _Social and Ethical
+Interpretations_.
+
+[24] _Human Nature and the Social Order._
+
+[25] _Cf._ Ellwood, C. H., _Some Prolegomena to Social Psychology_,
+Chicago, 1901, and Cooley, C. H., _Social Organization_, New York, 1909.
+See also _Social Value_, ch. 9.
+
+[26] _Cf. Social Value_, ch. 8. H. J. Davenport is the best modern
+representative of this extreme individualism in economics. Individualism
+is nearly dead in modern political, ethical, and sociological theory.
+Revivals of it appear, however, in W. Fite, _Individualism_, and in a
+recent article by R. B. Perry, "Economic Value and Moral Value," _Quart.
+Journal of Economics_, May, 1916. (I have discussed Professor Fite's
+views in the _Pol. Sci. Quart._ of June, 1912.) Professor Perry would
+there appear to reduce ethical value to a purely individual phenomenon.
+But he really brings in a "categorical imperative," not derived from the
+values of the individual, by the "back door." "Now our general moral law
+prescribes that an agent shall take account of all the interests which
+his conduct affects, or shall judge his conduct by its consequences all
+round." (_Loc. cit._, p. 481.) Just how this "general moral law" is to
+be derived from individual values, is not made clear. That the wants of
+every man should count equally with the wants of the agent is a
+principle which one would expect from Kant or Fichte, but hardly one
+which individualism can expect to maintain.
+
+[27] I use "volition" here in that wide sense which makes it cover both
+the motor and the affective phases of mind. Munroe Smith would emphasize
+the motor aspect, where Savigny stresses feeling and sentiment.
+
+[28] "Jurisprudence," a lecture delivered before the faculty of Columbia
+University, Feb. 1908, New York, The Columbia University Press, 1909, p.
+14.
+
+[29] I ran across this in Wagner's _Grundlegung_. Wagner had found it in
+Raul. It is from _Troilus and Cressida_, Act II, Scene II.
+
+[30] Davenport, _Value and Distribution_, pp. 184, n., and 330-31, n.;
+Jevons, _Theory of Political Economy_, pp. 14, 78-84, esp. 83. _Cf.
+Social Value_, ch. 4. This seems to be the position of Professor R. B.
+Perry, also, though he is not so extreme as Davenport. _Loc. cit._
+
+[31] This term carries no connotation of teleology, as here used. I am
+merely trying to state what the different kinds of value _do_, as a
+matter of fact.
+
+[32] The _extent_ to which the values of consumption goods and services
+are reflected in other economic values will receive attention below, in
+the present chapter.
+
+[33] _Cf. Social Value_, p. 125, and Urban, _Valuation, passim_. Urban's
+idea of "participation values" is better expressed by Cooley's phrase,
+"human nature values," while Cooley's excellent phrase, "institutional
+values" characterizes the more complex values in which classes and
+institutions are specially _weighted_. _Cf._ Cooley's articles referred
+to above, and _Social Value_, chs. 11-15, inclusive.
+
+[34] "The Institutional Character of Pecuniary Valuation," _American
+Journal of Sociology_, Jan. 1913, p. 546.
+
+[35] This, unfortunately, is not high praise, as the Federal Judiciary
+in general sets a lamentably low standard in these matters.
+
+[36] Neither "desire" nor "satisfaction" is really accurate here, but I
+do not wish to digress for a discussion of the psychology of value in
+the individual mind. The present argument can be developed without it.
+The matter is discussed in detail in ch. 10 of _Social Value_.
+
+[37] Ross, E. A., _Social Psychology, passim_.
+
+[38] _Cf._ Veblen, T. B., _Theory of the Leisure Class_, and Carlile, W.
+W., _Evolution of Modern Money_.
+
+[39] _Social Value_, chs. 3-7, esp. ch. 5.
+
+[40] But land does often have value which it is impossible to explain on
+the basis of any income which may reasonably be expected from it, even
+in the remote future.
+
+[41] P. 174.
+
+[42] _Cf._ the discussion of Wieser, Schumpeter and von Mises in the
+chapter on "Marginal Utility," _infra_.
+
+[43] Flux, W. A., _Economic Principles_, London, 1904, pp. 4, 27, 29;
+Taussig, F. W., _Principles of Economics_, New York, 1911, vol. I, pp.
+141-143. _Cf._ my _Social Value_, ch. 5.
+
+[44] _Cf._ the present writer's _Social Value_, chs. 3-6, inclusive.
+
+[45] I am here abstracting from an important factor, namely, that not
+all prices are affected equally by changes in the value of money. Some
+prices are fixed by law and custom, and some incomes are tied by long
+time contracts. Thus, it will happen, in many cases, that supply and
+demand for a given good will be unequally affected by a change in the
+value of money. This means that certain values are _tied_ to the value
+of money, rising and falling with it, so that the amount of _power_
+which some elements in the economic situation are able to exert through
+supply-price-offer and demand-price-offer are at the mercy of changes in
+the value of money. But this is an element which is incalculable, on the
+basis of the supply and demand concepts, and must be abstracted from if
+we are to make any definite assertions as to the effect of increase or
+decrease of demand in the active sense on supply in the passive sense,
+or vice versa. Unless we make this abstraction, and unless we assume a
+fixed value of money, we might find increase of demand in the active
+sense (nominal) leading sometimes to an increase, and sometimes to a
+decrease of supply in the passive sense, or rather, being accompanied by
+either increase or decrease of supply in the passive sense. No law would
+be possible. In practice, both of these abstractions are more or less
+consciously assumed.
+
+[46] I think that it is a feeling that Mill has left out the
+psychological factors in supply and demand which led Cairnes to the
+effort to give definiteness to other and vaguer notions on the subject.
+
+[47] _Cf. Social Value_, ch. 2; "The Concept of Value Further
+Considered," _Quart. Jour. of Economics_, Aug. 1915. For the doctrine
+that supply and demand, and other elements of current price theory,
+assume a fixed absolute value of money, see _Social Value_, p. 166, n.,
+and ch. 17.
+
+[48] _Leading Principles_, ch. on "Supply and Demand."
+
+[49] _Cf. Social Value_, pp. 29-30, and 64-71.
+
+[50] _Cf._ the discussion, _infra_, of "T" in the "equation of
+exchange."
+
+[51] Cotton is chosen for this illustration because it has actually
+happened, more than once, that a large crop has sold for a smaller
+aggregate price than a smaller one. Thus, not to take an extreme
+illustration, the crop of 1910-11 was 11,568,334 bales. That of 1911-12
+was 15,553,073 bales. The average price of spot cotton at New York from
+Oct. 1910 to June, 1911, inclusive, was almost 15c. per lb.; the average
+price of spot cotton in New York during the same months in 1911-12 was
+not quite 10 cents per lb. On this basis, the eleven million odd bales
+of 1910-11 sold for substantially more than the fifteen million odd
+bales of 1911-12.
+
+[52] Nor is there anything in the hypothesis to reduce the number of
+times any good needs to be exchanged against money. Rather there would
+be an increase of exchanging, as speculation took place to bring about
+the needed readjustments. For the present, I abstract from this. _Cf.
+infra_, the chapter on "Volume of Money and Volume of Trade."
+
+[53] I shall recur to this point in the chapter on "The Quantity Theory
+and International Gold Movements."
+
+[54] _Quart. Jour. of Economics_, 1894-95, p. 372.
+
+[55] _Cf._ Davenport, _Value and Distribution_, and Whitaker, _Labor
+Theory of Value_.
+
+[56] _Cf. Social Value_, pp. 29-30; 64-71.
+
+[57] I incline to the view that the explanation of costs by foregone
+positive values needs supplementing by a recognition of the rôle of
+_negative social values_, and that thus interpreted, "real costs" have a
+minor part to play. But I have not thought the matter through
+satisfactorily, and shall find no occasion to use the doctrine in the
+present volume.
+
+[58] This doctrine as applied to rates on call loans appears in
+Seligman's _Principles of Economics_, 1912 ed., p. 395. The
+peculiarities of call loans have also been discussed by C. A. Conant,
+_Principles of Money and Banking_, I, p. 171. Conant there refers to a
+discussion by Joseph F. Johnson, in _Pol. Sci. Quarterly_, Sept. 1900,
+p. 500. There are some very interesting distinctions between the "hire
+price" and the "purchase price" of money developed by J. A. Hobson, in
+his _Gold, Prices and Wages_, pp. 153 _et. seq._
+
+[59] One "pure rate" of interest, for loans of all periods over, say,
+three years, is doubtless, a myth, or better, a methodological device
+for simplifying thinking in connection with the theory of interest, and
+the capitalization theory. It is not necessary for our purposes,
+however, to give detailed analysis to the notion. We shall discuss the
+capitalization theory as we find it, assuming that, as a matter of fact,
+the difference between loans of 20 years and loans of 35 years, or in
+perpetuity, of equal quality in other respects, may be abstracted from,
+with safety.
+
+[60] The price-level is a _weighted_ average. These elements dominate
+it. _Cf._ our discussion, in the chapter on the "Volume of Money and the
+Volume of Trade," _infra_, of the elements entering into trade. We shall
+make use of the capitalization theory at various points in our
+discussion of general prices. _Cf._ the chapter on "The Passiveness of
+Prices," where it is shown that the capitalization theory and the
+quantity theory are irreconcilable.
+
+[61] There is an extensive body of controversial literature connected
+with the capitalization theory, which it is unnecessary, for present
+purposes, to consider. One interesting line of doctrine is that
+developed by DR Scott (_Jour. of Pol. Econ._, Mar. 1910) and H. J.
+Davenport (_Yale Review_, Aug. 1910), in which ordinary formulations are
+criticised as assuming a "social rate" of interest, and in which the
+effort is made to work the thing out on the basis of extreme
+individualization, each man having a rate of discount of his own. I have
+accepted the doctrine in the general form in which it has been developed
+by Böhm-Bawerk (in criticism of Turgot and Henry George in his _Capital
+and Interest_), by Fetter, in his _Principles of Economics_, and by
+Fisher in his _Rate of Interest_, abstracting from points on which these
+writers disagree. My criticism of their doctrines, were it necessary
+here to develop it, would rest on the ground that their treatment of the
+general interest problem is too individualistic, and I should side with
+them as against Scott and Davenport. But these matters are aside from
+our present problem.
+
+In our chapter on "Marginal Utility" we shall meet the capitalization
+theory again, as applied to the value of money by David Kinley. We shall
+also take it up in the chapters on "Dodo Bones," and "The Functions of
+Money."
+
+[62] _Social Value_, chs. 3-7. The point is discussed _infra_ in the
+present chapter.
+
+[63] Fisher, I, _Purchasing Power of Money_, p. 32.
+
+[64] Edition of 1903.
+
+[65] _Cf._ the chapter on "Dodo Bones," _infra_.
+
+[66] _Cf._ Menger's art. "Geld," Conrad's _Handwörterbuch_, 328, 3rd
+ed., vol iv, p. 566.
+
+[67] _Cf._ Helfferich, _Das Geld_, ed. 1903, p. 480.
+
+[68] Discussed more fully _infra_, chapter on "Dodo Bones."
+
+[69] I make virtually no reference to the "spoken" part, which is
+chiefly concerned with index numbers.
+
+[70] Chapter on "Dodo Bones."
+
+[71] Chapter on "Barter."
+
+[72] In its psychological explanation, this bears somewhat the same
+relation to the social value concept of the present writer that the
+social mind concept of Giddings and Lewes bears to the social mind
+concept of the present writer. _Cf._ _Social Value_, ch. 9. Wieser's
+concept excludes individual peculiarities. It is an abstraction from
+individual values, a distillation of their common essence. The social
+value concept of the present writer is a focal point in which are
+summarized all the individual values, whether alike or divergent, and
+not merely the individual marginal utilities of the goods in question
+(Wieser's only factors) but also the individual emotions which affect
+the distribution of wealth. Wieser's concept is based on a study of
+individual marginal utilities considered as atomic elements; that of the
+present writer looks on the social mind as an organic whole, in which
+individual mental processes are phases, and does not try to synthesize a
+social value out of elements, but rather, to analyze it into elements.
+In the function in economic theory for which they are destined, however,
+the two concepts have much in common. Both seek to be the fundamental
+economic quantity. Both seek to be causal forces, lying behind prices,
+even though expressed in prices; both oppose the conception of value as
+merely relative.
+
+[73] _Social Value_, chs. 5, 6, 7, and 13. _Infra_ in the present
+chapter.
+
+[74] See especially the chapter on "The Passiveness of Prices."
+
+[75] _Cf._ the writer's "Schumpeter's Dynamic Economics," _Political
+Science Quarterly_, Dec. 1915. Schumpeter's theory, as there presented,
+is based on the brief discussion in his _Theorie der wirtschaftlichen
+Entwicklung_ (Leipzig, 1912), pp. 61 et seq., 105, 166-667, 116, 464,
+and on Schumpeter's verbal expositions of the theory during his American
+trip. Since that account was published, Professor W. C. Mitchell has
+given an account of Schumpeter's doctrine, based on the fuller
+discussion in Schumpeter's _Wesen und Hauptinhalt der theoretischen
+Nationalökonomie_, which is in accord with the account here given.
+(Mitchell, in _Papers and Proceedings_, Supplement to March, 1916,
+_American Econ. Rev._, p. 150.) Mitchell attributes the essential
+elements of Schumpeter's theory to Walras. The first exposition in
+English of the conception, so far as the present writer is aware, is in
+Irving Fisher's _Mathematical Investigations in the Theory of Value and
+Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. Professor
+Fisher, in his preface, accords priority to Jevons, Auspitz and Lieben,
+and to Walras. The conception is not to be found in Jevons, though many
+of the ideas involved in it are. The first non-mathematical exposition
+of the doctrine, so far as I know, is by Schumpeter. As will be made
+clear in a footnote at the end of the present chapter, neither Wicksteed
+nor Davenport has really forced the problem through, to the full
+equilibrium picture, and neither has escaped the Austrian circle. I do
+not concur with Professor Mitchell's interpretation of Wicksteed on this
+point. It may well be that mathematical method, with a system of
+simultaneous equations, was necessary for the development of the idea.
+If so, it illustrates both the strength and the weakness of mathematical
+economic theory: it clarifies thinking, but it gets no causal theory! At
+all events, no causal theory emerges in this case.
+
+[76] _Positive Theory of Capital_, Bk. IV, and _Grundzüge der Theorie
+des wirtschaftlichen Güterwerts_, in Conrad's _Jahrbücher_, 1886. The
+writer who would adhere to Schumpeter's doctrine must give up all notion
+that any individual occupies a critical "marginal" position. All men are
+equally marginal in Schumpeter's scheme.
+
+[77] _Positive Theory of Capital_, p. 156.
+
+[78] Schumpeter's scheme gives no money-prices. No form of this scheme
+gives any quantitative values. Nothing but ratios can come from it.
+
+[79] _Supra_, chs. on "Value" and "Supply and Demand."
+
+[80] See, _infra_, the chapters on "Volume of Money and Volume of
+Trade," and "The Functions of Money."
+
+[81] _Infra_, chs. on "Origin of Money," "Functions of Money," and
+"Credit."
+
+[82] _Supra_, ch. on "Supply and Demand."
+
+[83] See note at the end of this chapter.
+
+[84] _Supra_, chapter on "Cost of Production."
+
+[85] That this is wholly alien to Böhm-Bawerk's thought is sufficiently
+indicated by Böhm-Bawerk's vigorous criticism of Professor J. B. Clark,
+in "The Ultimate Standard of Value," _Annals of the American Academy_,
+vol. v, pp. 149-209. It may be noticed that Schumpeter makes use of
+Menger's and Böhm-Bawerk's general doctrine of imputation of the value
+of goods of the first order to goods of higher orders, without seeing
+that his equilibrium picture gives no basis for such a procedure.
+
+[86] _Cf._ comments on Professor R. B. Perry's view, in the long note at
+the end of this chapter.
+
+[87] _Cf._ Böhm-Bawerk, _Grundzüge_, etc. (_loc. cit._), pp. 5, 478, n.;
+_Social Value_, chs. 2 and 11; J. M. Clark and B. M. Anderson, Jr., in
+_Quarterly Journal of Economics_, 1915--"The Concept of Value." I may
+add that this equilibrium scheme is, in my judgment, equally useless as
+the basis of a hedonistic theory of _welfare_, since it is _absolute_
+amounts of utility that are significant there.
+
+[88] _Theorie der wirtschaftlichen Entwicklung_, pp. 83-84.
+
+[89] _Loc. cit._, ch. 3, part ii.
+
+[90] _Ibid._, p. 199.
+
+[91] For the assimilation of credit phenomena to the general phenomena
+of value, by means of the social value doctrine, see _infra_ our section
+on "Credit." The social value doctrine is still further generalized in
+the chapter on "The Reconciliation of Statics and Dynamics."
+
+[92] _Ibid._ p. 169.
+
+[93] _Vide Mathematical Investigations_, _loc. cit._, p. 62, where
+Fisher assumes _one_ price to be unity, "to determine a standard of
+value." _Purchasing Power of Money_, pp. 174-175.
+
+[94] _Loc. cit._, pp. 72 _et seq._
+
+[95] Pp. 132-136.
+
+[96] See _Social Value_, chs. vi and vii.
+
+[97] Bk. ii, ch. vi.
+
+[98] "_Cf._ Davenport, _Value and Distribution_, 560. 'For, in truth,
+not merely the distribution of the landed and other instrumental,
+income-commanding wealth in society, but also the distribution of
+general purchasing power ... are, at any moment in society, to be
+explained only by appeal to a _long and complex history_ [italics mine],
+a distribution resting, no doubt, in part upon technological value
+productivity, past or present, but in part also tracing back to bad
+institutions of property rights and inheritance, to bad taxation, to
+class privileges, to stock-exchange manipulation ... and, as well, to
+every sort of vested right in iniquity.... _But there being no apparent
+method of bringing this class of facts within the orderly sequences of
+economic law, we shall--perhaps--do well to dismiss them from our
+discussion_....' [Italics are mine.] It may be questioned if the
+'orderly sequence' is worth very much if it ignore facts so decisive as
+these! It is precisely this sort of abstractionism which has vitiated so
+much of value theory. Most economists slur over the omissions; Professor
+Davenport, seeing clearly and speaking frankly, makes the extent of the
+abstraction clear. We venture to suggest that the reason he can find no
+place for facts like these within the orderly sequence of his economic
+theory is that he lacks an adequate sociological theory at the basis of
+his economic theory. A historical _regressus_ will not, of course, fit
+in in any logical manner with a synthetic theory which tries to
+construct an existing situation out of existing elements. Our plan of a
+_logical_ analysis of existing psychic forces makes it possible to treat
+these facts which have come to us from the past, not as facts of
+different nature from the 'utilities' with which the value theorists
+have dealt, but rather as fluid psychic forces, of the same nature, and
+in the same system, as those 'utilities.'"
+
+[99] Of course, we do not mean to question the immense light which
+history throws upon the nature of existing social forces.
+
+[100] _Theory of Political Economy_, 4th ed., p. 34.
+
+[101] Art. "Geld," in _Handwörterbuch der Staatswissenschaften_.
+
+[102] _Cf._ Helfferich, _Das Geld_, Leipzig, 1903, for the same
+terminology, pp. 485-486.
+
+[103] Exchange creates _values_. It does not necessarily create
+_utilities_. Wheat going from a famine-stricken part of India to a place
+where it will sell for higher prices does not gain in utility thereby.
+
+[104] A possible exception to this general statement might be made for
+Professor H. J. Davenport, who would insist that his version of the
+utility theory is based on "relative marginal utility," rather than on
+marginal utility in Böhm-Bawerk's fashion. No critic has been more
+merciless than he in the criticism of the Austrian confusions of
+demand-curves with utility-curves, etc. But it is not clear to me that
+Professor Davenport has freed himself from the general doctrine that he
+criticises. I am not sure that he would accept Schumpeter's version of
+the Austrian theory as correct. It may be possible to _read_
+Schumpeter's doctrine _into_ chapter 7 of Davenport's admirable
+_Economics of Enterprise_, but it is not clear that one could read it
+_in_ the chapter! That individual price-offer depends on the marginal
+utilities of alternative goods, in comparison with the marginal utility
+of the good in question, Davenport does emphasize. But the complication
+that not merely the utilities of alternative goods, but also their
+_prices_, have to be taken into account, and that this involves circular
+reasoning when an effort is made to give a summary of the whole system
+of prices by means of individual utility calculations, he does not, so
+far as I can see, grapple with. He summarizes the thing on p. 104: "The
+steps, then, are from (1) utility to (2) marginal utility, thence to (3)
+the comparison of marginal utilities, and finally to (4) price-offer."
+He takes no account here of the complication that the third step is in
+large degree a comparison, not of marginal utilities proper, but rather,
+of "subjective values in exchange." Yet just in this lies a vital
+difficulty of utility theory, in so far as it attempts to explain
+causation. Moreover, Professor Davenport is seeking to explain the
+_causal_ relation of utility to _demand_, the old Austrian problem. The
+explanation of demand is, indeed, the problem with which all theories of
+value must come to terms, if they are to be of any use. As we have seen,
+Schumpeter's schema has no bearing whatever on the explanation of
+demand, or on _causation_ of any sort. Schumpeter's scheme leaves money
+out, and demand-curves run in money terms. Davenport's scheme assumes
+money--and "purchasing power." (_Loc. cit._, 91.) We have seen in the
+chapter on "Supply and Demand" that the notion of demand and supply
+involves money and a fixed absolute value of money. Professor Davenport
+is thus doubly assuming value, the thing to be explained! Laws of
+"relative marginal utility" developed on the assumption of money, and in
+abstraction from changes in the value of money, are not likely to be of
+service when the problem of the value of money itself is taken up. On
+pp. 95-96, Davenport comes closest to Schumpeter's doctrine, saying that
+"the total situation is directive of each individual in it," and that
+there are "mutual reactions," such that particular facts are both
+effects and causes, illustrated by the last person who jumps on a
+crowded raft--does he sink the others, or do they sink him? This
+recognizes the complexity of the problem, but it is not clear that it
+even purports to do more than that. What is called for is a _definition_
+of the essential elements in that "total situation," with precise
+statement as to what is assumed constant and what is allowed to vary,
+and an analysis of the "mutual reactions," with a starting point and a
+_terminus ad quem_,--an equilibrium in which "mutual reactions" cease to
+trouble with their endless circle! Schumpeter's schema, though meeting
+criticism on other scores, does meet this logical test, but Davenport's
+does not appear to do so.
+
+It is interesting to note that Professor Alvin S. Johnson, in his review
+of the _Economics of Enterprise_, concludes that Professor Davenport,
+instead of meaning by "relative marginal utility" anything of the sort
+that Schumpeter has in mind in his equilibrium picture of all utilities
+to all individuals, really has an absolute value in mind. (_Quarterly
+Journal of Economics_, May, 1914, pp. 433-436.) There is much in
+Professor Davenport's book to justify this interpretation.
+
+Professor Davenport's application of "utility" to the problem of the
+value of money will be found on pp. 267-275 of the _Economics of
+Enterprise_. The general discussion of money and credit in the
+_Economics of Enterprise_ has been exceedingly illuminating to me, and
+my indebtedness to it will appear in the present book.
+
+Much of what has been said of Davenport's "relative utility" theory may
+also be said of Wicksteed's. (_Common Sense of Political Economy_,
+London, 1910.) This is in many ways a remarkable book, characterized by
+excellencies of many different sorts. But it fails to present the
+utility theory in such a way as to avoid circular reasoning. Wicksteed
+sees the confusion of utility-curves with demand-curves, and protests
+vigorously and at length against it. (_E. g._, pp. 147-150.) He starts
+out by assuming money and a set of market prices. His earlier chapters
+are given to showing how the individual adjusts himself to the market,
+bringing his "marginal utilities" of various goods into harmony with the
+market prices. He recognizes that he has made these assumptions (pp.
+130-131), and that he cannot use the results thus achieved as an
+explanation of the market prices. They are "our goal, not our starting
+point." But by pp. 161-162 he finds himself with the "suspicion" that
+nothing special or peculiar is to be found in the laws of "market or
+current prices--a phenomenon which it is obviously impossible to regard
+as ultimate, which demands explanation, and which we have not yet
+explained.... Much remains to be done, but we can already see that the
+preferences of each individual help to determine the terms or conditions
+under which the choice of other members of the community must be
+exercised. If you take the individuals of the community two and two it
+is clear that the marginal preferences of each determine the limits
+within which direct exchanges with the other can be entertained, and we
+must already have at least a presentiment that the collective scale is
+the register of the final and precise 'resultant' of all these mutually
+determining conditions and forces."
+
+This seems to forecast Schumpeter's doctrine, but in the development
+which follows, we do not find it. The heart of his analysis of the
+causation of prices is in ch. vi, on "Markets." The "summary" which
+precedes that chapter again suggests Schumpeter's analysis--the notion
+of an all-embracing equilibrium. But when we get into the detailed
+analyses of the chapter we find nothing more than an exceedingly good
+account of the process by which supply and demand of particular goods,
+considered separately, become equated, through two-sided competition,
+and under conditions of monopoly. Instead of "relative marginal
+utilities," we see customers coming into the market with various
+money-prices in mind, and sellers trying out various money-prices--not
+marginal utilities, nor yet two or more marginal utilities in comparison
+with one another, but rather, money-prices, which, in the minds of the
+buyers may be supposed to represent "subjective values in exchange,"
+based on both marginal utilities _and_ objective prices of other things
+that enter into the budget, and which, in the minds of sellers,
+represent estimates of the prices which buyers may be induced to pay.
+Wicksteed does not transcend the circle. Finally, despite his caution to
+avoid the more glaring forms of the circle, and the confounding of
+demand-curves with utility-curves, and of utility with value, he does
+lapse into it in its completest form in expounding the Austrian doctrine
+of cost of production. "The only sense, then, in which cost of
+production can affect the value of one thing is the sense in which it is
+itself the value of another thing. Thus what has been variously termed
+utility, ophelemity, or desiredness, is the sole and ultimate
+determinant of all exchange values." (P. 391.) Here is the illicit leap
+from marginal demand price to marginal utility which all utility
+theorists make, sooner or later! It is true that costs in one place are
+reflections of _demand_ elsewhere. But it is not true that costs in one
+place have any definite quantitative relation to _utilities_ in another
+place!
+
+When Wicksteed comes to discuss the value of money, he makes slight use
+of the notion of abstract ratios among relative utilities, and employs a
+concept which he has nowhere vindicated or explained: the _value_ of
+money, as distinct from the reciprocal of the price-level, treating the
+value of money as something which can be directly influenced by sinister
+rumors affecting the credit of the Government, and which can be an
+independent cause affecting velocity of circulation, and the amount of
+trade done by means of money. _Loc. cit._, p. 623. See _infra_, our
+chapter on "Velocity of Circulation."
+
+The only writers I know at first hand who have really thought the thing
+through, and avoided the circle in form, are Schumpeter and Irving
+Fisher. (_Mathematical Investigations in the Theory of Value and
+Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. See
+bibliographical note, _supra_, in this chapter.) I have given an
+exposition of Schumpeter, rather than Fisher, because the former has put
+the doctrine in non-mathematical form. In the text I have indicated the
+limitations of their doctrine. Fisher definitely avows the impossibility
+of applying the doctrine to the problem of the value of money.
+_Purchasing Power of Money_, p. 174. Schumpeter doesn't apply it to
+money, and when he tries to work out a utility doctrine of money, he
+lapses into the Austrian circle in a very obvious form. In later
+writings, Fisher also seems to forget the limitations imposed on utility
+theory in his earlier essay. In his _Elementary Principles_, ed. 1912,
+Fisher lists (pp. 408-409) a great multitude of factors that might
+affect the price of pig iron, and then says: "Back of these causes lie
+other causes, multiplying endlessly as we proceed backward. But if we
+trace back all these causes to their utmost limits, they will all
+resolve themselves into changes in the marginal desirability or
+undesirability of satisfactions and of efforts, respectively, at
+different points of time, and in the marginal rate of impatience as
+between any one year and the next." Here these marginal psychic
+magnitudes, which in the earlier essay appeared merely as surface
+phenomena, resultants of a total situation, proportional to prices,
+causes of nothing, merely symptoms of a completed equilibrium, are
+erected into atomic _veræ causæ_, the ultimate ultimates!
+
+It is interesting to contrast this with a yet more recent statement by a
+philosopher who has undertaken a defence of the utility theory of
+economic value, Professor R. B. Perry, in the _Quarterly Journal of
+Economics_, for May, 1916. Considering the contentions of the present
+writer that many general social causes, in addition to the individual
+utilities concerned with consumption, are needed to explain changes in
+the values of goods, such as changes in fashion, mode, in general
+business confidence, in moral attitude toward different sorts of
+consumption, in the distribution of wealth, in taxes and other laws,
+Professor Perry says: "If the Austrian School has neglected this, then
+it needs to be corrected. But the essential contention of that school
+remains, so far as I can see, unaltered; _in that these changes work
+through individuals_ and have their _point of application_ in a more or
+less rational _comparison of needs_ made by the _individual buyer or
+seller_. Whatever affects these _individual schedules_ on a sufficiently
+large scale will affect prices. But to ignore the individual channels
+through which these forces pass, is elliptical." (Pp. 469-470. Italics
+mine.) Now I call attention to several points in the foregoing. First, I
+would contrast it with the doctrine quoted from Professor Fisher's
+_Elementary Principles_. Where Fisher puts the utilities far back in the
+realm of ultimate causation, making them the source from which spring
+all the proximate social causes which might affect the price of pig iron
+(such as "a trade war," "a change in fashion," a "change in incomes,"
+"decreasing foresight," etc., _loc. cit._, p. 409), Professor Perry
+would make individual utility schedules the final focal point, toward
+which converge, and through which pass, all the causal forces, however
+richly explained by antecedent social factors, which affect prices. The
+utility theory of value means all things to all men!
+
+But a second point with reference to Professor Perry's doctrine. It is
+perfectly true that _all_ social activities are the work of
+_individuals_. Society is nothing apart from the individuals who make it
+up. To think of society and the individual as separate and antithetical
+is a fallacy which I have criticised in detail in Part III of _Social
+Value_. The social value theory does not mean that there are social
+forces which do not run through individual channels. This is not to
+accept the notion that individuals are really, in their psychical
+nature, isolated monads, however. There is a functional unity of
+individual minds, and no individual can be understood in abstraction
+from society. But this view is as old as Aristotle. I have not contended
+that prices can change apart from the mental activities of individual
+men, working upon one another. So far there _may_ be no issue with
+Professor Perry.
+
+But there is a big issue when he contends that all the causation is
+focussed in _individual utility schedules_, and in a more or less
+rational comparison of needs made by the _individual buyer and seller_.
+This is _demonstrably erroneous_. Let us assume, for example, that
+utility schedules of every individual New Yorker remain unchanged, but
+that, through a change in the law (the work of individual men, under the
+influence of their own individual emotions and ideas, of, say, ethical
+character), incomes in New York City are _equalized_. Hold rigidly to
+the assumption that there are no changes in utility schedules. Will
+there not be, none the less, a radical readjustment of prices? Will not
+the prices of Riverside palaces and steam yachts sink and the prices of
+things which the poor esteem rise? The utility-curves of the erstwhile
+rich, assumed to remain unchanged, no longer count for so much as before
+in the market. The rich cannot go so far down their curves in the
+consumption process as before. The poor, or those who had been poorest,
+now count for more in the market. They can lower their margins. In other
+words, the forces affecting the distribution of wealth, in so far as
+they are legal and moral in character, at least, may affect the
+price-situation, _without_ altering _utility schedules_. Some social
+factors, as changes in mode and fashion, will work _through_ the utility
+schedules, but others will not. One big _variable_ affecting prices
+which need not, in idea, at least, affect utility schedules at all, and
+whose main influence is anyhow not directed through them, is the volume
+of business confidence. This factor we shall analyze in our discussion
+of credit, _infra_. Professor Perry thus escapes only part of the
+criticism which we have made (_Social Value_, pp. 45 and 56) of the
+Austrian theory: (1) that it abstracts the individual from his vital
+contacts with other individuals, and (2) that, within the individual
+mind thus abstracted, the Austrians make a further abstraction, taking
+as relevant only the interests concerned with _consumption of economic
+goods_, summed up in the utility schedules. The second criticism applies
+to Professor Perry as well. Men's total interests are not summed up in
+utility schedules, and do not affect prices exclusively _via_ utility
+schedules.
+
+It may be noticed, also, with reference to Professor Perry's discussion
+that he has misconstrued the Austrian theory in conceiving it as an
+analysis of an historical _process_, with a beginning and an end,
+instead of a static picture, in which preëxisting individual factors
+come into equilibrium. (_Loc. cit._, 475.) He seeks thus to avoid the
+Austrian circle, but as we have shown in the discussion of von Mises in
+the text, this way is not open to the Austrians.
+
+Able and penetrating though Professor Perry's discussion is, on the
+psychological side, it fails, I think, to take adequate account of the
+complexities with which the economist and sociologist must deal.
+
+In general, I find no version of the utility theory of value which is
+defensible, and, above all, no effort to apply it to the value of money
+which has met with success.
+
+[105] _Vide_ Taussig, _Principles_, I, 432.
+
+[106] "Der Bankzins als Regulator der Waarenpreise," Conrad's
+_Jahrbücher_, 1897.
+
+[107] _Loc. cit._, ch. 8.
+
+[108] _Cf._ ch. on "Economic Value."
+
+[109] Nicholson, J. S., _Money and Monetary Problems_, pp. 64-66; 71-73.
+
+[110] _Works_, McCulloch ed. 1852, p. 213.
+
+[111] _Cf._ the criticism of Nicholson by W. A. Scott, _Money and
+Banking_, 1903 ed., ch. 4.
+
+[112] _Cf._ Mill, _Principles_, Bk. III, ch. xiii, par. 1. "Nothing more
+is needful to make a person accept anything as money, and even at any
+arbitrary value, than the persuasion that it will be taken from him on
+the same terms by others." It is not quite fair to identify Mill's
+doctrine with the circle stated above, however, since Mill couples it
+with a reference to convention, resting on the influence of
+government--a mention, without analysis, of some of the factors to be
+discussed shortly.
+
+[113] _Cf._ Knies, _Das Geld_, I, p. 140.
+
+[114] _Cf. Social Value_, ch. 2. _Infra_, our chapter on "The Functions
+of Money."
+
+[115] _Das Geld_, Leipzig, 1903, p. 477.
+
+[116] Laughlin, rejoinder to Clow, "The Quantity Theory and its
+Critics," in _Jour. of Pol. Econ._, 1902.
+
+[117] _Principles of Money_, _passim_.
+
+[118] _Cf. Social Value_, pp. 132-136, and _supra_, ch. on "Marginal
+Utility and Value of Money."
+
+[119] Strictly speaking, there is no marginal utility, but only a
+"subjective value in exchange," for money of the sort here discussed.
+See _supra_, the chapter on "Marginal Utility."
+
+[120] The psychological reactions of the people in times of stress and
+uncertainty toward different kinds of money cannot be predicted with any
+certainty, and there seems to be absolutely no definite or universal law
+governing the matter. The present writer collected a lot of newspaper
+clippings at the outbreak of the present World War. From these it
+appears that in both Paris and Berlin there was a very great distrust of
+bank-notes, and an insistence by retailers, restaurants, landladies,
+etc., on _coin_. But _silver_, which was not standard money, seems to
+have been accepted without question. When hoarding is referred to in
+these clippings, it is invariably gold that is mentioned. A similar
+hoarding of gold took place during the Balkan crisis at the time of the
+outbreak of the war between the Balkan Allies and Turkey. Professor E.
+E. Agger informs me, however, that he has found some evidence that
+bank-notes as well as gold were hoarded in Austria, at this time.
+
+Sometimes we have a suspension of Gresham's law, and an acceptance of
+all kinds of money at varying ratios. The following clipping from the
+_Boston Herald_ of March 17, 1914, illustrates this: "Douglas, Ariz.,
+March 16.--Four kinds of money are now circulating in the Mexican
+territory controlled by the Constitutionalists. These are United States
+currency, the first issues of the Constitutionalist government and of
+Sonora state, and 'Villa money,' or that issued by Chihuahua at the
+instance of the rebel military commander. United States takes
+precedence. Merchants in Sonora, in order to protect themselves and at
+the same time observe the laws requiring acceptance of the rebel
+currency issues, have established a sliding scale of prices. This was
+discovered when five merchants were arrested at Cananea by
+Constitutionalist secret service men, who found that for American money
+they could buy goods for less than half the amount exacted when payment
+was offered in Mexican currency. The uncertainty of the rebel campaign
+against Torreon is reflected in the money market. To-day
+Constitutionalist sold for 22 and 28 cents American on the peso. Mexican
+federal currency commanded from 30 to 32 cents." In the experience of
+travellers who have discussed the matter with the writer, there was
+little of this flexibility of relation between paper money and coin in
+Berlin, or Paris at the outbreak of the present War. Where paper was
+refused, it was absolutely refused, and where it was accepted, it seems
+to have been accepted without discount. No doubt, a fuller investigation
+would reveal all manner of variation in the behavior of different people
+in different centres, and at the same centres, at the outbreak of the
+War.
+
+[121] _Money and Banking_, 1903 ed., pp. 58-60; 101-104.
+
+[122] _Principles of Money_, p. 530.
+
+[123] Written in December, 1914.
+
+[124] _Cf._ Clow, F. R., "The Quantity Theory and its Critics," _Jour.
+of Pol. Econ._, 1902, p. 602.
+
+[125] _Cf._ Emery, _Speculation_, pp. 90-91.
+
+[126] _Cf._ Böhm-Bawerk's criticisms of the "use" theory of interest.
+(_Capital and Interest_, _passim_.) Both use theories and productivity
+theories are probably suggested, in part, by peculiarities which money
+possesses in pre-eminent degree. See _infra_, the chapter on the
+"Functions of Money."
+
+[127] A more precise analysis of all these points will be given in the
+chapter on "The Functions of Money."
+
+[128] _Cf._ Professor Taussig's account of expansions and contractions
+of the silver currency in his _Silver Situation_, _passim_.
+
+[129] For bibliography, see _Am. Econ. Rev._, Dec., 1914, pp. 838-839.
+
+[130] New York, 1911. All references to this book in the present volume
+are to the 1913 edition, which contains some new matter.
+
+[131] _Standard of Value_, London, 1912, p. 48, n.
+
+[132] _Papers and Proceedings_, Supplement to March, 1913, number of
+_American Econ. Review_, p. 131.
+
+[133] _American Econ. Rev._, Supplement to March, 1916, number, p. 138.
+
+[134] _Loc. cit._, pp. 31-32.
+
+[135] _Loc. cit._, pp. 175ff.
+
+[136] "The Passiveness of Prices," _infra_.
+
+[137] Particularly in view of the elaborate statistics, to be considered
+below, with which it is sought to make the equation realistic.
+
+[138] _Loc. cit._, p. 16ff.
+
+[139] _Loc. cit._ p. 25.
+
+[140] _Ibid._, p. 26.
+
+[141] _Ibid._, p. 27.
+
+[142] Where it is not meaningless, as at various points in the theory of
+mechanics, the product is always of a different denomination from either
+factor.
+
+[143] _Vide_ our ch. on "Supply and Demand," _supra_, for a discussion
+of Mill's doctrine as to the "demand" for money.
+
+[144] What is here said of Fisher's equation of exchange applies, for
+the most part, to all versions of it.
+
+[145] _Loc. cit._, p. 298. _Cf._ our chapter, _infra_, on "Statistical
+Demonstrations of the Quantity Theory."
+
+[146] _Purchasing Power of Money_, p. 290.
+
+[147] The amplified equation is MV + M´V´ = PT, which takes account of
+bank-credit. This is explained, _infra_.
+
+[148] _Loc. cit._, p. 487. I recur to this point in discussing the
+statistics of the "equation of exchange" in ch. 19.
+
+[149] _Infra_, ch. on "Quantity Theory and World Prices."
+
+[150] _Loc. cit._, p. 48.
+
+[151] _Loc. cit._, p. 370. The same position is taken by Kemmerer,
+_Money and Credit Instruments_, pp. 68 _et seq._ Mill denies the
+validity of these distinctions. See _Principles_, Bk. III, ch. 12, Par.
+8.
+
+[152] The above was written before the discussion in the _Annalist_
+(Feb. 7, Feb. 21, March 6, March 13, March 20, 1916) in which the
+present writer urged that Professor Fisher had greatly exaggerated the
+volume of trade in the United States by taking banking transactions as
+representative of trade. In reply (see especially the number for Feb.
+21, pp. 245 _et seq._) Professor Fisher maintains that the overcounting
+to which I call attention is offset by undercounting, and considers
+offsetting book-credits, which actually dispense with the use of money
+and checks, an important element in the undercounting. I am unable to
+reconcile this position with the reasons given for excluding
+book-credits from the "equation of exchange." A detailed discussion of
+the points at issue appears in later chapters, particularly in the
+chapter on "Statistical Demonstrations of the Quantity Theory."
+
+[153] _Quarterly Journal of Economics_, vols. 8 and 9; _Political
+Economy_, pp. 169-175; _Money_, chs. 3-8.
+
+[154] In our analysis of bank-loans, _infra_, we shall find reason to
+hold that Walker, though false to the logic of the quantity theory,
+comes nearer to a tenable doctrine than do Kemmerer, Fisher, Andrew, and
+most other quantity theorists.
+
+[155] _Principles_, Bk. III, chs. 11 and 12.
+
+[156] _Purchasing Power of Money._
+
+[157] _Loc. cit._, pp. 50-51.
+
+[158] _Loc. cit._, p. 280.
+
+[159] A. W. Atwood, "Hoarded Gold," _Saturday Evening Post_, Dec. 12,
+1914, p. 26.
+
+[160] _Cf._ Kinley, D., _The Use of Credit Instruments_, Senate Document
+399, 1910, pp. 192-194.
+
+[161] _Ibid._, pp. 102-103. In the same volume, on p. 200, the figures
+are given _incorrectly_, as 70% checks and 30% cash. C. A. Phillips,
+_Readings in Money and Banking_, 1916, p. 151, repeats this erroneous
+statement.
+
+[162] _Cf._ Sprague, _Crises under the National Banking System_, Nat.
+Monetary Commission Report, pp. 71-75; 200, 202.
+
+[163] _Cf._ also p. 280 of Fisher's _Purchasing Power of Money_.
+
+[164] Kemmerer (_Money and Credit Instruments_, p. 80) maintains that,
+"under perfectly static conditions," money in circulation and money in
+bank reserves will keep a fixed relation to one another. He offers no
+argument to support this view. Of course, "under perfectly static
+conditions," everything keeps in fixed relation to everything else. The
+volume of credit will keep a fixed relation to the number of laborers
+and to the supply of clocks. But this would hardly establish causal
+connections! Fisher multiplies "fixed relations" of various kinds,
+without, so far as very diligent search can tell, offering any argument
+to support them. Thus, we have on p. 105 the statement, "We have seen
+that normally the quantities of other currency are proportional to the
+quantity of primary money, which we are supposing to be gold." Where
+this thesis has been demonstrated, he does not indicate. In view of the
+fact that gold has been the one really flexible element in our money
+supply, the thesis is hardly credible. On pp. 146-147, facing this
+difficulty, Fisher says: "Since, however, almost all the money can be
+used as bank reserves, even national bank-notes being so used by state
+banks and trust companies, the proportionate relations between money in
+circulation, money in reserves, and bank-deposits will hold
+approximately true as the normal condition of affairs. The legal
+requirements as to reserves strengthen the tendency." Here is a very
+substantial growth in the doctrine, with only one new argument, namely,
+that concerning legal reserve requirements--which gives minimal ratios,
+not _fixed_ ratios. In what way the fact that most kinds of money can
+serve as legal reserves gives reason for the doctrine of fixed
+proportions is not made clear. For Professor Fisher, however, it seems
+quite enough, for on p. 162, in the heart of his causal theory, he
+boldly announces: "There must be some relation between the amount of
+money in circulation, the amount of reserves, and the amount of
+deposits. Normally _we have seen_ that the three remain in given ratios
+to each other." (Italics mine.) It is doubtless somewhat dangerous to
+make a confident negative statement concerning a book which has no
+index. But careful reading of all that has preceded this statement
+reveals no references to this topic except those quoted above. "We have
+seen" is not a legitimate premise when so important an issue is
+involved. In our discussion of reserves in the section on credit, as
+well as in the discussion of the volume of trade, it will appear that no
+"normal" or "static" relations of this kind are possible.
+
+[165] "The price-level outside of New York City, for instance, affects
+the price-level in New York City only _via_ changes in the money in New
+York City. Within New York City it is the money which influences the
+price-level, and not the price-level which influences the money. The
+price-level is effect and not cause." (_Loc. cit._, p. 172.)
+
+[166] _Loc. cit._, p. 50.
+
+[167] W. C. Mitchell, _Business Cycles_, p. 306.
+
+[168] _Ibid._, p. 325.
+
+[169] J. P. Norton, _Statistical Studies in the New York Money Market_,
+p. 71, and chart opposite p. 72.
+
+[170] _Ibid._, chart facing p. 72.
+
+[171] _Cf._ Mitchell, _loc. cit._, chart, p. 298, and text, p. 295. As
+the ratio of _reserves_ to _money in circulation_ was greater in 1911
+than in 1894, and as the ratio of _deposits to reserves_ was also
+higher, we have a still wider variation in the ratio of money in
+_circulation to deposits_--M:M´.
+
+[172] See the striking figures collected by A. P. Andrew for 1907.
+_Quart. Jour. of Econ._, Feb. 1908, p. 297.
+
+[173] _Infra_, our discussions of the relations of volume of money and
+credit to volume of trade, and our discussion of credit in the
+constructive part of the book. The theory of money and credit must be a
+dynamic theory.
+
+[174] Senate Document, No. 405, 1910. For the Bank of England, see p.
+25; for the Crédit Lyonnais, pp. 224-226; for the Deutsche Bank, pp.
+374-375.
+
+[175] _Statist_, 1912, p. 577.
+
+[176] "The Prospects of Money," British _Economic Journal_, Dec. 1914.
+
+[177] _Cf._ Ashley, W. J., _Gold and Prices_, N. Y., 1912, pp. 21 _et
+seq._
+
+[178] _Cf._ von Mises, "The Foreign Exchange Policy of the
+Austro-Hungarian Bank," British _Econ. Jour._, 1909, vol. 19. _Cf._
+Keynes, _Indian Currency and Finance_.
+
+[179] Conant, _Principles of Money and Banking_, vol. II, p. 50. In
+1899, the reserve of the Bank of Belgium consisted of 107 millions
+(francs) in specie, and 108 millions in foreign bills.
+
+[180] _Principles of Economics_, vol. I, pp. 432 _et seq._
+
+[181] In the chapter on "Quantity Theory and International Gold
+Movements," _infra_.
+
+[182] The Joint Stock Banks in England keep "till money" in cash, even
+though their "reserves" are chiefly deposits at the Bank of England.
+
+[183] Fisher, _loc. cit. passim_. _Vide_ especially ch. 8.
+
+[184] _Purchasing Power of Money_.
+
+[185] _Business Cycles_, pp. 580, 595-596.
+
+[186] _Cf._ C. M. Walsh, _The Measurement of General Exchange Value_,
+pp. 480-481.
+
+[187] On pp. 314-315, and elsewhere, Fisher indicates that _all_ the
+causes affecting prices operate _through_ the factors in the equation of
+exchange. _Cf._ p. 74. This would require a concrete equation of
+exchange throughout.
+
+[188] Chapter on "Passiveness of Prices."
+
+[189] _Loc. cit._, p. 169.
+
+[190] _Cf._ his _Silver Situation_. 1878 to 1891 do not give time enough
+for quantity of money to dominate volume of credit, in his exposition!
+
+[191] Mill, _Principles_, Bk. III, ch. 12, par. 1.
+
+[192] Fisher, _loc. cit._, p. 62.
+
+[193] "A Compensated Dollar," _Quart. Jour. of Econ._, Feb. 1913.
+
+[194] The chapter on "Dodo-Bones," _supra_, and the chapter on "The
+Quantity Theory and World Prices," _infra_.
+
+[195] _Loc. cit._, p. 156.
+
+[196] _Ibid._, p. 160.
+
+[197] Or organs for pianos, etc. A common practice--less common in the
+North than formerly--is the payment of bills at country stores in
+produce. There is not a little barter at secondhand stores in New York
+City.
+
+[198] Mr. Burton Thompson, of No. 7 Wall St., who knows the real estate
+situation there intimately, states that while dealers do not like to
+"swap" real estate, and do little of it when business is good, they are
+forced to do it extensively when business is sluggish, "as has been the
+case for the past four or five years."
+
+[199] _Cf._ E. S. Meade, _Corporation Finance_, p. 376, and _passim_.
+
+[200] The same thing often happens when a bond issue is paid
+off--bond-holders may take their pay in new bonds. "Conversions" of
+bonds into stocks, or of preferred into common stock, are also barter
+transactions. $220,000,000 of the $420,000,000 which Mr. Carnegie and
+his associates received from the Steel Trust for their plants, etc., was
+paid, not with money and checks, but with bonds. _Vide_ Stevens,
+_Industrial Combinations and Trusts_, p. 101.
+
+[201] The foregoing had been written before the discussion in the
+_Annalist_ of Feb. and March, 1916 (pp. 183-184, 245-272, 313-317, 344,
+377), in which Professor Fisher and the present writer joined issue with
+reference to Professor Fisher's estimate, 387 billions, for the volume
+of trade in the United States in 1909. The present writer contended that
+the banking transactions which Professor Fisher took as representative
+of trade greatly overcounted trade, since they included loans and
+repayments, taxes, several checks in one transaction, gifts, etc., etc.
+Professor Fisher contended that the overcounting was offset by
+undercounting, and instanced particularly the clearing-house
+arrangements in the speculative exchanges, where checks are in part
+dispensed with, and the offsetting in "running accounts" through
+book-credit. This indicates a substantial change in Professor Fisher's
+view as compared with that set forth in the _Purchasing Power of Money_,
+where he maintains, as shown above, that barter is virtually
+non-existent, that money and checks are "for all practical purposes and
+all normal cases," "necessities of modern trade," (p. 160), and that
+book-credit merely postpones, and does not dispense with, the use of
+money and checks (p. 370).
+
+The extent of the offsetting by barter, clearing-houses in the
+exchanges, and book-credit, though very great, is quite small as
+compared with Professor Fisher's 387 billions, and does not nearly
+offset the overcounting. The writer has obtained some fairly definite
+data on this point, which will be presented in the chapter on
+"Statistical Demonstrations of the Quantity Theory," in discussing the
+volume of trade.
+
+[202] _Miscellaneous Articles on German Banking_, Report of National
+Monetary Commission, p. 175. _Cf. infra_, pp. 288-290.
+
+[203] _Cf._ our chapter on "The Functions of Money," _infra_.
+
+[204] One familiar feature of corporation finance makes barter much
+preferable to money transactions, in one connection, which involves very
+many corporations indeed, at their inception. Stock, in order to be
+marketable, must be "full-paid and non-assessable." If the corporation
+sells its stock to the first stockholders, this means that money must be
+paid for it to the full par value, dollar for dollar. This is usually
+not easy. An especial difficulty would then present itself that the
+promotor would have trouble in getting any pay for his work. (Meade,
+_Corporation Finance_, _passim_; Sullivan, _American Corporations_,
+_passim_.) If, however, the stocks are paid for in _goods and services_,
+the courts are much less exacting in looking to see if full value has
+been received. Barring obvious fraud, the courts will usually count the
+stock full paid and non-assessable even though the value of the goods
+and services received is not very great. The first sale of the stocks of
+a new corporation, therefore (if it is important enough to wish to have
+a public market for its stocks), is a _barter_ transaction, as a rule.
+
+[205] _Purchasing Power of Money_, p. 152.
+
+[206] _Ibid._, pp. 352 _et seq._
+
+[207] _Infra_, ch. on "Passiveness of Prices." _Weighted_ averages of
+"person-turnovers" will not save the situation here, if incomes stop
+entirely, since the persons involved then drop out altogether. Moreover,
+_weighted_ averages would clearly depend on _incomes_, and hence on
+_prices_, and hence could not depend on _habits_ exclusively, or
+_causally explain_ prices.
+
+[208] _Loc. cit._, pp. 152-153.
+
+[209] _Ibid._, p. 154. Italics mine.
+
+[210] _Supra_, ch. on "Volume of Money and Volume of Credit." _Infra_,
+ch. on "Bank Assets and Bank Reserves."
+
+[211] _Cf._ Kinley, _Money_, pp. 145 and 205-206, for the discussion of
+various moveable margins of this sort.
+
+[212] Van Hise, _Concentration and Control_, p. 16. The tendency to
+accumulate hoards when money is plentiful is notoriously strong in
+countries like India.
+
+[213] _Loc. cit._, pp. 167-168.
+
+[214] _Ibid._, p. 164.
+
+[215] _Cf._ Davenport's analysis of the causes governing volume of
+trade, _Economics of Enterprise_, p. 272.
+
+[216] _Loc. cit._, p. 110.
+
+[217] Perhaps not quite correct, since he does recognize differences in
+degree as between different places, though, perhaps properly, from the
+standpoint of his normal theory, saying nothing about differences in
+degree as between different times in the same place.
+
+[218] _Cf._ also p. 315, _loc. cit._, where this is placed as one of
+three main causes of the historical rise in prices.
+
+[219] That the overwhelming bulk of trade is in the cities will appear
+in our chapter, _infra_, on "Volume of Money and Volume of Trades."
+
+[220] On the average, in the United States, the banks have less money
+than the people have. _Vide_ Mitchell, _Business Cycles_, pp. 295 and
+298.
+
+[221] Based on arbitrary assumptions as to variability. _Cf._ his p.
+477. _Cf._ our chapter, _infra_, on "Statistics of the Quantity Theory."
+
+[222] Other passages might be cited to show that Fisher thinks that T
+and the V's are fundamentally governed by different causes. For example,
+he says "an increased trade in the Southern States, where the velocity
+of circulation of money is presumably slow, would tend to lower the
+average velocity in the United States, simply by giving more weight to
+the velocity in the slower portions of the country." _Loc. cit._, p.
+166.
+
+[223] _Cf._, _infra_, our chapter on "Statistical Demonstrations of the
+Quantity Theory."
+
+[224] _Common Sense of Political Economy_, p. 623.
+
+[225] _Principles_, I, 432.
+
+[226] _Loc. cit._, pp. 432, 438-439.
+
+[227] _Ibid._, p. 439. _Cf._ our chapter, _supra_, on "Volume of Money
+and Volume of Credit," where Taussig's view as to the relation of money
+and bank-credit is analyzed.
+
+[228] _Loc. cit._
+
+[229] Virtually the same expression is to be found in Barbour, David,
+_The Standard of Value_, London, 1912, p. 43. Barbour denies vigorously
+that more money can increase business, since it cannot increase the
+number of laborers, or of machines, or the amount of food, etc. The
+doctrine that volume of trade is fixed by (1) volume of products, and
+(2) degree of specialization of production, and hence is independent of
+volume of money, appears in Davenport, _Econ. of Enterprise_, 271-273.
+
+[230] In this view, Fisher typifies the general position of the quantity
+theory, and, indeed, in part even of those who do not agree with the
+quantity theory, but who, with the quantity theorists, view the problems
+of money and banking as matters of static theory. High or low prices,
+once the transition is made, exhaust the effects of increasing or
+decreasing the money supply. During the period of transition, certain
+readjustments in relations between creditors and debtors arise, which
+lead to either temporary prosperity or temporary distress, but after the
+transition, it is a matter of indifference whether or not money is
+abundant. Though the view is, logically, an essential part of quantity
+theory reasoning, we find much of it vigorously maintained by Laughlin,
+_Principles of Money_, ch. on "Amount of Money Needed by a Country."
+Laughlin and Fisher would seem to be at one in maintaining that the
+quantity of money in a country is a matter of indifference, and from the
+views of both would follow a condemnation of the idea that any long run
+consequences for volume of trade, efficiency of production, etc., could
+follow from increasing or decreasing the volume of money.
+
+It may be just as well here to indicate the conviction of the present
+writer that the relation between the quantity theory and the bimetallic
+movement is historical rather than logical. Indeed, in laying the stress
+they did on the importance of an inadequate stock of money in accounting
+for the depression of the latter part of the 19th Century, the
+bimetallists were out of harmony with the quantity theory.
+
+[231] P. 50.
+
+[232] Pp. 358-372, vol. I.
+
+[233] _Loc. cit._, p. 160. _Cf._ our chapter on "Barter."
+
+[234] The fact that prices are often high in gold mining regions, as
+compared with prices in the general world markets, has been taken by
+many writers as proof of the quantity theory. _Cf._ Kemmerer, _Money and
+Credit Instruments_, pp. 50-51, 58; Cairnes, J. E., _Essays in Political
+Economy_, particularly the discussion of the Australian episode. It
+seems to me that this is particularly inconclusive. High prices
+characterize remote mining regions of all kinds, whether gold, silver,
+copper, diamonds, tin or what not be the quest. Prices are not lower in
+the tin and copper region in the northern part of the Seward Peninsula
+in Alaska than they are in the gold region about Nome in the southern
+part of that peninsula. They are high in both places, not because of the
+abundance of gold or of money, but because of the great value of goods,
+which have to be brought with great trouble and expense from the United
+States. They are higher in the region of the Saw Tooth Mountains, in the
+centre of this peninsula, where hydro-electric power for the use of the
+gold miners about Nome, and for the copper and tin mines further north,
+is being developed, than they are at Nome itself, on the coast, where
+the gold is being mined. They were high in Australia because the
+discovery of gold led everybody to abandon everything but gold mining,
+and to bring in virtually everything from a distance. Wooden beams were
+imported to Australia from Sweden! (Pierson, N. G., _Principles of
+Economics_, I, p. 389.) One would expect prices in gold money to be
+higher in a silver or copper mining region, which is prospering, than in
+a gold mining region, equally remote, where a great deal of gold is
+being mined, but at a cost too great to make the region prosperous.
+
+[235] _Loc. cit._, p. 51.
+
+[236] _Meaning of Money_, p. 18.
+
+[237] Price's address before Western Econ. Asso'n, Nov. 26, 1915; Holt's
+letter; Dec. 2.
+
+[238] _Loc. cit._, p. 172.
+
+[239] See our discussion of "money rates" and "interest rates," _supra_,
+in the chapter on "Capitalization," and _infra_, in the chapters on "The
+Functions of Money," and on "Credit."
+
+[240] _Infra_, chapter on "Functions of Money," and _supra_, chapters on
+"Capitalization" and "Dodo-Bones."
+
+[241] _Cf._ our chapters on "Supply and Demand," and "The Origin of
+Money."
+
+[242] New York City can always use idle funds, "at a price."
+
+[243] Kemmerer, as well as Fisher, allows physical production and
+consumption to dominate his "index" of trade variation. _Loc. cit._, pp.
+130-131; Fisher, _loc. cit._, p. 479. _Cf._ our discussion of their
+statistics, _infra_.
+
+[244] This confusion of volume of trade and volume of production is a
+companion of the confusion discussed on p. 307, _infra_, of quantity of
+money with volume of money-_income_. The two confusions, found in
+virtually all expositions of the quantity theory, give it most of its
+plausibility.
+
+[245] _Loc. cit._, ch. 12, and appendix to ch. 12.
+
+[246] _Supra_, ch. on "Equation of Exchange."
+
+[247] In a letter to the writer, Professor Fisher states that the
+figures for the physical receipts at the cities, which dominate his
+index for T, have not been available for recent years, and that since
+they were discontinued, he has relied chiefly on the indirect
+calculation of T _via_ the other factors in the equation. These figures
+were discontinued in 1912. In the _American Economic Review_ for June,
+1916 (p. 457, n.) Professor Fisher states that the indirect calculation
+of T has always had more weight in his figures than the direct
+calculation. This would serve in some degree to lessen the errors of his
+index of variation. The extent to which he has allowed his T as directly
+calculated on the basis of the index to be modified by the indirect
+calculation, is indicated on p. 302 of the _Purchasing Power of Money_,
+as follows: "The alterations in T, as shown in Figure 16, though still
+greater than the preceding, are nevertheless so small and uniform as to
+preserve an almost perfect parallelism between the original and the
+altered curve. The differences rarely exceed 10%." Even an indirect
+calculation of T, however, would not avoid the criticisms here urged,
+since the other factors, MV, M´V´, and P are all, as we shall see in the
+chapter on "Statistical Demonstrations of the Quantity Theory,"
+calculated by methods which give very excessive weight to trade outside
+New York City and to non-speculative transactions.
+
+[248] _Loc. cit._, p. 485.
+
+[249] _The Use of Credit Instruments in Payments_, Senate Document No.
+399, 61st Congress, 2nd Session.
+
+[250] This brief account will be amplified for critical discussion in
+the statistical chapter below. Fisher in fact calculated MV and M´V´
+separately. The account above given is strictly accurate only for that
+part of T, 353 billions, which is carried on by means of checks. The
+calculation of MV, however, is also based on Kinley's figures. My
+account here is adequate for the question at issue, which is, not as to
+the absolute magnitude of trade, but rather, as to the _proportions_ of
+speculation and other elements in trade.
+
+[251] The substance of the argument here presented first appeared in
+articles in the _Annalist_, to which I am indebted for permission to use
+it here. See the numbers of Feb. 7, March 6, and March 20, 1916.
+Professor Fisher's replies, directed wholly against the charge of double
+counting, appeared in the _Annalist_ of Feb. 21 and March 13, 1916.
+Professor Fisher does not question my contention that speculation makes
+up the overwhelming bulk of trade, in these replies. He rather seeks to
+meet the charge of overcounting by holding that bank-transactions do not
+fully count speculation! This he thinks particularly true of stock
+exchange transactions. _Cf._ his article of Feb. 21, 1916.
+
+[252] The Census Bureau figures have been subject to a good deal of
+criticism, and I therefore refrain from trying to draw precise
+conclusions from them.
+
+[253] The figures showing the number of banks reporting from each State,
+together with the number of reports rejected, will be found on pp. 47-49
+of his monograph. The figures above are combinations of figures from his
+various tables. These tables are so carefully indexed in Dean Kinley's
+monograph that detailed page references are unnecessary here.
+
+[254] _Cf._ our discussion of this topic in the statistical chapter,
+_infra_.
+
+[255] _Loc. cit._, pp. 153-154.
+
+[256] _Discussions in Economics and Statistics_, I, 204. Quoted by
+Kinley, _loc. cit._, 152.
+
+[257] The coefficient of correlation has been developed by the
+biologists, chiefly Karl Pearson, but has been applied to problems in
+many fields, especially economics, sociology, psychology, and education.
+A good source is Yule's _Introduction to the Theory of Statistics_.
+Professor H. L. Moore has made extensive use of the method in his _Laws
+of Wages_, and his _Economic Cycles_.
+
+Connected with the coefficient of correlation, usually, is a figure for
+"probable error," which depends, primarily, on the square root of the
+number of observations. When the probable error is low, and the
+coefficient of correlation high (as .8), it is commonly supposed that a
+very high degree of causal connection is established. I shall not go
+into detail in discussion of the method. My personal judgment is that it
+is overrated, that "spurious" correlations, leading to quite erroneous
+conclusions, have frequently resulted from it, and that the labor
+involved in calculating coefficients of correlation is frequently too
+great for the results obtained. I should never be disposed to accept
+conclusions based on a "correlation coefficient" unless there were other
+converging evidence to support it. In effect we have, in the coefficient
+of correlation, nothing more than a refinement of the method of
+comparing two curves on a graph. The curves tell the story, in a general
+way, whereas the coefficient of correlation sums up all the comcomitant
+variations (and disagreements) in one figure. The eye does not readily
+compare the degree of relation between two curves with the degree of
+relation between two others. When it is desired to know which, of
+several relationships, is closest, the graphic method, or the method of
+comparing series of figures, burdens the attention. The coefficient of
+correlation condenses the information to such a degree as to make
+comparison easy. It is, then, merely a refinement of familiar
+statistical methods. Used wisely, guided by sound theory, it aids in
+presenting facts. It enables us to state quantitatively things we
+already know qualitatively. But there is no magic in it! As I have
+mentioned both Mr. Silberling and Professor Moore in this connection, it
+is proper to say that both of them are fully alive to the dangers and
+limitations of the method, and that Professor Moore emphasises strongly
+the need for sound _a priori_ testing of hypotheses before submitting
+them to the test of correlation. One danger, that of getting a high
+correlation merely because both of the variables compared are _growing
+rapidly_, has been avoided by Mr. Silberling by the use of successive
+_percentage_ deviations, instead of absolute figures. For reasons
+explained by Mr. Silberling in a footnote, he uses, instead of the
+"probable error," a statement of the number of observations. Thus,
+"r = .78 (46)" means that the coefficient of correlation is .78, and
+that there are 46 observations for each of the two variables compared.
+
+[258] They get into clearings, however, _two_ days after.
+
+[259] Professor Kemmerer, also. See his index of variation of trade,
+_op. cit._, pp. 130-131.
+
+[260] It is unfortunate that weekly figures from railways do not exist
+in such number, or for roads of sufficient importance, to justify
+correlations of the weekly figures with clearings.
+
+[261] Professor W. M. Persons informs me that Mr. Silberling's results
+are in accord with calculations which he has made. _Vide_ his article in
+the _Am. Econ. Rev._ of Dec. 1916.
+
+[262] _The Wealth and Income of the People of the United States_, New
+York, 1915.
+
+[263] See our chapter, "Statistical Demonstrations of the Quantity
+Theory."
+
+[264] _Loc. cit._, pp. 78-79.
+
+[265] _Jour. of Polit. Econ._, vol. v, p. 165.
+
+[266] Even this is too high, for 1909, on the basis of our estimate for
+net income in 1909, in the Appendix to this chapter.
+
+[267] The extent of speculation in wholesale trade is discussed in this
+chapter, _infra_. "Double counting" is discussed in the chapter on
+"Statistical Demonstrations of the Quantity Theory."
+
+[268] _The Use of Credit Instruments_, p. 151.
+
+[269] The figures for rent and wages are from W. I. King, _op. cit._ The
+other figures are from the _Statistical Abstract of the United States_,
+unless otherwise stated. King's estimates are for 1910. The other
+figures are for 1909. Compare this list with my discussion in the
+_Annalist_, March 6, 1916, p. 317, where I made computations purposely
+much too large. In that computation I clearly greatly exaggerated
+salaries and professional incomes, and rent as well as retail and
+wholesale trade. My figure there included the rent of houses as well as
+the rent of land. King's figure is only for land rent. However, in view
+of the fact that a high percentage of real estate is used by the owner,
+with the result that no rent-payments are required, I think King's
+figure high enough for the whole item.
+
+[270] Professor Fisher has estimated total real estate exchanges in the
+country at less than 1% of the total 387 billions (_op. cit._, p. 226),
+and a colleague of the Harvard Business School has given me an estimate
+of $1,300,000,000 for total advertising in the United States. Neither of
+these items is properly counted part of the "static" trade that would
+occur were things in "normal equilibrium." If, however, we counted them,
+we should add only 1%, say, of the total. When it is seen how
+insignificant, in comparison with the 387 billions indicated by
+deposits, the figures for total manufactures, total farm products, and
+total wages, are, there really is little need to argue the case. It is
+impossible to find, in the "ordinary trade" we have not mentioned, items
+whose total will equal the least of these three. Moreover, we have
+allowed for a multitude of these items in permitting the figure for
+retail trade to be as high as it is, and have left large leeway in
+making no deduction for the speculation in wholesale trade, and in
+counting farm products in full. Interest and dividends I have not
+counted. They are not "trade." When we have counted stock sales, we have
+already counted the exchanges in which dividends were sold. The man who
+buys the stocks has already bought the dividends. To count the dividends
+in addition would be a case of that double counting of capital and
+income against which Professor Fisher has warned us in his _Nature of
+Capital and Income_. Rents and wages represent payment for current
+services, and are properly items of trade. Interest and dividends are
+one-sided money payments, completing transactions for which money has
+already passed, and in which a man is merely getting a delivery of
+something he has already bought. In general, loans and repayments are
+not properly counted as part of ordinary, or physical trade. If,
+however, we counted total corporate dividends and interest we should get
+only $4,781,000,000 (King's estimate, _loc. cit._, p. 262). This is a
+little over 1%. What else is there? In his article of March 13, 1916, in
+the _Annalist_, Professor Fisher failed to meet my suggestion that a
+bill of particulars was called for!
+
+[271] See the table of shares and approximate values in Pratt's _Work of
+Wall Street_, 1912 ed., p. 187. This table covers the years, 1890-1911.
+
+[272] Boston _Transcript_, "Tape Record of Sales Incomplete," May 6,
+1916, Pt. I, p. 12. The _Transcript_ quotes as authority the New York
+_Commercial_. Following the extraordinary market of Sept. 25, 1916, when
+the ticker recorded 2,317,000 shares sold on the New York Stock
+Exchange, the newspapers estimated that missed sales, odd lots, and
+unrecorded sales on stop loss orders, would bring the total above
+3,000,000 shares. There was an unusual number of stop orders caught that
+day. There will be very few other sales of 100 shares missed by the
+ticker, except in times of extraordinary pressure. See _Boston Herald_,
+Sept. 26, 1916, p. 1.
+
+[273] Hollander, J. H., _Bank Loans and Stock Exchange Speculation_,
+Senate Document 589, 61st Congress, 2nd Session, p. 23.
+
+[274] Pratt, _Work of Wall Street_, 1912 ed., p. 264.
+
+[275] _Annalist_, Dec. 27, 1915, p. 719--"Selling Phantom Grain."
+
+[276] My information regarding the Coffee Exchange in New York comes
+from the Treasurer of the Exchange, Mr. Jas. H. Taylor, through the
+courtesy of Mr. W. H. Aborn, of Aborn and Cushman, New York.
+
+[277] Report of the Hughes Commission, in appendix to Pratt's _Work of
+Wall Street_, Rev. ed., p. 417. This report gives information regarding
+all the organized exchanges in New York.
+
+[278] L. Conant, Jr., "The United States Cotton Futures Act," _American
+Economic Review_, March, 1915, p. 1.
+
+[279] Hughes Commission, _loc. cit._, p. 418.
+
+[280] Taussig, _Principles of Economics_, I, p. 405; Kinley, _Report of
+the Comptroller_ for 1896, p. 89.
+
+[281] This is probably more extensive in London than in the United
+States.
+
+[282] _Loc. cit._, p. 47.
+
+[283] _Loc. cit._, pp. 130-131. The very title, "_growth_ of business,"
+suggests the fallacy to which we refer in the text, namely, that we have
+a steady upward movement, with little variation. This is largely true of
+production and consumption. It is in no sense true of "trade," as
+distinguished from production.
+
+[284] Kemmerer relied on the investigation of 1896, whereas Fisher used
+more the figures of 1909. Kemmerer does not, in general, assign an
+absolute magnitude for "trade," but for 1890 he gives a figure. _Loc.
+cit._, p. 136. _d._
+
+[285] _Loc. cit._, p. 136, _d._
+
+[286] A recent discussion of these problems is to be found in Shaw, A.
+W., _Some Problems in Market Distribution_, Harvard Univ. Press, 1915.
+
+[287] _Op. cit._, pp. 51-52.
+
+[288] London, Paris, and New York all do a great deal of manufacturing,
+particularly of finer things, whose value is high, and which require a
+high proportion of labor, as compared with machinery. _Cf._ our
+discussion of the London "Money Market," _infra_, in Part III.
+
+[289] _Ibid._, p. 47.
+
+[290] _Cf._ Jenks, _The Trust Problem_, Rev. ed., p. 29. The doctrine
+that these costs are net social loss is challenged by the present writer
+in an article, "Competition _vs._ Monopoly," in the New York
+_Independent_, of Oct., 1912.
+
+[291] "Royal" has been estimated at $5,000,000; "Spearmint" at
+$100,000,000. Mr. Guy C. Hubbard, of the _Dry Goods Economist_, New
+York, has given the writer some exceedingly interesting data regarding
+the value, as bankable collateral, of various trade-marks and firm
+names.
+
+[292] _Cf._ our discussion of "The Reconciliation of Statics and
+Dynamics," _infra._
+
+[293] Significant in this connection, is the contention of recent
+students of American agriculture, that the great need is better
+organization and credit, facilities for _marketing_.
+
+[294] _Loc. cit._, p. 89. Though Fisher does not conclude that banking
+is bad, he does conclude that gold mining is a parasitic and socially
+injurious industry, like the making of burglars' "jimmies." See his
+_Elementary Principles of Economics_, N. Y., 1912, pp. 499-500.
+
+[295] Fisher does admit that the _character_ of the banking system, and
+of the money system, will affect the volume of trade. "There have been
+times in the history of the world when money was in so uncertain a state
+that people hesitated to make many contracts because of the lack of
+knowledge of what would be required of them when the contract should be
+fulfilled. In the same way, when people cannot depend on the good faith
+or stability of banks, they will hesitate to use deposits and checks"
+(78). But there is nowhere an admission that the _amount_ of bank-credit
+has any influence on the volume of trade, and there are repeated
+assertions, as already instanced in the text, that the volume of trade
+is quite independent of the volume of money and bank-credit.
+
+[296] Part IV of this book gives a detailed analysis to the problems
+involved in these contrasts.
+
+[297] This thesis was set forth by the present writer at the 1915
+meeting of the American Economic Association. See _Papers and
+Proceedings_, Supplement to March, 1916, _Amer. Econ. Rev._, pp.
+168-169.
+
+[298] _Cf._ J. B. Clark, _Distribution of Wealth_, _passim_, and J.
+Schumpeter, _Theorie der wirtschaftlichen Entwicklung_, pp. 1-101. See
+also the present writer's "Schumpeter's Dynamic Economics," _Pol. Sci.
+Quart._, Dec, 1915, and A. S. Johnson, in _Quart. Jour. of Econ._, May,
+1914.
+
+[299] _Principles_, Bk. III, ch. xviii, par. 1.
+
+[300] _Theorie der wirtschaftlichen Entwicklung_, p. 77. Since the
+foregoing was written, Professor W. C. Mitchell has presented an
+admirable historical paper on "The Rôle of Money in Economic Theory," in
+which he has multiplied instances, in the history of the science, of
+this contempt for money, or abstraction from money, in economic theory.
+He finds that Marshall, and some other later writers, have given much
+fuller recognition to the rôle of money, which he conceives of primarily
+as an institution which has rationalized economic behavior, by forcing
+upon the individual bookkeeping habits of thought. This still leaves it
+legitimate to abstract from money, however, for "pure theory." Highly
+important as is the "measure of values" function, it does not explain
+the main work which money, as money, actually _does_ in economic life,
+nor need it be a source of value for money. _Cf._, _infra_, our chapter
+on "The Functions of Money." Professor Mitchell's paper will be found in
+"Papers and Proceedings," Supplement to the March, 1916, number of the
+_Am. Econ. Rev._
+
+[301] The materials in this appendix are taken from an article published
+in the _Annalist_ of Jan. 8, 1917, pp. 39, 53-54, and the New York
+_Times_ Annual Financial Review of Dec. 31, 1916, and are reprinted by
+the courtesy of the New York Times Company.
+
+[302] _Vide Annalist_, Feb. 7, 1916, pp. 183-184, and Feb. 21, 1916, p.
+246.
+
+[303] _Wealth and Income of the People of the United States_, p. 129.
+
+[304] The justification of this procedure is argued more fully in my
+article in the _Annalist_ of Feb. 7, 1916, above referred to.
+
+[305] The figures for railway gross receipts are taken from the
+_Commercial and Financial Chronicle_, rather than from Government
+reports, in order to get figures for calendar rather than fiscal years,
+and in order to get the latest possible figures. As the absolute figures
+are not strictly comparable throughout, the method employed has been to
+calculate _percentage_ gains or losses for the _same roads_ for
+successive years. This would lead to a cumulative error, if large new
+roads had been built during the period, and had retained their
+independence. In point of fact, however, the curves for the absolute
+figures and for the percentage changes run pretty closely parallel down
+to 1909, at which time a large number of small roads, not previously
+counted, are brought into the figures. As the number of roads reported
+varies, the percentage changes on the same roads give us the more
+accurate measure of year by year variation. It is, at the date of
+writing (December, 1916), the only possible method for 1916, since the
+_Chronicle_ figures which come to the end of November are based on only
+37 roads, with a mileage of 84,452 out of over 240,000 miles usually
+reported. For these roads, a gain of 19.63%, for the first eleven months
+of 1916 over the same months in 1915, is reported, and our figures for
+1916 rest on the assumption that the gain for the whole year over 1915
+is 17.27%. (The greatest gains are for the earlier months, as the end of
+1915 was a period of great activity.) Much fuller figures supplied me by
+Mr. Osmund Phillips, of the _New York Times_, for the first _ten_ months
+of 1915 and 1916 serve to justify this estimate for the gain of 1916
+over 1915. For the _Chronicle_ data, see vol. 102, p. 930, vol. 103, p.
+2112, and _passim_.
+
+The index of prices chosen is Dun's. (See especially _Dun's Review_ of
+May 11, 1907, Jan. 9, 1915, and later months, and the discussion of
+Dun's index number in the _Bulletin of the United States Bureau of Labor
+Statistics_, Whole Number 173, July, 1915, pp. 148 _et seq._) Dun's
+index number is chosen partly because it is complete for 1916, and
+partly because it is weighted in accordance with the consumption of
+different classes of goods, and so particularly suited to this inquiry.
+I venture to express strong preference for rationally weighted index
+numbers, and for the use of different index numbers for different
+purposes. (_Vide_ the discussion of index numbers in ch. 19.) Our price
+index for each year is an average of the twelve monthly figures given by
+Dun from 1894 to 1916. For the years 1890-94, our price index is an
+average of the figures for January and July. This average is lower, in
+most years, than the average for the whole year, and may well be lower
+than the average for these years, but no attempt has been made to
+rectify this possible source of error. The index is recalculated from
+Dun's figures (where it is not a percentage, but a sum of prices), and
+made a true percentage index, with a base in 1910.
+
+The figures for exports and imports are for _calendar_ years. They were
+obtained, for the years 1890-1909, from _Statistics of the United
+States, 1867-1909_ (National Monetary Commission Report), and, for the
+years since 1909 from the _Commercial and Financial Chronicle_. For
+1916, November and December are estimated.
+
+[306] Their indicia of variation for "trade," though failing to meet the
+problems for which they were designed, as shown in chs. 13 and 19, are
+good indicia of variation for physical production and consumption.
+
+[307] That this should have been seriously denied during the recent
+Presidential campaign, on the basis of the estimate that foreign trade
+is minute as compared with domestic trade, gives special point to the
+present discussion.
+
+[308] King's figures, for which he estimates a margin of error of 25%
+are used for these years. (_Loc. cit._, p. 129.) The export and import
+figures used are for fiscal years.
+
+[309] Probably the apparent moderate increase in imports is due wholly
+to higher prices. The actual physical volume has possibly been reduced,
+as compared with the period before the War.
+
+[310] I am indebted to several colleagues for advice and criticism in
+connection with these tables, particularly Professors Taussig and W. M.
+Persons. Mr. N. J. Silberling has been particularly helpful, aiding in
+the choice of the statistical sources, suggesting methods of handling
+and interpreting them, and making virtually all the computations in the
+tables.
+
+[311] Retail prices of exports and imports are obtained by adding 50% to
+the wholesale figures reported, on the assumption that wholesale prices
+are two-thirds of retail prices. The percentages in the final column are
+obtained by dividing the figures for foreign trade by the figures for
+domestic trade. The percentage would reach 100 when foreign trade
+becomes equal to domestic trade.
+
+[312] The figures in column 4 are obtained for any year, say 1905, by
+taking the index in column 3 for 1905, the index in column 3 for 1910,
+and the absolute figure in column 4 for 1910, and solving by the "rule
+of three."
+
+[313] The notion of interdependence need not involve circular reasoning,
+if the facts really justify it. The whole cosmos is, doubtless,
+interdependent. Often certain systems within the cosmos manifest enough
+_in_dependence of the rest of the universe to justify us, for some
+purposes, in thinking only of _inter_relations within the systems. The
+important thing is to make the circle in theory as big as the circle in
+fact. _Cf. Social Value_, p. 152, n.
+
+[314] In chapter XVI.
+
+[315] _Cf._ our chapter, _infra_, on "The Quantity Theory and
+International Gold Movements."
+
+[316] Italics mine.
+
+[317] _Loc. cit._, p. 165.
+
+[318] The resemblance of the view here maintained to that of Professor
+Laughlin is at many points close. I am indebted to his _Principles of
+Money_ for many suggestions.
+
+[319] _Loc. cit._, p. 165, n. The doctrine is reiterated on p. 168.
+
+[320] This is strikingly true in the stock market--the place where more
+trade takes place than in any other market. See the figures in the
+preceding chapter with reference to stock transactions, and the chapter
+on "Bank Assets and Bank Reserves."
+
+[321] For a history of this debate, with bibliography, see Laughlin's
+_Principles of Money_, ch. 7, on the "History and Literature of the
+Quantity Theory," esp. pp. 260 and 263-264. Laughlin shows the
+connection of the currency principle and the quantity theory.
+
+[322] It may be that in the brief discussion of elastic bank-notes on p.
+173 (_loc. cit._), Fisher means to given an explanation of the theory of
+elasticity from a quantity theory standpoint. The statement there is
+that money not only tends to flow away from _places_ where prices are
+high, but also from _times_ when money is high. "If the price-level is
+high in January as compared with the rest of the year, bank-notes will
+not tend to be issued in large quantities then. On the contrary, people
+will seek to avoid paying money at high prices and wait till prices are
+lower. When that time comes they may need more currency; bank-notes and
+deposits may then expand to meet the excessive demand for loans which
+may ensue. Thus currency expands when prices are low and contracts when
+prices are high, and such expansions and contractions tend to lower the
+high prices and to raise the low prices, thus working toward mutual
+equality."
+
+If this be the quantity theory account of elasticity--and it would seem
+to be about the only thing the quantity theory could say--it is about as
+far from giving an account of the real facts as any theory could be!
+Something of this sort is suggested, perhaps, by the behavior of
+Canadian bank-notes, which do expand in the fall, when prices of wheat
+are lowest, and contract in January, when wheat prices are higher. This
+grows, however, out of the peculiarities of an agricultural country, and
+does not at all illustrate the general doctrine maintained. First, wheat
+prices in the fall are low because wheat is most abundant then. Wheat
+prices in January, under the influence of speculation, commonly differ
+from wheat prices in the fall by an amount about equal to the elevator
+charges, rattage, insurance, interest, and other carrying charges
+involved. Second, wheat prices are only one element in the general
+price-level. Low wheat does not prove that the level is necessarily low.
+A good wheat crop may mean increases in general prices, and often does.
+Third, and more important, the real reason for an expansion in Canadian
+notes at such a time is that the wheat _has to be moved_. The farmers do
+not want to carry it; the speculators are ready to carry it; and it must
+be sold. Expanding _trade_, at the season, is the cause of expanding
+bank-notes. The influence of the _price_ of wheat is exactly the reverse
+of that which Fisher assigns. If the price of wheat is low in the
+crop-moving season, _less_ notes will be issued than if the price is
+high. In other words, the greater the increase in PT, not P or T alone,
+the greater will be the expansion of bank-notes. Decrease either P or T,
+and less notes will be issued.
+
+In general, the phenomenon of elastic bank-credit is the phenomenon of
+an expanding bank-note or deposit issue accompanied by rising prices and
+volume of trade, and a decrease when trade and prices decrease. This is
+all commonplace, but I feel it best to refer to familiar sources to show
+how old and well recognized my statement of the case is. The following
+is from Mill's _Principles of Economics_, Bk. III, ch. 24, par. 1: "Not
+only has this fixed idea of the currency as the prime agent in the
+fluctuations of price made them shut their eyes to the multitude of
+circumstances which, by influencing the expectations of supply, are the
+true causes of almost all speculations and of almost all fluctuations of
+price; but in order to bring about the chronological agreement required
+by their theory, between the variations of bank issues and those of
+prices, they have played such fantastic tricks with facts and dates as
+would be thought incredible, if an eminent practical authority had not
+taken the trouble of meeting them, on the ground of mere history, with
+an elaborate exposure. I refer, as all conversant with the subject must
+be aware, to Mr. Tooke's _History of Prices_. The result of Mr. Tooke's
+investigations was thus stated by himself, in his examination before the
+Commons Committee on the Bank Charter question in 1832; and the
+evidences of it stand recorded in his book: 'In point of fact, and
+historically, as far as my researches have gone, in every signal
+instance of a rise or fall of prices, the rise or fall has preceded, and
+therefore could not be the effect of, an enlargement or contraction of
+the bank circulation.'"
+
+I see nothing in Fisher's discussion of credit to differentiate it from
+the position of the old Currency School. And the reason is a very simple
+one: Fisher has followed the quantity theory to its logical conclusions!
+
+[323] See our chapter on the "Volume of Money and the Volume of Credit."
+
+[324] How close the relation between loans and deposits is may be seen
+from Professor Mitchell's chart, _Business Cycles_, p. 344. The same
+chart exhibits the variations in the reserve percentage, which is very
+much greater. The New York Clearing House banks, which we have seen
+(_supra_, "Volume of Money and Volume of Credit") have a spread of from
+24.89% to 37.59% in the yearly average of percentage of reserves to
+deposits--a spread of over 50%--show a variation in yearly average for
+the percentage of loans to deposits of only 24.3%--the range being from
+83% to 104%. _Ibid._, pp. 325 and 331. For a partially different series
+of years, see the chart of J. P. Norton, _Statistical Studies in the New
+York Money Market_, facing p. 104.
+
+[325] Neither deposits nor loans vary _proportionately_ with trade. Very
+active trade may merely increase the activity of loans and deposits,
+causing both to be shifted more rapidly--larger outgo, larger income,
+loans more frequently contracted and paid off, larger amounts
+"deposited" on a given day, but balances, both of loans and deposits, at
+the end of the day not increased proportionately with the activity. This
+is strikingly illustrated in the business of the stockbroker.
+
+[326] _Supra_, p. 47.
+
+[327] Italics mine.
+
+[328] "Miscellaneous Articles on German Banking," in _Report of Nat.
+Mon. Commission_, p. 175. Art. by Max Wittner and Siegfried Wolff.
+
+[329] The figures are not easily compared, as the figures for
+giro-_transfers_ do not indicate the volume of giro-_accounts_, which is
+doubtless much smaller. I know no estimates for the turnover either of
+notes or of bills of exchange. To determine what _proportion_ of
+business is done by each would, thus, not be easy. The volume of bills
+of exchange for the year is three times as great, for 1907, as the
+figures for note issue. The giro-system, as is well known, is relatively
+unimportant as compared with notes. But I do not undertake to assign
+figures showing proportions of business done.
+
+[330] Inland bills of exchanges in connection with the grain trade are
+still very important, especially at Chicago and Minneapolis. The writer
+has met frequent reference to cotton bills at St. Louis. Wool bills are
+frequent in Boston.
+
+[331] _Vide_ my criticism of his statistical fallacy in this connection,
+in the _Annalist_ of Feb. 7, 1916. He rules out foreign trade from his
+"equation of exchange" by the device of assuming that imports and
+exports cancel one another. This, however, to the extent that it is
+true, makes the bill of exchange more, rather than less, important as a
+substitute for money and deposits. Fisher, _loc. cit._, pp. 306, and
+374-375. See appendix to chapter XIII of the present book.
+
+[332] _Vide_ ch. 16 for a more precise statement of this part of
+quantity theory doctrine.
+
+[333] _Purchasing Power of Money_, pp. 169-170.
+
+[334] _Ibid._, p. 170.
+
+[335] _Ibid._, p. 171.
+
+[336] _Ibid._, p. 172.
+
+[337] _Ibid._, p. 172. Italics mine.
+
+[338] _Ibid._, pp. 174-181.
+
+[339] I call attention, in passing, to Fisher's confusion, in this
+sentence, of "commodities" with "trade." This occurs frequently in his
+argument. _Cf._ pp. 225-226, _supra_.
+
+[340] The Capitalization theory is briefly outlined by Böhm-Bawerk, in
+the critical and historical volume of his _Kapital und Kapitalzins_
+(English title of the volume, _Capital and Interest_), in his criticisms
+of the theories of Henry George and Turgot. It has subsequently been
+elaborated, and much improved, by Fetter, in his _Principles of
+Economics_, and, more recently, has been restated, with mathematical
+formulæ, by Fisher, in his _Rate of Interest_. A good brief statement
+will be found in Seligman, _Principles of Economics_, ch. on "The
+Capitalization of Value." Extensive use has been made of it by Veblen.
+More recently, it has been elaborated in the controversy over the theory
+of interest participated in by Seager, Fisher, Brown and Fetter, in the
+_American Economic Review_, 1912-13-14, and the _Quarterly Journal of
+Economics_, 1913.
+
+[341] Italics mine.
+
+[342] The criticisms I should make of the present formulations of the
+time-preference theory of interest, as presented by Böhm-Bawerk, Fetter
+and Fisher, rest on the individualistic method of approach, and are at
+many points analogous to the criticisms I have made of the utility
+theory of value. These criticisms need not affect the points at issue
+here. On the particular point involved, I agree with Fisher that the
+productivity theory gives a wrong answer.
+
+[343] _E. g._, Fisher, _Purchasing Power of Money_, p. 179.
+
+[344] This confusion is a companion of the confusion between volume of
+_goods in existence_, or volume of _production_, and volume of goods
+_exchanged_. The errors growing out of this confusion have been dealt
+with in ch. 13, especially pp. 225-226. Virtually all quantity theorists
+make both these mistakes.
+
+[345] The fundamental causation is psychological, and calls for a theory
+of _value_, as distinguished from exchange-relations.
+
+[346] _Supra_, chapter on "Velocity of Circulation."
+
+[347] This distinction is clearly made and developed by von Wieser, in
+the two articles referred to in our chapter on "Marginal Utility." It is
+used by him in criticisms of the quantity theory. "Der Geldwert und
+seine geschichtlichen Veränderungen," _Zeitsch. für Volkswirtschaft,
+Sozialpolitik und Verwaltung_, XIII, 1904; discussions in _Schriften des
+Vereins für Sozialpolitik_, 1009, no. 132. A similar distinction runs
+through J. A. Hobson's _Gold, Prices and Wages_, London, 1913. The
+present writer had worked out the line of argument here presented before
+reading either of these discussions.
+
+[348] I have chosen maid-servants, to avoid complications of costs of
+production in the reasoning that might come if other labor, engaged in
+producing goods for the market, were selected. To tighten the argument a
+tittle further, I assume that the masters receive their monthly incomes
+on the first day of the month; that they pay the maids on the same day;
+that the rest of the expenditures, both of masters and maids, are strung
+out through the rest of the month.
+
+[349] _Op. cit._, p. 27.
+
+[350] A possible alternative interpretation of Professor Fisher's
+conception is suggested in two or three sentences in the passage of the
+_Purchasing Power of Money_ I have been discussing. On p. 175 he makes a
+distinction between individual prices _relatively to each other_ and the
+price-level. But the distinction which he _discusses_ in the passage as
+a whole is between the price-level and individual prices _not_
+considered in relation to each other. Comparison, moreover, with his
+original enunciation of the notion (Papers and Discussions, 23d Annual
+Meeting of the American Economic Association, pp. 36-37), would serve to
+justify the interpretation I give, as nothing at all is said there about
+super-ratios between individual prices. But the internal evidence is
+even more convincing. Demand and supply, and cost of production, find
+their problem, not in the relation between the money price of aspirin
+and the money price of caviar, but in the money-price of aspirin or the
+money-price of caviar considered separately. Professor Fisher thus
+conceives supply and demand in his _Elementary Principles_ (p. 260).
+This interpretation is especially necessary, since Professor Fisher is
+joining issue with writers who surely use demand and supply and cost of
+production as means of explaining money-prices, and not super-ratios
+between them. Further, the price-level is _not_, on Professor Fisher's
+own scheme, a factor in determining the relations of the prices of sugar
+and of wheat _inter se_. With a given price-level, wheat might be worth
+a dollar and sugar nine cents, and the ratio of their money equivalents
+would be 100:9; with a price-level twice as high, wheat would be worth
+two dollars, and sugar eighteen cents, but the ratio between their money
+equivalents would be still 100:9. The whole discussion is quite
+meaningless unless the contrast be between concrete money-prices of
+particular goods, and their average. On either interpretation, moreover,
+my criticism of the exalting of the average into an entity would stand.
+
+[351] _Purchasing Power of Money_, pp. 175-179.
+
+[352] I am glad to find myself in agreement with Professors Laughlin and
+Kemmerer in holding that this notion of Professor Fisher's is untenable.
+"The distinction Professor Fisher draws between the prices of individual
+commodities and the general price-level appears to me, as to Professor
+Laughlin, to be untenable. It is, moreover, contradictory to his general
+philosophy of money. His index numbers recognize no general price-level
+distinct from individual prices.... Professor Fisher's illustration of
+the ocean would be more apposite if he called it a lake whose level was
+continually changing, and if he considered each particular wave as
+extending to the bottom." Kemmerer, _Papers and Discussions_, 23d Annual
+Meeting of the American Economic Association, p. 53. At the same time, I
+agree with Professor Fisher that there must be something more
+fundamental than the particular prices to make the scheme work. This
+something I find in the absolute value of money.
+
+[353] _Loc. cit._, p. 14.
+
+[354] _Cf. Social Value_, chs. 2 and 11, and "The Concept of Value
+Further Considered," _Quart. Jour. of Econ._, Aug., 1915. See also,
+_supra_, the chs. on "Value," "Supply and Demand," "Cost of Production,"
+and "Capitalization."
+
+[355] This tendency may be more than offset by the increasing
+significance of money as a "bearer of options" or "store of value" in
+periods of panic and depression. See, _infra_, the chapter on "The
+Functions of Money," and Davenport, _Economics of Enterprise_, pp.
+301-03.
+
+[356] "Agricultural Credit in the United States," _Quart. Jour. of
+Econ._, Aug., 1914, p. 708, n.
+
+[357] Iowa farm lands are exceedingly active, 18% of the farms being
+sold annually. The Mississippi lands are much less active. I am indebted
+to Dr. Pope for information regarding Iowa on this point.
+
+[358] The Single Taxer could at least retort that this need not protect
+landlords in countries, like England, which lend surplus capital abroad.
+
+[359] _Cf._ Trosien, _Der landwirtschaftliche Kredit und seine
+durchgreifende Verbesserung_, p. 29, cited by J. E. Pope, _loc. cit._,
+p. 705, n.
+
+[360] This was seen by Mill, (_Principles_, Bk. III, ch. viii, par. 4),
+and has been especially emphasized by Laughlin, _Principles of Money_,
+ch. 10. _Cf._ A. C. Whitaker's discussion in the _Quart. Jour. of
+Econ._, Feb. 1904.
+
+[361] _Supra_, p. 124, and ch. on "Dodo-Bones."
+
+[362] Comptroller of the Currency estimates the State bank-notes in 1861
+at 202 millions; in 1862, at 183 millions. _Report of the Comptroller of
+the Currency_, 1915, vol. II, p. 37.
+
+[363] W. C. Mitchell, _History of the Greenbacks_, ch. on "The
+Circulating Medium," and _passim_.
+
+[364] See Conant, _Modern Banks of Issue_, New York, 1896, p. 114. An
+interesting analysis of the course of the gold premium and of prices
+during the period of the Bank Restriction in England, and of the
+controversies relating thereto, will be found in Knies, _Der Credit_
+(vol. II of _Geld und Credit_), pp. 247 _et seq._ The same period is
+studied in detail by Thos. Tooke in his _History of Prices_.
+
+[365] _Money and Monetary Problems_, p. 105, and preceding.
+
+[366] Nicholson, _loc. cit._, 84ff.
+
+[367] _Ibid._, 76ff.
+
+[368] _Cf._ Laughlin, J. L., _Principles of Money_, and Scott, W. A.,
+_Money and Banking_.
+
+[369] _Cf._ _infra_, our discussion of credit. It is not maintained that
+credit needs to be based on _physical_ goods, but it is maintained that
+credit is based on _values_, which are generally not the value of a sum
+of gold.
+
+[370] I have elaborated this notion in a hypothetical case in the
+chapter on "Dodo-Bones," to which I would now refer. See also the
+analysis of an "ideal credit economy" in the discussion of reserves in
+the section on Credit, in Part III.
+
+[371] _Infra_, the discussion of reserves in Part III.
+
+[372] _Cf._ the chapter on "The Origin of Money," _infra_.
+
+[373] See especially _History of the Greenbacks_, pp. 188ff.; 207-208;
+275-279.
+
+[374] Various efforts have been made by adherents of the quantity theory
+to meet the facts developed by Mitchell with reference to the
+Greenbacks. Thus, it has been suggested that the coming to par of the
+Greenbacks shortly before the resumption of specie payments was an
+accidental coincidence, due to the fact that the volume of trade in the
+United States just happened to grow to the right amount to bring the
+Greenbacks to par at that time. No statistical evidence has been offered
+for this thesis, I believe. It is, indeed, the only logical thing which
+a quantity theorist could say on the matter, except one alternative, (F.
+R. Clow, _J. P. E._, vol. II, p. 597) namely, that if the Greenbacks
+should exist in such quantity that, under the quantity theory, their
+value ought to fall below the discounted future value of the gold in
+which they were to be redeemed, speculators would take them out of
+circulation, holding them for the interest, and so reduce their quantity
+that the value would rise to that discounted future value. The first
+thesis, that based on putative changes in the volume of trade, though
+highly improbable in fact, is logically possible. The second thesis,
+however (_Purchasing Power of Money_, p. 261) meets serious
+difficulties. What motive would a speculator have for taking the
+Greenbacks out of circulation, and hoarding them? The answer is, he gets
+thereby the "interest," as the Greenbacks approach the date for
+redemption in gold. If this were the only way in which he could get this
+gain, the answer would be good. But there is another way in which he can
+get it, and something more besides, namely, by _lending out_ his
+Greenbacks. In that case, since the creditor gets the full benefit of an
+appreciating standard of deferred payments, he would get all the
+"interest" which he could get by hoarding, and, in addition, he would
+get contract interest on his loan. Of course, if the principle of
+"appreciation and interest" worked out with perfect smoothness, he would
+find his contract interest reduced as the other rose, and one might even
+expect, if the Greenbacks were very redundant, that contract interest
+would disappear. There is no evidence that this did happen, however! And
+so long as any contract interest existed, we have a thoroughly valid
+reason why a holder of Greenbacks would lend them rather than hoard
+them.
+
+Another effort to harmonize the facts with the theory consists in the
+contention that _anticipated_ future increases in the Greenbacks would
+work in the same way as actual increases. But this is to shift the whole
+basis of the quantity theory, which rests in the notion of a mechanical
+and--in the mass--unconscious equilibration of quantity of money and
+number of exchanges. The quantity of money is not increased until it is
+increased! _Cf._ Mill, _Principles_, Bk. III, ch. 12, par. 2, and Jos.
+F. Johnson, _Money and Currency_, Rev. ed., p. 235.
+
+Professor Fisher has another way to meet the facts of the Greenback
+régime, and that is by holding that they prove his case! I do not think
+that anyone, however, who examines the figures he offers on p. 260
+(_loc. cit._) will be impressed by the degree of concomitance between
+money and prices which they exhibit, especially after Mitchell's careful
+analysis of changes in detail.
+
+At another point, Professor Fisher maintains (p. 263) that the rapid
+changes in gold premium which came with news from the military
+operations (_e. g._, the 4% drop in Greenbacks after Chickamauga), were
+due to alterations in velocity of circulation and in volume of trade! As
+the gold market usually got the news by wire, before the newspapers got
+it, however, this thesis is not very convincing.
+
+[375] Kemmerer, E. W., _Money and Credit Instruments in their Relation
+to General Prices_, New York, 1907; Fisher, _Purchasing Power of Money_,
+New York, 1911; subsequent yearly continuations of "The Equation of
+Exchange" in the _American Economic Review_. The references here, as
+throughout, are to the 1913 edition of Professor Fisher's book.
+
+[376] _History of Prices._
+
+[377] To this type would belong Professor Fisher's figures with
+reference to the years, 1860-66 on p. 260 of his _Purchasing Power of
+Money_.
+
+[378] This relates particularly to Fisher's figures.
+
+[379] _Loc. cit._, p. 298.
+
+[380] _Ibid._, p. 297.
+
+[381] _Cf._ our chapter, _supra_, on the "Equation of Exchange."
+
+[382] These are the "finally adjusted" figures. _Loc. cit._, 304.
+
+[383] _Ibid._, p. 277. Fisher's estimate for V, as corresponding more
+closely to Kinley's figures for the proportions of money and checks in
+trade, is to be preferred to Kemmerer's. _Cf._ our comments on this
+point, _infra_, in this chapter. Even the figures for M´ are not
+correct, since they do not include deposits growing out of "morning
+loans," cancelled during the day. _Infra_, ch. 24.
+
+[384] _Report of the Comptroller_, 1896; _The Use of Credit Instruments
+in Payments in the United States_, National Monetary Commission Report,
+Washington, 1910.
+
+[385] I am indebted to the _Annalist_ for permission to use here
+materials first published in the _Annalist_ in articles by the present
+writer: "Home vs. Foreign Trade," Feb. 6, 1916; "Tests of Home Trade
+Volume--a Rejoinder," March 6, 1916; "Home Trade Volume," March 20,
+1916, p. 377. To these articles Professor Fisher replied: "A
+Multi-Billion Dollar Nation," _Annalist_ Feb. 21, 1916; and "Over and
+Under Counting," _Ibid._, March 13, 1916.
+
+[386] Except checks deposited by one bank in another. Kinley's figures
+exclude these in 1909, but not in 1896.
+
+[387] The methods and data employed by Professor Fisher are described at
+length in his _Purchasing Power of Money_, ch. XII, and Appendix to ch.
+XII.
+
+[388] M´ is the _average_ of bank deposits, as shown by the balance
+sheets, for all banks in the country for the year. Throughout, the
+reader must distinguish this from the "deposits" of Kinley's
+figures--amounts "deposited" on March 16.
+
+[389] It is easier, sometimes, to make an assumption regarding a set of
+facts than to find out what they are! In this case, some work was
+involved. Old newspapers had to be hunted up for various cities, and
+letters had to be written, to find out, for various cities, (a)
+clearings for March 17, 1909, and (b) the number of banking days in the
+year 1909. This work was done by Mr. N. J. Silberling, who got figures
+from 12 cities which had 69% of all clearings outside New York. These
+cities are: Chicago, Philadelphia, Boston, St. Louis, Pittsburg, San
+Francisco, Baltimore, New Orleans, Atlanta, Providence, St. Paul, and
+Seattle. The daily average of clearings for these cities in 1909 was
+$136,222,436; the actual clearings for March 17, 1909, was $132,961,273.
+The ratio of average daily clearings to actual clearings on March 17 was
+1.0245:1. The increase needed in the figure for deposits outside New
+York, then, was only 2.45%. Mr. Silberling, wishing to be conservative
+in view of the 31% of outside clearings not investigated, allows outside
+clearings to be 3% below normal. On this basis, following Professor
+Fisher's method of computation, he multiplies the deposits assigned by
+Professor Fisher to New York by 1.28, and the deposits assigned to the
+country outside by 1.03, getting total deposits for the day of 1.11
+billions, as against Professor Fisher's figure of 1.20 billions, and a
+total for the year of 333 billions, as against a total obtained by
+Professor Fisher of 364 billions.
+
+[390] To this 786 millions is added all that comes from the erroneous
+assumption regarding outside clearings, when figures for the whole year
+are obtained. Country deposits, for the year, are thus still further
+exaggerated by 31 billions!
+
+[391] _The Use of Credit Instruments_, etc., p. 152. There is abundant
+evidence in Dean Kinley's figures that only a decidedly minor part of
+the amount (373 millions) of checks allowed by Professor Weston for the
+non-reporting banks could have been outside the larger cities. The
+amount deposited in a day in a country bank is so small that a great
+multitude of these banks would be required to show as much as a single
+New York City institution. Thus, ninety banks (27 national banks, 58
+State banks, 3 private banks, 1 stock savings bank, 1 trust company) in
+Arkansas, report only $728,148 in checks, an average of $8,090 per bank.
+If all the 13,000 non-reporting banks were country banks, and if this
+ratio held, we should have 105 millions more for the day (instead of
+Professor Weston's 373 millions), or 31 billions more for the year. This
+average is based chiefly on State and national banks. The average is too
+high for the private banks (whose daily average as reported is $4,010),
+and for the mutual savings banks (whose daily average is $1,254). It is
+well above the daily average of the stock savings banks, which are, in
+many States, practically commercial banks ($6,405). In the non-reporting
+banks there are comparatively few national banks, and about 5,000
+private banks and savings banks, of these the great majority being
+private banks. We cannot make up the 373 millions in the country
+districts. Nor can we make up the 373 millions by taking in all the
+reserve and central reserve cities, exclusive of New York. Chicago, in
+the returns, shows 42.6 millions in checks; St. Louis, 14 millions;
+Boston, 48.8 millions; Philadelphia, 28.6 millions; the other reserve
+cities show 40.2 millions--a total of 174 millions. If we doubled the
+returns for these cities, we should still be 200 millions short of the
+373 millions added by Professor Weston to the total! Neither in the
+country districts, nor in the major cities outside New York can we find
+enough to make up that addition. Very much of the amount added for
+non-reporting banks must be found in New York City itself.
+
+[392] Dean Kinley's questionnaire asked the banks reporting their
+deposits for the day to exclude deposits made by other banks. These
+deposits were not excluded in the 1896 investigation.
+
+[393] House Committee on "Money Trust." Feb. 28, 1913. Pp. 57, 78, 145.
+
+[394] _Cf._ _supra_, and _infra_ our discussion of the volume of trade,
+and _infra_, our discussion of credit, particularly the analysis of
+bank-loans.
+
+[395] _Vide_ the opinion expressed by an official of a New York trust
+company, quoted below, on p. 346.
+
+[396] _Cf._ Horace White, _Money and Banking_, 5th ed., p. 364.
+
+[397] Kirkbride and Sterret, _The Modern Trust Co._, New York, 1905, pp.
+59-60; Cannon, _Clearing Houses_, _Nat. Mon. Com. Report_, p. 178;
+Conant, _Principles of Money and Banking_, II, p. 244.
+
+[398] Inquiry was also made of Professor George E. Barnett, who had
+cited the figures given by the New York Supt. of Banks at p. 133 of his
+_State Banks and Trust Companies_. Professor Barnett writes, in part, as
+follows: "I made no independent inquiry at the time, and accepted the
+statement of the superintendent of banks without critical examination of
+its basis. From what you say, it appears highly probable that he was
+mistaken in his conclusions. The only question in which I was interested
+was whether the reserves of the trust companies could be reasonably
+lower than those of the national banks. I did not care so much about the
+exact ratio of clearings and only quoted that incidentally." For the
+purposes which both Professor Barnett and Mr. Williams had in view, the
+exact ratio was unimportant. The higher figures which I have given above
+would support the thesis in which both were interested, namely, that
+trust company accounts are less active than bank accounts, and so lower
+reserves may be safely held by trust companies than by national banks.
+
+[399] Fisher, _loc. cit._, p. 444.
+
+[400] P. 443. Other discussions of this investigation are in the
+_Journal of the American Bankers' Association_, Jan. 1914, p. 487;
+_Ibid._, Feb. 1915, p. 555; _National Banker_, March, 1915.
+
+[401] None of the cities covered in the figures given in the _Annalist_
+were in New York State. Kinley's figures show that the percentage of
+checks received in deposits of March 16, 1909, in banks outside New York
+State was 91%. _Loc. cit._, p. 180.
+
+[402] Multiplying the 408 millions of checks deposited outside New York
+on March 16, 1909 by 303, the assumed number of banking days, gives
+123.6 billions. Probably, therefore, 124 billions is too small a figure.
+But we should be slow in modifying a figure based on 17 months'
+observations because of the figures from one day's observations.
+
+[403] I have greater confidence in this conclusion, since seeing a
+letter from Mr. Howard Wolfe, who made the investigation of outside
+clearings and "total transactions" for the American Bankers'
+Association, to Mr. Osmund Phillips, Editor of the _Annalist_. Mr. Wolfe
+writes: "I do not believe that the experience of the New York banks
+would differ from that of other institutions which now supply [these
+figures]."
+
+[404] My information on this point comes from Professor O. M. W.
+Sprague. It is corroborated by an official of the Bankers Trust Company
+in New York.
+
+[405] _Vide_ Rodney Dean, of the Fifth Avenue Bank, New York, "The
+Problem of Collecting Transit Items," _Journal of the American Bankers'
+Association_, Jan. 1914, p. 537. Boston inaugurated the system in
+1890-1900; Kansas City five years later. Since the above was written, I
+have learned that New York, in recent months, has introduced the new
+system. This does not affect our argument regarding the figures for
+1909.
+
+[406] Since the foregoing was written, my attention has been called by
+Mr. Osmund Phillips, Financial Editor of the New York _Times_, and
+Editor of the _Annalist_, to indirect ways in which items on out of town
+banks sent to New York for collection will affect New York clearings.
+Country correspondent banks to which New York banks send these items for
+collection, may remit for them in four ways: (1) by sending cash; (2) by
+sending items on out-of-town banks, which the New York bank will send on
+to some other correspondent for collection; (3) by draft on the New York
+bank which has sent the items to be collected; (4) by draft on some
+other New York bank. In the last case, New York clearings are affected.
+The first case is not, quantitatively, important. The second and third
+cases would seem to be the normal types, assuming correspondent
+relations between New York banks and country banks to be _reciprocal_,
+since the New York bank would be disposed, as far as possible, to turn
+over its collection business to its own depositors among the country
+banks. Mr. Phillips says, however, that the fourth case is important. To
+the extent that this is true, our conclusion that out of town collection
+items do not affect New York clearings must be modified, and it becomes
+a matter of importance whether these items are large or small. My
+information, as stated above, is that Chicago exceeds New York City in
+this.
+
+If, however, the Kansas City and Boston arrangements held in New York,
+these collection items would be represented _twice_ in New York
+clearings. The fact that the items do not themselves get into the
+clearings remains.
+
+Direct information regarding New York clearings is very desirable. Our
+indirect approach must be considered inconclusive until more detailed
+figures for New York City are at hand. We need figures covering all
+types of banks in New York, for a period of, say, a year (to allow for
+seasonal changes), in which deposits made by one bank in another are
+separated from other deposits. National banks alone would exaggerate the
+item of deposits by one bank in another, especially as they are the
+depositories of the great private banks.
+
+[407] Or, in some cases, taking the place of cash dealings between banks
+and a local clearing house. On the face of it, it is incredible that
+_balances_ between cities, or _within_ cities, after the country
+clearing houses have done their work, should be so great as to account
+for a very great part of New York clearings. These balances between
+cities other than New York, and balances within country clearing houses,
+must be a minor fraction of _country_ clearings, and country clearings
+are little more than half of New York clearings. Ordinary commerce, as
+shown in chapter XIII, cannot give rise to great sums in the aggregate,
+to say nothing of giving rise to great _balances_.
+
+[408] The whole thing is summed up on p. 25 of the Comptroller's
+_Report_ for 1892.
+
+[409] _Cf._ Kemmerer, _Money and Credit Instruments_, p. 117.
+
+[410] _Annalist_, July 6, 1914, p. 8. The editor of the _Annalist_ gives
+me the following information: data for twenty banks, six in New York and
+fourteen in Chicago, Philadelphia, Boston, and St. Louis, for the week,
+Aug. 28-Sept. 2, 1916, show that clearings are 71% of "total
+transactions" in New York, and about 40% in the other cities. These
+figures are all for national banks, except for one bank in St. Louis.
+
+[411] There is one further generalization developed in connection with
+Mr. Wolfe's investigation of the ratio of clearings to "total
+transactions" which seems to have relevance here, though I am not sure
+how it should be interpreted. The average ratio, as stated, is about
+40%. This varies, however, for different cities. "The rule seems to be
+that the larger the proportion of bank deposits to individual deposits,
+the smaller will be the figure representing this ratio. In Cincinnati,
+for example, it is 31.4% while in Los Angeles it is 59.7%." (_Jour. of
+American Bankers' Ass'n_, Jan. 1914, p. 487.) How safely based this
+generalization is cannot be told from the context, as no further facts
+are offered. Nor is its bearing on the question at issue, as to whether
+or not New York clearings bear a higher ratio to New York deposits than
+country clearings do to country deposits, entirely clear. It would seem
+to indicate that deposits made by outside bankers in the banks of
+reserve cities make smaller contributions to clearings than individual
+deposits do, and this would fit in with the fact that checks on outside
+banks, deposited for collection by one bank in another, do not get into
+clearings. What further explanation or significance it has I leave to
+the reader. It is possible that there are a number of important relevant
+facts missing regarding New York clearings, and that the conclusions
+here reached may require later revision.
+
+[412] _Loc. cit._, p. 304.
+
+[413] But not as a correct estimate of M´V´ for the equation of
+exchange! We do not know what part of these checks were used in "trade."
+_Cf._ our discussion of the estimate of T, _infra_.
+
+[414] Kemmerer does not do this, but takes total clearings for the
+country as his index of variation. _Loc. cit._, 118-120. His figures for
+"check circulation" are, thus, more variable than Fisher's. In this,
+Kemmerer's results are much to be preferred.
+
+[415] I have taken the figures for clearings from Professor Fisher's
+table, _loc. cit._, p. 448.
+
+[416] _Loc. cit._, p. 304. _Cf._ our chapter on "Velocity of
+Circulation," _supra_.
+
+[417] _Loc. cit._, pp. 477-478.
+
+[418] There is, of course, the further point, to be emphasized in the
+discussion of T, _infra_, that MV (and hence V), assuming the
+calculation otherwise correct, is too large, to the extent that it
+includes tax payments, loans and repayments, dealings between agent and
+principal, etc. But this criticism does not so clearly apply to MV as it
+does to M´V´.
+
+[419] _Business Cycles_, p. 308.
+
+[420] That volume of trade and volume of physical goods are virtually
+interchangeable in Fisher's thought is strikingly illustrated on p. 195
+of the _Purchasing Power of Money_: "A doubling in the quantities of all
+commodities _sold_, or (_what is almost the same thing_) a doubling of
+the quantities _consumed_." Italics are mine.
+
+[421] This is strictly true only of the part of T which comes from the
+figure for M´V´, 353 billions. In calculating MV, Professor Fisher
+introduces more complexities, into which we shall not enter, as the
+absolute amount is small--only 34 billions!--and the possible error from
+this source not great enough to affect a calculation where 20 billions
+one way or the other is within the "margin of error."
+
+[422] _Vide_ _Annalist_, Feb. 17, Feb. 21, March 6, March 13, and March
+20, 1916, for a discussion of this point by Professor Fisher and the
+present writer.
+
+[423] _Op. cit._, pp. 112-113. It is interesting to note that Kemmerer's
+argument takes the form of proving, not that bank transactions do not
+overcount trade, but merely that they do not _undercount_ trade. With
+this contention I am in hearty agreement! The overcounting is worse in
+Kemmerer's figures for 1896 than for Fisher's in 1909, since the 1896
+figures included deposits made by one bank in another, while the 1909
+figures do not. _Cf._ Kemmerer, p. 105, and Kinley, in _Report of the
+Comptroller_ for 1896 and in the 1909 monograph, _passim._
+
+[424] _Vide_ the present writer's discussion in the _Annalist_, March 6,
+1916, p. 313.
+
+[425] I am informed by Mr. B. F. Smith, Treasurer of the Cambridge Trust
+Company, that the practice of having separate dividend accounts is a
+very widespread one, especially with the larger corporations.
+
+[426] _Statistics of Railways_, 1909, p. 71.
+
+[427] Professor Fisher, in his _Annalist_ article of Feb. 21, 1916,
+quotes Dean Kinley (_The Use of Credit Instruments_, p. 151), as holding
+that duplications have largely been eliminated from his 1909 figures.
+Professor Fisher overlooks the fact that Dean Kinley is here referring,
+not to money value of trade, but merely to volume of checks. Dean Kinley
+merely indicates that by eliminating deposits made by one bank in
+another, he has avoided having the same check counted in deposits made
+in two or more banks on the same day. Even this is not wholly avoided.
+(_Ibid._, pp. 158-159.) It was extensive in the 1896 figures. Dean
+Kinley thinks, properly enough, that he has a sufficiently close
+approximation to the volume of checks, for the reporting banks, but what
+the checks were drawn for he does not undertake to say. His problem was
+_payments_, not _trade_. From the angle of volume of trade, he finds
+duplications even in the retail deposits (_Jour. of Polit. Econ._, vol.
+5, p. 165).
+
+[428] _Annalist_, March 13, 1916, p. 344.
+
+[429] Chapter on "Volume of Money and Volume of Trade," pp. 241-248. We
+really did not "find" nearly that much. The figures assigned to retail
+and wholesale trade rest on figures for retail and wholesale bank
+"deposits," and are, especially the wholesale figures, much too large.
+
+[430] _Annalist_, Feb. 21 and March 13, 1916.
+
+[431] _Loc. cit._, p. 180.
+
+[432] _Ibid._, pp. 166-167; 187; 273.
+
+[433] Pratt, _loc. cit._, p. 166.
+
+[434] _Ibid._, p. 187.
+
+[435] Emery, _Speculation on the Stock and Produce Exchanges_, pp. 89;
+74-95. A Boston broker expresses the opinion that the magnitude of
+artificial borrowing to make the clearance sheet misleading is not
+great, so far as Boston is concerned. I have got no estimates for New
+York.
+
+[436] The banks, of course, are not borrowing stocks.
+
+[437] Van Antwerp, _The Stock Exchange from Within_, New York, 1913, p.
+290
+
+[438] It recently happened that Alaska Gold was being "loaned flat" on
+the Boston Stock Exchange, which was a prelude for a six point advance
+in the next two or three days, as the bears were driven to cover.
+
+[439] One factor complicates this. Are all the hundred share sales
+recorded? In our chapter on "Volume of Money and Volume of Trade," we
+called attention to a statement to the effect that brokers get together
+before the market opens, and compare "stop loss" orders, matching these
+with other orders, with the understanding that they automatically go
+into effect if the "market" reaches the prices indicated. The statement
+indicated that this substantially increases sales beyond the recorded
+totals, as such sales do not get on the ticker. I think, however, that
+this cannot throw our reckoning out greatly. The great majority of sales
+are not on "stop loss" orders. None of the sales of "floor traders," who
+average a third of the total trading (_Pujo Committee Report_, Feb. 28,
+1913, p. 45), would be on "stop loss" orders. The bulk of the rest is
+not. Moreover, not all stop loss orders, by any means, would be executed
+in this manner. It is not easy to see how, under the rules and practices
+of the Exchange, many other sales could go unrecorded, except on days of
+greatest stress. On September 25, 1916, when over 2,300,000 shares were
+sold, the daily paper spoke of sales missed by the ticker, which was
+swamped with sales to be recorded, as an item of some magnitude. But the
+Ticker is wonderfully efficient. It sometimes gets behind the market by
+several minutes, but it rarely misses anything, under ordinary
+conditions.
+
+[440] _Ibid._, p. 166.
+
+[441] This explains the estimates of Wall Street men that the Clearing
+House reduces checks by two-thirds. For _their purposes_, the saving is
+almost that much, of the items offered for clearings. _Cf._ Van Antwerp,
+_The Stock Exchange from Within_, pp. 121-122.
+
+[442] _Ibid._, p. 273. There is one billion difference between Pratt's
+estimate and mine. I incline to the view that mine is correct, the more
+as he puts his figure, 14 billions, as a safe lower limit. But a billion
+one way or the other is trifling!
+
+[443] An official of the Bankers Trust Company has secured for me from a
+broker at the "Money Post" an estimate of 20 to 25 millions as an
+average, with 50 millions as a maximum, for 1915. The Pujo Committee, in
+its report in 1913, p. 34, gives a similar estimate.
+
+[444] P. 34.
+
+[445] _Annalist_, Aug. 14, 1916.
+
+[446] N. J. Silberling, "The Mystery of Clearings," _Annalist_, Aug. 14,
+1916, p. 223.
+
+[447] There is one further piece of evidence which has been obtained
+through the courtesy of a New York brokerage house. At the request of
+the gentleman who has supplied the figures, I have altered them by a
+constant percentage, to prevent possible identification, but the
+proportions among them hold as they were given. The figures show the
+business of the house for the month of March, 1916. The figures show:
+
+ Market value of stocks and bonds bought, 1,644,630
+ Total deposits made during month, 1,475,502
+ Average borrowed from banks, 952,000
+
+For this house, then, for this month, the deposits were less than the
+value of securities sold, by 11.5%. The month, however, was unusual. It
+was a month of reduced activity, following large activity. This is
+strikingly shown by the figure for the _average_ bank loans for the
+month--over two-thirds of the _total_ deposits for the month. The house
+had a large bull _clientèle_, which was holding its stocks, and not
+selling on a bear market. The turnover was very slow, as Wall Street
+goes. It was a time of extraordinarily easy money when banks called few
+if any loans. The broker, in explanation of his figures, says: "The most
+of our checks were to other brokers. Checks to banks about equaled
+checks to customers. Your assumption that we did not pay off many loans
+in March is, I think, right." The same broker states in another letter
+that he thinks that, in general, the bulk of checks to and from brokers
+are in dealings with banks. In this month, then, with this factor
+reduced to a minimum, we still have deposits undercounting sales by only
+11.5%. The figures do not prove my thesis that brokers' deposits greatly
+overcount their sales, but they at least show that they do not greatly
+undercount them. In view of the peculiarities of the month chosen, with
+transactions between banks and brokers cut to the minimum, they are
+quite consistent with the contention that normally the brokers' deposits
+will much exceed their sales.
+
+[448] Kemmerer's main figures are merely _indicia_ of variation, rather
+than absolute magnitudes, for trade. On p. 136, _d._ (_loc. cit._),
+however, he indicates that his figures for "total monetary and check
+circulation" is also a figure for "total business transactions"--and
+counts 89% of it as wholesale trade.
+
+[449] _Cf._ the discussion of the relation of P and T in the chapter on
+"The Equation of Exchange."
+
+[450] _Op. cit._, p. 136.
+
+[451] _Ibid._, pp. 70-71.
+
+[452] _Loc. cit._, p. 487.
+
+[453] Kemmerer does not accept Kinley's estimate of 75% for checks as
+compared with money in payments as a "sure minimum" for 1896, but rather
+counts it as a "fair maximum." (_Loc. cit._, p. 106.) Using this as a
+basis, he gets a monetary circulation for 1896 of 47.7 billions, and a
+"velocity of money" (since the monetary stock in circulation in 1896 was
+a little over 1 billion) of 47. (_Loc. cit._, p. 114.) Kinley's fuller
+investigation in 1909 has made it clear that his 1896 conclusions
+understated, rather than overstated, the proportion of checks to money.
+His "sure minimum" was needlessly low. He concludes in 1909 that 80 to
+85% for checks is safe. (_Op. cit._, p. 201.) _Cf._ Fisher's comments,
+_loc. cit._, pp. 430; 460 _et seq._ Fisher's V is about half as great as
+Kemmerer's, and varies to some extent. I think Fisher, since his results
+are closer to Kinley's later figures, has made much the better estimate
+here.
+
+[454] Since I have already compressed the contents of a book of 200
+pages into Chapter I of the present book, it seems undesirable to
+attempt here a further compression of that chapter. These theses,
+therefore, do not give the substance of the social value theory.
+
+[455] Menger, "Geld," _Handwörterbuch der Staatswissenschaften_;
+Carlile, _Evolution of Modern Money_.
+
+[456] We should make a slight and unimportant qualification as to
+Kemmerer. _Cf._ our chapter on "Dodo-Bones," _supra_.
+
+[457] It seems necessary to point out this essential lack of correlation
+between value and exchangeability, since Mr. Horace White, in his _Money
+and Banking_ (5th ed., p. 135), identifies value and exchangeability:
+"Value is an ideal thing in the same sense that weight is. The former
+means exchangeability; the latter means force of gravity. A dollar is a
+definite amount of exchangeability." _Cf._ also Amasa Walker's
+contention that "exchangeable value" is tautology, equivalent to
+"exchangeable exchangeability!" _Science of Wealth_, 5th ed., p. 9.
+_Cf._ my article "The Concept of Value Further Considered," _Quart.
+Jour. of Econ._, Aug. 1915, pp. 696 _et seq._
+
+[458] This is stated by Schumpeter, so far as land is concerned. _Vide
+Quarterly Journal of Economics_, Aug. 1915, p. 704. It is due Menger to
+point out that he does not make the distinction between value and
+exchangeability which I have just made. His theory rests in an analysis
+of the saleability or exchangeability of goods. But Menger's conception
+of value is essentially different from my own. He commonly means by
+"_Wert_" merely subjective value, or marginal utility. He objects to the
+notion that one good measures the value of another, or that goods, when
+exchanged, are equivalent in value, on the ground that there must be a
+surplus in value (subjective value) for each exchanger, or exchange
+would not take place. He has, as a primary concept, no absolute social
+value. "_Tauschwert_" is for him a relative value, though he is finally
+driven to constructing what is virtually an absolute value notion, by
+distinguishing "_äusserer Tauschwert_" from "_innerer Tauschwert_" in
+the case of money, the latter being concerned exclusively with the
+causes affecting prices _from the side_ of money, ignoring changes
+in prices due to causes affecting goods. (_Cf._ art. "Geld," in
+_Handwörterbuch der Staatswissenschaften_, 3d ed., pp. 592-593. He does
+not make this distinction in developing the theory of saleability of
+goods, however. _Cf._ the chapter, _supra_, on "Marginal Utility and the
+Value of Money." It is absolute social value which I am here
+distinguishing from exchangeability. It is equally true, however, that
+subjective value and exchangeability have no necessary correlation.)
+
+[459] _Cf._ A. S. Johnson, "Davenport's Competitive Economics," _Quart.
+Jour. of Econ._, May, 1914, p. 431.
+
+[460] The man who wishes to "break" a twenty dollar bill may well have
+to go through Menger's process, getting two tens from one man, breaking
+one of these into two fives with another, and so on. Or he may have to
+buy something which he does not want to get "change."
+
+[461] Ridgeway, _Origin of Metallic Currency_, p. 327; Carlile,
+_Evolution of Modern Money_, p. 233. Grain is said to have been used in
+ancient China as money,--not as a standard of value, but as a medium of
+exchange. Chen Huan Chang, _Economic Principles of Confucius and his
+School_, vol. II, p. 437.
+
+[462] Written in 1914.
+
+[463] The Hindu law of inheritance is a factor here. The Hindu woman may
+retain, after the death of her husband, father or brother, the ornaments
+he has given her during his lifetime. But all of the rest of the family
+property must go to male heirs, even remote male heirs coming in before
+the closest female relatives.
+
+[464] _Cf._ Carlile, _Monetary Economics_, introductory chapter. The
+whole question may hinge on terminology, so far as Carlile is concerned.
+It is not clear what he means by "value of gold."
+
+[465] _Cf._ Conant, _Principles of Money and Banking_, I, ch. 7, esp. p.
+102.
+
+[466] I do not believe that we have sufficient agreement among the best
+students of the statistics of the precious metals to justify any
+statistical conclusions regarding the laws governing the industrial
+consumption of gold and silver. Even the facts as to the proportions of
+annual production of gold in recent years going to money and to the arts
+are in dispute. Thus, DeLaunay (_The World's Gold_, New York, 1908, p.
+176), divides the annual output as follows: Exportation to the East, and
+loss, 16%; coinage, 44%; industry, 40%. The industrial employments are
+divided as follows: jewelry, 24% (of total annual gold production);
+watch cases, 10%; gold leaf, 2.25%; watch chains, 1.75%; plate, 0.75%;
+various uses, as pens, dentistry, chemical works, etc., 1.25%.
+DeLaunay's competence as an authority is attested by various writers,
+among them W. C. Mitchell (_Business Cycles_, p. 281). Mitchell,
+comparing DeLaunay's estimates with divergent estimates of other
+authorities, concludes that there is not sufficient evidence to justify
+definite conclusions. I do not think that anyone who has read the
+criticisms which Touzet has brought together (_Emplois Industriels des
+Métaux Précieux_, Paris, 1911, pp. 49-52) of the methods employed in the
+investigations by the Director of the United States Mint in 1879, 1881,
+1884, 1886, and 1900, will have large confidence in the exactness of the
+results reached in those investigations. (See annual reports of the
+Director of the Mint for the years in question.) Touzet's careful and
+elaborate study employs the figures of these investigations as the best
+available, but with substantial misgivings. There are many indeterminate
+elements in the problem, as shown by both Touzet and DeLaunay, among
+them, the extent to which coin is melted down for industrial purposes.
+
+The Director of the Mint would assign a much higher proportion of the
+annual output to coinage than would DeLaunay.
+
+Earlier studies, by Soetbeer and Suess, seem quite out of harmony with
+these conclusions. (Suess, Eduard, _The Future of Silver_, Washington,
+Government Printing Office, 1893, pp. 51-53.) Suess thinks that
+virtually as much gold was going into the arts uses as was being
+produced, in 1892, and quotes Soetbeer (_Litteraturnachweis_, p. 285) as
+admitting that such a contention may not be demonstrable, but at the
+same time holding that it cannot be disproved.
+
+In the face of what seems to be a really indeterminate statistical
+problem, I content myself with the theoretical conclusions in the text.
+Because I cannot find adequate grounds for confidence in the main source
+from which he has drawn his statistics, I refrain from a criticism of
+the theory and method underlying Professor J. M. Clark's ingenious
+effort to derive statistical laws for the elasticity of the arts demand
+for gold. (_American Economic Review_, Sept. 1913.)
+
+[467] _Cf._ our chapter on "Economic Value," _supra_, and "Social
+Value," _passim_.
+
+[468] F. A. Walker, _International Bimet_.
+
+[469] See DeLaunay, _The World's Gold_, New York, 1908, p. 176.
+DeLaunay's figures indicate that the use of gold for gold leaf and plate
+is quantitatively a minor factor in the industrial consumption of gold.
+Jewelry and watch cases are the most important items.
+
+[470] Capital prices of lands and securities might well be lower, if
+interest rates are markedly higher, and if land rents and "quasi-rents"
+suffer from higher wages and higher interest.
+
+[471] _Cf._ chapter on "Dodo-Bones," _supra_.
+
+[472] Among the writers who have treated this topic, I would mention
+especially Menger, "Geld," in _Handwörterbuch der Staatswissenschaften_;
+Laughlin, _Principles of Money_; Scott, W. A., _Money and Banking_;
+Knies, _Das Geld_; Walker, F. A., _Money and Political Economy_; Conant,
+_Principles of Money and Banking_; Seligman, _Principles of Economics_;
+Johnson, J. F., _Money and Currency_; von Mises, L., _Theorie des Geldes
+und der Umlaufsmittel_; Helfferich, K., _Das Geld_; Simmel, _Philosophie
+des Geldes_; Davenport, H. J., _Economics of Enterprise_. The difference
+between the standard of value (common measure of values) function, and
+the medium of exchange function is particularly well illustrated by
+Scott, _loc. cit._, ch. 1. The legal functions of money are especially
+treated by Knapp, _Staatliche Theorie des Geldes_.
+
+[473] For discussions of the idea of measuring values, and the
+dependence of this on the conception of value as an absolute quantity, a
+common or generic quality of wealth, see Knies, _Das Geld_, I, 113ff.;
+Kinley, _Money_, 61-62; Merriam, L. S., "Money as a Measure of Value,"
+_Annals of the American Academy_, vol. IV; Carver, "The Concept of an
+Economic Quantity," _Quart. Jour. of Econ._, 1907; Laughlin, _Principles
+of Money_, 1903, pp. 14-16; Davenport, _Value and Distribution_, p. 181,
+n.; Anderson, _Social Value_, chs. 2 and 11, and "The Concept of Value
+Further Considered," _Quart. Journal of Econ._, 1915; Helfferich, _Das
+Geld_, 1903 ed., pp. 470-478; Scott, _Money and Banking_, ch. 1.
+
+[474] See Scott, _Money and Banking_, ch. 3.
+
+[475] A further reason for preferring "common measure of values" is that
+expression carries dearly the connotation of absolute values. "Relative
+values" cannot be "measured," _Social Value_, pp. 26-27.
+
+[476] Current text-books, following the Austrian doctrine, define
+production as the creation of "utilities." This is incorrect. Production
+is the creation of _values_. _Cf. Social Value_, pp. 119 and 189.
+
+[477] This is the view of H. J. Davenport (_Economics of Enterprise_,
+pp. 301-302).
+
+[478] Kemmerer has shown this to be true of bank reserves. As we shall
+see, the reserve function is merely a special case of the "bearer of
+options" function. For Kemmerer's discussion of business distrust, see
+_Money and Credit Instruments_, pp. 124-126, and 144.
+
+[479] "In New York, for instance, loans by banks 'on call' are subject
+to repayment within an hour or two after notice is given that repayment
+is desired." Conant, _Principles of Money and Banking_, vol. II, p. 56.
+In general, the banks are content if the loan is repaid by 3 o'clock on
+the day it is called.
+
+[480] _E. g._, Cairnes, J. E., _Leading Principles of Political
+Economy_.
+
+[481] _One_ "pure rate" is a myth, but the notion has some significance,
+as setting off a body of causes distinct from the money-market factors
+under consideration. _Cf. supra_, the ch. on "The Capitalization
+Theory."
+
+[482] See von Mises, "The Foreign Exchange Policy of the
+Austro-Hungarian Bank," British _Economic Journal_, 1909, pp. 208-209.
+An able Boston broker, in Feb. 1917, calls attention to the growing
+difficulty of placing long-time bonds, without very high yield, in view
+of the scarcity of real capital, despite the exceedingly low
+"money-rates." I venture to predict an increasing "spread" between
+"money-rates" and the yield on long-time investments, the longer the War
+lasts. The view of Davenport and Schumpeter (_Annalist_, Feb. 28, 1916,
+and _Theorie der wirtschaftlichen Entwicklung_), which would deny the
+validity of the distinction between money-rates and interest rates, and
+would make the money-market phenomena the primary cause of all interest
+phenomena, seems to me indefensible, alike in theory and in fact.
+
+[483] _Cf._ the analysis of bank-loans in the United States, _infra_.
+
+[484] Mitchell, _Business Cycles_, p. 146.
+
+[485] _Journal of Political Economy_, XVI, May, 1908, pp. 273-298.
+
+[486] Leipzig, 1905. This book has had wide influence on German thinking
+on money. It is typical of the tendency in German thought to make the
+State the centre of everything. Recognizing the historical fact that
+money has originated in a commodity, it holds that the commodity basis
+is a phenomenon of historical significance only, that modern money is a
+creature of the State. The money-unit is not definable as a quantity of
+metal, of given fineness, but rather is a "nominal" thing, present
+monetary standards being defined by legal proclamation in terms of past
+standards. The necessity for this reference to past standards grows out
+of the existence of past _debts_. The State must preserve the continuity
+of juristic relations, between debtors and creditors as elsewhere. Knapp
+holds that the _Zahlungsmittel_ (legal means of quittance, legal tender)
+function is the primary function of money, and that it is not a concept
+subordinate to _Tauschmittel_ (medium of exchange). It is not necessary
+for our purposes to take account of Knapp's theory in detail. He really
+has little to say about the value of money. Indeed, he confesses, in a
+later discussion, that his theory is not concerned with that subject!
+(_Schriften des Vereins für Sozialpolitik_, No. 132, 1909, pp. 559-563.)
+The amount of economic analysis in the book is not great. It is a
+striking illustration of the fact that legal thinking is largely
+concerned with _qualitative distinctions_, rather than with quantitative
+causal conceptions. (_Cf._ my discussion in the chapter on "The
+Reconciliation of Statics and Dynamics," _infra_, of the "statics" of
+the law.) Knapp's book has a forbidding appearance, because of the large
+number of new terms, based on Greek roots, which he has coined. The
+German language is inadequate to express his ideas! The Germans
+themselves have complained much of this. Careful reading of the book
+discloses, however, that the new terms are admirably adapted to express
+the distinctions he draws. I think, too, that English readers of the
+book, who remember enough of their Greek to recognize an occasional
+Greek root as vaguely familiar, will find less difficulty in giving
+fixed meanings to his new terms than would be the case with new German
+compounds. One who takes the trouble to master Knapp's vocabulary will
+find the effort worth while. Knapp has a high order of dialectical
+acumen. But the main part of the book has little direct bearing on the
+problem of the value of money, whether one understand by "value of
+money" the absolute social value of money, or the reciprocal of the
+price-level. The main points to be drawn from his discussion are (1) the
+fact that past debts may tend to sustain the value of an otherwise
+worthless money; and (2) that the State's willingness to accept money
+for taxes, etc., may also contribute to its value. Knapp lays heaviest
+stress on this last point. He seems to concede, however, that the rôle
+of the State here is not different from that of any other big factor in
+the market, and that the State's power in this particular is a function
+of the magnitude of its fiscal operations. Both of these doctrines fit
+readily into my social value theory. Knapp's discussion of methods of
+regulating the international exchanges by methods other than gold
+shipments is interesting, and might well be studied by those who are
+concerned with the exchange situation in the present war. His thesis
+that the value of silver depended on the course of the exchanges between
+gold and silver countries, instead of the course of the exchanges
+depending on the values of gold and silver, seems to me an absurd
+exaggeration of a minor qualification into a main theory. His doctrine
+that international relations alone make the purely legal money, without
+commodity basis, unsatisfactory, I do not accept. I have discussed this
+general topic in my chapter on "Dodo-Bones," however, and may content
+myself with now referring to that chapter. It is not true, as a matter
+of fact, moreover, that the money-unit is no longer defined as a
+quantity of metal. Our own American practice is sufficient evidence on
+this point. Knapp has sought to generalize his own interpretation of the
+history of Austrian paper into universal laws of money! That his
+interpretations meet authoritative dissent in Austria is sufficiently
+evidenced by von Mises' discussion, in his _Theorie des Geldes_ (ch. on
+"Das Geld und der Staat"), and in his English article on "The Foreign
+Exchange Policy of the Austro-Hungarian Bank," British _Economic
+Journal_, 1909. The notion that the legal tender function is prior to
+the medium of exchange function I regard as quite indefensible. It is
+doubtless true, in certain cases, that a government may debase its
+money, defining the new debased money in terms of the old, and that
+people who have debts to pay may, for a time, accept the debased money
+as a medium of exchange. But the limit of this is reached when the old
+debts have been paid. Unless other factors (not necessarily redemption),
+then come in to sustain the value, the value will sink, to a level
+commensurate with the debasement. The value would generally sink to a
+considerable degree, in any case, if only the legal factors worked to
+sustain it. I have gone over this in the chapter on "Dodo-Bones,"
+_supra_. It was only by being a valuable object, and commonly only by
+being a medium of exchange, that the money could have become a means of
+legal quittance in the first place. Men would not have made contracts in
+terms of it, otherwise. And men would cease making contracts in it as
+soon as it (or other things tied to it in value) ceased to be an
+acceptable medium of exchange.
+
+Knapp finds a good many phenomena in the history of money for which the
+quantity theory, and the metallist theory, can give no explanation. He
+has an exceedingly poor opinion of both theories, and makes many telling
+points against both. In so far as his doctrine asserts that the
+phenomena of money are matters of social organization, psychological in
+nature, I find myself in harmony with it. My dissent comes when he seeks
+to erect the abstractions of the jurist into a complete social
+philosophy! Law is only a part of the system of social control, and
+economic values, while influenced by legal values, are far from being
+explained when legal factors only are taken into account. Legal factors
+often play a more direct part in connection with the value of money than
+in connection with other values, but they do not dominate the value of
+money.
+
+Recent German literature on money (_e. g._, Fr. Bendixsen, _Geld und
+Kapital_, Leipzig, 1912) has been a good deal influenced by Knapp, and
+there is a fair chance that American students may have to read his book
+if they wish to understand the next decade of German monetary history.
+It will be well for Germany if this is not the case!
+
+[487] _Economics of Enterprise_, p. 257.
+
+[488] _Cf._ Böhm-Bawerk's _Capital and Interest_, _passim_, particularly
+his discussion of Hermann, for an exposition and criticism of the "use"
+theory of interest.
+
+[489] _Cf._ Clark, J. B., _The Distribution of Wealth_, pp. 210-245.
+
+[490] This is not necessarily true among Asiatics, or on the East Side
+in New York City.
+
+[491] The adherent of the Ricardian analysis who would deny this may
+fight it out with Clark, Fetter, and A. S. Johnson!
+
+[492] A friendly critic--with a radically different theoretical point of
+view--feels that I am here playing fast and loose with the word,
+"value," meaning sometimes "total utility," sometimes "marginal
+utility," sometimes "relative marginal utility," and sometimes "price."
+I _never_ mean any of these things by "value," when used without
+qualification, in this book. I mean always _social economic value_,
+conceived of as _absolute_.
+
+[493] I have been unable to satisfy myself that anyone has made a
+sufficiently thorough study of the course of the gold premium on the
+Rupee, the agio of the Rupee over its bullion content, or the course of
+prices in India, during the period from 1893 to 1898, to justify
+confident statements as to the comparative strength of different
+elements in the explanation of that history. Kemmerer states (_Money and
+Credit Instruments_, p. 38) that he can find no evidence at all to
+support Laughlin's view of the matter. (See Laughlin, _Principles of
+Money_, pp. 524 et seq.) J. M. Keynes, however, in his _Indian Currency
+and Finance_, p. 5, says: "The Committee of 1892 did not commit
+themselves; but the system which their recommendations established was
+_generally supposed_ [Italics mine.] to be transitional and a first step
+toward the _introduction of gold_ [italics mine.]." In the arrangements
+of 1893, moreover, a ratio between English gold and the Rupee was
+established, of 16d. to the Rupee, even though provisions for holding
+the Rupee to this ratio were left till the establishment of the "gold
+exchange standard," several years later. Keynes, on p. 3, discusses the
+arguments of the silver party against the introduction of gold, which is
+further evidence that the action of the Committee was understood as
+looking toward a gold standard. There is _some_ evidence at least for
+Laughlin's view. That his view offers a complete explanation, I think
+unlikely.
+
+Kemmerer's admirable _Modern Currency Reforms_ (Macmillan, 1916), is at
+hand while the proof sheets are being revised. It is interesting to note
+that he finds the statistical evidence regarding Indian prices, trade,
+etc., far too scanty to justify positive conclusions as to the causes
+governing the course of the rupee. He prefers, rather, to rest the case
+for the quantity theory on _a priori_ reasoning and statistics for the
+United States. _Loc. cit._, pp. 70-71. In the chapter on "Dodo-Bones," I
+have suggested that India might come nearer than other countries to
+actualizing the assumptions of the quantity theory. On Kemmerer's
+showing, however, it appears to be a liability, rather than an asset!
+
+[494] This is a national bank. In the same community, the writer asked
+the president of a State bank about his gold reserve, and was told that
+light-weight gold coin could not be used, since the State bank examiner
+made a practice of _weighing_ the gold of State banks.
+
+[495] Legal tender can add to value of money only when it confers an
+option on the _debtor_. In the case discussed, it is the _creditor_ who
+has the option. But options are not necessarily valuable.
+
+[496] As Davenport has pointed out, money is really moneys--there is a
+hierarchy. _Cf. Economics of Enterprise_, pp. 256-259.
+
+[497] The restricted legal tender of small coins, where the coins are
+limited in amount to the needs of retail trade, is virtually an
+unrestricted legal tender, in practice, and amounts, in fact, to
+redemption. The coins are capable of being used where large coins, of
+standard metal, would otherwise be used, or where checks, redeemable in
+standard coin, would be used. Legal tender is vastly more effective with
+reference to a small part of the money system than it would be with the
+whole of the money supply. The same is true of the privilege of using a
+particular form of money in paying taxes. _Cf._ W. C. Mitchell's
+discussion of the "Demand Notes," _History of Greenbacks_, _passim_.
+
+[498] _Cf._ Mitchell's account, (_Ibid._, pp. 166-173), of the premium
+on minor currency, during the Civil War. Pennies were used in rolls of
+25 as a substitute for silver quarters, which had left the country under
+Gresham's Law. The premium was due primarily to the need for small
+change, rather than to bullion content, though the latter was a factor
+even for coins made of baser metals, in 1864.
+
+[499] _Cf._ my article in the _Annalist_, Feb. 7, 1916, "The Ratio of
+Foreign to Domestic Trade," and the chapter, _supra_, on "The Quantity
+of Money and the Volume of Trade."
+
+[500] Kinley's figures show a much lower percentage of money than this.
+He is anxious not to overestimate the extent to which checks are used,
+however, and so gives the figures of 50 to 60% of checks as a safe lower
+limit.
+
+[501] _Cf. Social Value_, 183-184.
+
+[502] _Cf._ Carver's contention that "the demand for money is a demand
+for value." "Concept of an Economic Quantity," _Quart. Jour. of Econ._,
+1907.
+
+[503] _Cf._ Laughlin's _Principles of Money_, p. 73.
+
+[504] The main modern type of loan for non-business purposes is the
+public loan for war purposes, or to meet fiscal deficits. In the case of
+war loans, the emergencies are often so great that the rate of interest
+makes little difference.
+
+[505] No longer true of Europe, probably, since the huge war debts have
+been incurred.
+
+[506] The interest so defaulted is cumulative, like a preferred
+dividend, for years after 1909. Wall Street speaks of this issue as a
+"half-bond."
+
+[507] _Supra_, chapter on "Origin of Money."
+
+[508] "It is needless to say that Government bonds always rank as the
+very highest class of collateral, and the banks require no margin on
+such security." Pratt, _Work of Wall Street_, 1912 ed., p. 287. This, it
+need not be said, is not always true!
+
+[509] Veblen has elaborated the doctrine that stocks and bonds are much
+the same. _Cf._ the discussion in Meade's _Corporation Finance_ of the
+relation of junior bonds and preferred stocks in reorganizations.
+
+[510] I do not accept the imputation theory, or the capitalization
+theory, without qualification, except as static first approximations.
+Values of "factors of production" may easily become, and do become, in
+large part independent of their "presuppositions," _Cf._ the chapter on
+"Dodo-Bones", _supra_, and the chapter on "Economic Value."
+
+[511] This would seem to be Davenport's view. See his article in the
+_Quarterly Journal of Economics_, Nov. 1910.
+
+[512] To a high degree, "good will," trade-marks, etc., are bankable
+assets.
+
+[513] _Social Value_, 1911, _passim_, especially ch. XIII. Cooley, C.
+H., "Institutional Character of Pecuniary Valuation," _Am. Jour. of
+Sociology_, Jan. 1913.
+
+[514] _Cf._ my article, "Schumpeter's Dynamic Economics," _Political
+Science Quarterly_, Dec. 1915, and the chapter on "Marginal Utility,"
+_supra_. That the new bank-credit, without the painful _preliminary_
+"abstinence" which the classical economics has stressed, is enough to
+provide capital for a new enterprise is, as Schumpeter insists, true.
+Schumpeter has made an important contribution in his emphasis on this
+too much neglected point. But it should be noted that this does not
+dispense with curtailing of consumption, and "abstinence." It merely
+shifts the necessity for curtailing consumption to some one else. The
+new plan of the dynamic entrepreneur, by means of bank credit, draws
+labor and capital away from the existing static enterprises. That
+curtails their output. That leaves less goods of the old kinds for
+people to consume. That means higher prices for consumption goods, in
+the interval between the starting of the new enterprise and the time
+when its finished products are added to the "real income" of the
+community. Extensions of bank credit, there, shift the burden of
+"abstinence" to the consumer, and to the static producer. "Saving" is
+still the source of capital, but it is involuntary saving.
+
+[515] In 1912, the First National Bank of New York owned 43 millions of
+bonds, but no stocks. Report of Pujo Committee, Feb. 28, 1913, p. 66.
+The National City Bank had 33 millions in bonds, but no stocks. _Ibid._,
+p. 72. State banks own few stocks; trust companies own a good many.
+
+[516] _Cf._ the chapter on "The Origin of Money," _supra_.
+
+[517] In March, 1916, one of the largest banking houses in Boston
+informed the writer that over one-fourth of its notes and discounts
+(including all forms of loans) had been bought through note-brokers.
+
+[518] _Cf._, _e. g._, pp. 135ff. of Scott's excellent _Money and
+Banking_, Rev. ed., New York, 1910.
+
+[519] The year 1909 is chosen, in order that comparison may be more
+readily made with the figures of Dean Kinley's investigations based on
+reported deposits made on March 16 of that year. The figures quoted are
+taken from p. 39 of the Report of the Comptroller for 1913.
+
+[520] Even excluding the item "due from other banks and bankers," as
+representing duplications, the item "other loans and discounts" remains
+approximately only one-fourth of total banking assets.
+
+[521] Almost all agricultural processes require more than six months
+from their inception to the marketing of the product.
+
+[522] This view would seem to correspond with the view of Babson and May
+(_Commercial Paper_, 1912), and of W. A. Scott ("Investment vs.
+Commercial Banking," _Proceedings of Investment Bankers' Association of
+America_, 1913, pp. 81-84). Both of these discussions appear in Moulton,
+_Money and Banking_, Pt. II, pp. 70 and 75-77. Dr. J. E. Pope considers
+the view correct. On the other hand, Professor O. M. W. Sprague thinks
+the "other loans and discounts" of large city banks are more liquid than
+my statement would indicate.
+
+[523] _Principles of Money and Banking_, II, p. 52.
+
+[524] _Report of the Comptroller of the Currency_, vol. II, pp. 145 _et
+seq._
+
+[525] Total collateral loans in New York City on that date were
+$719,327,596. This is for national banks alone. _Report of Comptroller_,
+1915, II, 144. There is every reason to suppose that if trust companies
+and private banks were included, the _proportion_ of stock exchange
+collateral loans would be very much higher.
+
+[526] I am very fortunate in having the views of Dr. J. E. Pope on this
+question. I know no one whose knowledge of agricultural credit, whether
+of American or of European conditions, is so thorough and extensive.
+
+[527] This table is constructed on the basis of data in the _Report of
+the Comptroller_ for 1913, pp. 774-78.
+
+[528] A single observation does not justify very confident conclusions,
+and figures for subsequent years may alter this. There is reason for
+supposing that commodity collateral was unusually large in proportion in
+the Comptroller's figures for national banks in June, 1915, (1) because
+the banks had been trying to reduce stock collateral loans, following
+the collapse of the outbreak of the War, (2) because they were aiding
+cotton owners to tide over a period of stress, and (3) because of great
+grain speculation. Later: 1916 figures show this. Comptroller's
+_Report_, I, p. 30. Stock loans increase from 66% to 71.2%, of
+collateral loans.
+
+[529] The preceding argument would indicate that it is much too high.
+
+[530] The figures for 1909 are fairly typical of the proportions of
+these items in the assets of the three classes of institutions for the
+ten years from 1904 to 1914. Since 1900, there has been some increase in
+the percentages of real estate loans and "all other loans," at the
+expense of the percentage of securities owned, and collateral loans, as
+these years have been years of reduced activity on the Stock Exchange.
+The changes are not important enough, however, to modify any conclusions
+which we shall base on the figures here given. All classes of loans have
+grown, and investments in securities have grown, but real estate loans
+and "all other loans," particularly the latter, have grown somewhat more
+rapidly.
+
+[531] These figures are taken from Conant, _Principles of Money and
+Banking_, vol. II, p. 52.
+
+[532] The term "commercial paper," as here used by Conant (whose source
+is the _Comptroller's Report_ for 1904 and preceding years), doubtless
+includes a good many items which we have decided not to count as
+commercial paper. The item, "advances on securities," also includes some
+items other than stock exchange loans, but not a high percentage in New
+York City. In 1913 the figures for all reporting banks in New York City
+were: collateral loans, 1,070; "other loans," 658. _Report of
+Comptroller_, 1913, p. 779.
+
+[533] Taken by Conant (_Ibid._, p. 51) from the _Économiste Européen_
+(April 29, 1904), XXV, p. 546.
+
+[534] For the depositor who borrows from several banks, but deposits
+only in one,--as a stockbroker--the items deposited will, of course,
+substantially exceed the amounts borrowed at the bank where the deposits
+are made. But this will not affect our argument for _classes_ of
+depositors from _representative_ banks in the community as a whole.
+
+[535] _Supra_, chapters on "Volume of Money and Volume of Trade," and
+"Statistical Demonstrations of the Quantity Theory."
+
+[536] The relevance of comparing wholesale and retail figures with
+figures for "commercial paper" may well be questioned, since our
+conception of commercial liquid loans would include manufacturers' paper
+which represents raw materials, work in process, and bills receivable.
+However, we have found reason to conclude that Kinley's wholesale
+deposits include a large percentage of manufacturers' deposits.
+(_Supra_, p. 245.) The comparison here is in any case rough. We do not
+need precise figures for the argument.
+
+[537] Pratt, _Work of Wall Street_, 1912 ed., p. 264.
+
+[538] Returns from private banks in Kinley's investigation of 1909 are
+virtually negligible, so far as absolute amounts are concerned, for the
+whole country. For New York City, they are absolutely negligible. The
+"all other deposits" reported by private banks in New York City for
+March 16, 1909, are one thousand, nine hundred and eighty-four dollars,
+in all! The grand total, "all other deposits" for all classes of banks
+reporting in New York, is over a hundred and ninety-eight millions. The
+great private banks are, thus, clearly not represented. They are not
+represented in any form, since Kinley's figures exclude deposits made by
+such banks in other banks. How important they would be, if included, one
+cannot be sure, since they keep their affairs pretty secret. Some
+information, however, is available. Thus, the Pujo Committee reports
+(_Report_, Feb. 28, 1913, p. 145) that on Nov. 1, 1912, there was
+$114,000,000 on deposit with J. P. Morgan and Company, exclusive of
+$49,000,000 on deposit with their Philadelphia branch of Drexel and Co.
+It is understood to be the practice of J. P. Morgan and Co. to keep no
+cash on hand, and to deposit with other banks all their cash and checks.
+On this date, they had on deposit with other banks $12,094,000, "which
+presumably included all their own funds." It may be assumed, therefore,
+that the remaining 102 millions was loaned out. There can be no doubt at
+all, I suppose, that practically all they had lent out was on stock and
+bond collateral. They are known to be one of the biggest lenders at the
+"money post" on the Stock Exchange. They are not supposed to do much
+business with ordinary merchants in the usual discount and deposit way.
+
+I have found no figures for Kuhn-Loeb & Co., for total deposits made
+with them, nor for their deposits in other banks. The Pujo Committee
+(_Ibid._, p. 73) states that for the six years preceding 1913 this firm
+held, on the average, deposits from interstate corporations amounting to
+over 17 millions. For J. P. Morgan & Co., this class of deposits
+amounted to about half of total deposits. (_Ibid._, p. 57.) There is, of
+course, no assurance that this proportion holds with Kuhn-Loeb's
+deposits.
+
+These figures are very great, however. For the week ending April 3,
+1915, for example, only three banks (the National City Bank, the
+National Bank of Commerce, and the Chase National Bank), and only two
+trust companies (the Bankers Trust Company and the Guarantee Trust
+Company), held deposits exceeding those credited to J. P. Morgan and
+Co., and only one of these, the National City Bank, very markedly
+exceeded the Morgan deposits. The majority of the New York Clearing
+House banks had less than the deposits of interstate corporations with
+Kuhn-Loeb.
+
+As all the big private bankers deal chiefly in stock exchange loans and
+securities, and foreign exchange, and as this kind of business has been
+shown to be exceedingly active and to call for large checks and
+clearings, we may assume that Kinley's figures would be greatly
+increased if they were included.
+
+The trust company reports for New York in Kinley's figures are also very
+incomplete. New York trust companies report less than twice as much as
+Boston trust companies, and an absurdly small amount as compared with
+banks. _Cf._, _supra_, the chapter on "Statistical Demonstrations of the
+Quantity Theory."
+
+[539] It has been supposed by many writers that New York clearings
+exaggerate New York transactions as compared with the extent to which
+outside clearings represent transactions. Such evidence as we have would
+show that this is not true to a sufficient degree to modify the present
+argument. Clearings are less than deposits in both New York and the
+country outside, _Supra_, chapter on "Statistical Demonstrations of
+Quantity Theory."
+
+[540] "The Mystery of Clearings," _Annalist_, Aug. 14, 1916, p. 198.
+_Supra_, chapter on "Volume of Money and Volume of Trade."
+
+[541] See any Congressional debate on "the Money Trust."
+
+[542] _Pujo Committee Report_, Feb. 28, 1913, p. 130. _Cf._ also p. 138
+(statements of Messrs. Baker, Reynolds, Schiff, and Perkins), and p. 160
+for Statements regarding the testimony of Messrs. Morgan and Baker.
+
+[543] I know no responsible writer who has charged that there is a
+monopoly, or a tendency toward monopoly, in this matter.
+
+[544] I am not naïve enough to suppose that this suggestion can be much
+more than an illustration of the bearing of my theory! I should even
+agree that the political difficulties are so great that we would do well
+to try out our system in times of stress before seriously raising the
+question of giving the Federal Reserve Banks the power to rediscount
+loans on stock exchange collateral.
+
+[545] Walker's version of the quantity theory, excluding credit
+transactions, escapes much of this criticism. _Supra_, chapter on
+"Equation of Exchange."
+
+[546] It is nothing for Wall Street to "turn over" many times two
+billion dollars worth of securities. In a big bull year, this will be
+accomplished twelve or more times without effort--prices rising merrily,
+so long as no new supply of stocks and bonds comes in to make trouble.
+(See our estimate of New York security transactions, _supra_, chapter on
+"Volume of Money and Volume of Trade.") But let there be a liquidation
+by investors of anything like two billions, sold once, and the market
+feels a tremendous drag. It seems universally agreed that foreign
+selling of securities during the present War has been a great factor in
+checking advances in security prices in New York. The actual amount of
+liquidating by foreign investors, however, has been trifling as compared
+with the volume of sales since the War began. The best estimate of
+foreign liquidation is probably that of the National City Bank, which
+has taken careful account of previous estimates, and which has unrivaled
+sources of "inside information." The estimate of this institution is
+that from a billion and a half to a billion six hundred million dollars
+worth of foreign held securities have been liquidated in America since
+the beginning of the War. (This does not include foreign loans placed
+here.) This estimate is given in October of 1916. (Monthly circular of
+the National City Bank on "Economic Conditions, etc.," Oct., 1916, p.
+3.) It is safe to say that no amount of "churning" of securities already
+in the market could have anything like the depressing effect on security
+prices that an unusual amount of liquidation by investors has. It is not
+increase in number of _exchanges_ that depresses prices. It is increase
+in the floating _supply_. Activity in the floating supply makes it
+easier, rather than harder, for speculators to get banking
+accommodations which enable them to "hold" and "carry" securities, and
+activity in sales therefore positively tends to _increase_ rather than
+to decrease, security prices. The broadening of the range of securities
+dealt in, moreover, instead of depressing the prices of those already
+active, helps to sustain them. Thus, brokers and bankers welcomed the
+recent revival of activity in the rails, following the bull market in
+war stocks. It gave a broader basis for loans. Banks would lend more
+liberally, and on narrower margins, if railroad stocks could be mixed
+with the brokers' war stock collateral.
+
+Here again we see the significance of the distinction between long-time
+interest rates, connected with the volume of real capital, and the
+"money-rates."
+
+Again, periodic payments of interest and dividends, temporarily locking
+up considerable sums of bank deposits which have to be built up in
+anticipation of such payments, have a very much more serious effect on
+the money market than do payments many times greater in connection with
+stock sales. The tension in the London money market growing out of
+periodic accumulations and disbursements of the British Government is
+well known. The summer of 1916 witnessed a temporary tightening in Wall
+Street (in what was, generally, the period of easiest money the Street
+has ever known), from a similar cause--a bunching of dividend and
+interest payments, with some other large financial transactions. Money
+rates in New York regularly show the influence of such payments,
+temporarily. Money rates also show the influence of active speculation,
+as a rule, as shown by Mr. Silberling's investigations ("The Mystery of
+Clearings," _Annalist_, Aug. 14, 1916), but it takes a very much greater
+volume of stock sales than of dividend and interest payments to produce
+a given effect on money rates.
+
+[547] As May 9, 1901, when 3,336,695 shares were sold. Compare
+Mitchell's stock barometer, 1890-1911, _Business Cycles_, p. 175, with
+records of share sales for those years.
+
+[548] _Purchasing Power of Money_, 1913 ed., p. 186. The same criticism
+applies to Kemmerer, and Jevons. _Cf._ Kemmerer, _Money and Credit
+Instruments_, pp. 70-71. It is applicable to most quantity theorists.
+
+[549] _Ibid._, p. 185. It will be noted that at this point, Fisher
+lapses from the doctrine that volume of trade is determined by "physical
+capacities and technique." _Ibid._, p. 155.
+
+[550] _Cf._ our discussion, _supra_, in the chapter on the "Functions of
+Money," of money in retail trade.
+
+[551] Our great private banks, bond houses, and investment bankers,
+etc., of course do buy stocks of new enterprises on a huge scale. Many
+of our big commercial banks have taken part in underwriting operations.
+
+[552] See pp. 428-432, _supra_.
+
+[553] _Wealth of Nations_, Bk. II, ch. 2, ed. Cannan, I, pp. 187 and
+290-291.
+
+[554] _Theorie der wirtschaftlichen Entwicklung_, chs. 2 and 3.
+
+[555] _Supra_, chapter on "Volume of Money and Volume of Credit."
+
+[556] _Interviews on the Banking and Currency Systems of England,
+Scotland, etc._, Senate Document No. 405, 1910 (National Monetary
+Commission Report), p. 25.
+
+[557] This is clearly the opinion of European bankers, as indicated in
+their statements to interviewers for the Monetary Commission. See, _e.
+g._, statements by the _Deutsche Bank_, _Ibid._, pp. 374-375, and the
+_Crédit Lyonnais_, _Ibid._, pp. 224-226.
+
+[558] The item, "Due from other banks and bankers" in our table of total
+bank resources for 1909, is 2,563 millions--about 12% of the whole and
+slightly more than the amount we assigned to "commercial paper." It is a
+highly important factor making for liquidity. For State, and National
+banks and trust companies it is almost as great--2,302 millions. The
+first figure does not include many great private banks.
+
+[559] _Vide_ Professor Taussig's history of the years, 1878-1890, in his
+_Silver Situation_.
+
+[560] _Cf._ Mitchell's _Business Cycles_, pp. 495-496; and _passim_.
+
+[561] _Cf._ the chapter, _supra_, on "The Quantity Theory and
+International Gold Movements."
+
+[562] "The Prospects of Money," British _Economic Journal_, Dec. 1914.
+
+[563] _Cf._ Conant's discussion, _Principles of Money and Banking_, I,
+ch. 7.
+
+[564] This would seem to be Mitchell's view. _Cf. Business Cycles_, p.
+494.
+
+[565] _Cf._ chapter XIII.
+
+[566] _Cf._ the chapter on "The Functions of Money," _supra_.
+
+[567] _Money and Credit Instruments_, p. 80.
+
+[568] _Ibid._, p. 82. Italics mine.
+
+[569] Kemmerer, in general, is less concerned, apparently, with
+defending a causal quantity theory than with defending the "equation of
+exchange." To the extent that this is true, I have little quarrel with
+his doctrines. To "prove" the "equation of exchange," however, is,
+first, a work of supererogation, and, second, in no sense a proof of the
+quantity theory. _Vide_ the chapters, _supra_, on the equation of
+exchange and on statistics of the quantity theory.
+
+[570] Published by the National City Bank of New York. _Vide_ also
+Bagehot. _Lombard Street_, introductory chapter, and Withers, _The
+Meaning of Money_.
+
+[571] This information is supplied me by an official of the New York
+Coffee Exchange, through the courtesy of Mr. W. H. Aborn, of Aborn and
+Cushman, Coffee Brokers, 77 Front St., New York.
+
+[572] _Principles of Economics_, _passim_.
+
+[573] _Theorie der wirtschaftlichen Entwicklung._
+
+[574] The writer has ventured some tentative predictions as to
+conditions following the present War in the New York _Times_ Sunday
+magazine of Dec. 10, 1916, pp. 10-11.
+
+[575] There are important dynamic and "frictional" considerations
+opposed to protective tariffs, as well as static considerations. Very
+many of the "intangibles" later to be discussed depend on free trade. A
+high percentage of England's "capital" would be destroyed by protective
+tariffs and trade restrictions, and to a less degree this is true of all
+countries. _Vide_ N. Y. _Times_ Sunday magazine, Dec. 10, 1916, pp.
+10-11.
+
+[576] A case in point is the discussion of the effects of increment
+taxes on the building trade, participated in by Professor R. M. Haig and
+the present writer in the _Quarterly Journal of Economics_, Aug. 1914,
+and Aug. 1915. The doctrines criticised in my article were static
+theories, and my criticisms made the static assumptions. Professor Haig,
+accepting the validity of my criticisms on the assumptions laid down,
+for the most part, seeks to recast the argument on a dynamic basis,
+emphasizing dynamic and "frictional" considerations from which my
+argument had abstracted. I think that what difference of opinion remains
+between us would probably be removed if the distinction between static
+and dynamic were clearly drawn and rigidly adhered to.
+
+[577] _Cf._ my review-article, "Schumpeter's Dynamic Economics," _Pol.
+Sci. Quart._, Dec. 1915, p. 645.
+
+[578] _Distribution of Wealth_; _Essentials of Economic Theory_.
+
+[579] _Theorie der wirtschaftlichen Entwicklung_.
+
+[580] _Cf._ my _Social Value_, pp. 139-140, n.
+
+[581] _Purchasing Power of Money_, ch. 4.
+
+[582] _Theory of Business Enterprise._
+
+[583] _Vide_ my discussion of Professor Patten's _Reconstruction of
+Economic Theory_ in the _Political Science Quarterly_ of March, 1913,
+and the _American Economic Review_, Supplement to the March number,
+1913, pp. 90-93.
+
+[584] _Cf._ Schumpeter, _loc. cit._, pp. 1-101, and _passim_. That the
+quantity theory is essentially "static" will appear strikingly if the
+statements in the text be compared with Fisher's discussion in chs. 5-7
+of _The Purchasing Power of Money_.
+
+[585] It is only as a matter of highly abstract statics that the
+capitalization theory (as presented in earlier chapters) can be
+maintained with any strictness. In fact, capital values are not always
+passive shadows, yielding freely to changes in anticipated income, and
+to changes in the rate of discount. Very often capital values become
+themselves substantial, become divorced from their presuppositions, can
+no longer be explained by any imputation process. This is particularly
+likely to be the case with lands in inactive markets. The income-bearer
+is as much an object of value as is the income; is often _immediately_,
+for its own sake, an object of value. The long-run tendency to
+assimilate this value to a capitalization of prospective incomes may be
+exceedingly slow in working out, if it ever works out. Indeed, a high
+capital value may sometimes be a means of increasing the income, since
+in the minds both of lessor and lessee the usual percentage return on
+capital will be a factor in determining what is a "proper" rental. If a
+capital value, no longer justified by prospective income, has behind it
+the sanction of actual cost-outlay, there may easily be a reflex from it
+on the size of the income itself. Such a capital value, unjustified by
+prospective income, but still believed in by the market, may function
+just as effectively as any other capital value. Book-values, not marked
+down to correspond with changed income-prospects, even when they cannot
+command purchasers, may still serve as a basis for _loans_--Veblen's
+theory of crises rests, as we shall see, in part on this fact.
+
+Considerations of this sort strengthen still further the case against
+the marginal utility theory of value. To pass,--as Fetter and the
+Austrians in general seek to do--from marginal individual consumption
+values to market prices of consumption goods, then to prices of
+production goods, or to magnitudes of distributive shares, then, simply,
+by the capitalization theory, to capital values, with the notion that
+the original marginal utilities supply the psychological explanation at
+every stage of the process, the remoter values being merely built up of
+the original marginal utilities, is quite invalid. At every stage there
+is a hitch: the marginal utilities do not explain the prices or values
+of the consumption goods, as has already been elaborately pointed out;
+and the relation between the values of consumption goods and the capital
+values is very much looser and less direct than the static theory
+requires. Institutional, legal, and moral forces come in, not alone at
+the first step, in giving social weight to the wants of special classes
+and individuals, but also at the second, giving prestige to certain
+enterprises, and so higher values to their securities, giving banking
+support here and refusing it there, giving popular and patriotic support
+here, and not there, giving direct action of law, custom and tradition
+on certain _prices_ (whence, indirectly on values), and leaving prices
+free to change readily in other cases. (_Cf._ my discussion in _Quart.
+Jour, of Economics_, Aug. 1915, pp. 699-701.) The static theory of
+capitalization describes an ideal logical relation, while capital values
+are, in fact, built up by a psychological process which is logical only
+in part. In large degree, especially when the market lacks perfect
+fluidity, capital values are _immediate_, and not merely _derived_,
+values. In this, I think, I am in accord with the view briefly stated by
+A. S. Johnson in his recent review of Böhm-Bawerk (_Am. Econ. Rev._,
+March, 1914, pp. 115-116).
+
+[586] _Loc. cit._, ch. IV. _Vide_ Veblen's discussion of Fisher in the
+_Pol. Sci. Quart._ of 1908, and his discussion of Clark in the _Quart.
+Jour. of Econ._, Feb. 1908.
+
+[587] Chapter on "Volume of Money and Volume of Trade."
+
+[588] On Oct. 9 of 1916, I still venture the opinion that the stock
+market has shown wonderful conservatism in the face of extraordinary
+temptations. From Oct. 1915, to Aug. 1916, the "bears" dominated the
+market, and prices fell pretty steadily. The "bull" movement of Sept.
+1916, seems to have reached its crest without passing the level of a
+year ago. The market may "run away," but it has not yet done so.
+
+[589] _Psychologie Économique_, vol. I, pp. 77-78.
+
+[590] Nor do I see any method for bringing into our equilibrium picture
+the control which the environment retains over values by its power to
+_eliminate_ those groups whose choices vary too widely from the norms of
+"survival-necessities." Vide Giddings, _Principles of Sociology_, ed.
+1905, p. 20; Carver, _Essays in Social Justice_, _passim_. I think that
+the range of choices compatible with survival is very wide. Moreover,
+"adaptation" is not a simple matter of adjustment to the physiographic
+environment. It includes adjustment to the _social values_, both of the
+group in question and of other groups.
+
+[591] _Cf._ H. C. Emery's discussion of "manipulation" in his
+_Speculation in the Stock and Produce Exchanges_, pp. 171ff.
+
+[592] _Cf._ Dewey, _Essays in Logical Theory_; Bergson, _Time and Free
+Will_, _passim_, and _Creative Evolution_; James, _Problems of
+Philosophy_.
+
+[593] _Cf._ Bagehot's discussion in _Lombard Street_ of the features of
+English organization which prevented supremacy in the Eastern trade from
+passing to Greece and Italy with the opening of the Suez Canal.
+(Introductory chapter.) See also the discussion of the English money
+market in ch. XXIV, _supra_.
+
+[594] _Cf._ my article on "Schumpeter's Dynamic Economics" in _Political
+Science Quarterly_, Dec. 1915, and ch. XXIII, _supra_.
+
+[595] In my article on Schumpeter's theory above mentioned, I have
+pointed out that his contrast between statics and dynamics is not by any
+means a fixed one, and that in particular he shifts back and forth
+between a hypothetical static state, primarily a methodological device,
+which assumes perfect fluidity and mobility of the objects of exchange,
+on the one hand, and a realistic static state, immobile, held in the
+bonds of custom and tradition, illustrated by India and China, on the
+other hand. The version of the distinction between statics and dynamics
+here discussed is only one of several which he gives. It is, however,
+the one which at present I wish to contrast with my own view. With many
+of Schumpeter's doctrines I am in hearty accord, and I have learned much
+from his book. I think that his book affords abundant evidence of the
+usefulness of the static-dynamic contrast.
+
+[596] Schumpeter's contrast between statics and dynamics is in most
+essentials closely parallel to Veblen's contrast between the theory of
+wealth and the theory of prosperity, and his main conclusions resemble
+Veblen's, despite Schumpeter's optimism and Veblen's pessimism, and
+despite temperamental and methodological differences. Most of my
+criticisms of Veblen apply also to Schumpeter.
+
+[597] _Cf._ our discussion, _supra_, of the relation of credit to
+futurity.
+
+ * * * * *
+
+
+
+
+TRANSCRIBER'S NOTES
+
+
+1. Passages in italics are surrounded by _underscores_.
+
+2. Footnotes have been moved from the middle of a paragraph to the end
+of the e-text.
+
+3. The original text includes Greek sigma character. For this e-text
+version it has been replaced with its transliteration [Greek: S].
+
+4. Fractions are indicated as in the example below:
+ 6-1/4 indicates whole number 6 with fractional part of one-fourth.
+
+5. The following misprints have been corrected:
+ "thing" corrected to "think" (page 124)
+ "theorrists" corrected to "theorists" (page 155)
+ "$75,00,000.00" corrected to "$75,000,000.00" (page 208)
+ "theory theory" corrected to "theory" (page 330)
+ "practive" corrected to "practice" (page 428)
+ "this held" corrected to "thus held" (page 442)
+ "in in" corrected to "in" (page 476)
+ "clasess" corrected to "classes" (page 509)
+ "legarthic" corrected to "lethargic" (page 573)
+ "enchancement" corrected to "enhancement" (page 591)
+ "74-71" corrected to "64-71" (ftn. 55)
+ "equilibbrium" corrected to "equilibrium" (ftn. 86)
+ "Instrnmeuts" corrected to "Instruments" (ftn. 163)
+ "reguularly" corrected to "regularly" (ftn. 545)
+ Missing text added in footnotes 412, 468, 595.
+
+6. Some of the page references in the index have been corrected.
+
+7. Other than the corrections listed above, printer's inconsistencies
+in spelling and hyphenation have been retained.
+
+
+
+
+
+End of Project Gutenberg's The Value of Money, by Benjamin M. Anderson, Jr.
+
+*** END OF THIS PROJECT GUTENBERG EBOOK THE VALUE OF MONEY ***
+
+***** This file should be named 34823-8.txt or 34823-8.zip *****
+This and all associated files of various formats will be found in:
+ http://www.gutenberg.org/3/4/8/2/34823/
+
+Produced by Curtis Weyant and the Online Distributed
+Proofreading Team at http://www.pgdp.net (This book was
+produced from scanned images of public domain material
+from the Google Print project.)
+
+
+Updated editions will replace the previous one--the old editions
+will be renamed.
+
+Creating the works from public domain print editions means that no
+one owns a United States copyright in these works, so the Foundation
+(and you!) can copy and distribute it in the United States without
+permission and without paying copyright royalties. Special rules,
+set forth in the General Terms of Use part of this license, apply to
+copying and distributing Project Gutenberg-tm electronic works to
+protect the PROJECT GUTENBERG-tm concept and trademark. Project
+Gutenberg is a registered trademark, and may not be used if you
+charge for the eBooks, unless you receive specific permission. If you
+do not charge anything for copies of this eBook, complying with the
+rules is very easy. You may use this eBook for nearly any purpose
+such as creation of derivative works, reports, performances and
+research. They may be modified and printed and given away--you may do
+practically ANYTHING with public domain eBooks. Redistribution is
+subject to the trademark license, especially commercial
+redistribution.
+
+
+
+*** START: FULL LICENSE ***
+
+THE FULL PROJECT GUTENBERG LICENSE
+PLEASE READ THIS BEFORE YOU DISTRIBUTE OR USE THIS WORK
+
+To protect the Project Gutenberg-tm mission of promoting the free
+distribution of electronic works, by using or distributing this work
+(or any other work associated in any way with the phrase "Project
+Gutenberg"), you agree to comply with all the terms of the Full Project
+Gutenberg-tm License (available with this file or online at
+http://gutenberg.org/license).
+
+
+Section 1. General Terms of Use and Redistributing Project Gutenberg-tm
+electronic works
+
+1.A. By reading or using any part of this Project Gutenberg-tm
+electronic work, you indicate that you have read, understand, agree to
+and accept all the terms of this license and intellectual property
+(trademark/copyright) agreement. If you do not agree to abide by all
+the terms of this agreement, you must cease using and return or destroy
+all copies of Project Gutenberg-tm electronic works in your possession.
+If you paid a fee for obtaining a copy of or access to a Project
+Gutenberg-tm electronic work and you do not agree to be bound by the
+terms of this agreement, you may obtain a refund from the person or
+entity to whom you paid the fee as set forth in paragraph 1.E.8.
+
+1.B. "Project Gutenberg" is a registered trademark. It may only be
+used on or associated in any way with an electronic work by people who
+agree to be bound by the terms of this agreement. There are a few
+things that you can do with most Project Gutenberg-tm electronic works
+even without complying with the full terms of this agreement. See
+paragraph 1.C below. There are a lot of things you can do with Project
+Gutenberg-tm electronic works if you follow the terms of this agreement
+and help preserve free future access to Project Gutenberg-tm electronic
+works. See paragraph 1.E below.
+
+1.C. The Project Gutenberg Literary Archive Foundation ("the Foundation"
+or PGLAF), owns a compilation copyright in the collection of Project
+Gutenberg-tm electronic works. Nearly all the individual works in the
+collection are in the public domain in the United States. If an
+individual work is in the public domain in the United States and you are
+located in the United States, we do not claim a right to prevent you from
+copying, distributing, performing, displaying or creating derivative
+works based on the work as long as all references to Project Gutenberg
+are removed. Of course, we hope that you will support the Project
+Gutenberg-tm mission of promoting free access to electronic works by
+freely sharing Project Gutenberg-tm works in compliance with the terms of
+this agreement for keeping the Project Gutenberg-tm name associated with
+the work. You can easily comply with the terms of this agreement by
+keeping this work in the same format with its attached full Project
+Gutenberg-tm License when you share it without charge with others.
+
+1.D. The copyright laws of the place where you are located also govern
+what you can do with this work. Copyright laws in most countries are in
+a constant state of change. If you are outside the United States, check
+the laws of your country in addition to the terms of this agreement
+before downloading, copying, displaying, performing, distributing or
+creating derivative works based on this work or any other Project
+Gutenberg-tm work. The Foundation makes no representations concerning
+the copyright status of any work in any country outside the United
+States.
+
+1.E. Unless you have removed all references to Project Gutenberg:
+
+1.E.1. The following sentence, with active links to, or other immediate
+access to, the full Project Gutenberg-tm License must appear prominently
+whenever any copy of a Project Gutenberg-tm work (any work on which the
+phrase "Project Gutenberg" appears, or with which the phrase "Project
+Gutenberg" is associated) is accessed, displayed, performed, viewed,
+copied or distributed:
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever. You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+1.E.2. If an individual Project Gutenberg-tm electronic work is derived
+from the public domain (does not contain a notice indicating that it is
+posted with permission of the copyright holder), the work can be copied
+and distributed to anyone in the United States without paying any fees
+or charges. If you are redistributing or providing access to a work
+with the phrase "Project Gutenberg" associated with or appearing on the
+work, you must comply either with the requirements of paragraphs 1.E.1
+through 1.E.7 or obtain permission for the use of the work and the
+Project Gutenberg-tm trademark as set forth in paragraphs 1.E.8 or
+1.E.9.
+
+1.E.3. If an individual Project Gutenberg-tm electronic work is posted
+with the permission of the copyright holder, your use and distribution
+must comply with both paragraphs 1.E.1 through 1.E.7 and any additional
+terms imposed by the copyright holder. Additional terms will be linked
+to the Project Gutenberg-tm License for all works posted with the
+permission of the copyright holder found at the beginning of this work.
+
+1.E.4. Do not unlink or detach or remove the full Project Gutenberg-tm
+License terms from this work, or any files containing a part of this
+work or any other work associated with Project Gutenberg-tm.
+
+1.E.5. Do not copy, display, perform, distribute or redistribute this
+electronic work, or any part of this electronic work, without
+prominently displaying the sentence set forth in paragraph 1.E.1 with
+active links or immediate access to the full terms of the Project
+Gutenberg-tm License.
+
+1.E.6. You may convert to and distribute this work in any binary,
+compressed, marked up, nonproprietary or proprietary form, including any
+word processing or hypertext form. However, if you provide access to or
+distribute copies of a Project Gutenberg-tm work in a format other than
+"Plain Vanilla ASCII" or other format used in the official version
+posted on the official Project Gutenberg-tm web site (www.gutenberg.org),
+you must, at no additional cost, fee or expense to the user, provide a
+copy, a means of exporting a copy, or a means of obtaining a copy upon
+request, of the work in its original "Plain Vanilla ASCII" or other
+form. Any alternate format must include the full Project Gutenberg-tm
+License as specified in paragraph 1.E.1.
+
+1.E.7. Do not charge a fee for access to, viewing, displaying,
+performing, copying or distributing any Project Gutenberg-tm works
+unless you comply with paragraph 1.E.8 or 1.E.9.
+
+1.E.8. You may charge a reasonable fee for copies of or providing
+access to or distributing Project Gutenberg-tm electronic works provided
+that
+
+- You pay a royalty fee of 20% of the gross profits you derive from
+ the use of Project Gutenberg-tm works calculated using the method
+ you already use to calculate your applicable taxes. The fee is
+ owed to the owner of the Project Gutenberg-tm trademark, but he
+ has agreed to donate royalties under this paragraph to the
+ Project Gutenberg Literary Archive Foundation. Royalty payments
+ must be paid within 60 days following each date on which you
+ prepare (or are legally required to prepare) your periodic tax
+ returns. Royalty payments should be clearly marked as such and
+ sent to the Project Gutenberg Literary Archive Foundation at the
+ address specified in Section 4, "Information about donations to
+ the Project Gutenberg Literary Archive Foundation."
+
+- You provide a full refund of any money paid by a user who notifies
+ you in writing (or by e-mail) within 30 days of receipt that s/he
+ does not agree to the terms of the full Project Gutenberg-tm
+ License. You must require such a user to return or
+ destroy all copies of the works possessed in a physical medium
+ and discontinue all use of and all access to other copies of
+ Project Gutenberg-tm works.
+
+- You provide, in accordance with paragraph 1.F.3, a full refund of any
+ money paid for a work or a replacement copy, if a defect in the
+ electronic work is discovered and reported to you within 90 days
+ of receipt of the work.
+
+- You comply with all other terms of this agreement for free
+ distribution of Project Gutenberg-tm works.
+
+1.E.9. If you wish to charge a fee or distribute a Project Gutenberg-tm
+electronic work or group of works on different terms than are set
+forth in this agreement, you must obtain permission in writing from
+both the Project Gutenberg Literary Archive Foundation and Michael
+Hart, the owner of the Project Gutenberg-tm trademark. Contact the
+Foundation as set forth in Section 3 below.
+
+1.F.
+
+1.F.1. Project Gutenberg volunteers and employees expend considerable
+effort to identify, do copyright research on, transcribe and proofread
+public domain works in creating the Project Gutenberg-tm
+collection. Despite these efforts, Project Gutenberg-tm electronic
+works, and the medium on which they may be stored, may contain
+"Defects," such as, but not limited to, incomplete, inaccurate or
+corrupt data, transcription errors, a copyright or other intellectual
+property infringement, a defective or damaged disk or other medium, a
+computer virus, or computer codes that damage or cannot be read by
+your equipment.
+
+1.F.2. LIMITED WARRANTY, DISCLAIMER OF DAMAGES - Except for the "Right
+of Replacement or Refund" described in paragraph 1.F.3, the Project
+Gutenberg Literary Archive Foundation, the owner of the Project
+Gutenberg-tm trademark, and any other party distributing a Project
+Gutenberg-tm electronic work under this agreement, disclaim all
+liability to you for damages, costs and expenses, including legal
+fees. YOU AGREE THAT YOU HAVE NO REMEDIES FOR NEGLIGENCE, STRICT
+LIABILITY, BREACH OF WARRANTY OR BREACH OF CONTRACT EXCEPT THOSE
+PROVIDED IN PARAGRAPH 1.F.3. YOU AGREE THAT THE FOUNDATION, THE
+TRADEMARK OWNER, AND ANY DISTRIBUTOR UNDER THIS AGREEMENT WILL NOT BE
+LIABLE TO YOU FOR ACTUAL, DIRECT, INDIRECT, CONSEQUENTIAL, PUNITIVE OR
+INCIDENTAL DAMAGES EVEN IF YOU GIVE NOTICE OF THE POSSIBILITY OF SUCH
+DAMAGE.
+
+1.F.3. LIMITED RIGHT OF REPLACEMENT OR REFUND - If you discover a
+defect in this electronic work within 90 days of receiving it, you can
+receive a refund of the money (if any) you paid for it by sending a
+written explanation to the person you received the work from. If you
+received the work on a physical medium, you must return the medium with
+your written explanation. The person or entity that provided you with
+the defective work may elect to provide a replacement copy in lieu of a
+refund. If you received the work electronically, the person or entity
+providing it to you may choose to give you a second opportunity to
+receive the work electronically in lieu of a refund. If the second copy
+is also defective, you may demand a refund in writing without further
+opportunities to fix the problem.
+
+1.F.4. Except for the limited right of replacement or refund set forth
+in paragraph 1.F.3, this work is provided to you 'AS-IS' WITH NO OTHER
+WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO
+WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR ANY PURPOSE.
+
+1.F.5. Some states do not allow disclaimers of certain implied
+warranties or the exclusion or limitation of certain types of damages.
+If any disclaimer or limitation set forth in this agreement violates the
+law of the state applicable to this agreement, the agreement shall be
+interpreted to make the maximum disclaimer or limitation permitted by
+the applicable state law. The invalidity or unenforceability of any
+provision of this agreement shall not void the remaining provisions.
+
+1.F.6. INDEMNITY - You agree to indemnify and hold the Foundation, the
+trademark owner, any agent or employee of the Foundation, anyone
+providing copies of Project Gutenberg-tm electronic works in accordance
+with this agreement, and any volunteers associated with the production,
+promotion and distribution of Project Gutenberg-tm electronic works,
+harmless from all liability, costs and expenses, including legal fees,
+that arise directly or indirectly from any of the following which you do
+or cause to occur: (a) distribution of this or any Project Gutenberg-tm
+work, (b) alteration, modification, or additions or deletions to any
+Project Gutenberg-tm work, and (c) any Defect you cause.
+
+
+Section 2. Information about the Mission of Project Gutenberg-tm
+
+Project Gutenberg-tm is synonymous with the free distribution of
+electronic works in formats readable by the widest variety of computers
+including obsolete, old, middle-aged and new computers. It exists
+because of the efforts of hundreds of volunteers and donations from
+people in all walks of life.
+
+Volunteers and financial support to provide volunteers with the
+assistance they need, are critical to reaching Project Gutenberg-tm's
+goals and ensuring that the Project Gutenberg-tm collection will
+remain freely available for generations to come. In 2001, the Project
+Gutenberg Literary Archive Foundation was created to provide a secure
+and permanent future for Project Gutenberg-tm and future generations.
+To learn more about the Project Gutenberg Literary Archive Foundation
+and how your efforts and donations can help, see Sections 3 and 4
+and the Foundation web page at http://www.pglaf.org.
+
+
+Section 3. Information about the Project Gutenberg Literary Archive
+Foundation
+
+The Project Gutenberg Literary Archive Foundation is a non profit
+501(c)(3) educational corporation organized under the laws of the
+state of Mississippi and granted tax exempt status by the Internal
+Revenue Service. The Foundation's EIN or federal tax identification
+number is 64-6221541. Its 501(c)(3) letter is posted at
+http://pglaf.org/fundraising. Contributions to the Project Gutenberg
+Literary Archive Foundation are tax deductible to the full extent
+permitted by U.S. federal laws and your state's laws.
+
+The Foundation's principal office is located at 4557 Melan Dr. S.
+Fairbanks, AK, 99712., but its volunteers and employees are scattered
+throughout numerous locations. Its business office is located at
+809 North 1500 West, Salt Lake City, UT 84116, (801) 596-1887, email
+business@pglaf.org. Email contact links and up to date contact
+information can be found at the Foundation's web site and official
+page at http://pglaf.org
+
+For additional contact information:
+ Dr. Gregory B. Newby
+ Chief Executive and Director
+ gbnewby@pglaf.org
+
+
+Section 4. Information about Donations to the Project Gutenberg
+Literary Archive Foundation
+
+Project Gutenberg-tm depends upon and cannot survive without wide
+spread public support and donations to carry out its mission of
+increasing the number of public domain and licensed works that can be
+freely distributed in machine readable form accessible by the widest
+array of equipment including outdated equipment. Many small donations
+($1 to $5,000) are particularly important to maintaining tax exempt
+status with the IRS.
+
+The Foundation is committed to complying with the laws regulating
+charities and charitable donations in all 50 states of the United
+States. Compliance requirements are not uniform and it takes a
+considerable effort, much paperwork and many fees to meet and keep up
+with these requirements. We do not solicit donations in locations
+where we have not received written confirmation of compliance. To
+SEND DONATIONS or determine the status of compliance for any
+particular state visit http://pglaf.org
+
+While we cannot and do not solicit contributions from states where we
+have not met the solicitation requirements, we know of no prohibition
+against accepting unsolicited donations from donors in such states who
+approach us with offers to donate.
+
+International donations are gratefully accepted, but we cannot make
+any statements concerning tax treatment of donations received from
+outside the United States. U.S. laws alone swamp our small staff.
+
+Please check the Project Gutenberg Web pages for current donation
+methods and addresses. Donations are accepted in a number of other
+ways including checks, online payments and credit card donations.
+To donate, please visit: http://pglaf.org/donate
+
+
+Section 5. General Information About Project Gutenberg-tm electronic
+works.
+
+Professor Michael S. Hart is the originator of the Project Gutenberg-tm
+concept of a library of electronic works that could be freely shared
+with anyone. For thirty years, he produced and distributed Project
+Gutenberg-tm eBooks with only a loose network of volunteer support.
+
+
+Project Gutenberg-tm eBooks are often created from several printed
+editions, all of which are confirmed as Public Domain in the U.S.
+unless a copyright notice is included. Thus, we do not necessarily
+keep eBooks in compliance with any particular paper edition.
+
+
+Most people start at our Web site which has the main PG search facility:
+
+ http://www.gutenberg.org
+
+This Web site includes information about Project Gutenberg-tm,
+including how to make donations to the Project Gutenberg Literary
+Archive Foundation, how to help produce our new eBooks, and how to
+subscribe to our email newsletter to hear about new eBooks.
generated by cgit v1.2.3 (git 2.25.1) at 2026-06-19 11:16:45 +0000