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diff --git a/34823-h/34823-h.htm b/34823-h/34823-h.htm new file mode 100644 index 0000000..d223f78 --- /dev/null +++ b/34823-h/34823-h.htm @@ -0,0 +1,24646 @@ +<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" + "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> + +<html xmlns="http://www.w3.org/1999/xhtml"> + <head> + <meta http-equiv="Content-Type" content="text/html;charset=iso-8859-1" /> + <title> + The Project Gutenberg eBook of The Value of Money, by B. M. Anderson, Jr. + </title> + <style type="text/css"> + + p { margin-top: .75em; + text-align: justify; + margin-bottom: .75em; + } + h1,h2,h3,h4,h5,h6 { + text-align: center; /* all headings centered */ + margin-top: 2em; + margin-bottom: 2em; + clear: both; + } + hr { width: 33%; + margin-top: 2em; + margin-bottom: 2em; + margin-left: auto; + margin-right: auto; + clear: both; + } + + table {margin-left: auto; margin-right: auto;} + + body{margin-left: 10%; + margin-right: 10%; + } + + .pagenum { /* uncomment the next line for invisible page numbers */ + /* visibility: hidden; */ + position: absolute; + left: 92%; + font-size: smaller; + text-align: right; + } /* page numbers */ + + .blockquot{margin-left: 5%; margin-right: 10%;} + + .center {text-align: center;} + .rightaln {text-align: right;} + .smcap {font-variant: small-caps;} + .u {text-decoration: underline;} + + .caption {font-weight: bold;} + + .figcenter {margin: auto; text-align: center;} + + .footnote {margin-left: 10%; margin-right: 10%; font-size: 0.9em;} + .footnote .label {position: absolute; right: 86%; text-align: right;} + .fnanchor {vertical-align: super; font-size: .8em; text-decoration: none;} + + </style> + </head> +<body> + + +<pre> + +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.) + + + + + + +</pre> + + + + +<h4>HARVARD COLLEGE<br /> +LIBRARY</h4> + +<h5>FROM THE</h5> + +<h4>QUARTERLY JOURNAL<br /> +OF ECONOMICS</h4> + + + +<hr style="width: 15%;" /> + +<h5>THE MACMILLAN COMPANY<br /> +NEW YORK · BOSTON · CHICAGO · DALLAS<br /> +ATLANTA · SAN FRANCISCO<br /> +<br /> +MACMILLAN & CO., <span class="smcap">Limited</span><br /> +LONDON · BOMBAY · CALCUTTA<br /> +MELBOURNE<br /> +<br /> +THE MACMILLAN CO. OF CANADA, <span class="smcap">Ltd.</span><br /> +TORONTO</h5> + + + +<hr style="width: 65%;" /> +<h1>THE<br /> +VALUE OF MONEY</h1> + +<h3>BY<br /><br /> + +<big>B. M. ANDERSON, JR., <span class="smcap">Ph. D.</span></big><br /><br /> +<small>ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY<br /> +AUTHOR OF "SOCIAL VALUE"</small></h3> + +<p class="center">New York<br /> +THE MACMILLAN COMPANY<br /> +1917<br /> +<br /> +<i>All rights reserved</i></p> + + + +<hr style="width: 65%;" /> +<p class="center"> +<span class="smcap">Copyright, 1917<br /> +By</span> THE MACMILLAN COMPANY<br /> +Set up and electrotyped. Published May, 1917.<br /> +</p> + + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'>[Pg v]</span></p> +<p class="center"> +To<br /> +<br /> +B. M. A., III<br /> +<br /> +AND<br /> +<br /> +J. C. A.<br /> +<br /> +WHO OFTEN INTERRUPTED THE WORK<br /> +BUT NONE THE LESS INSPIRED IT<br /> +</p> +<p><span class='pagenum'>[Pg vi]</span></p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'>[Pg vii]</span></p> +<h2>PREFACE</h2> + + +<p>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.</p> + +<p>"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 <i>must be a dynamic theory</i>. 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.</p> + +<p>This thesis has seemed to require statistical verification, +and the effort has been made to measure the elements in +<span class='pagenum'>[Pg viii]</span> +trade, to assign proportions for retail trade and for wholesale +trade, to obtain <i>indicia</i> 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.</p> + +<p>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.</p> + +<p>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 <i>industry</i>. +"Commercial paper" is no longer the chief banking asset.</p> + +<p>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.</p> + +<p><span class='pagenum'>[Pg ix]</span></p> +<p>The quantity theory of money is examined in detail, in +various formulations, and the conclusion is reached that the +quantity theory is utterly invalid.</p> + +<p>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, <i>Social +Value</i>, 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.</p> + +<p>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>i. e.</i>, "statics") which +has hitherto chiefly busied economists, and the more realistic +studies of economic change (<i>i. e.</i> "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.</p> + +<p>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 +<span class='pagenum'>[Pg x]</span> +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.</p> + +<p>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 +<span class='pagenum'>[Pg xi]</span> +needed information. Among these may be especially +mentioned Mr. Byron W. Holt, of New York, Mr. Osmund +Phillips, Editor of the <i>Annalist</i> and Financial Editor of the +<i>New York Times</i>, 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.</p> + +<p>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 <i>Purchasing +Power of Money</i>, and at very many points of detail. To a +less degree, I find myself unable to concur with Professor +<span class='pagenum'>[Pg xii]</span> +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.</p> + +<p class="rightaln"><span class="smcap">B. M. Anderson, Jr.</span> </p> + +<p> <span class="smcap">Harvard University</span>, March 31, 1917.</p> + + + +<hr style="width: 100%;" /> +<p><span class='pagenum'>[Pg xiii]</span></p> +<h2>ANALYTICAL TABLE OF CONTENTS</h2> + + + +<h3><a href="#PartI"><i>PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE</i></a></h3> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary="PART I"> +<colgroup><col width="90%" /><col width="10%" /></colgroup> +<tr><th align='center' colspan='2'><big>CHAPTER I</big><br /><br /> +ECONOMIC VALUE</th></tr> +<tr><td align='justify'> </td><td align='right'><small>PAGE</small></td></tr> +<tr><td align='justify'>Problem of value of money special case of general theory of value; present chapter concerned with general theory</td><td align='right'><a href="#Page_1">1</a></td></tr> +<tr><td align='justify'>Formal and logical aspects of value: value as quality; value as quantity; value and wealth</td><td align='right'><a href="#Page_5">5-6</a></td></tr> +<tr><td align='justify'>Absolute <i>vs.</i> relative conceptions of value: value of money <i>vs.</i> "reciprocal of price-level"; value prior to exchange; value and exchangeability; do prices correctly express values?</td><td align='right'><a href="#Page_6">6-12</a></td></tr> +<tr><td align='justify'>Doctrine so far in accord with main current of economic opinion</td><td align='right'><a href="#Page_12">12-14</a></td></tr> +<tr><td align='justify'>Causal theory of value new: marginal utility, labor theory, etc., rejected</td><td align='right'><a href="#Page_14">14-16</a></td></tr> +<tr><td align='justify'>Social explanation required: "individual" a social product, both in history of individual and in history of race</td><td align='right'><a href="#Page_16">16-19</a></td></tr> +<tr><td align='justify'>And above individual impersonal psychic forces, law, public opinion, morality, economic values</td><td align='right'><a href="#Page_19">19-20</a></td></tr> +<tr><td align='justify'>Three types of theory have dealt with these: theory of extra-human objective forces; extreme individualism; social value theory</td><td align='right'><a href="#Page_20">20-21</a></td></tr> +<tr><td align='justify'>Illustrated in jurisprudence, ethics, and economic theory</td><td align='right'><a href="#Page_21">21-26</a></td></tr> +<tr><td align='justify'>Law, morals, and economic values generically alike, but have <i>differentiæ</i></td><td align='right'><a href="#Page_26">26-28</a></td></tr> +<tr><td align='justify'>But not differentiated on basis of states of consciousness of individual immediately moved by them, because many minds in organic interplay involved</td><td align='right'><a href="#Page_28">28-33</a><span class='pagenum'>[Pg xiv]</span></td></tr> +<tr><td align='justify'>Economic social value (a) of consumers' goods and services: +"utility" and scarcity; "marginal utility"; social explanation +of marginal utility; marginal utilities the conscious +<i>focus</i> 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</td><td align='right'><a href="#Page_33">33-38</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_38">38-41</a></td></tr> +<tr><td align='justify'>Pragmatic character of theory</td><td align='right'><a href="#Page_41">41-43</a></td></tr> +<tr><td align='justify'>Relation of social values to individual values</td><td align='right'><a href="#Page_43">43-45</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER II</big><br /><br /> +SUPPLY AND DEMAND, AND THE VALUE OF MONEY</th></tr> +<tr><td align='justify'><i>Hiatus</i> between general theory of value and theory of value of money</td><td align='right'><a href="#Page_46">46-47</a></td></tr> +<tr><td align='justify'>Partly because former has been developed by different writers from those who have developed latter</td><td align='right'><a href="#Page_47">47-49</a></td></tr> +<tr><td align='justify'>But chiefly because supply and demand, cost of production, etc., <i>assume</i> fixed value of money, and are theories of <i>price</i>, rather than <i>value</i></td><td align='right'><a href="#Page_49">49</a></td></tr> +<tr><td align='justify'>Supply and demand useful but superficial formula, common property of many value theories</td><td align='right'><a href="#Page_49">49-50</a></td></tr> +<tr><td align='justify'>Crude and unanalyzed in Smith and Ricardo; first made precise by J. S. Mill, who gives essentials of modern doctrine</td><td align='right'><a href="#Page_49">49-51</a></td></tr> +<tr><td align='justify'>Böhm-Bawerk's pseudo-psychology spoils Mill's clean-cut doctrine</td><td align='right'><a href="#Page_51">51-52</a></td></tr> +<tr><td align='justify'>Supply and demand assumes fixed <i>value</i> of money-unit, and hence inapplicable to money itself</td><td align='right'><a href="#Page_52">52-56</a></td></tr> +<tr><td align='justify'>But supply and demand does <i>not</i> assume fixed <i>price-level</i></td><td align='right'><a href="#Page_56">56-57</a></td></tr> +<tr><td align='justify'>Cairnes <i>vs.</i> Mill</td><td align='right'><a href="#Page_57">57-58</a></td></tr> +<tr><td align='justify'>Mill's unsuccessful effort to apply supply and demand to money</td><td align='right'><a href="#Page_59">59-62</a></td></tr> +<tr><td align='justify'>Walker's attempt</td><td align='right'><a href="#Page_62">62</a></td></tr> +<tr><td align='justify'>Supply and demand in the "money market"</td><td align='right'><a href="#Page_62">62-63</a><span class='pagenum'>[Pg xv]</span></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER III</big><br /><br /> +COST OF PRODUCTION AND THE VALUE OF MONEY</th></tr> +<tr><td align='justify'>Types of cost theory: modern cost doctrine is "money costs" doctrine, and inapplicable to value of money</td><td align='right'><a href="#Page_64">64</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_64">64-67</a></td></tr> +<tr><td align='justify'>Because "real cost" doctrine does not square with facts</td><td align='right'><a href="#Page_67">67-69</a></td></tr> +<tr><td align='justify'>"Money-cost" of producing money-metal</td><td align='right'><a href="#Page_69">69-70</a></td></tr> +<tr><td align='justify'>Austrian cost doctrine runs still in money terms, assuming value, money, and fixed value of money</td><td align='right'><a href="#Page_70">70-71</a></td></tr> +<tr><td align='justify'>"Negative social values" as "real costs"</td><td align='right'>note, <a href="#Page_71">71</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER IV</big><br /><br /> +THE CAPITALIZATION THEORY AND THE VALUE OF MONEY</th></tr> +<tr><td align='justify'>Money as "capital good," and "money-rates" as rentals</td><td align='right'><a href="#Page_72">72-73</a></td></tr> +<tr><td align='justify'>Capitalization theory; formula; capital value passive resultant of annual income and rate of discount</td><td align='right'><a href="#Page_73">73-74</a></td></tr> +<tr><td align='justify'>But in case of money, rental and rate of discount not independent variables</td><td align='right'><a href="#Page_74">74-76</a></td></tr> +<tr><td align='justify'>And in case of money, capital value not passive shadow, but active cause of income</td><td align='right'><a href="#Page_76">76</a></td></tr> +<tr><td align='justify'>Capitalization theory assumes money, and fixed value of money</td><td align='right'><a href="#Page_76">76-77</a></td></tr> +<tr><td align='justify'>Assumed fixed value of money absolute, and not relative</td><td align='right'><a href="#Page_77">77-78</a></td></tr> +<tr><td align='justify'>Capitalization theory, in current formulation, inapplicable to value of money</td><td align='right'><a href="#Page_78">78-79</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER V</big><br /><br /> +MARGINAL UTILITY AND THE VALUE OF MONEY</th></tr> +<tr><td align='justify'>Marginal utility theory usually thinly disguised version of supply and demand, and hence inapplicable to money</td><td align='right'><a href="#Page_80">80</a></td></tr> +<tr><td align='justify'>View that money is unique in having no utility <i>per se</i></td><td align='right'><a href="#Page_81">81-83</a><span class='pagenum'>[Pg xvi]</span></td></tr> +<tr><td align='justify'>Marginal utility and "commodity theory" of money-value</td><td align='right'><a href="#Page_81">81-82</a></td></tr> +<tr><td align='justify'>Quantity theorists and marginal utility of money</td><td align='right'><a href="#Page_81">81-82</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_82">82-120</a></td></tr> +<tr><td align='justify'>Wieser's theory of value of money</td><td align='right'><a href="#Page_83">83-88</a></td></tr> +<tr><td align='justify'>A circle in reasoning</td><td align='right'><a href="#Page_88">88-90</a></td></tr> +<tr><td align='justify'>Schumpeter's similar circle</td><td align='right'><a href="#Page_100">100</a></td></tr> +<tr><td align='justify'>But Schumpeter's general utility theory, though inapplicable to value of money, in form avoids a causal circle</td><td align='right'><a href="#Page_90">90-98</a></td></tr> +<tr><td align='justify'>Schumpeter's <i>conspectus</i>; different from Böhm-Bawerk and most utility theorists</td><td align='right'><a href="#Page_90">90-92</a>, <a href="#Page_113">113-120</a></td></tr> +<tr><td align='justify'>Defects and limitations of Schumpeter's general theory</td><td align='right'><a href="#Page_90">90-98</a></td></tr> +<tr><td align='justify'>Schumpeter's substitutes for social value concept</td><td align='right'><a href="#Page_98">98-99</a></td></tr> +<tr><td align='justify'>Von Mises sees circle of Wieser and Schumpeter</td><td align='right'><a href="#Page_100">100</a></td></tr> +<tr><td align='justify'>Seeks to avoid it by construing utility theory as historical, instead of static, theory</td><td align='right'><a href="#Page_101">101</a></td></tr> +<tr><td align='justify'>But this departs from fundamentals of utility theory; other difficulties</td><td align='right'><a href="#Page_101">101-110</a></td></tr> +<tr><td align='justify'>Kinley's doctrine</td><td align='right'><a href="#Page_110">110-111</a></td></tr> +<tr><td align='justify'>General criticism of utility theory</td><td align='right'><a href="#Page_111">111-115</a></td></tr> +<tr><td align='justify'>Davenport, Wicksteed, Fisher, Perry</td><td align='right'><a href="#Page_113">113-120</a></td></tr> +</table></div> + + + +<h3><a href="#PartII"><i>PART II. THE QUANTITY THEORY</i></a></h3> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary="PART II"> +<colgroup><col width="90%" /><col width="10%" /></colgroup> +<tr><th align='center' colspan='2'><big>CHAPTER VI</big><br /><br /> +THE QUANTITY THEORY OF PRICES. INTRODUCTION</th></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_123">123-129</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER VII</big><br /><br /> +DODO-BONES</th></tr> +<tr><td align='justify'>Quantity theory doctrine that valueless objects can serve as +money; Nicholson's assumption: money made of dodo-bones</td><td align='right'><a href="#Page_130">130-131</a><span class='pagenum'>[Pg xvii]</span></td></tr> +<tr><td align='justify'>Fisher's view also</td><td align='right'><a href="#Page_130">130</a></td></tr> +<tr><td align='justify'>And Ricardo's</td><td align='right'><a href="#Page_131">131-132</a></td></tr> +<tr><td align='justify'>Will dodo-bones circulate? Dodo-bones and poker chips; +circular reasoning</td><td align='right'><a href="#Page_132">132</a></td></tr> +<tr><td align='justify'>Both medium of exchange and standard of value must be +valuable</td><td align='right'><a href="#Page_133">133</a></td></tr> +<tr><td align='justify'>Is inconvertible paper an exception?</td><td align='right'><a href="#Page_133">133-134</a></td></tr> +<tr><td align='justify'>Doctrine that money gives legal claim to things in general</td><td align='right'><a href="#Page_134">134</a></td></tr> +<tr><td align='justify'>Kemmerer's assumptions; money made of commodity, once +valuable, now used only as money</td><td align='right'><a href="#Page_135">135</a></td></tr> +<tr><td align='justify'>Commodity theory requires present commodity value</td><td align='right'><a href="#Page_135">135</a></td></tr> +<tr><td align='justify'>Historical <i>vs.</i> cross-section view: possibility that such money +would circulate</td><td align='right'><a href="#Page_135">135-136</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_136">136-139</a></td></tr> +<tr><td align='justify'>But this no basis for quantity theory: social psychology, not +mechanics</td><td align='right'><a href="#Page_139">139</a></td></tr> +<tr><td align='justify'>"Banker's psychology" <i>vs.</i> psychology of blind habit: India, +Austria, United States; monetary phenomena of war +times; "credit theory" of Greenbacks</td><td align='right'><a href="#Page_139">139-142</a></td></tr> +<tr><td align='justify'>Question-begging definitions</td><td align='right'><a href="#Page_142">142-143</a></td></tr> +<tr><td align='justify'>Assumptions of quantity theory: blind habit and fluid prices</td><td align='right'><a href="#Page_143">143-144</a></td></tr> +<tr><td align='justify'>Extreme commodity theory denies that money-use adds to +value of money; usually not true; analysis of money-functions</td><td align='right'><a href="#Page_144">144-150</a></td></tr> +<tr><td align='justify'>Hypothetical case in which whole value of money comes from +commodity value</td><td align='right'><a href="#Page_150">150-152</a></td></tr> +<tr><td align='justify'>Money must have value apart from monetary employments, +but, in general, gains additional value from employment +as money</td><td align='right'><a href="#Page_152">152-153</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER VIII</big><br /><br /> +THE "EQUATION OF EXCHANGE"</th></tr> +<tr><td align='justify'>Fisher leading, most consistent, most uncompromising +quantity theorist: wide acceptance of his views</td><td align='right'><a href="#Page_154">154</a></td></tr> +<tr><td align='justify'>Taussig <i>vs.</i> Fisher</td><td align='right'><a href="#Page_155">155</a><span class='pagenum'>[Pg xviii]</span></td></tr> +<tr><td align='justify'>Fisher and dodo-bone doctrine: logical part of quantity +theory; Fisher's value concept</td><td align='right'><a href="#Page_155">155-156</a></td></tr> +<tr><td align='justify'>"Equation of exchange": analysis of Fisher's version, typical +of all</td><td align='right'><a href="#Page_156">156-171</a></td></tr> +<tr><td align='justify'>In what sense equality between two sides of equation? Meaning +of "T"</td><td align='right'><a href="#Page_158">158-161</a></td></tr> +<tr><td align='justify'>No "goods side" to equation; both sides sums of money; +equal because identical; equation meaningless</td><td align='right'><a href="#Page_161">161-162</a></td></tr> +<tr><td align='justify'>All factors in equation highly abstract</td><td align='right'><a href="#Page_162">162-163</a></td></tr> +<tr><td align='justify'>"P" and "T" cannot both be given independent definitions: +P defined as <i>weighted</i> average, with T in denominator; +and must be changed from year to year, as elements in T +change, even though no prices change</td><td align='right'><a href="#Page_164">164-166</a></td></tr> +<tr><td align='justify'>This makes circular theory: <i>problem</i> defined in terms of <i>explanation</i></td><td align='right'><a href="#Page_165">165-166</a></td></tr> +<tr><td align='justify'>Causal theory associated with equation of exchange</td><td align='right'><a href="#Page_166">166</a></td></tr> +<tr><td align='justify'>Equation amplified to include credit; not acceptable to +Nicholson or Walker, and caricature of conditions in +Germany and France</td><td align='right'><a href="#Page_166">166-170</a></td></tr> +<tr><td align='justify'>Book-credit, bills of exchange, etc., excluded</td><td align='right'><a href="#Page_167">167-170</a></td></tr> +<tr><td align='justify'>Why a one-year period?</td><td align='right'><a href="#Page_170">170-171</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER IX</big><br /><br /> +THE VOLUME OF MONEY AND THE VOLUME OF CREDIT</th></tr> +<tr><td align='justify'>Mill thought credit acts on prices like money, and that this +reduces quantity theory tendency to indeterminate +degree; Fisher holds volume of money <i>in circulation</i> governs +volume of credit, so that quantity theory stands</td><td align='right'><a href="#Page_172">172</a></td></tr> +<tr><td align='justify'>Fisher's arguments for fixed ratio, <i>money</i> to bank-deposits</td><td align='right'><a href="#Page_172">172-173</a></td></tr> +<tr><td align='justify'>Argument a <i>non-sequitur</i>, even if contentions true</td><td align='right'><a href="#Page_173">173-177</a></td></tr> +<tr><td align='justify'>Contentions untrue: no fixed ratio between <i>reserves</i> and deposits, +or reserves and demand liabilities, either in +America or Europe</td><td align='right'><a href="#Page_177">177-182</a></td></tr> +<tr><td align='justify'>Taussig's views; virtually surrender of quantity theory in +modern conditions</td><td align='right'><a href="#Page_182">182-185</a></td></tr> +<tr><td align='justify'>Bulk of quantity theorists in between Fisher and Taussig, +but nearer to Fisher's view than to Taussig's</td><td align='right'><a href="#Page_185">185</a><span class='pagenum'>[Pg xix]</span></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER X</big><br /><br /> +"NORMAL" VS. "TRANSITIONAL" TENDENCIES</th></tr> +<tr><td align='justify'>Quantity theory qualified by distinction between "normal" +and "transitional" effects of change in quantity of +money, etc.</td><td align='right'><a href="#Page_186">186</a></td></tr> +<tr><td align='justify'>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 +<i>vs.</i> hypothetical price-levels</td><td align='right'><a href="#Page_186">186-189</a></td></tr> +<tr><td align='justify'>Legitimate and illegitimate abstraction</td><td align='right'><a href="#Page_189">189-190</a></td></tr> +<tr><td align='justify'>Causation and temporal order</td><td align='right'><a href="#Page_190">190-191</a></td></tr> +<tr><td align='justify'>Fisher admits very slight qualification of "normal theory"</td><td align='right'><a href="#Page_192">192</a></td></tr> +<tr><td align='justify'>Mill's quantity theory "short run" theory; Taussig's "long +run" theory; radically different logic in the two</td><td align='right'><a href="#Page_192">192-193</a></td></tr> +<tr><td align='justify'>Fisher's theory sometimes "long run" and sometimes "short +run"</td><td align='right'><a href="#Page_194">194-195</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XI</big><br /><br /> +BARTER</th></tr> +<tr><td align='justify'>Quantity theory spoiled if resort to barter possible and important</td><td align='right'><a href="#Page_196">196</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_197">197-200</a></td></tr> +<tr><td align='justify'>Barter made easier under money economy, by measure of +value function of money</td><td align='right'><a href="#Page_201">201</a></td></tr> +<tr><td align='justify'>Bills of exchange; foreign trade</td><td align='right'><a href="#Page_201">201</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XII</big><br /><br /> +VELOCITY OF CIRCULATION</th></tr> +<tr><td align='justify'>Velocity conceived by quantity theory as causal entity, +independent of quantity of money and prices; necessary +assumption for law of proportionality</td><td align='right'><a href="#Page_203">203</a><span class='pagenum'>[Pg xx]</span></td></tr> +<tr><td align='justify'>"Coin-transfer" <i>vs.</i> "person-turnover" concepts</td><td align='right'><a href="#Page_203">203-204</a></td></tr> +<tr><td align='justify'>Velocity really non-essential by-product, meaningless average</td><td align='right'><a href="#Page_204">204-205</a></td></tr> +<tr><td align='justify'>Doctrine that velocity independent of money; habit and convenience; +hoarding; hoarding by banks</td><td align='right'><a href="#Page_205">205-209</a></td></tr> +<tr><td align='justify'>Velocity and volume of trade; vary together</td><td align='right'><a href="#Page_209">209-214</a></td></tr> +<tr><td align='justify'>Value of money causally governs velocity</td><td align='right'><a href="#Page_214">214-215</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XIII</big><br /><br /> +THE VOLUME OF MONEY AND THE VOLUME OF TRADE—TRADE AND SPECULATION</th></tr> +<tr><td align='justify'>Quantity theory doctrine that volume of trade, and volume +of money (and credit), are independent; trade governed +by physical and technical conditions, not money</td><td align='right'><a href="#Page_216">216-219</a></td></tr> +<tr><td align='justify'>View that quantity of money vitally affects production and +trade</td><td align='right'><a href="#Page_219">219</a></td></tr> +<tr><td align='justify'>Walker, Sombart, Withers, Price, Holt</td><td align='right'><a href="#Page_219">219-222</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_222">222-225</a></td></tr> +<tr><td align='justify'><i>Trade</i> distinguished from <i>production</i> and from <i>stock</i></td><td align='right'><a href="#Page_225">225-226</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_227">227-230</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_230">230-241</a></td></tr> +<tr><td align='justify'>Measurement of "ordinary trade"</td><td align='right'><a href="#Page_241">241-248</a></td></tr> +<tr><td align='justify'>Volume of stock speculation</td><td align='right'><a href="#Page_248">248-251</a></td></tr> +<tr><td align='justify'>Commodity speculation</td><td align='right'><a href="#Page_251">251-252</a></td></tr> +<tr><td align='justify'>Unorganized speculation</td><td align='right'><a href="#Page_252">252-254</a></td></tr> +<tr><td align='justify'>Bill and note speculation</td><td align='right'><a href="#Page_255">255</a><span class='pagenum'>[Pg xxi]</span></td></tr> +<tr><td align='justify'>Fisher's and Kemmerer's indicia of trade variation wholly +misleading</td><td align='right'><a href="#Page_255">255-257</a></td></tr> +<tr><td align='justify'>Production waits on trade; selling costs <i>vs.</i> "cost of production"; +"good will"; are banks useless?</td><td align='right'><a href="#Page_257">257-262</a></td></tr> +<tr><td align='justify'>"Normal <i>vs.</i> transitional": statics <i>vs.</i> 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</td><td align='right'><a href="#Page_262">262-266</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>APPENDIX TO CHAPTER XIII</big><br /><br /> +THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES</th></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_267">267-278</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XIV</big><br /><br /> +THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT</th></tr> +<tr><td align='justify'>Interdependence of trade, and money (and credit); increasing +trade causes increase of money and credit</td><td align='right'><a href="#Page_279">279-281</a></td></tr> +<tr><td align='justify'>Quantity theory doctrine: Fisher <i>vs.</i> Laughlin</td><td align='right'><a href="#Page_281">281-282</a></td></tr> +<tr><td align='justify'>Quantity theory has no explanation of elastic bank credit: +"Currency Theory" of deposits</td><td align='right'><a href="#Page_282">282-285</a></td></tr> +<tr><td align='justify'>Loans and deposits</td><td align='right'><a href="#Page_285">285-288</a></td></tr> +<tr><td align='justify'>Bills of exchange</td><td align='right'><a href="#Page_288">288-290</a></td></tr> +<tr><td align='justify'>Summary of quantity theory doctrine</td><td align='right'><a href="#Page_290">290-291</a><span class='pagenum'>[Pg xxii]</span></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XV</big><br /><br /> +THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES"</th></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_292">292-295</a></td></tr> +<tr><td align='justify'>Criticism: argument impressive only because it assumes an +<i>uncaused</i> 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</td><td align='right'><a href="#Page_295">295-299</a></td></tr> +<tr><td align='justify'>Quantity theory conflicts with supply and demand: supply +and demand holds good: particular prices and price-level</td><td align='right'><a href="#Page_299">299-300</a></td></tr> +<tr><td align='justify'>Generalization of conflict to include cost of production, +capitalization theory, imputation theory</td><td align='right'><a href="#Page_300">300</a></td></tr> +<tr><td align='justify'>Capitalization theory <i>vs.</i> quantity theory; different psychological +assumptions of the two theories</td><td align='right'><a href="#Page_300">300-306</a></td></tr> +<tr><td align='justify'>Cost of production <i>vs.</i> quantity theory; money-<i>income vs.</i> +quantity of money</td><td align='right'><a href="#Page_306">306-308</a></td></tr> +<tr><td align='justify'>Quantity theory false, granting all its assumptions</td><td align='right'><a href="#Page_308">308-310</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_310">310-314</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XVI</big><br /><br /> +THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS</th></tr> +<tr><td align='justify'>Quantity theory holds that gold movements depend on +price-<i>levels</i>; but price-level mere average, cause of nothing</td><td align='right'><a href="#Page_315">315-316</a></td></tr> +<tr><td align='justify'>Some prices, rising, tend to repel gold, but most prices have +no such effect</td><td align='right'><a href="#Page_316">316-317</a><span class='pagenum'>[Pg xxiii]</span></td></tr> +<tr><td align='justify'>Some prices, rising, bring in gold</td><td align='right'><a href="#Page_317">317-319</a></td></tr> +<tr><td align='justify'>Gold movements and money-rates</td><td align='right'><a href="#Page_319">319-320</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XVII</big></th></tr> +<tr><td align='justify'>THE QUANTITY THEORY <i>vs.</i> GRESHAM'S LAW</td><td align='right'><a href="#Page_321">321-323</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XVIII</big><br /><br /> +THE QUANTITY THEORY AND "WORLD PRICES"</th></tr> +<tr><td align='justify'>Types of quantity theory: world's volume of <i>gold vs.</i> quantity +of <i>money</i> in given country; standard <i>vs.</i> token money; +abandonment of dodo-bone theory and "equation of +exchange"</td><td align='right'><a href="#Page_324">324-326</a></td></tr> +<tr><td align='justify'>Credit does not rest on money: measure of values <i>vs.</i> reserves; +loans and wealth; value of money <i>vs.</i> price-level</td><td align='right'><a href="#Page_326">326-328</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_328">328-330</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XIX</big><br /><br /> +STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY—THE REDISCOVERY OF A BURIED CITY</th></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_331">331-335</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_335">335-337</a></td></tr> +<tr><td align='justify'>Fisher's statistics, resting on Kemmerer's, chiefly studied: +their relation to Kinley's "deposits" figures</td><td align='right'><a href="#Page_337">337-338</a></td></tr> +<tr><td align='justify'>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; +<span class='pagenum'>[Pg xxiv]</span>major part of all "check deposits" in New York City</td><td align='right'><a href="#Page_348">348-353</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_353">353-361</a></td></tr> +<tr><td align='justify'>Index of variation for M´V´ wrongly weighted; V´ wrongly +calculated for all years; which upsets calculation of V</td><td align='right'><a href="#Page_361">361-363</a></td></tr> +<tr><td align='justify'>Volume of trade: greatly exaggerated by bank transactions, +which include vast deal of duplications in checks, loans +and repayments, etc.</td><td align='right'><a href="#Page_363">363-368</a></td></tr> +<tr><td align='justify'>Fisher's reply; <i>under</i>counting offsets <i>over</i>counting</td><td align='right'><a href="#Page_368">368-369</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_369">369-381</a></td></tr> +<tr><td align='justify'>Price-indexes of Kemmerer and Fisher, dominated by wholesale +prices, have no relevance to their "equations of exchange"</td><td align='right'><a href="#Page_381">381-383</a></td></tr> +<tr><td align='justify'>In general, their figures bury speculation and New York City</td><td align='right'><a href="#Page_383">383</a></td></tr> +</table></div> + + +<h3><a href="#PartIII"><i>PART III. THE VALUE OF MONEY</i></a></h3> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary="PART III"> +<colgroup><col width="90%" /><col width="10%" /></colgroup> +<tr><th align='center' colspan='2'><big>CHAPTER XX</big><br /><br /> +RECAPITULATION OF POSITIVE DOCTRINE</th></tr> +<tr><td align='justify'>Recapitulation of constructive theses of Parts I and II, and +program of Parts III and IV</td><td align='right'><a href="#Page_387">387-396</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XXI</big><br /><br /> +THE ORIGIN OF MONEY, AND THE VALUE OF GOLD</th></tr> +<tr><td align='justify'>Problem stated</td><td align='right'><a href="#Page_397">397-401</a></td></tr> +<tr><td align='justify'>Value <i>vs. saleability</i>: degrees of saleability; theory of saleability; +"buying price" <i>vs.</i> "selling price"; indirect exchange +in barter economy; development of commodity of superior +saleability into money</td><td align='right'><a href="#Page_401">401-406</a></td></tr> +<tr><td align='justify'>Money never unique</td><td align='right'><a href="#Page_406">406-407</a><span class='pagenum'>[Pg xxv]</span></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_407">407-413</a></td></tr> +<tr><td align='justify'>Distribution of wealth and power, and value of gold</td><td align='right'><a href="#Page_413">413-416</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XXII</big><br /><br /> +THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY</th></tr> +<tr><td align='justify'>Classification</td><td align='right'><a href="#Page_417">417-418</a></td></tr> +<tr><td align='justify'>Measure of values (standard of value) distinguished from +medium of exchange; former does not add value to +money metal, latter does</td><td align='right'><a href="#Page_418">418-424</a></td></tr> +<tr><td align='justify'>Reserve function</td><td align='right'><a href="#Page_424">424</a></td></tr> +<tr><td align='justify'>Money as "bearer of options"; distinguished from store of +value; the <i>dynamic</i> function of money <i>par excellence</i>; 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 <i>vs.</i> "money +rates": Austria; the New York money market</td><td align='right'><a href="#Page_424">424-432</a></td></tr> +<tr><td align='justify'>Legal tender; the <i>Staatliche Theorie</i></td><td align='right'><a href="#Page_432">432-436</a></td></tr> +<tr><td align='justify'>Standard of deferred payments; which functions add to value +of money metal?</td><td align='right'><a href="#Page_436">436</a></td></tr> +<tr><td align='justify'>Relation of money rates to capital value of money</td><td align='right'><a href="#Page_436">436-442</a></td></tr> +<tr><td align='justify'>Agio when coinage is restricted: India <i>vs.</i> Western World</td><td align='right'><a href="#Page_442">442-450</a></td></tr> +<tr><td align='justify'>Equilibrium of gold in arts and gold as money: difficulties of +marginal analysis; the money-market phenomena</td><td align='right'><a href="#Page_450">450-458</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XXIII</big><br /><br /> +CREDIT</th></tr> +<tr><td align='justify'>Analysis rather than definition: "futurity" not essence of +credit; credit part of general value system; stocks as +credit instruments; juridical and accounting phases</td><td align='right'><a href="#Page_459">459-462</a></td></tr> +<tr><td align='justify'>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 <i>vs.</i> borrowing</td><td align='right'><a href="#Page_462">462-469</a><span class='pagenum'>[Pg xxvi]</span></td></tr> +<tr><td align='justify'>Definition of credit; credit <i>vs.</i> credit transaction; credit and +exchange; bulk of credit grows out of dynamic conditions</td><td align='right'><a href="#Page_469">469-474</a></td></tr> +<tr><td align='justify'>Functions of credit; increasing saleability of non-pecuniary +wealth; corporate organization; limits of credit expansion</td><td align='right'><a href="#Page_475">475-478</a></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_478">478-484</a></td></tr> +<tr><td align='justify'>Schumpeter's "heresies"; his view of the function of the +banker: "dynamic credit"; America <i>vs.</i> Continental +Europe</td><td align='right'><a href="#Page_484">484-488</a></td></tr> +<tr><td align='justify'>Peculiarities and functions of bank credit; technique of +banking: capital; assets; reserves; "liquidity"; money +market</td><td align='right'><a href="#Page_488">488-496</a></td></tr> +<tr><td align='center' colspan='2'> </td></tr> +<tr><th align='center' colspan='2'><big>CHAPTER XXIV</big><br /><br /> +CREDIT—BANK ASSETS AND BANK RESERVES</th></tr> +<tr><td align='justify'>Traditional view that liquid commercial loans normal and +dominant type of bank asset disproved; cannot exceed +11½ 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</td><td align='right'><a href="#Page_498">498-512</a></td></tr> +<tr><td align='justify'>Activity of different types of loans: banking assets get +liquidity chiefly from stock market, and from produce +speculators</td><td align='right'><a href="#Page_512">512-516</a></td></tr> +<tr><td align='justify'>Credit extended to Wall Street not at expense of ordinary +commerce; country banks and Wall Street</td><td align='right'><a href="#Page_516">516-518</a></td></tr> +<tr><td align='justify'>Federal Reserve Banks should rediscount stock collateral +loans; "Money Trust" a trust in financing corporations, +not ordinary commerce; panics and Federal Reserve +System</td><td align='right'><a href="#Page_520">520</a><span class='pagenum'>[Pg xxvii]</span></td></tr> +<tr><td align='justify'>Quantity theory, putting all exchanges on a par, grotesque: +volume of trade and prices in the stock market</td><td align='right'><a href="#Page_520">520-523</a></td></tr> +<tr><td align='justify'>Direct and indirect financing of corporations by banks; +"margin dealer" as "banker"</td><td align='right'><a href="#Page_523">523-526</a></td></tr> +<tr><td align='justify'>Adam Smith's view of banker's functions, and of safe bank +loans</td><td align='right'><a href="#Page_526">526</a></td></tr> +<tr><td align='justify'>Correct on basis of facts of his day, but corporate organization +and organized stock market have made smelting +house as liquid as consumers' goods</td><td align='right'><a href="#Page_527">527</a></td></tr> +<tr><td align='justify'>Division of labor in banking: America <i>vs.</i> Germany</td><td align='right'><a href="#Page_527">527-528</a></td></tr> +<tr><td align='justify'>Agriculture in money market</td><td align='right'><a href="#Page_528">528-529</a></td></tr> +<tr><td align='justify'>Reserve problem: special case of problem of liquid assets; +many flexible substitutes for cash</td><td align='right'><a href="#Page_529">529-532</a></td></tr> +<tr><td align='justify'>Causal relation runs from deposits to reserves; gold production +and reserve-ratio</td><td align='right'><a href="#Page_532">532-535</a></td></tr> +<tr><td align='justify'>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"</td><td align='right'><a href="#Page_536">536-544</a></td></tr> +</table></div> + +<h3><a href="#PartIV"><i>PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS</i></a></h3> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary="PART IV"> +<colgroup><col width="90%" /><col width="10%" /></colgroup> +<tr><th align='center' colspan='2'><big>CHAPTER XXV</big><br /><br /> +THE RECONCILIATION OF STATICS AND DYNAMICS</th></tr> +<tr><td align='justify'>Theory of money as focus of general economic theory, exhibiting +interdependence of doctrines; basis of further +unification of statics and dynamics in higher synthesis</td><td align='right'><a href="#Page_547">547-548</a></td></tr> +<tr><td align='justify'>Statics <i>vs.</i> dynamics, normal <i>vs.</i> transitional, and related contrasts; +illustrations; divergent lines of doctrine: tariffs, +wars, overproduction, extravagance, etc.</td><td align='right'><a href="#Page_548">548-552</a></td></tr> +<tr><td align='left'>Statics quantitative; dynamics qualitative</td><td align='right'><a href="#Page_552">552-553</a></td></tr> +<tr><td align='left'>Statics and dynamics both abstract</td><td align='right'><a href="#Page_553">553-554</a></td></tr> +<tr><td align='left'>Dynamics and "friction"</td><td align='right'><a href="#Page_554">554-555</a></td></tr> +<tr><td align='left'>"Theory of prosperity" and dynamics</td><td align='right'><a href="#Page_555">555-556</a></td></tr> +<tr><td align='left'>Statics and cross-section analysis; statics as price-theory; dynamics as value-theory</td><td align='right'><a href="#Page_556">556-560</a><span class='pagenum'>[Pg xxviii]</span></td></tr> +<tr><td align='justify'>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</td><td align='right'><a href="#Page_560">560-569</a></td></tr> +<tr><td align='left'>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</td><td align='right'><a href="#Page_569">569-575</a></td></tr> +<tr><td align='left'>Business man <i>vs.</i> economic theorist, and value-theory; manipulation of values and prices</td><td align='right'><a href="#Page_575">575-578</a></td></tr> +<tr><td align='left'>Statics and time</td><td align='right'><a href="#Page_578">578-580</a></td></tr> +<tr><td align='left'>Immaterial capital</td><td align='right'><a href="#Page_580">580-582</a></td></tr> +<tr><td align='left'>Statics and dynamics have not different subject-matter</td><td align='right'><a href="#Page_583">583-586</a></td></tr> +<tr><td align='left'>Equilibrium of all social values: statics and dynamics of the law: social forces and social control</td><td align='right'><a href="#Page_586">586-589</a></td></tr> +<tr><td align='left'>Summary of Part IV</td><td align='right'><a href="#Page_589">589-591</a></td></tr> +</table></div> + + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_1" id="Page_1">[Pg 1]</a></span></p> + +<h2><a name="PartI" id="PartI"></a>PART I. THE VALUE OF MONEY AND THE<br /> +GENERAL THEORY OF VALUE</h2> + +<p><span class='pagenum'><a name="Page_2" id="Page_2">[Pg 2]</a></span></p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_3" id="Page_3">[Pg 3]</a></span></p> +<h1>THE VALUE OF MONEY</h1> + + + +<h3>CHAPTER I</h3> + +<h3>ECONOMIC VALUE</h3> + + +<p>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<a name="FNanchor_1_1" id="FNanchor_1_1"></a><a href="#Footnote_1_1" class="fnanchor">[1]</a> 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.<a name="FNanchor_2_2" id="FNanchor_2_2"></a><a href="#Footnote_2_2" class="fnanchor">[2]</a> On the +whole, however, the theory presented in this chapter is +<span class='pagenum'><a name="Page_4" id="Page_4">[Pg 4]</a></span> +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.</p> + +<p>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 <i>causes</i> 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.<a name="FNanchor_3_3" id="FNanchor_3_3"></a><a href="#Footnote_3_3" class="fnanchor">[3]</a></p> + +<p><span class='pagenum'><a name="Page_5" id="Page_5">[Pg 5]</a></span></p> +<p>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.</p> + +<p>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.<a name="FNanchor_4_4" id="FNanchor_4_4"></a><a href="#Footnote_4_4" class="fnanchor">[4]</a> +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 <i>quantity</i>. 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 <i>quantities</i>. There is nothing novel in the statement +<span class='pagenum'><a name="Page_6" id="Page_6">[Pg 6]</a></span> +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.</p> + +<p>Ratios of Exchange are ratios between two quantities of +value, the values of the units of the two kinds of wealth +exchanged.<a name="FNanchor_5_5" id="FNanchor_5_5"></a><a href="#Footnote_5_5" class="fnanchor">[5]</a> 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 <i>two</i> 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.</p> + +<div class="figcenter" style="width: 640px;"> +<img src="images/p006.png" width="640" height="314" alt="" title="" /> +</div> + +<p>In the diagram above, something of what is to follow is +<span class='pagenum'><a name="Page_7" id="Page_7">[Pg 7]</a></span> +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 <i>reciprocal</i> 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.</p> + +<p>A <i>price</i> 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.<a name="FNanchor_6_6" id="FNanchor_6_6"></a><a href="#Footnote_6_6" class="fnanchor">[6]</a> In modern life, prices are +<span class='pagenum'><a name="Page_8" id="Page_8">[Pg 8]</a></span> +the chief form of ratio of exchange, but it is important +for some purposes to remember that they are not the only +form.</p> + +<p>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.</p> + +<p>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, <i>ipso facto</i>, 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 +<span class='pagenum'><a name="Page_9" id="Page_9">[Pg 9]</a></span> +behind, and causally explains, the exchange relations into +which money enters. Every price implies <i>two</i> values, the +value of the money-unit and the value of the unit of the +good in question.</p> + +<p>Value is prior to <i>exchange</i>. Value is not to be defined as +"power in exchange." Certain writers<a name="FNanchor_7_7" id="FNanchor_7_7"></a><a href="#Footnote_7_7" class="fnanchor">[7]</a> 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."</p> + +<p>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 <i>between</i> 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 +<span class='pagenum'><a name="Page_10" id="Page_10">[Pg 10]</a></span> +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.<a name="FNanchor_8_8" id="FNanchor_8_8"></a><a href="#Footnote_8_8" class="fnanchor">[8]</a> +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.<a name="FNanchor_9_9" id="FNanchor_9_9"></a><a href="#Footnote_9_9" class="fnanchor">[9]</a></p> + +<p><span class='pagenum'><a name="Page_11" id="Page_11">[Pg 11]</a></span></p> +<p>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.<a name="FNanchor_10_10" id="FNanchor_10_10"></a><a href="#Footnote_10_10" class="fnanchor">[10]</a> 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 +<span class='pagenum'><a name="Page_12" id="Page_12">[Pg 12]</a></span> +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.</p> + +<p>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.<a name="FNanchor_11_11" id="FNanchor_11_11"></a><a href="#Footnote_11_11" class="fnanchor">[11]</a> The "human +factor" which <i>explains</i> 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 <i>average</i>, 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 <i>average</i> +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.<a name="FNanchor_12_12" id="FNanchor_12_12"></a><a href="#Footnote_12_12" class="fnanchor">[12]</a> 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 +<span class='pagenum'><a name="Page_13" id="Page_13">[Pg 13]</a></span> +has been set forth by Professor Clark.<a name="FNanchor_13_13" id="FNanchor_13_13"></a><a href="#Footnote_13_13" class="fnanchor">[13]</a> Professor Clark's +<i>causal</i> theory of value, his explanation of this absolute +quantity of value as a <i>sum</i> of individual marginal utilities, +we have elsewhere<a name="FNanchor_14_14" id="FNanchor_14_14"></a><a href="#Footnote_14_14" class="fnanchor">[14]</a> 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.</p> + +<p>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<a name="FNanchor_15_15" id="FNanchor_15_15"></a><a href="#Footnote_15_15" class="fnanchor">[15]</a> as to the +nature of value here presented, whatever differences might +appear among them as to the causal explanation of value.</p> + +<p>The value concept here presented performs the same +logical functions as the "inner objective value" of Karl +<span class='pagenum'><a name="Page_14" id="Page_14">[Pg 14]</a></span> +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.<a name="FNanchor_16_16" id="FNanchor_16_16"></a><a href="#Footnote_16_16" class="fnanchor">[16]</a> That there should +remain critics<a name="FNanchor_17_17" id="FNanchor_17_17"></a><a href="#Footnote_17_17" class="fnanchor">[17]</a> 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.<a name="FNanchor_18_18" id="FNanchor_18_18"></a><a href="#Footnote_18_18" class="fnanchor">[18]</a></p> + +<p>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 +<span class='pagenum'><a name="Page_15" id="Page_15">[Pg 15]</a></span> +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,<a name="FNanchor_19_19" id="FNanchor_19_19"></a><a href="#Footnote_19_19" class="fnanchor">[19]</a> 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 <i>value</i>, +gives a commodity value. But this is to explain value +by value, which is circular. So with the theory of average +labor <i>time</i>. 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 <i>hats</i> 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 <i>value</i>. 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 +<span class='pagenum'><a name="Page_16" id="Page_16">[Pg 16]</a></span> +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 <i>whole</i> man, in his <i>social</i> 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.</p> + +<hr style='width: 45%;' /> + +<p>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<a name="FNanchor_20_20" id="FNanchor_20_20"></a><a href="#Footnote_20_20" class="fnanchor">[20]</a> 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.</p> + +<p>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 <i>human mind</i>. Nor could the human +animal, apart from association with his fellows, ever develop +<span class='pagenum'><a name="Page_17" id="Page_17">[Pg 17]</a></span> +a human mind. "The human mind is what happens +to the human animal in a social situation."<a name="FNanchor_21_21" id="FNanchor_21_21"></a><a href="#Footnote_21_21" class="fnanchor">[21]</a> 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 <i>personally</i>, attributes life and human attributes to +them, holds conversation with them, praises and blames +them, makes companions of them. This <i>animism</i> 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.</p> + +<p>In the history of human society, a similar generalization +is possible. The human <i>individual</i> 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 +<span class='pagenum'><a name="Page_18" id="Page_18">[Pg 18]</a></span> +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 <i>Jus Gentium</i>, 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,<a name="FNanchor_22_22" id="FNanchor_22_22"></a><a href="#Footnote_22_22" class="fnanchor">[22]</a>—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."</p> + +<p>Bagehot, in his <i>Physics and Politics</i>, Tarde, and Baldwin, +to name no others,<a name="FNanchor_23_23" id="FNanchor_23_23"></a><a href="#Footnote_23_23" class="fnanchor">[23]</a> have shown how tremendously responsive +human beings are to suggestion, how wide is the +<span class='pagenum'><a name="Page_19" id="Page_19">[Pg 19]</a></span> +sway of imitation in human life, how fashion, mode, custom, +etc., make and mold the individual. Cooley,<a name="FNanchor_24_24" id="FNanchor_24_24"></a><a href="#Footnote_24_24" class="fnanchor">[24]</a> 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_20" id="Page_20">[Pg 20]</a></span> +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?</p> + +<p>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 <i>datum</i> 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 <i>separately</i>. No individual is +<span class='pagenum'><a name="Page_21" id="Page_21">[Pg 21]</a></span> +completely, or primarily, accounted for until his <i>relations</i> +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 <i>sum</i> +of the parts. The relationships are not arithmetical, additive, +mechanical, but are vital and organic. Men's minds +<i>function</i> together, in an organic unity.<a name="FNanchor_25_25" id="FNanchor_25_25"></a><a href="#Footnote_25_25" class="fnanchor">[25]</a></p> + +<p>The first two of these types of theory (perhaps because +individuals are <i>physically</i> sharply marked off from one +another, and go on in <i>biological</i> functioning in obvious +separateness) have falsely accentuated the self-dependence +and separateness of individual <i>minds</i>. 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.<a name="FNanchor_26_26" id="FNanchor_26_26"></a><a href="#Footnote_26_26" class="fnanchor">[26]</a> We will set our doctrine +<span class='pagenum'><a name="Page_22" id="Page_22">[Pg 22]</a></span> +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.</p> + +<p>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 <i>will</i> 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 +<span class='pagenum'><a name="Page_23" id="Page_23">[Pg 23]</a></span> +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 <i>par excellence</i>, which the +group will <i>enforce</i> 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_24" id="Page_24">[Pg 24]</a></span> +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<a name="FNanchor_27_27" id="FNanchor_27_27"></a><a href="#Footnote_27_27" class="fnanchor">[27]</a> 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."<a name="FNanchor_28_28" id="FNanchor_28_28"></a><a href="#Footnote_28_28" class="fnanchor">[28]</a> 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," <i>infra</i>, I have cited certain opinions of +Mr. Justice Holmes which apply it, and even bring into +it the notions of the marginal analysis.</p> + +<p>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 +<span class='pagenum'><a name="Page_25" id="Page_25">[Pg 25]</a></span> +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:<a name="FNanchor_29_29" id="FNanchor_29_29"></a><a href="#Footnote_29_29" class="fnanchor">[29]</a></p> + +<div class="blockquot"><p> +"But value dwells not in particular will;<br /> +It holds his estimate and dignity<br /> +As well wherein 'tis precious of itself<br /> +As in the prizer."<br /> +</p></div> + +<p>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.<a name="FNanchor_30_30" id="FNanchor_30_30"></a><a href="#Footnote_30_30" class="fnanchor">[30]</a> 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 +<span class='pagenum'><a name="Page_26" id="Page_26">[Pg 26]</a></span> +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, <i>species</i> of the <i>genus</i>, 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 <i>social forces</i>, which govern, in a social scheme, the +actions of men.</p> + +<p>It may be well to suggest rough <i>differentiæ</i> which mark +off these values from one another. Legal values are social +values which will be enforced, if need be, by the organized +<i>physical</i> 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.</p> + +<p>The differentiation of these types of social value may +<span class='pagenum'><a name="Page_27" id="Page_27">[Pg 27]</a></span> +also run in terms of their <i>functions</i>,<a name="FNanchor_31_31" id="FNanchor_31_31"></a><a href="#Footnote_31_31" class="fnanchor">[31]</a> 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 <i>impels</i> +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 <i>positively</i> 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.</p> + +<p>The differentiation is easier when we look at the social +<i>institutions</i> which have to do primarily with the one or the +<span class='pagenum'><a name="Page_28" id="Page_28">[Pg 28]</a></span> +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.</p> + +<p>When we view the matter from the standpoint of the +<i>objects</i> of value, <i>differentiæ</i> 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 <i>quantitatively</i> 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;<a name="FNanchor_32_32" id="FNanchor_32_32"></a><a href="#Footnote_32_32" class="fnanchor">[32]</a> 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_29" id="Page_29">[Pg 29]</a></span> +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 <i>corpus delicti</i>, with +their emotional sanction.</p> + +<p>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 <i>qualitatively</i> 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,"<a name="FNanchor_33_33" id="FNanchor_33_33"></a><a href="#Footnote_33_33" class="fnanchor">[33]</a> shared by the whole group in common, +<span class='pagenum'><a name="Page_30" id="Page_30">[Pg 30]</a></span> +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 <i>corpus delicti</i>, or the rule governing pleas in +<i>estoppel</i>. 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 <i>Institutes</i> of Calvin, by the +immediate working of religious instinct as to explain the +market values of the present time by the immediate working +<span class='pagenum'><a name="Page_31" id="Page_31">[Pg 31]</a></span> +of natural wants."<a name="FNanchor_34_34" id="FNanchor_34_34"></a><a href="#Footnote_34_34" class="fnanchor">[34]</a> 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 <i>validity</i> 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_32" id="Page_32">[Pg 32]</a></span> +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.<a name="FNanchor_35_35" id="FNanchor_35_35"></a><a href="#Footnote_35_35" class="fnanchor">[35]</a></p> + +<p>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 <i>his</i> 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 +<span class='pagenum'><a name="Page_33" id="Page_33">[Pg 33]</a></span> +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, <i>they</i> are determined by all manner of social considerations, +and <i>always</i>, <i>the degree to which they count</i> in +determining values depends on his weight in the economic +situation, which rests (1) on his <i>prestige</i>, <i>i. e.</i>, the massing of +beliefs and hopes of many men, (2) on his <i>wealth</i>, 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.</p> + +<p>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. +<span class='pagenum'><a name="Page_34" id="Page_34">[Pg 34]</a></span> +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.</p> + +<p>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 +<i>focus</i> 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 +<span class='pagenum'><a name="Page_35" id="Page_35">[Pg 35]</a></span> +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<a name="FNanchor_36_36" id="FNanchor_36_36"></a><a href="#Footnote_36_36" class="fnanchor">[36]</a> 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 <i>behind +it</i>. 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.</p> + +<p>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 <i>instinctive</i> +equipment in the matter of hunger is vastly more like that +<span class='pagenum'><a name="Page_36" id="Page_36">[Pg 36]</a></span> +of a man than is the <i>actual</i> 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_37" id="Page_37">[Pg 37]</a></span> +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"<a name="FNanchor_37_37" id="FNanchor_37_37"></a><a href="#Footnote_37_37" class="fnanchor">[37]</a> 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.</p> + +<p>Certain wants are competitive.<a name="FNanchor_38_38" id="FNanchor_38_38"></a><a href="#Footnote_38_38" class="fnanchor">[38]</a> 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.</p> + +<p>So much for the human wants which stand as the focus +of economic values in the case of articles of immediate +consumption.</p> + +<p>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 +<span class='pagenum'><a name="Page_38" id="Page_38">[Pg 38]</a></span> +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, +<i>centres</i> 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.<a name="FNanchor_39_39" id="FNanchor_39_39"></a><a href="#Footnote_39_39" class="fnanchor">[39]</a> 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 <i>weight</i> +which these individuals have in our economic system. +This <i>weight</i> 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 <i>to</i> the individuals who consume +them, but also the values <i>of</i> the individuals themselves +in the social scheme of things.</p> + +<p>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?</p> + +<p>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 +<span class='pagenum'><a name="Page_39" id="Page_39">[Pg 39]</a></span> +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.</p> + +<p>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 +<span class='pagenum'><a name="Page_40" id="Page_40">[Pg 40]</a></span> +have no value.<a name="FNanchor_40_40" id="FNanchor_40_40"></a><a href="#Footnote_40_40" class="fnanchor">[40]</a> 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 <i>nil</i>. 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.</p> + +<p>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 <i>beliefs</i> and hopes, not concerned with specific +satisfactions of wants, but with the existence of <i>future</i> economic +values. These beliefs and hopes again have their social +explanation. It is not a case where each man counts +<span class='pagenum'><a name="Page_41" id="Page_41">[Pg 41]</a></span> +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.</p> + +<p>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>i. e.</i>, 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.</p> + +<p>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.</p> + +<p>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 +<span class='pagenum'><a name="Page_42" id="Page_42">[Pg 42]</a></span> +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.</p> + +<p>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.</p> + +<p>He offers the social value theory as the only way of giving +a <i>psychological</i> explanation to the demand-curve, and a +marginal <i>value</i> explanation of marginal demand-<i>price</i>. 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 +<i>any</i> point on the demand-curve. In general, he offers the +social value notion as the justification for the assumption +<span class='pagenum'><a name="Page_43" id="Page_43">[Pg 43]</a></span> +of a quantitative value which, as we shall see, underlies the +whole of our current price analysis.</p> + +<p>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.</p> + +<div class="blockquot"><p><span class="smcap">Note.</span> 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_44" id="Page_44">[Pg 44]</a></span> +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 <i>on</i> him, rather than <i>in</i> 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.</p> + +<p>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," <i>Annals of the American Academy</i>, Vol. V, pp. +149-209.) But it is worth something, not as explaining social values +or market prices, but rather, as showing how individuals <i>conform</i> to +social values and market prices. <i>Cf. Social Value</i>, pp. 43-44, n. 2, +and 148.</p> + +<p>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 +<span class='pagenum'><a name="Page_45" id="Page_45">[Pg 45]</a></span> +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!</p> + +<p>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.</p></div> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_46" id="Page_46">[Pg 46]</a></span></p> +<h3>CHAPTER II</h3> + +<h3>SUPPLY AND DEMAND, AND THE VALUE OF +MONEY</h3> + + +<p>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 <i>deduction from</i> the utility theory of value, and +a <i>special case</i> 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<span class='pagenum'><a name="Page_47" id="Page_47">[Pg 47]</a></span> +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 <i>Purchasing Power of +Money</i>, very explicitly repudiates this doctrine.<a name="FNanchor_41" id="FNanchor_41"></a><a href="#Footnote_41" class="fnanchor">[41]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_48" id="Page_48">[Pg 48]</a></span> +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 <i>Principles</i> (Vol. I) +says almost nothing about the theory of money; his opinions +on that subject are to be found in some <i>ex cathedra</i> 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 (<i>e. g.</i>, 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 (<i>e. g.</i>, 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 <i>Handwörterbuch +der Staatswissenschaften</i>, 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<span class='pagenum'><a name="Page_49" id="Page_49">[Pg 49]</a></span> +contributions to the theory of money are not likely to be +very influential, or to add to his reputation.<a name="FNanchor_42" id="FNanchor_42"></a><a href="#Footnote_42" class="fnanchor">[42]</a> 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.</p> + +<p>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 <i>prices</i>, +theories which presuppose <i>value</i>, and <i>money</i>, and a <i>fixed +value of money</i>. 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, <i>e. g.</i>, Flux and Taussig<a name="FNanchor_43" id="FNanchor_43"></a><a href="#Footnote_43" class="fnanchor">[43]</a>) to the +treatment of market prices. I shall take up these points in +order.</p> + +<p>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.<span class='pagenum'><a name="Page_50" id="Page_50">[Pg 50]</a></span> +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 <i>through</i> 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 <i>Principles of Political Economy and Taxation</i> (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 <i>through</i> 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>i. e.</i>, 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<span class='pagenum'><a name="Page_51" id="Page_51">[Pg 51]</a></span> +reader may compare the pages in <i>Ricardo's Works</i> cited +above, and the discussion of the demand for labor on p. 241 +in the same volume.</p> + +<p>In J.S. Mill, a clean-cut notion first appears. The doctrine +that price is determined by a ratio between effectual demand +(<i>i. e.</i>, the wish to possess combined with the power to purchase) +and supply (<i>i. e.</i>, 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 <i>equalizes</i> 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 <i>ratio</i> between supply and demand +is replaced by the notion of an <i>equation</i> 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<span class='pagenum'><a name="Page_52" id="Page_52">[Pg 52]</a></span> +analysis, because of the impedimenta of pseudo-psychology +it has to carry, and because of its confusion of utility schedules +with demand schedules.<a name="FNanchor_44" id="FNanchor_44"></a><a href="#Footnote_44" class="fnanchor">[44]</a> 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.</p> + +<p>One point is to be added, making explicit what is implicit +in the modern theory of supply and demand. Supply and +demand doctrine assumes <i>money</i>, and a <i>fixed value</i> 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.</p> + +<p>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:</p> + +<p>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 <i>results</i>, rather +than causes, and by putting the causation back into<span class='pagenum'><a name="Page_53" id="Page_53">[Pg 53]</a></span> +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 <i>both</i> 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 <i>common</i> movement, without modifying their <i>relation</i> +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.</p> + +<p>Again, we must precise the notion of an <i>increase</i> in demand, +or of supply. Increase in demand may mean mere +increase in amount demanded, consequent upon a lower +price, consequent, <i>i. e.</i>, 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 <i>same</i> 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. <i>Mutatis mutandis</i>, 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<span class='pagenum'><a name="Page_54" id="Page_54">[Pg 54]</a></span> +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 <i>increase the supply</i>. But this is true only if +the <i>cause</i> 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 <i>pro +tanto</i>, and the new equilibrium, <i>cæteris paribus</i>, 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 <i>real</i> increase in demand in the active +sense, which does modify the adjustments in production, +and alter the proportions of different supplies, from a <i>nominal</i> +increase in demand in the active sense, which merely +raises a money-price, without affecting supply.<a name="FNanchor_45" id="FNanchor_45"></a><a href="#Footnote_45" class="fnanchor">[45]</a></p> + +<p><span class='pagenum'><a name="Page_55" id="Page_55">[Pg 55]</a></span>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 <i>significances</i>, manifesting <i>psychological</i> +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.<a name="FNanchor_46" id="FNanchor_46"></a><a href="#Footnote_46" class="fnanchor">[46]</a> +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.<span class='pagenum'><a name="Page_56" id="Page_56">[Pg 56]</a></span></p> + +<p>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, <i>e. g.</i>, 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.</p> + +<p>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.</p> + +<p>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 (<i>Purchasing Power of Money</i>, ch. 8), and +others, that a fixed <i>general price level</i> 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 <i>absolute</i> and value as <i>relative</i>. For my<span class='pagenum'><a name="Page_57" id="Page_57">[Pg 57]</a></span> +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 <i>goods</i>. 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 <i>Assignats</i>), 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.</p> + +<p>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.<a name="FNanchor_47" id="FNanchor_47"></a><a href="#Footnote_47" class="fnanchor">[47]</a></p> + +<p>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<a name="FNanchor_48" id="FNanchor_48"></a><a href="#Footnote_48" class="fnanchor">[48]</a> who criticised<span class='pagenum'><a name="Page_58" id="Page_58">[Pg 58]</a></span> +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 <i>money</i> demanded, but the quantity of +goods offered against money—a very different conception. +(Mill, <i>Principles</i>, 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<span class='pagenum'><a name="Page_59" id="Page_59">[Pg 59]</a></span> +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,<a name="FNanchor_49" id="FNanchor_49"></a><a href="#Footnote_49" class="fnanchor">[49]</a> 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 +<i>value</i>. 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.</p> + +<p>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 "quan<span class='pagenum'><a name="Page_60" id="Page_60">[Pg 60]</a></span>tity +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.<a name="FNanchor_50" id="FNanchor_50"></a><a href="#Footnote_50" class="fnanchor">[50]</a> 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 <i>repel</i> money, to reduce the <i>supply</i> 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.<a name="FNanchor_51" id="FNanchor_51"></a><a href="#Footnote_51" class="fnanchor">[51]</a> 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,<a name="FNanchor_52" id="FNanchor_52"></a><a href="#Footnote_52" class="fnanchor">[52]</a> so that they could exert a coun<span class='pagenum'><a name="Page_61" id="Page_61">[Pg 61]</a></span>teracting +"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.</p> + +<p>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 <i>rising</i> +price levels which drive gold away, and <i>falling</i> price levels +which attract gold!<a name="FNanchor_53" id="FNanchor_53"></a><a href="#Footnote_53" class="fnanchor">[53]</a></p> + +<p>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 physi<span class='pagenum'><a name="Page_62" id="Page_62">[Pg 62]</a></span>cal +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 <i>prices</i><a name="FNanchor_54" id="FNanchor_54"></a><a href="#Footnote_54" class="fnanchor">[54]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_63" id="Page_63">[Pg 63]</a></span> +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.</p> + +<p>Demand and supply are superficial formulæ. They +cannot touch a problem so fundamental as that of the value +of money.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_64" id="Page_64">[Pg 64]</a></span></p> +<h3>CHAPTER III</h3> + +<h3>COST OF PRODUCTION AND THE VALUE OF +MONEY</h3> + + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_65" id="Page_65">[Pg 65]</a></span> +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.</p> + +<p>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.</p> + +<p>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.<a name="FNanchor_55" id="FNanchor_55"></a><a href="#Footnote_55" class="fnanchor">[55]</a> 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<span class='pagenum'><a name="Page_66" id="Page_66">[Pg 66]</a></span> +quantity of labour, or, which is the same thing, the value +of the produce of a greater quantity of labour, to procure +it." (<i>Works</i>, 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 +<i>relative</i> 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 <i>surplus</i> 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<span class='pagenum'><a name="Page_67" id="Page_67">[Pg 67]</a></span> +dormant." (Davenport, <i>Value and Distribution</i>, 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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_68" id="Page_68">[Pg 68]</a></span> +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.<a name="FNanchor_56" id="FNanchor_56"></a><a href="#Footnote_56" class="fnanchor">[56]</a> 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<span class='pagenum'><a name="Page_69" id="Page_69">[Pg 69]</a></span> +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 (<i>Social +Value</i>, chs. 3-7, and the ch. on "Marginal Utility," <i>infra</i>) +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.</p> + +<p>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 <i>supply</i>-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<span class='pagenum'><a name="Page_70" id="Page_70">[Pg 70]</a></span> +by checking supply. Rising costs tend to mean a lessened +supply. But if the cost-curve is rising <i>because</i> 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.</p> + +<p>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 <i>because</i> the land and labor in question +have <i>alternative</i> uses, because other industries, or other<span class='pagenum'><a name="Page_71" id="Page_71">[Pg 71]</a></span> +competitors in the same industry, bid for them. Cost-curves, +then, are reflections of demand-curves. The cost-curve +of wheat, <i>e. g.</i>, 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.</p> + +<p>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.<a name="FNanchor_57" id="FNanchor_57"></a><a href="#Footnote_57" class="fnanchor">[57]</a></p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_72" id="Page_72">[Pg 72]</a></span></p> +<h3>CHAPTER IV</h3> + +<h3>THE CAPITALIZATION THEORY AND THE VALUE +OF MONEY</h3> + + +<p>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."<span class='pagenum'><a name="Page_73" id="Page_73">[Pg 73]</a></span> +These are properly to be conceived, not as pure interest on +abstract capital, but as rents<a name="FNanchor_58" id="FNanchor_58"></a><a href="#Footnote_58" class="fnanchor">[58]</a> which are to be attributed +to money as a concrete tool.</p> + +<p>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 <i>time</i> +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 +<span class='pagenum'><a name="Page_74" id="Page_74">[Pg 74]</a></span> +"present worths" of the incomes. The formula is as follows: +capital price of land = <small>$100/1.05 + $100/(1.05)<sup>2</sup> + $100/(1.05)<sup>3</sup> ... + $100/(1.05)<sup>n</sup></small> +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.</p> + +<p>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<span class='pagenum'><a name="Page_75" id="Page_75">[Pg 75]</a></span> +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 <i>expectation</i> +of those who are concerned in the capitalization +process.</p> + +<p>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,"<a name="FNanchor_59" id="FNanchor_59"></a><a href="#Footnote_59" class="fnanchor">[59]</a> +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<span class='pagenum'><a name="Page_76" id="Page_76">[Pg 76]</a></span> +the disk grows greater, and so the <i>shadow</i> tends to remain +the same.</p> + +<p>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 +<i>value of money</i> which makes possible the <i>money work</i>. 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?</p> + +<p>But further, the capitalization theory, as heretofore formulated, +like the doctrines of supply and demand and cost +of production, assumes <i>money</i>, and a <i>fixed absolute value</i> 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<span class='pagenum'><a name="Page_77" id="Page_77">[Pg 77]</a></span> +"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 <i>given</i> 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.</p> + +<p>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.<a name="FNanchor_60" id="FNanchor_60"></a><a href="#Footnote_60" class="fnanchor">[60]</a> If one hold the <i>relative</i> conception of value, according +to which the value of money necessarily falls when prices<span class='pagenum'><a name="Page_78" id="Page_78">[Pg 78]</a></span> +rise, because the two are merely obverse phases of the same +thing, then this rise in the price level is, <i>ipso facto</i>, 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>i. e.</i>, 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.</p> + +<p>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.</p> + +<p>In general, none of the polished tools of the economic +analysis,—neither cost of production, the capitalization +theory,<a name="FNanchor_61" id="FNanchor_61"></a><a href="#Footnote_61" class="fnanchor">[61]</a> nor the law of supply and demand,—is applicable +to the problem of the value of money. The reason is that<span class='pagenum'><a name="Page_79" id="Page_79">[Pg 79]</a></span> +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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_80" id="Page_80">[Pg 80]</a></span></p> +<h3>CHAPTER V</h3> + +<h3>MARGINAL UTILITY AND THE VALUE OF MONEY</h3> + + +<p>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.</p> + +<p>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.<a name="FNanchor_62" id="FNanchor_62"></a><a href="#Footnote_62" class="fnanchor">[62]</a> 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.<span class='pagenum'><a name="Page_81" id="Page_81">[Pg 81]</a></span></p> + +<p>Sometimes the contention is made that money is unique +among goods in having "no power to satisfy human wants +except a power <i>to purchase</i> things which do have such +power."<a name="FNanchor_63" id="FNanchor_63"></a><a href="#Footnote_63" class="fnanchor">[63]</a> 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 <i>per se</i>, however, have felt it necessary +to give up the marginal utility theory as a theory of money, +as we shall later see.</p> + +<p>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 <i>Money and Banking</i><a name="FNanchor_64" id="FNanchor_64"></a><a href="#Footnote_64" class="fnanchor">[64]</a>, +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 the<span class='pagenum'><a name="Page_82" id="Page_82">[Pg 82]</a></span>ory,<a name="FNanchor_65" id="FNanchor_65"></a><a href="#Footnote_65" class="fnanchor">[65]</a> +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, <i>qua</i> 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<a name="FNanchor_66" id="FNanchor_66"></a><a href="#Footnote_66" class="fnanchor">[66]</a>—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.<a name="FNanchor_67" id="FNanchor_67"></a><a href="#Footnote_67" class="fnanchor">[67]</a> It<span class='pagenum'><a name="Page_83" id="Page_83">[Pg 83]</a></span> +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 <i>value</i> +from non-monetary sources<a name="FNanchor_68" id="FNanchor_68"></a><a href="#Footnote_68" class="fnanchor">[68]</a> 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.</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_84" id="Page_84">[Pg 84]</a></span> +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 <i>Zeitschrift für Volkswirtschaft, +Sozialpolitik und Verwaltung</i>, 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 <i>Schriften des Vereins für Sozialpolitik, Referate +zur Tagung</i>, 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 <i>via</i> 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."<a name="FNanchor_69" id="FNanchor_69"></a><a href="#Footnote_69" class="fnanchor">[69]</a></p> + +<p>Wieser holds that it is possible to have money wholly +apart from a commodity basis (I, p. 45), citing the Austrian +<i>Staatsnoten</i> 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.<a name="FNanchor_70" id="FNanchor_70"></a><a href="#Footnote_70" class="fnanchor">[70]</a> 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<span class='pagenum'><a name="Page_85" id="Page_85">[Pg 85]</a></span> +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.<a name="FNanchor_71" id="FNanchor_71"></a><a href="#Footnote_71" class="fnanchor">[71]</a> I do not think that <i>any</i> +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 +(<i>Wesen</i>), 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 (<i>Geldsurrogate</i>) 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 <i>Geldsurrogate</i> 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,<span class='pagenum'><a name="Page_86" id="Page_86">[Pg 86]</a></span> +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<span class='pagenum'><a name="Page_87" id="Page_87">[Pg 87]</a></span> +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").<a name="FNanchor_72" id="FNanchor_72"></a><a href="#Footnote_72" class="fnanchor">[72]</a> 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 (<i>Preisstand</i>), but which +excludes from its content everything that comes purely +from the value of goods" (II, 511). To the public eco<span class='pagenum'><a name="Page_88" id="Page_88">[Pg 88]</a></span>nomic +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 (<i>innere Werte</i>) 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. (<i>Cf.</i> the usage of +Menger and von Mises, <i>infra</i>, 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.</p> + +<p>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<span class='pagenum'><a name="Page_89" id="Page_89">[Pg 89]</a></span> +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.)</p> + +<p>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 explana<span class='pagenum'><a name="Page_90" id="Page_90">[Pg 90]</a></span>tion +of value and prices by means of marginal utility,<a name="FNanchor_73" id="FNanchor_73"></a><a href="#Footnote_73" class="fnanchor">[73]</a> +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.<a name="FNanchor_74" id="FNanchor_74"></a><a href="#Footnote_74" class="fnanchor">[74]</a> 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 <i>cause</i> of a general rise in prices. +The Austrian doctrine is rather that rising money costs +are <i>reflections</i> 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.</p> + +<p>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.</p> + +<p>Schumpeter's theory of value,<a name="FNanchor_75" id="FNanchor_75"></a><a href="#Footnote_75" class="fnanchor">[75]</a> though he attributes it<span class='pagenum'><a name="Page_91" id="Page_91">[Pg 91]</a></span> +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 +<i>own</i> marginal utility to different individuals, buyers and +sellers of the good—indeed, by its marginal utility to <i>four</i> +individuals, the two "marginal pairs."<a name="FNanchor_76" id="FNanchor_76"></a><a href="#Footnote_76" class="fnanchor">[76]</a> 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.<a name="FNanchor_77" id="FNanchor_77"></a><a href="#Footnote_77" class="fnanchor">[77]</a> 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,<span class='pagenum'><a name="Page_92" id="Page_92">[Pg 92]</a></span> +instead of attributing the market value of each good to its +own marginal utility, you explain the exchange ratios<a name="FNanchor_78" id="FNanchor_78"></a><a href="#Footnote_78" class="fnanchor">[78]</a> of +every good to every other good, all at once, by reference to +a total situation: <i>given</i> the number of goods of each class, +given the number of individuals in the market, given the <i>distribution</i> +of each class of goods among the individuals, given +the utility-<i>curves</i> (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 <i>causal</i> +relation between marginal utility and market ratios; it +merely states certain <i>mathematical</i> relations between each +individual system of marginal utilities on the one hand, +and the abstract market ratios on the other. By avoiding +<i>assertions</i> as to causation, it avoids a causal circle. In such +a situation, marginal utilities and market ratios are, in +reality, alike resultants, <i>effects</i>, of the given quantities of +goods, distribution of goods, numbers of buyers and sellers, +and individual utility-<i>curves</i>—not <i>marginal</i> 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 <i>dis</i>-utility for the individuals +who produce each kind of good. The system, it may +be noted, is as good a proof of <i>real cost</i> doctrine as it is of +utility doctrine.<span class='pagenum'><a name="Page_93" id="Page_93">[Pg 93]</a></span></p> + +<p>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 <i>ignotum per ignotius</i>, 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),<a name="FNanchor_79" id="FNanchor_79"></a><a href="#Footnote_79" class="fnanchor">[79]</a> 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<span class='pagenum'><a name="Page_94" id="Page_94">[Pg 94]</a></span> +bringing about just the absence of friction which static +theory assumes. That is what money is <i>for</i>. The functional +theory of money, therefore, cannot abstract from friction +and dynamic change.<a name="FNanchor_80" id="FNanchor_80"></a><a href="#Footnote_80" class="fnanchor">[80]</a> 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 <i>differences</i> in <i>salability</i><a name="FNanchor_81" id="FNanchor_81"></a><a href="#Footnote_81" class="fnanchor">[81]</a> 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.</p> + +<p>(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 <i>system</i> +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,<a name="FNanchor_82" id="FNanchor_82"></a><a href="#Footnote_82" class="fnanchor">[82]</a> 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,<a name="FNanchor_83" id="FNanchor_83"></a><a href="#Footnote_83" class="fnanchor">[83]</a> +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<span class='pagenum'><a name="Page_95" id="Page_95">[Pg 95]</a></span> +has simply no bearing at all on this vital point. The equilibrium +picture in which <i>all</i> 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 <i>toward all kinds of goods</i> is emphasized; +whereas in supply and demand analysis, the <i>good</i>—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.</p> + +<p>(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 <i>demand</i> 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<span class='pagenum'><a name="Page_96" id="Page_96">[Pg 96]</a></span> +give no account of the <i>demand</i> for labor in the munitions +factories, it follows that it can give no account of the <i>cost</i> +of labor in the other factories. Instead, indeed, of giving +us the modern cost doctrine, we see Schumpeter's scheme +reviving the old <i>real cost</i> doctrine, running in terms of +sacrifices in production.<a name="FNanchor_84" id="FNanchor_84"></a><a href="#Footnote_84" class="fnanchor">[84]</a></p> + +<p>(6) The foregoing paragraph gives emphasis to the point +with which we started, namely, that Schumpeter's theory +is not a <i>causal</i> 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 <i>causes</i> which guide and motivate industry. The <i>clue</i> to +all values is in the values of <i>consumption</i> goods, which are +in direct contact with the utilities which are the source of +value. From the values of consumption goods, we <i>derive</i> +the values of production goods, labor, etc., which are goods +of "second, third and fourth <i>ranks</i>" 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.<a name="FNanchor_85" id="FNanchor_85"></a><a href="#Footnote_85" class="fnanchor">[85]</a></p> + +<p>(7) Such an equilibrium picture leaves untouched the<span class='pagenum'><a name="Page_97" id="Page_97">[Pg 97]</a></span> +vital question which any theory must answer which means +to be of practical use in concrete situations: what are the +real <i>variables</i> in the situation, and what factors are constant? +What causes are <i>likely</i> 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 <i>constant</i> 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 <i>distribution of +wealth</i> 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,<a name="FNanchor_86" id="FNanchor_86"></a><a href="#Footnote_86" class="fnanchor">[86]</a> 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.</p> + +<p>(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<span class='pagenum'><a name="Page_98" id="Page_98">[Pg 98]</a></span> +of the same individual, and abstract market ratios. It +gives no <i>quantitative</i> value, which can be attributed to +goods as a quality,<a name="FNanchor_87" id="FNanchor_87"></a><a href="#Footnote_87" class="fnanchor">[87]</a> 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 <i>Kaufkraft</i> +and <i>Kapital</i>. <i>Kaufkraft</i>, 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.<a name="FNanchor_88" id="FNanchor_88"></a><a href="#Footnote_88" class="fnanchor">[88]</a> This <i>Kaufkraft</i> is needed to give the +causal "steam," the "motivating power," which the social +value concept connotes, but which ratios in the market +lack. Similarly, <i>Kapital</i> 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.<a name="FNanchor_89" id="FNanchor_89"></a><a href="#Footnote_89" class="fnanchor">[89]</a> Other functions of the quantitative value are +shouldered on a hard-worked and unusually defined concept, +<i>Kredit</i>, which leads Schumpeter into certain "heresies"<a name="FNanchor_90" id="FNanchor_90"></a><a href="#Footnote_90" class="fnanchor">[90]</a> +regarding credit, which are mostly harmless in themselves, +but which will arouse misunderstanding and opposition. +"<i>Præter necessitatem entia non multiplicanda sunt</i>," +and the social value concept, which covers by inclusion the<span class='pagenum'><a name="Page_99" id="Page_99">[Pg 99]</a></span> +notion of market ratio—market ratios being ratios between +social values—and which does all the work that Schumpeter +attributes to <i>Kapital</i> and <i>Kaufkraft</i>, and most of the new +work which he attributes to <i>Kredit</i>, is to be preferred,<a name="FNanchor_91" id="FNanchor_91"></a><a href="#Footnote_91" class="fnanchor">[91]</a> 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,<a name="FNanchor_92" id="FNanchor_92"></a><a href="#Footnote_92" class="fnanchor">[92]</a> unless used in domestic service, +has, not utility, but only value.</p> + +<p>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,<a name="FNanchor_93" id="FNanchor_93"></a><a href="#Footnote_93" class="fnanchor">[93]</a> and offers the quantity theory<span class='pagenum'><a name="Page_100" id="Page_100">[Pg 100]</a></span> +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 <i>Preis</i> of money<a name="FNanchor_94" id="FNanchor_94"></a><a href="#Footnote_94" class="fnanchor">[94]</a>—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.</p> + +<p>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 <i>Theorie des Geldes und der Umlaufsmittel</i> +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<span class='pagenum'><a name="Page_101" id="Page_101">[Pg 101]</a></span> +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 (<i>loc. cit.</i>), and to +Simmel (<i>Philosophie des Geldes</i>, 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 <i>yesterday</i>. 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 +<i>regressus</i>. 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.</p> + +<p>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 +<i>Social Value</i>, and therefore venture a quotation from that +book.<a name="FNanchor_95" id="FNanchor_95"></a><a href="#Footnote_95" class="fnanchor">[95]</a></p> + +<p>"How are we to get out of our circle:<a name="FNanchor_96" id="FNanchor_96"></a><a href="#Footnote_96" class="fnanchor">[96]</a> 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<span class='pagenum'><a name="Page_102" id="Page_102">[Pg 102]</a></span> +has 'utility,' and whose 'effective demand' is a <i>sine qua +non</i> of A's value? The most convenient point of departure +seems to be the simple situation which Wieser has assumed +in his <i>Natural Value.</i><a name="FNanchor_97" id="FNanchor_97"></a><a href="#Footnote_97" class="fnanchor">[97]</a> 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?</p> + +<p>"A <i>temporal regressus</i>, 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 car<span class='pagenum'><a name="Page_103" id="Page_103">[Pg 103]</a></span>ried +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.<a name="FNanchor_98" id="FNanchor_98"></a><a href="#Footnote_98" class="fnanchor">[98]</a></p> + +<p>"What is called for is, not a temporal <i>regressus</i>, 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 <i>logical analysis</i> 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<span class='pagenum'><a name="Page_104" id="Page_104">[Pg 104]</a></span> +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.</p> + +<p>"Our reason for choosing a logical analysis of existing +psychic forces instead of a temporal <i>regressus</i>—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 <i>regressus</i>. But, more fundamental +than this logical point, is this: the forces which have historically +<i>begot</i> a social situation are not, necessarily, the +forces which <i>sustain</i> 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 <i>as</i> 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 situa<span class='pagenum'><a name="Page_105" id="Page_105">[Pg 105]</a></span>tion, +therefore, are not necessarily the ones which historically +brought it into being."<a name="FNanchor_99" id="FNanchor_99"></a><a href="#Footnote_99" class="fnanchor">[99]</a></p> + +<p>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 <i>Social Value</i> (<i>Am. Econ. Rev.</i>, +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, <i>as</i> antecedently +existing, that give value to the new piece of +wealth. The antecedent values function only as <i>persisting</i>, +as <i>contemporary</i> 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 <i>were</i> 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 con<span class='pagenum'><a name="Page_106" id="Page_106">[Pg 106]</a></span>temporary +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.</p> + +<p>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, <i>marginal</i> 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<span class='pagenum'><a name="Page_107" id="Page_107">[Pg 107]</a></span> +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." (<i>Natural Value</i>, +p. 9.) A similar statement is in Taussig's <i>Principles</i> (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.</p> + +<p>It is true that <i>future</i> marginal utilities come into the +utility theory scheme, but they come in, not as future +utilities, but as "<i>present worths</i>" of future utilities, or as +"present anticipated feelings" in Jevons' phrase<a name="FNanchor_100" id="FNanchor_100"></a><a href="#Footnote_100" class="fnanchor">[100]</a> 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 <i>memory</i> is a <i>present</i> +psychological fact.</p> + +<p>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, <i>and the individual knows it</i>? 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<span class='pagenum'><a name="Page_108" id="Page_108">[Pg 108]</a></span> +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 <i>New +York Times</i>, 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<span class='pagenum'><a name="Page_109" id="Page_109">[Pg 109]</a></span> +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 <i>past</i> utilities that explain present subjective +values of money when these subjective values are +out of harmony with the present market facts, but rather +<i>present</i> 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.</p> + +<p>When writing the passage in <i>Social Value</i>, 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.</p> + +<p>Von Mises, like Wieser, needs an absolute value of money +in his thinking. He does not call the concept by that<span class='pagenum'><a name="Page_110" id="Page_110">[Pg 110]</a></span> +name, but, following Menger<a name="FNanchor_101" id="FNanchor_101"></a><a href="#Footnote_101" class="fnanchor">[101]</a> 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.<a name="FNanchor_102" id="FNanchor_102"></a><a href="#Footnote_102" class="fnanchor">[102]</a> 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.</p> + +<p>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 <i>existence</i> of the value of money, and +at most gives a law for <i>changes</i> 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.</p> + +<p>The writer who has most definitely stated the relation of +utility to the functions of money, is David Kinley (<i>Money</i>, +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<span class='pagenum'><a name="Page_111" id="Page_111">[Pg 111]</a></span> +them, increases the utility of those goods. Money, as +money, thus produces utility.<a name="FNanchor_103" id="FNanchor_103"></a><a href="#Footnote_103" class="fnanchor">[103]</a> 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."</p> + +<p>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 <i>Social +Value</i>. 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."</p> + +<p>I conclude that the marginal utility theory has not +solved the problem of the value of money. The reason,<span class='pagenum'><a name="Page_112" id="Page_112">[Pg 112]</a></span> +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 <i>cause</i> 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 +<span class='pagenum'><a name="Page_113" id="Page_113">[Pg 113]</a></span>controlling the market. With sellers, it is <i>generally</i> 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<a name="FNanchor_104" id="FNanchor_104"></a><a href="#Footnote_104" class="fnanchor">[104]</a> 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.</p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_121" id="Page_121">[Pg 121]</a></span></p> +<h2><a name="PartII" id="PartII"></a>PART II. THE QUANTITY THEORY</h2> +<p><span class='pagenum'><a name="Page_122" id="Page_122">[Pg 122]</a></span></p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_123" id="Page_123">[Pg 123]</a></span></p> +<h3>CHAPTER VI</h3> + +<h3>THE QUANTITY THEORY OF PRICES. INTRODUCTION</h3> + + +<p>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<a name="FNanchor_105" id="FNanchor_105"></a><a href="#Footnote_105" class="fnanchor">[105]</a> 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 mul<span class='pagenum'><a name="Page_124" id="Page_124">[Pg 124]</a></span>tiplied +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 <i>number</i> 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 +<i>actual quantity</i>. 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, <i>Purchasing Power of Money</i>, +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 +<i>numbers</i> of goods and dollars that are to be exchanged for +one another, and not by the <i>values</i> of the goods and dollars;<span class='pagenum'><a name="Page_125" id="Page_125">[Pg 125]</a></span>—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.</p> + +<p>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 <i>exchanged</i> 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 <i>activities of men</i>; 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 <i>what</i> the money-unit is made of is irrelevant. On the<span class='pagenum'><a name="Page_126" id="Page_126">[Pg 126]</a></span> +contrary, I shall maintain that the <i>quality</i> 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.<span class='pagenum'><a name="Page_127" id="Page_127">[Pg 127]</a></span></p> + +<p>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 +<i>foci</i> 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 <i>fluctuating</i> +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 <i>foci</i> 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 <i>general</i> 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<span class='pagenum'><a name="Page_128" id="Page_128">[Pg 128]</a></span> +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.</p> + +<p>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<a name="FNanchor_106" id="FNanchor_106"></a><a href="#Footnote_106" class="fnanchor">[106]</a> and Irving Fisher,<a name="FNanchor_107" id="FNanchor_107"></a><a href="#Footnote_107" class="fnanchor">[107]</a> that<span class='pagenum'><a name="Page_129" id="Page_129">[Pg 129]</a></span> +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 <i>value</i> of money, they <i>are</i> 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<a name="FNanchor_108" id="FNanchor_108"></a><a href="#Footnote_108" class="fnanchor">[108]</a> value, and not—what the quantity theorists +commonly mean—its "purchasing power," or the "reciprocal +of the price-level."</p> + +<p>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.</p> + +<p>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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_130" id="Page_130">[Pg 130]</a></span></p> +<h3>CHAPTER VII</h3> + +<h3>DODO-BONES</h3> + + +<p>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>i. e.</i>, 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<span class='pagenum'><a name="Page_131" id="Page_131">[Pg 131]</a></span> +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, <i>who wants the dodo-bones</i>. +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."<a name="FNanchor_109" id="FNanchor_109"></a><a href="#Footnote_109" class="fnanchor">[109]</a></p> + +<p>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.</p> + +<p>"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<span class='pagenum'><a name="Page_132" id="Page_132">[Pg 132]</a></span> +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."<a name="FNanchor_110" id="FNanchor_110"></a><a href="#Footnote_110" class="fnanchor">[110]</a></p> + +<p>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 <i>agreement</i> among the traders, <i>assigning</i> +a significance<a name="FNanchor_111" id="FNanchor_111"></a><a href="#Footnote_111" class="fnanchor">[111]</a> 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.<a name="FNanchor_112" id="FNanchor_112"></a><a href="#Footnote_112" class="fnanchor">[112]</a> +I do not deny that if the traders used the dodo-bones as<span class='pagenum'><a name="Page_133" id="Page_133">[Pg 133]</a></span> +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<a name="FNanchor_113" id="FNanchor_113"></a><a href="#Footnote_113" class="fnanchor">[113]</a> 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 <i>homogeneous</i> +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 <i>value</i>.<a name="FNanchor_114" id="FNanchor_114"></a><a href="#Footnote_114" class="fnanchor">[114]</a> 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 <i>quid pro quo</i>, +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 incon<span class='pagenum'><a name="Page_134" id="Page_134">[Pg 134]</a></span>vertible +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, <i>per se</i>—they cannot, +then, measure values; they are neither valuable nor titles +to valuable things—they are not <i>quid pro quo</i> in exchange, +and will not circulate.</p> + +<p>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.<a name="FNanchor_115" id="FNanchor_115"></a><a href="#Footnote_115" class="fnanchor">[115]</a></p> + +<p>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 <i>suppose</i> that B will<span class='pagenum'><a name="Page_135" id="Page_135">[Pg 135]</a></span> +take them? What could bring about such a system of +social relations that a general expectation of this sort +could arise?</p> + +<p>Kemmerer undertakes to give an answer in a hypothetical +case by the following ingenious assumption (<i>Money and +Credit Instruments</i>, 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.</p> + +<p>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,"<a name="FNanchor_116" id="FNanchor_116"></a><a href="#Footnote_116" class="fnanchor">[116]</a> 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.<a name="FNanchor_117" id="FNanchor_117"></a><a href="#Footnote_117" class="fnanchor">[117]</a> 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?</p> + +<p>This brings us to a question I have raised before, namely,<span class='pagenum'><a name="Page_136" id="Page_136">[Pg 136]</a></span> +whether the genetic, or historical account of a social situation, +and the cross-section analysis of the same situation, +necessarily agree.<a name="FNanchor_118" id="FNanchor_118"></a><a href="#Footnote_118" class="fnanchor">[118]</a> 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 <i>Banque de France</i>. All these possibilities I +admit. Value is not physical, but psychological. And +the form of value with which we are here concerned, economic +value <i>par excellence</i>, 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<span class='pagenum'><a name="Page_137" id="Page_137">[Pg 137]</a></span> +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<a name="FNanchor_119" id="FNanchor_119"></a><a href="#Footnote_119" class="fnanchor">[119]</a> 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 <i>Social +Value</i>, 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 <i>teleogical</i>. 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, regard<span class='pagenum'><a name="Page_138" id="Page_138">[Pg 138]</a></span>less +of consequences. Thus Fichte declares, "I would not +tell a lie to save the universe from destruction." Older +still is the dictum, "<i>Fiat justitia, ruat coelum.</i>" 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 <i>raison +d'être</i> 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 <i>raison<span class='pagenum'><a name="Page_139" id="Page_139">[Pg 139]</a></span> +d'être</i> 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.</p> + +<p>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 <i>a priori</i> 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.<a name="FNanchor_120" id="FNanchor_120"></a><a href="#Footnote_120" class="fnanchor">[120]</a> In so far as you have<span class='pagenum'><a name="Page_140" id="Page_140">[Pg 140]</a></span> +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 +<span class='pagenum'><a name="Page_141" id="Page_141">[Pg 141]</a></span>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<a name="FNanchor_121" id="FNanchor_121"></a><a href="#Footnote_121" class="fnanchor">[121]</a> and Laughlin<a name="FNanchor_122" id="FNanchor_122"></a><a href="#Footnote_122" class="fnanchor">[122]</a> 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<span class='pagenum'><a name="Page_142" id="Page_142">[Pg 142]</a></span> +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.<a name="FNanchor_123" id="FNanchor_123"></a><a href="#Footnote_123" class="fnanchor">[123]</a> +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 +<i>fiat</i> 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.</p> + +<p>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.</p> + +<p>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 <i>causes</i> for the circulation of money. But the +same causes which make money circulate will also be factors +in the determination of the <i>terms</i> on which it circulates, +<i>i. e.</i>, the prices. To seek then, by a new principle, the +quantity theory, to explain these prices without reference<span class='pagenum'><a name="Page_143" id="Page_143">[Pg 143]</a></span> +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, <i>by definition</i>, +you have it circulating! A rather striking case of this, +which is either tautology or circular reasoning, appears in +Fisher's <i>Purchasing Power of Money</i> (p. 129): "Take the +case, for instance, of paper money. So long as it has the +<i>distinctive characteristic of money,—general acceptability at +its legal value</i>,—and is limited in quantity, its value will +ordinarily be equal to that of its legal equivalent in gold." +(Italics mine.)</p> + +<p>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 <i>reason</i> 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 <i>proportions</i> 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 +(<i>loc. cit.</i>, 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<span class='pagenum'><a name="Page_144" id="Page_144">[Pg 144]</a></span> +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 <i>psychological</i> 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?<a name="FNanchor_124" id="FNanchor_124"></a><a href="#Footnote_124" class="fnanchor">[124]</a> 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.</p> + +<p>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.<span class='pagenum'><a name="Page_145" id="Page_145">[Pg 145]</a></span> +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>i. e.</i>, 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) "<i>Report</i>." 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<span class='pagenum'><a name="Page_146" id="Page_146">[Pg 146]</a></span> +use," "backwardation," (London) or "<i>Deport</i>" (Germany).<a name="FNanchor_125" id="FNanchor_125"></a><a href="#Footnote_125" class="fnanchor">[125]</a> +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.<a name="FNanchor_126" id="FNanchor_126"></a><a href="#Footnote_126" class="fnanchor">[126]</a> 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 <i>value</i> 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<span class='pagenum'><a name="Page_147" id="Page_147">[Pg 147]</a></span> +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 (<i>Zahlungs</i>- or <i>Solutions-mittel</i>), as distinguished +from medium of exchange (<i>Tauschmittel</i>), 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>i. e.</i>, 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<span class='pagenum'><a name="Page_148" id="Page_148">[Pg 148]</a></span> +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.<a name="FNanchor_127" id="FNanchor_127"></a><a href="#Footnote_127" class="fnanchor">[127]</a></p> + +<p>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<span class='pagenum'><a name="Page_149" id="Page_149">[Pg 149]</a></span> +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.</p> + +<p>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.</p> + +<p>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, <i>xy</i> = <i>c</i>. 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<span class='pagenum'><a name="Page_150" id="Page_150">[Pg 150]</a></span> +the absolute value of money, and not in terms of the level +of prices.</p> + +<p>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 <i>marc banko</i> of the Hamburg Girobank. +(<i>Cf.</i> Knapp, <i>Staatliche Theorie des Geldes</i>, p. 136.) +The legal tender peculiarity may, however, in special circumstances +be a source of a very considerable temporary +agio.</p> + +<p>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<span class='pagenum'><a name="Page_151" id="Page_151">[Pg 151]</a></span> +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.<a name="FNanchor_128" id="FNanchor_128"></a><a href="#Footnote_128" class="fnanchor">[128]</a> 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.</p> + +<p>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.<span class='pagenum'><a name="Page_152" id="Page_152">[Pg 152]</a></span> +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<a name="FNanchor_129" id="FNanchor_129"></a><a href="#Footnote_129" class="fnanchor">[129]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_153" id="Page_153">[Pg 153]</a></span> +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.</p> + +<hr style='width: 45%;' /> + +<p>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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_154" id="Page_154">[Pg 154]</a></span></p> +<h3>CHAPTER VIII</h3> + +<h3>THE "EQUATION OF EXCHANGE"</h3> + + +<p>In Professor Irving Fisher's <i>Purchasing Power of Money</i><a name="FNanchor_130" id="FNanchor_130"></a><a href="#Footnote_130" class="fnanchor">[130]</a> +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,<a name="FNanchor_131" id="FNanchor_131"></a><a href="#Footnote_131" class="fnanchor">[131]</a> while Professor A. C. +Whitaker declares that he adopts "without qualification +the whole body of general monetary theory" for which +Professor Fisher stands.<a name="FNanchor_132" id="FNanchor_132"></a><a href="#Footnote_132" class="fnanchor">[132]</a> 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.<a name="FNanchor_133" id="FNanchor_133"></a><a href="#Footnote_133" class="fnanchor">[133]</a> The <i>American +Economic Review</i> presents as an annual feature Professor +Fisher's "Equation of Exchange."<span class='pagenum'><a name="Page_155" id="Page_155">[Pg 155]</a></span></p> + +<p>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 <i>The Purchasing Power of Money</i>. 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.</p> + +<p>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.<a name="FNanchor_134" id="FNanchor_134"></a><a href="#Footnote_134" class="fnanchor">[134]</a> 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 <i>quality</i> 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.</p> + +<p>Second, Professor Fisher has no absolute value in his +scheme. By the value of money he means merely its pur<span class='pagenum'><a name="Page_156" id="Page_156">[Pg 156]</a></span>chasing +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." (<i>Loc. +cit.</i>, 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 +<i>Money and Credit Instruments</i>, 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,<a name="FNanchor_135" id="FNanchor_135"></a><a href="#Footnote_135" class="fnanchor">[135]</a> the particular +prices of which it is an average. I mention this remarkable +doctrine here, reserving its discussion for a later +chapter.<a name="FNanchor_136" id="FNanchor_136"></a><a href="#Footnote_136" class="fnanchor">[136]</a></p> + +<p>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, +<span class='pagenum'><a name="Page_157" id="Page_157">[Pg 157]</a></span>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.<a name="FNanchor_137" id="FNanchor_137"></a><a href="#Footnote_137" class="fnanchor">[137]</a> 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 +<i>for a certain period in a given community</i>."<a name="FNanchor_138" id="FNanchor_138"></a><a href="#Footnote_138" class="fnanchor">[138]</a> 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 +<span class='pagenum'><a name="Page_158" id="Page_158">[Pg 158]</a></span> +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."</p> + +<p>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:</p> + +<div class="blockquot"><p> +MV = pQ + p´Q´ + p´´Q´´ + etc.<a name="FNanchor_139" id="FNanchor_139"></a><a href="#Footnote_139" class="fnanchor">[139]</a><br /> +</p></div> + +<p>"The right-hand side of this equation is the sum of terms of +the form pQ—a price multiplied by the quantity bought."<a name="FNanchor_140" id="FNanchor_140"></a><a href="#Footnote_140" class="fnanchor">[140]</a> +The equation may then be written,</p> + +<p>MV = Σ pQ (Sigma being the symbol of summation). +The equation is further simplified<a name="FNanchor_141" id="FNanchor_141"></a><a href="#Footnote_141" class="fnanchor">[141]</a> by rewriting the right-hand +side as PT, where P is the weighted <i>average</i> of all the +p's, and T is the <i>sum</i> 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."</p> + +<p>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 <i>homogeneous</i> 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 <i>valuable</i>, 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<span class='pagenum'><a name="Page_159" id="Page_159">[Pg 159]</a></span> +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 <i>must</i> mean, if his +equation is to be intelligible. That question is regarding +the meaning of T.</p> + +<p>T, in Professor Fisher's equation, is defined as the sum +of all the Q's. But how does one sum up <i>pounds</i> of <i>sugar</i>, +<i>loaves</i> of <i>bread</i>, <i>tons</i> of <i>coal</i>, <i>yards</i> of <i>cloth</i>, 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-<span class='pagenum'><a name="Page_160" id="Page_160">[Pg 160]</a></span>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 <i>general</i> answer to the +question of the method of summing up T, if it is to be employed +in his equation when the question of <i>causation</i>, as +distinguished from <i>mensuration</i>, 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.</p> + +<p>What, then, is T? Perhaps another question will aid +us in answering this. What does it mean to <i>multiply</i> 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 <i>square</i> feet, and square feet by +feet to get cubic feet. But in general, the multiplication<span class='pagenum'><a name="Page_161" id="Page_161">[Pg 161]</a></span> +of <i>concrete</i> quantities by <i>concrete</i> quantities is meaningless.<a name="FNanchor_142" id="FNanchor_142"></a><a href="#Footnote_142" class="fnanchor">[142]</a> +One of the generalizations of elementary arithmetic is that +concrete quantities may usually be multiplied, not by other +concrete quantities, but rather by <i>abstract</i> 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,<a name="FNanchor_143" id="FNanchor_143"></a><a href="#Footnote_143" class="fnanchor">[143]</a> 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.</p> + +<p>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 <i>sum of money</i>. These sums are equal. They are equal +because they are <i>identical</i>. The equation asserts merely +that what is <i>paid</i> is equal to what is <i>received</i>. 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<span class='pagenum'><a name="Page_162" id="Page_162">[Pg 162]</a></span> +this is not Professor Fisher's interpretation of his equation. +But it seems the only interpretation which is defensible.</p> + +<p>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 ΣpQ, 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 ΣpQ as PT. One +might restate ΣpQ as PT, defining P as the <i>sum</i> (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. ΣpQ might be factorized in an +indefinite number of ways. But it is important to note +that in PT, as defined by Professor Fisher,<a name="FNanchor_144" id="FNanchor_144"></a><a href="#Footnote_144" class="fnanchor">[144]</a> 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<span class='pagenum'><a name="Page_163" id="Page_163">[Pg 163]</a></span> +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 <i>causal</i> 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<a name="FNanchor_145" id="FNanchor_145"></a><a href="#Footnote_145" class="fnanchor">[145]</a>—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 +<i>causal</i> 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<span class='pagenum'><a name="Page_164" id="Page_164">[Pg 164]</a></span> +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 <i>dollars</i>.<a name="FNanchor_146" id="FNanchor_146"></a><a href="#Footnote_146" class="fnanchor">[146]</a> 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.<a name="FNanchor_147" id="FNanchor_147"></a><a href="#Footnote_147" class="fnanchor">[147]</a> 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 <i>Purchasing Power of Money</i> in the <i>Bulletin of the +American Mathematical Society</i>, 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<span class='pagenum'><a name="Page_165" id="Page_165">[Pg 165]</a></span> +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 +<i>weighted</i> 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<small><sup>5</sup>/<sub>14</sub></small> 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>i. e.</i>, 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.</p> + +<p>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<small><sup>5</sup>/<sub>14</sub></small> cents. The T in the +new equation is 13. The product of P and T is $1.34<small><sup>9</sup>/<sub>14</sub></small>. +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 <i>causal</i><span class='pagenum'><a name="Page_166" id="Page_166">[Pg 166]</a></span> +theory, this is delightful. P is the <i>problem</i>. But you are +not allowed to <i>define</i> the problem until you know what the +<i>explanation</i> is! Then you define the problem as that which +the explanation will explain!</p> + +<p>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.<a name="FNanchor_148" id="FNanchor_148"></a><a href="#Footnote_148" class="fnanchor">[148]</a></p> + +<p>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.</p> + +<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."</p> + +<p>The formula which includes credit is as follows:</p> + +<div class="blockquot"><p> +MV + M´V´ = PT<br /> +</p></div> + +<p>Here, MV and PT have the same significance as before. +M´ is the average amount of bank-deposits in the given<span class='pagenum'><a name="Page_167" id="Page_167">[Pg 167]</a></span> +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 <i>generally</i> 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,<a name="FNanchor_149" id="FNanchor_149"></a><a href="#Footnote_149" class="fnanchor">[149]</a> 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, <i>e. g.</i>, 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<a name="FNanchor_150" id="FNanchor_150"></a><a href="#Footnote_150" class="fnanchor">[150]</a> 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.<a name="FNanchor_151" id="FNanchor_151"></a><a href="#Footnote_151" class="fnanchor">[151]</a> +<span class='pagenum'><a name="Page_168" id="Page_168">[Pg 168]</a></span> +Book-credits, unlike deposits, have no <i>direct</i> effect on prices +(<i>Ibid.</i>, 82, n.; 370), but only an indirect effect, by increasing +the velocity of money. (<i>Ibid.</i>, 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. (<i>Ibid.</i>, p. 371.) +The difference on this point is a difference in degree merely.<a name="FNanchor_152" id="FNanchor_152"></a><a href="#Footnote_152" class="fnanchor">[152]</a> +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 <i>direct</i> effect on prices, and<span class='pagenum'><a name="Page_169" id="Page_169">[Pg 169]</a></span> +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.<a name="FNanchor_153" id="FNanchor_153"></a><a href="#Footnote_153" class="fnanchor">[153]</a> 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</p> + +<div class="blockquot"><p> +MV = PT<br /> +</p></div> + +<p>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?<a name="FNanchor_154" id="FNanchor_154"></a><a href="#Footnote_154" class="fnanchor">[154]</a> Is there any reason for supposing that<span class='pagenum'><a name="Page_170" id="Page_170">[Pg 170]</a></span> +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:</p> + +<div class="blockquot"><p> +MV + M´V´ + BV´´ + EV´´´ + OV´´´´ = PT,<br /> +</p></div> + +<p>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.</p> + +<p>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.</p> + +<p>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 +<span class='pagenum'><a name="Page_171" id="Page_171">[Pg 171]</a></span>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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_172" id="Page_172">[Pg 172]</a></span></p> +<h3>CHAPTER IX</h3> + +<h3>THE VOLUME OF MONEY AND THE VOLUME OF +CREDIT</h3> + + +<p>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<a name="FNanchor_155" id="FNanchor_155"></a><a href="#Footnote_155" class="fnanchor">[155]</a> 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,<a name="FNanchor_156" id="FNanchor_156"></a><a href="#Footnote_156" class="fnanchor">[156]</a> 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 <i>that +the book falls with this proposition</i>, 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<span class='pagenum'><a name="Page_173" id="Page_173">[Pg 173]</a></span> +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.<a name="FNanchor_157" id="FNanchor_157"></a><a href="#Footnote_157" class="fnanchor">[157]</a></p> + +<p>If these be granted, what follows: the money in bank-<i>reserves</i> +is no part of M! M is the money in circulation, +being exchanged against goods, not the money lying in +bank-vaults!<a name="FNanchor_158" id="FNanchor_158"></a><a href="#Footnote_158" class="fnanchor">[158]</a> 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."<a name="FNanchor_159" id="FNanchor_159"></a><a href="#Footnote_159" class="fnanchor">[159]</a> 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,<span class='pagenum'><a name="Page_174" id="Page_174">[Pg 174]</a></span> +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<a name="FNanchor_160" id="FNanchor_160"></a><a href="#Footnote_160" class="fnanchor">[160]</a>—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<a name="FNanchor_161" id="FNanchor_161"></a><a href="#Footnote_161" class="fnanchor">[161]</a> 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 <i>time</i> they buy!) Money for payrolls +is one of the serious problems in times of financial panics.<a name="FNanchor_162" id="FNanchor_162"></a><a href="#Footnote_162" class="fnanchor">[162]</a> +To fix the proportion between money in the hands of bank +depositors and non-depositors is not necessary for my purposes—<i>a +priori</i> 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 <i>whole</i> +of M tends to keep a definite ratio to M´? Fisher's argument +is a clear <i>non-sequitur</i>. If it proves anything, it<span class='pagenum'><a name="Page_175" id="Page_175">[Pg 175]</a></span> +proves that a sum of money,<a name="FNanchor_163" id="FNanchor_163"></a><a href="#Footnote_163" class="fnanchor">[163]</a> 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 <i>l'embarras des +richesses</i> 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<a name="FNanchor_164" id="FNanchor_164"></a><a href="#Footnote_164" class="fnanchor">[164]</a> (independent, at least, so far as<span class='pagenum'><a name="Page_176" id="Page_176">[Pg 176]</a></span> +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.</p> + +<p>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, <i>requiring as it normally does a proportional +change in M´</i>, the volume of deposits subject to check." +(<i>Ibid.</i>, 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 magni<span class='pagenum'><a name="Page_177" id="Page_177">[Pg 177]</a></span>tudes +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<a name="FNanchor_165" id="FNanchor_165"></a><a href="#Footnote_165" class="fnanchor">[165]</a>—<i>because +of</i> 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.</p> + +<p>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.<a name="FNanchor_166" id="FNanchor_166"></a><a href="#Footnote_166" class="fnanchor">[166]</a> It would be necessary to go +further and prove that large and small payments bear a<span class='pagenum'><a name="Page_178" id="Page_178">[Pg 178]</a></span> +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.</p> + +<p>While general averages could not <i>prove</i> the contention of +a constant ratio between reserves and deposits for individual +banks, general averages can <i>disprove</i> 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 +<i>inconstant</i>, 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).</p> + +<p>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<span class='pagenum'><a name="Page_179" id="Page_179">[Pg 179]</a></span> +money in banks."<a name="FNanchor_167" id="FNanchor_167"></a><a href="#Footnote_167" class="fnanchor">[167]</a> 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.<a name="FNanchor_168" id="FNanchor_168"></a><a href="#Footnote_168" class="fnanchor">[168]</a> +The extreme variations<a name="FNanchor_169" id="FNanchor_169"></a><a href="#Footnote_169" class="fnanchor">[169]</a> 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%.<a name="FNanchor_170" id="FNanchor_170"></a><a href="#Footnote_170" class="fnanchor">[170]</a> The yearly fluctuation +in all these ratios is very great.</p> + +<p>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.<a name="FNanchor_171" id="FNanchor_171"></a><a href="#Footnote_171" class="fnanchor">[171]</a> +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.<a name="FNanchor_172" id="FNanchor_172"></a><a href="#Footnote_172" class="fnanchor">[172]</a> We shall later show that there can be no static laws +whatever governing the relations of credit and reserves.<a name="FNanchor_173" id="FNanchor_173"></a><a href="#Footnote_173" class="fnanchor">[173]</a></p> + +<p>For European banks, the case is equally clear. European<span class='pagenum'><a name="Page_180" id="Page_180">[Pg 180]</a></span> +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.<a name="FNanchor_174" id="FNanchor_174"></a><a href="#Footnote_174" class="fnanchor">[174]</a> 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%.<a name="FNanchor_175" id="FNanchor_175"></a><a href="#Footnote_175" class="fnanchor">[175]</a> J. M. Keynes<a name="FNanchor_176" id="FNanchor_176"></a><a href="#Footnote_176" class="fnanchor">[176]</a> 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 <i>automatic consequence</i>, +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 <i>that amount of gold as +sufficient</i> which, <i>if they are chiefly passive, the tides of gold +bring them</i>. [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 re<span class='pagenum'><a name="Page_181" id="Page_181">[Pg 181]</a></span>serves. +Countries have got on in the past with much less, +and under force of circumstances could do so again."</p> + +<p>It will be noticed that Keynes, in the passage cited, is +speaking of <i>gold</i> 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 <i>liabilities</i>, +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.<a name="FNanchor_177" id="FNanchor_177"></a><a href="#Footnote_177" class="fnanchor">[177]</a></p> + +<p>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>i. e.</i>, +when the exchange is "in favor" of Austria-Hungary, the<span class='pagenum'><a name="Page_182" id="Page_182">[Pg 182]</a></span> +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.<a name="FNanchor_178" id="FNanchor_178"></a><a href="#Footnote_178" class="fnanchor">[178]</a> A similar practice has been +employed by the Reichsbank, by the National Bank of +Belgium,<a name="FNanchor_179" id="FNanchor_179"></a><a href="#Footnote_179" class="fnanchor">[179]</a> by virtually all the debtor countries of Europe, +and the great trading countries of Asia.</p> + +<p>Confidence in these conclusions is much increased by a +study of the views of Professor Taussig.<a name="FNanchor_180" id="FNanchor_180"></a><a href="#Footnote_180" class="fnanchor">[180]</a> 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 <i>limitation</i> on elastic +credit instruments in the quantity of <i>specie</i>. (This is very<span class='pagenum'><a name="Page_183" id="Page_183">[Pg 183]</a></span> +different from the assertion that there is a <i>fixed</i> ratio between +<i>deposits</i> and <i>money</i> in circulation, including paper, +bank-notes, etc., in money. The present writer has no +quarrel with the doctrine that the gold supply of the <i>world</i> +imposes <i>outside</i> limitations on the <i>possible</i> 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.<a name="FNanchor_181" id="FNanchor_181"></a><a href="#Footnote_181" class="fnanchor">[181]</a> I shall there maintain that the +quantity theory, which explains gold movements on the +basis of price-<i>levels</i> 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) <i>Direct necessity</i> constrains the bankers to keep <i>some</i> +cash on hand.<a name="FNanchor_182" id="FNanchor_182"></a><a href="#Footnote_182" class="fnanchor">[182]</a> This fixes a <i>minimum limit</i> (Taussig's +contention), but does not at all suggest a "normal ratio" +(Fisher's contention). (b) <i>Binding custom</i>, 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<span class='pagenum'><a name="Page_184" id="Page_184">[Pg 184]</a></span> +fixed, ratios are suggested. Limitations on the <i>expansion</i> +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 <i>supra</i> 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) <i>Direct regulation by law</i>, peculiar +to the United States. Here again, a minimum, +rather than a fixed ratio, is indicated. Some <i>limitation</i> on +credit expansion by the banks is caused by this at times, +but Fisher's argument would require vastly more. (d) +<i>The interaction in the use of deposits, notes, and other constituents +in the circulating medium.</i> 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 <i>are</i> 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.<span class='pagenum'><a name="Page_185" id="Page_185">[Pg 185]</a></span></p> + +<p>Finally, Professor Taussig recognizes a coefficient with +the quantity of specie in the <i>temper of the business community</i>. +Whether or not deposits are to expand, depends +not only on reserves, but also on the attitude of borrowers.</p> + +<p>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, <i>and still less +direct relation to the amount of money afloat in the community +at large</i>. 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.)</p> + +<p>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 <i>dynamic</i> 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.</p> + +<p>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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_186" id="Page_186">[Pg 186]</a></span></p> +<h3>CHAPTER X</h3> + +<h3>"NORMAL" VS. "TRANSITIONAL" TENDENCIES</h3> + + +<p>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<a name="FNanchor_183" id="FNanchor_183"></a><a href="#Footnote_183" class="fnanchor">[183]</a> 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´.</p> + +<p>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<span class='pagenum'><a name="Page_187" id="Page_187">[Pg 187]</a></span> +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,<a name="FNanchor_184" id="FNanchor_184"></a><a href="#Footnote_184" class="fnanchor">[184]</a> 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<span class='pagenum'><a name="Page_188" id="Page_188">[Pg 188]</a></span> +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.<a name="FNanchor_185" id="FNanchor_185"></a><a href="#Footnote_185" class="fnanchor">[185]</a> 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.<a name="FNanchor_186" id="FNanchor_186"></a><a href="#Footnote_186" class="fnanchor">[186]</a> 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<span class='pagenum'><a name="Page_189" id="Page_189">[Pg 189]</a></span> +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 <i>would have</i> +obtained had only the "normal" causes been in operation.<a name="FNanchor_187" id="FNanchor_187"></a><a href="#Footnote_187" class="fnanchor">[187]</a></p> + +<p>The distinction between "normal" and "transition" +<i>periods</i> 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 +<i>think in vacuo</i>! All that he has a right to do is to assume +the factors which he does not wish to study <i>constant</i>. 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 <i>because</i> of prior or concomitant<span class='pagenum'><a name="Page_190" id="Page_190">[Pg 190]</a></span> +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?</p> + +<p>The notion, too, that causation can be seen in a state of +stable equilibrium should be critically analyzed. Causation +is only <i>revealed</i> by a <i>course of events</i>, 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 <i>change</i> 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<span class='pagenum'><a name="Page_191" id="Page_191">[Pg 191]</a></span> +normal equilibrium which is stable. I shall later show +cases of this sort.<a name="FNanchor_188" id="FNanchor_188"></a><a href="#Footnote_188" class="fnanchor">[188]</a></p> + +<p>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 <i>would have been realized</i> 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 <i>importance</i> of his tendency, as +compared with other tendencies. But we have the other +tendencies merely mentioned in qualitative terms, and we<span class='pagenum'><a name="Page_192" id="Page_192">[Pg 192]</a></span> +never find any definite statement, of mathematical character, +as to how important they are.</p> + +<p>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, +<i>except to a</i> <small>LIMITED</small> <i>extent during transition periods, +or during a passing season</i>, (<i>e. g.</i>, <i>the fall</i>) (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."<a name="FNanchor_189" id="FNanchor_189"></a><a href="#Footnote_189" class="fnanchor">[189]</a> 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 <i>are subject to</i> +<small>SLIGHT</small> <i>modification during transition periods</i>." (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.</p> + +<p>The question as to how long a <i>time</i> 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.<a name="FNanchor_190" id="FNanchor_190"></a><a href="#Footnote_190" class="fnanchor">[190]</a> 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<span class='pagenum'><a name="Page_193" id="Page_193">[Pg 193]</a></span> +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."<a name="FNanchor_191" id="FNanchor_191"></a><a href="#Footnote_191" class="fnanchor">[191]</a> 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,"<a name="FNanchor_192" id="FNanchor_192"></a><a href="#Footnote_192" class="fnanchor">[192]</a> 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<span class='pagenum'><a name="Page_194" id="Page_194">[Pg 194]</a></span> +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 <i>monthly</i> adjustments in anticipation +of it.<a name="FNanchor_193" id="FNanchor_193"></a><a href="#Footnote_193" class="fnanchor">[193]</a> 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.<span class='pagenum'><a name="Page_195" id="Page_195">[Pg 195]</a></span></p> + +<p>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 <i>qualitative</i> 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,<a name="FNanchor_194" id="FNanchor_194"></a><a href="#Footnote_194" class="fnanchor">[194]</a> 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.</p> + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_196" id="Page_196">[Pg 196]</a></span></p> +<h3>CHAPTER XI</h3> + +<h3>BARTER</h3> + + +<p>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?</p> + +<p>Fisher maintains the thesis—the failure of which he +admits would spoil the quantity theory<a name="FNanchor_195" id="FNanchor_195"></a><a href="#Footnote_195" class="fnanchor">[195]</a>—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."<a name="FNanchor_196" id="FNanchor_196"></a><a href="#Footnote_196" class="fnanchor">[196]</a></p> + +<p><span class='pagenum'><a name="Page_197" id="Page_197">[Pg 197]</a></span>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.</p> + +<p>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 <i>Telegram</i> 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,<a name="FNanchor_197" id="FNanchor_197"></a><a href="#Footnote_197" class="fnanchor">[197]</a> 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<span class='pagenum'><a name="Page_198" id="Page_198">[Pg 198]</a></span> +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. +<i>Real estate</i> 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.<a name="FNanchor_198" id="FNanchor_198"></a><a href="#Footnote_198" class="fnanchor">[198]</a></p> + +<p>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.<a name="FNanchor_199" id="FNanchor_199"></a><a href="#Footnote_199" class="fnanchor">[199]</a> The great +advantage of the lease is that, when the money market is +tight, it involves no <i>financial plan</i>, no underwriting, no +outlay of "cash." This is, therefore, an equivalent of<span class='pagenum'><a name="Page_199" id="Page_199">[Pg 199]</a></span> +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 <i>monopoly</i> has been in great degree checked, presents +a great deal of this sort of barter, or equivalents of barter.<a name="FNanchor_200" id="FNanchor_200"></a><a href="#Footnote_200" class="fnanchor">[200]</a> +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.</p> + +<p>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<span class='pagenum'><a name="Page_200" id="Page_200">[Pg 200]</a></span> +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 <i>Crises Under the National Banking System</i>: +"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 <i>clearing-house exchanges +of the banks</i> 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.)</p> + +<p>The same arrangements have been widely introduced +in other stock exchanges, and in the produce exchanges.<a name="FNanchor_201" id="FNanchor_201"></a><a href="#Footnote_201" class="fnanchor">[201]</a></p> + +<p><span class='pagenum'><a name="Page_201" id="Page_201">[Pg 201]</a></span>In general, with reference to barter, this point is significant. +The money economy has made barter <i>easier</i> 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<a name="FNanchor_202" id="FNanchor_202"></a><a href="#Footnote_202" class="fnanchor">[202]</a>—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 <i>standard of value</i> (<i>common measure of value</i>) +function of money.<a name="FNanchor_203" id="FNanchor_203"></a><a href="#Footnote_203" class="fnanchor">[203]</a> This standard of value function, be +it noted, makes no call on money itself, necessarily. The +<i>medium of exchange</i> and "<i>bearer of options</i>" 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.<a name="FNanchor_204" id="FNanchor_204"></a><a href="#Footnote_204" class="fnanchor">[204]</a></p> + +<p><span class='pagenum'><a name="Page_202" id="Page_202">[Pg 202]</a></span></p> + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_203" id="Page_203">[Pg 203]</a></span></p> +<h3>CHAPTER XII</h3> + +<h3>VELOCITY OF CIRCULATION</h3> + + +<p>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.<a name="FNanchor_205" id="FNanchor_205"></a><a href="#Footnote_205" class="fnanchor">[205]</a></p> + +<p>V is defined,<a name="FNanchor_206" id="FNanchor_206"></a><a href="#Footnote_206" class="fnanchor">[206]</a> 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 <i>each man's</i> 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<span class='pagenum'><a name="Page_204" id="Page_204">[Pg 204]</a></span> +them here: if money is <i>short-circuited</i>, if, <i>i. e.</i>, 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 <i>middlemen</i>.<a name="FNanchor_207" id="FNanchor_207"></a><a href="#Footnote_207" class="fnanchor">[207]</a></p> + +<p>The conception of velocity of circulation as a real, unitary +entity, a <i>cause</i>, 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 <i>activities of men</i>, some of which work +one way, and others of which work in another way, in +affecting prices. It is at best a passive <i>resultant</i> of conflicting +and divergent tendencies, and has, to my mind, no +more <i>causal</i> 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<span class='pagenum'><a name="Page_205" id="Page_205">[Pg 205]</a></span> +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.</p> + +<p>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 <i>habits</i>. Each person regulates +his turnover to suit his individual <i>convenience</i>.... 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 <i>customs</i>, rapidity of transport, and +other technical conditions, but not on the quantity of +money and deposits nor on the price-level." (Italics +mine.<a name="FNanchor_208" id="FNanchor_208"></a><a href="#Footnote_208" class="fnanchor">[208]</a>) He proceeds to assume that money is doubled +with a <i>halving</i> of the V's, instead of a <i>doubling</i> of P. Everybody +now has on hand twice as much money <i>and deposits</i> +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. "<i>Obviously</i> this tendency will continue +until there if found another adjustment of quantities to expenditures, +and the <i>V's are the same as originally</i>."<a name="FNanchor_209" id="FNanchor_209"></a><a href="#Footnote_209" class="fnanchor">[209]</a> The +foregoing argument rests in part, it will be seen, on the<span class='pagenum'><a name="Page_206" id="Page_206">[Pg 206]</a></span> +assumption that a fixed ratio between M and M´ obtains, +else the increase of <i>money</i> in everybody's hands would not +mean a corresponding increase in their <i>deposits</i>. I have +already criticised this doctrine. For the contention that +the V's will finally be <i>just the same</i> as before, I find no specific +argument at all—"<i>obviously</i>" presumably making that +unnecessary.</p> + +<p>As the point immediately at issue is that V's will be +<i>unchanged</i> by the increase in M (otherwise P would not +increase <i>proportionately</i>—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 <i>habit</i>, and in the +next sentence, on <i>convenience</i>. He speaks, also, of business +<i>custom</i>. 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 <i>amount of cash on hand</i>. 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>i. e</i>., +there would be no rule valid for all communities. That +convenience would lead to a larger amount of money on<span class='pagenum'><a name="Page_207" id="Page_207">[Pg 207]</a></span> +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<a name="FNanchor_210" id="FNanchor_210"></a><a href="#Footnote_210" class="fnanchor">[210]</a> 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 +<i>change</i> 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 <i>proportionately</i> 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.</p> + +<p>Whatever be the ultimate effect of an increase in money,<span class='pagenum'><a name="Page_208" id="Page_208">[Pg 208]</a></span> +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,<a name="FNanchor_211" id="FNanchor_211"></a><a href="#Footnote_211" class="fnanchor">[211]</a> 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.<a name="FNanchor_212" id="FNanchor_212"></a><a href="#Footnote_212" class="fnanchor">[212]</a> 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<span class='pagenum'><a name="Page_209" id="Page_209">[Pg 209]</a></span> +ordinarily repress it give way, and, by being gratified, +grow stronger.</p> + +<p>I conclude that there is positive reason for expecting an +increase of money to reduce the velocity of money.</p> + +<p>Horace White, in his <i>Money and Banking</i>, in the earlier +editions, speaks of the velocity of money, "<i>alias</i> 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 <i>cause</i> 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.<a name="FNanchor_213" id="FNanchor_213"></a><a href="#Footnote_213" class="fnanchor">[213]</a> +He denies, however, that an increase in the V's will increase +T.<a name="FNanchor_214" id="FNanchor_214"></a><a href="#Footnote_214" class="fnanchor">[214]</a> 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:</p> + +<p>Causes governing V's:</p> + +<div class="blockquot"><p> +1. Habits of the individual.<br /> +<span style="margin-left: 1em;">(a) As to thrift and hoarding.</span><br /> +<span style="margin-left: 1em;">(b) As to book credit.</span><br /> +<span style="margin-left: 1em;">(c) As to use of checks.</span><br /> +<br /> +2. Systems of payments in the community.<br /> +<span style="margin-left: 1em;">(a) As to frequency of receipts and disbursements.</span><br /> +<span class='pagenum'><a name="Page_210" id="Page_210">[Pg 210]</a></span><span style="margin-left: 1em;">(b) As to regularity of receipts and disbursements.</span><br /> +<span style="margin-left: 1em;">(c) As to correspondence between times and amounts of receipts and disbursements.</span><br /> +<br /> +3. General causes.<br /> +<span style="margin-left: 1em;">(a) Density of population.</span><br /> +<span style="margin-left: 1em;">(b) Rapidity of transportation.</span><br /> +</p></div> + +<p>Compare this list with the causes governing T:<a name="FNanchor_215" id="FNanchor_215"></a><a href="#Footnote_215" class="fnanchor">[215]</a></p> + +<div class="blockquot"><p> +1. Conditions affecting producers: Geographical differences in Natural Resources; the division of labor; knowledge of technique of production; +accumulation of capital.<br /> +<br /> +2. Conditions affecting consumers: the extent and variety of human wants.<br /> +<br /> +3. Conditions connecting consumers and producers:<br /> +<span style="margin-left: 1em;">(a) Facilities for transportation.</span><br /> +<span style="margin-left: 1em;">(b) Relative freedom of trade.</span><br /> +<span style="margin-left: 1em;">(c) <i>Character</i> of monetary and banking systems. (Not their <i>extent</i>.)</span><br /> +<span style="margin-left: 1em;">(d) Business confidence.</span><br /> +</p></div> + +<p>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<a name="FNanchor_216" id="FNanchor_216"></a><a href="#Footnote_216" class="fnanchor">[216]</a> 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,"<span class='pagenum'><a name="Page_211" id="Page_211">[Pg 211]</a></span> +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 <i>variable</i> at all—his normal theory has +nothing to do with <i>variables</i>—but as a thing which either +is or is not present, a sort of Mendelian unit, not a thing of +degrees.<a name="FNanchor_217" id="FNanchor_217"></a><a href="#Footnote_217" class="fnanchor">[217]</a> It will be noted, further, that most of the causes +which Fisher lists as affecting T are really causes affecting +<i>production</i>—they would be just as important under a +socialistic as under an exchange economy.</p> + +<p>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, <i>and in the same direction</i>. 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 <i>on a lower price-level</i>. 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<span class='pagenum'><a name="Page_212" id="Page_212">[Pg 212]</a></span> +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.</p> + +<p>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.</p> + +<p>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. <i>Historically +this concentration of population in cities has been an important +factor in raising prices in the United States.</i>"<a name="FNanchor_218" id="FNanchor_218"></a><a href="#Footnote_218" class="fnanchor">[218]</a> (P. 88. +Italics mine.)</p> + +<p>This is an astounding proposition. It is not merely that +the concentration of population in cities has <i>tended</i> to raise +prices through raising velocities. It is a statement that +this has been an important historical cause of the actual<span class='pagenum'><a name="Page_213" id="Page_213">[Pg 213]</a></span> +increase in prices. For Fisher's own theory, if the same +cause had tended to increase T,<a name="FNanchor_219" id="FNanchor_219"></a><a href="#Footnote_219" class="fnanchor">[219]</a> 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.</p> + +<p>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).<a name="FNanchor_220" id="FNanchor_220"></a><a href="#Footnote_220" class="fnanchor">[220]</a> 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.<a name="FNanchor_221" id="FNanchor_221"></a><a href="#Footnote_221" class="fnanchor">[221]</a> 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<span class='pagenum'><a name="Page_214" id="Page_214">[Pg 214]</a></span> +show that V´, at least, is a child of the "state of trade."<a name="FNanchor_222" id="FNanchor_222"></a><a href="#Footnote_222" class="fnanchor">[222]</a> +Critical analysis of these statistics show that they greatly +underestimate the variability of the V's.<a name="FNanchor_223" id="FNanchor_223"></a><a href="#Footnote_223" class="fnanchor">[223]</a></p> + +<p>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.</p> + +<p>Among the factors affecting both V and T, there is one +which sometimes makes them move in opposite directions, +and that is the <i>value of money</i> itself. This is so well stated +in Wicksteed's interesting criticism of the quantity theory +that I content myself with a quotation:<a name="FNanchor_224" id="FNanchor_224"></a><a href="#Footnote_224" class="fnanchor">[224]</a> "Again, the his<span class='pagenum'><a name="Page_215" id="Page_215">[Pg 215]</a></span>tory +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."</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_216" id="Page_216">[Pg 216]</a></span></p> +<h3>CHAPTER XIII</h3> + +<h3>THE VOLUME OF MONEY AND THE VOLUME OF +TRADE—TRADE AND SPECULATION</h3> + + +<p>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,<a name="FNanchor_225" id="FNanchor_225"></a><a href="#Footnote_225" class="fnanchor">[225]</a> "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 <i>inter</i>dependent.<a name="FNanchor_226" id="FNanchor_226"></a><a href="#Footnote_226" class="fnanchor">[226]</a> +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.<a name="FNanchor_227" id="FNanchor_227"></a><a href="#Footnote_227" class="fnanchor">[227]</a> Fisher, however, makes no such<span class='pagenum'><a name="Page_217" id="Page_217">[Pg 217]</a></span> +surrender. He is quite as uncompromising as to the independence +of <i>deposits</i> and trade as he is with reference +to the independence of <i>money</i> and trade. He does, indeed, +make the concession that increasing trade tends +to increase deposits <i>indirectly</i>, 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),<a name="FNanchor_228" id="FNanchor_228"></a><a href="#Footnote_228" class="fnanchor">[228]</a> +but he denies stoutly that there is any <i>direct</i> relation +between them. (P. 168.) Trade acts only <i>via</i> 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.</p> + +<p>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 <i>physical +capacities and technique</i>, 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<span class='pagenum'><a name="Page_218" id="Page_218">[Pg 218]</a></span> +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." (<i>Loc. cit.</i> 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, <i>almost entirely</i>, on other things than +the quantity of currency, so that an increase of currency +cannot, <i>even temporarily</i>, 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.<a name="FNanchor_229" id="FNanchor_229"></a><a href="#Footnote_229" class="fnanchor">[229]</a> 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, <i>yet almost the entire effect</i> of an increase in deposits +must be seen in a change in prices. Normally the +<i>entire</i> effect would so express itself, but transitionally +there will be also <i>some</i> increase in the Q's." (Pp. 62-63. +Italics mine.)</p> + +<p>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<span class='pagenum'><a name="Page_219" id="Page_219">[Pg 219]</a></span> +distinction as I proceed, in justice to other, more moderate, +quantity theorists.</p> + +<p>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 <i>capital</i> rather than <i>money</i>. At the opposite extreme, we +have writers like Brooks Adams (<i>Law of Civilization and +Decay</i>), 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.<a name="FNanchor_230" id="FNanchor_230"></a><a href="#Footnote_230" class="fnanchor">[230]</a></p> + +<p>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 <i>Inter</i><span class='pagenum'><a name="Page_220" id="Page_220">[Pg 220]</a></span><i>national +Bimetallism</i>,<a name="FNanchor_231" id="FNanchor_231"></a><a href="#Footnote_231" class="fnanchor">[231]</a> 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 <i>Der Moderne +Kapitalismus</i>,<a name="FNanchor_232" id="FNanchor_232"></a><a href="#Footnote_232" class="fnanchor">[232]</a> 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,<a name="FNanchor_233" id="FNanchor_233"></a><a href="#Footnote_233" class="fnanchor">[233]</a> 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<a name="FNanchor_234" id="FNanchor_234"></a><a href="#Footnote_234" class="fnanchor">[234]</a> gold discoveries<span class='pagenum'><a name="Page_221" id="Page_221">[Pg 221]</a></span> +in the 19th Century on trade, industry, and speculation.<a name="FNanchor_235" id="FNanchor_235"></a><a href="#Footnote_235" class="fnanchor">[235]</a></p> + +<p>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.</p> + +<p>The view of Hartley Withers<a name="FNanchor_236" id="FNanchor_236"></a><a href="#Footnote_236" class="fnanchor">[236]</a> 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<span class='pagenum'><a name="Page_222" id="Page_222">[Pg 222]</a></span> +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.</p> + +<p>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,<a name="FNanchor_237" id="FNanchor_237"></a><a href="#Footnote_237" class="fnanchor">[237]</a> 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."</p> + +<p>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<a name="FNanchor_238" id="FNanchor_238"></a><a href="#Footnote_238" class="fnanchor">[238]</a>—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,<span class='pagenum'><a name="Page_223" id="Page_223">[Pg 223]</a></span> +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.</p> + +<p>But, more fundamentally, an increase in gold itself +within the country, if not bought by the export of an +equivalent amount of other goods, <i>is an increase of capital</i>. +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<a name="FNanchor_239" id="FNanchor_239"></a><a href="#Footnote_239" class="fnanchor">[239]</a>—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<span class='pagenum'><a name="Page_224" id="Page_224">[Pg 224]</a></span> +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 <i>directly</i>, not the capital value of +money, but rather the "money-rates." The relation between +the money rates and the capital value of money will<span class='pagenum'><a name="Page_225" id="Page_225">[Pg 225]</a></span> +best be discussed at another point.<a name="FNanchor_240" id="FNanchor_240"></a><a href="#Footnote_240" class="fnanchor">[240]</a> We have no reason +at all to suppose that either of these demands<a name="FNanchor_241" id="FNanchor_241"></a><a href="#Footnote_241" class="fnanchor">[241]</a> exhibits +the tendency to obey the law of proportional variation +which the quantity theory requires of money.</p> + +<p>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 <i>par excellence</i>, in the speculative centres, that the demand +for the money-service is most elastic.<a name="FNanchor_242" id="FNanchor_242"></a><a href="#Footnote_242" class="fnanchor">[242]</a> 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.</p> + +<p>And this leads to a vital distinction, which quantity theorists +almost always lose: the distinction between the volume<span class='pagenum'><a name="Page_226" id="Page_226">[Pg 226]</a></span> +of <i>production</i>, and the volume of <i>trade</i>. Even in the mechanical +system of causation which they describe, it is true only +of production and transportation that <i>technical</i> and <i>physical</i><a name="FNanchor_243" id="FNanchor_243"></a><a href="#Footnote_243" class="fnanchor">[243]</a> +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 <i>commerce</i>, 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. <i>Trade</i>, 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. <i>Trade</i>,<a name="FNanchor_244" id="FNanchor_244"></a><a href="#Footnote_244" class="fnanchor">[244]</a> 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 in<span class='pagenum'><a name="Page_227" id="Page_227">[Pg 227]</a></span>crease, +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.</p> + +<p>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<a name="FNanchor_245" id="FNanchor_245"></a><a href="#Footnote_245" class="fnanchor">[245]</a> 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,<a name="FNanchor_246" id="FNanchor_246"></a><a href="#Footnote_246" class="fnanchor">[246]</a> 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 <i>relative</i> 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., <i>received +at</i> principal cities of the United States, taken as +typical of the variations of the internal <i>commerce</i> of the +United States; (2) quantities of 23 articles of import and 25 +articles of export, for each year, taken as typical of varia<span class='pagenum'><a name="Page_228" id="Page_228">[Pg 228]</a></span>tions +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 <i>tonnage</i>, and the figures for <i>receipts on first class +mail</i>, 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 <i>weight</i> given to +each element in the final index: The first three elements count +<i>twice</i> 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 <i>weighted +by 20</i>, the item taken as typical of foreign trade is <i>weighted +by 3</i>, and sale of stocks <i>by 1</i>. It appears from Fisher's +figures (p. 479), that the one really big <i>variable</i> 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 <i>decreased</i> +over 21%, but total trade, on Fisher's figures, <i>increased</i>. +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<span class='pagenum'><a name="Page_229" id="Page_229">[Pg 229]</a></span> +<i>receipts</i> of selected staples, cattle, cotton, rice, pig iron, etc., +in the principal cities of the United States. There is not a +<i>single year</i> 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.</p> + +<p>In defence<a name="FNanchor_247" id="FNanchor_247"></a><a href="#Footnote_247" class="fnanchor">[247]</a> of his method of weighting, Fisher says, +simply: "These weights are, of course, merely matters of +opinion, but, as is well known, <i>wide differences in systems +of weighting make only slight differences in the final averages</i>." +(Italics mine.)<a name="FNanchor_248" id="FNanchor_248"></a><a href="#Footnote_248" class="fnanchor">[248]</a></p> + +<p>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 col<span class='pagenum'><a name="Page_230" id="Page_230">[Pg 230]</a></span>lected +by Dean David Kinley for the National Monetary +Commission,<a name="FNanchor_249" id="FNanchor_249"></a><a href="#Footnote_249" class="fnanchor">[249]</a> 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.<a name="FNanchor_250" id="FNanchor_250"></a><a href="#Footnote_250" class="fnanchor">[250]</a></p> + +<p>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."<span class='pagenum'><a name="Page_231" id="Page_231">[Pg 231]</a></span> +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.</p> + +<p>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.</p> + +<p>The United States Census Bureau<a name="FNanchor_251" id="FNanchor_251"></a><a href="#Footnote_251" class="fnanchor">[251]</a> in 1904 reached the +conclusion that the <i>total wealth</i> 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!</p> + +<p>These figures are for 1904,<a name="FNanchor_252" id="FNanchor_252"></a><a href="#Footnote_252" class="fnanchor">[252]</a> whereas Fisher's figures are +<span class='pagenum'><a name="Page_232" id="Page_232">[Pg 232]</a></span> +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!</p> + +<p>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:</p> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary=""> +<tr><td align='left'>Retail deposits</td><td align='right'>60 millions</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>124 millions</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>502 millions</td></tr> +</table></div> + +<p>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.</p> + +<p>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, +<span class='pagenum'><a name="Page_233" id="Page_233">[Pg 233]</a></span> +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.</p> + +<p>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:</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="8" summary=""> +<tr><td align='left'></td><td align='right'> </td><td align='right'><i>Per Cent.</i></td></tr> +<tr><td align='center' colspan='3'><i>South Atlantic States:</i></td></tr> +<tr><td align='left'>Retail deposits</td><td align='right'>$ 3,300,000</td><td align='right'>19.0</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>4,900,000</td><td align='right'>29.0</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>8,900,000</td><td align='right'>52.0</td></tr> +<tr><td align='center' colspan='3'> </td></tr> +<tr><td align='center' colspan='3'><i>Reserve Cities (including New York City):</i></td></tr> +<tr><td align='left'>Retail deposits</td><td align='right'>$ 24,000,000</td><td align='right'>5.6</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>78,000,000</td><td align='right'>18.2</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>326,000,000</td><td align='right'>76.1</td></tr> +<tr><td align='center' colspan='3'> </td></tr> +<tr><td align='center' colspan='3'><i>New York City:</i></td></tr> +<tr><td align='left'>Retail deposits</td><td align='right'>9,000,000</td><td align='right'>3.7</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>34,000,000</td><td align='right'>14.0</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>198,000,000</td><td align='right'>82.2</td></tr> +</table></div> + +<p>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:</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="8" summary=""> +<tr><td align='left'>Retail deposits</td><td align='right'>$ 179,915</td><td align='right'>24.1</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>246,647</td><td align='right'>33.1</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>318,915</td><td align='right'>42.8</td></tr> +</table></div> + +<p><span class='pagenum'><a name="Page_234" id="Page_234">[Pg 234]</a></span></p> + +<p>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.</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="8" summary=""> +<tr><td align='left'></td><td align='right'> </td><td align='right'><i>Per Cent.</i></td></tr> +<tr><td align='center' colspan='3'><i>Arkansas:</i></td></tr> +<tr><td align='left'>Retail deposits</td><td align='right'>$ 232,017</td><td align='right'>25+</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>231,614</td><td align='right'>25+</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>456,544</td><td align='right'>49+</td></tr> +</table></div> + +<p>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.<a name="FNanchor_253" id="FNanchor_253"></a><a href="#Footnote_253" class="fnanchor">[253]</a></p> + +<p>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.</p> + +<p>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,<span class='pagenum'><a name="Page_235" id="Page_235">[Pg 235]</a></span> +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 <i>average</i> 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?</p> + +<p>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: <i>brokers</i>, +<i>and stock and bond financial corporations</i>. Of course, +theatres, hotels, publishing houses, railroads, public funds,<span class='pagenum'><a name="Page_236" id="Page_236">[Pg 236]</a></span> +"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,<a name="FNanchor_254" id="FNanchor_254"></a><a href="#Footnote_254" class="fnanchor">[254]</a> +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.</p> + +<p>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<span class='pagenum'><a name="Page_237" id="Page_237">[Pg 237]</a></span> +of which, or practically all of which, are settled with credit +paper."<a name="FNanchor_255" id="FNanchor_255"></a><a href="#Footnote_255" class="fnanchor">[255]</a> It is also the opinion of General Francis A. +Walker, expressed concerning similar figures from earlier +inquiries.<a name="FNanchor_256" id="FNanchor_256"></a><a href="#Footnote_256" class="fnanchor">[256]</a></p> + +<p>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 <i>Annalist</i> 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.<a name="FNanchor_257" id="FNanchor_257"></a><a href="#Footnote_257" class="fnanchor">[257]</a></p> + +<p><span class='pagenum'><a name="Page_238" id="Page_238">[Pg 238]</a></span>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 <i>of the week</i> in which they occur, their +<span class='pagenum'><a name="Page_239" id="Page_239">[Pg 239]</a></span>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<a name="FNanchor_258" id="FNanchor_258"></a><a href="#Footnote_258" class="fnanchor">[258]</a>), 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).</p> + +<p>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 <i>below</i> country +clearings. When the Stock Exchange was opened, the old +proportions suddenly reappeared.</p> + +<p>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<span class='pagenum'><a name="Page_240" id="Page_240">[Pg 240]</a></span> +of their diverse composition, and are less sensitive than the +periods of shorter length."</p> + +<p>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,<a name="FNanchor_259" id="FNanchor_259"></a><a href="#Footnote_259" class="fnanchor">[259]</a> +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<a name="FNanchor_260" id="FNanchor_260"></a><a href="#Footnote_260" class="fnanchor">[260]</a> 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,<span class='pagenum'><a name="Page_241" id="Page_241">[Pg 241]</a></span> +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 <i>total clearings for the country</i> 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!</p> + +<p>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.<a name="FNanchor_261" id="FNanchor_261"></a><a href="#Footnote_261" class="fnanchor">[261]</a> 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 <small>SPECULATION</small>, rather than +that sort of trade which is determined "by physical capacities +and technique."</p> + +<p>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%<span class='pagenum'><a name="Page_242" id="Page_242">[Pg 242]</a></span> +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<a name="FNanchor_262" id="FNanchor_262"></a><a href="#Footnote_262" class="fnanchor">[262]</a>—around 7% of the 387 +billions.</p> + +<p>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.<a name="FNanchor_263" id="FNanchor_263"></a><a href="#Footnote_263" class="fnanchor">[263]</a> 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<span class='pagenum'><a name="Page_243" id="Page_243">[Pg 243]</a></span> +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,"<a name="FNanchor_264" id="FNanchor_264"></a><a href="#Footnote_264" class="fnanchor">[264]</a> 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 (<small><sup>1</sup>/<sub>12</sub></small> of 387 billions), which +would exceed the total income of the country as calculated<span class='pagenum'><a name="Page_244" id="Page_244">[Pg 244]</a></span> +by King for 1910. Dean Kinley reached the conclusion +that the retail deposits reported in 1896 also exceeded the +probable retail expenditures.<a name="FNanchor_265" id="FNanchor_265"></a><a href="#Footnote_265" class="fnanchor">[265]</a> 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<a name="FNanchor_266" id="FNanchor_266"></a><a href="#Footnote_266" class="fnanchor">[266]</a> for all these +items, under the general head of "retail trade."</p> + +<p>For wholesale trade, if we take the figures at face value, +the estimate would be 65¾ billions (<small><sup>124</sup>/<sub>726</sub></small> +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,<span class='pagenum'><a name="Page_245" id="Page_245">[Pg 245]</a></span> +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<a name="FNanchor_267" id="FNanchor_267"></a><a href="#Footnote_267" class="fnanchor">[267]</a> 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.</p> + +<p>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,<a name="FNanchor_268" id="FNanchor_268"></a><a href="#Footnote_268" class="fnanchor">[268]</a> 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:</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="8" summary=""> +<tr><td align='left'></td><td align='right'> </td><td align='right'><i>Per Cent.</i></td></tr> +<tr><td align='left'>Retail deposits</td><td align='right'>$ 1,061,420</td><td align='right'>9.6</td></tr> +<tr><td align='left'>Wholesale deposits</td><td align='right'>3,368,004</td><td align='right'>29.7</td></tr> +<tr><td align='left'>"All other" deposits</td><td align='right'>6,672,378</td><td align='right'>60.6</td></tr> +</table></div> + +<p>For Pittsburg, the percentage of "all other" deposits +is lower decidedly than the percentage for the country as +<span class='pagenum'><a name="Page_246" id="Page_246">[Pg 246]</a></span> +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.</p> + +<p>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;<a name="FNanchor_269" id="FNanchor_269"></a><a href="#Footnote_269" class="fnanchor">[269]</a> and the items for railway gross re<span class='pagenum'><a name="Page_247" id="Page_247">[Pg 247]</a></span>ceipts, +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.<a name="FNanchor_270" id="FNanchor_270"></a><a href="#Footnote_270" class="fnanchor">[270]</a></p> + +<p><span class='pagenum'><a name="Page_248" id="Page_248">[Pg 248]</a></span>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<a name="FNanchor_271" id="FNanchor_271"></a><a href="#Footnote_271" class="fnanchor">[271]</a> +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<span class='pagenum'><a name="Page_249" id="Page_249">[Pg 249]</a></span> +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>i. e.</i>, 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 53¾ million shares to our 215, getting +268¾ 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.<a name="FNanchor_272" id="FNanchor_272"></a><a href="#Footnote_272" class="fnanchor">[272]</a> Thus, on the floor of the New York<span class='pagenum'><a name="Page_250" id="Page_250">[Pg 250]</a></span> +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.<a name="FNanchor_273" id="FNanchor_273"></a><a href="#Footnote_273" class="fnanchor">[273]</a> 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<span class='pagenum'><a name="Page_251" id="Page_251">[Pg 251]</a></span> +Exchange.<a name="FNanchor_274" id="FNanchor_274"></a><a href="#Footnote_274" class="fnanchor">[274]</a> 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.</p> + +<p>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.<a name="FNanchor_275" id="FNanchor_275"></a><a href="#Footnote_275" class="fnanchor">[275]</a> +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 +80c. 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.</p> + +<p>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<span class='pagenum'><a name="Page_252" id="Page_252">[Pg 252]</a></span> +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,<a name="FNanchor_276" id="FNanchor_276"></a><a href="#Footnote_276" class="fnanchor">[276]</a> 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,<a name="FNanchor_277" id="FNanchor_277"></a><a href="#Footnote_277" class="fnanchor">[277]</a> +though only about 160,000 bales are ordinarily received +there, in a year.<a name="FNanchor_278" id="FNanchor_278"></a><a href="#Footnote_278" class="fnanchor">[278]</a> In the five years preceding 1909, the +sales on the New York Coffee Exchange averaged over 16 +million bags of 250 pounds each.<a name="FNanchor_279" id="FNanchor_279"></a><a href="#Footnote_279" class="fnanchor">[279]</a> 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.</p> + +<p>Contacts between the organized exchanges and ordinary<span class='pagenum'><a name="Page_253" id="Page_253">[Pg 253]</a></span> +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<span class='pagenum'><a name="Page_254" id="Page_254">[Pg 254]</a></span> +Taussig, and made by him an important point in the theory +of crises. Dean Kinley<a name="FNanchor_280" id="FNanchor_280"></a><a href="#Footnote_280" class="fnanchor">[280]</a> 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.</p> + +<p>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.<a name="FNanchor_281" id="FNanchor_281"></a><a href="#Footnote_281" class="fnanchor">[281]</a> 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.</p> + +<p>Speculation in bills and notes, by note-brokers and par<span class='pagenum'><a name="Page_255" id="Page_255">[Pg 255]</a></span>ticularly +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.<a name="FNanchor_282" id="FNanchor_282"></a><a href="#Footnote_282" class="fnanchor">[282]</a> +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.</p> + +<p>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 <i>indicia</i> +of variation in trade, weighted as they are, are totally misleading. +The same is true of Kemmerer's <i>indicia</i> of +"growth of business."<a name="FNanchor_283" id="FNanchor_283"></a><a href="#Footnote_283" class="fnanchor">[283]</a> These are: population, tonnage +entered and cleared, exports and imports of merchandise,<span class='pagenum'><a name="Page_256" id="Page_256">[Pg 256]</a></span> +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 <i>nil</i>. 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,<a name="FNanchor_284" id="FNanchor_284"></a><a href="#Footnote_284" class="fnanchor">[284]</a> should assign 89% of his estimated +trade (183 billions in 1890) to wholesale commodities,<a name="FNanchor_285" id="FNanchor_285"></a><a href="#Footnote_285" class="fnanchor">[285]</a> +(with 3% to wages, and 8% to securities), when Kinley's +figures show that wholesale deposits are a minor fraction +of the total!</p> + +<p>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<span class='pagenum'><a name="Page_257" id="Page_257">[Pg 257]</a></span> +flexible thing, varying enormously from year to year, +moved by a multiplicity of causes, among them <i>fluctuations</i> +in particular prices, and the ease and tightness in the +money market—the quantity of money and deposits.</p> + +<p>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!</p> + +<p>Production, as now carried on, is primarily conducted in +the expectation of <i>sale</i>, 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 <i>the</i> productive department.</p> + +<p>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<span class='pagenum'><a name="Page_258" id="Page_258">[Pg 258]</a></span> +advertising,—some of them in such a periodical as the <i>Saturday +Evening Post</i>, 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!<span class='pagenum'><a name="Page_259" id="Page_259">[Pg 259]</a></span></p> + +<p>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, <i>The Laws of +Supply and Demand</i>.<a name="FNanchor_286" id="FNanchor_286"></a><a href="#Footnote_286" class="fnanchor">[286]</a> 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:<a name="FNanchor_287" id="FNanchor_287"></a><a href="#Footnote_287" class="fnanchor">[287]</a> 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?<a name="FNanchor_288" id="FNanchor_288"></a><a href="#Footnote_288" class="fnanchor">[288]</a> The town of Oldham,<a name="FNanchor_289" id="FNanchor_289"></a><a href="#Footnote_289" class="fnanchor">[289]</a> 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 <i>market</i> 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 gen<span class='pagenum'><a name="Page_260" id="Page_260">[Pg 260]</a></span>eral +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).<a name="FNanchor_290" id="FNanchor_290"></a><a href="#Footnote_290" class="fnanchor">[290]</a> If one considers how large the item of "good will" +often bulks in the value of "going concerns"<a name="FNanchor_291" id="FNanchor_291"></a><a href="#Footnote_291" class="fnanchor">[291]</a>—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."<a name="FNanchor_292" id="FNanchor_292"></a><a href="#Footnote_292" class="fnanchor">[292]</a> Of course, not all good will is got at a +cost. Much of it is adventitious.</p> + +<p>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?<a name="FNanchor_293" id="FNanchor_293"></a><a href="#Footnote_293" class="fnanchor">[293]</a> It is easy +to sneer at the efforts of the successive frontiers in our<span class='pagenum'><a name="Page_261" id="Page_261">[Pg 261]</a></span> +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 <i>depress</i> 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,<a name="FNanchor_294" id="FNanchor_294"></a><a href="#Footnote_294" class="fnanchor">[294]</a> which very<span class='pagenum'><a name="Page_262" id="Page_262">[Pg 262]</a></span> +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."<a name="FNanchor_295" id="FNanchor_295"></a><a href="#Footnote_295" class="fnanchor">[295]</a> +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!</p> + +<p>We are driven to one of the most fundamental contrasts +in economic theory, which appears under various guises +and in different forms: statics <i>vs.</i> dynamics; transition <i>vs.</i> +equilibrium, theory of prosperity <i>vs.</i> theory of goods; normal +tendency <i>vs.</i> "friction."<a name="FNanchor_296" id="FNanchor_296"></a><a href="#Footnote_296" class="fnanchor">[296]</a> 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<span class='pagenum'><a name="Page_263" id="Page_263">[Pg 263]</a></span> +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: +<small>MONEY</small> and <small>CREDIT</small>.<a name="FNanchor_297" id="FNanchor_297"></a><a href="#Footnote_297" class="fnanchor">[297]</a></p> + +<p>It is the <i>business</i>, the <i>function</i>, 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.</p> + +<p>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<span class='pagenum'><a name="Page_264" id="Page_264">[Pg 264]</a></span> +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 <i>trade</i>, as distinguished from volume of <i>production</i>, +is controlled by the number and extent of the "transitions" +that have to be made. The chief work of money +and credit is done <i>in</i>, and <i>because of</i>, "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."<a name="FNanchor_298" id="FNanchor_298"></a><a href="#Footnote_298" class="fnanchor">[298]</a> The static picture<span class='pagenum'><a name="Page_265" id="Page_265">[Pg 265]</a></span> +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.</p> + +<p>Hence the curious phenomenon that very much of static +theory has been developed in abstraction from <i>money</i> and +<i>credit</i>. 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."<a name="FNanchor_299" id="FNanchor_299"></a><a href="#Footnote_299" class="fnanchor">[299]</a> 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."<a name="FNanchor_300" id="FNanchor_300"></a><a href="#Footnote_300" class="fnanchor">[300]</a> <i>On the static as<span class='pagenum'><a name="Page_266" id="Page_266">[Pg 266]</a></span>sumptions</i>, +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.</p> + +<p>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.</p> + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_267" id="Page_267">[Pg 267]</a></span></p> +<h3>APPENDIX TO CHAPTER XIII</h3> + +<h3>THE RELATION OF FOREIGN TO DOMESTIC +TRADE IN THE UNITED STATES<a name="FNanchor_301" id="FNanchor_301"></a><a href="#Footnote_301" class="fnanchor">[301]</a></h3> + + +<p>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:<a name="FNanchor_302" id="FNanchor_302"></a><a href="#Footnote_302" class="fnanchor">[302]</a> 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<span class='pagenum'><a name="Page_268" id="Page_268">[Pg 268]</a></span> +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.</p> + +<p>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, <i>how important</i> 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 <i>once</i> in the figures for export +and import. We must find a figure for domestic "trade"<span class='pagenum'><a name="Page_269" id="Page_269">[Pg 269]</a></span> +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.</p> + +<p>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 <i>Annalist</i> of Feb. 7, +1916. A figure based on the bank deposits of <i>retail merchants</i> +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 <i>deposits</i> by the same method is $32,000,000,000. +Even this figure is too high, however, as I there concluded, +to represent retail <i>trade</i>, and I shall use it only as a check +on King's figure for <i>the total income of the United States in +1910</i>, 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.<a name="FNanchor_303" id="FNanchor_303"></a><a href="#Footnote_303" class="fnanchor">[303]</a> 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<span class='pagenum'><a name="Page_270" id="Page_270">[Pg 270]</a></span> +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 <i>imports</i>. Then we +compare the residue with the figure for <i>exports</i>, and get +our ratio of foreign to domestic trade. The export and +import figures must first, however, be reduced to a <i>retail</i> +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 <i>retail</i> basis.<a name="FNanchor_304" id="FNanchor_304"></a><a href="#Footnote_304" class="fnanchor">[304]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_271" id="Page_271">[Pg 271]</a></span> +foreign trade is too low, as compared with previous +years.</p> + +<p>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 <i>railway gross receipts</i> +weighted by <i>wholesale prices</i>. 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 <i>pecuniary</i> volume of production and consumption, +however, if due to rising or falling <i>prices</i>, 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 <i>prices</i> as +well as physical volume of transportation. For 1910,<span class='pagenum'><a name="Page_272" id="Page_272">[Pg 272]</a></span> +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.<a name="FNanchor_305" id="FNanchor_305"></a><a href="#Footnote_305" class="fnanchor">[305]</a></p> + +<p><span class='pagenum'><a name="Page_273" id="Page_273">[Pg 273]</a></span></p> + +<p>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 <i>his figure</i> 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 +<span class='pagenum'><a name="Page_274" id="Page_274">[Pg 274]</a></span> +index of variation derived from Kemmerer's and Fisher's +figures for trade<a name="FNanchor_306" id="FNanchor_306"></a><a href="#Footnote_306" class="fnanchor">[306]</a> and prices. My figure for 1890 may, +moreover, be checked by comparison with the figure given +by C. B. Spahr in <i>The Present Distribution of Wealth in the +United States</i> (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.</p> + +<p>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<span class='pagenum'><a name="Page_275" id="Page_275">[Pg 275]</a></span> +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.<a name="FNanchor_307" id="FNanchor_307"></a><a href="#Footnote_307" class="fnanchor">[307]</a></p> + +<p>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.<a name="FNanchor_308" id="FNanchor_308"></a><a href="#Footnote_308" class="fnanchor">[308]</a></p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_276" id="Page_276">[Pg 276]</a></span> +as they stand. Moreover, for 1916, the great increase in +foreign trade is in <i>exports</i>. Merchandise imports are not +much greater than in previous years.<a name="FNanchor_309" id="FNanchor_309"></a><a href="#Footnote_309" class="fnanchor">[309]</a> 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.</p> + +<p>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.<a name="FNanchor_310" id="FNanchor_310"></a><a href="#Footnote_310" class="fnanchor">[310]</a></p> + +<p><span class='pagenum'><a name="Page_277" id="Page_277">[Pg 277]</a></span></p> + +<p class="center"><big><b>TABLE I<a name="FNanchor_311" id="FNanchor_311"></a><a href="#Footnote_311" class="fnanchor">[311]</a></b></big></p> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary=""> +<tr><th> </th><th>1</th><th>2</th><th>3</th><th>4</th></tr> +<tr><th>Calendar<br />Years</th><th>Net Income of the<br />United States</th><th>Domestic Trade of<br />United States =<br />Net Income minus<br />Imports at Retail Prices</th><th>Foreign Trade of<br />United States =<br />Exports at Retail Prices</th><th>Ratio of Foreign<br />to Domestic Trade</th></tr> +<tr><td align='left'>1890</td><td align='right'>$ 9,300,000,000</td><td align='right'>$ 8,100,000,000</td><td align='right'>$1,300,000,000</td><td align='right'>16.1%</td></tr> +<tr><td align='left'>1891</td><td align='right'>10,400,000,000</td><td align='right'>9,200,000,000</td><td align='right'>1,400,000,000</td><td align='right'>15.2%</td></tr> +<tr><td align='left'>1892</td><td align='right'>10,000,000,000</td><td align='right'>8,700,000,000</td><td align='right'>1,400,000,000</td><td align='right'>16.1%</td></tr> +<tr><td align='left'>1893</td><td align='right'>10,100,000,000</td><td align='right'>8,900,000,000</td><td align='right'>1,300,000,000</td><td align='right'>14.6%</td></tr> +<tr><td align='left'>1894</td><td align='right'>8,300,000,000</td><td align='right'>7,300,000,000</td><td align='right'>1,200,000,000</td><td align='right'>16.5%</td></tr> +<tr><td align='left'>1895</td><td align='right'>8,400,000,000</td><td align='right'>7,200,000,000</td><td align='right'>1,200,000,000</td><td align='right'>16.7%</td></tr> +<tr><td align='left'>1896</td><td align='right'>7,900,000,000</td><td align='right'>6,900,000,000</td><td align='right'>1,500,000,000</td><td align='right'>21.8%</td></tr> +<tr><td align='left'>1897</td><td align='right'>8,000,000,000</td><td align='right'>6,900,000,000</td><td align='right'>1,600,000,000</td><td align='right'>23.2%</td></tr> +<tr><td align='left'>1898</td><td align='right'>9,100,000,000</td><td align='right'>8,200,000,000</td><td align='right'>1,900,000,000</td><td align='right'>23.2%</td></tr> +<tr><td align='left'>1899</td><td align='right'>10,900,000,000</td><td align='right'>9,700,000,000</td><td align='right'>1,900,000,000</td><td align='right'>19.6%</td></tr> +<tr><td align='left'>1900</td><td align='right'>12,900,000,000</td><td align='right'>11,700,000,000</td><td align='right'>2,200,000,000</td><td align='right'>18.8%</td></tr> +<tr><td align='left'>1901</td><td align='right'>14,600,000,000</td><td align='right'>13,300,000,000</td><td align='right'>2,200,000,000</td><td align='right'>16.5%</td></tr> +<tr><td align='left'>1902</td><td align='right'>15,600,000,000</td><td align='right'>14,200,000,000</td><td align='right'>2,000,000,000</td><td align='right'>14.1%</td></tr> +<tr><td align='left'>1903</td><td align='right'>17,700,000,000</td><td align='right'>16,200,000,000</td><td align='right'>2,200,000,000</td><td align='right'>13.6%</td></tr> +<tr><td align='left'>1904</td><td align='right'>18,000,000,000</td><td align='right'>16,500,000,000</td><td align='right'>2,200,000,000</td><td align='right'>13.3%</td></tr> +<tr><td align='left'>1905</td><td align='right'>19,600,000,000</td><td align='right'>17,800,000,000</td><td align='right'>2,400,000,000</td><td align='right'>13.5%</td></tr> +<tr><td align='left'>1906</td><td align='right'>21,500,000,000</td><td align='right'>19,500,000,000</td><td align='right'>2,700,000,000</td><td align='right'>13.8%</td></tr> +<tr><td align='left'>1907</td><td align='right'>26,600,000,000</td><td align='right'>24,500,000,000</td><td align='right'>2,900,000,000</td><td align='right'>11.8%</td></tr> +<tr><td align='left'>1908</td><td align='right'>23,000,000,000</td><td align='right'>21,300,000,000</td><td align='right'>2,600,000,000</td><td align='right'>12.2%</td></tr> +<tr><td align='left'>1909</td><td align='right'>27,600,000,000</td><td align='right'>25,400,000,060</td><td align='right'>2,600,000,000</td><td align='right'>10.2%</td></tr> +<tr><td align='left'>1910</td><td align='right'>30,500,000,000</td><td align='right'>28,200,000,060</td><td align='right'>2,800,000,000</td><td align='right'>9.9%</td></tr> +<tr><td align='left'>1911</td><td align='right'>29,600,000,000</td><td align='right'>27,300,000,000</td><td align='right'>3,100,000,000</td><td align='right'>11.4%</td></tr> +<tr><td align='left'>1912</td><td align='right'>33,800,000,000</td><td align='right'>31,100,000,000</td><td align='right'>3,600,000,000</td><td align='right'>11.6%</td></tr> +<tr><td align='left'>1913</td><td align='right'>34,800,000,000</td><td align='right'>32,100,000,000</td><td align='right'>3,700,000,000</td><td align='right'>11.5%</td></tr> +<tr><td align='left'>1914</td><td align='right'>32,600,000,000</td><td align='right'>29,900,000,000</td><td align='right'>3,200,000,000</td><td align='right'>10.7%</td></tr> +<tr><td align='left'>1915</td><td align='right'>35,400,000,000</td><td align='right'>32,700,000,000</td><td align='right'>5,300,000,000</td><td align='right'>16.4%</td></tr> +<tr><td align='left'>1916</td><td align='right'>49,200,000,000</td><td align='right'>45,800,000,000</td><td align='right'>8,200,000,000</td><td align='right'>17.9%</td></tr> +</table></div> + +<p><span class='pagenum'><a name="Page_278" id="Page_278">[Pg 278]</a></span></p> + +<p> </p> + +<p class="center"><big><b>TABLE II. INDEX NUMBERS FROM WHICH THE FIGURES FOR NET INCOME ARE DERIVED</b></big></p> + + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary=""> +<tr><th> </th><th>1</th><th>2</th><th>3</th><th>4</th></tr> +<tr><th>Calendar<br />Years</th><th>Dun's Prices with<br />base in 1910</th><th>R. R. Gross Receipts,<br />reduced to base of 1910</th><th>Composite Index,<br />R. R. Gr. Rcts.<br />multiplied by Prices.<br />(Column 1 × column 2.)</th><th>Net Income<a name="FNanchor_312" id="FNanchor_312"></a><a href="#Footnote_312" class="fnanchor">[312]</a> of<br />the United States<br />in billions of dollars:<br />100:30.5::(3):$</th></tr> +<tr><td align='left'>1890</td><td align='right'>76.5</td><td align='right'>39.8</td><td align='right'>30.8</td><td align='right'>$ 9.3 billions</td></tr> +<tr><td align='left'>1891</td><td align='right'>81.5</td><td align='right'>42.0</td><td align='right'>34.2</td><td align='right'>10.4</td></tr> +<tr><td align='left'>1892</td><td align='right'>75.6</td><td align='right'>43.5</td><td align='right'>32.8</td><td align='right'>10.0</td></tr> +<tr><td align='left'>1893</td><td align='right'>77.3</td><td align='right'>42.9</td><td align='right'>33.2</td><td align='right'>10.1</td></tr> +<tr><td align='left'>1894</td><td align='right'>71.5</td><td align='right'>38.1</td><td align='right'>27.2</td><td align='right'>8.3</td></tr> +<tr><td align='left'>1895</td><td align='right'>68.0</td><td align='right'>40.7</td><td align='right'>27.8</td><td align='right'>8.4</td></tr> +<tr><td align='left'>1896</td><td align='right'>63.8</td><td align='right'>40.6</td><td align='right'>25.9</td><td align='right'>7.9</td></tr> +<tr><td align='left'>1897</td><td align='right'>62.2</td><td align='right'>42.4</td><td align='right'>26.4</td><td align='right'>8.0</td></tr> +<tr><td align='left'>1898</td><td align='right'>66.4</td><td align='right'>45.1</td><td align='right'>29.9</td><td align='right'>9.1</td></tr> +<tr><td align='left'>1899</td><td align='right'>72.3</td><td align='right'>49.6</td><td align='right'>35.8</td><td align='right'>10.9</td></tr> +<tr><td align='left'>1900</td><td align='right'>78.1</td><td align='right'>54.0</td><td align='right'>42.1</td><td align='right'>12.9</td></tr> +<tr><td align='left'>1901</td><td align='right'>80.6</td><td align='right'>59.4</td><td align='right'>47.8</td><td align='right'>14.6</td></tr> +<tr><td align='left'>1902</td><td align='right'>84.0</td><td align='right'>62.6</td><td align='right'>51.3</td><td align='right'>15.6</td></tr> +<tr><td align='left'>1903</td><td align='right'>83.1</td><td align='right'>70.1</td><td align='right'>58.2</td><td align='right'>17.7</td></tr> +<tr><td align='left'>1904</td><td align='right'>84.0</td><td align='right'>70.3</td><td align='right'>59.0</td><td align='right'>18.0</td></tr> +<tr><td align='left'>1905</td><td align='right'>84.0</td><td align='right'>76.4</td><td align='right'>64.2</td><td align='right'>19.6</td></tr> +<tr><td align='left'>1906</td><td align='right'>88.1</td><td align='right'>85.0</td><td align='right'>70.5</td><td align='right'>21.5</td></tr> +<tr><td align='left'>1907</td><td align='right'>94.0</td><td align='right'>92.9</td><td align='right'>86.3</td><td align='right'>26.6</td></tr> +<tr><td align='left'>1908</td><td align='right'>92.4</td><td align='right'>81.8</td><td align='right'>75.6</td><td align='right'>23.0</td></tr> +<tr><td align='left'>1909</td><td align='right'>99.0</td><td align='right'>91.7</td><td align='right'>91.0</td><td align='right'>27.6</td></tr> +<tr><th align='left'>1910</th><th align='right'>100.00</th><th align='right'>100.00</th><th align='right'>100.0</th><th align='right'>30.5</th></tr> +<tr><td align='left'>1911</td><td align='right'>98.1</td><td align='right'>99.0</td><td align='right'>97.0</td><td align='right'>29.6</td></tr> +<tr><td align='left'>1912</td><td align='right'>104.1</td><td align='right'>106.9</td><td align='right'>111.0</td><td align='right'>33.8</td></tr> +<tr><td align='left'>1913</td><td align='right'>101.7</td><td align='right'>112.5</td><td align='right'>114.0</td><td align='right'>34.8</td></tr> +<tr><td align='left'>1914</td><td align='right'>102.5</td><td align='right'>104.5</td><td align='right'>107.0</td><td align='right'>32.6</td></tr> +<tr><td align='left'>1915</td><td align='right'>106.0</td><td align='right'>110.0</td><td align='right'>116.0</td><td align='right'>35.4</td></tr> +<tr><td align='left'>1916</td><td align='right'>125.0</td><td align='right'>129.0</td><td align='right'>161.2</td><td align='right'>49.2</td></tr> +</table></div> + + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_279" id="Page_279">[Pg 279]</a></span></p> +<h3>CHAPTER XIV</h3> + +<h3>THE VOLUME OF TRADE AND THE VOLUME OF +MONEY AND CREDIT</h3> + + +<p>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 <i>inter</i>dependent. +Interdependence suggests circular theory, +and is often a phrase to cover circular reasoning.<a name="FNanchor_313" id="FNanchor_313"></a><a href="#Footnote_313" class="fnanchor">[313]</a> In the +case of the relation under discussion, however, I have, I +trust, already abundantly protected myself against the +charge of circular reasoning by <i>denying</i> 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, <i>individually</i> 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 <i>veræ causæ</i> 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.</p> + +<p>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 illus<span class='pagenum'><a name="Page_280" id="Page_280">[Pg 280]</a></span>trations, +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.</p> + +<p>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.</p> + +<p>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.<a name="FNanchor_314" id="FNanchor_314"></a><a href="#Footnote_314" class="fnanchor">[314]</a> For the present, I merely interject the question +as to the probability of an expansion of trade when +prices are falling. Increasing <i>stocks</i> of particular goods may<span class='pagenum'><a name="Page_281" id="Page_281">[Pg 281]</a></span> +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 +<i>stocks</i> of articles of <i>export</i> is very different from total <i>trade</i> +within the country; and lower prices in articles of export +are very different from a generally lower price-level.<a name="FNanchor_315" id="FNanchor_315"></a><a href="#Footnote_315" class="fnanchor">[315]</a></p> + +<p>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.] <i>The +increase in M brings about a proportionate increase in M´.</i><a name="FNanchor_316" id="FNanchor_316"></a><a href="#Footnote_316" class="fnanchor">[316]</a> +Besides this effect, the increase in trade undoubtedly has +some effect in modifying the habits of the community with +regard to the <i>proportion</i> 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."<a name="FNanchor_317" id="FNanchor_317"></a><a href="#Footnote_317" class="fnanchor">[317]</a> 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<span class='pagenum'><a name="Page_282" id="Page_282">[Pg 282]</a></span> +to the increase in legitimate credit operations is always +expansible with the increase in the actual movement of +goods'; see <i>Principles of Money</i>,<a name="FNanchor_318" id="FNanchor_318"></a><a href="#Footnote_318" class="fnanchor">[318]</a> 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>i. e.</i>, by changing the <i>habits</i> of the +community, influence the proportion, but, except for +transition periods, it cannot influence it directly."<a name="FNanchor_319" id="FNanchor_319"></a><a href="#Footnote_319" class="fnanchor">[319]</a></p> + +<p>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 <i>prices</i> 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,<a name="FNanchor_320" id="FNanchor_320"></a><a href="#Footnote_320" class="fnanchor">[320]</a>—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 <i>elastic</i><span class='pagenum'><a name="Page_283" id="Page_283">[Pg 283]</a></span> +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"<a name="FNanchor_321" id="FNanchor_321"></a><a href="#Footnote_321" class="fnanchor">[321]</a> 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<span class='pagenum'><a name="Page_284" id="Page_284">[Pg 284]</a></span> +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.<a name="FNanchor_322" id="FNanchor_322"></a><a href="#Footnote_322" class="fnanchor">[322]</a> The references to it are few and grudging,<span class='pagenum'><a name="Page_285" id="Page_285">[Pg 285]</a></span> +and <i>always</i> 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?</p> + +<p>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 +<span class='pagenum'><a name="Page_286" id="Page_286">[Pg 286]</a></span>enormous.<a name="FNanchor_323" id="FNanchor_323"></a><a href="#Footnote_323" class="fnanchor">[323]</a> 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 <i>loans</i>. +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, <i>notes</i> 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<a name="FNanchor_324" id="FNanchor_324"></a><a href="#Footnote_324" class="fnanchor">[324]</a> of loans and +discounts to deposits.<span class='pagenum'><a name="Page_287" id="Page_287">[Pg 287]</a></span></p> + +<p>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, <i>through loans</i>, deposits are linked with volume of +trade and prices. Trade and deposits wax and wane together.<a name="FNanchor_325" id="FNanchor_325"></a><a href="#Footnote_325" class="fnanchor">[325]</a> +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<span class='pagenum'><a name="Page_288" id="Page_288">[Pg 288]</a></span> +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.</p> + +<p>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?<a name="FNanchor_326" id="FNanchor_326"></a><a href="#Footnote_326" class="fnanchor">[326]</a> I +do not mean that quantity <i>theorists</i> 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 +<i>theory</i> 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 <i>in circulation</i>, with +causation running from money to deposits?</p> + +<p>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 <i>usually</i><a name="FNanchor_327" id="FNanchor_327"></a><a href="#Footnote_327" class="fnanchor">[327]</a> +performs a series of monetary transfers, for the small<span class='pagenum'><a name="Page_289" id="Page_289">[Pg 289]</a></span> +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."<a name="FNanchor_328" id="FNanchor_328"></a><a href="#Footnote_328" class="fnanchor">[328]</a> 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.<a name="FNanchor_329" id="FNanchor_329"></a><a href="#Footnote_329" class="fnanchor">[329]</a> In the United States, of course, the use of bills +of exchange has become comparatively unimportant in +domestic commerce,<a name="FNanchor_330" id="FNanchor_330"></a><a href="#Footnote_330" class="fnanchor">[330]</a> 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<a name="FNanchor_331" id="FNanchor_331"></a><a href="#Footnote_331" class="fnanchor">[331]</a> is the unconscious desire to get<span class='pagenum'><a name="Page_290" id="Page_290">[Pg 290]</a></span> +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?</p> + +<p>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!</p> + +<p>As applied to modern conditions, the quantity theory +is obliged to assert—and Fisher does assert:</p> + +<div class="blockquot"><p>(a) that there is a causal dependence of bank-credit on +money, and "normally" a fixed ratio between them;</p> + +<p>(b) that velocity of circulation of money and credit instruments +are independent of quantity of money and +credit instruments;</p> + +<p>(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 <i>some</i> reaction of trade on velocities;</p> + +<p>(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.</p> + +<p>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.</p></div> + +<p>Not yet, however, have we reached the least tenable +<span class='pagenum'><a name="Page_291" id="Page_291">[Pg 291]</a></span>aspect of the quantity theory. There remains the contention +that prices are passive, that a change, <i>originating</i> 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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_292" id="Page_292">[Pg 292]</a></span></p> +<h3>CHAPTER XV</h3> + +<h3>THE QUANTITY THEORY: THE "PASSIVENESS OF +PRICES"</h3> + + +<p>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.</p> + +<p>Now in one sense, it is my own contention that the price-<i>level</i> +can never be a <i>cause</i> of anything. The price-level is +an <i>average</i>. Averages may be <i>indicia</i> of causation, but +they are not themselves causes. They are not, in reality, +anything <i>at all</i>. 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.<a name="FNanchor_332" id="FNanchor_332"></a><a href="#Footnote_332" class="fnanchor">[332]</a> It will be seen, in a moment, that +Fisher relies on this principle to prove that the price-level<span class='pagenum'><a name="Page_293" id="Page_293">[Pg 293]</a></span> +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 <i>prior</i> 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 <i>prior</i> 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 <i>outside</i> the equation of exchange, +that as a <i>consequence of such rise</i> 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.</p> + +<p>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 +<i>averages</i>, of the factors in his own equation. But for the +present, I shall meet him on his own ground, give his dis<span class='pagenum'><a name="Page_294" id="Page_294">[Pg 294]</a></span>tinctions +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.</p> + +<p>Fisher's argument to show the passiveness of prices takes +the form of a <i>reductio ad absurdum</i>. "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."<a name="FNanchor_333" id="FNanchor_333"></a><a href="#Footnote_333" class="fnanchor">[333]</a> 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."<a name="FNanchor_334" id="FNanchor_334"></a><a href="#Footnote_334" class="fnanchor">[334]</a> +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.<a name="FNanchor_335" id="FNanchor_335"></a><a href="#Footnote_335" class="fnanchor">[335]</a> (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. "<i>The price-level is +normally the one absolutely passive element in the equation of +exchange.</i>"<a name="FNanchor_336" id="FNanchor_336"></a><a href="#Footnote_336" class="fnanchor">[336]</a></p> + +<p>"But though it is a fallacy to think that the price-level<span class='pagenum'><a name="Page_295" id="Page_295">[Pg 295]</a></span> +in one community can, in the long run, affect the money in +<i>that</i> community, it is true that the price-level in one community +may affect the money in <i>another</i> 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. +<i>The price-level outside New York City, for instance, affects +the price-level in New York City only</i> via <i>changes in the money +in New York City</i>."<a name="FNanchor_337" id="FNanchor_337"></a><a href="#Footnote_337" class="fnanchor">[337]</a>...</p> + +<p>"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.<a name="FNanchor_338" id="FNanchor_338"></a><a href="#Footnote_338" class="fnanchor">[338]</a></p> + +<p>The <i>reductio ad absurdum</i>, 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 <i>all</i> 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<span class='pagenum'><a name="Page_296" id="Page_296">[Pg 296]</a></span> +prices, no <i>cause</i> 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 <i>concrete causes</i>, outside the equation of exchange, +which might affect prices, and see how the thing works +then!</p> + +<p>Fisher states on p. 95 that "other elements in the equation +of exchange than money and commodities<a name="FNanchor_339" id="FNanchor_339"></a><a href="#Footnote_339" class="fnanchor">[339]</a> 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 <i>via</i> changes in money, in the second +country or city. But other elements in the equation are +<i>directly</i> transferable, in fact. <i>Deposits</i>, <i>e. g.</i>, in London, +to the credit of New York bankers, may be transferred to +Paris, directly, by <i>cable</i> or by <i>letter</i>, and <i>prices</i> 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<span class='pagenum'><a name="Page_297" id="Page_297">[Pg 297]</a></span> +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 <i>capitalization</i> +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 +<i>sympathetic</i> rise in prices, the <i>price-level</i> has risen independently, +from causes <i>outside the equation of exchange</i>. 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,<span class='pagenum'><a name="Page_298" id="Page_298">[Pg 298]</a></span> +rather than lower, since the <i>stock</i> 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.</p> + +<p>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.</p> + +<p>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? <i>First</i>. +a rise in prices; <i>second</i>, an expansion of credit, book-credit, +notes and deposits; <i>third</i>, 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!</p> + +<p>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 <i>values</i> 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<span class='pagenum'><a name="Page_299" id="Page_299">[Pg 299]</a></span> +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!</p> + +<p>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 +<i>rising</i> prices can cause increasing money, the whole quantity +theory is upset, whatever the proportions involved.</p> + +<p>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<span class='pagenum'><a name="Page_300" id="Page_300">[Pg 300]</a></span> +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!</p> + +<p>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.</p> + +<p>The general form of the conflict may be stated for all +these theories. They are theories of the <i>relations</i> of particular +prices, concerned with showing that individual +prices are so related that they tend to <i>vary together</i>. A +rise in one price, according to these theories, tends to bring +about <i>rises</i> in others, and <i>vice versa</i>. The quantity theory, +on the other hand, asserts a relation among individual +prices such that a rise in one tends to bring about a <i>fall</i> in +others—it requires a <i>compensatory</i> fall at one point, if there +has been a rise somewhere else.</p> + +<p>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<span class='pagenum'><a name="Page_301" id="Page_301">[Pg 301]</a></span> +prices of things of this sort, according to the capitalization<a name="FNanchor_340" id="FNanchor_340"></a><a href="#Footnote_340" class="fnanchor">[340]</a> +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<span class='pagenum'><a name="Page_302" id="Page_302">[Pg 302]</a></span> +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 <i>Elementary Principles of Economics</i> +(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 2½%, 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, <i>The Rate of Interest</i>: +"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<span class='pagenum'><a name="Page_303" id="Page_303">[Pg 303]</a></span> +rate of interest. <i>To double the productivity of capital might +more than double the value of the capital.</i>" (<i>Rate of Interest</i>, +p. 16.)<a name="FNanchor_341" id="FNanchor_341"></a><a href="#Footnote_341" class="fnanchor">[341]</a> Fisher reiterates this doctrine in his reply to +Seager, in the <i>American Economic Review</i>, Sept. 1913, pp. +614-615.</p> + +<p>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.<a name="FNanchor_342" id="FNanchor_342"></a><a href="#Footnote_342" class="fnanchor">[342]</a> 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 <i>money-prices</i> 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 <i>price</i> (<i>e. g., +Purchasing Power of Money,</i> pp. 3-4, and <i>Elementary Principles</i>, +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<span class='pagenum'><a name="Page_304" id="Page_304">[Pg 304]</a></span> +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 <i>increases</i> 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!</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_305" id="Page_305">[Pg 305]</a></span> +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.</p> + +<p>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<span class='pagenum'><a name="Page_306" id="Page_306">[Pg 306]</a></span> +Fisher's <i>Rate of Interest</i>, 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, <i>a +priori</i>, to conflict. That they do conflict is not remarkable.</p> + +<p>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.<a name="FNanchor_343" id="FNanchor_343"></a><a href="#Footnote_343" class="fnanchor">[343]</a> +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 <i>reduction</i> 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 <i>higher</i> 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 <i>produced</i>, but volume of <i>exchanges</i>. With a reduced +trade, the quantity theory must assert that prices of com<span class='pagenum'><a name="Page_307" id="Page_307">[Pg 307]</a></span>modities +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 <i>exactly +as much less</i> as the others have <i>more</i>, 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!</p> + +<p>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 <i>volume of money</i>, and +volume of <i>money-income</i>.<a name="FNanchor_344" id="FNanchor_344"></a><a href="#Footnote_344" class="fnanchor">[344]</a> 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,<a name="FNanchor_345" id="FNanchor_345"></a><a href="#Footnote_345" class="fnanchor">[345]</a> but frequently useful, view<span class='pagenum'><a name="Page_308" id="Page_308">[Pg 308]</a></span>-point—it +is clearly money-<i>income</i>, 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.</p> + +<p>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.<a name="FNanchor_346" id="FNanchor_346"></a><a href="#Footnote_346" class="fnanchor">[346]</a> 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," (<i>cf.</i> <i>supra</i>, +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.</p> + +<p>With this distinction between volume of money and +volume of money-income<a name="FNanchor_347" id="FNanchor_347"></a><a href="#Footnote_347" class="fnanchor">[347]</a> clearly held, we are prepared to +go further in our attack on the quantity theory, granting<span class='pagenum'><a name="Page_309" id="Page_309">[Pg 309]</a></span> +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.<a name="FNanchor_348" id="FNanchor_348"></a><a href="#Footnote_348" class="fnanchor">[348]</a> So +far, we have made a change in <i>one</i> price, the price of domestic +service. What of the general average of prices, the +price-<i>level</i>? 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<span class='pagenum'><a name="Page_310" id="Page_310">[Pg 310]</a></span> +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. <i>Because</i> the +wages of maid-servants are reduced, <i>less</i> money goes through +their <i>hands</i>; $10 per month per maid are short-circuited. +But the <i>cause</i> is with the <i>prices</i>. The price-level, even +under these absolutely rigorous assumptions, is not passive.</p> + +<p>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 <i>social</i> 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<span class='pagenum'><a name="Page_311" id="Page_311">[Pg 311]</a></span> +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.</p> + +<p>Fisher, as we have seen, is not of this opinion. Although +he has defined the price-level as an average of particular +prices<a name="FNanchor_349" id="FNanchor_349"></a><a href="#Footnote_349" class="fnanchor">[349]</a> 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.<a name="FNanchor_350" id="FNanchor_350"></a><a href="#Footnote_350" class="fnanchor">[350]</a> This<span class='pagenum'><a name="Page_312" id="Page_312">[Pg 312]</a></span> +average, he maintains, is presupposed in the determination +of all particular prices.<a name="FNanchor_351" id="FNanchor_351"></a><a href="#Footnote_351" class="fnanchor">[351]</a> This seems to me a wholly +untenable position. <i>Ex nihilo nihil fit.</i> There cannot be +<i>more</i> 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 <i>statement</i>, a summary of +<i>results</i>. I know nothing more metaphysical in the history +of economic theory than this hypostasis of an +average.<a name="FNanchor_352" id="FNanchor_352"></a><a href="#Footnote_352" class="fnanchor">[352]</a></p> + +<p>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 +<i>do</i> presuppose something more fundamental. They do presuppose +<i>money</i>, and the <i>value</i> 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 <i>reciprocal of the price-level</i>, and his contention +that the study of the value of money is identical with the +study of price-levels.<a name="FNanchor_353" id="FNanchor_353"></a><a href="#Footnote_353" class="fnanchor">[353]</a> Value is not a mere exchange rela<span class='pagenum'><a name="Page_313" id="Page_313">[Pg 313]</a></span>tion.<a name="FNanchor_354" id="FNanchor_354"></a><a href="#Footnote_354" class="fnanchor">[354]</a> +Rather, every exchange relation involves <i>two</i> values, +the values of the two objects exchanged. These two values +<i>causally</i> 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<span class='pagenum'><a name="Page_314" id="Page_314">[Pg 314]</a></span> +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,<a name="FNanchor_355" id="FNanchor_355"></a><a href="#Footnote_355" class="fnanchor">[355]</a> 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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_315" id="Page_315">[Pg 315]</a></span></p> +<h3>CHAPTER XVI</h3> + +<h3>THE QUANTITY THEORY AND INTERNATIONAL +GOLD MOVEMENTS</h3> + + +<p>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.</p> + +<p>I am here concerned chiefly with one contention: the price-<i>level</i>, +the average of prices, is not a <i>cause</i> 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<span class='pagenum'><a name="Page_316" id="Page_316">[Pg 316]</a></span> +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.</p> + +<p>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:<a name="FNanchor_356" id="FNanchor_356"></a><a href="#Footnote_356" class="fnanchor">[356]</a> 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<span class='pagenum'><a name="Page_317" id="Page_317">[Pg 317]</a></span> +their money, to Yazoo County, Mississippi? The answer +is simply, that they would have to go <i>with</i> 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 <i>as land</i>, actively bought and sold,<a name="FNanchor_357" id="FNanchor_357"></a><a href="#Footnote_357" class="fnanchor">[357]</a> 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.</p> + +<p>The second point is that some prices, by rising, actually +bring in gold from abroad, while by falling they tend to re<span class='pagenum'><a name="Page_318" id="Page_318">[Pg 318]</a></span>lease +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 <i>credit</i> 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>i. e.</i>, 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 +<i>lenders</i>, who wish a good margin of security, would find less +inducement to lend.<a name="FNanchor_358" id="FNanchor_358"></a><a href="#Footnote_358" class="fnanchor">[358]</a> This is a digression, but one feature<span class='pagenum'><a name="Page_319" id="Page_319">[Pg 319]</a></span> +of it is pertinent: though the foreigner does not care to +migrate from his high-priced land to <i>low</i>-priced land elsewhere, +he is often willing to trust a <i>loan</i> to the owner of +<i>high</i>-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>i. e.</i>, +puts so large a mortgage on it that he has little margin of +security to offer for working capital.<a name="FNanchor_359" id="FNanchor_359"></a><a href="#Footnote_359" class="fnanchor">[359]</a> 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.</p> + +<p>Finally, the international movements of gold<a name="FNanchor_360" id="FNanchor_360"></a><a href="#Footnote_360" class="fnanchor">[360]</a> 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.<span class='pagenum'><a name="Page_320" id="Page_320">[Pg 320]</a></span> +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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_321" id="Page_321">[Pg 321]</a></span></p> +<h3>CHAPTER XVII</h3> + +<h3>THE QUANTITY THEORY <i>vs.</i> GRESHAM'S LAW</h3> + + +<p>There is a pretty obvious conflict between the quantity +theory and Gresham's Law. The latter is, essentially, a +"<i>quality</i>" 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"!<a name="FNanchor_361" id="FNanchor_361"></a><a href="#Footnote_361" class="fnanchor">[361]</a> 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 <i>value</i> of the thing of which money is +made, considered in its commodity aspect, is the starting +point of that doctrine.</p> + +<p>The quantity theorist seeks, indeed, to harmonize the +two. His theory is that Gresham's Law manifests itself only +when there is a <i>redundancy</i> 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 <i>via</i> 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<span class='pagenum'><a name="Page_322" id="Page_322">[Pg 322]</a></span> +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.</p> + +<p>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.</p> + +<p>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 <i>decrease</i>,<a name="FNanchor_362" id="FNanchor_362"></a><a href="#Footnote_362" class="fnanchor">[362]</a> +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<span class='pagenum'><a name="Page_323" id="Page_323">[Pg 323]</a></span> +with the total amount of money. On the quantity theory +version of Gresham's Law, there was nothing to drive gold +out. Gold was <i>not pushed out</i> by redundant currency. +Rather, it <i>left</i>, leaving a monetary vacuum behind. Coincidently, +strangely enough, prices <i>rose</i>. 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 <i>rose</i>.<a name="FNanchor_363" id="FNanchor_363"></a><a href="#Footnote_363" class="fnanchor">[363]</a></p> + +<p>A similar episode, the obverse of this, occurred when the +Bank of England <i>resumed</i> specie payments in the early +'20's. Then gold came back, the currency was increased, +and, coincidently, <i>prices fell</i>.<a name="FNanchor_364" id="FNanchor_364"></a><a href="#Footnote_364" class="fnanchor">[364]</a></p> + +<p>I conclude that the conflict between Gresham's Law and +the quantity theory is real and fundamental, and that in +cases where different <i>qualities</i> of money are in concurrent +circulation, the undervalued money will leave, regardless +of the question of quantity.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_324" id="Page_324">[Pg 324]</a></span></p> +<h3>CHAPTER XVIII</h3> + +<h3>THE QUANTITY THEORY AND "WORLD PRICES"</h3> + + +<p>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.</p> + +<p>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 <i>gold production</i> 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.</p> + +<p>A view of this sort is presented by J. S. Nicholson, whose<span class='pagenum'><a name="Page_325" id="Page_325">[Pg 325]</a></span> +statement of the application of the quantity theory to the +modern world differs almost <i>toto coelo</i> from his original +statement in the dodo-bone illustration already discussed. +Nicholson<a name="FNanchor_365" id="FNanchor_365"></a><a href="#Footnote_365" class="fnanchor">[365]</a> declares that in our modern society "the +quantity of <i>standard</i> money, other things remaining the +same, determines the general level of prices, whilst, on the +other hand, the quantity of <i>token</i> 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."</p> + +<p>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<span class='pagenum'><a name="Page_326" id="Page_326">[Pg 326]</a></span> +<i>money</i>. Money is not regarded as a homogeneous thing, +each element having the same influence on prices. Rather, +<i>token</i> 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. <i>Gold</i>, 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 <i>existence</i>, of a commodity +standard. Nicholson definitely avows the necessity for +the <i>redemption</i> of representative money, even going so far +as to say that "all credit rests on a gold basis,"<a name="FNanchor_366" id="FNanchor_366"></a><a href="#Footnote_366" class="fnanchor">[366]</a> 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.<a name="FNanchor_367" id="FNanchor_367"></a><a href="#Footnote_367" class="fnanchor">[367]</a></p> + +<p>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 <i>standard of deferred +payments</i>, 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<span class='pagenum'><a name="Page_327" id="Page_327">[Pg 327]</a></span> +exchange was drawn,<a name="FNanchor_368" id="FNanchor_368"></a><a href="#Footnote_368" class="fnanchor">[368]</a> 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.<a name="FNanchor_369" id="FNanchor_369"></a><a href="#Footnote_369" class="fnanchor">[369]</a> +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.<a name="FNanchor_370" id="FNanchor_370"></a><a href="#Footnote_370" class="fnanchor">[370]</a> +Nicholson's description of the use of gold as a +reserve, while calling attention to an important fact, has led<span class='pagenum'><a name="Page_328" id="Page_328">[Pg 328]</a></span> +him into the error of supposing that what may be true of +gold, the <i>medium of exchange</i>, and <i>reserve for credit operations</i> +is necessarily true of the <i>standard of value as +such</i>.</p> + +<p>Nicholson is correct, however, in looking to the standard +of value for part of the explanation of changes in prices. +And, <i>since it so happens</i> 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.</p> + +<p>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.</p> + +<p>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 +<span class='pagenum'><a name="Page_329" id="Page_329">[Pg 329]</a></span>from precise<a name="FNanchor_371" id="FNanchor_371"></a><a href="#Footnote_371" class="fnanchor">[371]</a>—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.</p> + +<p>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?</p> + +<p>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 <i>proportional</i> variation with the quantity of money, or +with the world's stock of gold.</p> + +<p>Is it not true, then, that there is <i>some</i> 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,<a name="FNanchor_372" id="FNanchor_372"></a><a href="#Footnote_372" class="fnanchor">[372]</a> +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 <i>proportionately</i> +with an increase in its quantity, I should not<span class='pagenum'><a name="Page_330" id="Page_330">[Pg 330]</a></span> +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.</p> + +<p>But why do we need a <i>quantity theory</i> of <i>money</i>, +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!</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_331" id="Page_331">[Pg 331]</a></span></p> +<h3>CHAPTER XIX</h3> + +<h3>STATISTICAL DEMONSTRATIONS OF THE +QUANTITY THEORY—THE REDISCOVERY OF A +BURIED CITY</h3> + + +<p>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 judg<span class='pagenum'><a name="Page_332" id="Page_332">[Pg 332]</a></span>ment +of the writer, untenable, but the figures themselves +are of immense interest and importance.</p> + +<p>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 <i>History of the Greenbacks</i> (followed by his +<i>Gold, Prices and Wages under the Greenback Standard</i>), 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,<a name="FNanchor_373" id="FNanchor_373"></a><a href="#Footnote_373" class="fnanchor">[373]</a> 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.<a name="FNanchor_374" id="FNanchor_374"></a><a href="#Footnote_374" class="fnanchor">[374]</a></p> + +<p><span class='pagenum'><a name="Page_333" id="Page_333">[Pg 333]</a></span>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 +<span class='pagenum'><a name="Page_334" id="Page_334">[Pg 334]</a></span>Kemmerer<a name="FNanchor_375" id="FNanchor_375"></a><a href="#Footnote_375" class="fnanchor">[375]</a> 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,<a name="FNanchor_376" id="FNanchor_376"></a><a href="#Footnote_376" class="fnanchor">[376]</a> 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<span class='pagenum'><a name="Page_335" id="Page_335">[Pg 335]</a></span> +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 <i>as a basis of prediction</i> is gone.</p> + +<p>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.<a name="FNanchor_377" id="FNanchor_377"></a><a href="#Footnote_377" class="fnanchor">[377]</a> +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.</p> + +<p>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<span class='pagenum'><a name="Page_336" id="Page_336">[Pg 336]</a></span> +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.</p> + +<p>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.</p> + +<p>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.<a name="FNanchor_378" id="FNanchor_378"></a><a href="#Footnote_378" class="fnanchor">[378]</a> But the equation +of exchange, as we have seen, does not prove the quantity +theory. The quantity theory is a <i>causal</i> theory, and +causation involves an order <i>in time</i>. 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 <i>causes</i> 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."<a name="FNanchor_379" id="FNanchor_379"></a><a href="#Footnote_379" class="fnanchor">[379]</a> Again: "But, to a candid mind, the quantity +theory, in the sense in which we have taken it, ought to<span class='pagenum'><a name="Page_337" id="Page_337">[Pg 337]</a></span> +appear sufficiently secure without such checking. Its best +proof must be <i>a priori</i>."<a name="FNanchor_380" id="FNanchor_380"></a><a href="#Footnote_380" class="fnanchor">[380]</a></p> + +<p>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<a name="FNanchor_381" id="FNanchor_381"></a><a href="#Footnote_381" class="fnanchor">[381]</a> 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.<a name="FNanchor_382" id="FNanchor_382"></a><a href="#Footnote_382" class="fnanchor">[382]</a></p> + +<p>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.<a name="FNanchor_383" id="FNanchor_383"></a><a href="#Footnote_383" class="fnanchor">[383]</a> My criticisms with reference to V, +however, will relate to the years other than 1909 and 1896.</p> + +<p>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.<a name="FNanchor_384" id="FNanchor_384"></a><a href="#Footnote_384" class="fnanchor">[384]</a> The purpose of +these investigations was to ascertain the proportions of<span class='pagenum'><a name="Page_338" id="Page_338">[Pg 338]</a></span> +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, <i>for his purpose</i>, +seems to me in every way conclusive and safe. He was +interested merely in the question of the <i>proportions</i> of checks +and money in <i>payments</i>, retail, wholesale, and "<i>all other</i>." +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.<a name="FNanchor_385" id="FNanchor_385"></a><a href="#Footnote_385" class="fnanchor">[385]</a></p> + +<p>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.<a name="FNanchor_386" id="FNanchor_386"></a><a href="#Footnote_386" class="fnanchor">[386]</a> To get this, for 1909, Kinley's figure, above, for<span class='pagenum'><a name="Page_339" id="Page_339">[Pg 339]</a></span> +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.<a name="FNanchor_387" id="FNanchor_387"></a><a href="#Footnote_387" class="fnanchor">[387]</a> 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,<a name="FNanchor_388" id="FNanchor_388"></a><a href="#Footnote_388" class="fnanchor">[388]</a> 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´.</p> + +<p>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 <i>trade</i> is a violent one. +<i>Payments</i> may be tax payments, loans and repayments,<span class='pagenum'><a name="Page_340" id="Page_340">[Pg 340]</a></span> +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.<a name="FNanchor_389" id="FNanchor_389"></a><a href="#Footnote_389" class="fnanchor">[389]</a></p> + +<p>(3) A yet more serious error in this computation is the +assumption that New York City was complete in Kinley's<span class='pagenum'><a name="Page_341" id="Page_341">[Pg 341]</a></span> +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, <i>being for New York</i>, +[Italics mine], is probably nearly complete." (<i>Loc. cit.</i>, 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.<a name="FNanchor_390" id="FNanchor_390"></a><a href="#Footnote_390" class="fnanchor">[390]</a> 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<span class='pagenum'><a name="Page_342" id="Page_342">[Pg 342]</a></span> +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!"</p> + +<p>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.</p> + +<p>First, the figures for New York were far from complete. +It may be noted that Dean Kinley, in his volume for 1909,<a name="FNanchor_391" id="FNanchor_391"></a><a href="#Footnote_391" class="fnanchor">[391]</a> +<span class='pagenum'><a name="Page_343" id="Page_343">[Pg 343]</a></span> +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. <i>A great many city +banks also did not report.</i>" (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 <i>by</i> these banks in other +banks are also excluded from Kinley's figures.<a name="FNanchor_392" id="FNanchor_392"></a><a href="#Footnote_392" class="fnanchor">[392]</a> 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<span class='pagenum'><a name="Page_344" id="Page_344">[Pg 344]</a></span> +what Kinley means in this investigation, namely, checks, +etc., <i>deposited</i> 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.<a name="FNanchor_393" id="FNanchor_393"></a><a href="#Footnote_393" class="fnanchor">[393]</a> +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.<a name="FNanchor_394" id="FNanchor_394"></a><a href="#Footnote_394" class="fnanchor">[394]</a> I refrain from assigning any figures as to the +amount of checks deposited in private banks in New York<span class='pagenum'><a name="Page_345" id="Page_345">[Pg 345]</a></span> +on March 16, 1909. It must have run high into the millions.<a name="FNanchor_395" id="FNanchor_395"></a><a href="#Footnote_395" class="fnanchor">[395]</a> +It certainly exceeded the two thousands, or less, +reported to Kinley! The figures for New York were, thus, +incomplete.</p> + +<p>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<a name="FNanchor_396" id="FNanchor_396"></a><a href="#Footnote_396" class="fnanchor">[396]</a> +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!</p> + +<p>These figures are hard to reconcile with the assumption +that the trust companies in New York were complete on +that date.</p> + +<p>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<span class='pagenum'><a name="Page_346" id="Page_346">[Pg 346]</a></span> +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 <i>through</i> 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.</p> + +<p>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."</p> + +<p>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<span class='pagenum'><a name="Page_347" id="Page_347">[Pg 347]</a></span> +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 <i>through</i> +member banks.<a name="FNanchor_397" id="FNanchor_397"></a><a href="#Footnote_397" class="fnanchor">[397]</a> 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.<a name="FNanchor_398" id="FNanchor_398"></a><a href="#Footnote_398" class="fnanchor">[398]</a> 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.</p> + +<p>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 con<span class='pagenum'><a name="Page_348" id="Page_348">[Pg 348]</a></span>siderable +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.</p> + +<p>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,<a name="FNanchor_399" id="FNanchor_399"></a><a href="#Footnote_399" class="fnanchor">[399]</a> substantially exceeding the reported check deposits. +Now do clearings exceed check deposits in New +York City?</p> + +<p>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, <i>via</i> +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. (<i>Loc. cit.</i>, 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.</p> + +<p>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. How<span class='pagenum'><a name="Page_349" id="Page_349">[Pg 349]</a></span>ard +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 <i>Annalist</i> of Dec. 7, +1914.<a name="FNanchor_400" id="FNanchor_400"></a><a href="#Footnote_400" class="fnanchor">[400]</a> 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 <i>Annalist</i>, 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.</p> + +<p>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 <i>deposited</i>, <i>excluding</i> +items deposited by banks, and excluding, of course, cash +deposited. What is the relation between Kinley's "deposits" +and Wolfe's "total transactions"?</p> + +<p>It is clear that "total transactions" must, in a period of<span class='pagenum'><a name="Page_350" id="Page_350">[Pg 350]</a></span> +time, <i>exceed</i> 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%.<a name="FNanchor_401" id="FNanchor_401"></a><a href="#Footnote_401" class="fnanchor">[401]</a> To allow 11%<span class='pagenum'><a name="Page_351" id="Page_351">[Pg 351]</a></span> +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.</p> + +<p>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<a name="FNanchor_402" id="FNanchor_402"></a><a href="#Footnote_402" class="fnanchor">[402]</a> 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, <i>a difference of 116 billions</i>! 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.<span class='pagenum'><a name="Page_352" id="Page_352">[Pg 352]</a></span></p> + +<p>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.</p> + +<p>The indirect approach to the relation between New York +clearings and New York deposits, <i>via</i> the study of outside<span class='pagenum'><a name="Page_353" id="Page_353">[Pg 353]</a></span> +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.<a name="FNanchor_403" id="FNanchor_403"></a><a href="#Footnote_403" class="fnanchor">[403]</a> 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.</p> + +<p>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.</p> + +<p>The reason commonly offered for holding that New York<span class='pagenum'><a name="Page_354" id="Page_354">[Pg 354]</a></span> +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.</p> + +<p>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.<a name="FNanchor_404" id="FNanchor_404"></a><a href="#Footnote_404" class="fnanchor">[404]</a> 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.<a name="FNanchor_405" id="FNanchor_405"></a><a href="#Footnote_405" class="fnanchor">[405]</a> The only +checks that get into New York clearings will be checks +drawn on New York banks.<a name="FNanchor_406" id="FNanchor_406"></a><a href="#Footnote_406" class="fnanchor">[406]</a></p> + +<p><span class='pagenum'><a name="Page_355" id="Page_355">[Pg 355]</a></span>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 +<span class='pagenum'><a name="Page_356" id="Page_356">[Pg 356]</a></span>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.<a name="FNanchor_407" id="FNanchor_407"></a><a href="#Footnote_407" class="fnanchor">[407]</a> (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.</p> + +<p>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 +<i>Reports</i> for the three years, under the caption, "Domestic +Exchanges." For 1890 the figures are:<span class='pagenum'><a name="Page_357" id="Page_357">[Pg 357]</a></span></p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="8" summary=""> +<tr><th>Drafts on</th><th align='right'>(000,000 omitted)</th><th> </th></tr> +<tr><td align='left'>New York</td><td align='right'>$ 7,284</td><td align='right'>(63.07%)</td></tr> +<tr><td align='left'>Chicago</td><td align='right'>1,084</td><td align='right'>(9.30%)</td></tr> +<tr><td align='left'>St. Louis</td><td align='right'>188</td><td align='right'>(1.64%)</td></tr> +<tr><td align='left'>Other reserve cities</td><td align='right'>2,537</td><td align='right'>(21.88%)</td></tr> +<tr><td align='left'>Other cities</td><td align='right'>464</td><td align='right'>(4.02%)</td></tr> +<tr><th>Total</th><th align='right'>11,550</th><th align='right'>(100%)</th></tr> +</table></div> + +<p>The Comptroller (<i>Report</i> 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.</p> + +<p>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 re<span class='pagenum'><a name="Page_358" id="Page_358">[Pg 358]</a></span>sult +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.</p> + +<p>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.<a name="FNanchor_408" id="FNanchor_408"></a><a href="#Footnote_408" class="fnanchor">[408]</a></p> + +<p>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.</p> + +<p>The two sets of data converge. Both from the figures<span class='pagenum'><a name="Page_359" id="Page_359">[Pg 359]</a></span> +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,<a name="FNanchor_409" id="FNanchor_409"></a><a href="#Footnote_409" class="fnanchor">[409]</a> and one observation +for five national banks for a ten-day period shows +67% of checks deposited cleared.<a name="FNanchor_410" id="FNanchor_410"></a><a href="#Footnote_410" class="fnanchor">[410]</a> 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.<a name="FNanchor_411" id="FNanchor_411"></a><a href="#Footnote_411" class="fnanchor">[411]</a></p> + +<p><span class='pagenum'><a name="Page_360" id="Page_360">[Pg 360]</a></span>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<a name="FNanchor_412" id="FNanchor_412"></a><a href="#Footnote_412" class="fnanchor">[412]</a> for the year as roughly approximating +the amount of checks deposited.<a name="FNanchor_413" id="FNanchor_413"></a><a href="#Footnote_413" class="fnanchor">[413]</a> 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, <i>via</i> 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 +<span class='pagenum'><a name="Page_361" id="Page_361">[Pg 361]</a></span> +questioning that "check deposits" and M´V´ are identical.</p> + +<p>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,<a name="FNanchor_414" id="FNanchor_414"></a><a href="#Footnote_414" class="fnanchor">[414]</a> +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<small><sup>10</sup>/<sub>23</sub></small> as great as +the former. But more significant is the degree of <i>year by +year</i> 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.<a name="FNanchor_415" id="FNanchor_415"></a><a href="#Footnote_415" class="fnanchor">[415]</a> When country clearings +are weighted by 5, almost all of the high degree of variability +<span class='pagenum'><a name="Page_362" id="Page_362">[Pg 362]</a></span> +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.<a name="FNanchor_416" id="FNanchor_416"></a><a href="#Footnote_416" class="fnanchor">[416]</a></p> + +<p>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´.<a name="FNanchor_417" id="FNanchor_417"></a><a href="#Footnote_417" class="fnanchor">[417]</a> 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.<a name="FNanchor_418" id="FNanchor_418"></a><a href="#Footnote_418" class="fnanchor">[418]</a></p> + +<p>The same conclusion regarding Professor Fisher's estimates +for V´ have been reached, by a different method, by +<span class='pagenum'><a name="Page_363" id="Page_363">[Pg 363]</a></span> +Professor Wesley C. Mitchell. He, too, concludes that V´ +is, in fact, more variable than Professor Fisher would indicate.<a name="FNanchor_419" id="FNanchor_419"></a><a href="#Footnote_419" class="fnanchor">[419]</a></p> + +<p>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.</p> + +<p>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 <i>weighted</i> 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.</p> + +<p>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 <i>indicia</i> of variation +which Fisher<a name="FNanchor_420" id="FNanchor_420"></a><a href="#Footnote_420" class="fnanchor">[420]</a> 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 +<span class='pagenum'><a name="Page_364" id="Page_364">[Pg 364]</a></span> +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.</p> + +<p>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.<a name="FNanchor_421" id="FNanchor_421"></a><a href="#Footnote_421" class="fnanchor">[421]</a> 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<a name="FNanchor_422" id="FNanchor_422"></a><a href="#Footnote_422" class="fnanchor">[422]</a> that deposits made in +banks very greatly overcount trade.</p> + +<p>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.</p> + +<p>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, +<span class='pagenum'><a name="Page_365" id="Page_365">[Pg 365]</a></span> +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,"<a name="FNanchor_423" id="FNanchor_423"></a><a href="#Footnote_423" class="fnanchor">[423]</a> and makes no claim to have +given the matter careful study.</p> + +<p>In general, I think it safe to hold that the case where a +single check passes through several hands is not important.<a name="FNanchor_424" id="FNanchor_424"></a><a href="#Footnote_424" class="fnanchor">[424]</a> +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.</p> + +<p>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,<span class='pagenum'><a name="Page_366" id="Page_366">[Pg 366]</a></span> +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.</p> + +<p>A check is drawn by a subsidiary corporation to its dividend +account, and deposited; a check on this dividend +account<a name="FNanchor_425" id="FNanchor_425"></a><a href="#Footnote_425" class="fnanchor">[425]</a> 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. <i>Not one</i> +of these six deposits represents <i>trade</i>. 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 <i>payments</i>, but not <i>trade</i>. Even if the dividend +payment be counted as trade, however, it is counted <i>six</i> +times.</p> + +<p>There is enormous overcounting as a consequence of the +combinations of corporations, each of which retains its<span class='pagenum'><a name="Page_367" id="Page_367">[Pg 367]</a></span> +own numerous bank accounts. The Interstate Commerce +Commission calls attention to great duplications from this +cause in connection with railway income accounts.<a name="FNanchor_426" id="FNanchor_426"></a><a href="#Footnote_426" class="fnanchor">[426]</a> Even +within single corporations the duplications<a name="FNanchor_427" id="FNanchor_427"></a><a href="#Footnote_427" class="fnanchor">[427]</a> 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. <i>All</i> 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<span class='pagenum'><a name="Page_368" id="Page_368">[Pg 368]</a></span> +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%.<a name="FNanchor_428" id="FNanchor_428"></a><a href="#Footnote_428" class="fnanchor">[428]</a> 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 <i>all</i> the checks that pass in +this way represent double counting. The total is large.</p> + +<p><i>Public funds</i> are included in the deposits reported to +Kinley. Taxes are not <i>trade</i>. 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.</p> + +<p>Whenever a retail store has branches, duplications are +likely to occur. "Chain stores" make great overcounting. +"Kiting" swells bank deposits.</p> + +<p>Replying to these contentions, Professor Fisher has urged +that there is large <i>undercounting</i>, also, and that the under<span class='pagenum'><a name="Page_369" id="Page_369">[Pg 369]</a></span>counting +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,<a name="FNanchor_429" id="FNanchor_429"></a><a href="#Footnote_429" class="fnanchor">[429]</a> 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.</p> + +<p>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.<a name="FNanchor_430" id="FNanchor_430"></a><a href="#Footnote_430" class="fnanchor">[430]</a> +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>i. e.</i>, 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.</p> + +<p>For the New York Stock Exchange, figures are taken +from Pratt's <i>Work of Wall Street</i>, 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,<span class='pagenum'><a name="Page_370" id="Page_370">[Pg 370]</a></span> +Pratt states,<a name="FNanchor_431" id="FNanchor_431"></a><a href="#Footnote_431" class="fnanchor">[431]</a> 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.</p> + +<p>In 1901, 265,944,659 shares were sold. Of these, 15% +were "X-Clearing House," <i>i. e.</i>, 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.<a name="FNanchor_432" id="FNanchor_432"></a><a href="#Footnote_432" class="fnanchor">[432]</a> 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?</p> + +<p>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.<a name="FNanchor_433" id="FNanchor_433"></a><a href="#Footnote_433" class="fnanchor">[433]</a> 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;<a name="FNanchor_434" id="FNanchor_434"></a><a href="#Footnote_434" class="fnanchor">[434]</a> 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<span class='pagenum'><a name="Page_371" id="Page_371">[Pg 371]</a></span> +House undercounts recorded share sales. This is less than +1.7% of Professor Fisher's 387 billions! To offset this, +however, we have <i>over</i>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 <i>over</i>counting +which vastly more than offset this undercounting, +in <i>loan</i> transactions between brokers, and between banks +and brokers, to which we shall shortly give attention.</p> + +<p>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 <i>sales</i>, by no +means measures the services of the Clearing House to the +Stock Exchange. Not merely stocks <i>sold</i> have to be +cleared. Stocks <i>borrowed</i> are also cleared. Borrowing of +stocks is not <i>trade</i>, but borrowing of stocks requires the +passage of money and checks. When stocks are borrowed, +money is <i>loaned</i>. 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.<a name="FNanchor_435" id="FNanchor_435"></a><a href="#Footnote_435" class="fnanchor">[435]</a> 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<span class='pagenum'><a name="Page_372" id="Page_372">[Pg 372]</a></span> +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.</p> + +<p>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 <i>banks</i> at +the "Money Post" do not affect the Stock Exchange Clearing +House totals.<a name="FNanchor_436" id="FNanchor_436"></a><a href="#Footnote_436" class="fnanchor">[436]</a> 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.<a name="FNanchor_437" id="FNanchor_437"></a><a href="#Footnote_437" class="fnanchor">[437]</a> Of course, if the pressure +gets too strong, it will manifest itself at the money<span class='pagenum'><a name="Page_373" id="Page_373">[Pg 373]</a></span> +post anyhow, since bears borrowing particular stocks will +forego all or part of the interest, or even pay a premium +for the stock.<a name="FNanchor_438" id="FNanchor_438"></a><a href="#Footnote_438" class="fnanchor">[438]</a></p> + +<p>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.<a name="FNanchor_439" id="FNanchor_439"></a><a href="#Footnote_439" class="fnanchor">[439]</a> Borrowing exceeds actual +sales, if the figures for 1901—a year of enormous sales<span class='pagenum'><a name="Page_374" id="Page_374">[Pg 374]</a></span>—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. <i>For their +purposes</i>, it does make a vast difference. Pratt's figures<a name="FNanchor_440" id="FNanchor_440"></a><a href="#Footnote_440" class="fnanchor">[440]</a> +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<a name="FNanchor_441" id="FNanchor_441"></a><a href="#Footnote_441" class="fnanchor">[441]</a> 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.<a name="FNanchor_442" id="FNanchor_442"></a><a href="#Footnote_442" class="fnanchor">[442]</a> 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<span class='pagenum'><a name="Page_375" id="Page_375">[Pg 375]</a></span> +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.</p> + +<p>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.<a name="FNanchor_443" id="FNanchor_443"></a><a href="#Footnote_443" class="fnanchor">[443]</a> 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,<a name="FNanchor_444" id="FNanchor_444"></a><a href="#Footnote_444" class="fnanchor">[444]</a> are the National +Bank of Commerce, The Chase National, the Hanover +National, J. P. Morgan and Co., and Kuhn-Loeb. The<span class='pagenum'><a name="Page_376" id="Page_376">[Pg 376]</a></span> +same report states that the bulk of such loans are made +directly between banks and brokers, and not at the "Money +Post."</p> + +<p>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 col<span class='pagenum'><a name="Page_377" id="Page_377">[Pg 377]</a></span>lateral +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.<span class='pagenum'><a name="Page_378" id="Page_378">[Pg 378]</a></span> +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.</p> + +<p>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<a name="FNanchor_445" id="FNanchor_445"></a><a href="#Footnote_445" class="fnanchor">[445]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_379" id="Page_379">[Pg 379]</a></span> +refinement of the correlation method, the method of partial +correlation, with the result of confirming this view.<a name="FNanchor_446" id="FNanchor_446"></a><a href="#Footnote_446" class="fnanchor">[446]</a></p> + +<p>I conclude, therefore, that stock exchange transactions, +instead of being undercounted in bank deposits, are very +greatly overcounted.<a name="FNanchor_447" id="FNanchor_447"></a><a href="#Footnote_447" class="fnanchor">[447]</a> The big item that does it is loan +transactions between brokers and brokers and between +brokers and banks.</p> + +<p>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 trans<span class='pagenum'><a name="Page_380" id="Page_380">[Pg 380]</a></span>actions +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 <i>arriving</i> [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 <i>arriving</i> grain. How great the loan transactions +on subsequent sales will be we can only conjecture.</p> + +<p>While able to find, then, important cases of trade and<span class='pagenum'><a name="Page_381" id="Page_381">[Pg 381]</a></span> +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.</p> + +<p>I conclude, therefore, with reference to the figures of +Fisher and Kemmerer<a name="FNanchor_448" id="FNanchor_448"></a><a href="#Footnote_448" class="fnanchor">[448]</a> 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.</p> + +<p>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 +<i>weighted</i> 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.<a name="FNanchor_449" id="FNanchor_449"></a><a href="#Footnote_449" class="fnanchor">[449]</a> Now +Kemmerer's P is weighted as follows: wages, 3, security +prices, 8, wholesale prices, 89.<a name="FNanchor_450" id="FNanchor_450"></a><a href="#Footnote_450" class="fnanchor">[450]</a> 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<span class='pagenum'><a name="Page_382" id="Page_382">[Pg 382]</a></span> +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),<a name="FNanchor_451" id="FNanchor_451"></a><a href="#Footnote_451" class="fnanchor">[451]</a> 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.<a name="FNanchor_452" id="FNanchor_452"></a><a href="#Footnote_452" class="fnanchor">[452]</a> +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.</p> + +<p>As <i>indicia</i> of changes in the <i>absolute value</i> 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 <i>the value of money</i>, +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 <i>price-level</i> +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!</p> + +<p>Now, in general summary of our criticisms of the figures<span class='pagenum'><a name="Page_383" id="Page_383">[Pg 383]</a></span> +of Kemmerer and Fisher: they have systematically buried +New York City, and systematically covered up speculation. +All the errors converge in this direction. The <i>indicia</i> of +trade cover up speculation and the other things that go on +in New York, and other financial centers. The <i>indicia</i> +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.<a name="FNanchor_453" id="FNanchor_453"></a><a href="#Footnote_453" class="fnanchor">[453]</a> In general, our task in this chapter has +been an archæological excavation—we have rediscovered +a buried city.</p> +<p><span class='pagenum'><a name="Page_384" id="Page_384">[Pg 384]</a></span></p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_385" id="Page_385">[Pg 385]</a></span></p> +<h2><a name="PartIII" id="PartIII"></a>PART III. THE VALUE OF MONEY</h2> +<p><span class='pagenum'><a name="Page_386" id="Page_386">[Pg 386]</a></span></p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_387" id="Page_387">[Pg 387]</a></span></p> +<h3>CHAPTER XX</h3> + +<h3>RECAPITULATION OF POSITIVE DOCTRINE</h3> + + +<p>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 <i>stating</i> problems, and so have aided in clearing the +way for theories better based.</p> + +<p>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.<span class='pagenum'><a name="Page_388" id="Page_388">[Pg 388]</a></span></p> + +<p>1. The theory of the value of money is a special case of +the general theory of value.</p> + +<p>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.</p> + +<p>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.</p> + +<p>4. Economic value is a <i>species</i> of the <i>genus</i>, <i>social value</i>, +coördinate with legal value, and moral value. It is part +of a system of social motivation and control.<a name="FNanchor_454" id="FNanchor_454"></a><a href="#Footnote_454" class="fnanchor">[454]</a> Psychological +in character, it none the less presents itself to an individual +as an objective, external force, to which he must adapt +himself.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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,<span class='pagenum'><a name="Page_389" id="Page_389">[Pg 389]</a></span> +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.</p> + +<p>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.</p> + +<p>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.")</p> + +<p>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.")</p> + +<p>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.")</p> + +<p>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.<span class='pagenum'><a name="Page_390" id="Page_390">[Pg 390]</a></span></p> + +<p>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.</p> + +<p>14. But, in general, money gets part of its value from its +monetary employments. (Chapter on "Dodo-Bones.")</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>18. But this is not to assert the doctrine of the quantity +theory. Because</p> + +<p>19. The money service presupposes the existence of +value for money from some source other than the monetary +employment (chapter on "Dodo-Bones"); and<span class='pagenum'><a name="Page_391" id="Page_391">[Pg 391]</a></span></p> + +<p>20. Hence the monetary employment can explain only a +differential portion of the value of money.</p> + +<p>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.</p> + +<p>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.</p> + +<p>23. The quantity of money and credit are matters of<span class='pagenum'><a name="Page_392" id="Page_392">[Pg 392]</a></span> +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.")</p> + +<p>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.")</p> + +<p>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 specu<span class='pagenum'><a name="Page_393" id="Page_393">[Pg 393]</a></span>lative +centres. (Chapters on "Volume of Money and +Volume of Trade," and "The Rediscovery of a Buried +City.")</p> + +<p>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,</p> + +<p>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.</p> + +<p>28. An increase of money tends to increase trade. (Chapter +on "Volume of Money and Volume of Trade.")</p> + +<p>29. An increase of credit tends to increase trade. (Same +chapter.)</p> + +<p>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.")</p> + +<p>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.")</p> + +<p>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.")<span class='pagenum'><a name="Page_394" id="Page_394">[Pg 394]</a></span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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 <i>stated</i>, if seen at all.</p> + +<p>In what follows, these theses, with doctrines yet to be +developed, will be woven together into a systematic theory +of money and credit.</p> + +<p>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.<span class='pagenum'><a name="Page_395" id="Page_395">[Pg 395]</a></span></p> + +<p>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.</p> + +<p>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 <i>vs.</i> theory of wealth," +"statics <i>vs.</i> dynamics," "normal <i>vs.</i> 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 prin<span class='pagenum'><a name="Page_396" id="Page_396">[Pg 396]</a></span>ciples +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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_397" id="Page_397">[Pg 397]</a></span></p> +<h3>CHAPTER XXI</h3> + +<h3>THE ORIGIN OF MONEY, AND THE VALUE OF GOLD</h3> + + +<p>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.<a name="FNanchor_455" id="FNanchor_455"></a><a href="#Footnote_455" class="fnanchor">[455]</a> 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:</p> + +<p>(1) How did money come to be?</p> + +<p>(2) Why should gold and silver have passed all rival +commodities in the competition for employment as money?</p> + +<p>Viewing these questions from the standpoint of present +functioning, rather than from the standpoint of historical +origins, we may restate them as follows:</p> + +<p>(1) Why should men accept small disks of metal, or +paper representatives of these metal disks, for which, <i>as</i> +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<span class='pagenum'><a name="Page_398" id="Page_398">[Pg 398]</a></span> +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, <i>if he is assured that he can pass them on to +others at will</i> 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, <i>unless we assume the practice general</i>. +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.<span class='pagenum'><a name="Page_399" id="Page_399">[Pg 399]</a></span> +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, <i>on the part of other people</i>, 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?</p> + +<p>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 <i>how the money<span class='pagenum'><a name="Page_400" id="Page_400">[Pg 400]</a></span> +function adds to the value of money</i>. The answer which I +shall give on the first question will in large measure follow +the lines laid down by Menger.</p> + +<p>(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:</p> + +<p>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 +<i>as a commodity</i>.</p> + +<p>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<a name="FNanchor_456" id="FNanchor_456"></a><a href="#Footnote_456" class="fnanchor">[456]</a> 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 <i>analysis</i> 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 <i>terms</i> on which money circulates, +that is to say, the <i>prices</i>. But then a quantity theory would<span class='pagenum'><a name="Page_401" id="Page_401">[Pg 401]</a></span> +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.</p> + +<p>The answer to the first question rests primarily in the +fact that there are differences in the <i>saleability</i> of goods. +Value and saleability are not the same thing. A copper +cent has high saleability; a farm has low saleability.<a name="FNanchor_457" id="FNanchor_457"></a><a href="#Footnote_457" class="fnanchor">[457]</a> 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,<a name="FNanchor_458" id="FNanchor_458"></a><a href="#Footnote_458" class="fnanchor">[458]</a> securities, and other long-time +income-bearers would cease, but they would still be valuable. +I have developed these notions in my article on<span class='pagenum'><a name="Page_402" id="Page_402">[Pg 402]</a></span> +"Value" in the <i>Quarterly Journal of Economics</i>, 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_403" id="Page_403">[Pg 403]</a></span>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.<a name="FNanchor_459" id="FNanchor_459"></a><a href="#Footnote_459" class="fnanchor">[459]</a></p> + +<p>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 +<i>universality</i> of the desire for them. They may have high +<i>value</i> 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.</p> + +<p>Menger enumerates a number of circumstances connected +with a good which increase its saleability. Among them +are the following:</p> + +<p>1. Widespread and intense desire for the thing (to which<span class='pagenum'><a name="Page_404" id="Page_404">[Pg 404]</a></span> +should be added, adequate wealth on the part of those who +desire it).</p> + +<p>2. Scarcity of the commodity in question.</p> + +<p>3. Divisibility of the commodity.</p> + +<p>4. Considerable development of the market.</p> + +<p>5. That the demand for the article should be more than +local.</p> + +<p>6. That it be cheaply transportable.</p> + +<p>7. That commerce between localities in the article be +unrestricted.</p> + +<p>8. That demand for the article be constant, not fluctuating, +in time.</p> + +<p>9. That the article be durable.</p> + +<p>10. That it be uniform in quality, so that standardization +is easy.</p> + +<p>In general, Menger's list meets the requirements often +laid down for a good <i>medium of exchange</i>. In general, to +the extent that any commodity meets these tests, it will +be <i>saleable</i>. Commodities will vary indefinitely in the extent +of their saleability.</p> + +<p>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, <i>still not the thing he wants</i>, he has yet made +progress, he has got <i>one step nearer</i> 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<span class='pagenum'><a name="Page_405" id="Page_405">[Pg 405]</a></span> +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.</p> + +<p>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.</p> + +<p>With the development of a highly saleable article into +money, moreover, we have further a great increase in that<span class='pagenum'><a name="Page_406" id="Page_406">[Pg 406]</a></span> +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, <i>also adds to the saleability of other +goods</i>. <i>Two</i> things must be exchanged, in order that <i>one</i> +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 <i>priced</i> +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 3½% may well have trouble in turning that +loan over to someone else immediately without shaving +¼% 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 <i>his +economic power</i> has ceased to sustain the value of the<span class='pagenum'><a name="Page_407" id="Page_407">[Pg 407]</a></span> +wheat, and the price would not correctly express the value +if it remained uninfluenced by that fact.</p> + +<p>Further, as we shall see when we come to the analysis of +credit, one chief function of modern credit is to increase the +<i>saleability of goods</i>, 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.<a name="FNanchor_460" id="FNanchor_460"></a><a href="#Footnote_460" class="fnanchor">[460]</a> But this is to anticipate later discussion.</p> + +<p>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.<a name="FNanchor_461" id="FNanchor_461"></a><a href="#Footnote_461" class="fnanchor">[461]</a> 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.<span class='pagenum'><a name="Page_408" id="Page_408">[Pg 408]</a></span></p> + +<p>The accumulation of money, moreover, implies a stage of +human development where the accumulation of <i>capital</i> 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.</p> + +<p>But very early a different sort of commodity comes in. +Articles of <i>ornament</i> 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.<a name="FNanchor_462" id="FNanchor_462"></a><a href="#Footnote_462" class="fnanchor">[462]</a> 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 <i>inter</i>changeable +in primitive life. To-day, in the Western world, the thing is<span class='pagenum'><a name="Page_409" id="Page_409">[Pg 409]</a></span> +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, <i>through</i> 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.<a name="FNanchor_463" id="FNanchor_463"></a><a href="#Footnote_463" class="fnanchor">[463]</a> 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<span class='pagenum'><a name="Page_410" id="Page_410">[Pg 410]</a></span> +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.</p> + +<p>Three powerful elements of human nature work together +in sustaining the value of the metals which become widely +used as ornament:</p> + +<p>(1) love of approbation;</p> + +<p>(2) the sex impulse;</p> + +<p>(3) the spirit of rivalry, or competition.</p> + +<p>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 <i>qualitatively</i>, 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 <i>mores</i>. If +ornament confers distinction,—and almost everywhere it +does—men will seek to possess ornaments.<span class='pagenum'><a name="Page_411" id="Page_411">[Pg 411]</a></span></p> + +<p>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.</p> + +<p>Further, the desire for ornament is competitive. One's +women must be <i>better</i> ornamented than the women of one's +neighbors, if <i>distinction</i> 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 +<i>Theory of the Leisure Class</i>. 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<a name="FNanchor_464" id="FNanchor_464"></a><a href="#Footnote_464" class="fnanchor">[464]</a> +<span class='pagenum'><a name="Page_412" id="Page_412">[Pg 412]</a></span> +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,<a name="FNanchor_465" id="FNanchor_465"></a><a href="#Footnote_465" class="fnanchor">[465]</a> 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.<a name="FNanchor_466" id="FNanchor_466"></a><a href="#Footnote_466" class="fnanchor">[466]</a></p> + +<p><span class='pagenum'><a name="Page_413" id="Page_413">[Pg 413]</a></span>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.</p> + +<p>It is just as well to conclude at this point what I shall +have to say regarding the value of gold as a commodity.<a name="FNanchor_467" id="FNanchor_467"></a><a href="#Footnote_467" class="fnanchor">[467]</a> +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 organiza<span class='pagenum'><a name="Page_414" id="Page_414">[Pg 414]</a></span>tion. +The point is strikingly illustrated by Walker's<a name="FNanchor_468" id="FNanchor_468"></a><a href="#Footnote_468" class="fnanchor">[468]</a> +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 per<span class='pagenum'><a name="Page_415" id="Page_415">[Pg 415]</a></span>sisted, +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.</p> + +<p>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.<a name="FNanchor_469" id="FNanchor_469"></a><a href="#Footnote_469" class="fnanchor">[469]</a> Silver might well gain in value at the expense +of gold if there were radical changes in the distribu<span class='pagenum'><a name="Page_416" id="Page_416">[Pg 416]</a></span>tion +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.</p> + +<p>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.<a name="FNanchor_470" id="FNanchor_470"></a><a href="#Footnote_470" class="fnanchor">[470]</a></p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_417" id="Page_417">[Pg 417]</a></span></p> +<h3>CHAPTER XXII</h3> + +<h3>THE FUNCTIONS OF MONEY AND THE VALUE +OF MONEY</h3> + + +<p>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.<a name="FNanchor_471" id="FNanchor_471"></a><a href="#Footnote_471" class="fnanchor">[471]</a> +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.</p> + +<p>I shall not now undertake a history of theories of the<span class='pagenum'><a name="Page_418" id="Page_418">[Pg 418]</a></span> +functions of money. Many of the points which follow are +common property of many writers.<a name="FNanchor_472" id="FNanchor_472"></a><a href="#Footnote_472" class="fnanchor">[472]</a> 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.</p> + +<p>The functions of money have been variously described +and named. The following list seems most satisfactory to +me:</p> + +<div class="blockquot"><p> +1. Common measure of values (standard of value).<br /> +2. Medium of exchange.<br /> +3. Legal tender for debts (<i>Zahlungs-</i> or <i>Solutions-mittel</i>).<br /> +4. Standard of deferred payments.<br /> +5. Reserve for credit instruments, including reserve for +government paper money.<br /> +6. Store of value.<br /> +7. Bearer of options. +</p></div> + +<p>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<span class='pagenum'><a name="Page_419" id="Page_419">[Pg 419]</a></span> +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.<a name="FNanchor_473" id="FNanchor_473"></a><a href="#Footnote_473" class="fnanchor">[473]</a> 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 <i>one</i> 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, +<span class='pagenum'><a name="Page_420" id="Page_420">[Pg 420]</a></span> +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:</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="5" summary=""> +<tr><th><i>He has gained</i></th><th><i>He has lost</i></th></tr> +<tr><td align='left'>8 doz. eggs</td><td align='left'>12 lbs. nails</td></tr> +<tr><td align='left'>3 gallons whiskey</td><td align='left'>8 lbs. wire</td></tr> +<tr><td align='left'>4 hams</td><td align='left'>13 lbs. butter</td></tr> +<tr><td align='left'>5 yards cloth</td><td align='left'>10 lbs. sugar</td></tr> +</table></div> + +<p>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.</p> + +<p>Be it noted that this common measure of values does not +necessarily involve the use of a medium of exchange. The +practice of <i>thinking</i> 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 ex<span class='pagenum'><a name="Page_421" id="Page_421">[Pg 421]</a></span>change +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 <i>thought</i> 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.</p> + +<p>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 <i>think</i>, 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,<span class='pagenum'><a name="Page_422" id="Page_422">[Pg 422]</a></span> +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.</p> + +<p>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 <i>thought</i> 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.<a name="FNanchor_474" id="FNanchor_474"></a><a href="#Footnote_474" class="fnanchor">[474]</a> I think, +on the whole, that the term, "common measure of values" +describes the function which I wish to emphasize more<span class='pagenum'><a name="Page_423" id="Page_423">[Pg 423]</a></span> +clearly than the term, standard of values, and I shall, in +general, employ it for that purpose.<a name="FNanchor_475" id="FNanchor_475"></a><a href="#Footnote_475" class="fnanchor">[475]</a></p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>Exchange is an essential part of the productive process, +where you have division of labor with private ownership<span class='pagenum'><a name="Page_424" id="Page_424">[Pg 424]</a></span> +of the instruments of production, and private enterprise. +Values<a name="FNanchor_476" id="FNanchor_476"></a><a href="#Footnote_476" class="fnanchor">[476]</a> 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.</p> + +<p>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.</p> + +<p>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, <i>per +se</i>, 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.</p> + +<p>The "bearer of options" function of money is also a +source of value for money. It is a valuable service. The<span class='pagenum'><a name="Page_425" id="Page_425">[Pg 425]</a></span> +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.</p> + +<p>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 <i>Banque de France</i>), 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.</p> + +<p>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 +<span class='pagenum'><a name="Page_426" id="Page_426">[Pg 426]</a></span> +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 <i>whole</i> +of the "bearer of options" functions arises from dynamic +change. <i>This is the dynamic function</i> of money <i>par excellence</i>. +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.<a name="FNanchor_477" id="FNanchor_477"></a><a href="#Footnote_477" class="fnanchor">[477]</a> I should count it as in considerable degree +a <i>function</i> (using function in the mathematician's sense) of +"business distrust"<a name="FNanchor_478" id="FNanchor_478"></a><a href="#Footnote_478" class="fnanchor">[478]</a> waxing and waning in importance as +<span class='pagenum'><a name="Page_427" id="Page_427">[Pg 427]</a></span> +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 <i>acquisition</i> of wealth in <i>commercial</i> 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 <i>Banque de France</i>, 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."</p> + +<p>The significance of the "bearer of options" function is +<span class='pagenum'><a name="Page_428" id="Page_428">[Pg 428]</a></span>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,<a name="FNanchor_479" id="FNanchor_479"></a><a href="#Footnote_479" class="fnanchor">[479]</a> 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<a name="FNanchor_480" id="FNanchor_480"></a><a href="#Footnote_480" class="fnanchor">[480]</a> have been accustomed to look for +the "pure rate" of interest, <i>i. e.</i>, an interest unmixed with<span class='pagenum'><a name="Page_429" id="Page_429">[Pg 429]</a></span> +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, <i>at the +time they are made</i>, should represent the "pure rate" <i>for +that time</i>.<a name="FNanchor_481" id="FNanchor_481"></a><a href="#Footnote_481" class="fnanchor">[481]</a></p> + +<p>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."</p> + +<p>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.<a name="FNanchor_482" id="FNanchor_482"></a><a href="#Footnote_482" class="fnanchor">[482]</a> 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<span class='pagenum'><a name="Page_430" id="Page_430">[Pg 430]</a></span> +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.<a name="FNanchor_483" id="FNanchor_483"></a><a href="#Footnote_483" class="fnanchor">[483]</a> 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.</p> + +<p>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%.<a name="FNanchor_484" id="FNanchor_484"></a><a href="#Footnote_484" class="fnanchor">[484]</a> 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.<span class='pagenum'><a name="Page_431" id="Page_431">[Pg 431]</a></span></p> + +<p>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.<a name="FNanchor_485" id="FNanchor_485"></a><a href="#Footnote_485" class="fnanchor">[485]</a> He studies <i>two</i> sets of quotations +for call loans, those at the Stock Exchange "Money +Post" and those at the banks and trust companies; <i>seven</i> +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 <i>three</i> under the head of "commercial +paper," namely, double name choice 60- to 90-days, +and two varieties of single name paper.</p> + +<p>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."</p> + +<p>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%.</p> + +<p>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<span class='pagenum'><a name="Page_432" id="Page_432">[Pg 432]</a></span> +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.</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_433" id="Page_433">[Pg 433]</a></span> +money will find the thing elaborately worked out by G. F. +Knapp, in his <i>Staatliche Theorie des Geldes</i>.<a name="FNanchor_486" id="FNanchor_486"></a><a href="#Footnote_486" class="fnanchor">[486]</a> But "legal +tender" money is not always an adequate means of quittance. +If the contract calls for corn, or wheat, or North<span class='pagenum'><a name="Page_434" id="Page_434">[Pg 434]</a></span>ern +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<a name="FNanchor_487" id="FNanchor_487"></a><a href="#Footnote_487" class="fnanchor">[487]</a> 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, <i>at a price</i>, 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 <i>via</i> the bankruptcy court. In other words, the legal +tender function of money, while it does distinguish money<span class='pagenum'><a name="Page_435" id="Page_435">[Pg 435]</a></span> +from other goods as a matter of <i>degree</i>, does not erect an +absolute difference of <i>kind</i>.</p> + +<p>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 +<span class='pagenum'><a name="Page_436" id="Page_436">[Pg 436]</a></span>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.</p> + +<p>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.</p> + +<p>In general, the standard of deferred payments and the +measure of value functions do not, <i>per se</i>, 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.</p> + +<p>The question remains, however, as to the relation of the +rental value, and the capital value, of money. This ques<span class='pagenum'><a name="Page_437" id="Page_437">[Pg 437]</a></span>tion +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 <i>value</i> 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."<a name="FNanchor_488" id="FNanchor_488"></a><a href="#Footnote_488" class="fnanchor">[488]</a> (3) The<span class='pagenum'><a name="Page_438" id="Page_438">[Pg 438]</a></span> +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.</p> + +<p>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 <i>because</i> 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, <i>as</i> 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, +<span class='pagenum'><a name="Page_439" id="Page_439">[Pg 439]</a></span>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 +<i>Theory of the Leisure Class</i>. The <i>differential</i> advantage +of diamonds, when it is borne in mind that the conspicuous +display of wealth is not the <i>only</i> purpose, as a rule, for which +any of these things are bought, that the concrete diamond, +or other good bought, is a <i>bundle</i> of valuable services,<a name="FNanchor_489" id="FNanchor_489"></a><a href="#Footnote_489" class="fnanchor">[489]</a> 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<a name="FNanchor_490" id="FNanchor_490"></a><a href="#Footnote_490" class="fnanchor">[490]</a> in their +purpose of gaining social prestige. They must be part of a +complex of goods of the same sort, to accomplish their +purpose.</p> + +<p>Now it is the <i>differential</i> 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 +<i>class</i> 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.<span class='pagenum'><a name="Page_440" id="Page_440">[Pg 440]</a></span> +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 <i>cause</i> 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.<a name="FNanchor_491" id="FNanchor_491"></a><a href="#Footnote_491" class="fnanchor">[491]</a> But here is a case where +the differential factor is an actual <i>cause</i> of value. If all +wealth were equally effective in displaying itself, no form +of wealth could gain in value as a means of display.</p> + +<p>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<a name="FNanchor_492" id="FNanchor_492"></a><a href="#Footnote_492" class="fnanchor">[492]</a> 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 <i>units</i> +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 <i>aggregate</i> of +wealth, it probably reduces the values of given items.</p> + +<p>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.</p> + +<p>Money, by being valuable, is so far equipped to perform +the money service. But its <i>differential</i> advantage over +other valuable things comes from its superior <i>saleability</i>. +Its original value comes from non-monetary causes, and<span class='pagenum'><a name="Page_441" id="Page_441">[Pg 441]</a></span> +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 <i>saleability</i>. 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.</p> + +<p>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<span class='pagenum'><a name="Page_442" id="Page_442">[Pg 442]</a></span> +money. The reason is that diamonds may give forth a +continuous flow, <i>in the same hands</i>, of the service of conspicuous +display of wealth. Money, however, can perform +most of its services for a given owner <i>only once</i>. 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 <i>one</i> 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.</p> + +<p>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<span class='pagenum'><a name="Page_443" id="Page_443">[Pg 443]</a></span> +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, <i>anything</i> 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.<a name="FNanchor_493" id="FNanchor_493"></a><a href="#Footnote_493" class="fnanchor">[493]</a></p> + +<p>Modern money, in general, however, rests on a system of<span class='pagenum'><a name="Page_444" id="Page_444">[Pg 444]</a></span> +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.</p> + +<p>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 <i>at the limit</i>. +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 +<span class='pagenum'><a name="Page_445" id="Page_445">[Pg 445]</a></span>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.<a name="FNanchor_494" id="FNanchor_494"></a><a href="#Footnote_494" class="fnanchor">[494]</a> +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.</p> + +<p>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<span class='pagenum'><a name="Page_446" id="Page_446">[Pg 446]</a></span> +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 +<i>on a different basis from coin</i>. 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.<a name="FNanchor_495" id="FNanchor_495"></a><a href="#Footnote_495" class="fnanchor">[495]</a> 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 imme<span class='pagenum'><a name="Page_447" id="Page_447">[Pg 447]</a></span>diately. +But as long as there is time for men to work +things out, I should not expect the legal tender feature, +<i>per se</i>, to add to the agio of coined metal even under restricted +coinage.</p> + +<p>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.</p> + +<p>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<a name="FNanchor_496" id="FNanchor_496"></a><a href="#Footnote_496" class="fnanchor">[496]</a> of money might, in<span class='pagenum'><a name="Page_448" id="Page_448">[Pg 448]</a></span> +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.</p> + +<p>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,<a name="FNanchor_497" id="FNanchor_497"></a><a href="#Footnote_497" class="fnanchor">[497]</a> +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.</p> + +<p>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<span class='pagenum'><a name="Page_449" id="Page_449">[Pg 449]</a></span> +transactions as typical of the whole situation.<a name="FNanchor_498" id="FNanchor_498"></a><a href="#Footnote_498" class="fnanchor">[498]</a> I have elsewhere +shown, however, that, in so far as Kinley's figures +for 1909 give us a clue,<a name="FNanchor_499" id="FNanchor_499"></a><a href="#Footnote_499" class="fnanchor">[499]</a> 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%,<a name="FNanchor_500" id="FNanchor_500"></a><a href="#Footnote_500" class="fnanchor">[500]</a> 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.</p> + +<p>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.</p> + +<p>Under the system of free and gratuitous coinage, no agio<span class='pagenum'><a name="Page_450" id="Page_450">[Pg 450]</a></span> +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.</p> + +<p>What, then, shall we say of the way in which the forces +drawing gold from the arts into money manifest themselves?</p> + +<p>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<span class='pagenum'><a name="Page_451" id="Page_451">[Pg 451]</a></span> +I fear that I shall fail to satisfy the demand for an application +of curves to the problem!</p> + +<p>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 <i>pari passu</i>, 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,<a name="FNanchor_501" id="FNanchor_501"></a><a href="#Footnote_501" class="fnanchor">[501]</a> +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.</p> + +<p>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<span class='pagenum'><a name="Page_452" id="Page_452">[Pg 452]</a></span> +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 <i>capital values</i> 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 <i>not true of gold</i>, 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. <i>Because gold is a valuable</i>, 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,<span class='pagenum'><a name="Page_453" id="Page_453">[Pg 453]</a></span> +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 <i>value</i> in +highly saleable form.<a name="FNanchor_502" id="FNanchor_502"></a><a href="#Footnote_502" class="fnanchor">[502]</a> 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.</p> + +<p>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 <i>change</i>,<span class='pagenum'><a name="Page_454" id="Page_454">[Pg 454]</a></span> +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.</p> + +<p>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.</p> + +<p>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, <i>then the money-rates will come into comparison with the +profits he expects to make from working up the gold</i>. 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<span class='pagenum'><a name="Page_455" id="Page_455">[Pg 455]</a></span> +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<span class='pagenum'><a name="Page_456" id="Page_456">[Pg 456]</a></span> +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.</p> + +<p>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.</p> + +<p>Business in general, as well as the jewelers, may be mak<span class='pagenum'><a name="Page_457" id="Page_457">[Pg 457]</a></span>ing +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.</p> + +<p>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<span class='pagenum'><a name="Page_458" id="Page_458">[Pg 458]</a></span> +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 <i>raison d'être</i>.</p> + +<p>In the next chapter I shall take up the problems of credit, +and the money market.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_459" id="Page_459">[Pg 459]</a></span></p> +<h3>CHAPTER XXIII</h3> + +<h3>CREDIT</h3> + + +<p>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 "<i>Wesen</i>" +of the thing defined never presents itself, but is only to be +reached by violent abstraction. To pick out one element—as +"futurity"<a name="FNanchor_503" id="FNanchor_503"></a><a href="#Footnote_503" class="fnanchor">[503]</a>—as marking off credit from other things would +be an illustration of this. Or to take the notion of <i>promise</i>, +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 <i>future</i><span class='pagenum'><a name="Page_460" id="Page_460">[Pg 460]</a></span> +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 <i>differentiæ</i> +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.</p> + +<p>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 <i>ownership</i>. 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<span class='pagenum'><a name="Page_461" id="Page_461">[Pg 461]</a></span> +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.</p> + +<p>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<span class='pagenum'><a name="Page_462" id="Page_462">[Pg 462]</a></span> +have given us such a definition. But analysis and description +will precede definition.</p> + +<p>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>i. e.</i>, 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<span class='pagenum'><a name="Page_463" id="Page_463">[Pg 463]</a></span> +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.</p> + +<p>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.<a name="FNanchor_504" id="FNanchor_504"></a><a href="#Footnote_504" class="fnanchor">[504]</a> +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<span class='pagenum'><a name="Page_464" id="Page_464">[Pg 464]</a></span> +different sort. Most of it arises from business activities +of one kind or another, and rests on expectation of profit +and loss.<a name="FNanchor_505" id="FNanchor_505"></a><a href="#Footnote_505" class="fnanchor">[505]</a> Such loans are not made when borrowers, as +well as lenders, have not confidence in the transactions they +mean to put through.</p> + +<p>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.<span class='pagenum'><a name="Page_465" id="Page_465">[Pg 465]</a></span> +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.</p> + +<p>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 <i>effective</i> +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<span class='pagenum'><a name="Page_466" id="Page_466">[Pg 466]</a></span> +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 <i>he</i> 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.</p> + +<p>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.</p> + +<p>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,<span class='pagenum'><a name="Page_467" id="Page_467">[Pg 467]</a></span> +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.</p> + +<p>In <i>Social Value</i> (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-<i>feeling</i>" 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.</p> + +<p>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<span class='pagenum'><a name="Page_468" id="Page_468">[Pg 468]</a></span> +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 <i>belief</i> 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.</p> + +<p>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 <i>rights</i>, which involve the +payment of money in the future, sold for money, and priced +in money. In general, it is <i>rights</i>, rather than <i>things</i>, +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, <i>in personam</i> or <i>in rem</i>, 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 rela<span class='pagenum'><a name="Page_469" id="Page_469">[Pg 469]</a></span>tions +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 <i>rights</i>, at <i>prices</i> (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.</p> + +<p>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,<span class='pagenum'><a name="Page_470" id="Page_470">[Pg 470]</a></span>—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.</p> + +<p>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.</p> + +<p>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 <i>place</i>, are called for. This<span class='pagenum'><a name="Page_471" id="Page_471">[Pg 471]</a></span> +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 <i>amount</i> of money is named in +the contract, for a stipulated time?</p> + +<p>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,<a name="FNanchor_506" id="FNanchor_506"></a><a href="#Footnote_506" class="fnanchor">[506]</a> and which yet call for the payment +of the principal at a stipulated time?</p> + +<p>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<span class='pagenum'><a name="Page_472" id="Page_472">[Pg 472]</a></span> +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?</p> + +<p>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.</p> + +<p>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.<span class='pagenum'><a name="Page_473" id="Page_473">[Pg 473]</a></span> +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.</p> + +<p>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 pay<span class='pagenum'><a name="Page_474" id="Page_474">[Pg 474]</a></span>ments, +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.</p> + +<p>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.</p> + +<p>All these debts in terms of money, to which, in the aggregate, +we have given the name, volume of credit, have grown +out of <i>exchanges</i>. 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 <i>volume</i> 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.<span class='pagenum'><a name="Page_475" id="Page_475">[Pg 475]</a></span></p> + +<p>This will be clearer when we raise the question as to <i>why</i> +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, <i>credit has functioned as a means +of increasing the marketability or saleability of non-pecuniary +forms of wealth</i>. 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.<span class='pagenum'><a name="Page_476" id="Page_476">[Pg 476]</a></span></p> + +<p>Credit thus tends to universalize that characteristic +which Menger<a name="FNanchor_507" id="FNanchor_507"></a><a href="#Footnote_507" class="fnanchor">[507]</a> 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%.<a name="FNanchor_508" id="FNanchor_508"></a><a href="#Footnote_508" class="fnanchor">[508]</a> +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 <i>portion</i> 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,—<i>the</i> chief function for +our purposes—to make fluid and saleable articles of wealth +other than money; to universalize the quality of saleability.</p> + +<p>This justifies us in our contention made before that <i>all</i><span class='pagenum'><a name="Page_477" id="Page_477">[Pg 477]</a></span> +corporate securities, whether stocks or bonds,<a name="FNanchor_509" id="FNanchor_509"></a><a href="#Footnote_509" class="fnanchor">[509]</a> 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.</p> + +<p>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.</p> + +<p>Further, as objects of value other than money gain in +saleability, money tends to lose its <i>differential advantage</i> in<span class='pagenum'><a name="Page_478" id="Page_478">[Pg 478]</a></span> +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 <i>raison d'être</i> 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.</p> + +<p>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.</p> + +<p>First, objection will be offered to the doctrine that all<span class='pagenum'><a name="Page_479" id="Page_479">[Pg 479]</a></span> +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.<span class='pagenum'><a name="Page_480" id="Page_480">[Pg 480]</a></span></p> + +<p>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, +<i>supra</i>, 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 <i>ideal</i> values,—those whose fate is dependent +on the outcome of the war—enter into and increase the<span class='pagenum'><a name="Page_481" id="Page_481">[Pg 481]</a></span> +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.</p> + +<p>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 +<i>rights</i>. 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,<a name="FNanchor_510" id="FNanchor_510"></a><a href="#Footnote_510" class="fnanchor">[510]</a> 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<span class='pagenum'><a name="Page_482" id="Page_482">[Pg 482]</a></span> +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."<a name="FNanchor_511" id="FNanchor_511"></a><a href="#Footnote_511" class="fnanchor">[511]</a> +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 <i>sine +qua non</i> 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 <i>of a given establishment</i> 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<span class='pagenum'><a name="Page_483" id="Page_483">[Pg 483]</a></span> +concrete goods as such, and if these "intangibles" have +value, they may have credits based upon them.<a name="FNanchor_512" id="FNanchor_512"></a><a href="#Footnote_512" class="fnanchor">[512]</a></p> + +<p>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<span class='pagenum'><a name="Page_484" id="Page_484">[Pg 484]</a></span> +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.<a name="FNanchor_513" id="FNanchor_513"></a><a href="#Footnote_513" class="fnanchor">[513]</a></p> + +<p>Joseph Schumpeter, in his <i>Theorie der wirtschaftlichen +Entwicklung</i>, has made much of the rôle of the banker in +economic evolution. He sees in the banker a creator of +"<i>Kaufkraft</i>," 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 <i>Kaufkraft</i> is the +true <i>Kapital</i> which the new enterprise requires. Capital, +thus defined, is not an accumulation of goods, is not embodied +in goods. It is an <i>agent</i>, a <i>power</i>, 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.<a name="FNanchor_514" id="FNanchor_514"></a><a href="#Footnote_514" class="fnanchor">[514]</a> +<span class='pagenum'><a name="Page_485" id="Page_485">[Pg 485]</a></span> +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 "<i>Wesen</i>" 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 <i>Deckung</i>. 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 <i>ad hoc</i>. 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 <i>Kapital</i>. His contentions that the new +credit does not rest on goods, that it has no <i>Deckung</i>, and +that we have a new thing in the world since in dynamic +credit we have a case of temporal discrepancy between the +<span class='pagenum'><a name="Page_486" id="Page_486">[Pg 486]</a></span>making of obligations and the ability to pay them, calls for +further analysis.</p> + +<p>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 <i>values</i>. 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 <i>raison d'être</i> of the new credit is the +new values which have come into existence: the new plan +of the entrepreneur, <i>validated by the banker</i>, 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.</p> + +<p>The banker's validation of the plan may be an essential +factor in its value. <i>Belief</i> 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<span class='pagenum'><a name="Page_487" id="Page_487">[Pg 487]</a></span> +granting of credit. But the value of the <i>bank-credit</i> rests +ultimately in the <i>prestige</i> 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.</p> + +<p>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 +<i>as values</i>, the two are of the same psychological stuff and +substance: futurity and belief are essential elements in both +of them.</p> + +<p>Stable belief, and strong belief, are easier to evoke in the +case of the established and the familiar. New ways of<span class='pagenum'><a name="Page_488" id="Page_488">[Pg 488]</a></span> +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 <i>buyers</i> 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 <i>start</i> dynamic changes, even though bank-credit +may do, and does do, that. The chief reason for bank<span class='pagenum'><a name="Page_489" id="Page_489">[Pg 489]</a></span>-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.</p> + +<p>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.</p> + +<p>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>i. e.</i>, for those things which he can quickly dispose of for +cash, or for the promises of other bankers which are the<span class='pagenum'><a name="Page_490" id="Page_490">[Pg 490]</a></span> +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<span class='pagenum'><a name="Page_491" id="Page_491">[Pg 491]</a></span> +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).</p> + +<p>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 +<i>sine qua non</i> for a bank which expects its notes or deposit +currency to have general acceptability.</p> + +<p>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.<a name="FNanchor_515" id="FNanchor_515"></a><a href="#Footnote_515" class="fnanchor">[515]</a> 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<span class='pagenum'><a name="Page_492" id="Page_492">[Pg 492]</a></span> +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).</p> + +<p>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<span class='pagenum'><a name="Page_493" id="Page_493">[Pg 493]</a></span> +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<a name="FNanchor_516" id="FNanchor_516"></a><a href="#Footnote_516" class="fnanchor">[516]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_494" id="Page_494">[Pg 494]</a></span> +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 4½% 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, es<span class='pagenum'><a name="Page_495" id="Page_495">[Pg 495]</a></span>pecially +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.</p> + +<p>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.</p> + +<p>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 in<span class='pagenum'><a name="Page_496" id="Page_496">[Pg 496]</a></span>clude +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<span class='pagenum'><a name="Page_497" id="Page_497">[Pg 497]</a></span> +even increased.<a name="FNanchor_517" id="FNanchor_517"></a><a href="#Footnote_517" class="fnanchor">[517]</a> 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 <i>par excellence</i> 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.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_498" id="Page_498">[Pg 498]</a></span></p> +<h3>CHAPTER XXIV</h3> + +<h3>CREDIT—BANK ASSETS AND BANK RESERVES</h3> + + +<p>In traditional discussions of banking, the impression is +given that commercial paper is the normal and dominant +type of banking assets.<a name="FNanchor_518" id="FNanchor_518"></a><a href="#Footnote_518" class="fnanchor">[518]</a> 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,<a name="FNanchor_519" id="FNanchor_519"></a><a href="#Footnote_519" class="fnanchor">[519]</a> will occasion dismay:</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="5" summary=""> +<tr><th></th><th>(000,000 omitted)</th></tr> +<tr><td align='left'>Loans on real estate</td><td align='right'>$ 2,505</td></tr> +<tr><td align='left'>Loans on other collateral security</td><td align='right'>3,975</td></tr> +<tr><td align='left'>Other loans and discounts</td><td align='right'>4,821</td></tr> +<tr><td align='left'>Overdrafts</td><td align='right'>69</td></tr> +<tr><td align='left'>United States bonds</td><td align='right'>792</td></tr> +<tr><td align='left'>State, county and municipal bonds</td><td align='right'>1,091</td></tr> +<tr><td align='left'>Railroad bonds and stocks</td><td align='right'>1,560</td></tr> +<tr><td align='left'>Bonds of other public service corporations</td><td align='right'>466</td></tr> +<tr><td align='left'>Other stocks, bonds, etc</td><td align='right'>703</td></tr> +<tr><td align='left'>Due from other banks and bankers</td><td align='right'>2,562</td></tr> +<tr><td align='left'>Real estate, furniture, etc</td><td align='right'>544</td></tr> +<tr><td align='left'>Checks and other cash items</td><td align='right'>437</td></tr> +<tr><td align='left'>Cash on hand</td><td align='right'>1,452</td></tr> +<tr><td align='left'>Other resources</td><td align='right'>111</td></tr> +<tr><th>Total Resources</th><th align='right'>$21,095</th></tr> +</table></div> + +<p>These figures, however, call for further analysis. They +include figures from institutions which should not be +counted with commercial banks. The percentage of real<span class='pagenum'><a name="Page_499" id="Page_499">[Pg 499]</a></span> +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.</p> + +<p>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 com<span class='pagenum'><a name="Page_500" id="Page_500">[Pg 500]</a></span>mercial +paper, we raise again the question as to where it may +be found in the items above given.</p> + +<p>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.<a name="FNanchor_520" id="FNanchor_520"></a><a href="#Footnote_520" class="fnanchor">[520]</a> 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. <i>None</i> 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.<span class='pagenum'><a name="Page_501" id="Page_501">[Pg 501]</a></span></p> + +<p>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,<a name="FNanchor_521" id="FNanchor_521"></a><a href="#Footnote_521" class="fnanchor">[521]</a> +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.<a name="FNanchor_522" id="FNanchor_522"></a><a href="#Footnote_522" class="fnanchor">[522]</a></p> + +<p><span class='pagenum'><a name="Page_502" id="Page_502">[Pg 502]</a></span>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.</p> + +<p>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<a name="FNanchor_523" id="FNanchor_523"></a><a href="#Footnote_523" class="fnanchor">[523]</a> 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,<a name="FNanchor_524" id="FNanchor_524"></a><a href="#Footnote_524" class="fnanchor">[524]</a> however, the +Comptroller separates the item, "loans on other collateral<span class='pagenum'><a name="Page_503" id="Page_503">[Pg 503]</a></span> +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?</p> + +<p>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.<a name="FNanchor_525" id="FNanchor_525"></a><a href="#Footnote_525" class="fnanchor">[525]</a> It may be doubted if very much of this<span class='pagenum'><a name="Page_504" id="Page_504">[Pg 504]</a></span> +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.</p> + +<p>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?<a name="FNanchor_526" id="FNanchor_526"></a><a href="#Footnote_526" class="fnanchor">[526]</a> 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<span class='pagenum'><a name="Page_505" id="Page_505">[Pg 505]</a></span> +two name paper, unsecured. Not many loans to retailers +and wholesalers will fall in the category under +discussion.</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_506" id="Page_506">[Pg 506]</a></span> +"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.</p> + +<p>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:</p> + + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="10" summary=""> +<tr><th></th><th colspan='4'>(000,000 omitted)<a name="FNanchor_527" id="FNanchor_527"></a><a href="#Footnote_527" class="fnanchor">[527]</a></th></tr> +<tr><th><i>Resources</i></th><th><i>State Banks</i></th><th><i>National Banks</i></th><th><i>Trust Companies</i></th><th><i>Aggregate</i></th></tr> +<tr><td align='left'>Real estate loans</td><td align='right'>414</td><td align='right'>57</td><td align='right'>377</td><td align='right'>848</td></tr> +<tr><td align='left'>Collateral loans</td><td align='right'>559</td><td align='right'>1,939</td><td align='right'>1,222</td><td align='right'>3,720</td></tr> +<tr><td align='left'>All other loans</td><td align='right'>1,112</td><td align='right'>2,966</td><td align='right'>460</td><td align='right'>4,538</td></tr> +<tr><td align='left'>U. S. bonds</td><td align='right'>5</td><td align='right'>740</td><td align='right'>3</td><td align='right'>748</td></tr> +<tr><td align='left'>State, county and municipal bonds</td><td align='right'>65</td><td align='right'>156</td><td align='right'>155</td><td align='right'>376</td></tr> +<tr><td align='left'>Railway stocks and bonds</td><td align='right'>75</td><td align='right'>351</td><td align='right'>362</td><td align='right'>788</td></tr> +<tr><td align='left'>Bonds of other public service corporations</td><td align='right'>50</td><td align='right'>148</td><td align='right'>168</td><td align='right'>366</td></tr> +<tr><td align='left'>Other bonds, stocks, etc.</td><td align='right'>95</td><td align='right'>208</td><td align='right'>769</td><td align='right'>1,072</td></tr> +<tr><td align='left'>Total of items here listed</td><td align='right'>2,375</td><td align='right'>6,565</td><td align='right'>3,516</td><td align='right'>12,456</td></tr> +<tr><th>Total Resources</th><th align='right'>3,338</th><th align='right'>9,368</th><th align='right'>4,068</th><th align='right'>16,774</th></tr> +</table></div> + +<p><span class='pagenum'><a name="Page_507" id="Page_507">[Pg 507]</a></span></p> + +<p>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 13½% of the assets of these institutions in the +form of "commercial paper," an increase over the 11½% +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 +27½%.</p> + +<p>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.<a name="FNanchor_528" id="FNanchor_528"></a><a href="#Footnote_528" class="fnanchor">[528]</a> This<span class='pagenum'><a name="Page_508" id="Page_508">[Pg 508]</a></span> +would mean 16½% of the total resources of these institutions +in stock exchange loans—still well above the 13½% +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 13½% 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 27½.</p> + +<p>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 +<span class='pagenum'><a name="Page_509" id="Page_509">[Pg 509]</a></span>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, <i>overcertifications</i> +and "<i>morning loans</i>." 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:</p> + +<div class="blockquot"><p>Real estate loans, 7.4%;</p> + +<p>Collateral loans, 30%, of which we assign to stock exchange +collateral, 22½%, and to other collateral, 7½%;</p> + +<p>All other loans, 36.4%, of which we assign to "Commercial paper" +18.2%;</p> + +<p>Total stocks and bonds, 26%.</p></div> + +<p>Adding the percentages for stock exchange collateral loans +and for stocks and bonds owned, we get 48½% 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,<a name="FNanchor_529" id="FNanchor_529"></a><a href="#Footnote_529" class="fnanchor">[529]</a> 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<span class='pagenum'><a name="Page_510" id="Page_510">[Pg 510]</a></span> +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.</p> + +<p>A final comparison,<a name="FNanchor_530" id="FNanchor_530"></a><a href="#Footnote_530" class="fnanchor">[530]</a> which will conclude this perhaps too +wearisome analysis of these figures, will consider the loans +alone, neglecting the securities owned:</p> + +<p> Of total loans:</p> + +<div class="blockquot"><p>Real estate loans, 9.3%;</p> + +<p>Collateral loans, 40.8%, of which we assign to stock +exchange collateral, 30.6%, and to other collateral, +10.2%;</p> + +<p>All other loans, 49.6%, of which we assign to "Commercial +paper," 24.8%.</p></div> + +<p>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,<a name="FNanchor_531" id="FNanchor_531"></a><a href="#Footnote_531" class="fnanchor">[531]</a> illustrate the tendency:<span class='pagenum'><a name="Page_511" id="Page_511">[Pg 511]</a></span></p> + + + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary=""> +<tr><th align='center'> </th><th align='center' colspan='2'>(000,000 omitted)</th></tr> +<tr><th align='center'><i>Date</i></th><th align='center'><i>Loans on Commercial Paper</i><a name="FNanchor_532" id="FNanchor_532"></a><a href="#Footnote_532" class="fnanchor">[532]</a></th><th align='center'><i>Advances on Securities</i></th></tr> +<tr><td align='center'>1886</td><td align='center'>146</td><td align='center'>107</td></tr> +<tr><td align='center'>1890</td><td align='center'>151</td><td align='center'>145</td></tr> +<tr><td align='center'>1892</td><td align='center'>160</td><td align='center'>183</td></tr> +<tr><td align='center'>1894</td><td align='center'>168</td><td align='center'>192</td></tr> +<tr><td align='center'>1896</td><td align='center'>151</td><td align='center'>162</td></tr> +<tr><td align='center'>1898</td><td align='center'>181</td><td align='center'>260</td></tr> +<tr><td align='center'>1900</td><td align='center'>185</td><td align='center'>384</td></tr> +<tr><td align='center'>1902</td><td align='center'>210</td><td align='center'>396</td></tr> +<tr><td align='center'>1903</td><td align='center'>239</td><td align='center'>391</td></tr> +<tr><td align='center'>1904</td><td align='center'>268</td><td align='center'>538</td></tr> +</table></div> + +<p>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<a name="FNanchor_533" id="FNanchor_533"></a><a href="#Footnote_533" class="fnanchor">[533]</a> in selected years +from 1875 to 1903:</p> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="5" summary=""> +<tr><th align='center'> </th><th align='center' colspan='3'>(Figures in francs, 000,000 omitted)</th></tr> +<tr><th align='center'><i>Date</i></th><th align='center'><i>Note Circulation</i></th><th align='center'><i>Commercial Loans</i></th><th align='center'><i>Advances on Securities</i></th></tr> +<tr><td align='center'>1875</td><td align='center'>9,699</td><td align='center'>4,027</td><td align='center'>828</td></tr> +<tr><td align='center'>1880</td><td align='center'>10,482</td><td align='center'>3,384</td><td align='center'>1,112</td></tr> +<tr><td align='center'>1885</td><td align='center'>11,662</td><td align='center'>4,050</td><td align='center'>1,231</td></tr> +<tr><td align='center'>1890</td><td align='center'>13,194</td><td align='center'>5,192</td><td align='center'>1,549</td></tr> +<tr><td align='center'>1895</td><td align='center'>15,896</td><td align='center'>5,328</td><td align='center'>3,669</td></tr> +<tr><td align='center'>1899</td><td align='center'>14,992</td><td align='center'>8,352</td><td align='center'>4,037</td></tr> +<tr><td align='center'>1900</td><td align='center'>15,906</td><td align='center'>8,514</td><td align='center'>4,171</td></tr> +<tr><td align='center'>1902</td><td align='center'>16,215</td><td align='center'>6,939</td><td align='center'>4,178</td></tr> +<tr><td align='center'>1903</td><td align='center'>16,539</td><td align='center'>6,147</td><td align='center'>4,129</td></tr> +</table></div> + +<p>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, +<span class='pagenum'><a name="Page_512" id="Page_512">[Pg 512]</a></span> +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.</p> + +<p>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 <i>activity</i> of different classes +of deposits in the balance sheet sense, and so, indirectly, of +different classes of <i>loans</i>.</p> + +<p>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 de<span class='pagenum'><a name="Page_513" id="Page_513">[Pg 513]</a></span>posited +offset the amounts borrowed.<a name="FNanchor_534" id="FNanchor_534"></a><a href="#Footnote_534" class="fnanchor">[534]</a> 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."</p> + +<p>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."<a name="FNanchor_535" id="FNanchor_535"></a><a href="#Footnote_535" class="fnanchor">[535]</a> 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.<a name="FNanchor_536" id="FNanchor_536"></a><a href="#Footnote_536" class="fnanchor">[536]</a> 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 +<i>include</i> all commercial deposits, and uncertainty as<span class='pagenum'><a name="Page_514" id="Page_514">[Pg 514]</a></span> +to the extent to which they <i>exclude</i> 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.</p> + +<p>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.<a name="FNanchor_537" id="FNanchor_537"></a><a href="#Footnote_537" class="fnanchor">[537]</a> +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,<span class='pagenum'><a name="Page_515" id="Page_515">[Pg 515]</a></span> +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.<a name="FNanchor_538" id="FNanchor_538"></a><a href="#Footnote_538" class="fnanchor">[538]</a> Had they been included, the<span class='pagenum'><a name="Page_516" id="Page_516">[Pg 516]</a></span> +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.</p> + +<p>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.<a name="FNanchor_539" id="FNanchor_539"></a><a href="#Footnote_539" class="fnanchor">[539]</a> 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.<a name="FNanchor_540" id="FNanchor_540"></a><a href="#Footnote_540" class="fnanchor">[540]</a> The active deposits and the +liquid loans are chiefly connected with activities in finance +and speculation.</p> + +<p>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<span class='pagenum'><a name="Page_517" id="Page_517">[Pg 517]</a></span> +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 +<i>liquidity</i> 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<span class='pagenum'><a name="Page_518" id="Page_518">[Pg 518]</a></span> +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"!<a name="FNanchor_541" id="FNanchor_541"></a><a href="#Footnote_541" class="fnanchor">[541]</a> Wall Street is rather preventing +that life blood from coagulating!</p> + +<p>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 +<i>via</i> 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<span class='pagenum'><a name="Page_519" id="Page_519">[Pg 519]</a></span> +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."<a name="FNanchor_542" id="FNanchor_542"></a><a href="#Footnote_542" class="fnanchor">[542]</a> 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 <i>if</i> there is, or should come to be, a "Money +Trust," it is a trust concerned with <i>financing industry, +through handling security issues</i>, and not a trust <i>in the granting +of ordinary commercial credit.</i><a name="FNanchor_543" id="FNanchor_543"></a><a href="#Footnote_543" class="fnanchor">[543]</a> 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 com<span class='pagenum'><a name="Page_520" id="Page_520">[Pg 520]</a></span>mercial +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."<a name="FNanchor_544" id="FNanchor_544"></a><a href="#Footnote_544" class="fnanchor">[544]</a></p> + +<p>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<span class='pagenum'><a name="Page_521" id="Page_521">[Pg 521]</a></span> +par.<a name="FNanchor_545" id="FNanchor_545"></a><a href="#Footnote_545" class="fnanchor">[545]</a> 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.<a name="FNanchor_546" id="FNanchor_546"></a><a href="#Footnote_546" class="fnanchor">[546]</a> The<span class='pagenum'><a name="Page_522" id="Page_522">[Pg 522]</a></span> +years of extraordinary stock sales have always been "bull" +years. There have been big "bear" days,<a name="FNanchor_547" id="FNanchor_547"></a><a href="#Footnote_547" class="fnanchor">[547]</a> 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,<a name="FNanchor_548" id="FNanchor_548"></a><a href="#Footnote_548" class="fnanchor">[548]</a> "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"<a name="FNanchor_549" id="FNanchor_549"></a><a href="#Footnote_549" class="fnanchor">[549]</a> 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,<a name="FNanchor_550" id="FNanchor_550"></a><a href="#Footnote_550" class="fnanchor">[550]</a> but the money and credit used by specula<span class='pagenum'><a name="Page_523" id="Page_523">[Pg 523]</a></span>tors, +bill brokers, dealers in foreign exchange, investment +bankers, etc., increases, rather than decreases, the funds +available for ordinary industry and commerce.</p> + +<p>I have made clear the distinction between the direct and +indirect financing of industry by banks. Great banks in +Continental Europe often <i>buy</i> 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<a name="FNanchor_551" id="FNanchor_551"></a><a href="#Footnote_551" class="fnanchor">[551]</a> +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.</p> + +<p>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.<a name="FNanchor_552" id="FNanchor_552"></a><a href="#Footnote_552" class="fnanchor">[552]</a> They<span class='pagenum'><a name="Page_524" id="Page_524">[Pg 524]</a></span> +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<span class='pagenum'><a name="Page_525" id="Page_525">[Pg 525]</a></span> +yield as between more saleable and less saleable forms of +rights.</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_526" id="Page_526">[Pg 526]</a></span> +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.</p> + +<p>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<a name="FNanchor_553" id="FNanchor_553"></a><a href="#Footnote_553" class="fnanchor">[553]</a> 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<span class='pagenum'><a name="Page_527" id="Page_527">[Pg 527]</a></span> +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.</p> + +<p>This is not to accept Schumpeter's doctrine,<a name="FNanchor_554" id="FNanchor_554"></a><a href="#Footnote_554" class="fnanchor">[554]</a> 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<span class='pagenum'><a name="Page_528" id="Page_528">[Pg 528]</a></span> +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.</p> + +<p>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<span class='pagenum'><a name="Page_529" id="Page_529">[Pg 529]</a></span> +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 <i>Bayerische Landwirtschaftsbank</i>. +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.</p> + +<p>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 <i>differential</i> +advantages.</p> + +<p>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<span class='pagenum'><a name="Page_530" id="Page_530">[Pg 530]</a></span> +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.<a name="FNanchor_555" id="FNanchor_555"></a><a href="#Footnote_555" class="fnanchor">[555]</a> 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,<a name="FNanchor_556" id="FNanchor_556"></a><a href="#Footnote_556" class="fnanchor">[556]</a> 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.</p> + +<p>This is, in general, true throughout the world,<a name="FNanchor_557" id="FNanchor_557"></a><a href="#Footnote_557" class="fnanchor">[557]</a> 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<span class='pagenum'><a name="Page_531" id="Page_531">[Pg 531]</a></span> +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<span class='pagenum'><a name="Page_532" id="Page_532">[Pg 532]</a></span> +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.<a name="FNanchor_558" id="FNanchor_558"></a><a href="#Footnote_558" class="fnanchor">[558]</a> They will feel the need for less reserves, also, +with a wider rediscount market.</p> + +<p><i>Within a given country</i>, 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 <i>result</i>, and not a +<i>cause</i>, 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.<a name="FNanchor_559" id="FNanchor_559"></a><a href="#Footnote_559" class="fnanchor">[559]</a> 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,"<span class='pagenum'><a name="Page_533" id="Page_533">[Pg 533]</a></span> +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.<a name="FNanchor_560" id="FNanchor_560"></a><a href="#Footnote_560" class="fnanchor">[560]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_534" id="Page_534">[Pg 534]</a></span> +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.<a name="FNanchor_561" id="FNanchor_561"></a><a href="#Footnote_561" class="fnanchor">[561]</a></p> + +<p>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<span class='pagenum'><a name="Page_535" id="Page_535">[Pg 535]</a></span> +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.</p> + +<p>I would refer again to the discussion by J. M. Keynes, +quoted in Part II.<a name="FNanchor_562" id="FNanchor_562"></a><a href="#Footnote_562" class="fnanchor">[562]</a> 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<a name="FNanchor_563" id="FNanchor_563"></a><a href="#Footnote_563" class="fnanchor">[563]</a> 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.<span class='pagenum'><a name="Page_536" id="Page_536">[Pg 536]</a></span></p> + +<p>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.<a name="FNanchor_564" id="FNanchor_564"></a><a href="#Footnote_564" class="fnanchor">[564]</a> 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.<a name="FNanchor_565" id="FNanchor_565"></a><a href="#Footnote_565" class="fnanchor">[565]</a></p> + +<p>The reserve function of money is essentially a <i>dynamic</i> +function. The reserve function is merely a phase of the +bearer of options function.<a name="FNanchor_566" id="FNanchor_566"></a><a href="#Footnote_566" class="fnanchor">[566]</a> It is the practice of quantity<span class='pagenum'><a name="Page_537" id="Page_537">[Pg 537]</a></span> +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, <i>under perfectly +static conditions</i> [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."<a name="FNanchor_567" id="FNanchor_567"></a><a href="#Footnote_567" class="fnanchor">[567]</a> Kemmerer quotes the following +passage from A. P. Andrew: "In the long run, <i>as apart +from cyclic oscillations</i>, the quantity of bank-credit is governed +by the quantity of money."<a name="FNanchor_568" id="FNanchor_568"></a><a href="#Footnote_568" class="fnanchor">[568]</a> 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.<a name="FNanchor_569" id="FNanchor_569"></a><a href="#Footnote_569" class="fnanchor">[569]</a> Professor Taussig, whose view was<span class='pagenum'><a name="Page_538" id="Page_538">[Pg 538]</a></span> +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 <i>possible</i> 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!</p> + +<p>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 <i>are</i>, 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 +<span class='pagenum'><a name="Page_539" id="Page_539">[Pg 539]</a></span>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,"<span class='pagenum'><a name="Page_540" id="Page_540">[Pg 540]</a></span> +have come nearer to realizing the assumptions of static +economic theory, than is true of any other country on earth.</p> + +<p>The very fact, for one thing, that England is the great +<i>international</i> 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 <i>The Americas</i> for April, 1916,<a name="FNanchor_570" id="FNanchor_570"></a><a href="#Footnote_570" class="fnanchor">[570]</a> 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<span class='pagenum'><a name="Page_541" id="Page_541">[Pg 541]</a></span> +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.</p> + +<p>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!</p> + +<p>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<a name="FNanchor_571" id="FNanchor_571"></a><a href="#Footnote_571" class="fnanchor">[571]</a> in<span class='pagenum'><a name="Page_542" id="Page_542">[Pg 542]</a></span> +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 <i>unorganized</i> 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 +<i>more</i> marketable, gold—whose services are needed because +of its <i>superior</i> marketability—becomes <i>less</i> necessary.</p> + +<p>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<span class='pagenum'><a name="Page_543" id="Page_543">[Pg 543]</a></span> +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.</p> + +<p>As we approach static conditions, we need less and less +gold reserve behind bank demand liabilities. <i>The static +law of bank reserves is that none are needed!</i> 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.</p> + +<p>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 <i>money</i> 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.</p> + +<p>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.<span class='pagenum'><a name="Page_544" id="Page_544">[Pg 544]</a></span></p> + +<p>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.</p> + + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_545" id="Page_545">[Pg 545]</a></span></p> +<h2><a name="PartIV" id="PartIV"></a>PART IV. THE RECONCILIATION OF STATICS<br /> +AND DYNAMICS</h2> +<p><span class='pagenum'><a name="Page_546" id="Page_546">[Pg 546]</a></span></p> + + +<hr style="width: 100%;" /> +<p><span class='pagenum'><a name="Page_547" id="Page_547">[Pg 547]</a></span></p> +<h3>CHAPTER XXV</h3> + +<h3>THE RECONCILIATION OF STATICS AND DYNAMICS</h3> + + +<p>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.</p> + +<p>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 im<span class='pagenum'><a name="Page_548" id="Page_548">[Pg 548]</a></span>portance +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.</p> + +<p>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,<a name="FNanchor_572" id="FNanchor_572"></a><a href="#Footnote_572" class="fnanchor">[572]</a> 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.</p> + +<p>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 <i>Principles of Economics</i>, +to go back no further, we have had increasing recognition +of such occurrences as more or less periodic and inevitable,<span class='pagenum'><a name="Page_549" id="Page_549">[Pg 549]</a></span> +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,<a name="FNanchor_573" id="FNanchor_573"></a><a href="#Footnote_573" class="fnanchor">[573]</a> 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.</p> + +<p>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<span class='pagenum'><a name="Page_550" id="Page_550">[Pg 550]</a></span> +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.<a name="FNanchor_574" id="FNanchor_574"></a><a href="#Footnote_574" class="fnanchor">[574]</a></p> + +<p>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.</p> + +<p>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.</p> + +<p>The economic theory of the 19th Century, following the +lead of Adam Smith and Ricardo, has been accustomed to<span class='pagenum'><a name="Page_551" id="Page_551">[Pg 551]</a></span> +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.<a name="FNanchor_575" id="FNanchor_575"></a><a href="#Footnote_575" class="fnanchor">[575]</a> It<span class='pagenum'><a name="Page_552" id="Page_552">[Pg 552]</a></span> +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 <i>under a common measure</i>, 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.</p> + +<p>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.</p> + +<p>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.<a name="FNanchor_576" id="FNanchor_576"></a><a href="#Footnote_576" class="fnanchor">[576]</a></p> + +<p>How is it possible to give proper weight to considerations +drawn from such divergent spheres of thought? Indeed, how<span class='pagenum'><a name="Page_553" id="Page_553">[Pg 553]</a></span> +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.</p> + +<p>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<span class='pagenum'><a name="Page_554" id="Page_554">[Pg 554]</a></span> +statics and dynamics are <i>abstract</i>. <i>Laws</i> are not the same +thing as description and narration. The assertions of +both statics and dynamics are commonly made on the +assumption, "<i>cæteris paribus</i>." 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!<a name="FNanchor_577" id="FNanchor_577"></a><a href="#Footnote_577" class="fnanchor">[577]</a> 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.</p> + +<p>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<a name="FNanchor_578" id="FNanchor_578"></a><a href="#Footnote_578" class="fnanchor">[578]</a> and J. Schumpeter,<a name="FNanchor_579" id="FNanchor_579"></a><a href="#Footnote_579" class="fnanchor">[579]</a> is reserved for +those factors in economic life which make for constructive<span class='pagenum'><a name="Page_555" id="Page_555">[Pg 555]</a></span> +<i>change</i>. 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 <i>in</i> economic life +growing <i>out of</i><a name="FNanchor_580" id="FNanchor_580"></a><a href="#Footnote_580" class="fnanchor">[580]</a> economic causes. Schumpeter narrows the +dynamic factors to one, namely, <i>enterprise</i>, 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.</p> + +<p>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.<a name="FNanchor_581" id="FNanchor_581"></a><a href="#Footnote_581" class="fnanchor">[581]</a> 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.<span class='pagenum'><a name="Page_556" id="Page_556">[Pg 556]</a></span> +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<a name="FNanchor_582" id="FNanchor_582"></a><a href="#Footnote_582" class="fnanchor">[582]</a> 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.</p> + +<p>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.</p> + +<p>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 <i>Social Value</i>, 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 <i>Principles of Sociology</i> +(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<span class='pagenum'><a name="Page_557" id="Page_557">[Pg 557]</a></span> +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<span class='pagenum'><a name="Page_558" id="Page_558">[Pg 558]</a></span> +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.<a name="FNanchor_583" id="FNanchor_583"></a><a href="#Footnote_583" class="fnanchor">[583]</a> 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.</p> + +<p>Now this means that static theory is not <i>value</i> 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 <i>from outside</i> +the system in one or more of the data of the system.<a name="FNanchor_584" id="FNanchor_584"></a><a href="#Footnote_584" class="fnanchor">[584]</a></p> + +<p><span class='pagenum'><a name="Page_559" id="Page_559">[Pg 559]</a></span>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 +<i>theory of value</i>, and the <i>theory of price</i>, statics being price-theory, +and dynamics being value-theory. But this is a +thesis which calls for much elaboration and qualification +<span class='pagenum'><a name="Page_560" id="Page_560">[Pg 560]</a></span>before its significance is made clear, to say nothing of its +justification being established.</p> + +<hr style='width: 45%;' /> + +<p>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 <i>Theory of +Business Enterprise</i>, and in his other writings on the nature +of capital, etc. Something more in this direction I have +done in my <i>Social Value</i>, and other writers have elaborated +the notion. (2) The case for the second contention +has been made in detail in my <i>Social Value</i>, and in what +follows I shall rely chiefly on the discussion presented there, +and in the chapter on "Value" in this book.</p> + +<p>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<span class='pagenum'><a name="Page_561" id="Page_561">[Pg 561]</a></span> +question of folk psychology rather than of material fact." +(<i>Theory of Business Enterprise</i>, 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.</p> + +<p>The feature of static theory which Veblen chiefly em<span class='pagenum'><a name="Page_562" id="Page_562">[Pg 562]</a></span>ploys +in giving a money-measure to his "intangible capital" +is the capitalization theory.<a name="FNanchor_585" id="FNanchor_585"></a><a href="#Footnote_585" class="fnanchor">[585]</a> The capital magnitude of the +items of good will previously mentioned is a capitalization +of the <i>income</i> which they are expected to bring in. And it +may be said that a large part of Veblen's doctrine of the<span class='pagenum'><a name="Page_563" id="Page_563">[Pg 563]</a></span> +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<a name="FNanchor_586" id="FNanchor_586"></a><a href="#Footnote_586" class="fnanchor">[586]</a> 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<span class='pagenum'><a name="Page_564" id="Page_564">[Pg 564]</a></span> +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.</p> + +<p>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.</p> + +<p>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. <i>Static</i> +<span class='pagenum'><a name="Page_565" id="Page_565">[Pg 565]</a></span> +<i>theory applies increasingly as understanding increases!</i> 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 <i>cost</i> 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 <i>how much</i> 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 <i>out</i> 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,<a name="FNanchor_587" id="FNanchor_587"></a><a href="#Footnote_587" class="fnanchor">[587]</a> 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,<span class='pagenum'><a name="Page_566" id="Page_566">[Pg 566]</a></span> +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.</p> + +<p>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<span class='pagenum'><a name="Page_567" id="Page_567">[Pg 567]</a></span> +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"!<a name="FNanchor_588" id="FNanchor_588"></a><a href="#Footnote_588" class="fnanchor">[588]</a> 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."</p> + +<p>In <i>Social Value</i>, 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.<span class='pagenum'><a name="Page_568" id="Page_568">[Pg 568]</a></span> +Mitchell has conclusively proved, with a wealth of detailed +evidence, in his <i>History of the Greenbacks</i>. 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?</p> + +<p>"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, <i>Foundations of Sociology</i>, +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<a name="FNanchor_589" id="FNanchor_589"></a><a href="#Footnote_589" class="fnanchor">[589]</a> has +pointed out that money may function as a measure of +non-material goods through gifts, public subscriptions, etc.</p> + +<p>It is surely no extravagant claim to make that the meth<span class='pagenum'><a name="Page_569" id="Page_569">[Pg 569]</a></span>ods +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.</p> + +<p>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?</p> + +<p>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 some<span class='pagenum'><a name="Page_570" id="Page_570">[Pg 570]</a></span>thing +strange and novel, and sinister. I should maintain +that, whether sinister or no, they are in principle at least +not <i>novel</i> or <i>anomalous</i>. <i>All economic values are matters of +folk-psychology!</i> 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 <i>Social +Value</i>, 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<span class='pagenum'><a name="Page_571" id="Page_571">[Pg 571]</a></span> +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.</p> + +<p>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 (<i>Principles of +Sociology</i>, 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 (<i>Rev. Philosophique</i>, +vol. XLV, pp. 351-386; vol. XLIX, pp. 113-134; +summarized by Ross, <i>Foundations of Sociology</i>, 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<span class='pagenum'><a name="Page_572" id="Page_572">[Pg 572]</a></span> +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 <i>motivated</i> by values. That is the +<i>function</i> of values. On the other hand, physiographic +and technological factors modify the lives and characters +of men and peoples. <i>Values</i> are in part controlled by physiographic +and technological conditions of life. But these +technological and physiographic factors, in order to influence +economic <i>conduct</i>, must first influence the value +system. This they do, (1) by affecting the quantities of +<i>objects</i> 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, <i>in propriore persona</i>, 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.</p> + +<p>There remains, therefore, in the field of technological, +biological, and physiographic features affecting economic<span class='pagenum'><a name="Page_573" id="Page_573">[Pg 573]</a></span> +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.<a name="FNanchor_590" id="FNanchor_590"></a><a href="#Footnote_590" class="fnanchor">[590]</a> 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.</p> + +<p>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 <i>mutations</i> 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!<span class='pagenum'><a name="Page_574" id="Page_574">[Pg 574]</a></span> +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 <i>Business Cycles</i>, 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 <i>through</i> +modifications of the system of values and prices. H. L. +Moore's recent <i>Economic Cycles</i> 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.</p> + +<p>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<span class='pagenum'><a name="Page_575" id="Page_575">[Pg 575]</a></span> +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.</p> + +<p>The theory of <i>prices</i>, 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 <i>value</i>, in its concrete fulness, is the special interest +of the active business man, and especially of the +business man who wishes, not merely to <i>adapt himself</i> to +changes in values, but also in part, to <i>control</i> and <i>manipulate</i> +those values. <i>He</i> 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<span class='pagenum'><a name="Page_576" id="Page_576">[Pg 576]</a></span>-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 <i>tone</i>, +the <i>consensus</i>, 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.<a name="FNanchor_591" id="FNanchor_591"></a><a href="#Footnote_591" class="fnanchor">[591]</a> 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 <i>afraid</i> to buy, such is their<span class='pagenum'><a name="Page_577" id="Page_577">[Pg 577]</a></span> +prestige. When they give out opinions, these opinions +<i>become</i> 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 +<i>Morgan</i> 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 <i>disorganization</i>, +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 <i>integration</i>, 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!</p> + +<p>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 <i>controlling</i> 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,<span class='pagenum'><a name="Page_578" id="Page_578">[Pg 578]</a></span> +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.</p> + +<p>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.</p> + +<p>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<span class='pagenum'><a name="Page_579" id="Page_579">[Pg 579]</a></span> +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.<a name="FNanchor_592" id="FNanchor_592"></a><a href="#Footnote_592" class="fnanchor">[592]</a> +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. <i>Past</i> facts exert their influence +through <i>present</i> values; and <i>future</i> facts, which may be +expected to modify future values, come into the present +equilibrium as discounted <i>present</i> worths.</p> + +<p>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<span class='pagenum'><a name="Page_580" id="Page_580">[Pg 580]</a></span> +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.</p> + +<p>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.<a name="FNanchor_593" id="FNanchor_593"></a><a href="#Footnote_593" class="fnanchor">[593]</a> 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, <i>after the transition is +completed</i>, 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<span class='pagenum'><a name="Page_581" id="Page_581">[Pg 581]</a></span> +"scrapped" machines, but also, in "scrapped" social organization, +has missed a substantial part of his problem.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>It does not follow from the foregoing that many of the<span class='pagenum'><a name="Page_582" id="Page_582">[Pg 582]</a></span> +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.<span class='pagenum'><a name="Page_583" id="Page_583">[Pg 583]</a></span></p> + +<p>I wish to contrast the view I have been here presenting +with that developed by Schumpeter, in his <i>Theorie der +Wirtschaftlichen Entwicklung</i>. 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 "<i>energisch</i>" (as distinguished +from "<i>hedonisch</i>") factors. (<i>Loc. cit.</i>, 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 "<i>Kaufkraft</i>," "<i>Kapital</i>," and +"<i>Kredit</i>," which do not rest on marginal utility, but rather<span class='pagenum'><a name="Page_584" id="Page_584">[Pg 584]</a></span> +on the activities of certain centres of economic power, particularly +of banks.<a name="FNanchor_594" id="FNanchor_594"></a><a href="#Footnote_594" class="fnanchor">[594]</a> 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.<a name="FNanchor_595" id="FNanchor_595"></a><a href="#Footnote_595" class="fnanchor">[595]</a></p> + +<p><span class='pagenum'><a name="Page_585" id="Page_585">[Pg 585]</a></span>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.<a name="FNanchor_596" id="FNanchor_596"></a><a href="#Footnote_596" class="fnanchor">[596]</a> 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 <i>object of value</i>. The value is a +<i>future</i> 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 +<span class='pagenum'><a name="Page_586" id="Page_586">[Pg 586]</a></span>capital necessary for its realization. It does not differ in +its functioning from the present worths of future goods of +familiar sorts.<a name="FNanchor_597" id="FNanchor_597"></a><a href="#Footnote_597" class="fnanchor">[597]</a> 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.</p> + +<p>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.</p> + +<hr style='width: 45%;' /> + +<p>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. +<i>All</i> 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<span class='pagenum'><a name="Page_587" id="Page_587">[Pg 587]</a></span> +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, +"<i>de minimis non curat lex</i>," 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<span class='pagenum'><a name="Page_588" id="Page_588">[Pg 588]</a></span> +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 <i>margin</i> +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 <i>kind</i>. Mr. Justice Holmes +recognizes the necessity and the existence of legal <i>quantities</i>, +and of making quantitative distinctions, <i>i. e.</i>, distinctions +of <i>degree</i>. He sees a generic essence common to the whole +body of laws, such that marginal equilibria are possible and +actual.</p> + +<p>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 <i>vs.</i> 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.</p> + +<p>But further, in this view, and in the view of the best +students of jurisprudence in general, the legal values are not<span class='pagenum'><a name="Page_589" id="Page_589">[Pg 589]</a></span> +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 <i>Social Value</i>. 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!</p> + +<hr style='width: 45%;' /> + +<p>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<span class='pagenum'><a name="Page_590" id="Page_590">[Pg 590]</a></span> +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<span class='pagenum'><a name="Page_591" id="Page_591">[Pg 591]</a></span> +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 <i>per se</i>, 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.<span class='pagenum'><a name="Page_592" id="Page_592">[Pg 592]</a></span></p> + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_593" id="Page_593">[Pg 593]</a></span></p> +<h3>INDEX</h3> + +<p> +<b>A</b><br /> +<br /> +Aborn, W. H., <a href="#Footnote_276">252, n.</a><br /> +<br /> +Absolute <i>vs.</i> relative conceptions of value.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Value, Absolute</span> <i>vs.</i> <span class="smcap">Relative</span>.</span><br /> +<br /> +Abstinence, <a href="#Page_67">67ff.</a>, <a href="#Page_484">484-85</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Cost of Production, Interest</span>.</span><br /> +<br /> +Abstraction, legitimate and illegitimate, <a href="#Page_189">189-90</a>, <a href="#Page_553">553-54</a>.<br /> +<br /> +Acceptance house, <a href="#Page_497">497</a>, <a href="#Page_542">542</a>.<br /> +<br /> +Acquisition <i>vs.</i> production, <a href="#Page_482">482</a>.<br /> +<br /> +Adams, Brooks, <a href="#Page_219">219</a>.<br /> +<br /> +Adams, T. S., <a href="#Page_13">13</a>.<br /> +<br /> +"Adaptation," <a href="#Footnote_590">573, n.</a><br /> +<br /> +Advertising, <a href="#Page_257">257-58</a>, <a href="#Page_367">367</a>, <a href="#Page_565">565</a>.<br /> +<br /> +Agger, E. E., <a href="#Footnote_120">140, n.</a><br /> +<br /> +Agio, <a href="#Page_148">148-50</a>, <a href="#Page_390">390</a>, <a href="#Page_442">442-50</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Premium</span>.</span><br /> +<br /> +Agricultural credit, <a href="#Page_262">262</a>, <a href="#Page_318">318-19</a>, <a href="#Page_430">430</a>, <a href="#Page_492">492</a>, <a href="#Page_504">504-05</a>, <a href="#Page_528">528-29</a>.<br /> +<br /> +"All other deposits," see "<span class="smcap">Deposits</span>" in <span class="smcap">Kinley's figures</span>.<br /> +<br /> +<i>Americas, The</i>, <a href="#Page_540">540</a>.<br /> +<br /> +Analytical <i>vs.</i> historical theories, <a href="#Page_397">397-400</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Historical</span> <i>vs.</i> <span class="smcap">Cross-section Viewpoints, Statics, Dynamics, etc.</span></span><br /> +<br /> +Andrew, A. P., <a href="#Footnote_154">170, n.</a>, <a href="#Footnote_172">179, n.</a>, <a href="#Page_537">537</a>.<br /> +<br /> +Animism, social explanation of, <a href="#Page_16">16-17</a>.<br /> +<br /> +Ansiaux, M., <a href="#Footnote_2_2">4, n.</a><br /> +<br /> +"Appreciation and interest," <a href="#Page_76">76ff.</a>, <a href="#Footnote_374">333, n.</a><br /> +<span style="margin-left: 1em;">See <span class="smcap">Interest</span>.</span><br /> +<br /> +Aquinas, Thomas, <a href="#Page_30">30</a>.<br /> +<br /> +Arbitrage, <a href="#Page_268">268</a>, <a href="#Page_585">585</a>.<br /> +<br /> +Aristotle, <a href="#Footnote_104">118, n.</a><br /> +<br /> +Ashley, W. J., <a href="#Footnote_177">181, n.</a><br /> +<br /> +Assets of banks, <a href="#Page_285">285</a>, <a href="#Page_489">489-97</a>, <a href="#Page_498">Ch. XXIV</a>;<br /> +<span style="margin-left: 1em;">bonds in, <a href="#Page_250">250</a>, <a href="#Page_488">488</a>, <a href="#Page_498">498</a>, <a href="#Page_506">506</a>, <a href="#Page_508">508</a>, <a href="#Page_523">523</a>;</span><br /> +<span style="margin-left: 1em;">stocks in, <a href="#Page_491">491-93</a>, <a href="#Page_498">498</a>, <a href="#Page_506">506</a>, <a href="#Page_523">523</a>;</span><br /> +<span style="margin-left: 1em;">stock exchange items chief factor in, <a href="#Page_498">Ch. XXIV</a>, especially <a href="#Page_523">523ff.</a></span><br /> +<span style="margin-left: 1em;">See Loans, "<span class="smcap">Commercial Paper</span>," <span class="smcap">Collateral Loans</span>, <span class="smcap">Reserves</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Atwood, A. W., <a href="#Footnote_159">173, n.</a><br /> +<br /> +Auspitz and Lieben, <a href="#Footnote_75">91, n.</a><br /> +<br /> +Austrian School, <a href="#Page_56">56</a>, <a href="#Page_70">70</a>, <a href="#Page_94">94</a>, <a href="#Page_300">300</a>, <a href="#Page_486">486</a>, <a href="#Footnote_585">562, n.</a><br /> +<br /> +Austria, paper money in, <a href="#Page_140">140</a>, <a href="#Footnote_486">434, n.</a>;<br /> +<span style="margin-left: 1em;">foreign exchange policy of, <a href="#Page_181">181-82</a>, <a href="#Footnote_486">434, n.</a>, <a href="#Page_444">444</a>, <a href="#Page_530">530</a>;</span><br /> +<span style="margin-left: 1em;">money rates and interest rates in, <a href="#Page_429">429</a>.</span><br /> +<br /> +Averages, meaning of, <a href="#Page_178">178</a>, <a href="#Page_292">292</a>, <a href="#Page_312">312-13</a>, <a href="#Page_315">315</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Causation</span>.</span><br /> +<span style="margin-left: 1em;">Weighted. See <span class="smcap">Weighting</span>.</span><br /> +<br /> +<br /> +<b>B</b><br /> +<br /> +Babson and May, <a href="#Footnote_522">501, n.</a><br /> +<br /> +Backwardation, <a href="#Page_146">146</a>.<br /> +<br /> +Bagehot, W., <a href="#Page_18">18</a>, <a href="#Page_37">37</a>, <a href="#Footnote_570">540, n.</a>, <a href="#Page_580">580</a>.<br /> +<br /> +Baker, G. F., <a href="#Page_518">518</a>, <a href="#Footnote_542">519, n.</a><br /> +<br /> +Balances, required by banks, <a href="#Page_173">173</a>, <a href="#Page_377">377</a>.<br /> +<br /> +Balance of trade, <a href="#Page_320">320</a>, <a href="#Page_551">551</a>.<br /> +<br /> +Baldwin, J. M., <a href="#Page_18">18</a>, <a href="#Page_37">37</a>.<br /> +<br /> +Balkan Crisis, hoarding of bank-notes in Austria in, <a href="#Footnote_120">140, n.</a><br /> +<br /> +Banks. See <span class="smcap">England, Bank of</span>, <span class="smcap">State Banks</span>, <span class="smcap">Private Banks</span>, <span class="smcap">etc.</span><br /> +<span style="margin-left: 1em;">As book-keepers for business, <a href="#Page_365">365</a>;</span><br /> +<span style="margin-left: 1em;">correspondent relations of, <a href="#Footnote_406">355, n.</a>;</span><br /> +<span style="margin-left: 1em;">bank capital, <a href="#Page_489">489</a>, <a href="#Page_491">491</a>, <a href="#Page_524">524</a>;</span><br /> +<span style="margin-left: 1em;">bank-credit, <a href="#Page_172">Ch. IX</a>, <a href="#Page_261">261</a>, <a href="#Page_484">484ff.</a>, <a href="#Page_489">489-97</a>, <a href="#Page_498">Ch. XXIV</a>;</span><br /> +<span style="margin-left: 1em;">elasticity of, <a href="#Page_129">129</a>, <a href="#Page_183">183</a>, <a href="#Page_216">216</a>, <a href="#Page_281">281-88</a>, <a href="#Page_299">299</a>, <a href="#Page_320">320</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to trade, <a href="#Page_260">260ff.</a>, <a href="#Page_281">281</a>.</span><br /> +<span style="margin-left: 1em;">See Trade. Functions of, <a href="#Page_484">484-89</a>, <a href="#Page_492">492-95</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Credit, Functions of</span>.</span><br /> +<span style="margin-left: 1em;">Technique of, <a href="#Page_489">489-97</a>, <a href="#Page_498">Ch. XXIV</a>;</span><br /> +<span style="margin-left: 1em;">bank-drafts, <a href="#Page_355">355-58</a>, <a href="#Page_367">367</a>;</span><br /> +<span class='pagenum'><a name="Page_594" id="Page_594">[Pg 594]</a></span><span style="margin-left: 1em;">on New York and other centers, <a href="#Page_356">356-58</a>;</span><br /> +<span style="margin-left: 1em;">bank-notes, <a href="#Page_129">129</a>, <a href="#Footnote_120">139, n.</a>, <a href="#Page_289">289</a>, <a href="#Page_322">322-23</a>, <a href="#Page_447">447</a>, <a href="#Page_448">448</a>, <a href="#Page_472">472</a>, <a href="#Page_473">473</a>, <a href="#Page_487">487</a>, <a href="#Page_495">495</a>, <a href="#Page_496">496</a>, <a href="#Page_511">511</a>, <a href="#Page_530">530</a>, <a href="#Page_539">539</a>;</span><br /> +<span style="margin-left: 1em;">as "capital," <a href="#Page_261">261</a>, <a href="#Page_484">484-88</a>;</span><br /> +<span style="margin-left: 1em;">elasticity of, <a href="#Page_129">129</a>, <a href="#Page_298">298</a>, <a href="#Page_448">448</a>.</span><br /> +<br /> +Banking School, <a href="#Page_283">283ff.</a>, <a href="#Page_395">395</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Currency School</span>.</span><br /> +<br /> +Banker as centre of power, <a href="#Page_32">32</a>, <a href="#Page_466">466</a>, <a href="#Page_484">484ff.</a>, <a href="#Page_577">577</a>, <a href="#Page_583">583</a>.<br /> +<br /> +Banker's psychology, <a href="#Page_141">141</a>, <a href="#Page_304">304</a>.<br /> +<br /> +Barbour, David, <a href="#Page_154">154</a>, <a href="#Footnote_229">218, n.</a><br /> +<br /> +Barnett, G. E., <a href="#Footnote_398">347, n.</a><br /> +<br /> +Barter, <a href="#Page_99">99</a>, <a href="#Page_100">100</a>, <a href="#Page_130">130</a>, <a href="#Page_133">133</a>, <a href="#Page_196">Ch. XI</a>, <a href="#Page_220">220</a>, <a href="#Page_226">226</a>, <a href="#Page_265">265</a>, <a href="#Page_369">369</a>, <a href="#Page_394">394</a>, <a href="#Page_404">404-07</a>, <a href="#Page_419">419-21</a>, <a href="#Page_493">493</a>, <a href="#Page_536">536</a>;<br /> +<span style="margin-left: 1em;">highly important in modern life, <a href="#Page_196">Ch. XI</a>, <a href="#Page_394">394</a>;</span><br /> +<span style="margin-left: 1em;">made easier by money as a measure of values, <a href="#Page_201">201</a>, <a href="#Page_394">394</a>, <a href="#Page_421">421</a>;</span><br /> +<span style="margin-left: 1em;">intellectual difficulties of, <a href="#Page_418">418-20</a>;</span><br /> +<span style="margin-left: 1em;">physical difficulties of, <a href="#Page_423">423</a>.</span><br /> +<br /> +Bastiat, F., <a href="#Page_552">552</a>.<br /> +<br /> +Bears. See <span class="smcap">Bulls and Bears</span>.<br /> +<br /> +"Bearer of options" function of money, <a href="#Page_148">148</a>, <a href="#Page_201">201</a>, <a href="#Footnote_355">314, n.</a>, <a href="#Page_418">418</a>, <a href="#Page_424">424-32</a>, <a href="#Page_436">436</a>, <a href="#Page_442">442</a>, <a href="#Page_451">451</a>, <a href="#Page_495">495</a>, <a href="#Page_536">536</a>, <a href="#Page_543">543</a>;<br /> +<span style="margin-left: 1em;">distinguished from store of value, <a href="#Page_425">425</a>;</span><br /> +<span style="margin-left: 1em;">dynamic function of money <i>par excellence</i>, <a href="#Page_426">426</a>, <a href="#Page_495">495</a>, <a href="#Page_536">536</a>;</span><br /> +<span style="margin-left: 1em;">reserve function a special case of, <a href="#Footnote_478">426, n.</a>, <a href="#Page_536">536ff.</a></span><br /> +<br /> +Belgium, National Bank of, <a href="#Page_182">182</a>.<br /> +<br /> +Belief, as element in values, <a href="#Page_40">40</a>, <a href="#Page_136">136</a>, <a href="#Page_462">462-68</a>, <a href="#Page_486">486ff.</a>, <a href="#Page_574">574-75</a>;<br /> +<span style="margin-left: 1em;">relation of, to credit, <a href="#Footnote_295">262, n.</a>, <a href="#Page_462">462-68</a>, <a href="#Page_486">486ff.</a>, <a href="#Page_581">581</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Credit</span>.</span><br /> +<br /> +Bendixen, F., <a href="#Footnote_486">435, n.</a><br /> +<br /> +Bergson, H., <a href="#Footnote_592">579, n.</a><br /> +<br /> +Bilgram, H., <a href="#Footnote_2_2">3, n.</a><br /> +<br /> +Bills of exchange, <a href="#Page_167">167</a>, <a href="#Page_181">181-82</a>, <a href="#Page_201">201</a>, <a href="#Page_254">254-55</a>, <a href="#Page_288">288-90</a>, <a href="#Page_369">369</a>, <a href="#Page_444">444</a>, <a href="#Page_490">490-91</a>, <a href="#Page_530">530</a>;<br /> +<span style="margin-left: 1em;">speculation in, <a href="#Page_254">254-55</a>, <a href="#Page_514">514</a>, <a href="#Footnote_538">515, n.</a>;</span><br /> +<span style="margin-left: 1em;">as reserves, <a href="#Page_181">181-82</a>, <a href="#Page_444">444</a>, <a href="#Page_530">530</a>.</span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Foreign Bills, and Gold Movements, International</span>.</span><br /> +<br /> +Bimetallism, <a href="#Footnote_230">219, n.</a>, <a href="#Page_221">221</a>;<br /> +<span style="margin-left: 1em;">not logically related to quantity theory, <a href="#Footnote_230">219, n.</a></span><br /> +<br /> +Biological factors in social life, <a href="#Page_571">571-73</a>, <a href="#Page_590">590</a>.<br /> +<br /> +Böhm-Bawerk, E. von, <a href="#Footnote_7_7">9, n.</a>, <a href="#Page_44">44</a>, <a href="#Page_48">48</a>, <a href="#Page_51">51</a>, <a href="#Page_70">70</a>, <a href="#Footnote_61">78, n.</a>, <a href="#Page_91">91</a>, <a href="#Page_94">94</a>, <a href="#Footnote_85">96, n.</a>, <a href="#Footnote_104">113, n.</a>, <a href="#Footnote_126">146, n.</a>, <a href="#Footnote_340">301, n.</a>, <a href="#Footnote_342">303, n.</a>, <a href="#Page_437">437</a>, <a href="#Footnote_585">563, n.</a><br /> +<br /> +Bonds, as bearers of options, <a href="#Page_147">147-48</a>, <a href="#Page_425">425</a>, <a href="#Page_428">428</a>;<br /> +<span style="margin-left: 1em;">listed, sold "over the counter," <a href="#Page_250">250</a>, <a href="#Page_514">514</a>;</span><br /> +<span style="margin-left: 1em;">bonds sold on Stock Exchange, not "cleared," <a href="#Page_370">370</a>;</span><br /> +<span style="margin-left: 1em;">held by banks.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Assets of Banks</span>.</span><br /> +<span style="margin-left: 1em;">"One house bond," <a href="#Page_147">147</a>.</span><br /> +<br /> +Book-credit See <span class="smcap">Credit</span>.<br /> +<br /> +"Borrowing and carrying," See <span class="smcap">Stocks</span>.<br /> +<br /> +Bosanquet, B., <a href="#Footnote_22_22">18, n.</a><br /> +<br /> +Boston, <a href="#Footnote_330">289, n.</a>, <a href="#Page_354">354</a>, <a href="#Page_368">368</a>, <a href="#Footnote_482">429 n.</a>, <a href="#Page_503">503</a>.<br /> +<br /> +Brassage, <a href="#Page_450">450</a>.<br /> +<br /> +Brokers, <a href="#Page_168">168</a>, <a href="#Page_199">199</a>, <a href="#Page_235">235</a>, <a href="#Footnote_325">287, n.</a>, <a href="#Page_367">367-68</a>, <a href="#Page_371">371</a>, <a href="#Page_372">372</a>, <a href="#Page_374">374-79</a>, <a href="#Page_409">409</a>, <a href="#Page_496">496-97</a>, <a href="#Footnote_482">429, n.</a>, <a href="#Footnote_546">521, n.</a>, <a href="#Page_531">531</a>, <a href="#Page_575">575</a>.<br /> +<br /> +Brown, H. G., <a href="#Footnote_340">301, n.</a><br /> +<br /> +Business, speculation in, <a href="#Page_252">252ff.</a><br /> +<br /> +"Business capital" vs. capital-goods, <a href="#Page_482">482</a>, <a href="#Page_484">484ff.</a>, <a href="#Page_560">560-61</a>, <a href="#Page_569">569</a>, <a href="#Page_580">580-82</a>.<br /> +<span style="margin-left: 1em;">See also "<span class="smcap">Good Will</span>," <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>, <span class="smcap">Friction</span>, <span class="smcap">etc</span>.</span><br /> +<br /> +Business confidence, <a href="#Page_40">40-41</a>, <a href="#Page_97">97</a>, <a href="#Footnote_104">118</a>, <a href="#Page_185">185</a>, <a href="#Page_210">210-11</a>, <a href="#Page_214">214</a>, <a href="#Page_463">463-68</a>, <a href="#Page_530">530-31</a>, <a href="#Page_536">536</a>, <a href="#Page_574">574-75</a>, <a href="#Page_577">577</a>.<br /> +<br /> +Business cycle, <a href="#Page_187">187-89</a>, <a href="#Page_254">254</a>, <a href="#Page_548">548-49</a>, <a href="#Page_555">555</a>, <a href="#Page_573">573-75</a>.<br /> +<br /> +"Business distrust," <a href="#Page_426">426</a>, <a href="#Footnote_478">427, n.</a><br /> +<br /> +Business man <i>vs.</i> economist, as value theorist, <a href="#Page_573">573-78</a>.<br /> +<br /> +Bulls and bears, <a href="#Page_145">145</a>, <a href="#Page_371">371-73</a>, <a href="#Page_406">406</a>, <a href="#Page_471">471-72</a>, <a href="#Page_522">522</a>, <a href="#Page_576">576</a>, <a href="#Page_579">579</a>.<br /> +<br /> +"Buying price" <i>vs.</i> "selling price," <a href="#Page_402">402-04</a>, <a href="#Page_406">406-07</a>, <a href="#Page_476">476</a>.<br /> +<br /> +<br /> +<b>C</b><br /> +<br /> +Cairnes, J. E., <a href="#Page_47">47</a>, <a href="#Page_50">50</a>, <a href="#Footnote_46">55, n.</a>, <a href="#Page_57">57-59</a>, <a href="#Page_62">62</a>, <a href="#Page_64">64</a>, <a href="#Page_67">67-69</a>, <a href="#Footnote_234">220, n.</a>, <a href="#Footnote_480">428, n.</a><br /> +<br /> +Call loans, <a href="#Footnote_58">73, n.</a>, <a href="#Page_375">375-78</a>, <a href="#Page_382">382</a>, <a href="#Page_425">425</a>, <a href="#Page_428">428ff.</a>;<br /> +<span style="margin-left: 1em;">as "bearers of options," <a href="#Page_425">425</a>, <a href="#Page_428">428ff.</a></span><br /> +<span class='pagenum'><a name="Page_595" id="Page_595">[Pg 595]</a></span><br /> +Call rates, why low, <a href="#Page_428">428ff.</a><br /> +<span style="margin-left: 1em;">See <span class="smcap">Money Rates</span>, <span class="smcap">Interest</span>.</span><br /> +<br /> +Canada, <a href="#Page_216">216</a>, <a href="#Footnote_322">284, n.</a>, <a href="#Page_448">448</a>, <a href="#Page_450">450</a>.<br /> +<br /> +Cannon, J. G., <a href="#Footnote_397">347, n.</a><br /> +<br /> +Capital, <a href="#Page_72">Ch. IV</a>, <a href="#Page_98">98-99</a>, <a href="#Page_220">220</a>, <a href="#Page_222">222-23</a>, <a href="#Page_408">408</a>, <a href="#Page_410">410</a>, <a href="#Page_425">425</a>, <a href="#Page_429">429</a>, <a href="#Page_461">461</a>, <a href="#Page_484">484ff.</a>, <a href="#Page_526">526</a>, <a href="#Footnote_575">551, n.</a> <a href="#Page_560">560-62</a>, <a href="#Page_564">564-66</a>, <a href="#Page_569">569-70</a>, <a href="#Page_580">580-82</a>;<br /> +<span style="margin-left: 1em;">circulating <i>vs.</i> fixed, <a href="#Page_526">526</a>.</span><br /> +<br /> +Capital goods. See <span class="smcap">Goods, Instrumental</span>.<br /> +<br /> +Capitalist, <a href="#Page_264">264</a>.<br /> +<br /> +Capitalization theory, <a href="#Page_72">Ch. IV</a>, <a href="#Page_260">260</a>, <a href="#Page_297">297</a>, <a href="#Page_300">300ff.</a>, <a href="#Page_316">316</a>, <a href="#Page_318">318</a>, <a href="#Page_389">389</a>, <a href="#Footnote_470">416, n.</a>, <a href="#Page_436">436-42</a>, <a href="#Page_459">459-60</a>, <a href="#Page_494">494</a>, <a href="#Page_562">562-64</a>, <a href="#Page_575">575</a>;<br /> +<span style="margin-left: 1em;">assumes "banker's psychology," <a href="#Page_305">305-06</a>;</span><br /> +<span style="margin-left: 1em;">assumes fixed absolute value of money, <a href="#Page_76">76ff.</a>, <a href="#Page_313">313-14</a>, <a href="#Page_389">389</a>, <a href="#Page_438">438</a>;</span><br /> +<span style="margin-left: 1em;">limitations of, <a href="#Page_305">305-06</a>, <a href="#Page_316">316-17</a>, <a href="#Footnote_510">481, n.</a>, <a href="#Footnote_585">562, n.</a>;</span><br /> +<span style="margin-left: 1em;">applied to value of money, <a href="#Page_72">Ch. IV</a>, <a href="#Page_111">111</a>, <a href="#Page_424">424</a>, <a href="#Page_436">436-42</a>, <a href="#Page_456">456</a>;</span><br /> +<span style="margin-left: 1em;">conflicts with quantity theory, <a href="#Page_300">300ff.</a>, <a href="#Page_310">310-11</a>, <a href="#Page_389">389</a>.</span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Interest</span>, <span class="smcap">Capital</span>, <span class="smcap">Rent</span>.</span><br /> +<br /> +Capital value, <a href="#Page_72">Ch. IV</a>, <a href="#Page_149">149</a>, <a href="#Page_224">224</a>, <a href="#Page_318">318-19</a>, <a href="#Page_402">402</a>, <a href="#Page_424">424</a>, <a href="#Page_436">436ff.</a>, <a href="#Page_452">452</a>, <a href="#Page_459">459</a>.<br /> +<br /> +Carey, H. C., <a href="#Page_106">106</a>.<br /> +<br /> +Carlile, W. W., <a href="#Footnote_38_38">37, n.</a>, <a href="#Page_397">397</a>, <a href="#Page_400">400</a>, <a href="#Page_407">407</a>, <a href="#Footnote_464">411, n.</a><br /> +<br /> +Carver, T. N., <a href="#Footnote_2_2">4, n.</a>, <a href="#Footnote_473">419, n.</a>, <a href="#Footnote_502">453, n.</a>, <a href="#Footnote_590">573, n.</a><br /> +<br /> +Causation, <a href="#Page_142">142-43</a>, <a href="#Page_190">190</a>, <a href="#Page_204">204</a>, <a href="#Page_224">224</a>, <a href="#Page_279">279</a>, <a href="#Page_292">292</a>, <a href="#Page_312">312</a>, <a href="#Page_315">315</a>, <a href="#Page_336">336</a>, <a href="#Page_403">403</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Page_437">437</a>, <a href="#Page_438">438</a>, <a href="#Page_454">454</a>, <a href="#Page_548">548</a>;<br /> +<span style="margin-left: 1em;">exhibited by <i>change</i>, <a href="#Page_190">190</a>, <a href="#Page_454">454-55</a>.</span><br /> +<br /> +Causal theory of value, <a href="#Page_14">14ff.</a>, <a href="#Page_90">90ff.</a>, <a href="#Page_96">96</a>, <a href="#Footnote_104">114, n.</a>, <a href="#Page_163">163</a>, <a href="#Page_165">165-66</a>, <a href="#Page_176">176-77</a>, <a href="#Page_186">186</a>, <a href="#Page_192">192</a>, <a href="#Page_204">204</a>, <a href="#Page_296">296</a>, <a href="#Page_292">Ch. XV</a>, <a href="#Page_310">310</a>, <a href="#Page_336">336</a>, <a href="#Page_400">400-01</a>, <a href="#Footnote_486">433, n.</a> <a href="#Page_437">437-38</a>.<br /> +<br /> +Cause, a definition as, <a href="#Page_143">143</a>, <a href="#Page_400">400-01</a>.<br /> +<br /> +Checks, <a href="#Page_167">167</a>, <a href="#Page_168">168</a>, <a href="#Page_184">184</a>, <a href="#Page_281">281</a>, <a href="#Page_339">339ff.</a>, <a href="#Page_354">354ff.</a>, <a href="#Page_364">364-81</a>, <a href="#Page_499">499</a>;<br /> +<span style="margin-left: 1em;">"accommodation checks," <a href="#Page_243">243</a>;</span><br /> +<span style="margin-left: 1em;">certified, <a href="#Page_200">200</a>, <a href="#Page_322">322</a>, <a href="#Page_349">349</a>, <a href="#Page_370">370</a>, <a href="#Page_376">376</a>;</span><br /> +<span style="margin-left: 1em;">cashier's, <a href="#Page_349">349</a>;</span><br /> +<span style="margin-left: 1em;">collection of, <a href="#Page_354">354ff.</a>;</span><br /> +<span style="margin-left: 1em;">proportions of checks and money in payments, <a href="#Page_174">174</a>, <a href="#Page_338">338</a>, <a href="#Page_447">447</a>, <a href="#Page_449">449</a>, <a href="#Page_463">463</a>.</span><br /> +<br /> +Checking accounts, <a href="#Page_173">173-74</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Deposits</span>.</span><br /> +<br /> +Chen-Huang-Chang, <a href="#Footnote_461">407, n.</a><br /> +<br /> +Chicago, <a href="#Page_246">246</a>, <a href="#Page_259">259</a>, <a href="#Footnote_330">289, n.</a>, <a href="#Page_354">354</a>, <a href="#Page_379">379-80</a>, <a href="#Page_503">503</a>, <a href="#Page_542">542</a>;<br /> +<span style="margin-left: 1em;">chief centre for check collections, <a href="#Page_354">354</a>;</span><br /> +<span style="margin-left: 1em;">Board of Trade, <a href="#Page_252">252-52</a>, <a href="#Page_268">268</a>, <a href="#Page_327">327</a>, <a href="#Page_379">379-80</a>, <a href="#Page_503">503</a>, <a href="#Page_542">542</a>;</span><br /> +<span style="margin-left: 1em;">Board of Trade clearing house, <a href="#Page_369">369</a>, <a href="#Page_379">379-80</a>.</span><br /> +<br /> +Circular reasoning in value theory, <a href="#Page_15">15</a>, <a href="#Page_88">88</a>, <a href="#Page_89">89</a>, <a href="#Page_92">92</a>, <a href="#Page_100">100-01</a>, <a href="#Page_105">105</a>, <a href="#Page_112">112</a>, <a href="#Page_113">113</a>, <a href="#Footnote_104">115, 117</a>, <a href="#Page_132">132</a>, <a href="#Page_135">135</a>, <a href="#Page_143">143</a>, <a href="#Page_279">279</a>, <a href="#Page_438">438</a>, <a href="#Page_452">452</a>.<br /> +<br /> +Clark, J. B., <a href="#Page_12">12-13</a>, <a href="#Page_48">48</a>, <a href="#Footnote_85">96, n.</a>, <a href="#Footnote_298">264, n.</a>, <a href="#Footnote_489">439, n.</a>, <a href="#Footnote_491">440, n.</a>, <a href="#Page_554">554-55</a>.<br /> +<br /> +Clark's Law, <a href="#Page_439">439</a>.<br /> +<br /> +Clark, J. M., <a href="#Footnote_2_2">3, n.</a>, <a href="#Footnote_9_9">11, n.</a>, <a href="#Footnote_18_18">14, n.</a>, <a href="#Footnote_87">98, n.</a>, <a href="#Footnote_466">413, n.</a><br /> +<br /> +Classical School, <a href="#Page_69">69</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Cost of Production</span>, <span class="smcap">Cairnes, Senior</span>, <span class="smcap">Ricardo</span>, <span class="smcap">Jas. Mill</span>, <span class="smcap">J. S. Mill</span>, <span class="smcap">Labor Theory of Value</span>, <span class="smcap">etc</span>.</span><br /> +<br /> +Clearing houses in speculative exchanges.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Stock Exchange</span>.</span><br /> +<br /> +Clearing houses, bank.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Clearings</span>.</span><br /> +<span style="margin-left: 1em;">New York Clearing House, <a href="#Page_346">346</a>, <a href="#Page_354">354</a>;</span><br /> +<span style="margin-left: 1em;">New York Clearing House banks, <a href="#Page_179">179</a>, <a href="#Page_344">344</a>.</span><br /> +<br /> +Clearings, <a href="#Page_200">200</a>, <a href="#Page_237">237-41</a>, <a href="#Page_345">345-46</a>, <a href="#Page_378">378</a>, <a href="#Page_392">392</a>;<br /> +<span style="margin-left: 1em;">as index of "ordinary trade," <a href="#Page_240">240-41</a>, <a href="#Page_516">516</a>;</span><br /> +<span style="margin-left: 1em;">as index of speculation, <a href="#Page_237">237ff.</a>, <a href="#Page_378">378</a>, <a href="#Page_392">392</a>, <a href="#Page_516">516</a>;</span><br /> +<span style="margin-left: 1em;">in New York City, <a href="#Page_237">237-41</a>, <a href="#Page_339">339</a>, <a href="#Page_341">341-42</a>, <a href="#Page_345">345-47</a>, <a href="#Page_357">357-59</a>, <a href="#Page_360">360</a>, <a href="#Page_516">516</a>;</span><br /> +<span style="margin-left: 1em;">of New York City trust companies, <a href="#Page_345">345-47</a>;</span><br /> +<span style="margin-left: 1em;">outside New York City, <a href="#Page_239">239-41</a>, <a href="#Page_339">339</a>, <a href="#Page_340">340</a>, <a href="#Page_342">342</a>, <a href="#Page_348">348-53</a>, <a href="#Page_357">357-59</a>, <a href="#Footnote_539">516, n.</a>;</span><br /> +<span style="margin-left: 1em;">ratio of, to "deposits," <a href="#Page_341">341-42</a>, <a href="#Page_348">348-59</a>, <a href="#Footnote_539">516, n.</a>;</span><br /> +<span style="margin-left: 1em;">ratio of, to "total transactions," <a href="#Page_348">348-51</a>, <a href="#Page_353">353</a>, <a href="#Footnote_411">359, n.</a></span><br /> +<br /> +Clow, F. R., <a href="#Footnote_116">135, n.</a>, <a href="#Footnote_124">144, n.</a><br /> +<br /> +Coin, <a href="#Footnote_120">139, n.</a>, <a href="#Page_167">167</a>, <a href="#Page_443">443-50</a>;<br /> +<span style="margin-left: 1em;">coinage, <a href="#Page_443">443-50</a>;</span><br /> +<span style="margin-left: 1em;">statistics of, <a href="#Footnote_466">412, n.</a></span><br /> +<br /> +Collateral loans, <a href="#Page_461">461</a>, <a href="#Page_462">462</a>, <a href="#Page_463">463</a>, <a href="#Page_493">493</a>, <a href="#Page_494">494</a>, <a href="#Page_497">497</a>, <a href="#Page_502">502-06</a>, <a href="#Page_513">513</a>, <a href="#Page_523">523-26</a>;<br /> +<span style="margin-left: 1em;">percentages of, on stocks and bonds, and on "other collateral security," <a href="#Page_502">502-09</a>;</span><br /> +<span style="margin-left: 1em;">on "other collateral security" analyzed, <a href="#Page_502">502ff.</a></span><br /> +<span class='pagenum'><a name="Page_596" id="Page_596">[Pg 596]</a></span><br /> +Collection of out of town checks, <a href="#Page_354">354-55</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Checks</span>.</span><br /> +<br /> +Commerce. See <span class="smcap">Trade</span>.<br /> +<br /> +Commercial banks, <a href="#Page_357">357</a>, <a href="#Page_488">488</a>, <a href="#Page_490">490</a>, <a href="#Page_498">498-99</a>, <a href="#Page_519">519-20</a>, <a href="#Page_523">523-29</a>;<br /> +<span style="margin-left: 1em;">financing commerce no longer the chief function of, <a href="#Page_498">Ch. XXIV</a>, esp. <a href="#Page_523">523ff.</a></span><br /> +<br /> +Commercial cities, outgrow manufacturing cities, <a href="#Page_259">259</a>.<br /> +<br /> +"Commercial paper," <a href="#Page_431">431</a>, <a href="#Page_457">457</a>, <a href="#Page_490">490</a>, <a href="#Page_496">496-97</a>, <a href="#Page_498">498-520</a>.<br /> +<br /> +<i>Commercial and Financial Chronicle</i>, <a href="#Page_272">272</a>.<br /> +<br /> +Commodity theory (Metallist theory, Bullionist theory), <a href="#Page_81">81</a>, <a href="#Page_85">85</a>, <a href="#Page_129">129</a>, <a href="#Page_135">135</a>, <a href="#Page_144">144</a>, <a href="#Page_151">151-53</a>, <a href="#Page_330">330</a>, <a href="#Page_390">390</a>, <a href="#Page_391">391</a>, <a href="#Footnote_486">435, n.</a>;<br /> +<span style="margin-left: 1em;">hypothetical case illustrating, <a href="#Page_151">151-53</a>, <a href="#Page_327">327-28</a>, <a href="#Page_390">390</a>, <a href="#Page_421">421</a>;</span><br /> +<span style="margin-left: 1em;">contrasted with quantity theory, <a href="#Page_151">151-53</a>.</span><br /> +<br /> +Competitive display, relation of, to value, <a href="#Page_410">410-11</a>, <a href="#Page_438">438-42</a>, <a href="#Page_452">452</a>.<br /> +<br /> +Conant, C. A., <a href="#Footnote_58">73, n.</a>, <a href="#Footnote_179">182, n.</a>, <a href="#Footnote_364">323, n.</a>, <a href="#Footnote_397">347, n.</a>, <a href="#Footnote_465">412, n.</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_479">428, n.</a>, <a href="#Page_502">502</a>, <a href="#Footnote_531">510, n.</a>, <a href="#Footnote_533">511, n.</a>, <a href="#Footnote_563">535, n.</a><br /> +<br /> +Conant, L. Jr., <a href="#Footnote_278">252, n.</a><br /> +<br /> +Concatenation of values and prices.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Values</span>, <span class="smcap">Prices</span>.</span><br /> +<br /> +Consols, <a href="#Page_470">470</a>.<br /> +<br /> +Contango, <a href="#Page_145">145</a>.<br /> +<br /> +Cooley, C. H., <a href="#Page_3">3</a>, <a href="#Footnote_2_2">4, n.</a>, <a href="#Page_19">19</a>, <a href="#Footnote_25_25">21, n.</a>, <a href="#Page_30">30</a>, <a href="#Page_37">37</a>, <a href="#Footnote_513">484, n.</a><br /> +<br /> +Corporations. See <span class="smcap">Stocks</span>, <span class="smcap">Bonds</span>, <span class="smcap">Stock Exchange</span>.<br /> +<span style="margin-left: 1em;">Consolidations of, <a href="#Page_198">198-258</a>, <a href="#Page_366">366-67</a>;</span><br /> +<span style="margin-left: 1em;">lead to duplications of "deposits," <a href="#Page_366">366-67</a>;</span><br /> +<span style="margin-left: 1em;">corporation finance, <a href="#Page_198">198-99</a>, <a href="#Footnote_204">201, n.</a> <a href="#Page_3">3</a>, <a href="#Page_432">432</a>, <a href="#Page_460">460-61</a>, <a href="#Page_476">476-77</a>;</span><br /> +<span style="margin-left: 1em;">corporation securities as credit instruments, <a href="#Page_460">460-61</a>, <a href="#Page_476">476-77</a>, <a href="#Page_492">492-93</a>, <a href="#Page_527">527</a>.</span><br /> +<br /> +Correlation, coefficient of, <a href="#Page_237">237</a>, <a href="#Footnote_257">237, n.</a><br /> +<br /> +Cost of production, <a href="#Page_64">Ch. III</a>, <a href="#Page_193">193</a>, <a href="#Footnote_234">221, n.</a>, <a href="#Page_257">257ff.</a>, <a href="#Page_295">295</a>, <a href="#Page_300">300</a>, <a href="#Page_306">306-07</a>, <a href="#Footnote_348">309, n.</a>, <a href="#Page_389">389</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_565">565-66</a>;<br /> +<span style="margin-left: 1em;">inapplicable to value of money, <a href="#Page_64">Ch. III</a>, <a href="#Page_389">389</a>, <a href="#Page_451">451</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to supply and demand, <a href="#Page_50">50</a>, <a href="#Page_64">Ch. III</a>;</span><br /> +<span style="margin-left: 1em;">not related to quantity theory, <a href="#Page_46">46ff.</a>;</span><br /> +<span style="margin-left: 1em;">conflicts with quantity theory, <a href="#Page_300">300</a>, <a href="#Page_306">306-07</a>, <a href="#Page_310">310-11</a>, <a href="#Page_389">389</a>;</span><br /> +<span style="margin-left: 1em;">assumes fixed absolute value of money, <a href="#Page_64">Ch. III</a>, <a href="#Page_313">313-14</a>, <a href="#Page_389">389</a>, <a href="#Page_451">451</a>;</span><br /> +<span style="margin-left: 1em;">"real costs," <a href="#Page_44">44-45</a>, <a href="#Page_64">64ff.</a>, <a href="#Page_96">96</a>, <a href="#Footnote_104">117, n.</a> See <span class="smcap">Labor Theory of Value</span>.</span><br /> +<span style="margin-left: 1em;">Money costs, <a href="#Page_64">Ch. III</a>, <a href="#Page_90">90</a>, <a href="#Page_95">95</a>;</span><br /> +<span style="margin-left: 1em;">Austrian cost theory, <a href="#Page_56">56</a>, <a href="#Page_64">Ch. III</a>, <a href="#Page_90">90</a>, <a href="#Page_95">95</a>, <a href="#Footnote_104">116, n.</a></span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Selling Costs</span>.</span><br /> +<br /> +Cotton speculation. See <span class="smcap">New York Cotton Exchange, and Speculation</span>.<br /> +<br /> +Credit, <a href="#Page_42">42</a>, <a href="#Page_98">98-99</a>, <a href="#Page_130">130</a>, <a href="#Page_143">143-44</a>, <a href="#Page_166">166ff.</a>, <a href="#Page_172">Ch. IX</a>, <a href="#Page_216">Ch. XIII</a>, <a href="#Page_279">Ch. XIV</a>, <a href="#Page_318">318</a>, <a href="#Page_324">Ch. XVIII</a>, <a href="#Page_392">392-393</a>, <a href="#Page_395">395</a>, <a href="#Page_427">427</a>, <a href="#Page_441">441</a>, <a href="#Page_447">447</a>, <a href="#Page_459">Ch. XXIII</a>, <a href="#Page_498">Ch. XXIV</a>, <a href="#Page_581">581</a>;<br /> +<span style="margin-left: 2em;">not based on money, <a href="#Page_326">326-27</a>;</span><br /> +<span style="margin-left: 2em;">based on values, <a href="#Page_326">326-27</a>, <a href="#Page_478">478-86</a>, <a href="#Page_485">485-86</a>, <a href="#Page_528">528-29</a>;</span><br /> +<span style="margin-left: 2em;">part of general system of values, <a href="#Page_40">40-41</a>, <a href="#Page_460">460</a>, <a href="#Page_462">462-68</a>, <a href="#Page_480">480</a>, <a href="#Page_486">486ff.</a>, <a href="#Page_574">574-75</a>;</span><br /> +<span style="margin-left: 2em;">definition of, <a href="#Page_459">459-60</a>, <a href="#Page_472">472-74</a>, <a href="#Page_489">489</a>;</span><br /> +<span style="margin-left: 2em;">distinguished from credit transaction, <a href="#Page_473">473</a>;</span><br /> +<span style="margin-left: 2em;">juridical aspects of, <a href="#Page_395">395</a>, <a href="#Page_460">460-61</a>, <a href="#Page_468">468-73</a>; relation of, to belief. See <span class="smcap">Belief</span>.</span><br /> +<span style="margin-left: 1em;">Functions of, <a href="#Page_263">263-66</a>, <a href="#Page_391">391-92</a>, <a href="#Page_395">395</a>, <a href="#Page_407">407</a>, <a href="#Page_441">441</a>, <a href="#Page_475">475-78</a>, <a href="#Page_484">484ff.</a>, <a href="#Page_511">511-12</a>, <a href="#Page_523">523-29</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to money, <a href="#Page_172">Ch. IX</a>, <a href="#Page_324">Ch. XVIII</a>, <a href="#Page_393">393</a>, <a href="#Page_395">395</a>. See also <span class="smcap">Reserves</span>.</span><br /> +<span style="margin-left: 1em;">Relation of, to trade, <a href="#Page_216">Ch. XIII</a>, <a href="#Page_279">Ch. XIV</a>, <a href="#Page_391">391-92</a>, <a href="#Page_393">393</a>;</span><br /> +<span style="margin-left: 1em;">volume of, a function of dynamic change, <a href="#Page_474">474</a>;</span><br /> +<span style="margin-left: 1em;">elastic. See <span class="smcap">Bank Credit</span>.</span><br /> +<span style="margin-left: 1em;">As "capital," <a href="#Page_261">261</a>, <a href="#Page_461">461</a>, <a href="#Page_484">484ff.</a>;</span><br /> +<span style="margin-left: 2em;">in "equation of exchange," <a href="#Page_166">166ff.</a>;</span><br /> +<span style="margin-left: 2em;">book-credit, <a href="#Page_167">167ff.</a>, <a href="#Page_226">226</a>, <a href="#Page_369">369</a>; time-credit, <a href="#Page_168">168</a>.</span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Loans</span>, <span class="smcap">Interest</span>.</span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Bank-Credit</span>, <span class="smcap">Deposits</span>, <span class="smcap">Loans</span>, <span class="smcap">Collateral Loans</span>, <span class="smcap">Call Loans</span>, <span class="smcap">Assets of Banks</span>, <span class="smcap">Belief</span>, <span class="smcap">Business Confidence</span>, etc.</span><br /> +<br /> +<i>Crédit Lyonnais</i>, <a href="#Footnote_557">530, n.</a><br /> +<br /> +Credit theory of paper money. See <span class="smcap">Paper Money</span> and <span class="smcap">Greenbacks</span>.<br /> +<span class='pagenum'><a name="Page_597" id="Page_597">[Pg 597]</a></span><br /> +Crises, <a href="#Page_213">213</a>, <a href="#Page_254">254</a>, <a href="#Page_520">520</a>, <a href="#Page_548">548-49</a>, <a href="#Page_555">555</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Panics</span>, <span class="smcap">Business Cycles</span>, <span class="smcap">Business Confidence</span>, <span class="smcap">Theory of Prosperity</span>.</span><br /> +<br /> +Cross-section analysis. See <span class="smcap">Historical</span> <i>vs.</i> <span class="smcap">Cross-section Viewpoints</span>.<br /> +<br /> +Curb, <a href="#Page_250">250</a>.<br /> +<br /> +Currency School, <a href="#Page_283">283ff.</a>, <a href="#Page_395">395</a>;<br /> +<span style="margin-left: 1em;">"currency theory of deposits," <a href="#Page_283">283</a>.</span><br /> +<br /> +Curves applied to money, <a href="#Page_451">451-53</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Marginal Analysis</span>.</span><br /> +<br /> +Custom, <a href="#Page_36">36</a>, <a href="#Page_109">109</a>, <a href="#Page_135">135</a>, <a href="#Page_136">136</a>, <a href="#Page_183">183-84</a>, <a href="#Page_205">205ff.</a>, <a href="#Page_391">391</a>, <a href="#Page_405">405</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_589">589</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Habit</span>.</span><br /> +<br /> +<br /> +<b>D</b><br /> +<br /> +Davenport, H. J., <a href="#Footnote_11_11">12, n.</a>, <a href="#Footnote_18_18">14, n.</a>, <a href="#Footnote_26_26">21, n.</a>, <a href="#Page_25">25</a>, <a href="#Footnote_55">65, n.</a>, <a href="#Page_67">67</a>, <a href="#Footnote_61">78, n.</a>, <a href="#Page_80">80</a>, <a href="#Footnote_75">91, n.</a>, <a href="#Page_94">94</a>, <a href="#Footnote_98">103, n.</a>, <a href="#Footnote_104">113-15, n.</a>, <a href="#Footnote_229">218, n.</a>, <a href="#Page_314">314</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_473">419, n.</a>, <a href="#Footnote_477">426, n.</a>, <a href="#Footnote_482">429, n.</a>, <a href="#Page_434">434</a>, <a href="#Footnote_496">447, n.</a>, <a href="#Footnote_511">482, n.</a><br /> +<br /> +Davidson, T., <a href="#Footnote_22_22">18, n.</a><br /> +<br /> +Dean, Rodney, <a href="#Footnote_405">354, n.</a><br /> +<br /> +Debtor Class, <a href="#Page_139">139</a>.<br /> +<br /> +Debts, <a href="#Footnote_486">433, n.</a> ff., <a href="#Page_472">472-75</a>, <a href="#Page_489">489</a>;<br /> +<span style="margin-left: 1em;">repudiation of, <a href="#Page_581">581</a>.</span><br /> +<br /> +DeCoppet and Doremus, <a href="#Page_249">249</a>, <a href="#Page_370">370</a>.<br /> +<br /> +Definition, a, as cause for the circulation of money, <a href="#Page_143">143</a>, <a href="#Page_400">400-01</a>.<br /> +<br /> +DeLaunay, L., <a href="#Footnote_466">412, n.</a>, <a href="#Footnote_469">415, n.</a><br /> +<br /> +Demand. See <span class="smcap">Supply and Demand</span>.<br /> +<span style="margin-left: 1em;">Increase of, <a href="#Page_53">53</a>;</span><br /> +<span style="margin-left: 2em;">nominal increase of, <a href="#Page_54">54</a>;</span><br /> +<span style="margin-left: 2em;">elasticity of, <a href="#Page_55">55</a>, <a href="#Page_224">224-27</a>, <a href="#Page_411">411-13</a>;</span><br /> +<span style="margin-left: 2em;">for money, in what sense used, <a href="#Page_62">62</a>;</span><br /> +<span style="margin-left: 2em;">elasticity of, <a href="#Page_224">224-27</a>;</span><br /> +<span style="margin-left: 2em;">demand curves, <a href="#Page_51">51</a>;</span><br /> +<span style="margin-left: 2em;">applied to gold, <a href="#Page_451">451ff.</a>;</span><br /> +<span style="margin-left: 2em;">social value explanation of, <a href="#Page_42">42</a>, <a href="#Page_46">Ch. II</a>, <a href="#Page_93">93</a>;</span><br /> +<span style="margin-left: 2em;">distinguished from utility curves, <a href="#Page_49">49</a>, <a href="#Page_52">52</a>, <a href="#Page_70">70</a>, <a href="#Page_80">80</a>, <a href="#Footnote_104">113, n., 115, n., 116</a>.</span><br /> +<br /> +"Demand Notes," <a href="#Page_322">322</a>, <a href="#Footnote_497">448, n.</a><br /> +<br /> +Deposits, <a href="#Page_129">129</a>, <a href="#Page_143">143</a>, <a href="#Page_172">Ch. IX</a>, <a href="#Page_186">186</a>, <a href="#Page_296">296</a>, <a href="#Page_344">344</a>, <a href="#Page_345">345-47</a>, <a href="#Page_453">453</a>, <a href="#Page_472">472</a>, <a href="#Page_487">487</a>;<br /> +<span style="margin-left: 2em;">by one bank in another, <a href="#Footnote_408">358, n.</a>, <a href="#Page_349">349</a>, <a href="#Footnote_406">355, n.</a>, <a href="#Page_357">357</a>, <a href="#Footnote_423">365, n.</a>, <a href="#Footnote_427">367, n.</a>, <a href="#Footnote_520">500, n.</a>, <a href="#Page_508">508</a>, <a href="#Footnote_538">515, n.</a>, <a href="#Page_530">530-32</a>;</span><br /> +<span style="margin-left: 2em;">relations of, to "money in circulation," <a href="#Page_172">Ch. IX</a>, <a href="#Page_185">185</a>, <a href="#Page_294">294</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to reserves, <a href="#Page_172">Ch. IX</a>, <a href="#Page_286">286-87</a>, <a href="#Page_298">298-99</a>;</span><br /> +<span style="margin-left: 2em;">activity of, <a href="#Page_345">345-47</a>, <a href="#Page_512">512-16</a>;</span><br /> +<span style="margin-left: 2em;">in Europe <a href="#Page_262">262</a>.</span><br /> +<span style="margin-left: 2em;"><span class="smcap">See Giro-system</span>.</span><br /> +<span style="margin-left: 1em;">Deposits as "bearers of options," <a href="#Page_425">425</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to loans, <a href="#Page_285">285ff.</a>, <a href="#Page_512">512</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to trade and prices, <a href="#Page_216">Ch. XIII</a>, <a href="#Page_279">Ch. XIV</a>, <a href="#Page_287">287</a>;</span><br /> +<span style="margin-left: 2em;">of private banks, <a href="#Page_344">344</a>;</span><br /> +<span style="margin-left: 2em;">deposits distinguished from "deposits," <a href="#Footnote_388">339, n.</a>, <a href="#Page_343">343-44</a>, <a href="#Page_512">512</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to "deposits," <a href="#Page_512">512ff.</a></span><br /> +<br /> +"Deposits" in Kinley's studies of payments, <a href="#Page_230">230</a>, <a href="#Page_232">232-36</a>, <a href="#Page_242">242-43</a>, <a href="#Page_338">338ff.</a>, <a href="#Page_392">392</a>, <a href="#Page_512">512-16</a>;<br /> +<span style="margin-left: 1em;">retail "deposits," <a href="#Page_232">232</a>, <a href="#Page_243">243</a>, <a href="#Page_269">269</a>, <a href="#Page_338">338</a>, <a href="#Footnote_427">367, n.</a>, <a href="#Page_368">368</a>, <a href="#Page_392">392</a>, <a href="#Page_513">513</a>;</span><br /> +<span style="margin-left: 1em;">wholesale "deposits," <a href="#Page_232">232</a>, <a href="#Page_243">243</a>, <a href="#Page_338">338</a>, <a href="#Page_392">392</a>, <a href="#Page_513">513</a>;</span><br /> +<span style="margin-left: 1em;">"all other deposits," <a href="#Page_232">232</a>, <a href="#Page_235">235-37</a>, <a href="#Page_243">243</a>, <a href="#Page_338">338</a>, <a href="#Page_514">514</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to trade, <a href="#Page_230">230</a>, <a href="#Page_243">243-45</a>, <a href="#Page_248">248</a>, <a href="#Page_339">339-40</a>.</span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Overcounting and Undercounting</span>.</span><br /> +<span style="margin-left: 1em;">New York City, <a href="#Page_233">233</a>, <a href="#Page_234">234</a>, <a href="#Page_242">242</a>, <a href="#Page_246">246</a>, <a href="#Page_340">340ff.</a>;</span><br /> +<span style="margin-left: 2em;">country, <a href="#Page_246">246</a>;</span><br /> +<span style="margin-left: 2em;">in Pittsburg, <a href="#Page_245">245-46</a>;</span><br /> +<span style="margin-left: 2em;">check "deposits," volume of, <a href="#Page_339">339</a>, <a href="#Page_360">360-62</a>, <a href="#Page_392">392</a>.</span><br /> +<br /> +<i>Deutsche Bank</i>, <a href="#Footnote_557">530, n.</a><br /> +<br /> +Dewey, John, <a href="#Footnote_21_21">17, n.</a>, <a href="#Page_22">22</a>, <a href="#Footnote_592">579, n.</a><br /> +<br /> +Dibblee, G. B., <a href="#Page_259">259-60</a>.<br /> +<br /> +Differential principle, and theory of rent, <a href="#Page_430">430-41</a>;<br /> +<span style="margin-left: .5em;">applied to money, <a href="#Page_439">439-41</a>, <a href="#Page_529">529</a>.</span><br /> +<br /> +Director of the Mint, statistics of gold consumption, <a href="#Footnote_466">413, n.</a><br /> +<br /> +Discount. See <span class="smcap">Time-discount</span> and <span class="smcap">Capitalization Theory</span>;<br /> +<span style="margin-left: 1em;">rate of, see <span class="smcap">Interest</span>;</span><br /> +<span style="margin-left: 1em;">rate of, <i>vs.</i> money rates, see <span class="smcap">Interest</span>;</span><br /> +<span style="margin-left: 1em;">on Greenbacks, see <span class="smcap">Greenbacks</span>, <span class="smcap">Premium</span>, <span class="smcap">Agio</span>.</span><br /> +<br /> +"Discounting," <a href="#Page_298">298</a>, <a href="#Page_597">597</a>.<br /> +<br /> +Distribution of wealth, <a href="#Page_15">15</a>, <a href="#Page_31">31</a>, <a href="#Page_33">33</a>, <a href="#Page_37">37</a>, <a href="#Page_38">38</a>, <a href="#Page_97">97</a>, <a href="#Page_102">102-03</a>, <a href="#Page_246">246</a>, <a href="#Footnote_269">247, n.</a>, <a href="#Page_413">413-16</a>, <a href="#Page_465">465-67</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Interest</span>, <span class="smcap">Capital</span>, <span class="smcap">Capitalization Theory</span>, <span class="smcap">Rent</span>, <span class="smcap">Imputation Theory</span>.</span><br /> +<br /> +<span class='pagenum'><a name="Page_598" id="Page_598">[Pg 598]</a></span>Division of labor in banking, America and Germany contrasted, <a href="#Page_527">527</a>;<br /> +<span style="margin-left: 1em;">extent of in England, <a href="#Page_530">530</a>, <a href="#Page_540">540-41</a>, <a href="#Page_542">542</a>.</span><br /> +<br /> +Dodo-Bones, <a href="#Page_82">82</a>, CL VII, <a href="#Page_155">155</a>, <a href="#Page_280">280</a>, <a href="#Page_304">304</a>, <a href="#Page_321">321</a>, <a href="#Page_325">325</a>.<br /> +<br /> +"Dollar exchange," <a href="#Page_541">541</a>.<br /> +<br /> +"Domestic trade" <i>vs.</i> foreign trade, appendix to Ch. XIII.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Trade</span>.</span><br /> +<br /> +Double counting in estimating volume of trade. See <span class="smcap">Overcounting</span>.<br /> +<br /> +Dualism, most useful metaphysics for social sciences, <a href="#Page_571">571-72</a>.<br /> +<br /> +<i>Dun's Review</i>, <a href="#Footnote_305">272, n., 273, n.</a><br /> +<br /> +Dynamics, <a href="#Page_42">42</a>, <a href="#Page_106">106</a>, <a href="#Footnote_173">178, n.</a>, <a href="#Page_186">Ch. X</a>, <a href="#Page_254">254</a>, <a href="#Page_262">262-66</a>, <a href="#Page_392">392-93</a>, <a href="#Page_395">395-96</a>, <a href="#Page_426">426</a>, <a href="#Page_474">474</a>, <a href="#Page_484">484-89</a>, <a href="#Page_495">495</a>, <a href="#Page_527">527-28</a>, <a href="#Page_547">Ch. XXV</a>;<br /> +<span style="margin-left: 1em;">dynamics and statics, reconciliation of, <a href="#Page_42">42</a>, <a href="#Page_395">395-96</a>, <a href="#Page_547">Ch. XXV</a>;</span><br /> +<span style="margin-left: 1em;">"dynamic credit," <a href="#Page_484">484-89</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Transition Periods</span>, <span class="smcap">Prosperity</span>, <span class="smcap">Theory of</span>, <span class="smcap">Statics</span>, "<span class="smcap">Normal</span>," <span class="smcap">Friction</span>, <span class="smcap">Fluidity</span>, <span class="smcap">Liquidity</span>, <span class="smcap">Saleability</span>, <span class="smcap">Equilibrium</span>, <span class="smcap">Business Capital</span>, <span class="smcap">Intangible Capital</span>, etc.</span><br /> +<br /> +<br /> +<b>E</b><br /> +<br /> +Elasticity. See <span class="smcap">Demand</span>, <span class="smcap">Elasticity of</span>, <span class="smcap">and Bank-credit</span>, <span class="smcap">Elasticity of</span>.<br /> +<br /> +Ellwood, C. A., <a href="#Footnote_2_2">4, n.</a>, <a href="#Footnote_25_25">21, n.</a><br /> +<br /> +Emery, H. C, <a href="#Footnote_125">146, n.</a>, <a href="#Footnote_435">371, n.</a>, <a href="#Footnote_591">576, n.</a><br /> +<br /> +England, <a href="#Page_142">142</a>, <a href="#Page_184">184</a>, <a href="#Page_447">447-48</a>, <a href="#Page_450">450</a>, <a href="#Page_530">530</a>, <a href="#Page_534">534</a>, <a href="#Page_536">536-43</a>.<br /> +<span style="margin-left: 2em;">See <span class="smcap">London</span>, and <span class="smcap">Liverpool</span>.</span><br /> +<span style="margin-left: 1em;">Bank of England, <a href="#Page_183">183</a>, <a href="#Page_319">319</a>, <a href="#Page_323">323</a>, <a href="#Page_350">350</a>, <a href="#Page_538">538ff.</a>;</span><br /> +<span style="margin-left: 1em;">"Bank Restriction" in, <a href="#Footnote_364">323, n.</a></span><br /> +<br /> +English School, <a href="#Page_96">96</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Classical School</span>.</span><br /> +<br /> +Entrepreneur, <a href="#Page_67">67</a>, <a href="#Page_485">485ff.</a>, <a href="#Page_539">539</a>, <a href="#Page_583">583-85</a>.<br /> +<br /> +"Epi-phenomenon," money as, <a href="#Page_266">266</a>.<br /> +<br /> +"Equation of Exchange," <a href="#Page_154">Ch. VIII</a>, <a href="#Page_186">186</a>, <a href="#Page_188">188</a>, <a href="#Page_191">191</a>, <a href="#Page_204">204</a>, <a href="#Page_283">283</a>, <a href="#Page_292">Ch. XV</a>, <a href="#Page_326">326</a>, <a href="#Page_363">363</a>, <a href="#Page_520">520-22</a>, <a href="#Footnote_569">537, n., 538, n.</a>;<br /> +<span style="margin-left: 2em;">as equation of "values," <a href="#Page_159">159</a>;</span><br /> +<span style="margin-left: 2em;">mathematical analysis of, <a href="#Page_158">158-66</a>;</span><br /> +<span style="margin-left: 2em;">factors in, highly abstract, <a href="#Page_162">162-63</a>, <a href="#Page_176">176-77</a>;</span><br /> +<span style="margin-left: 2em;">"equation of exchange" <i>vs.</i> causal theory, <a href="#Page_163">163</a>, <a href="#Page_165">165-66</a>, <a href="#Page_186">186</a>, <a href="#Footnote_187">189, n.</a></span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Causal Theory of Value</span>.</span><br /> +<span style="margin-left: 1em;">Statistics of, <a href="#Page_331">Ch. XIX</a>.</span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Quantity Theory</span>, <span class="smcap">Deposits</span>, <span class="smcap">Velocity</span>, <span class="smcap">Trade</span>, <span class="smcap">Volume of</span>, <span class="smcap">Price-level</span>, etc.</span><br /> +<br /> +Equation of supply and demand, <a href="#Page_51">51</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Supply and Demand</span>.</span><br /> +<br /> +Equilibrium, <a href="#Page_91">91ff.</a>, <a href="#Page_105">105</a>, <a href="#Footnote_104">115, n., 116, 117, 119</a>, <a href="#Page_156">156</a>, <a href="#Page_187">187</a>, <a href="#Page_190">190</a>, <a href="#Page_222">222</a>, <a href="#Page_225">225</a>, <a href="#Page_254">254</a>, <a href="#Page_262">262-66</a>, <a href="#Page_293">293</a>, <a href="#Page_298">298-99</a>, <a href="#Page_328">328</a>, <a href="#Footnote_374">333, n.</a>, <a href="#Page_392">392-93</a>, <a href="#Page_401">401</a>, <a href="#Page_451">451-57</a>, <a href="#Page_557">557</a>, <a href="#Page_570">570-73</a>, <a href="#Page_583">583</a>, <a href="#Page_586">586-89</a>.<br /> +<br /> +European Banking, <a href="#Page_262">262</a>, <a href="#Page_497">497</a>, <a href="#Page_511">511</a>, <a href="#Page_523">523</a>, <a href="#Page_527">527</a>, <a href="#Page_530">530</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">England</span>, <span class="smcap">Germany</span>, <span class="smcap">France</span>, <span class="smcap">Austria-Hungary</span>, <span class="smcap">Belgium</span>, etc.</span><br /> +<br /> +Exchange, <a href="#Page_9">9-11</a>, <a href="#Page_133">133</a>, <a href="#Page_224">224ff.</a>, <a href="#Page_398">398ff.</a>, <a href="#Page_468">468-69</a>, <a href="#Page_520">520-23</a>;<br /> +<span style="margin-left: 1em;">creates <i>values</i>,</span><br /> +<span style="margin-left: 1em;">not <i>utilities</i>, <a href="#Footnote_103">111, n.</a>, <a href="#Page_145">145</a>, <a href="#Page_423">423-24</a>, <a href="#Footnote_476">424, n.</a>;</span><br /> +<span style="margin-left: 1em;">in static state, <a href="#Page_262">262-66</a>, <a href="#Page_401">401-02</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to value, <a href="#Page_9">9-11</a>, <a href="#Page_401">401ff.</a>, <a href="#Page_468">468-69</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Trade</span>, <span class="smcap">Gold Movements</span>, <span class="smcap">International</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Exchangeability. See <span class="smcap">Saleability</span>.<br /> +<br /> +<br /> +<b>F</b><br /> +<br /> +Fashion. See <span class="smcap">Suggestion</span>.<br /> +<br /> +Federal Government, <a href="#Page_147">147</a>, <a href="#Page_322">322</a>, <a href="#Page_332">332</a>, <a href="#Page_368">368</a>, <a href="#Page_432">432</a>, <a href="#Page_476">476</a>, <a href="#Page_549">549</a>;<br /> +<span style="margin-left: 1em;">Federal war tax as index of grain speculation, <a href="#Page_251">251</a>.</span><br /> +<br /> +Federal Reserve System, <a href="#Page_299">299</a>, <a href="#Page_490">490</a>, <a href="#Page_499">499</a>, <a href="#Page_518">518-20</a>;<br /> +<span style="margin-left: 1em;">should rediscount stock collateral loans, <a href="#Page_518">518-20</a>;</span><br /> +<span style="margin-left: 1em;">"money trust" and, <a href="#Page_518">518-20</a>.</span><br /> +<br /> +Fetter, F. A., <a href="#Footnote_6_6">7, n.</a>, <a href="#Page_48">48</a>, <a href="#Footnote_61">78, n.</a>, <a href="#Footnote_340">301, n.</a>, <a href="#Footnote_342">303, n.</a>, <a href="#Page_437">437</a>, <a href="#Footnote_491">440, n.</a>, <a href="#Footnote_585">562, n.</a><br /> +<br /> +Fiat theory, <a href="#Page_136">136</a>, <a href="#Page_142">142</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Legal Theory</span>, <i>Staatliche Theorie</i>.</span><br /> +<br /> +Fichte, J. G., <a href="#Page_22">22</a>, <a href="#Page_137">137</a>.<br /> +<br /> +<span class='pagenum'><a name="Page_599" id="Page_599">[Pg 599]</a></span> +Fisher, I., <a href="#Page_47">47</a>, <a href="#Page_56">56</a>, <a href="#Page_81">81</a>, <a href="#Footnote_75">91, n.</a>, <a href="#Page_99">99</a>, <a href="#Footnote_104">117, n.</a>, <a href="#Page_124">124</a>, <a href="#Page_128">128</a>, <a href="#Page_130">130</a>, <a href="#Page_143">143</a>, <a href="#Page_152">152</a>, <a href="#Page_154">154ff.</a>, <a href="#Page_172">172ff.</a>, <a href="#Page_186">186ff.</a>, <a href="#Page_196">196</a>, <a href="#Footnote_201">200, n.</a>, <a href="#Page_203">203ff.</a>, <a href="#Page_209">209ff.</a>, <a href="#Page_216">216ff.</a>, <a href="#Page_222">222</a>, <a href="#Page_226">226-29</a>, <a href="#Page_231">231</a>, <a href="#Page_240">240</a>, <a href="#Page_247">247</a>, <a href="#Footnote_270">248, n.</a>, <a href="#Page_254">254</a>, <a href="#Page_256">256</a>, <a href="#Page_261">261</a>, <a href="#Page_262">262</a>, <a href="#Page_274">274</a>, <a href="#Page_281">281ff.</a>, <a href="#Page_291">291ff.</a>, <a href="#Footnote_340">301, n.</a>, <a href="#Page_302">302-04</a>, <a href="#Page_306">306</a>, <a href="#Page_308">308</a>, <a href="#Page_311">311</a>, <a href="#Page_312">312</a>, <a href="#Page_324">324</a>, <a href="#Page_326">326</a>, <a href="#Page_331">331</a>, <a href="#Footnote_374">333, n.</a>, <a href="#Page_335">335ff.</a>, <a href="#Page_348">348-49</a>, <a href="#Page_351">351-52</a>, <a href="#Page_360">360ff.</a>, <a href="#Page_371">371</a>, <a href="#Page_376">376</a>, <a href="#Page_381">381-83</a>, <a href="#Page_400">400</a>, <a href="#Page_437">437</a>, <a href="#Page_455">455</a>, <a href="#Page_522">522</a>, <a href="#Page_537">537</a>, <a href="#Page_555">555</a>, <a href="#Page_559">559</a>, <a href="#Page_563">563</a>.<br /> +<br /> +Fite, W., <a href="#Footnote_26_26">21, n.</a><br /> +<br /> +Fluidity, <a href="#Page_143">143</a>, <a href="#Page_403">403</a>, <a href="#Page_456">456</a>, <a href="#Page_476">476</a>, <a href="#Page_542">542</a>, <a href="#Footnote_585">563, n.</a><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Liquidity</span>, <span class="smcap">Saleability</span>, <span class="smcap">Static Theory</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Flux, W. A., <a href="#Page_49">49</a>.<br /> +<br /> +Foreign bills of exchange, in reserves, <a href="#Page_181">181-82</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Bills of Exchange and Gold Movements</span>, <span class="smcap">International</span>.</span><br /> +<br /> +Foreign trade, <a href="#Page_261">261</a>, <a href="#Page_265">265</a>, <a href="#Page_503">503</a>;<br /> +<span style="margin-left: 1em;">ratio of, to "domestic trade," appendix to Ch. XIII.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Trade</span>, <span class="smcap">Bills of Exchange</span>, <span class="smcap">Gold Movements</span>, <span class="smcap">International</span>.</span><br /> +<br /> +France, <a href="#Page_136">136</a>, <a href="#Footnote_120">139, n.</a>, <a href="#Page_450">450</a>, <a href="#Footnote_557">530, n.</a>, <a href="#Page_533">533</a>;<br /> +<span style="margin-left: 1em;"><i>Banque de</i>, <a href="#Page_136">136</a>, <a href="#Page_183">183</a>, <a href="#Page_425">425</a>, <a href="#Page_538">538-39</a>.</span><br /> +<br /> +Friction, <a href="#Page_11">11</a>, <a href="#Page_94">94</a>, <a href="#Page_262">262-66</a>, <a href="#Page_392">392</a>, <a href="#Page_426">426</a>, <a href="#Page_543">543-44</a>, <a href="#Page_554">554-55</a>, <a href="#Page_563">563</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>, <span class="smcap">Saleability</span>.</span><br /> +<br /> +Functions of money, <a href="#Page_76">76</a>, <a href="#Page_81">81</a>, <a href="#Page_83">83</a>, <a href="#Page_93">93-94</a>, <a href="#Page_110">110-11</a>, <a href="#Page_144">144-48</a>, <a href="#Page_151">151-53</a>, <a href="#Page_201">201</a>, <a href="#Page_263">263-66</a>, <a href="#Page_313">313-14</a>, <a href="#Page_327">327-28</a>, <a href="#Page_390">390-91</a>, <a href="#Page_394">394</a>, <a href="#Page_399">399</a>, <a href="#Page_417">Ch. XXII</a>, <a href="#Page_536">536ff.</a>, <a href="#Page_543">543</a>;<br /> +<span style="margin-left: 1em;">in relation to value of money, <a href="#Page_144">144ff.</a>, <a href="#Page_390">390-91</a>, <a href="#Page_309">309-400</a>, <a href="#Page_417">Ch. XXII</a>.</span><br /> +<br /> +Functions of value. See <span class="smcap">Value, Functions of</span>.<br /> +<br /> +"Futures," <a href="#Page_243">243</a>, <a href="#Page_251">251</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Stocks</span>, <span class="smcap">"Borrowing and Carrying" of</span>.</span><br /> +<br /> +Future values, <a href="#Page_40">40</a>, <a href="#Page_107">107</a>, <a href="#Page_459">459-60</a>, <a href="#Page_480">480</a>, <a href="#Page_486">486</a>, <a href="#Page_585">585</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Credit</span>, <span class="smcap">Part of General System of Values</span>.</span><br /> +<br /> +Futurity, not peculiar to credit, <a href="#Page_459">459-60</a>, <a href="#Page_475">475</a>.<br /> +<br /> +<br /> +<b>G</b><br /> +<br /> +George, Henry, <a href="#Footnote_61">78, n.</a>, <a href="#Footnote_340">301, n.</a><br /> +<br /> +Germany, <a href="#Page_136">136</a>, <a href="#Footnote_120">139, n.</a>, <a href="#Page_145">145-46</a>, <a href="#Page_167">167</a>, <a href="#Page_425">425</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Footnote_486">435, n.</a>, <a href="#Page_527">527</a>, <a href="#Footnote_557">530, n.</a>;<br /> +<span style="margin-left: 1em;">giro-system in, <a href="#Page_150">150</a>, <a href="#Page_167">167</a>, <a href="#Page_289">289</a>;</span><br /> +<span style="margin-left: 1em;">great use of domestic bills of exchange in, <a href="#Page_288">288-89</a>;</span><br /> +<span style="margin-left: 1em;">limited division of labor in banking in, <a href="#Page_527">527</a>;</span><br /> +<span style="margin-left: 1em;">Reichsbank, <a href="#Page_182">182</a>, <a href="#Page_183">183</a>.</span><br /> +<br /> +Giddings, F. H., <a href="#Footnote_72">87, n.</a>, <a href="#Page_556">556-57</a>, <a href="#Page_571">571</a>, <a href="#Footnote_590">573, n.</a><br /> +<br /> +Giro-system. See <span class="smcap">Germany</span>.<br /> +<br /> +Gold, <a href="#Page_84">84</a>, <a href="#Page_143">143</a>, <a href="#Page_397">Ch. XXI</a>, <a href="#Page_422">422</a>, <a href="#Page_432">432</a>, <a href="#Page_436">436</a>, <a href="#Page_441">441-43</a>, <a href="#Footnote_493">443-44, n.</a>, <a href="#Page_530">530</a>, <a href="#Page_535">535-56</a>, <a href="#Page_538">538-39</a>, <a href="#Page_567">567</a>, <a href="#Page_591">591</a>;<br /> +<span style="margin-left: 1em;">in arts, <a href="#Page_84">84</a>, <a href="#Page_135">135</a>, <a href="#Page_151">151-53</a>, <a href="#Page_224">224</a>, <a href="#Page_314">314</a>, <a href="#Page_330">330</a>, <a href="#Page_390">390</a>, <a href="#Page_400">400</a>, <a href="#Page_397">Ch. XXI</a>, <a href="#Page_451">451-57</a>;</span><br /> +<span style="margin-left: 1em;">as money, <a href="#Page_84">84</a>, <a href="#Page_135">135</a>, <a href="#Page_141">141</a>, <a href="#Page_146">146</a>, <a href="#Page_224">224</a>, <a href="#Page_304">304</a>, <a href="#Page_322">322-23</a>, <a href="#Page_390">390</a>, <a href="#Page_408">408-16</a>, <a href="#Page_441">441-43</a>, <a href="#Page_445">445</a>, <a href="#Page_451">451-57</a>, <a href="#Page_495">495-96</a>, <a href="#Page_530">530</a>, <a href="#Page_535">535-56</a>, <a href="#Page_538">538-39</a>;</span><br /> +<span style="margin-left: 1em;">value of, <a href="#Page_84">84</a>, <a href="#Page_397">Ch. XXI</a>, esp. <a href="#Page_408">408-16</a>, <a href="#Page_451">451-57</a>;</span><br /> +<span style="margin-left: 1em;">in reserves, <a href="#Page_147">147</a>, <a href="#Page_180">180-81</a>, <a href="#Page_324">324-28</a>.</span><br /> +<br /> +Gold mining camps, high prices in, <a href="#Footnote_234">220, n.</a><br /> +<br /> +Gold movements, international, <a href="#Page_60">60-61</a>, <a href="#Page_129">129</a>, <a href="#Page_142">142</a>, <a href="#Page_181">181-82</a>, <a href="#Page_183">183</a>, <a href="#Page_261">261</a>, <a href="#Page_280">280</a>, <a href="#Page_292">292</a>, <a href="#Page_315">Ch. XVI</a>, <a href="#Footnote_486">434, n.</a>, <a href="#Page_531">531</a>, <a href="#Page_533">533-34</a>.<br /> +<br /> +Gold production and prices, <a href="#Page_324">Ch. XVIII</a>, <a href="#Page_535">535-36</a>;<br /> +<span style="margin-left: 1em;">new world discoveries, <a href="#Page_219">219ff.</a>;</span><br /> +<span style="margin-left: 1em;">Californian and Australian discoveries, <a href="#Page_220">220-21</a>, <a href="#Footnote_234">221, n.</a></span><br /> +<br /> +Goods, consumers', <a href="#Page_34">34ff.</a>, <a href="#Page_82">82</a>, <a href="#Page_96">96</a>, <a href="#Page_481">481</a>;<br /> +<span style="margin-left: 2em;">ranks or orders of. See <span class="smcap">Ranks</span>.</span><br /> +<span style="margin-left: 1em;">Instrumental, <a href="#Page_38">38</a>, <a href="#Page_81">81</a>, <a href="#Page_297">297</a>, <a href="#Page_482">482</a>, <a href="#Page_484">484</a>, <a href="#Page_500">500</a>, <a href="#Page_569">569</a>, <a href="#Page_579">579</a>.</span><br /> +<br /> +"Goods side" of "equation of exchange," no, <a href="#Page_159">159</a>.<br /> +<br /> +"Good will," <a href="#Page_260">260</a>, <a href="#Page_482">482-83</a>, <a href="#Page_561">561</a>, <a href="#Page_564">564</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Business Capital</span>, <span class="smcap">Intangible Capital</span>, <span class="smcap">Selling Costs</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Grain speculation. See <span class="smcap">Speculation</span>, <span class="smcap">Commodity</span>.<br /> +<br /> +Greenbacks, <a href="#Page_141">141</a>, <a href="#Page_146">146</a>, <a href="#Page_147">147</a>, <a href="#Page_194">194</a>, <a href="#Page_304">304</a>, <a href="#Page_322">322-23</a>, <a href="#Page_332">332-33</a>, <a href="#Page_422">422</a>, <a href="#Page_432">432</a>, <a href="#Page_435">435</a>, <a href="#Page_436">436</a>, <a href="#Page_567">567-68</a>.<br /> +<br /> +Gresham's Law, <a href="#Page_129">129</a>, <a href="#Footnote_120">140, n.</a>, <a href="#Page_321">Ch. XVII</a>;<br /> +<span style="margin-left: 1em;">conflicts with quantity theory, <a href="#Page_321">Ch. XVII</a>;</span><br /> +<span style="margin-left: 1em;">quantity theory version of, <a href="#Page_321">321-22</a>.</span><br /> +<br /> +<br /> +<b>H</b><br /> +<br /> +Habit, <a href="#Page_104">104</a>, <a href="#Page_109">109</a>, <a href="#Page_138">138</a>, <a href="#Page_225">225</a>, <a href="#Page_554">554-55</a>, <a href="#Page_589">589</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Custom</span>.</span><br /> +<br /> +Hadley, A. T., <a href="#Page_157">157</a>.<br /> +<br /> +Haig, R. M., <a href="#Footnote_576">552, n.</a><br /> +<span class='pagenum'><a name="Page_600" id="Page_600">[Pg 600]</a></span><br /> +Hamburg, coffee speculation in, <a href="#Page_252">252</a>;<br /> +<span style="margin-left: 1em;">Giro-Bank, <a href="#Page_150">150</a>.</span><br /> +<br /> +Haney, L. H., <a href="#Footnote_2_2">3, n.</a><br /> +<br /> +Harvey, "Coin," <a href="#Page_327">327</a>.<br /> +<br /> +Havre, coffee speculation in, <a href="#Page_252">252</a>.<br /> +<br /> +"Hedging," <a href="#Page_243">243</a>, <a href="#Page_253">253</a>, <a href="#Page_264">264</a>.<br /> +<br /> +Hegel, G. W. F., <a href="#Footnote_22_22">18, n.</a><br /> +<br /> +Helfferich, Karl, <a href="#Page_14">14</a>, <a href="#Footnote_67">82, n.</a>, <a href="#Footnote_102">110, n.</a>, <a href="#Page_134">134</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_473">419, n.</a><br /> +<br /> +Heredity, <a href="#Page_571">571-73</a>.<br /> +<br /> +Hermann, F. B. W. von, <a href="#Footnote_488">438, n.</a><br /> +<br /> +History, economic interpretation of, <a href="#Page_33">33</a>.<br /> +<br /> +Historical vs. cross-section viewpoints, <a href="#Page_101">101ff.</a>, <a href="#Footnote_104">119-20</a>, <a href="#Page_135">135-39</a>, <a href="#Page_397">397-400</a>, <a href="#Page_548">548</a>, <a href="#Page_553">553-54</a>, <a href="#Page_578">578-81</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>.</span><br /> +<br /> +Hoarding, <a href="#Footnote_120">140, n.</a>, <a href="#Page_174">174</a>, <a href="#Page_207">207</a>, <a href="#Page_208">208</a>, <a href="#Page_211">211</a>, <a href="#Footnote_374">333, n.</a><br /> +<br /> +Hobson, J. A., <a href="#Footnote_58">73, n.</a>, <a href="#Footnote_347">308, n.</a><br /> +<br /> +Hollander, J. H., <a href="#Page_154">154</a>, <a href="#Footnote_273">250, n.</a><br /> +<br /> +Holmes, Justice O. W., <a href="#Page_24">24</a>, <a href="#Page_587">587-90</a>.<br /> +<br /> +Holt, Byron W., <a href="#Page_222">222</a>, <a href="#Page_249">249</a>, <a href="#Page_370">370</a>.<br /> +<br /> +Hubbard, Guy C., <a href="#Footnote_291">260, n.</a><br /> +<br /> +Hughes Commission, <a href="#Footnote_277">252, n.</a><br /> +<br /> +Hume, David, <a href="#Page_21">21</a>, <a href="#Page_47">47</a>.<br /> +<br /> +<br /> +<b>I</b><br /> +<br /> +Ideal credit economy, <a href="#Page_543">543</a>.<br /> +<br /> +Ideal values, <a href="#Page_467">467</a>, <a href="#Page_480">480</a>.<br /> +<br /> +Imitation. See <span class="smcap">Suggestion</span>.<br /> +<br /> +Imputation theory, <a href="#Page_28">28</a>, <a href="#Page_38">38-40</a>, <a href="#Page_99">99</a>, <a href="#Page_300">300</a>, <a href="#Page_389">389</a>, <a href="#Page_424">424</a>, <a href="#Page_481">481</a>;<br /> +<span style="margin-left: 1em;">conflicts with quantity theory, <a href="#Page_300">300</a>, <a href="#Page_303">303-04</a>, <a href="#Page_310">310-11</a>, <a href="#Page_389">389</a>.</span><br /> +<br /> +Income, money. See <span class="smcap">Money Income</span>.<br /> +<br /> +Income, net, of the United States, <a href="#Page_267">appendix to Ch. XIII</a>.<br /> +<br /> +Index numbers, of check circulation, <a href="#Page_361">361-62</a>, <a href="#Page_383">383</a>;<br /> +<span style="margin-left: 1em;">of net income of the United States, <a href="#Page_278">278</a>;</span><br /> +<span style="margin-left: 1em;">of prices, <a href="#Page_278">278</a>, <a href="#Page_381">381-82</a>, <a href="#Page_383">383</a>, <a href="#Page_436">436</a>;</span><br /> +<span style="margin-left: 1em;">of railway gross receipts, <a href="#Page_278">278</a>;</span><br /> +<span style="margin-left: 1em;">of trade, <a href="#Page_227">227-29</a>, <a href="#Page_255">255-56</a>, <a href="#Page_278">278</a>, <a href="#Page_363">363</a>, <a href="#Page_381">381</a>, <a href="#Page_383">383</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Statistics</span>.</span><br /> +<br /> +India, <a href="#Page_140">140</a>, <a href="#Page_143">143</a>, <a href="#Page_149">149</a>, <a href="#Page_181">181</a>, <a href="#Page_443">443</a>, <a href="#Footnote_493">444, n.</a>, <a href="#Page_449">449</a>;<br /> +<span style="margin-left: 1em;">a liability, rather than an asset, to quantity theory, <a href="#Footnote_493">444, n.</a></span><br /> +<br /> +Individual interest and social advantage, <a href="#Page_397">397-99</a>.<br /> +<br /> +Individual values, <a href="#Page_19">19</a>, <a href="#Page_43">43-45</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Value</span>, <span class="smcap">Subjective</span>, <span class="smcap">Personal</span>, <span class="smcap">Subjective Exchange</span>.</span><br /> +<br /> +Individualistic theories, <a href="#Page_14">14-16</a>, <a href="#Page_20">20</a>, <a href="#Page_21">21</a>, <a href="#Page_22">22ff.</a><br /> +<br /> +Individuality, a social product, <a href="#Page_16">16-19</a>.<br /> +<br /> +Industry, rather than commerce, chiefly financed by modern banks, <a href="#Page_498">Ch. XXIV</a>, esp. <a href="#Page_523">523-29</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Assets of Banks</span>, <span class="smcap">Bank Credit</span>, <span class="smcap">Functions of</span>.</span><br /> +<br /> +Inertia. See <span class="smcap">Habit</span>, <span class="smcap">Custom</span>.<br /> +<br /> +Institutional values, <a href="#Page_29">29-30</a>, <a href="#Page_413">413</a>, <a href="#Page_484">484</a>.<br /> +<br /> +Institutions, <a href="#Page_19">19</a>, <a href="#Page_27">27</a>, <a href="#Page_484">484</a>, <a href="#Page_487">487</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_570">570</a>.<br /> +<br /> +Insurance policies as credit instruments, <a href="#Page_472">472</a>.<br /> +<br /> +Intangible "capital" <i>vs.</i> capital goods, <a href="#Page_482">482-83</a>, <a href="#Page_547">Ch. XXV</a>.<br /> +<span style="margin-left: 1em;">See also <span class="smcap">Good Will</span>, <span class="smcap">Business Capital</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Interest, <a href="#Page_146">146</a>, <a href="#Page_219">219</a>, <a href="#Page_223">223-24</a>, <a href="#Page_225">225</a>, <a href="#Page_301">301ff.</a>, <a href="#Footnote_374">333, n.</a>, <a href="#Footnote_470">416, n.</a>, <a href="#Page_428">428-32</a>, <a href="#Page_437">437</a>, <a href="#Page_471">471</a>, <a href="#Page_472">472</a>;<br /> +<span style="margin-left: 1em;">"appreciation and," <a href="#Page_76">76-78</a>;</span><br /> +<span style="margin-left: 1em;">productivity theory of, <a href="#Page_224">224</a>, <a href="#Page_302">302-03</a>, <a href="#Page_437">437</a>;</span><br /> +<span style="margin-left: 1em;">"use" theory of, <a href="#Page_437">437</a>, <a href="#Footnote_488">438, n.</a>;</span><br /> +<span style="margin-left: 1em;">"pure rate" of, <a href="#Page_75">75</a>, <a href="#Page_76">76</a>, <a href="#Page_77">77</a>, <a href="#Page_428">428-29</a>;</span><br /> +<span style="margin-left: 1em;"><i>vs.</i> "money rates," Ch. IV, <a href="#Page_224">224</a>, <a href="#Page_428">428-32</a>, <a href="#Page_461">461</a>, <a href="#Footnote_546">521, n.</a>, <a href="#Page_523">523-24</a>, <a href="#Page_526">526</a>, <a href="#Page_529">529</a>.</span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Money Rates</span>, <span class="smcap">Call Rates</span>, <span class="smcap">Capitalization</span>, <span class="smcap">Time Discount</span>.</span><br /> +<br /> +International banker, <a href="#Page_409">409</a>, <a href="#Page_446">446</a>, <a href="#Page_539">539ff.</a><br /> +<span style="margin-left: 1em;">See <span class="smcap">Gold Movements</span>, <span class="smcap">International</span>.</span><br /> +<br /> +International trade. See <span class="smcap">Foreign Trade</span>.<br /> +<br /> +Investment, <a href="#Page_270">270</a>, <a href="#Page_523">523ff.</a>, <a href="#Page_528">528</a>;<br /> +<span style="margin-left: 1em;"><i>vs.</i> speculation, <a href="#Footnote_546">521, n.</a>, <a href="#Page_523">523-26</a>;</span><br /> +<span style="margin-left: 1em;">banker, <a href="#Page_489">489</a>, <a href="#Page_519">519</a>, <a href="#Footnote_551">523, n.</a>, <a href="#Page_527">527-28</a>.</span><br /> +<br /> +"Invisible items" in foreign trade, <a href="#Page_268">268</a>, <a href="#Page_270">270</a>, <a href="#Page_320">320</a>.<br /> +<span class='pagenum'><a name="Page_601" id="Page_601">[Pg 601]</a></span><br /> +<br /> +<b>J</b><br /> +<br /> +James, William, <a href="#Footnote_592">579, n.</a><br /> +<br /> +Jenks, J. W., <a href="#Footnote_290">260, n.</a><br /> +<br /> +Jevons, W. S., <a href="#Page_25">25</a>, <a href="#Page_48">48</a>, <a href="#Footnote_75">91, n.</a>, <a href="#Page_107">107</a>, <a href="#Footnote_548">522, n.</a><br /> +<br /> +Jewelers, <a href="#Page_409">409</a>, <a href="#Page_454">454-57</a>;<br /> +<span style="margin-left: 1em;">paper of, in the money market, <a href="#Page_454">454-57</a>.</span><br /> +<br /> +Johnson, A. S., <a href="#Footnote_2_2">4, n.</a>, <a href="#Page_13">13</a>, <a href="#Page_105">105</a>, <a href="#Footnote_104">115, n.</a>, <a href="#Footnote_298">265, n.</a>, <a href="#Footnote_459">403, n.</a>, <a href="#Footnote_491">440, n.</a>, <a href="#Footnote_585">563, n.</a><br /> +<br /> +Johnson, J. F., <a href="#Footnote_58">73, n.</a>, <a href="#Footnote_374">333, n.</a>, <a href="#Footnote_472">418, n.</a><br /> +<br /> +Joint Stock Banks, <a href="#Page_184">184</a>, <a href="#Page_530">530</a>, <a href="#Page_539">539</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">London</span>, <span class="smcap">England</span>.</span><br /> +<br /> +Jurisprudence, <a href="#Page_23">23-24</a>, <a href="#Page_588">588</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Law</span>, <span class="smcap">Legal Values</span>.</span><br /> +<br /> +Juristic thinking, <a href="#Page_24">24-25</a>, <a href="#Page_29">29</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Page_586">586-88</a>;<br /> +<span style="margin-left: 1em;">contrasted with economic thinking, <a href="#Footnote_486">433, n.</a></span><br /> +<br /> +<br /> +<b>K</b><br /> +<br /> +Kant, I., <a href="#Page_22">22</a>, <a href="#Page_137">137</a>.<br /> +<br /> +Kemmerer, E. W., <a href="#Page_48">48</a>, <a href="#Page_129">129</a>, <a href="#Page_135">135</a>, <a href="#Page_140">140</a>, <a href="#Page_141">141</a>, <a href="#Page_156">156</a>, <a href="#Page_157">157</a>, <a href="#Page_167">167</a>, <a href="#Page_170">170</a>, <a href="#Footnote_164">175, n.</a>, <a href="#Footnote_234">220, n.</a>, <a href="#Page_226">226</a>, <a href="#Footnote_259">240, n.</a>, <a href="#Page_254">254</a>, <a href="#Page_256">256</a>, <a href="#Page_274">274</a>, <a href="#Footnote_352">312, n.</a>, <a href="#Page_321">321</a>, <a href="#Page_334">334-37</a>, <a href="#Footnote_409">359, n.</a>, <a href="#Footnote_414">361, n.</a>, <a href="#Page_363">363-65</a>, <a href="#Page_381">381-83</a>, <a href="#Page_400">400</a>, <a href="#Footnote_478">426, n.</a>, <a href="#Footnote_493">443, n., 444, n.</a>, <a href="#Footnote_548">522, n.</a>, <a href="#Page_537">537</a>, <a href="#Footnote_569">538, n.</a><br /> +<br /> +Keynes, J. M., <a href="#Page_180">180</a>, <a href="#Page_181">181</a>, <a href="#Footnote_178">182, n.</a>, <a href="#Page_184">184</a>, <a href="#Page_207">207</a>, <a href="#Footnote_493">443, n.</a>, <a href="#Page_535">535</a>.<br /> +<br /> +King, W. I., <a href="#Page_242">242</a>, <a href="#Page_243">243</a>, <a href="#Footnote_269">246, n.</a>, <a href="#Footnote_270">247, n., 248, n.</a>, <a href="#Page_269">269</a>, <a href="#Page_271">271-72</a>, <a href="#Footnote_308">275, n.</a><br /> +<br /> +Kinley, D., <a href="#Page_13">13</a>, <a href="#Page_48">48</a>, <a href="#Footnote_61">78, n.</a>, <a href="#Page_80">80</a>, <a href="#Page_110">110-11</a>, <a href="#Page_174">174</a>, <a href="#Footnote_211">208, n.</a>, <a href="#Page_230">230</a>, <a href="#Page_233">233-36</a>, <a href="#Footnote_256">237, n.</a>, <a href="#Page_242">242-45</a>, <a href="#Page_249">249</a>, <a href="#Page_254">254</a>, <a href="#Page_256">256</a>, <a href="#Page_269">269</a>, <a href="#Page_321">321</a>, <a href="#Page_337">337-45</a>, <a href="#Page_349">349</a>, <a href="#Page_350">350-52</a>, <a href="#Page_360">360</a>, <a href="#Footnote_423">365, n.</a>, <a href="#Page_368">368</a>, <a href="#Page_376">376</a>, <a href="#Footnote_453">383, n.</a>, <a href="#Footnote_473">419, n.</a>, <a href="#Page_447">447</a>, <a href="#Page_449">449</a>, <a href="#Page_463">463</a>, <a href="#Footnote_519">498, n.</a>, <a href="#Page_512">512-15</a>.<br /> +<br /> +Kirkbride and Sterret, <a href="#Footnote_397">347, n.</a><br /> +<br /> +"Kiting," <a href="#Page_368">368</a>.<br /> +<br /> +Knapp, G. F., <a href="#Page_49">49</a>, <a href="#Page_150">150</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_486">433-5, n.</a><br /> +<br /> +Knies, Carl, <a href="#Page_12">12</a>, <a href="#Page_133">133</a>, <a href="#Footnote_364">323, n.</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_473">419, n.</a><br /> +<br /> +Kuhn, Loeb & Co., <a href="#Page_343">343-44</a>, <a href="#Page_515">515</a>, <a href="#Footnote_538">515, n.</a><br /> +<br /> +<br /> +<b>L</b><br /> +<br /> +Labor theory of value, <a href="#Page_12">12</a>, <a href="#Page_44">44-45</a>, <a href="#Page_64">64ff.</a>, <a href="#Page_139">139</a>, <a href="#Page_570">570</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Value</span>, <span class="smcap">Cost of Production</span>, <span class="smcap">Adam Smith</span>, <span class="smcap">Ricardo</span>, <span class="smcap">Marx</span>, <span class="smcap">Cairnes</span>.</span><br /> +<br /> +Land speculation, <a href="#Page_254">254</a>, <a href="#Page_264">264</a>, <a href="#Page_317">317</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Speculation</span>.</span><br /> +<br /> +Laughlin, J. L., <a href="#Page_48">48</a>, <a href="#Page_135">135</a>, <a href="#Page_141">141</a>, <a href="#Page_144">144</a>, <a href="#Page_146">146</a>, <a href="#Page_177">177</a>, <a href="#Footnote_230">219, n.</a>, <a href="#Page_281">281</a>, <a href="#Footnote_318">282, n.</a>, <a href="#Footnote_321">283, n.</a>, <a href="#Page_284">284</a>, <a href="#Footnote_352">312, n.</a>, <a href="#Footnote_360">319, n.</a>, <a href="#Footnote_368">327, n.</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_473">419, n.</a>, <a href="#Footnote_493">443, n., 444, n.</a>, <a href="#Page_459">459</a>.<br /> +<br /> +Law, theories of, <a href="#Page_23">23ff.</a>, <a href="#Page_586">586-89</a>;<br /> +<span style="margin-left: 1em;">statics and dynamics of, <a href="#Page_586">586-88</a>.</span><br /> +<br /> +LeBon, G., <a href="#Page_37">37</a>.<br /> +<br /> +Legal tender, <a href="#Page_147">147</a>, <a href="#Page_418">418</a>, <a href="#Page_422">422</a>, <a href="#Page_432">432-36</a>, <a href="#Page_442">442</a>, <a href="#Page_445">445-47</a>, <a href="#Footnote_497">448, n.</a><br /> +<span style="margin-left: 1em;">See <span class="smcap">Functions of Money</span>.</span><br /> +<br /> +Legal theory of money, <a href="#Page_134">134</a>, <a href="#Page_136">136</a>, <a href="#Page_405">405</a>, <a href="#Footnote_486">433n., ff.</a><br /> +<span style="margin-left: 1em;">See <i>Staatliche Theorie</i>.</span><br /> +<br /> +Legal thinking. See <span class="smcap">Juristic Thinking</span>.<br /> +<br /> +Legal values, <a href="#Page_23">23-29</a>, <a href="#Page_40">40</a>, <a href="#Page_138">138-39</a>, <a href="#Page_413">413</a>, <a href="#Page_414">414</a>, <a href="#Footnote_486">435, n.</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_586">586-89</a>.<br /> +<br /> +Lewes, G. H., <a href="#Footnote_72">87, n.</a><br /> +<br /> +Liabilities of banks, <a href="#Page_285">285</a>;<br /> +<span style="margin-left: 1em;">relation of, to loans, <a href="#Page_286">286</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Deposits</span>, <span class="smcap">Bank-notes</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Liquid paper, <a href="#Page_455">455</a>, <a href="#Page_489">489-91</a>, <a href="#Page_499">499ff.</a>, <a href="#Page_513">513-18</a>.<br /> +<br /> +Liquidity, <a href="#Page_455">455</a>, <a href="#Page_475">475</a>, <a href="#Page_489">489</a>, <a href="#Page_495">495</a>, <a href="#Page_499">499ff.</a>, <a href="#Page_508">508</a>, <a href="#Page_513">513-18</a>, <a href="#Page_526">526-27</a>, <a href="#Page_529">529-44</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Saleability</span>, <span class="smcap">Statics</span>, <span class="smcap">Friction</span>.</span><br /> +<br /> +Liverpool, <a href="#Page_252">252</a>, <a href="#Page_259">259</a>.<br /> +<br /> +Loans, on call. See <span class="smcap">Call Loans</span>.<br /> +<span style="margin-left: 1em;">On cotton, <a href="#Page_481">481</a>, <a href="#Page_504">504</a>, <a href="#Footnote_528">508, n.</a>;</span><br /> +<span style="margin-left: 2em;">on grain, <a href="#Page_380">380</a>, <a href="#Page_503">503</a>, <a href="#Footnote_528">508, n.</a>;</span><br /> +<span style="margin-left: 2em;">to stock market, <a href="#Page_375">375ff.</a>, <a href="#Footnote_447">379, n.</a>, <a href="#Page_430">430</a>, <a href="#Page_488">488</a>, <a href="#Page_502">502-03</a>, <a href="#Page_507">507-12</a>, <a href="#Page_518">518-20</a>, <a href="#Page_523">523-28</a>;</span><br /> +<span style="margin-left: 2em;">to wholesalers and retailers, <a href="#Page_504">504-05</a>;</span><br /> +<span style="margin-left: 2em;">consumption, <a href="#Page_463">463</a>;</span><br /> +<span style="margin-left: 2em;">war, see <span class="smcap">War Loans</span>.</span><br /> +<span style="margin-left: 1em;">Collateral, see <span class="smcap">Collateral Loans</span>.</span><br /> +<span style="margin-left: 1em;">Activity of, <a href="#Page_512">512-14</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to deposits, <a href="#Page_285">285ff.</a>;</span><br /> +<span style="margin-left: 2em;">relation of to "deposits," <a href="#Page_375">375-81</a>, <a href="#Page_512">512-14</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to trade, <a href="#Page_287">287</a>, <a href="#Footnote_325">287, n.</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to international gold movements, <a href="#Page_318">318-19</a>;</span><br /> +<span style="margin-left: 2em;">short loans as bearers of options, <a href="#Page_425">425</a>, <a href="#Page_428">428-32</a>.</span><br /> +<span class='pagenum'><a name="Page_602" id="Page_602">[Pg 602]</a></span><span style="margin-left: 1em;">See also <span class="smcap">Assets of Banks</span>, "<span class="smcap">Commercial Paper</span>," "<span class="smcap">Morning Loans</span>," "<span class="smcap">Overcertifications</span>."</span><br /> +<br /> +Locke, John, <a href="#Page_47">47</a>.<br /> +<br /> +London, <a href="#Page_145">145</a>, <a href="#Page_251">251</a>, <a href="#Page_259">259</a>, <a href="#Footnote_288">259, n.</a>, <a href="#Page_497">497</a>, <a href="#Footnote_546">522, n.</a>, <a href="#Page_539">539ff.</a>;<br /> +<span style="margin-left: 1em;">stock exchange, <a href="#Page_451">451</a>;</span><br /> +<span style="margin-left: 1em;">money market, illustrates assumptions of static theory, <a href="#Page_539">539ff.</a></span><br /> +<br /> +<br /> +<b>M</b><br /> +<br /> +"Manipulation," of values and prices, <a href="#Page_575">575ff.</a>, <a href="#Page_589">589</a>.<br /> +<br /> +Manufacturers' "paper," <a href="#Page_454">454</a>, <a href="#Page_457">457</a>, <a href="#Page_500">500</a>, <a href="#Footnote_536">513, n.</a><br /> +<br /> +"Margins," <a href="#Page_372">372</a>, <a href="#Page_488">488</a>, <a href="#Page_489">489</a>, <a href="#Page_493">493</a>, <a href="#Footnote_546">521, n.</a>, <a href="#Page_523">523-26</a>, <a href="#Page_528">528</a>;<br /> +<span style="margin-left: 1em;">"margin operator" as "banker," <a href="#Page_524">524-26</a>.</span><br /> +<br /> +Marginal analysis, <a href="#Page_24">24</a>, <a href="#Page_51">51</a>, <a href="#Page_440">440</a>, <a href="#Page_547">Ch. XXV</a>;<br /> +<span style="margin-left: 1em;">applied to law, <a href="#Page_586">586-89</a>;</span><br /> +<span style="margin-left: 1em;">applied to money, <a href="#Page_152">152-53</a>, <a href="#Page_199">199</a>, <a href="#Page_208">208</a>, <a href="#Page_225">225</a>, <a href="#Page_227">227</a>, <a href="#Page_451">451-57</a>, <a href="#Page_534">534</a>.</span><br /> +<br /> +Marginal utility, <a href="#Page_13">13</a>, <a href="#Page_14">14-15</a>, <a href="#Page_30">30</a>, <a href="#Page_34">34-35</a>, <a href="#Page_38">38</a>, <a href="#Page_40">40</a>, <a href="#Page_42">42</a>, <a href="#Page_44">44</a>, <a href="#Page_46">46</a>, <a href="#Page_49">49</a>, <a href="#Page_80">Ch. V</a>, <a href="#Page_137">137</a>, <a href="#Footnote_492">440, n.</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_570">570</a>, <a href="#Page_583">583-86</a>;<br /> +<span style="margin-left: 1em;">applied to value of money, <a href="#Page_80">Ch. V</a>, <a href="#Page_137">137</a>;</span><br /> +<span style="margin-left: 1em;">essentially static theory, <a href="#Page_106">106ff.</a>;</span><br /> +<span style="margin-left: 1em;">Schumpeter's version of, <a href="#Page_44">44</a>, <a href="#Page_90">90ff.</a>, <a href="#Footnote_104">113, n., ff.</a>, <a href="#Page_583">583-86</a>;</span><br /> +<span style="margin-left: 1em;">limitations of, <a href="#Page_92">92ff.</a>;</span><br /> +<span style="margin-left: 1em;">"relative marginal utility," <a href="#Page_104">113-114, n., 115, n.</a>, <a href="#Footnote_492">440, n.</a>;</span><br /> +<span style="margin-left: 1em;">quantity theory and, <a href="#Page_46">46</a>.</span><br /> +<br /> +"Market letter," <a href="#Page_222">222</a>, <a href="#Page_575">575</a>.<br /> +<br /> +Marshall, A., <a href="#Page_48">48</a>, <a href="#Page_105">105</a>, <a href="#Footnote_300">265, n.</a><br /> +<br /> +Marx, Karl, <a href="#Page_12">12</a>.<br /> +<br /> +Mathematical economics, <a href="#Footnote_75">91, n.</a>, <a href="#Footnote_104">117</a>, <a href="#Page_139">139</a>, <a href="#Page_142">142</a>, <a href="#Page_154">Ch. VIII</a>, <a href="#Page_310">310</a>, <a href="#Page_438">438</a>, <a href="#Page_553">553</a>.<br /> +<br /> +McCulloch, J. R., <a href="#Page_66">66</a>.<br /> +<br /> +Mead, G. H., <a href="#Footnote_2_2">4, n.</a><br /> +<br /> +Meade, E. S., <a href="#Footnote_199">198, n.</a>, <a href="#Footnote_204">202, n.</a>, <a href="#Footnote_509">477, n.</a><br /> +<br /> +Measure of values, <a href="#Page_133">133</a>, <a href="#Page_150">150-53</a>, <a href="#Page_201">201</a>, <a href="#Footnote_300">265, n.</a>, <a href="#Page_325">325</a>, <a href="#Page_327">327-28</a>, <a href="#Page_391">391</a>, <a href="#Page_417">417</a>, <a href="#Page_418">418-23</a>, <a href="#Page_436">436</a>, <a href="#Page_451">451</a>, <a href="#Page_543">543</a>, <a href="#Page_567">567-69</a>, <a href="#Page_538">538</a>;<br /> +<span style="margin-left: 1em;">must have value, <a href="#Page_133">133</a>, <a href="#Page_326">326</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to commodity theory, <a href="#Page_151">151-53</a>;</span><br /> +<span style="margin-left: 1em;">applied to non-economic values, <a href="#Page_567">567-69</a>.</span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Functions of Money</span>.</span><br /> +<br /> +Medium of exchange, <a href="#Page_133">133</a>, <a href="#Page_201">201</a>, <a href="#Page_327">327-28</a>, <a href="#Page_391">391</a>, <a href="#Page_404">404</a>, <a href="#Page_418">418</a>, <a href="#Page_420">420-24</a>, <a href="#Page_425">425-26</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Footnote_486">434, n.</a>, <a href="#Page_436">436</a>, <a href="#Page_442">442</a>, <a href="#Page_543">543</a>;<br /> +<span style="margin-left: 1em;">must have value, <a href="#Page_133">133</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Functions of Money</span>.</span><br /> +<br /> +Meinong, A., <a href="#Page_467">467</a>.<br /> +<br /> +Menger, Karl, <a href="#Page_14">14</a>, <a href="#Page_48">48</a>, <a href="#Footnote_66">82, n.</a>, <a href="#Page_88">88</a>, <a href="#Footnote_85">96, n.</a>, <a href="#Page_110">110</a>, <a href="#Page_397">397</a>, <a href="#Page_398">398</a>, <a href="#Page_400">400</a>, <a href="#Footnote_458">401, n.</a>, <a href="#Page_402">402-04</a>, <a href="#Page_406">406</a>, <a href="#Footnote_460">407, n.</a>, <a href="#Page_418">418</a>, <a href="#Page_476">476</a>, <a href="#Page_493">493</a>.<br /> +<br /> +Mercantilism, <a href="#Page_225">225</a>, <a href="#Page_551">551</a>.<br /> +<br /> +Merriam, L. S., <a href="#Page_13">13</a>, <a href="#Footnote_473">419, n.</a><br /> +<br /> +Metallist theory. See <span class="smcap">Commodity Theory</span>.<br /> +<br /> +Middlemen, effect of eliminating, on price level, <a href="#Page_306">306-07</a>.<br /> +<br /> +Mill, James, <a href="#Page_66">66</a>.<br /> +<br /> +Mill, J. S., <a href="#Page_46">46</a>, <a href="#Page_47">47</a>, <a href="#Page_50">50-52</a>, <a href="#Footnote_46">55, n.</a>, <a href="#Page_58">58</a>, <a href="#Page_59">59</a>, <a href="#Page_61">61</a>, <a href="#Page_67">67</a>, <a href="#Page_69">69</a>, <a href="#Page_94">94</a>, <a href="#Page_129">129</a>, <a href="#Page_132">132</a>, <a href="#Footnote_143">161, n.</a>, <a href="#Page_172">172</a>, <a href="#Page_192">192</a>, <a href="#Footnote_191">193, n.</a>, <a href="#Page_265">265</a>, <a href="#Footnote_322">285, n.</a>, <a href="#Footnote_360">319, n.</a>, <a href="#Footnote_374">333, n.</a>, <a href="#Page_548">548</a>.<br /> +<br /> +Minneapolis, bills of exchange in, <a href="#Footnote_330">289, n.</a><br /> +<br /> +Mises, L. von, <a href="#Page_14">14</a>, <a href="#Page_48">48</a>, <a href="#Page_49">49</a>, <a href="#Page_80">80</a>, <a href="#Page_83">83</a>, <a href="#Page_88">88</a>, <a href="#Page_100">100</a>, <a href="#Page_109">109-11</a>, <a href="#Footnote_104">120, n.</a>, <a href="#Footnote_178">182, n.</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_482">429, n.</a>, <a href="#Footnote_486">434, n.</a>, <a href="#Page_556">556</a>.<br /> +<br /> +Mitchell, W. C., <a href="#Footnote_75">91, n.</a>, <a href="#Footnote_167">179, n.</a>, <a href="#Page_188">188</a>, <a href="#Footnote_220">213, n.</a>, <a href="#Footnote_300">265, n.</a>, <a href="#Footnote_324">286, n.</a>, <a href="#Footnote_363">323, n.</a>, <a href="#Footnote_374">329, n.</a>, <a href="#Page_332">332-34</a>, <a href="#Page_363">363</a>, <a href="#Footnote_466">412, n.</a>, <a href="#Footnote_484">430, n.</a>, <a href="#Footnote_497">448, n.</a>, <a href="#Footnote_498">449, n.</a>, <a href="#Footnote_547">522, n.</a>, <a href="#Page_533">533</a>, <a href="#Page_536">536</a>, <a href="#Page_568">568</a>, <a href="#Page_574">574</a>.<br /> +<br /> +Mode. See <span class="smcap">Suggestion</span>.<br /> +<br /> +Money, abstracted from by static theory, <a href="#Page_99">99</a>, <a href="#Page_265">265-66</a>, <a href="#Page_392">392</a>;<br /> +<span style="margin-left: 1em;">definitions of, <a href="#Page_167">167</a>, <a href="#Page_169">169</a>, <a href="#Page_325">325-26</a>, <a href="#Page_495">495-96</a>;</span><br /> +<span style="margin-left: 1em;">functions of, see <span class="smcap">Functions of Money</span>;</span><br /> +<span style="margin-left: 1em;">must have value from non-pecuniary source, <a href="#Page_130">Ch. VII</a>, <a href="#Page_326">326</a>, <a href="#Page_390">390-91</a>, <a href="#Page_417">417</a>, <a href="#Page_440">440</a>, <a href="#Page_449">449</a>, <a href="#Page_591">591</a>;</span><br /> +<span style="margin-left: 1em;">origin of, <a href="#Page_394">394</a>, <a href="#Page_397">Ch. XXI</a>;</span><br /> +<span style="margin-left: 1em;">money not unique, <a href="#Page_82">82-83</a>, <a href="#Page_85">85</a>, <a href="#Page_137">137</a>, <a href="#Page_145">145</a>, <a href="#Page_147">147</a>, <a href="#Page_148">148</a>, <a href="#Page_325">325</a>, <a href="#Page_329">329-30</a>, <a href="#Page_389">389</a>, <a href="#Page_406">406-07</a>, <a href="#Page_417">417</a>, <a href="#Page_425">425</a>, <a href="#Page_437">437-50</a>, <a href="#Page_477">477-78</a>, <a href="#Page_535">535</a>, <a href="#Page_542">542</a>, <a href="#Page_544">544</a>;</span><br /> +<span style="margin-left: 1em;">peculiarities of, <a href="#Page_3">3</a>, <a href="#Page_57">57-58</a>, <a href="#Page_64">64</a>, <a href="#Page_69">69</a>, <a href="#Page_71">71</a>, <a href="#Page_74">74ff.</a>, <a href="#Page_78">78-79</a>, <a href="#Page_81">81-83</a>, <a href="#Page_85">85</a>, <a href="#Page_88">88</a>, <a href="#Page_91">91</a>, <a href="#Page_101">101</a>, <a href="#Page_124">124</a>, <a href="#Page_130">Ch. VII</a>, <a href="#Footnote_112">132, n.</a>, <a href="#Page_134">134</a>, <a href="#Page_144">144-45</a>, <a href="#Page_153">153</a>, <a href="#Page_392">392-93</a>, <a href="#Page_397">Ch. XXI</a>, <a href="#Page_417">Ch. XXII</a>, <a href="#Page_406">406</a>, <a href="#Page_437">437ff.</a>;</span><br /> +<span class='pagenum'><a name="Page_603" id="Page_603">[Pg 603]</a></span><span style="margin-left: 1em;">tool or instrumental good, <a href="#Page_72">Ch. IV</a>, <a href="#Page_82">82-83</a>, <a href="#Page_224">224</a>, <a href="#Page_417">Ch. XXII</a>, <a href="#Page_591">591</a>;</span><br /> +<span style="margin-left: 1em;">theory of, developed in isolation, <a href="#Page_46">46ff.</a>;</span><br /> +<span style="margin-left: 1em;">theory of, must be dynamic, <a href="#Page_262">262-66</a>, <a href="#Page_393">393</a>.</span><br /> +<span style="margin-left: 1em;">See also <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>.</span><br /> +<span style="margin-left: 1em;">Value of, <i>vs.</i> "reciprocal of price-level," <a href="#Page_8">8</a>, <a href="#Page_56">56-57</a>, <a href="#Page_77">77</a>, <a href="#Page_100">100</a>, <a href="#Page_123">123</a>, <a href="#Page_128">128-29</a>, <a href="#Page_155">155-56</a>, <a href="#Page_312">312-13</a>, <a href="#Page_382">382</a>, <a href="#Page_388">388-89</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Page_449">449</a>.</span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Value, Absolute</span> <i>vs.</i> <span class="smcap">Relative</span>.</span><br /> +<span style="margin-left: 1em;">Relation of, to credit. See <span class="smcap">Credit</span>, <span class="smcap">Reserves</span>, <span class="smcap">Ratio</span>, <span class="smcap">Fixed</span>, M:M´.</span><br /> +<span style="margin-left: 1em;">Relation of, to trade, <a href="#Page_216">Ch. XIII</a>, <a href="#Page_279">Ch. XIV</a>.</span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Trade</span>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Analytical Table of Contents</span>.</span><br /> +<br /> +"Money in circulation," Ch. VIII, <a href="#Page_173">173</a>, <a href="#Footnote_164">175, n.</a>, <a href="#Page_179">179</a>, <a href="#Page_185">185</a>.<br /> +<br /> +Money economy, <a href="#Page_90">90</a>, <a href="#Page_220">220</a>, <a href="#Page_225">225</a>, <a href="#Footnote_300">265, n.</a>, <a href="#Page_397">397</a>, <a href="#Page_399">399</a>, <a href="#Page_397">Ch. XXI</a>, <a href="#Page_417">Ch. XXII</a>, <a href="#Page_555">555</a>.<br /> +<br /> +"Money-funds," distinguished from money, <a href="#Page_63">63</a>, <a href="#Page_427">427</a>, <a href="#Page_453">453</a>, <a href="#Page_495">495-96</a>.<br /> +<br /> +Money income, distinguished from real income, <a href="#Page_89">89</a>;<br /> +<span style="margin-left: 1em;">distinguished from quantity of money, <a href="#Page_90">90</a>, <a href="#Page_307">307-310</a>.</span><br /> +<br /> +Money market, <a href="#Page_32">32</a>, <a href="#Page_62">62</a>, <a href="#Page_221">221</a>, <a href="#Page_222">222</a>, <a href="#Page_319">319</a>, <a href="#Page_406">406</a>, <a href="#Page_427">427</a>, <a href="#Page_430">430</a>, <a href="#Page_453">453-58</a>, <a href="#Page_461">461</a>, <a href="#Page_495">495-97</a>, <a href="#Page_516">516-20</a>, <a href="#Footnote_546">522, n.</a>, <a href="#Page_524">524</a>, <a href="#Page_529">529-44</a>, <a href="#Page_575">575-76</a>.<br /> +<br /> +"Money Post," on New York Stock Exchange, <a href="#Page_372">372</a>, <a href="#Page_375">375</a>, <a href="#Page_430">430-31</a>.<br /> +<br /> +Money rates, <a href="#Page_80">Ch. V</a>, <a href="#Page_145">145</a>, <a href="#Page_149">149</a>, <a href="#Page_183">183</a>, <a href="#Page_223">223</a>, <a href="#Page_224">224-26</a>, <a href="#Page_316">316</a>, <a href="#Page_319">319-20</a>, <a href="#Page_378">378</a>, <a href="#Page_406">406</a>, <a href="#Page_428">428-32</a>, <a href="#Page_453">453-57</a>, <a href="#Page_461">461</a>, <a href="#Page_495">495</a>, <a href="#Page_523">523-24</a>, <a href="#Page_526">526</a>, <a href="#Page_529">529-30</a>, <a href="#Page_534">534</a>;<br /> +<span style="margin-left: 2em;"><i>vs.</i> interest rates. See <span class="smcap">Interest</span>.</span><br /> +<span style="margin-left: 1em;">Relation of, to bank reserves, <a href="#Page_378">378</a>;</span><br /> +<span style="margin-left: 2em;">to clearings, <a href="#Page_378">378</a>;</span><br /> +<span style="margin-left: 2em;">to international gold movements, <a href="#Page_316">316</a>, <a href="#Page_318">318-20</a>;</span><br /> +<span style="margin-left: 2em;">to dividend and interest payments, <a href="#Footnote_546">522, n.</a>;</span><br /> +<span style="margin-left: 2em;">to plans for corporate consolidations, <a href="#Page_198">198</a>;</span><br /> +<span style="margin-left: 2em;">to jewelers' profits, <a href="#Page_454">454</a>;</span><br /> +<span style="margin-left: 2em;">to trade, <a href="#Page_223">223</a>, <a href="#Page_224">224</a>, <a href="#Page_226">226</a>;</span><br /> +<span style="margin-left: 2em;">to volume of speculation, <a href="#Page_378">378</a>, <a href="#Footnote_546">522, n.</a></span><br /> +<br /> +"Money Trust," <a href="#Page_518">518-20</a>.<br /> +<br /> +Monism, unsatisfactory metaphysics for social sciences, <a href="#Page_571">571-72</a>.<br /> +<br /> +Moore, H. L., <a href="#Footnote_257">237, n., 238, n.</a>, <a href="#Page_574">574</a>.<br /> +<br /> +Morality, theories of, <a href="#Page_22">22-23</a>.<br /> +<br /> +Moral values, <a href="#Page_22">22-29</a>, <a href="#Page_40">40</a>, <a href="#Page_137">137-38</a>, <a href="#Page_480">480</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_567">567-69</a>, <a href="#Page_582">582</a>, <a href="#Page_589">589</a>.<br /> +<br /> +Morgan, J. P., <a href="#Page_140">140</a>, <a href="#Footnote_538">519, n.</a>, <a href="#Page_577">577</a>;<br /> +<span style="margin-left: 1em;">J. P. Morgan & Co., <a href="#Page_343">343-44</a>, <a href="#Page_375">375</a>, <a href="#Footnote_538">515, n.</a></span><br /> +<br /> +"Morning loans," <a href="#Page_376">376</a>, <a href="#Page_377">377</a>, <a href="#Page_509">509</a>, <a href="#Page_510">510</a>.<br /> +<span style="margin-left: 1em;">See "<span class="smcap">Overcertifications</span>."</span><br /> +<br /> +<br /> +<b>N</b><br /> +<br /> +National banks, <a href="#Page_234">234</a>, <a href="#Page_338">338</a>, <a href="#Footnote_391">342, n.</a>, <a href="#Page_343">343</a>, <a href="#Page_345">345</a>, <a href="#Page_347">347</a>, <a href="#Footnote_406">355, n.</a>, <a href="#Page_359">359</a>, <a href="#Page_375">375</a>, <a href="#Page_498">498-99</a>, <a href="#Page_502">502-03</a>.<br /> +<br /> +National City Bank, <a href="#Page_375">375</a>, <a href="#Footnote_546">521, n.</a>, <a href="#Footnote_570">540, n.</a><br /> +<br /> +Negative values, as "real costs," <a href="#Footnote_57">71, n.</a><br /> +<br /> +New York City, <a href="#Page_233">233-35</a>, <a href="#Page_259">259</a>, <a href="#Footnote_288">259, n.</a>, <a href="#Page_340">340ff.</a>, <a href="#Page_383">383</a>, <a href="#Page_392">392</a>, <a href="#Page_430">430-31</a>, <a href="#Footnote_490">439, n.</a>, <a href="#Page_502">502</a>, <a href="#Page_503">503</a>, <a href="#Page_506">506</a>, <a href="#Page_511">511</a>, <a href="#Page_514">514-16</a>, <a href="#Page_520">520</a>, <a href="#Page_541">541-42</a>;<br /> +<span style="margin-left: 1em;">as "clearing house" for country, <a href="#Page_236">236</a>, <a href="#Page_353">353ff.</a>;</span><br /> +<span style="margin-left: 1em;">contrasted with London, <a href="#Page_541">541-42</a>;</span><br /> +<span style="margin-left: 1em;">"deposits" in, <a href="#Page_233">233</a>, <a href="#Page_340">340ff.</a>, <a href="#Page_392">392</a>, <a href="#Page_515">515</a>;</span><br /> +<span style="margin-left: 1em;">"all other deposits" in, <a href="#Page_235">235-37</a>;</span><br /> +<span style="margin-left: 1em;">Cotton Exchange, <a href="#Page_252">252</a>, <a href="#Page_503">503</a>, <a href="#Page_541">541</a>;</span><br /> +<span style="margin-left: 1em;">Coffee Exchange, <a href="#Page_252">252</a>, <a href="#Page_268">268</a>, <a href="#Page_503">503</a>, <a href="#Page_541">541</a>;</span><br /> +<span style="margin-left: 1em;">Stock Exchange. See <span class="smcap">Stock Exchange</span>.</span><br /> +<span style="margin-left: 1em;">Money market. See <span class="smcap">Money Market</span>.</span><br /> +<span style="margin-left: 1em;">Clearings. See <span class="smcap">Clearings</span>.</span><br /> +<br /> +Newcomb, Simon, <a href="#Page_156">156</a>.<br /> +<br /> +Nicholson, J. S., <a href="#Page_81">81-82</a>, <a href="#Page_124">124</a>, <a href="#Page_129">129-32</a>, <a href="#Page_134">134</a>, <a href="#Page_151">151</a>, <a href="#Page_167">167</a>, <a href="#Page_325">325-29</a>.<br /> +<br /> +"Nominalism" in monetary theory, <a href="#Footnote_486">433, n., ff.</a><br /> +<span style="margin-left: 1em;">See <i>Staatliche Theorie</i>.</span><br /> +<br /> +"Normal tendency," <a href="#Page_176">176</a>, <a href="#Page_218">218</a>, <a href="#Page_254">254</a>, <a href="#Page_262">262-66</a>, <a href="#Page_293">293</a>, <a href="#Page_298">298-99</a>, <a href="#Page_315">315</a>, <a href="#Page_392">392-93</a>, <a href="#Page_395">395</a>, <a href="#Page_536">536ff.</a>;<br /> +<span style="margin-left: 1em;">"normal <i>vs.</i> transitional."</span><br /> +<span style="margin-left: 1em;">See "<span class="smcap">Transition Periods</span>," <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>.</span><br /> +<br /> +Norton, J. P., <a href="#Footnote_169">179, n.</a>, <a href="#Footnote_324">287, n.</a><br /> +<br /> +Note-brokers, <a href="#Page_496">496-97</a>, <a href="#Page_499">499</a>.<br /> +<br /> +<br /> +<b>O</b><br /> +<br /> +"Odd lot" dealings in securities, <a href="#Page_249">249</a>, <a href="#Page_370">370</a>.<br /> +<br /> +"One house bonds," <a href="#Page_147">147</a>.<br /> +<span class='pagenum'><a name="Page_604" id="Page_604">[Pg 604]</a></span><br /> +Origin of money, <a href="#Page_394">394</a>, <a href="#Page_397">Ch. XXI</a>.<br /> +<br /> +Ornament, and origin of money, <a href="#Page_408">408ff.</a><br /> +<br /> +Orthodox economist, <a href="#Page_258">258</a>, <a href="#Page_549">549</a>, <a href="#Page_560">560</a>.<br /> +<br /> +"Other collateral security," analyzed, <a href="#Page_502">502ff.</a><br /> +<br /> +"Other loans and discounts," analyzed, <a href="#Page_500">500ff.</a><br /> +<br /> +"Overcertification," <a href="#Page_200">200</a>, <a href="#Page_376">376</a>, <a href="#Page_509">509</a>, <a href="#Page_510">510</a>.<br /> +<span style="margin-left: 1em;">See "<span class="smcap">Morning Loans</span>."</span><br /> +<br /> +Overcounting in estimates of volume of trade, <a href="#Footnote_152">168, n.</a>, <a href="#Footnote_201">200, n.</a>, <a href="#Page_230">230</a>, <a href="#Page_243">243-45</a>, <a href="#Footnote_270">247, n.</a>, <a href="#Page_255">255</a>, <a href="#Page_339">339-40</a>, <a href="#Page_364">364-81</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Undercounting</span>.</span><br /> +<br /> +Overproduction, <a href="#Page_258">258</a>, <a href="#Page_550">550</a>.<br /> +<br /> +"Over the counter" dealings in securities, <a href="#Page_249">249</a>, <a href="#Page_370">370</a>.<br /> +<br /> +<br /> +<b>P</b><br /> +<br /> +Panics, <a href="#Page_174">174</a>, <a href="#Page_273">273</a>, <a href="#Page_435">435</a>, <a href="#Page_446">446</a>, <a href="#Page_448">448</a>, <a href="#Page_520">520</a>, <a href="#Page_548">548-49</a>, <a href="#Page_555">555</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Crises</span>, <span class="smcap">Business Cycles</span>.</span><br /> +<br /> +Paper money, <a href="#Page_143">143</a>, <a href="#Page_150">150</a>, <a href="#Page_151">151</a>, <a href="#Page_418">418</a>, <a href="#Page_421">421</a>, <a href="#Page_473">473</a>, <a href="#Page_495">495</a>, <a href="#Page_496">496</a>, <a href="#Page_538">538</a>;<br /> +<span style="margin-left: 1em;">inconvertible, <a href="#Page_57">57</a>, <a href="#Page_84">84</a>, <a href="#Page_108">108</a>, <a href="#Page_132">132</a>, <a href="#Page_134">134</a>, <a href="#Page_136">136</a>, <a href="#Footnote_120">140, n.</a>, <a href="#Page_141">141</a>, <a href="#Page_321">321-23</a>, <a href="#Page_391">391</a>;</span><br /> +<span style="margin-left: 1em;">credit theory of, <a href="#Page_141">141</a>, <a href="#Page_146">146</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Greenbacks</span>, <span class="smcap">Austria</span>.</span><br /> +<br /> +Parasitic occupations, <a href="#Page_482">482</a>;<br /> +<span style="margin-left: 1em;">gold mining as, <a href="#Footnote_294">262, n.</a>;</span><br /> +<span style="margin-left: 1em;">American banking as, <a href="#Page_527">527</a>.</span><br /> +<br /> +Patten, S. N., <a href="#Footnote_583">558, n.</a><br /> +<br /> +Paulsen, F., <a href="#Page_22">22</a>.<br /> +<br /> +Payments, <a href="#Page_177">177-78</a>, <a href="#Page_338">338</a>, <a href="#Footnote_427">367, n.</a>;<br /> +<span style="margin-left: 1em;">proportions of money and checks in, <a href="#Page_174">174</a>, <a href="#Page_338">338</a>, <a href="#Page_383">383</a>, <a href="#Page_447">447</a>, <a href="#Page_449">449</a>, <a href="#Page_463">463</a>;</span><br /> +<span style="margin-left: 1em;">wage, <a href="#Page_174">174</a>, <a href="#Page_531">531</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to volume of trade.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Overcounting</span>, <span class="smcap">Undercounting</span>, <span class="smcap">Barter</span>.</span><br /> +<br /> +Pay rolls, money for, <a href="#Page_174">174</a>, <a href="#Page_349">349</a>.<br /> +<br /> +Pearson, Karl, <a href="#Footnote_257">237, n.</a><br /> +<br /> +Perry, R. B., <a href="#Footnote_2_2">3, n.</a>, <a href="#Footnote_20_20">16, n.</a>, <a href="#Footnote_26_26">21, n.</a>, <a href="#Footnote_30_30">25, n.</a>, <a href="#Footnote_86">97, n.</a>, <a href="#Footnote_104">117, n., 118, n., 119, n.</a><br /> +<br /> +Persons, W. M., <a href="#Footnote_261">241, n.</a>, <a href="#Footnote_310">276, n.</a><br /> +<br /> +Phillips, C. A., <a href="#Footnote_161">174, n.</a><br /> +<br /> +Phillips, Osmund, <a href="#Footnote_305">272, n.</a>, <a href="#Footnote_403">353, n.</a>, <a href="#Footnote_406">354, n.</a><br /> +<br /> +Physiographic factors in social life, <a href="#Page_571">571-73</a>, <a href="#Page_574">574</a>, <a href="#Page_590">590</a>.<br /> +<br /> +Pierson, N. G., <a href="#Footnote_234">221, n.</a><br /> +<br /> +Pittsburg, "deposits" in, <a href="#Page_245">245-46</a>.<br /> +<br /> +"Platform" of quantity theorists, <a href="#Page_155">155</a>.<br /> +<br /> +Poker chips, <a href="#Page_132">132</a>.<br /> +<br /> +Pope, J. E., <a href="#Page_316">316</a>, <a href="#Page_317">317</a>, <a href="#Footnote_359">319, n.</a>, <a href="#Footnote_522">502, n.</a>, <a href="#Footnote_526">504, n.</a>, <a href="#Page_505">505</a>.<br /> +<br /> +Populists, and quantity theory, <a href="#Page_141">141</a>.<br /> +<br /> +Positive doctrine, in Parts I and II, summarized, <a href="#Page_387">Ch. XX</a>.<br /> +<br /> +"Power in exchange," <a href="#Page_9">9-10</a>, <a href="#Page_388">388</a>.<br /> +<br /> +Pragmatism in economic theory, <a href="#Page_41">41-42</a>, <a href="#Page_93">93</a>, <a href="#Page_96">96-97</a>, <a href="#Page_98">98-99</a>, <a href="#Page_553">553</a>, <a href="#Page_571">571-72</a>.<br /> +<br /> +Pratt, S. S., <a href="#Footnote_271">248, n.</a>, <a href="#Footnote_274">251, n.</a>, <a href="#Footnote_277">252, n.</a>, <a href="#Page_369">369</a>, <a href="#Page_370">370</a>, <a href="#Page_374">374</a>, <a href="#Footnote_508">476, n.</a><br /> +<br /> +Premium, <a href="#Page_146">146</a>, <a href="#Page_194">194</a>, <a href="#Page_322">322</a>, <a href="#Page_332">332</a>, <a href="#Page_390">390</a>, <a href="#Page_442">442-50</a>, <a href="#Page_471">471</a>. See <span class="smcap">Agio</span>.<br /> +<span style="margin-left: 1em;">Gold, <i>vs.</i> general price level as index of value of money, <a href="#Page_194">194</a>.</span><br /> +<br /> +Prestige as economic power, <a href="#Page_33">33</a>, <a href="#Page_37">37</a>, <a href="#Page_41">41</a>, <a href="#Page_405">405</a>, <a href="#Page_409">409</a>, <a href="#Page_411">411</a>, <a href="#Page_438">438-42</a>, <a href="#Page_463">463</a>, <a href="#Page_465">465-66</a>, <a href="#Page_487">487</a>, <a href="#Page_489">489</a>, <a href="#Page_570">570</a>;<br /> +<span style="margin-left: 1em;">prestige values.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Values</span>.</span><br /> +<br /> +Price, Theodore, <a href="#Page_222">222</a>.<br /> +<br /> +Price, <a href="#Page_7">7ff.</a>, <a href="#Page_388">388</a>, <a href="#Footnote_492">440, n.</a>;<br /> +<span style="margin-left: 1em;">and value, <a href="#Page_8">8ff.</a>, <a href="#Page_298">298</a>. See <span class="smcap">Value</span>.</span><br /> +<span style="margin-left: 1em;">"Buying price" <i>vs.</i> "selling price," <a href="#Page_402">402-04</a>, <a href="#Page_406">406-07</a>, <a href="#Page_476">476</a>;</span><br /> +<span style="margin-left: 1em;">"just price," <a href="#Page_24">24</a>.</span><br /> +<br /> +Price level, <a href="#Page_56">56</a>, <a href="#Page_86">86</a>, <a href="#Page_87">87</a>, <a href="#Page_123">Ch. VI</a>, <a href="#Page_154">Ch. VIII</a>, <a href="#Page_188">188-89</a>, <a href="#Page_292">Ch. XV</a>, <a href="#Page_315">315-17</a>, <a href="#Page_328">328</a>, <a href="#Page_381">381-82</a>, <a href="#Page_388">388-89</a>, <a href="#Page_416">416</a>, <a href="#Footnote_470">416, n.</a>, <a href="#Page_456">456</a>, <a href="#Page_520">520-23</a>;<br /> +<span style="margin-left: 1em;">relation of, to particular prices, <a href="#Page_156">156</a>, <a href="#Page_183">183</a>, <a href="#Page_295">295</a>, <a href="#Page_311">311-12</a>, <a href="#Page_315">315-17</a>, <a href="#Page_388">388-89</a>;</span><br /> +<span style="margin-left: 1em;"><i>weighted</i> average, tied to T, <a href="#Page_163">163ff.</a>, <a href="#Page_363">363</a>, <a href="#Page_381">381-82</a>;</span><br /> +<span style="margin-left: 1em;">supposed "passiveness" of, <a href="#Page_126">126</a>, <a href="#Page_186">186</a>, <a href="#Page_187">187</a>, <a href="#Page_192">192</a>, <a href="#Page_290">290</a>, <a href="#Page_292">Ch. XV</a>, <a href="#Page_389">389</a>;</span><br /> +<span style="margin-left: 1em;">"reciprocal of," <i>vs.</i> value of money. See <span class="smcap">Money, Value of</span>.</span><br /> +<br /> +Price-theory <i>vs.</i> value-theory, <a href="#Page_49">49</a>, <a href="#Page_78">78</a>, <a href="#Page_389">389</a>, <a href="#Page_558">558-59</a>, <a href="#Page_570">570-77</a>, <a href="#Page_589">589-90</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Supply and Demand</span>, <span class="smcap">Cost of Production</span>, <span class="smcap">Capitalization Theory</span>, <span class="smcap">Imputation Theory</span>.</span><br /> +<br /> +Prices, concatenations of, <a href="#Page_112">112-13</a>, <a href="#Page_300">300</a>, <a href="#Page_310">310</a>, <a href="#Page_313">313-14</a>;<br /> +<span style="margin-left: 1em;">customary, <a href="#Page_144">144</a>;</span><br /> +<span class='pagenum'><a name="Page_605" id="Page_605">[Pg 605]</a></span><span style="margin-left: 1em;">fluid, <a href="#Page_143">143</a>;</span><br /> +<span style="margin-left: 1em;">world prices, and gold production, <a href="#Page_324">Ch. XVIII</a>.</span><br /> +<br /> +Private banks, <a href="#Page_338">338</a>, <a href="#Page_343">343-45</a>, <a href="#Page_348">348</a>, <a href="#Footnote_406">355, n.</a>, <a href="#Page_357">357</a>, <a href="#Page_488">488</a>, <a href="#Page_498">498-99</a>, <a href="#Page_514">514-16</a>, <a href="#Page_527">527-28</a>, <a href="#Page_531">531</a>;<br /> +<span style="margin-left: 1em;">deposits in, in New York City, <a href="#Page_344">344</a>, <a href="#Page_515">515</a>;</span><br /> +<span style="margin-left: 1em;">"deposits" in, in New York City, <a href="#Page_343">343-45</a>, <a href="#Page_515">515-16</a>.</span><br /> +<br /> +Produce exchanges, <a href="#Page_200">200</a>, <a href="#Page_251">251ff.</a>, <a href="#Page_406">406</a>, <a href="#Page_541">541</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Speculation</span>, <span class="smcap">Commodity</span>, <span class="smcap">Chicago Board of Trade</span>, <span class="smcap">London Money Market</span>, <span class="smcap">New York Cotton Exchange</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Production, confused with trade. See <span class="smcap">Trade</span>.<br /> +<span style="margin-left: 1em;">Relation of, to trade, <a href="#Page_257">257ff.</a>, <a href="#Page_269">269</a>, <a href="#Page_393">393</a>;</span><br /> +<span style="margin-left: 1em;">exchange as. See <span class="smcap">Exchange</span>.</span><br /> +<span style="margin-left: 1em;">Factors of, <a href="#Page_268">268</a>, <a href="#Page_481">481-82</a>;</span><br /> +<span style="margin-left: 1em;">index of, <a href="#Page_278">278</a>;</span><br /> +<span style="margin-left: 1em;">money as instrument of. See <span class="smcap">Money</span>.</span><br /> +<br /> +"Productive," meaning of, <a href="#Page_257">257</a>, <a href="#Page_591">591</a>.<br /> +<br /> +Prosperity, theory of, <a href="#Page_262">262</a>, <a href="#Page_395">395</a>, <a href="#Page_548">548</a>, <a href="#Page_555">555</a>, <a href="#Page_556">556</a>, <a href="#Page_569">569</a>, <a href="#Page_573">573ff.</a><br /> +<span style="margin-left: 1em;">See <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>.</span><br /> +<br /> +Protective tariffs, <a href="#Page_550">550-52</a>, <a href="#Page_553">553</a>, <a href="#Page_580">580-81</a>.<br /> +<br /> +Pujo Committee, <a href="#Page_344">344</a>, <a href="#Footnote_439">373, n.</a>, <a href="#Page_375">375</a>, <a href="#Footnote_515">491, n.</a>, <a href="#Footnote_538">515, n.</a>, <a href="#Page_518">518-19</a>.<br /> +<br /> +"Purchasing power," <a href="#Page_9">9-10</a>, <a href="#Page_88">88</a>, <a href="#Page_98">98-99</a>, <a href="#Page_484">484</a>;<br /> +<span style="margin-left: 1em;">of money, <a href="#Page_86">86</a>, <a href="#Page_88">88</a>, <a href="#Page_155">155-56</a>, <a href="#Page_388">388</a>, <a href="#Page_583">583-86</a>.</span><br /> +<br /> +<br /> +<b>Q</b><br /> +<br /> +Qualitative <i>vs.</i> quantitative thinking, <a href="#Page_191">191-92</a>, <a href="#Page_195">195</a>, <a href="#Page_324">324</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Page_553">553</a>, <a href="#Page_586">586-88</a>, <a href="#Page_590">590</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Juristic</span> <i>vs.</i> <span class="smcap">Economic Thinking</span>.</span><br /> +<br /> +Quantity theory, <a href="#Page_42">42</a>, <a href="#Page_79">79</a>, <a href="#Page_81">81</a>, <a href="#Page_99">99</a>, <a href="#Page_110">110</a>, <a href="#Page_123">Pt. II</a>, esp. <a href="#Page_292">Ch. XV</a>, <a href="#Footnote_486">435, n.</a>, <a href="#Footnote_493">444, n.</a>, <a href="#Page_448">448-49</a>, <a href="#Page_478">478</a>, <a href="#Page_520">520-23</a>, <a href="#Page_537">537ff.</a>, <a href="#Page_550">550</a>, <a href="#Footnote_584">558, n.</a>;<br /> +<span style="margin-left: 2em;">modicum of truth in, <a href="#Page_195">195</a>, <a href="#Page_330">330</a>, <a href="#Page_448">448-49</a>;</span><br /> +<span style="margin-left: 2em;">as basis of prediction, <a href="#Page_334">334-35</a>;</span><br /> +<span style="margin-left: 2em;">doctrine of, that quantity of money is of no importance, <a href="#Page_219">219</a>, <a href="#Footnote_230">219, n.</a>, <a href="#Page_216">Ch. XIII</a>, <i>passim</i>, <a href="#Page_265">265</a>, <a href="#Page_391">391-92</a>;</span><br /> +<span style="margin-left: 2em;">conflicts with other theories, see <span class="smcap">Supply and Demand</span>, <span class="smcap">Cost of Production</span>, <span class="smcap">Capitalization Theory</span>, <span class="smcap"> Imputation Theory</span>, <span class="smcap">Gresham's Law</span>.</span><br /> +<span style="margin-left: 1em;">"Long run" <i>vs.</i> "short run" versions of, <a href="#Page_170">170-71</a>, <a href="#Page_188">188-89</a>, <a href="#Page_192">192ff.</a>, <a href="#Page_262">262</a>, <a href="#Page_393">393</a>;</span><br /> +<span style="margin-left: 2em;">not a functional theory, <a href="#Page_262">262-66</a>, <a href="#Page_400">400-401</a>;</span><br /> +<span style="margin-left: 2em;">not logically related to bimetallism, <a href="#Footnote_230">219, n.</a>;</span><br /> +<span style="margin-left: 2em;">applied to international trade, <a href="#Page_61">61</a>, <a href="#Page_129">129</a>, <a href="#Page_183">183</a>, <a href="#Page_280">280-81</a>, <a href="#Page_292">292</a>, <a href="#Page_315">Ch. XVI</a>;</span><br /> +<span style="margin-left: 2em;">not related to general theory of value, <a href="#Page_46">46ff.</a>, <a href="#Page_305">305</a>;</span><br /> +<span style="margin-left: 2em;">psychological assumptions of, <a href="#Page_143">143-44</a>, <a href="#Page_305">305</a>, <a href="#Page_444">444</a>;</span><br /> +<span style="margin-left: 2em;">relation to medium of exchange function, <a href="#Page_152">152</a>, <a href="#Page_266">266</a>;</span><br /> +<span style="margin-left: 2em;">contrasted with commodity theory, <a href="#Page_130">Ch. VII</a>, esp. <a href="#Page_151">151-53</a>;</span><br /> +<span style="margin-left: 2em;">types of, <a href="#Page_130">Ch. VII</a>, <a href="#Page_154">Ch. VIII</a>, <a href="#Page_172">172</a>, <a href="#Footnote_165">177, n.</a>, <a href="#Page_182">182-85</a>, <a href="#Page_192">192-94</a>, <a href="#Footnote_215">210, n.</a>, <a href="#Page_216">216-17</a>, <a href="#Footnote_229">218, n.</a>, <a href="#Footnote_230">219, n.</a>, <a href="#Page_220">220</a>, <a href="#Page_324">Ch. XVIII</a>, <a href="#Footnote_545">521, n.</a>, <a href="#Footnote_548">522, n.</a>, <a href="#Page_537">537</a>, <a href="#Footnote_569">538, n.</a></span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Ricardo</span>, <span class="smcap">Mill, J. S.</span>, <span class="smcap">Taussig</span>, <span class="smcap">Nicholson</span>, <span class="smcap">Fisher</span>, <span class="smcap">Walker, F. A.</span>, <span class="smcap">Johnson, J. F.</span>, <span class="smcap">Jevons</span>, <span class="smcap">Barbour</span>, <span class="smcap">Andrew</span>, <span class="smcap">Davenport</span> (p. <a href="#Footnote_229">218, n.</a>), <span class="smcap">Kemmerer</span>.</span><br /> +<br /> +<br /> +<b>R</b><br /> +<br /> +Railway gross receipts, <a href="#Page_240">240-41</a>, <a href="#Page_278">278</a>, <a href="#Page_516">516</a>;<br /> +<span style="margin-left: 1em;">relation of, to clearings, <a href="#Page_240">240-41</a>.</span><br /> +<br /> +"Ranks" or "orders" of goods, <a href="#Page_34">34</a>, <a href="#Page_38">38</a>, <a href="#Page_96">96</a>, <a href="#Page_481">481</a>, <a href="#Footnote_585">562, n.</a><br /> +<span style="margin-left: 1em;">See <span class="smcap">Imputation Theory</span>, <span class="smcap">Austrian School,</span> <span class="smcap">Capitalization Theory</span>.</span><br /> +<br /> +Ratio of exchange, <a href="#Page_6">6ff.</a>, <a href="#Page_25">25</a>, <a href="#Page_92">92</a>, <a href="#Page_388">388</a>, <a href="#Page_584">584</a>;<br /> +<span style="margin-left: 1em;">abstract, as value, <a href="#Page_25">25</a>, <a href="#Page_92">92</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Value</span>, <span class="smcap">Absolute</span> <i>vs.</i> <span class="smcap">Relative</span>, <span class="smcap">Price</span>, "<span class="smcap">Purchasing Power</span>."</span><br /> +<br /> +Ratio, fixed, M:M´, <a href="#Page_172">Ch. IX</a>, <a href="#Page_187">187</a>, <a href="#Page_206">206</a>, <a href="#Page_281">281</a>, <a href="#Page_288">288</a>, <a href="#Page_290">290</a>, <a href="#Page_294">294</a>, <a href="#Page_328">328-29</a>, <a href="#Page_529">529-44</a>.<br /> +<span style="margin-left: 1em;">See <span class="smcap">Reserves</span>, <span class="smcap">Deposits</span>, "<span class="smcap">Money in Circulation</span>."</span><br /> +<br /> +Real estate trade. See <span class="smcap">Trade</span>.<br /> +<br /> +Rediscounting, <a href="#Page_490">490</a>, <a href="#Page_494">494</a>, <a href="#Page_518">518-20</a>.<br /> +<br /> +<i>Reichsbank.</i> See <span class="smcap">Germany</span>.<br /> +<br /> +Religious values, <a href="#Page_414">414</a>.<br /> +<br /> +Rent, <a href="#Page_316">316</a>, <a href="#Page_439">439-41</a>;<br /> +<span style="margin-left: 1em;">as cost, <a href="#Page_70">70</a>;</span><br /> +<span style="margin-left: 1em;">of money, as "money rates," <a href="#Page_72">Ch. IV</a>, <a href="#Page_145">145</a>, <a href="#Page_149">149</a>, <a href="#Page_424">424</a>, <a href="#Page_438">438-42</a>, <a href="#Page_451">451-57</a>;</span><br /> +<span class='pagenum'><a name="Page_606" id="Page_606">[Pg 606]</a></span><span style="margin-left: 1em;">capitalization of. See <span class="smcap">Capitalization</span>.</span><br /> +<br /> +Reserve cities, <a href="#Page_233">233</a>, <a href="#Footnote_391">343, n.</a>, <a href="#Page_357">357</a>, <a href="#Footnote_411">359, n.</a><br /> +<br /> +Reserve function of money, <a href="#Page_324">Ch. XVIII</a>, <a href="#Page_418">418</a>, <a href="#Page_421">421</a>, <a href="#Page_424">424</a>, <a href="#Page_436">436</a>, <a href="#Page_536">536-44</a>;<br /> +<span style="margin-left: 1em;">special case of "bearer of options" function, <a href="#Footnote_478">426, n.</a>, <a href="#Page_536">536ff.</a></span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Functions of Money</span>.</span><br /> +<br /> +Reserves, <a href="#Page_172">Ch. IX</a>, <a href="#Page_324">Ch. XVIII</a>, <a href="#Page_393">393</a>, <a href="#Page_395">395</a>, <a href="#Page_447">447</a>, <a href="#Page_451">451</a>, <a href="#Page_491">491</a>, <a href="#Page_517">517</a>, <a href="#Page_529">529-44</a>;<br /> +<span style="margin-left: 1em;">bills of exchange as, <a href="#Page_181">181-82</a>, <a href="#Page_444">444</a>;</span><br /> +<span style="margin-left: 1em;">legal reserve requirements, <a href="#Footnote_164">175, n.</a>, <a href="#Page_184">184</a>, <a href="#Page_447">447</a>, <a href="#Page_448">448</a>, <a href="#Page_449">449</a>;</span><br /> +<span style="margin-left: 1em;">ratio of, to deposits, <a href="#Footnote_164">175, n.</a>, <a href="#Page_179">179</a>, <a href="#Page_286">286-87</a>, <a href="#Page_298">298</a>, <a href="#Page_324">324ff.</a>, <a href="#Page_529">529-44</a>;</span><br /> +<span style="margin-left: 1em;">ratio of, to "money in circulation," <a href="#Footnote_164">175, n.</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to money rates, <a href="#Page_378">378</a>;</span><br /> +<span style="margin-left: 1em;">"secondary reserves," <a href="#Page_530">530</a>.</span><br /> +<br /> +Resumption of specie payments, <a href="#Page_146">146</a>, <a href="#Page_323">323</a>.<br /> +<br /> +Retail "deposits," see "<span class="smcap">Deposits</span>."<br /> +<br /> +Retail trade. See <span class="smcap">Trade</span>.<br /> +<br /> +Ricardo, David, <a href="#Page_47">47</a>, <a href="#Page_50">50</a>, <a href="#Page_51">51</a>, <a href="#Page_64">64</a>, <a href="#Page_65">65</a>, <a href="#Page_66">66</a>, <a href="#Page_106">106</a>, <a href="#Page_131">131</a>, <a href="#Page_550">550</a>.<br /> +<br /> +Ridgeway, W., <a href="#Footnote_461">407, n.</a><br /> +<br /> +Ripley, W. Z., <a href="#Page_275">275</a>.<br /> +<br /> +Risk, <a href="#Page_67">67</a>, <a href="#Page_527">527</a>, <a href="#Page_542">542-43</a>. See <span class="smcap">Dynamics</span>, "<span class="smcap">Bearer of Options</span>."<br /> +<br /> +Ross, E. A., <a href="#Page_37">37</a>, <a href="#Page_568">568</a>, <a href="#Page_571">571</a>.<br /> +<br /> +Royce, J., <a href="#Footnote_22_22">18, n.</a><br /> +<br /> +Rupee. See <span class="smcap">India</span>.<br /> +<br /> +Rural banks, <a href="#Page_232">232-35</a>, <a href="#Page_491">491</a>, <a href="#Page_517">517-18</a>;<br /> +<span style="margin-left: 1em;">"all other deposits" in, <a href="#Page_233">233-35</a>;</span><br /> +<span style="margin-left: 1em;">loans by, in Wall Street, <a href="#Page_517">517-18</a>;</span><br /> +<span style="margin-left: 1em;">small volume of transactions of, <a href="#Page_235">235</a>, <a href="#Footnote_391">342, n.</a></span><br /> +<br /> +<br /> +<b>S</b><br /> +<br /> +Saleability, <a href="#Page_10">10</a>, <a href="#Page_94">94</a>, <a href="#Page_99">99</a>, <a href="#Page_401">401-07</a>, <a href="#Page_430">430</a>, <a href="#Page_440">440-41</a>, <a href="#Page_453">453</a>, <a href="#Page_475">475-78</a>, <a href="#Page_489">489</a>, <a href="#Page_493">493ff.</a>, <a href="#Page_524">524-25</a>, <a href="#Page_526">526-27</a>, <a href="#Page_529">529</a>, <a href="#Page_540">540ff.</a>, <a href="#Page_591">591</a>.<br /> +<br /> +Santos, coffee speculation in, <a href="#Page_252">252</a>.<br /> +<br /> +Savings banks, <a href="#Footnote_391">342, n.</a>, <a href="#Page_409">409</a>, <a href="#Page_472">472</a>, <a href="#Page_498">498-99</a>, <a href="#Page_523">523</a>.<br /> +<br /> +Savigny, F. C., von, <a href="#Page_24">24</a>, <a href="#Page_398">398</a>.<br /> +<br /> +Schumpeter, J., <a href="#Page_44">44</a>, <a href="#Footnote_42">49, n.</a>, <a href="#Page_80">80</a>, <a href="#Page_83">83</a>, <a href="#Page_90">90-100</a>, <a href="#Page_111">111</a>, <a href="#Footnote_104">113, n., ff.</a>, <a href="#Footnote_298">264, n.</a>, <a href="#Page_265">265</a>, <a href="#Page_401">401</a>, <a href="#Footnote_482">429, n.</a>, <a href="#Page_484">484-85</a>, <a href="#Page_488">488</a>, <a href="#Page_526">526</a>, <a href="#Page_549">549</a>, <a href="#Page_554">554-55</a>, <a href="#Footnote_584">558, n.</a>, <a href="#Page_583">583-86</a>.<br /> +<br /> +Scott, DR, <a href="#Footnote_61">78, n.</a><br /> +<br /> +Scott, W. A., <a href="#Page_13">13</a>, <a href="#Page_48">48</a>, <a href="#Page_81">81</a>, <a href="#Page_132">132</a>, <a href="#Page_141">141</a>, <a href="#Page_144">144</a>, <a href="#Footnote_368">327, n.</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Footnote_473">419, n.</a>, <a href="#Footnote_474">422, n.</a>, <a href="#Footnote_485">431, n.</a>, <a href="#Footnote_518">498, n.</a>, <a href="#Footnote_522">501, n.</a><br /> +<br /> +Seager, H. R., <a href="#Footnote_340">301, n.</a>, <a href="#Page_303">303</a>.<br /> +<br /> +Sea Board Air Line Adjustment 5's, <a href="#Page_471">471</a>.<br /> +<br /> +Seasonal changes, <a href="#Page_187">187</a>, <a href="#Page_192">192</a>, <a href="#Page_533">533</a>.<br /> +<br /> +Seignorage, <a href="#Page_131">131</a>.<br /> +<br /> +Self, the, <a href="#Page_19">19</a>.<br /> +<br /> +Seligman, E. R. A., <a href="#Footnote_58">73, n.</a>, <a href="#Footnote_340">301, n.</a>, <a href="#Footnote_472">418, n.</a>, <a href="#Page_548">548</a>.<br /> +<br /> +Selling costs, <a href="#Page_257">257ff.</a>, <a href="#Page_393">393</a>, <a href="#Page_565">565</a>.<br /> +<br /> +"Selling price" <i>vs.</i> "buying price." See "<span class="smcap">Buying Price</span>."<br /> +<br /> +Senior, N. W., <a href="#Footnote_16_16">14, n.</a>, <a href="#Page_67">67</a>.<br /> +<br /> +Sex, social transformation of, <a href="#Page_35">35-36</a>;<br /> +<span style="margin-left: 1em;">rôle of, in origin of money, <a href="#Page_409">409-13</a>.</span><br /> +<br /> +Shakspere, <a href="#Page_25">25</a>.<br /> +<br /> +Share sales. See <span class="smcap">Stock Exchange</span>, <span class="smcap">Clearings</span>.<br /> +<br /> +Shaw, A. W., <a href="#Footnote_286">259, n.</a><br /> +<br /> +Silver, <a href="#Footnote_120">139, n.</a>, <a href="#Page_150">150</a>, <a href="#Page_151">151</a>, <a href="#Page_152">152</a>, <a href="#Page_219">219</a>, <a href="#Footnote_234">221, n.</a>, <a href="#Page_327">327</a>, <a href="#Page_397">397</a>, <a href="#Page_412">412</a>, <a href="#Page_414">414</a>, <a href="#Page_415">415</a>, <a href="#Page_421">421</a>, <a href="#Page_434">434</a>;<br /> +<span style="margin-left: 1em;">certificates, <a href="#Page_432">432</a>.</span><br /> +<br /> +Simmel, G., <a href="#Page_101">101</a>, <a href="#Footnote_472">418, n.</a><br /> +<br /> +Single tax, <a href="#Page_318">318-19</a>, <a href="#Footnote_576">552, n.</a><br /> +<br /> +Smith, Adam, <a href="#Page_12">12</a>, <a href="#Page_50">50</a>, <a href="#Page_64">64</a>, <a href="#Page_65">65</a>, <a href="#Page_222">222</a>, <a href="#Page_526">526-27</a>, <a href="#Page_550">550</a>, <a href="#Page_556">556</a>.<br /> +<br /> +Smith, B. F., <a href="#Footnote_425">366, n.</a><br /> +<br /> +Smith, Munroe, <a href="#Page_24">24</a>.<br /> +<br /> +Social control, <a href="#Page_3">Ch. I</a>, <a href="#Page_395">395</a>, <a href="#Page_409">409</a>, <a href="#Page_435">435, n.</a>, <a href="#Page_482">482</a>, <a href="#Page_584">584</a>;<br /> +<span style="margin-left: 1em;">technology of, <a href="#Page_577">577ff.</a>, <a href="#Page_589">589</a>, <a href="#Page_591">591</a>;</span><br /> +<span style="margin-left: 1em;">"radiant points of," <a href="#Page_37">37</a>, <a href="#Page_576">576</a>.</span><br /> +<br /> +Social psychology, <a href="#Page_17">17</a>, <a href="#Page_36">36-37</a>, <a href="#Page_143">143-44</a>, <a href="#Page_560">560</a>, <a href="#Page_569">569-70</a>, <a href="#Page_577">577-78</a>, <a href="#Page_586">586</a>.<br /> +<br /> +Social value theory, <a href="#Page_3">Ch. I</a>, <a href="#Footnote_72">87, n.</a>, <a href="#Page_98">98-99</a>, <a href="#Page_137">137ff.</a>, <a href="#Page_158">158</a>, <a href="#Page_279">279</a>, <a href="#Page_310">310-11</a>, <a href="#Page_387">Ch. XX</a>, <a href="#Footnote_458">402, n.</a>, <a href="#Page_408">408-16</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Footnote_486">435, n.</a>, <a href="#Page_438">438-42</a>, <a href="#Page_464">464-67</a>, <a href="#Page_469">469</a>, <a href="#Page_480">480</a>, <a href="#Page_560">560</a>, <a href="#Page_569">569-82</a>, <a href="#Page_586">586-89</a>;<br /> +<span style="margin-left: 1em;">pragmatic character of, <a href="#Page_40">40-42</a>;</span><br /> +<span style="margin-left: 1em;">applied to law, <a href="#Page_24">24</a>, <a href="#Page_586">586-89</a>;</span><br /> +<span style="margin-left: 1em;">applied to morals, <a href="#Page_22">22-24</a>, <a href="#Page_589">589</a>.</span><br /> +<br /> +Social advantage, relation of, to individual interest, <a href="#Page_397">397-99</a>.<br /> +<span class='pagenum'><a name="Page_607" id="Page_607">[Pg 607]</a></span><br /> +Social "consciousness," <a href="#Page_16">16</a>;<br /> +<span style="margin-left: 1em;">social expectation, <a href="#Page_409">409</a>;</span><br /> +<span style="margin-left: 1em;">social forces, <a href="#Page_26">26</a>;</span><br /> +<span style="margin-left: 1em;">"social marginal utility," <a href="#Page_12">12</a>;</span><br /> +<span style="margin-left: 1em;">social mind, <a href="#Page_7">7</a>, <a href="#Page_12">12</a>, <a href="#Page_34">34</a>, <a href="#Footnote_72">87, n.</a>, <a href="#Page_557">557</a>, <a href="#Page_560">560</a>, <a href="#Page_570">570</a>, <a href="#Page_578">578</a>;</span><br /> +<span style="margin-left: 1em;">social objectivity, theories of, <a href="#Page_20">20ff.</a>;</span><br /> +<span style="margin-left: 1em;">social organism, <a href="#Page_16">16</a>, <a href="#Page_577">577</a>;</span><br /> +<span style="margin-left: 1em;">social "oversoul," <a href="#Page_16">16</a>;</span><br /> +<span style="margin-left: 1em;">"social use-value," <a href="#Page_12">12</a>;</span><br /> +<span style="margin-left: 1em;">social <i>vs.</i> individual values, <a href="#Page_43">43-45</a>.</span><br /> +<br /> +"Socially necessary labor-time," <a href="#Page_12">12</a>, <a href="#Page_15">15</a>.<br /> +<br /> +Society and individual, <a href="#Page_16">16-26</a>, <a href="#Footnote_104">118</a>.<br /> +<br /> +Soetbeer, A., <a href="#Footnote_466">413, n.</a><br /> +<br /> +Sombart, W., <a href="#Page_220">220</a>.<br /> +<br /> +South Atlantic States, "deposits" in, <a href="#Page_233">233</a>, <a href="#Page_246">246</a>.<br /> +<br /> +Spahr, C. B., <a href="#Page_274">274</a>.<br /> +<br /> +Specie, <a href="#Page_182">182</a>.<br /> +<br /> +Speculation, <a href="#Footnote_52">60, n.</a>, <a href="#Page_85">85</a>, <a href="#Page_143">143</a>, <a href="#Page_216">Ch. XIII</a>, <a href="#Page_221">221</a>, <a href="#Page_225">225</a>, <a href="#Page_231">231</a>, <a href="#Page_233">233-41</a>, <a href="#Page_248">248ff.</a>, <a href="#Page_267">267</a>, <a href="#Page_298">298</a>, <a href="#Page_363">363-64</a>, <a href="#Page_382">382</a>, <a href="#Page_392">392</a>, <a href="#Page_503">503</a>, <a href="#Page_514">514-28</a>, <a href="#Page_540">540ff.</a>, <a href="#Page_566">566-67</a>, <a href="#Page_579">579</a>, <a href="#Page_585">585</a>;<br /> +<span style="margin-left: 1em;">by manufacturers, wholesalers, and retailers, <a href="#Page_243">243-44</a>, <a href="#Page_252">252-54</a>;</span><br /> +<span style="margin-left: 1em;">commodity, <a href="#Page_251">251ff.</a>, <a href="#Page_379">379-80</a>, <a href="#Page_406">406</a>, <a href="#Page_503">503</a>, <a href="#Page_540">540-42</a>;</span><br /> +<span style="margin-left: 1em;">influence of, on bank clearings, <a href="#Page_237">237-41</a>;</span><br /> +<span style="margin-left: 1em;">land, <a href="#Page_254">254</a>;</span><br /> +<span style="margin-left: 1em;">in London, <a href="#Page_540">540ff.</a>;</span><br /> +<span style="margin-left: 1em;">"odd lot," <a href="#Page_249">249</a>, <a href="#Page_370">370</a>.</span><br /> +<br /> +Speculators, <a href="#Page_31">31</a>, <a href="#Page_249">249</a>, <a href="#Page_263">263</a>, <a href="#Page_322">322</a>, <a href="#Page_488">488</a>, <a href="#Page_499">499</a>, <a href="#Page_523">523-27</a>, <a href="#Page_529">529</a>, <a href="#Page_544">544</a>;<br /> +<span style="margin-left: 1em;"><i>vs.</i> investors. See <span class="smcap">Investment</span>.</span><br /> +<br /> +Spencer, Herbert, <a href="#Page_571">571</a>.<br /> +<br /> +"Spot" transactions, <a href="#Page_251">251</a>.<br /> +<br /> +Sprague, O. M. W., <a href="#Footnote_162">174, n.</a>, <a href="#Page_200">200</a>, <a href="#Footnote_404">354, n.</a>, <a href="#Page_378">378</a>, <a href="#Footnote_522">502, n.</a><br /> +<br /> +<i>Staatliche Theorie</i>, <a href="#Footnote_486">433, n., ff.</a><br /> +<br /> +Stabilizing the value of money, <a href="#Page_152">152</a>, <a href="#Page_194">194</a>.<br /> +<br /> +Standard, of deferred payments, <a href="#Page_326">326</a>, <a href="#Page_391">391</a>, <a href="#Page_418">418</a>, <a href="#Page_436">436</a>;<br /> +<span style="margin-left: 2em;">of value, <a href="#Page_133">133</a>, <a href="#Page_201">201</a>, <a href="#Page_390">390</a>, <a href="#Page_418">418-23</a>. See <span class="smcap">Measure of Values</span>.</span><br /> +<span style="margin-left: 1em;">Money, <a href="#Page_135">135</a>, <a href="#Page_325">325-26</a>, <a href="#Page_421">421</a>, <a href="#Page_445">445</a>;</span><br /> +<span style="margin-left: 2em;">"primary" and "secondary," <a href="#Page_422">422</a>;</span><br /> +<span style="margin-left: 2em;">tabular, <a href="#Page_152">152</a>, <a href="#Page_436">436</a>.</span><br /> +<br /> +State banks, <a href="#Page_234">234</a>, <a href="#Page_322">322</a>, <a href="#Page_338">338</a>, <a href="#Footnote_391">342, n.</a>, <a href="#Page_343">343</a>, <a href="#Page_345">345</a>, <a href="#Page_347">347</a>, <a href="#Page_498">498-99</a>, <a href="#Page_505">505-09</a>;<br /> +<span style="margin-left: 1em;">collateral loans in, <a href="#Page_505">505-06</a>, <a href="#Page_507">507</a>.</span><br /> +<br /> +Static theory, <a href="#Page_11">11</a>, <a href="#Page_42">42</a>, <a href="#Page_93">93</a>, <a href="#Page_106">106ff.</a>, <a href="#Footnote_164">176, n., 177, n.</a>, <a href="#Page_186">Ch. X</a>, <a href="#Footnote_230">219, n.</a>, <a href="#Page_223">223</a>, <a href="#Page_254">254</a>, <a href="#Page_262">262-66</a>, <a href="#Page_292">292-93</a>, <a href="#Page_395">395-96</a>, <a href="#Page_403">403</a>, <a href="#Page_426">426</a>, <a href="#Footnote_486">433, n.</a>, <a href="#Page_474">474</a>, <a href="#Footnote_510">481, n.</a>, <a href="#Page_485">485</a>, <a href="#Page_487">487</a>, <a href="#Page_488">488</a>, <a href="#Page_536">536-44</a>, <a href="#Page_547">Ch. XXV</a>;<br /> +<span style="margin-left: 1em;">abstracts from money, <a href="#Page_99">99</a>, <a href="#Page_265">265-66</a>, <a href="#Page_392">392</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to speculation, <a href="#Page_263">263ff.</a>, <a href="#Page_392">392</a>, <a href="#Page_474">474</a>;</span><br /> +<span style="margin-left: 1em;">dynamics and, reconciliation of, <a href="#Page_547">Ch. XXV</a>.</span><br /> +<span style="margin-left: 1em;">See also, <span class="smcap">Saleability</span>, <span class="smcap">Liquidity</span>, <span class="smcap">Fluidity</span>, "<span class="smcap">Normal Tendency</span>," <span class="smcap">Equilibrium</span>, "<span class="smcap">Wealth of Nations, Theory of</span>," <span class="smcap">Dynamics</span>, <span class="smcap">Transition Period</span>, <span class="smcap">Prosperity, Theory of</span>, <span class="smcap">Good Will</span>, "<span class="smcap">Business Capital</span>," <span class="smcap">Friction</span>, <span class="smcap">Historical</span> <i>vs.</i> <span class="smcap">Cross-section Viewpoints</span>.</span><br /> +<br /> +Statistics, <a href="#Footnote_256">237, n.</a>, <a href="#Footnote_305">272, n.</a>, <a href="#Page_331">Ch. XIX</a>;<br /> +<span style="margin-left: 1em;">of banking assets, <a href="#Page_498">498</a>, <a href="#Page_503">503-04</a>, <a href="#Page_506">506</a>, <a href="#Page_509">509-11</a>;</span><br /> +<span style="margin-left: 1em;">of bank-drafts on New York and other centres, <a href="#Page_357">357</a>;</span><br /> +<span style="margin-left: 1em;">of "equation of exchange," <a href="#Page_191">191</a>, <a href="#Page_213">213</a>, <a href="#Page_331">Ch. XIX</a>;</span><br /> +<span style="margin-left: 1em;">of foreign and domestic trade, appendix to Ch. XIII;</span><br /> +<span style="margin-left: 1em;">of gold consumption, <a href="#Footnote_466">412, n.</a>;</span><br /> +<span style="margin-left: 1em;">of money in banks, <i>vs.</i> money in circulation, <a href="#Page_179">179</a>;</span><br /> +<span style="margin-left: 1em;">of money-rates, <a href="#Page_430">430-31</a>;</span><br /> +<span style="margin-left: 1em;">of net income of the United States, <a href="#Page_246">246</a>, <a href="#Footnote_269">247, n.</a>, <a href="#Page_278">278</a>;</span><br /> +<span style="margin-left: 1em;">of prices, <a href="#Page_278">278</a>;</span><br /> +<span style="margin-left: 1em;">of quantity theory, <a href="#Footnote_322">285, n.</a>, <a href="#Page_331">Ch. XIX</a>;</span><br /> +<span style="margin-left: 1em;">ratio, loans to deposits, <a href="#Page_286">286-87</a>, n.;</span><br /> +<span style="margin-left: 1em;">reserves, <a href="#Page_178">178-79</a>, <a href="#Page_286">286-87</a>, n.;</span><br /> +<span style="margin-left: 1em;">of speculation, <a href="#Page_248">248ff.</a>;</span><br /> +<span style="margin-left: 1em;">of trade, <a href="#Page_227">227ff.</a>, <a href="#Page_216">Ch. XIII</a>, <a href="#Page_363">363-81</a>;</span><br /> +<span style="margin-left: 1em;">"ordinary trade," <a href="#Page_240">240-47</a>;</span><br /> +<span style="margin-left: 1em;">of velocity, <a href="#Page_339">339</a>, <a href="#Page_361">361-63</a>.</span><br /> +<span style="margin-left: 1em;">See <span class="smcap">Weighting in Statistics</span>.</span><br /> +<br /> +Stevens, W. S., <a href="#Footnote_200">199, n.</a><br /> +<br /> +St. Louis, <a href="#Page_246">246</a>, <a href="#Page_252">252</a>, <a href="#Footnote_320">289, n.</a>, <a href="#Page_503">503</a>;<br /> +<span style="margin-left: 1em;">Merchants' Exchange, <a href="#Page_253">253</a>.</span><br /> +<br /> +Stock exchange, <a href="#Page_31">31</a>, <a href="#Page_145">145</a>, <a href="#Page_254">254</a>, <a href="#Footnote_320">282, n.</a>, <a href="#Page_369">369ff.</a>, <a href="#Page_406">406</a>, <a href="#Page_458">458</a>, <a href="#Page_491">491</a>, <a href="#Page_520">520</a>, <a href="#Page_521">521-23</a>, <a href="#Page_527">527</a>, <a href="#Page_541">541</a>, <a href="#Page_564">564</a>;<br /> +<span style="margin-left: 1em;">New York Stock Exchange, <a href="#Page_242">242</a>, <a href="#Page_248">248ff.</a>, <a href="#Page_268">268</a>, <a href="#Page_344">344</a>, <a href="#Page_430">430-31</a>, <a href="#Page_514">514</a>, <a href="#Page_521">521-23</a>, <a href="#Page_541">541</a>;</span><br /> +<span style="margin-left: 1em;">clearing house in, <a href="#Page_199">199-200</a>, <a href="#Page_369">369-75</a>;</span><br /> +<span style="margin-left: 1em;">share sales on, volume of, <a href="#Page_248">248ff.</a>, <a href="#Footnote_546">521, n., 522, n.</a>, <a href="#Page_541">541</a>;</span><br /> +<span style="margin-left: 1em;">share sales on, correlated with bank clearings, <a href="#Page_237">237ff.</a>, <a href="#Page_516">516</a>;</span><br /> +<span class='pagenum'><a name="Page_608" id="Page_608">[Pg 608]</a></span><span style="margin-left: 1em;">bond sales on, <a href="#Page_249">249</a>, <a href="#Page_370">370</a>;</span><br /> +<span style="margin-left: 1em;">"odd lot" dealings on, <a href="#Page_249">249</a>, <a href="#Page_370">370</a>, <a href="#Page_374">374</a>;</span><br /> +<span style="margin-left: 1em;">security dealings outside, <a href="#Page_250">250-51</a>, <a href="#Page_514">514</a>;</span><br /> +<span style="margin-left: 1em;">compared with other exchanges, <a href="#Page_250">250</a>, <a href="#Page_541">541</a>.</span><br /> +<br /> +Stocks and bonds, essential identity of, <a href="#Page_460">460-61</a>, <a href="#Page_476">476-77</a>;<br /> +<span style="margin-left: 1em;">"borrowing" of, <a href="#Page_145">145-46</a>, <a href="#Page_371">371-74</a>, <a href="#Page_471">471-72</a>;</span><br /> +<span style="margin-left: 1em;">value of. See <span class="smcap">Value</span>.</span><br /> +<br /> +"Stop loss" orders, <a href="#Page_249">249</a>, <a href="#Footnote_439">373, n.</a><br /> +<br /> +Store of value, <a href="#Footnote_355">314, n.</a>, <a href="#Page_408">408</a>, <a href="#Page_418">418</a>, <a href="#Page_424">424</a>, <a href="#Page_426">426</a>, <a href="#Page_451">451</a>. See <span class="smcap">Functions of Money</span>.<br /> +<br /> +Substitutes for money. See <span class="smcap">Money, not Unique</span>.<br /> +<br /> +Suess, Eduard, <a href="#Footnote_466">413, n.</a><br /> +<br /> +Suggestion, <a href="#Page_18">18</a>, <a href="#Page_36">36-37</a>, <a href="#Page_97">97</a>, <a href="#Footnote_104">118</a>, <a href="#Page_405">405</a>, <a href="#Page_410">410</a>, <a href="#Page_411">411</a>, <a href="#Page_464">464-66</a>, <a href="#Page_560">560</a>, <a href="#Page_570">570</a>, <a href="#Page_577">577-78</a>.<br /> +<br /> +Supply and demand, <a href="#Page_46">Ch. II</a>, <a href="#Page_80">80</a>, <a href="#Page_295">295</a>, <a href="#Page_299">299-300</a>, <a href="#Footnote_350">311, n.</a>, <a href="#Page_389">389</a>, <a href="#Page_453">453</a>;<br /> +<span style="margin-left: 1em;">applicable to general price level, <a href="#Page_299">299-300</a>, <a href="#Page_389">389</a>;</span><br /> +<span style="margin-left: 1em;">assumes fixed absolute value of money, <a href="#Page_52">52ff.</a>, <a href="#Page_313">313-14</a>, <a href="#Page_389">389</a>;</span><br /> +<span style="margin-left: 1em;">conflicts with quantity theory, <a href="#Page_299">299-300</a>, <a href="#Page_310">310-11</a>, <a href="#Page_389">389</a>;</span><br /> +<span style="margin-left: 1em;">not related to quantity theory, <a href="#Page_46">46-47</a>, <a href="#Page_59">59-61</a>, <a href="#Page_295">295</a>;</span><br /> +<span style="margin-left: 1em;">inapplicable to money, <a href="#Page_46">Ch. II</a>, <a href="#Page_389">389</a>;</span><br /> +<span style="margin-left: 1em;">applied to money, <a href="#Page_59">59-62</a>, <a href="#Page_325">325</a>, <a href="#Footnote_502">453, n.</a>;</span><br /> +<span style="margin-left: 1em;">in "money market," <a href="#Page_62">62-63</a>, <a href="#Page_224">224</a>, <a href="#Page_453">453</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to cost of production, <a href="#Page_50">50</a>, <a href="#Page_69">69-70</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to marginal utility, <a href="#Page_46">Ch. II</a>, <a href="#Page_80">Ch. V</a>, esp. <a href="#Page_94">94-95</a>, and <a href="#Footnote_104">114, n.</a></span><br /> +<br /> +<br /> +<b>T</b><br /> +<br /> +Tabular standard, <a href="#Page_152">152</a>, <a href="#Page_436">436</a>, <a href="#Page_451">451</a>.<br /> +<br /> +Tarde, G., <a href="#Page_18">18</a>, <a href="#Page_37">37</a>, <a href="#Page_466">466</a>, <a href="#Page_568">568</a>.<br /> +<br /> +Tariff. See <span class="smcap">Protective Tariff</span>.<br /> +<br /> +Taussig, F. W., <a href="#Page_48">48</a>, <a href="#Page_49">49</a>, <a href="#Page_107">107</a>, <a href="#Footnote_105">123, n.</a>, <a href="#Page_129">129</a>, <a href="#Footnote_128">151, n.</a>, <a href="#Page_155">155</a>, <a href="#Page_182">182-85</a>, <a href="#Page_192">192</a>, <a href="#Page_216">216</a>, <a href="#Page_254">254</a>, <a href="#Footnote_310">276, n.</a>, <a href="#Page_379">379</a>, <a href="#Footnote_559">532, n.</a>, <a href="#Page_537">537</a>.<br /> +<br /> +"Taxonomy" in economic theory, <a href="#Page_563">563-64</a>, <a href="#Page_565">565</a>, <a href="#Page_566">566</a>.<br /> +<br /> +Taylor, Jas. H., <a href="#Footnote_276">252, n.</a><br /> +<br /> +Taylor, W. G. L., <a href="#Page_13">13</a>.<br /> +<br /> +Technology, <a href="#Page_571">571-74</a>, <a href="#Page_576">576</a>, <a href="#Page_590">590-91</a>;<br /> +<span style="margin-left: 1em;">"technology of social control." See <span class="smcap">Social Control</span>.</span><br /> +<br /> +Temporal <i>regressus</i>. See <span class="smcap">Historical</span> <i>vs.</i> <span class="smcap">Cross-section Viewpoints</span>.<br /> +<br /> +Thompson, Burton, on barter in New York City real estate dealings, <a href="#Footnote_198">198, n.</a><br /> +<br /> +Ticker, <a href="#Page_248">248-49</a>, <a href="#Footnote_439">373, n.</a><br /> +<br /> +"Till money," <a href="#Page_183">183</a>, <a href="#Page_530">530</a>, <a href="#Page_539">539</a>.<br /> +<br /> +Time credit. See <span class="smcap">Credit</span>, <span class="smcap">Futurity</span>, <span class="smcap">Book-credit</span>, <span class="smcap">Bills of Exchange</span>.<br /> +<br /> +Time discount, <a href="#Page_72">Ch. IV</a>, <a href="#Page_92">92</a>, <a href="#Page_93">93</a>, <a href="#Page_224">224</a>. See <span class="smcap">Interest</span>, <span class="smcap">Capitalization</span>.<br /> +<br /> +Time, influence of, of money-rates, <a href="#Page_428">428-32</a>.<br /> +<br /> +Timeless-logical <i>vs.</i> causal-temporal, relationships, <a href="#Page_403">403</a>, <a href="#Page_548">548</a>. See <span class="smcap">Causation</span>, <span class="smcap">Statics</span>.<br /> +<br /> +Token money, <a href="#Page_325">325</a>, <a href="#Page_326">326</a>.<br /> +<br /> +Touzet, A., <a href="#Footnote_466">412, n.</a><br /> +<br /> +Trade, various meanings of, <a href="#Page_267">267ff.</a>;<br /> +<span style="margin-left: 1em;">"domestic" <i>vs.</i> foreign, appendix to <a href="#Page_216">Ch. XIII</a>;</span><br /> +<span style="margin-left: 1em;">"ordinary," volume of, <a href="#Page_241">241-47</a>, <a href="#Page_369">369</a>.</span><br /> +<br /> +Trade, volume of, <a href="#Page_59">59-61</a>, <a href="#Footnote_104">117</a>, <a href="#Page_123">Ch. VI</a>, <a href="#Page_144">144</a>, <a href="#Page_149">149</a>, <a href="#Page_159">159ff.</a>, <a href="#Page_194">194</a>, <a href="#Page_215">215</a>, <a href="#Page_216">Ch. XIII</a>, <a href="#Footnote_374">332, n.</a>, <a href="#Page_339">339-40</a>, <a href="#Page_363">363-81</a>, <a href="#Page_521">521-23</a>;<br /> +<span style="margin-left: 2em;">an abstract number, distinguished from concrete goods, <a href="#Page_161">161</a>;</span><br /> +<span style="margin-left: 2em;">a pecuniary magnitude, <a href="#Page_16">16-64</a>, <a href="#Page_271">271</a>, <a href="#Page_277">277-78</a>;</span><br /> +<span style="margin-left: 2em;">confusions of, with production, or with stock, <a href="#Page_225">225ff.</a>, <a href="#Page_281">281</a>, <a href="#Footnote_339">296, n.</a>, <a href="#Page_306">306-07</a>, <a href="#Footnote_420">363, n.</a>, <a href="#Footnote_546">521, n.</a>;</span><br /> +<span style="margin-left: 2em;">governed by dynamic causes, <a href="#Page_262">262-66</a>, <a href="#Page_392">392</a>, <a href="#Page_474">474</a>;</span><br /> +<span style="margin-left: 2em;">quantity theory doctrine of causes governing, <a href="#Page_217">217-18</a>, <a href="#Footnote_229">218, n.</a>, <a href="#Page_240">240</a>, <a href="#Page_255">255</a>, <a href="#Page_256">256</a>, <a href="#Page_257">257</a>, <a href="#Page_294">294</a>, <a href="#Footnote_546">522, n.</a>;</span><br /> +<span style="margin-left: 2em;">real estate trade in, <a href="#Page_198">198</a>, <a href="#Page_254">254</a>, <a href="#Page_264">264</a>, <a href="#Page_317">317</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to money and credit, <a href="#Page_203">Ch. XII</a>, <a href="#Page_279">Ch. XIV</a>, <a href="#Page_391">391-92</a>, <a href="#Page_532">532-36</a>;</span><br /> +<span style="margin-left: 2em;">relation of, to price level, <a href="#Page_160">160-66</a>, <a href="#Page_363">363</a>, <a href="#Page_381">381-82</a>, <a href="#Page_536">536</a>;</span><br /> +<span style="margin-left: 2em;">retail trade in, <a href="#Page_173">173</a>, <a href="#Page_184">184</a>, <a href="#Page_232">232</a>, <a href="#Page_242">242-44</a>, <a href="#Footnote_429">369, n.</a>, <a href="#Page_444">444-45</a>, <a href="#Page_447">447</a>, <a href="#Page_448">448-49</a>, <a href="#Page_463">463</a>, <a href="#Page_489">489</a>, <a href="#Page_531">531</a>;</span><br /> +<span style="margin-left: 2em;">speculation chief factor in, <a href="#Page_216">Ch. XIII</a>. See <span class="smcap">Speculation</span>.</span><br /> +<span style="margin-left: 1em;">Wholesale trade in, <a href="#Page_232">232</a>, <a href="#Page_243">243</a>, <a href="#Page_244">244-46</a>, <a href="#Page_253">253-54</a>, <a href="#Footnote_429">369, n.</a>, <a href="#Page_381">381</a>.</span><br /> +<span class='pagenum'><a name="Page_609" id="Page_609">[Pg 609]</a></span><span style="margin-left: 2em;">See also <span class="smcap">Barter</span>, <span class="smcap">Transactions</span>, <span class="smcap">Payments</span>, <span class="smcap">Overcounting</span>, <span class="smcap">Undercounting</span>.</span><br /> +<br /> +"Transactions, total," relation of, to bank clearings, <a href="#Page_348">348-51</a>, <a href="#Page_353">353</a>, <a href="#Footnote_411">359, n.</a>, <a href="#Page_360">360</a>;<br /> +<span style="margin-left: 1em;">relation of, to "deposits," <a href="#Page_349">349-51</a>, <a href="#Page_353">353</a>.</span><br /> +<br /> +"Transition periods," <a href="#Page_186">Ch. X</a>, <a href="#Page_196">196</a>, <a href="#Page_218">218</a>, <a href="#Page_262">262-66</a>, <a href="#Page_293">293</a>, <a href="#Page_298">298-99</a>, <a href="#Page_392">392-93</a>, <a href="#Page_537">537ff.</a>, <a href="#Page_548">548</a>, <a href="#Page_578">578-81</a>, <a href="#Page_589">589</a>. See "<span class="smcap">Normal Tendency</span>," <span class="smcap">Statics</span>, <span class="smcap">Dynamics</span>.<br /> +<br /> +Trosien, <a href="#Footnote_359">319, n.</a><br /> +<br /> +Trust companies, <a href="#Page_338">338</a>, <a href="#Footnote_391">342, n.</a>, <a href="#Page_343">343</a>, <a href="#Page_345">345-48</a>, <a href="#Page_498">498-99</a>, <a href="#Page_505">505-09</a>, <a href="#Footnote_538">516, n.</a>;<br /> +<span style="margin-left: 1em;">New York City, "deposits" in, <a href="#Page_345">345-48</a>;</span><br /> +<span style="margin-left: 1em;">clearings of, <a href="#Page_345">345-47</a>;</span><br /> +<span style="margin-left: 1em;">deposits of, <a href="#Page_345">345</a>, <a href="#Footnote_538">516, n.</a>;</span><br /> +<span style="margin-left: 1em;">collateral loans of, <a href="#Page_505">505-07</a>;</span><br /> +<span style="margin-left: 1em;">reserves of, <a href="#Page_346">346-47</a>, <a href="#Page_531">531</a>.</span><br /> +<br /> +Turgot, <a href="#Footnote_61">78, n.</a>, <a href="#Footnote_340">301, n.</a><br /> +<br /> +<br /> +<b>U</b><br /> +<br /> +Undercounting in estimates of volume of trade, <a href="#Footnote_152">168, n.</a>, <a href="#Footnote_201">200, n.</a>, <a href="#Footnote_251">231, n.</a>, <a href="#Page_364">364-65</a>, <a href="#Page_369">369-81</a>. See <span class="smcap">Overcounting</span>, <span class="smcap">Barter</span>.<br /> +<br /> +Underwriters, <a href="#Page_32">32</a>, <a href="#Page_488">488</a>, <a href="#Footnote_551">523, n.</a><br /> +<br /> +Urban, W. M., <a href="#Footnote_33_33">29, n.</a><br /> +<br /> +"Use theory." See <span class="smcap">Interest</span>.<br /> +<br /> +Utility. See <span class="smcap">Marginal Utility</span>.<br /> +<br /> +<br /> +<b>V</b><br /> +<br /> +Vacuum, monetary, <a href="#Page_323">323</a>.<br /> +<br /> +Value, <a href="#Page_1">Part I</a>, <a href="#Page_388">388-89</a> and <i>passim</i>;<br /> +<span style="margin-left: 2em;">absolute <i>vs.</i> relative, <a href="#Page_7">7ff.</a>, <a href="#Page_56">56-57</a>, <a href="#Page_77">77-78</a>, <a href="#Page_81">81</a>, <a href="#Page_86">86ff.</a>, <a href="#Page_109">109-110</a>, <a href="#Page_123">123</a>, <a href="#Page_156">156</a>, <a href="#Page_158">158-59</a>, <a href="#Page_303">303</a>, <a href="#Page_312">312</a>, <a href="#Page_328">328</a>, <a href="#Page_388">388-89</a>, <a href="#Footnote_458">402, n.</a>, <a href="#Footnote_492">440, n.</a>, <a href="#Page_449">449</a>;</span><br /> +<span style="margin-left: 2em;">abstract units of, <a href="#Page_451">451</a>;</span><br /> +<span style="margin-left: 2em;">exchange and, <a href="#Page_9">9-11</a>, <a href="#Page_401">401ff.</a>, <a href="#Page_483">483-84</a>;</span><br /> +<span style="margin-left: 2em;">wealth and, <a href="#Page_5">5</a>, <a href="#Page_41">41</a>, <a href="#Page_388">388</a>;</span><br /> +<span style="margin-left: 2em;">as generic, <a href="#Page_26">26</a>, <a href="#Page_288">288</a>, <a href="#Page_467">467</a>;</span><br /> +<span style="margin-left: 2em;"><i>differentiæ</i> of species of, <a href="#Page_26">26ff.</a>;</span><br /> +<span style="margin-left: 2em;">as quality, <a href="#Page_5">5</a>, <a href="#Page_41">41</a>, <a href="#Page_97">97-98</a>, <a href="#Page_388">388</a>;</span><br /> +<span style="margin-left: 2em;">as quantity, <a href="#Page_5">5</a>, <a href="#Page_41">41</a>, <a href="#Page_97">97</a>, <a href="#Page_98">98</a>, <a href="#Page_388">388</a>;</span><br /> +<span style="margin-left: 2em;">control over, <a href="#Page_575">575ff.</a>;</span><br /> +<span style="margin-left: 2em;">causal theory of. See <span class="smcap">Causal Theory</span>.</span><br /> +<span style="margin-left: 1em;">Definition of, <a href="#Page_5">5-7</a>, <a href="#Page_388">388</a>;</span><br /> +<span style="margin-left: 2em;">derived, becomes independent, <a href="#Page_40">40</a>, <a href="#Page_137">137ff.</a>, <a href="#Page_391">391</a>, <a href="#Page_480">480</a>, <a href="#Footnote_510">481, n.</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Footnote_585">563, n.</a></span><br /> +<span style="margin-left: 2em;">See also <span class="smcap">Imputation Theory</span>, <span class="smcap">Capitalization Theory</span>, <span class="smcap">Ranks or Orders of Goods</span>.</span><br /> +<span style="margin-left: 1em;">Formal and logical aspects of, <a href="#Page_5">5ff.</a>, <a href="#Page_41">41</a>, <a href="#Page_86">86</a>, <a href="#Page_98">98</a>, <a href="#Page_388">388-89</a>, <a href="#Footnote_458">401-02, n.</a>;</span><br /> +<span style="margin-left: 2em;">functions of, <a href="#Page_10">10</a>, <a href="#Page_27">27</a>, <a href="#Page_43">43</a>, <a href="#Page_57">57</a>, <a href="#Footnote_72">87, n.</a>, <a href="#Page_388">388</a>, <a href="#Page_440">440</a>, <a href="#Page_487">487</a>, <a href="#Page_552">552</a>, <a href="#Footnote_585">562, n.</a>, <a href="#Page_572">572</a>, <a href="#Page_585">585-86</a>;</span><br /> +<span style="margin-left: 2em;">"human nature," <a href="#Footnote_33_33">30, n.</a>;</span><br /> +<span style="margin-left: 2em;">"inner objective," <a href="#Page_13">13</a>, <a href="#Page_88">88</a>, <a href="#Page_110">110</a>, <a href="#Footnote_458">402, n.</a>;</span><br /> +<span style="margin-left: 2em;">institutional. See <span class="smcap">Institutional Values</span>.</span><br /> +<span style="margin-left: 1em;">"Intrinsic," <a href="#Page_24">24</a>;</span><br /> +<span style="margin-left: 2em;">"intrinsic causes of," <a href="#Footnote_16_16">14, n.</a>;</span><br /> +<span style="margin-left: 2em;">objective, <a href="#Page_85">85</a>, <a href="#Page_87">87</a>, <a href="#Page_100">100</a>;</span><br /> +<span style="margin-left: 2em;">of consumers' goods, <a href="#Page_34">34ff.</a>, <a href="#Page_300">300</a>;</span><br /> +<span style="margin-left: 2em;">of diamonds, <a href="#Page_438">438-42</a>;</span><br /> +<span style="margin-left: 2em;">of gold. See <span class="smcap">Gold</span>.</span><br /> +<span style="margin-left: 1em;">Of instrumental goods, <a href="#Page_38">38ff.</a>, <a href="#Page_297">297</a>, <a href="#Page_300">300ff.</a>, <a href="#Page_304">304</a>, <a href="#Page_467">467</a>;</span><br /> +<span style="margin-left: 2em;">of money. See <span class="smcap">Money</span> and <span class="smcap">Analytical Table of Contents</span>.</span><br /> +<span style="margin-left: 1em;">Of stocks and bonds, <a href="#Page_30">30-31</a>, <a href="#Page_32">32</a>, <a href="#Page_36">36-41</a>, <a href="#Page_300">300ff.</a>, <a href="#Page_462">462</a>;</span><br /> +<span style="margin-left: 2em;">"participation," <a href="#Page_29">29</a>, <a href="#Footnote_33_33">30, n.</a>;</span><br /> +<span style="margin-left: 2em;">"personal," <a href="#Page_19">19</a>, <a href="#Page_86">86</a>, <a href="#Page_88">88</a>, <a href="#Page_89">89</a>;</span><br /> +<span style="margin-left: 2em;">"prestige," <a href="#Page_410">410-11</a>, <a href="#Page_438">438-42</a>, <a href="#Page_452">452-53</a>;</span><br /> +<span style="margin-left: 2em;">"public economic," <a href="#Page_13">13</a>, <a href="#Page_86">86</a>, <a href="#Page_88">88</a>, <a href="#Page_89">89</a>;</span><br /> +<span style="margin-left: 2em;">"something physical," <a href="#Page_135">135</a>;</span><br /> +<span style="margin-left: 2em;">subjective, <a href="#Page_85">85</a>, <a href="#Page_86">86</a>, <a href="#Page_88">88</a>, <a href="#Page_99">99</a>, <a href="#Page_100">100</a>, <a href="#Footnote_458">401-02, n.</a>;</span><br /> +<span style="margin-left: 2em;">subjective, in exchange, <a href="#Page_88">88</a>, <a href="#Page_89">89</a>, <a href="#Page_91">91</a>, <a href="#Page_99">99</a>, <a href="#Page_100">100</a>, <a href="#Page_101">101</a>, <a href="#Page_112">112-119</a>, <a href="#Footnote_119">137, n.</a></span><br /> +<span style="margin-left: 2em;">See <span class="smcap">Money, Value of</span>, <span class="smcap">Social Value</span>, <span class="smcap">Price</span>, <span class="smcap">Ratio of Exchange</span>, "<span class="smcap">Purchasing Power</span>," "<span class="smcap">Power in Exchange</span>," <span class="smcap">Marginal Utility</span>, <span class="smcap">Cost of Production</span>, <span class="smcap">Supply and Demand</span>, <span class="smcap">etc.</span></span><br /> +<br /> +Value theory <i>vs.</i> price theory. See <span class="smcap">Price Theory</span>.<br /> +<br /> +Values, concatenation of, <a href="#Page_313">313-14</a>;<br /> +<span style="margin-left: 1em;">simultaneous rise or fall of, <a href="#Page_8">8</a>.</span><br /> +<br /> +Van Antwerp, W. C., <a href="#Footnote_437">372, n.</a>, <a href="#Footnote_441">374, n.</a><br /> +<br /> +Van Hise, C. R., <a href="#Footnote_212">208, n.</a><br /> +<br /> +Variables and constants, <a href="#Page_97">97</a>, <a href="#Footnote_104">119</a>, <a href="#Page_143">143-44</a>, <a href="#Page_204">204-05</a>, <a href="#Page_256">256-57</a>.<br /> +<br /> +Veblen, T. B., <a href="#Footnote_38_38">37, n.</a>, <a href="#Page_411">411</a>, <a href="#Page_439">439</a>, <a href="#Footnote_509">477, n.</a>, <a href="#Page_556">556</a>, <a href="#Page_560">560-64</a>, <a href="#Page_569">569</a>, <a href="#Page_570">570</a>, <a href="#Page_580">580</a>, <a href="#Page_582">582</a>, <a href="#Page_585">585</a>.<br /> +<br /> +<span class='pagenum'><a name="Page_610" id="Page_610">[Pg 610]</a></span>Velocity of circulation, <a href="#Page_85">85</a>, <a href="#Page_123">Ch. VI</a>, <a href="#Footnote_104">117</a>, <a href="#Page_131">131</a>, <a href="#Page_143">143</a>, <a href="#Page_194">194</a>, <a href="#Page_203">Ch. XII</a>, <a href="#Page_290">290</a>, <a href="#Page_292">292</a>, <a href="#Page_298">298</a>, <a href="#Page_309">309</a>, <a href="#Page_310">310</a>, <a href="#Footnote_374">333, n.</a>, <a href="#Page_339">339</a>, <a href="#Page_361">361-63</a>, <a href="#Page_394">394</a>;<br /> +<span style="margin-left: 1em;">"coin transfer" <i>vs.</i> "person-turnover" concepts of, <a href="#Page_203">203-04</a>, <a href="#Page_308">308</a>;</span><br /> +<span style="margin-left: 1em;">as causal entity, <a href="#Page_204">204</a>, <a href="#Page_209">209</a>, <a href="#Page_213">213-13</a>, <a href="#Page_214">214</a>;</span><br /> +<span style="margin-left: 1em;">quantity theory analysis of causes governing, <a href="#Page_143">143</a>, <a href="#Page_203">203</a>, <a href="#Page_205">205ff.</a>, <a href="#Page_309">309</a>;</span><br /> +<span style="margin-left: 1em;">most highly flexible factor in "equation of exchange," <a href="#Page_205">205</a>;</span><br /> +<span style="margin-left: 1em;">varies with trade, <a href="#Page_209">209ff.</a>, <a href="#Page_306">306-08</a>, <a href="#Page_394">394</a>;</span><br /> +<span style="margin-left: 1em;">varies with prices, <a href="#Page_308">308-10</a>, <a href="#Page_394">394</a>;</span><br /> +<span style="margin-left: 1em;">varies with value of money, <a href="#Page_215">215</a>;</span><br /> +<span style="margin-left: 1em;">meaningless abstract number, <a href="#Page_204">204</a>.</span><br /> +<br /> +<br /> +<b>W</b><br /> +<br /> +Wagner, A., <a href="#Footnote_29_29">25, n.</a><br /> +<br /> +Walker, Amasa, <a href="#Footnote_457">401, n.</a><br /> +<br /> +Walker, F. A., <a href="#Page_46">46</a>, <a href="#Page_62">62</a>, <a href="#Page_169">169</a>, <a href="#Footnote_154">170, n.</a>, <a href="#Page_219">219, 220, n.</a>, <a href="#Page_237">237</a>, <a href="#Footnote_468">414, n.</a>, <a href="#Footnote_472">419, n.</a>, <a href="#Footnote_545">521, n.</a><br /> +<br /> +Wall Street. See <span class="smcap">New York City</span>, <span class="smcap">Stock Exchange</span>, <span class="smcap">New York City Clearing House</span>, <span class="smcap">Speculation</span>, <span class="smcap">Money Market</span>, "<span class="smcap">Money Trust</span>," <span class="smcap">etc.</span><br /> +<br /> +Walras, L., <a href="#Footnote_75">91, n.</a><br /> +<br /> +Walsh, C. M., <a href="#Footnote_186">188, n.</a><br /> +<br /> +Wants, social nature of, <a href="#Page_35">35ff.</a>;<br /> +<span style="margin-left: 1em;">competitive. See <span class="smcap">Competitive Display</span>.</span><br /> +<br /> +War, <a href="#Page_108">108</a>, <a href="#Footnote_120">140, n.</a>, <a href="#Page_194">194</a>, <a href="#Page_427">427</a>, <a href="#Page_549">549-51</a>;<br /> +<span style="margin-left: 1em;">World War, <a href="#Page_136">136</a>, <a href="#Footnote_120">139, n.</a>, <a href="#Page_142">142</a>, <a href="#Page_416">416</a>, <a href="#Page_427">427</a>, <a href="#Page_481">481</a>, <a href="#Page_521">521</a>, <a href="#Page_539">539</a>, <a href="#Footnote_574">550, n.</a>;</span><br /> +<span style="margin-left: 1em;">American securities returned during, <a href="#Footnote_546">521, n.</a></span><br /> +<br /> +War loans, <a href="#Footnote_504">463, n.</a>, <a href="#Footnote_505">464, n.</a>, <a href="#Page_480">480-81</a>.<br /> +<br /> +Wealth, <a href="#Page_440">440</a>;<br /> +<span style="margin-left: 1em;">definitions of, <a href="#Footnote_4_4">5, n.</a>;</span><br /> +<span style="margin-left: 1em;">relation of, to value, <a href="#Page_5">5</a>;</span><br /> +<span style="margin-left: 1em;">distribution of. See <span class="smcap">Distribution of Wealth</span>.</span><br /> +<br /> +"Wealth of nations," theory of, <a href="#Page_262">262</a>, <a href="#Page_395">395</a>, <a href="#Page_556">556</a>, <a href="#Page_569">569</a>.<br /> +<br /> +Weighting, in statistics, <a href="#Page_163">163ff.</a>, <a href="#Page_229">229</a>, <a href="#Footnote_247">229, n.</a>, <a href="#Footnote_305">272, n.</a>, <a href="#Page_341">341</a>, <a href="#Page_361">361</a>, <a href="#Page_383">383</a>.<br /> +<br /> +Weston, N. A., <a href="#Page_339">339</a>, <a href="#Page_341">341</a>, <a href="#Footnote_391">342, n.</a>, <a href="#Page_360">360</a>.<br /> +<br /> +Wheat as money, <a href="#Page_407">407</a>.<br /> +<br /> +Whitaker, A. C., <a href="#Page_65">65</a>, <a href="#Page_154">154</a>, <a href="#Footnote_360">319, n.</a><br /> +<br /> +White, Horace, <a href="#Page_209">209</a>, <a href="#Page_211">211</a>, <a href="#Footnote_396">345, n.</a>, <a href="#Footnote_457">401, n.</a><br /> +<br /> +Wholesale "deposits." See "<span class="smcap">Deposits</span>."<br /> +<span style="margin-left: 1em;">Trade. See <span class="smcap">Trade, Volume of</span>.</span><br /> +<br /> +Wicksell, Knut, <a href="#Page_128">128</a>.<br /> +<br /> +Wicksteed, P. A., <a href="#Footnote_75">91, n.</a>, <a href="#Footnote_104">115, n., 116, 117</a>, <a href="#Page_214">214</a>.<br /> +<br /> +Wieser, F. von, <a href="#Page_14">14</a>, <a href="#Page_48">48</a>, <a href="#Page_49">49</a>, <a href="#Page_70">70</a>, <a href="#Page_80">80</a>, <a href="#Page_83">83-90</a>, <a href="#Page_99">99</a>, <a href="#Page_100">100</a>, <a href="#Page_101">101</a>, <a href="#Page_102">102</a>, <a href="#Page_106">106</a>, <a href="#Page_109">109</a>, <a href="#Page_111">111</a>, <a href="#Footnote_347">308, n.</a><br /> +<br /> +Williams, A., <a href="#Page_152">152</a>.<br /> +<br /> +Williams, Clark, <a href="#Page_347">347</a>.<br /> +<br /> +Willoughby, W. W., <a href="#Footnote_22_22">18, n.</a><br /> +<br /> +Wilson, E. B., <a href="#Page_164">164</a>, <a href="#Page_165">165</a>.<br /> +<br /> +Withers, Hartley, <a href="#Page_221">221</a>, <a href="#Page_222">222</a>, <a href="#Footnote_570">540, n.</a><br /> +<br /> +Wittner, Max, <a href="#Footnote_328">289, n.</a><br /> +<br /> +Wolfe, O. Howard, <a href="#Page_349">349</a>, <a href="#Footnote_403">353, n.</a>, <a href="#Footnote_411">359, n.</a><br /> +<br /> +Wolff, S., <a href="#Footnote_328">289, n.</a><br /> +<br /> +<br /> +<b>X</b><br /> +<br /> +<i>xy = c</i>, <a href="#Page_149">149</a>.<br /> +<br /> +<br /> +<b>Y</b><br /> +<br /> +Yule, G. U., <a href="#Footnote_257">237, n.</a><br /> +</p> + + +<h5>Printed in the United States of America</h5> + + +<hr style="width: 100%;" /> +<h3>FOOTNOTES</h3> + +<div class="footnote"><p><a name="Footnote_1_1" id="Footnote_1_1"></a><a href="#FNanchor_1_1"><span class="label">[1]</span></a> <i>Social Value</i>, Houghton Mifflin, Boston, 1911.</p></div> + +<div class="footnote"><p><a name="Footnote_2_2" id="Footnote_2_2"></a><a href="#FNanchor_2_2"><span class="label">[2]</span></a> Cooley, C. H., "Valuation as a Social Process," <i>Psych. Bull.</i>, Dec. 15, +1912; "The Institutional Character of Pecuniary Valuation," <i>American +Journal of Sociology</i>, Jan. 1913; "The Sphere of Pecuniary Valuation," +<i>Ibid.</i>, Sept. 1913; "The Progress of Pecuniary Valuation," <i>Quart. Jour. of +Econ.</i>, Nov. 1915. Clark, J. M., "The Concept of Value," and "A Rejoinder," +<i>Quart. Jour. of Econ.</i>, Aug. 1915. Anderson, B. M., Jr., "The Concept +of Value Further Considered," <i>Ibid.</i>; "Schumpeter's Dynamic Economics," +<i>Pol. Sci. Quart.</i>, Dec. 1915. Perry, R. B., "Economic Value and +Moral Value," <i>Quart. Jour. of Econ.</i>, May, 1916. Bilgram, Hugo, "The +Equivalent Concept of Value," <i>Ibid.</i>, Nov. 1915. Haney, L. H., "The +Social Point of View in Economics," <i>Ibid.</i>, Nov. 1913 and Feb. 1914. Johnson, +A. S., in <i>American Economic Review</i>, June, 1912, pp. 320 <i>et seq.</i> Carver, +T. N., in <i>Jour. of Pol. Econ.</i>, June, 1912. Mead, G. H., in <i>Psych. Bull.</i>, +Dec. 1911. Ellwood, C. A., in <i>American Jour. of Sociology</i>, 1913. Ansiaux, +M., in <i>Archives Sociologiques, Bulletin de l'Institut de Sociologie Solvay</i>, +May 25, 1912, pp. 949-55. +</p><p> +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.</p></div> + +<div class="footnote"><p><a name="Footnote_3_3" id="Footnote_3_3"></a><a href="#FNanchor_3_3"><span class="label">[3]</span></a> Including many whose formal definitions are quite different, and who +would repudiate the contentions here advanced! <i>Cf.</i> my article, "The Concept +of Value Further Considered," <i>Quarterly Journal of Economics</i>, Aug. +1915, and <i>Social Value</i>, chs. 2 and 11.</p></div> + +<div class="footnote"><p><a name="Footnote_4_4" id="Footnote_4_4"></a><a href="#FNanchor_4_4"><span class="label">[4]</span></a> 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."</p></div> + +<div class="footnote"><p><a name="Footnote_5_5" id="Footnote_5_5"></a><a href="#FNanchor_5_5"><span class="label">[5]</span></a> 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. <i>Cf.</i> my article, "The +Concept of Value Further Considered," <i>Q. J. E.</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_6_6" id="Footnote_6_6"></a><a href="#FNanchor_6_6"><span class="label">[6]</span></a> In chapter 17 of <i>Social Value</i>, 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 <i>American Economic Review</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_7_7" id="Footnote_7_7"></a><a href="#FNanchor_7_7"><span class="label">[7]</span></a> E. g., Böhm-Bawerk, <i>Grundzüge der Theorie des wirtschaftlichen Güterwerts</i>, +Conrad's <i>Jahrbücher</i>, 1886, p. 478, n.; Carver, "Concept of an Economic +Quantity," <i>Quarterly Journal of Economics</i>, 1907.</p></div> + +<div class="footnote"><p><a name="Footnote_8_8" id="Footnote_8_8"></a><a href="#FNanchor_8_8"><span class="label">[8]</span></a> This distinction is elaborated <i>infra</i>, in the chapter on the "Origin of +Money."</p></div> + +<div class="footnote"><p><a name="Footnote_9_9" id="Footnote_9_9"></a><a href="#FNanchor_9_9"><span class="label">[9]</span></a> 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. <i>Cf.</i> Schäffle, +<i>Quintessence of Socialism</i>, and Clark, J. M., <i>Quart. Jour. of Econ.</i>, Aug. +1915, p. 710.</p></div> + +<div class="footnote"><p><a name="Footnote_10_10" id="Footnote_10_10"></a><a href="#FNanchor_10_10"><span class="label">[10]</span></a> As shown, <i>infra</i>, in the chapters on "Supply and Demand," "Cost of +Production," "Capitalization Theory," etc.</p></div> + +<div class="footnote"><p><a name="Footnote_11_11" id="Footnote_11_11"></a><a href="#FNanchor_11_11"><span class="label">[11]</span></a> <i>Vide Social Value</i>, p. 176, n. <i>Cf.</i> Davenport, <i>Value and Distribution</i>, +chapter on "Ricardo."</p></div> + +<div class="footnote"><p><a name="Footnote_12_12" id="Footnote_12_12"></a><a href="#FNanchor_12_12"><span class="label">[12]</span></a> Knies, <i>Das Geld</i>, vol. I of <i>Geld und Credit</i>, Berlin, 1873, pp. 113-125, +esp. 124.</p></div> + +<div class="footnote"><p><a name="Footnote_13_13" id="Footnote_13_13"></a><a href="#FNanchor_13_13"><span class="label">[13]</span></a> Chapter on "Value" in the <i>Philosophy of Wealth</i>, and ch. 24 of the +<i>Distribution of Wealth</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_14_14" id="Footnote_14_14"></a><a href="#FNanchor_14_14"><span class="label">[14]</span></a> <i>Social Value</i>, ch. 7.</p></div> + +<div class="footnote"><p><a name="Footnote_15_15" id="Footnote_15_15"></a><a href="#FNanchor_15_15"><span class="label">[15]</span></a> T. S. Adams, "Index Numbers and the Standard of Value," <i>Jour. of Pol. +Econ.</i>, vol. x, 1901-02, pp. 11 and 18-19; Kinley, "Money", p. 62; W. G. L. +Taylor, "Values, Relative and Positive," <i>Annals of the Amer. Acad.</i>, vol. ix; +Merriam, L. S., "The Theory of Final Utility in its Relation to Money and +the Standard of Deferred Payments," <i>Annals of the American Acad.</i>, vol. iii. +and "Money as a Measure of Value," <i>Ibid.</i>, 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," <i>Quarterly Journal of +Economics</i>, May, 1914, and <i>American Econ. Rev.</i>, June, 1912, p. 320.</p></div> + +<div class="footnote"><p><a name="Footnote_16_16" id="Footnote_16_16"></a><a href="#FNanchor_16_16"><span class="label">[16]</span></a> Cf. also Wieser's <i>Natural Value</i>, p. 53, n. Senior's "intrinsic causes of +value" comes to the same thing.</p></div> + +<div class="footnote"><p><a name="Footnote_17_17" id="Footnote_17_17"></a><a href="#FNanchor_17_17"><span class="label">[17]</span></a> Cf. <i>Quarterly Journal of Economics</i>, Aug. 1915, pp. 681-82, esp. +681, n.</p></div> + +<div class="footnote"><p><a name="Footnote_18_18" id="Footnote_18_18"></a><a href="#FNanchor_18_18"><span class="label">[18]</span></a> Among the leading figures in economics to whom this doctrine is unacceptable, +I would mention especially Professor H. J. Davenport, <i>Value +and Distribution</i> and <i>The Economics of Enterprise</i>. 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 <i>Quarterly Journal of Economics</i>, +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 <i>caveat</i> that this is true only so long as we can assume a +fixed absolute value of money.</p></div> + +<div class="footnote"><p><a name="Footnote_19_19" id="Footnote_19_19"></a><a href="#FNanchor_19_19"><span class="label">[19]</span></a> The psychology of this statement, which involves hedonism, needs improvement, +but the issue need not be discussed here. <i>Cf. Social Value</i>, +ch. 10.</p></div> + +<div class="footnote"><p><a name="Footnote_20_20" id="Footnote_20_20"></a><a href="#FNanchor_20_20"><span class="label">[20]</span></a> As Professor R. B. Perry, <i>Quart. Jour. of Econ.</i>, May, 1916.</p></div> + +<div class="footnote"><p><a name="Footnote_21_21" id="Footnote_21_21"></a><a href="#FNanchor_21_21"><span class="label">[21]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_22_22" id="Footnote_22_22"></a><a href="#FNanchor_22_22"><span class="label">[22]</span></a> For the elaboration of these ideas, cf. Hegel, <i>Philosophy of History</i>, +<i>passim</i>; Willoughby, <i>The Nature of the State</i>, <i>passim;</i> Davidson, T., <i>History +of Education</i>, New York, 1900, <i>passim</i>; Bosanquet, B., <i>Philosophical Theory +of the State</i>; Royce, J., <i>The World and the Individual</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_23_23" id="Footnote_23_23"></a><a href="#FNanchor_23_23"><span class="label">[23]</span></a> Tarde, <i>Laws of Imitation</i>; Baldwin, <i>Social and Ethical Interpretations</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_24_24" id="Footnote_24_24"></a><a href="#FNanchor_24_24"><span class="label">[24]</span></a> <i>Human Nature and the Social Order.</i></p></div> + +<div class="footnote"><p><a name="Footnote_25_25" id="Footnote_25_25"></a><a href="#FNanchor_25_25"><span class="label">[25]</span></a> <i>Cf.</i> Ellwood, C. H., <i>Some Prolegomena to Social Psychology</i>, Chicago, +1901, and Cooley, C. H., <i>Social Organization</i>, New York, 1909. See also +<i>Social Value</i>, ch. 9.</p></div> + +<div class="footnote"><p><a name="Footnote_26_26" id="Footnote_26_26"></a><a href="#FNanchor_26_26"><span class="label">[26]</span></a> <i>Cf. Social Value</i>, 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, <i>Individualism</i>, and in a recent article by R. B. +Perry, "Economic Value and Moral Value," <i>Quart. Journal of Economics</i>, +May, 1916. (I have discussed Professor Fite's views in the <i>Pol. Sci. Quart.</i> +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." (<i>Loc. cit.</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_27_27" id="Footnote_27_27"></a><a href="#FNanchor_27_27"><span class="label">[27]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_28_28" id="Footnote_28_28"></a><a href="#FNanchor_28_28"><span class="label">[28]</span></a> "Jurisprudence," a lecture delivered before the faculty of Columbia +University, Feb. 1908, New York, The Columbia University Press, 1909, +p. 14.</p></div> + +<div class="footnote"><p><a name="Footnote_29_29" id="Footnote_29_29"></a><a href="#FNanchor_29_29"><span class="label">[29]</span></a> I ran across this in Wagner's <i>Grundlegung</i>. Wagner had found it in Raul. +It is from <i>Troilus and Cressida</i>, Act II, Scene II.</p></div> + +<div class="footnote"><p><a name="Footnote_30_30" id="Footnote_30_30"></a><a href="#FNanchor_30_30"><span class="label">[30]</span></a> Davenport, <i>Value and Distribution</i>, pp. 184, n., and 330-31, n.; Jevons, +<i>Theory of Political Economy</i>, pp. 14, 78-84, esp. 83. <i>Cf. Social Value</i>, ch. 4. +This seems to be the position of Professor R. B. Perry, also, though he is +not so extreme as Davenport. <i>Loc. cit.</i></p></div> + +<div class="footnote"><p><a name="Footnote_31_31" id="Footnote_31_31"></a><a href="#FNanchor_31_31"><span class="label">[31]</span></a> This term carries no connotation of teleology, as here used. I am merely +trying to state what the different kinds of value <i>do</i>, as a matter of fact.</p></div> + +<div class="footnote"><p><a name="Footnote_32_32" id="Footnote_32_32"></a><a href="#FNanchor_32_32"><span class="label">[32]</span></a> The <i>extent</i> to which the values of consumption goods and services are +reflected in other economic values will receive attention below, in the present +chapter.</p></div> + +<div class="footnote"><p><a name="Footnote_33_33" id="Footnote_33_33"></a><a href="#FNanchor_33_33"><span class="label">[33]</span></a> <i>Cf. Social Value</i>, p. 125, and Urban, <i>Valuation, passim</i>. 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 <i>weighted</i>. <i>Cf.</i> Cooley's articles referred to above, and <i>Social +Value</i>, chs. 11-15, inclusive.</p></div> + +<div class="footnote"><p><a name="Footnote_34_34" id="Footnote_34_34"></a><a href="#FNanchor_34_34"><span class="label">[34]</span></a> "The Institutional Character of Pecuniary Valuation," <i>American Journal +of Sociology</i>, Jan. 1913, p. 546.</p></div> + +<div class="footnote"><p><a name="Footnote_35_35" id="Footnote_35_35"></a><a href="#FNanchor_35_35"><span class="label">[35]</span></a> This, unfortunately, is not high praise, as the Federal Judiciary in +general sets a lamentably low standard in these matters.</p></div> + +<div class="footnote"><p><a name="Footnote_36_36" id="Footnote_36_36"></a><a href="#FNanchor_36_36"><span class="label">[36]</span></a> 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 <i>Social Value</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_37_37" id="Footnote_37_37"></a><a href="#FNanchor_37_37"><span class="label">[37]</span></a> Ross, E. A., <i>Social Psychology, passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_38_38" id="Footnote_38_38"></a><a href="#FNanchor_38_38"><span class="label">[38]</span></a> <i>Cf.</i> Veblen, T. B., <i>Theory of the Leisure Class</i>, and Carlile, W. W., <i>Evolution +of Modern Money</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_39_39" id="Footnote_39_39"></a><a href="#FNanchor_39_39"><span class="label">[39]</span></a> <i>Social Value</i>, chs. 3-7, esp. ch. 5.</p></div> + +<div class="footnote"><p><a name="Footnote_40_40" id="Footnote_40_40"></a><a href="#FNanchor_40_40"><span class="label">[40]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_41" id="Footnote_41"></a><a href="#FNanchor_41"><span class="label">[41]</span></a> P. 174.</p></div> + +<div class="footnote"><p><a name="Footnote_42" id="Footnote_42"></a><a href="#FNanchor_42"><span class="label">[42]</span></a> <i>Cf.</i> the discussion of Wieser, Schumpeter and von Mises in the chapter +on "Marginal Utility," <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_43" id="Footnote_43"></a><a href="#FNanchor_43"><span class="label">[43]</span></a> Flux, W. A., <i>Economic Principles</i>, London, 1904, pp. 4, 27, 29; Taussig, +F. W., <i>Principles of Economics</i>, New York, 1911, vol. I, pp. 141-143. <i>Cf.</i> my +<i>Social Value</i>, ch. 5.</p></div> + +<div class="footnote"><p><a name="Footnote_44" id="Footnote_44"></a><a href="#FNanchor_44"><span class="label">[44]</span></a> <i>Cf.</i> the present writer's <i>Social Value</i>, chs. 3-6, inclusive.</p></div> + +<div class="footnote"><p><a name="Footnote_45" id="Footnote_45"></a><a href="#FNanchor_45"><span class="label">[45]</span></a> 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 <i>tied</i> to the value of money, rising and +falling with it, so that the amount of <i>power</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_46" id="Footnote_46"></a><a href="#FNanchor_46"><span class="label">[46]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_47" id="Footnote_47"></a><a href="#FNanchor_47"><span class="label">[47]</span></a> <i>Cf. Social Value</i>, ch. 2; "The Concept of Value Further Considered," +<i>Quart. Jour. of Economics</i>, Aug. 1915. For the doctrine that supply and +demand, and other elements of current price theory, assume a fixed absolute +value of money, see <i>Social Value</i>, p. 166, n., and ch. 17.</p></div> + +<div class="footnote"><p><a name="Footnote_48" id="Footnote_48"></a><a href="#FNanchor_48"><span class="label">[48]</span></a> <i>Leading Principles</i>, ch. on "Supply and Demand."</p></div> + +<div class="footnote"><p><a name="Footnote_49" id="Footnote_49"></a><a href="#FNanchor_49"><span class="label">[49]</span></a> <i>Cf. Social Value</i>, pp. 29-30, and 64-71.</p></div> + +<div class="footnote"><p><a name="Footnote_50" id="Footnote_50"></a><a href="#FNanchor_50"><span class="label">[50]</span></a> <i>Cf.</i> the discussion, <i>infra</i>, of "T" in the "equation of exchange."</p></div> + +<div class="footnote"><p><a name="Footnote_51" id="Footnote_51"></a><a href="#FNanchor_51"><span class="label">[51]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_52" id="Footnote_52"></a><a href="#FNanchor_52"><span class="label">[52]</span></a> 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. <i>Cf. infra</i>, +the chapter on "Volume of Money and Volume of Trade."</p></div> + +<div class="footnote"><p><a name="Footnote_53" id="Footnote_53"></a><a href="#FNanchor_53"><span class="label">[53]</span></a> I shall recur to this point in the chapter on "The Quantity Theory and +International Gold Movements."</p></div> + +<div class="footnote"><p><a name="Footnote_54" id="Footnote_54"></a><a href="#FNanchor_54"><span class="label">[54]</span></a> <i>Quart. Jour. of Economics</i>, 1894-95, p. 372.</p></div> + +<div class="footnote"><p><a name="Footnote_55" id="Footnote_55"></a><a href="#FNanchor_55"><span class="label">[55]</span></a> <i>Cf.</i> Davenport, <i>Value and Distribution</i>, and Whitaker, <i>Labor Theory +of Value</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_56" id="Footnote_56"></a><a href="#FNanchor_56"><span class="label">[56]</span></a> <i>Cf. Social Value</i>, pp. 29-30; 64-71.</p></div> + +<div class="footnote"><p><a name="Footnote_57" id="Footnote_57"></a><a href="#FNanchor_57"><span class="label">[57]</span></a> I incline to the view that the explanation of costs by foregone positive +values needs supplementing by a recognition of the rôle of <i>negative social +values</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_58" id="Footnote_58"></a><a href="#FNanchor_58"><span class="label">[58]</span></a> This doctrine as applied to rates on call loans appears in Seligman's <i>Principles +of Economics</i>, 1912 ed., p. 395. The peculiarities of call loans have also +been discussed by C. A. Conant, <i>Principles of Money and Banking</i>, I, p. 171. +Conant there refers to a discussion by Joseph F. Johnson, in <i>Pol. Sci. Quarterly</i>, +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 <i>Gold, Prices and Wages</i>, pp. 153 <i>et. seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_59" id="Footnote_59"></a><a href="#FNanchor_59"><span class="label">[59]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_60" id="Footnote_60"></a><a href="#FNanchor_60"><span class="label">[60]</span></a> The price-level is a <i>weighted</i> average. These elements dominate it. +<i>Cf.</i> our discussion, in the chapter on the "Volume of Money and the Volume +of Trade," <i>infra</i>, of the elements entering into trade. We shall make use +of the capitalization theory at various points in our discussion of general +prices. <i>Cf.</i> the chapter on "The Passiveness of Prices," where it is shown +that the capitalization theory and the quantity theory are irreconcilable.</p></div> + +<div class="footnote"><p><a name="Footnote_61" id="Footnote_61"></a><a href="#FNanchor_61"><span class="label">[61]</span></a> 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 +(<i>Jour. of Pol. Econ.</i>, Mar. 1910) and H. J. Davenport (<i>Yale Review</i>, 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 <i>Capital and Interest</i>), by Fetter, in his <i>Principles of Economics</i>, +and by Fisher in his <i>Rate of Interest</i>, 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. +</p><p> +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."</p></div> + +<div class="footnote"><p><a name="Footnote_62" id="Footnote_62"></a><a href="#FNanchor_62"><span class="label">[62]</span></a> <i>Social Value</i>, chs. 3-7. The point is discussed <i>infra</i> in the present +chapter.</p></div> + +<div class="footnote"><p><a name="Footnote_63" id="Footnote_63"></a><a href="#FNanchor_63"><span class="label">[63]</span></a> Fisher, I, <i>Purchasing Power of Money</i>, p. 32.</p></div> + +<div class="footnote"><p><a name="Footnote_64" id="Footnote_64"></a><a href="#FNanchor_64"><span class="label">[64]</span></a> Edition of 1903.</p></div> + +<div class="footnote"><p><a name="Footnote_65" id="Footnote_65"></a><a href="#FNanchor_65"><span class="label">[65]</span></a> <i>Cf.</i> the chapter on "Dodo Bones," <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_66" id="Footnote_66"></a><a href="#FNanchor_66"><span class="label">[66]</span></a> <i>Cf.</i> Menger's art. "Geld," Conrad's <i>Handwörterbuch</i>, 328, 3rd ed., vol iv, +p. 566.</p></div> + +<div class="footnote"><p><a name="Footnote_67" id="Footnote_67"></a><a href="#FNanchor_67"><span class="label">[67]</span></a> <i>Cf.</i> Helfferich, <i>Das Geld</i>, ed. 1903, p. 480.</p></div> + +<div class="footnote"><p><a name="Footnote_68" id="Footnote_68"></a><a href="#FNanchor_68"><span class="label">[68]</span></a> Discussed more fully <i>infra</i>, chapter on "Dodo Bones."</p></div> + +<div class="footnote"><p><a name="Footnote_69" id="Footnote_69"></a><a href="#FNanchor_69"><span class="label">[69]</span></a> I make virtually no reference to the "spoken" part, which is chiefly +concerned with index numbers.</p></div> + +<div class="footnote"><p><a name="Footnote_70" id="Footnote_70"></a><a href="#FNanchor_70"><span class="label">[70]</span></a> Chapter on "Dodo Bones."</p></div> + +<div class="footnote"><p><a name="Footnote_71" id="Footnote_71"></a><a href="#FNanchor_71"><span class="label">[71]</span></a> Chapter on "Barter."</p></div> + +<div class="footnote"><p><a name="Footnote_72" id="Footnote_72"></a><a href="#FNanchor_72"><span class="label">[72]</span></a> 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. <i>Cf.</i> <i>Social Value</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_73" id="Footnote_73"></a><a href="#FNanchor_73"><span class="label">[73]</span></a> <i>Social Value</i>, chs. 5, 6, 7, and 13. <i>Infra</i> in the present chapter.</p></div> + +<div class="footnote"><p><a name="Footnote_74" id="Footnote_74"></a><a href="#FNanchor_74"><span class="label">[74]</span></a> See especially the chapter on "The Passiveness of Prices."</p></div> + +<div class="footnote"><p><a name="Footnote_75" id="Footnote_75"></a><a href="#FNanchor_75"><span class="label">[75]</span></a> <i>Cf.</i> the writer's "Schumpeter's Dynamic Economics," <i>Political Science +Quarterly</i>, Dec. 1915. Schumpeter's theory, as there presented, is based +on the brief discussion in his <i>Theorie der wirtschaftlichen Entwicklung</i> (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 <i>Wesen und Hauptinhalt +der theoretischen Nationalökonomie</i>, which is in accord with the account +here given. (Mitchell, in <i>Papers and Proceedings</i>, Supplement to March, +1916, <i>American Econ. Rev.</i>, 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 +<i>Mathematical Investigations in the Theory of Value and Prices</i>, <i>Trans. Conn. +Acad. of Arts and Sciences</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_76" id="Footnote_76"></a><a href="#FNanchor_76"><span class="label">[76]</span></a> <i>Positive Theory of Capital</i>, Bk. IV, and <i>Grundzüge der Theorie des wirtschaftlichen +Güterwerts</i>, in Conrad's <i>Jahrbücher</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_77" id="Footnote_77"></a><a href="#FNanchor_77"><span class="label">[77]</span></a> <i>Positive Theory of Capital</i>, p. 156.</p></div> + +<div class="footnote"><p><a name="Footnote_78" id="Footnote_78"></a><a href="#FNanchor_78"><span class="label">[78]</span></a> Schumpeter's scheme gives no money-prices. No form of this scheme +gives any quantitative values. Nothing but ratios can come from it.</p></div> + +<div class="footnote"><p><a name="Footnote_79" id="Footnote_79"></a><a href="#FNanchor_79"><span class="label">[79]</span></a> <i>Supra</i>, chs. on "Value" and "Supply and Demand."</p></div> + +<div class="footnote"><p><a name="Footnote_80" id="Footnote_80"></a><a href="#FNanchor_80"><span class="label">[80]</span></a> See, <i>infra</i>, the chapters on "Volume of Money and Volume of Trade," +and "The Functions of Money."</p></div> + +<div class="footnote"><p><a name="Footnote_81" id="Footnote_81"></a><a href="#FNanchor_81"><span class="label">[81]</span></a> <i>Infra</i>, chs. on "Origin of Money," "Functions of Money," and "Credit."</p></div> + +<div class="footnote"><p><a name="Footnote_82" id="Footnote_82"></a><a href="#FNanchor_82"><span class="label">[82]</span></a> <i>Supra</i>, ch. on "Supply and Demand."</p></div> + +<div class="footnote"><p><a name="Footnote_83" id="Footnote_83"></a><a href="#FNanchor_83"><span class="label">[83]</span></a> See note at the end of this chapter.</p></div> + +<div class="footnote"><p><a name="Footnote_84" id="Footnote_84"></a><a href="#FNanchor_84"><span class="label">[84]</span></a> <i>Supra</i>, chapter on "Cost of Production."</p></div> + +<div class="footnote"><p><a name="Footnote_85" id="Footnote_85"></a><a href="#FNanchor_85"><span class="label">[85]</span></a> 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," <i>Annals of the American Academy</i>, +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.</p></div> + +<div class="footnote"><p><a name="Footnote_86" id="Footnote_86"></a><a href="#FNanchor_86"><span class="label">[86]</span></a> <i>Cf.</i> comments on Professor R. B. Perry's view, in the long note at the +end of this chapter.</p></div> + +<div class="footnote"><p><a name="Footnote_87" id="Footnote_87"></a><a href="#FNanchor_87"><span class="label">[87]</span></a> <i>Cf.</i> Böhm-Bawerk, <i>Grundzüge</i>, etc. (<i>loc. cit.</i>), pp. 5, 478, n.; <i>Social Value</i>, +chs. 2 and 11; J. M. Clark and B. M. Anderson, Jr., in <i>Quarterly Journal +of Economics</i>, 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 <i>welfare</i>, since it is <i>absolute</i> amounts of utility that are significant +there.</p></div> + +<div class="footnote"><p><a name="Footnote_88" id="Footnote_88"></a><a href="#FNanchor_88"><span class="label">[88]</span></a> <i>Theorie der wirtschaftlichen Entwicklung</i>, pp. 83-84.</p></div> + +<div class="footnote"><p><a name="Footnote_89" id="Footnote_89"></a><a href="#FNanchor_89"><span class="label">[89]</span></a> <i>Loc. cit.</i>, ch. 3, part ii.</p></div> + +<div class="footnote"><p><a name="Footnote_90" id="Footnote_90"></a><a href="#FNanchor_90"><span class="label">[90]</span></a> <i>Ibid.</i>, p. 199.</p></div> + +<div class="footnote"><p><a name="Footnote_91" id="Footnote_91"></a><a href="#FNanchor_91"><span class="label">[91]</span></a> For the assimilation of credit phenomena to the general phenomena +of value, by means of the social value doctrine, see <i>infra</i> our section on +"Credit." The social value doctrine is still further generalized in the chapter +on "The Reconciliation of Statics and Dynamics."</p></div> + +<div class="footnote"><p><a name="Footnote_92" id="Footnote_92"></a><a href="#FNanchor_92"><span class="label">[92]</span></a> <i>Ibid.</i> p. 169.</p></div> + +<div class="footnote"><p><a name="Footnote_93" id="Footnote_93"></a><a href="#FNanchor_93"><span class="label">[93]</span></a> <i>Vide Mathematical Investigations</i>, <i>loc. cit.</i>, p. 62, where Fisher assumes +<i>one</i> price to be unity, "to determine a standard of value." <i>Purchasing +Power of Money</i>, pp. 174-175.</p></div> + +<div class="footnote"><p><a name="Footnote_94" id="Footnote_94"></a><a href="#FNanchor_94"><span class="label">[94]</span></a> <i>Loc. cit.</i>, pp. 72 <i>et seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_95" id="Footnote_95"></a><a href="#FNanchor_95"><span class="label">[95]</span></a> Pp. 132-136.</p></div> + +<div class="footnote"><p><a name="Footnote_96" id="Footnote_96"></a><a href="#FNanchor_96"><span class="label">[96]</span></a> See <i>Social Value</i>, chs. vi and vii.</p></div> + +<div class="footnote"><p><a name="Footnote_97" id="Footnote_97"></a><a href="#FNanchor_97"><span class="label">[97]</span></a> Bk. ii, ch. vi.</p></div> + +<div class="footnote"><p><a name="Footnote_98" id="Footnote_98"></a><a href="#FNanchor_98"><span class="label">[98]</span></a> "<i>Cf.</i> Davenport, <i>Value and Distribution</i>, 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 <i>long and +complex history</i> [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.... <i>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</i>....' [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 <i>regressus</i> 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 <i>logical</i> 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.'"</p></div> + +<div class="footnote"><p><a name="Footnote_99" id="Footnote_99"></a><a href="#FNanchor_99"><span class="label">[99]</span></a> Of course, we do not mean to question the immense light which history +throws upon the nature of existing social forces.</p></div> + +<div class="footnote"><p><a name="Footnote_100" id="Footnote_100"></a><a href="#FNanchor_100"><span class="label">[100]</span></a> <i>Theory of Political Economy</i>, 4th ed., p. 34.</p></div> + +<div class="footnote"><p><a name="Footnote_101" id="Footnote_101"></a><a href="#FNanchor_101"><span class="label">[101]</span></a> Art. "Geld," in <i>Handwörterbuch der Staatswissenschaften</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_102" id="Footnote_102"></a><a href="#FNanchor_102"><span class="label">[102]</span></a> <i>Cf.</i> Helfferich, <i>Das Geld</i>, Leipzig, 1903, for the same terminology, pp. +485-486.</p></div> + +<div class="footnote"><p><a name="Footnote_103" id="Footnote_103"></a><a href="#FNanchor_103"><span class="label">[103]</span></a> Exchange creates <i>values</i>. It does not necessarily create <i>utilities</i>. 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.</p></div> + +<div class="footnote"><p><a name="Footnote_104" id="Footnote_104"></a><a href="#FNanchor_104"><span class="label">[104]</span></a> 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 <i>read</i> +Schumpeter's doctrine <i>into</i> chapter 7 of Davenport's admirable <i>Economics +of Enterprise</i>, but it is not clear that one could read it <i>in</i> 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 <i>prices</i>, +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 <i>causal</i> relation of utility to <i>demand</i>, 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 <i>causation</i> of any sort. Schumpeter's +scheme leaves money out, and demand-curves run in money terms. +Davenport's scheme assumes money—and "purchasing power." +(<i>Loc. cit.</i>, 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 <i>definition</i> 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 <i>terminus ad +quem</i>,—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. +</p><p> +It is interesting to note that Professor Alvin S. Johnson, in his +review of the <i>Economics of Enterprise</i>, 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. +(<i>Quarterly Journal of Economics</i>, May, 1914, pp. 433-436.) There is +much in Professor Davenport's book to justify this interpretation. +</p><p> +Professor Davenport's application of "utility" to the problem +of the value of money will be found on pp. 267-275 of the <i>Economics +of Enterprise</i>. The general discussion of money and credit in the +<i>Economics of Enterprise</i> has been exceedingly illuminating to me, and +my indebtedness to it will appear in the present book. +</p><p> +Much of what has been said of Davenport's "relative utility" +theory may also be said of Wicksteed's. (<i>Common Sense of Political +Economy</i>, 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. (<i>E. g.</i>, 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." +</p><p> +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 <i>and</i> 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 +<i>demand</i> elsewhere. But it is not true that costs in one place +have any definite quantitative relation to <i>utilities</i> in another +place! +</p><p> +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 <i>value</i> 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. <i>Loc. cit.</i>, p. 623. +See <i>infra</i>, our chapter on "Velocity of Circulation." +</p><p> +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. (<i>Mathematical Investigations in the Theory of Value +and Prices</i>, <i>Trans. Conn. Acad. of Arts and Sciences</i>, 1892. See bibliographical +note, <i>supra</i>, 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. <i>Purchasing Power of Money</i>, 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 <i>Elementary Principles</i>, +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 <i>veræ causæ</i>, the ultimate ultimates! +</p><p> +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 <i>Quarterly +Journal of Economics</i>, 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; <i>in +that these changes work through individuals</i> and have their <i>point of +application</i> in a more or less rational <i>comparison of needs</i> made by the +<i>individual buyer or seller</i>. Whatever affects these <i>individual schedules</i> +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 <i>Elementary Principles</i>. 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., +<i>loc. cit.</i>, 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! +</p><p> +But a second point with reference to Professor Perry's doctrine. +It is perfectly true that <i>all</i> social activities are the work of <i>individuals</i>. +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 <i>Social Value</i>. +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 <i>may</i> be no issue with +Professor Perry. +</p><p> +But there is a big issue when he contends that all the causation +is focussed in <i>individual utility schedules</i>, and in a more or less rational +comparison of needs made by the <i>individual buyer and seller</i>. This is +<i>demonstrably erroneous</i>. 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 <i>equalized</i>. 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, <i>without</i> altering <i>utility schedules</i>. +Some social factors, as changes in mode and fashion, will work <i>through</i> +the utility schedules, but others will not. One big <i>variable</i> 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, <i>infra</i>. Professor Perry thus escapes only +part of the criticism which we have made (<i>Social Value</i>, 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 <i>consumption +of economic goods</i>, 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 <i>via</i> utility schedules. +</p><p> +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 <i>process</i>, with a beginning +and an end, instead of a static picture, in which preëxisting individual +factors come into equilibrium. (<i>Loc. cit.</i>, 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. +</p><p> +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. +</p><p> +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.</p></div> + +<div class="footnote"><p><a name="Footnote_105" id="Footnote_105"></a><a href="#FNanchor_105"><span class="label">[105]</span></a> <i>Vide</i> Taussig, <i>Principles</i>, I, 432.</p></div> + +<div class="footnote"><p><a name="Footnote_106" id="Footnote_106"></a><a href="#FNanchor_106"><span class="label">[106]</span></a> "Der Bankzins als Regulator der Waarenpreise," Conrad's <i>Jahrbücher</i>, +1897.</p></div> + +<div class="footnote"><p><a name="Footnote_107" id="Footnote_107"></a><a href="#FNanchor_107"><span class="label">[107]</span></a> <i>Loc. cit.</i>, ch. 8.</p></div> + +<div class="footnote"><p><a name="Footnote_108" id="Footnote_108"></a><a href="#FNanchor_108"><span class="label">[108]</span></a> <i>Cf.</i> ch. on "Economic Value."</p></div> + +<div class="footnote"><p><a name="Footnote_109" id="Footnote_109"></a><a href="#FNanchor_109"><span class="label">[109]</span></a> Nicholson, J. S., <i>Money and Monetary Problems</i>, pp. 64-66; 71-73.</p></div> + +<div class="footnote"><p><a name="Footnote_110" id="Footnote_110"></a><a href="#FNanchor_110"><span class="label">[110]</span></a> <i>Works</i>, McCulloch ed. 1852, p. 213.</p></div> + +<div class="footnote"><p><a name="Footnote_111" id="Footnote_111"></a><a href="#FNanchor_111"><span class="label">[111]</span></a> <i>Cf.</i> the criticism of Nicholson by W. A. Scott, <i>Money and Banking</i>, +1903 ed., ch. 4.</p></div> + +<div class="footnote"><p><a name="Footnote_112" id="Footnote_112"></a><a href="#FNanchor_112"><span class="label">[112]</span></a> <i>Cf.</i> Mill, <i>Principles</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_113" id="Footnote_113"></a><a href="#FNanchor_113"><span class="label">[113]</span></a> <i>Cf.</i> Knies, <i>Das Geld</i>, I, p. 140.</p></div> + +<div class="footnote"><p><a name="Footnote_114" id="Footnote_114"></a><a href="#FNanchor_114"><span class="label">[114]</span></a> <i>Cf. Social Value</i>, ch. 2. <i>Infra</i>, our chapter on "The Functions of +Money."</p></div> + +<div class="footnote"><p><a name="Footnote_115" id="Footnote_115"></a><a href="#FNanchor_115"><span class="label">[115]</span></a> <i>Das Geld</i>, Leipzig, 1903, p. 477.</p></div> + +<div class="footnote"><p><a name="Footnote_116" id="Footnote_116"></a><a href="#FNanchor_116"><span class="label">[116]</span></a> Laughlin, rejoinder to Clow, "The Quantity Theory and its Critics," +in <i>Jour. of Pol. Econ.</i>, 1902.</p></div> + +<div class="footnote"><p><a name="Footnote_117" id="Footnote_117"></a><a href="#FNanchor_117"><span class="label">[117]</span></a> <i>Principles of Money</i>, <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_118" id="Footnote_118"></a><a href="#FNanchor_118"><span class="label">[118]</span></a> <i>Cf. Social Value</i>, pp. 132-136, and <i>supra</i>, ch. on "Marginal Utility and +Value of Money."</p></div> + +<div class="footnote"><p><a name="Footnote_119" id="Footnote_119"></a><a href="#FNanchor_119"><span class="label">[119]</span></a> Strictly speaking, there is no marginal utility, but only a "subjective +value in exchange," for money of the sort here discussed. See <i>supra</i>, the +chapter on "Marginal Utility."</p></div> + +<div class="footnote"><p><a name="Footnote_120" id="Footnote_120"></a><a href="#FNanchor_120"><span class="label">[120]</span></a> 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 <i>coin</i>. But <i>silver</i>, +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. +</p><p> +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 +<i>Boston Herald</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_121" id="Footnote_121"></a><a href="#FNanchor_121"><span class="label">[121]</span></a> <i>Money and Banking</i>, 1903 ed., pp. 58-60; 101-104.</p></div> + +<div class="footnote"><p><a name="Footnote_122" id="Footnote_122"></a><a href="#FNanchor_122"><span class="label">[122]</span></a> <i>Principles of Money</i>, p. 530.</p></div> + +<div class="footnote"><p><a name="Footnote_123" id="Footnote_123"></a><a href="#FNanchor_123"><span class="label">[123]</span></a> Written in December, 1914.</p></div> + +<div class="footnote"><p><a name="Footnote_124" id="Footnote_124"></a><a href="#FNanchor_124"><span class="label">[124]</span></a> <i>Cf.</i> Clow, F. R., "The Quantity Theory and its Critics," <i>Jour. of Pol. +Econ.</i>, 1902, p. 602.</p></div> + +<div class="footnote"><p><a name="Footnote_125" id="Footnote_125"></a><a href="#FNanchor_125"><span class="label">[125]</span></a> <i>Cf.</i> Emery, <i>Speculation</i>, pp. 90-91.</p></div> + +<div class="footnote"><p><a name="Footnote_126" id="Footnote_126"></a><a href="#FNanchor_126"><span class="label">[126]</span></a> <i>Cf.</i> Böhm-Bawerk's criticisms of the "use" theory of interest. (<i>Capital +and Interest</i>, <i>passim</i>.) Both use theories and productivity theories are +probably suggested, in part, by peculiarities which money possesses in pre-eminent +degree. See <i>infra</i>, the chapter on the "Functions of Money."</p></div> + +<div class="footnote"><p><a name="Footnote_127" id="Footnote_127"></a><a href="#FNanchor_127"><span class="label">[127]</span></a> A more precise analysis of all these points will be given in the chapter +on "The Functions of Money."</p></div> + +<div class="footnote"><p><a name="Footnote_128" id="Footnote_128"></a><a href="#FNanchor_128"><span class="label">[128]</span></a> <i>Cf.</i> Professor Taussig's account of expansions and contractions of the +silver currency in his <i>Silver Situation</i>, <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_129" id="Footnote_129"></a><a href="#FNanchor_129"><span class="label">[129]</span></a> For bibliography, see <i>Am. Econ. Rev.</i>, Dec., 1914, pp. 838-839.</p></div> + +<div class="footnote"><p><a name="Footnote_130" id="Footnote_130"></a><a href="#FNanchor_130"><span class="label">[130]</span></a> New York, 1911. All references to this book in the present volume are +to the 1913 edition, which contains some new matter.</p></div> + +<div class="footnote"><p><a name="Footnote_131" id="Footnote_131"></a><a href="#FNanchor_131"><span class="label">[131]</span></a> <i>Standard of Value</i>, London, 1912, p. 48, n.</p></div> + +<div class="footnote"><p><a name="Footnote_132" id="Footnote_132"></a><a href="#FNanchor_132"><span class="label">[132]</span></a> <i>Papers and Proceedings</i>, Supplement to March, 1913, number of <i>American +Econ. Review</i>, p. 131.</p></div> + +<div class="footnote"><p><a name="Footnote_133" id="Footnote_133"></a><a href="#FNanchor_133"><span class="label">[133]</span></a> <i>American Econ. Rev.</i>, Supplement to March, 1916, number, p. 138.</p></div> + +<div class="footnote"><p><a name="Footnote_134" id="Footnote_134"></a><a href="#FNanchor_134"><span class="label">[134]</span></a> <i>Loc. cit.</i>, pp. 31-32.</p></div> + +<div class="footnote"><p><a name="Footnote_135" id="Footnote_135"></a><a href="#FNanchor_135"><span class="label">[135]</span></a> <i>Loc. cit.</i>, pp. 175ff.</p></div> + +<div class="footnote"><p><a name="Footnote_136" id="Footnote_136"></a><a href="#FNanchor_136"><span class="label">[136]</span></a> "The Passiveness of Prices," <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_137" id="Footnote_137"></a><a href="#FNanchor_137"><span class="label">[137]</span></a> Particularly in view of the elaborate statistics, to be considered below, +with which it is sought to make the equation realistic.</p></div> + +<div class="footnote"><p><a name="Footnote_138" id="Footnote_138"></a><a href="#FNanchor_138"><span class="label">[138]</span></a> <i>Loc. cit.</i>, p. 16ff.</p></div> + +<div class="footnote"><p><a name="Footnote_139" id="Footnote_139"></a><a href="#FNanchor_139"><span class="label">[139]</span></a> <i>Loc. cit.</i> p. 25.</p></div> + +<div class="footnote"><p><a name="Footnote_140" id="Footnote_140"></a><a href="#FNanchor_140"><span class="label">[140]</span></a> <i>Ibid.</i>, p. 26.</p></div> + +<div class="footnote"><p><a name="Footnote_141" id="Footnote_141"></a><a href="#FNanchor_141"><span class="label">[141]</span></a> <i>Ibid.</i>, p. 27.</p></div> + +<div class="footnote"><p><a name="Footnote_142" id="Footnote_142"></a><a href="#FNanchor_142"><span class="label">[142]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_143" id="Footnote_143"></a><a href="#FNanchor_143"><span class="label">[143]</span></a> <i>Vide</i> our ch. on "Supply and Demand," <i>supra</i>, for a discussion of Mill's +doctrine as to the "demand" for money.</p></div> + +<div class="footnote"><p><a name="Footnote_144" id="Footnote_144"></a><a href="#FNanchor_144"><span class="label">[144]</span></a> What is here said of Fisher's equation of exchange applies, for the most +part, to all versions of it.</p></div> + +<div class="footnote"><p><a name="Footnote_145" id="Footnote_145"></a><a href="#FNanchor_145"><span class="label">[145]</span></a> <i>Loc. cit.</i>, p. 298. <i>Cf.</i> our chapter, <i>infra</i>, on "Statistical Demonstrations +of the Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_146" id="Footnote_146"></a><a href="#FNanchor_146"><span class="label">[146]</span></a> <i>Purchasing Power of Money</i>, p. 290.</p></div> + +<div class="footnote"><p><a name="Footnote_147" id="Footnote_147"></a><a href="#FNanchor_147"><span class="label">[147]</span></a> The amplified equation is MV + M´V´ = PT, which takes account of +bank-credit. This is explained, <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_148" id="Footnote_148"></a><a href="#FNanchor_148"><span class="label">[148]</span></a> <i>Loc. cit.</i>, p. 487. I recur to this point in discussing the statistics of the +"equation of exchange" in ch. 19.</p></div> + +<div class="footnote"><p><a name="Footnote_149" id="Footnote_149"></a><a href="#FNanchor_149"><span class="label">[149]</span></a> <i>Infra</i>, ch. on "Quantity Theory and World Prices."</p></div> + +<div class="footnote"><p><a name="Footnote_150" id="Footnote_150"></a><a href="#FNanchor_150"><span class="label">[150]</span></a> <i>Loc. cit.</i>, p. 48.</p></div> + +<div class="footnote"><p><a name="Footnote_151" id="Footnote_151"></a><a href="#FNanchor_151"><span class="label">[151]</span></a> <i>Loc. cit.</i>, p. 370. The same position is taken by Kemmerer, <i>Money and +Credit Instruments</i>, pp. 68 <i>et seq.</i> Mill denies the validity of these distinctions. +See <i>Principles</i>, Bk. III, ch. 12, Par. 8.</p></div> + +<div class="footnote"><p><a name="Footnote_152" id="Footnote_152"></a><a href="#FNanchor_152"><span class="label">[152]</span></a> The above was written before the discussion in the <i>Annalist</i> (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 <i>et seq.</i>) +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."</p></div> + +<div class="footnote"><p><a name="Footnote_153" id="Footnote_153"></a><a href="#FNanchor_153"><span class="label">[153]</span></a> <i>Quarterly Journal of Economics</i>, vols. 8 and 9; <i>Political Economy</i>, pp. 169-175; +<i>Money</i>, chs. 3-8.</p></div> + +<div class="footnote"><p><a name="Footnote_154" id="Footnote_154"></a><a href="#FNanchor_154"><span class="label">[154]</span></a> In our analysis of bank-loans, <i>infra</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_155" id="Footnote_155"></a><a href="#FNanchor_155"><span class="label">[155]</span></a> <i>Principles</i>, Bk. III, chs. 11 and 12.</p></div> + +<div class="footnote"><p><a name="Footnote_156" id="Footnote_156"></a><a href="#FNanchor_156"><span class="label">[156]</span></a> <i>Purchasing Power of Money.</i></p></div> + +<div class="footnote"><p><a name="Footnote_157" id="Footnote_157"></a><a href="#FNanchor_157"><span class="label">[157]</span></a> <i>Loc. cit.</i>, pp. 50-51.</p></div> + +<div class="footnote"><p><a name="Footnote_158" id="Footnote_158"></a><a href="#FNanchor_158"><span class="label">[158]</span></a> <i>Loc. cit.</i>, p. 280.</p></div> + +<div class="footnote"><p><a name="Footnote_159" id="Footnote_159"></a><a href="#FNanchor_159"><span class="label">[159]</span></a> A. W. Atwood, "Hoarded Gold," <i>Saturday Evening Post</i>, Dec. 12, 1914, +p. 26.</p></div> + +<div class="footnote"><p><a name="Footnote_160" id="Footnote_160"></a><a href="#FNanchor_160"><span class="label">[160]</span></a> <i>Cf.</i> Kinley, D., <i>The Use of Credit Instruments</i>, Senate Document 399, +1910, pp. 192-194.</p></div> + +<div class="footnote"><p><a name="Footnote_161" id="Footnote_161"></a><a href="#FNanchor_161"><span class="label">[161]</span></a> <i>Ibid.</i>, pp. 102-103. In the same volume, on p. 200, the figures are +given <i>incorrectly</i>, as 70% checks and 30% cash. C. A. Phillips, <i>Readings +in Money and Banking</i>, 1916, p. 151, repeats this erroneous statement.</p></div> + +<div class="footnote"><p><a name="Footnote_162" id="Footnote_162"></a><a href="#FNanchor_162"><span class="label">[162]</span></a> <i>Cf.</i> Sprague, <i>Crises under the National Banking System</i>, Nat. Monetary +Commission Report, pp. 71-75; 200, 202.</p></div> + +<div class="footnote"><p><a name="Footnote_163" id="Footnote_163"></a><a href="#FNanchor_163"><span class="label">[163]</span></a> <i>Cf.</i> also p. 280 of Fisher's <i>Purchasing Power of Money</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_164" id="Footnote_164"></a><a href="#FNanchor_164"><span class="label">[164]</span></a> Kemmerer (<i>Money and Credit Instruments</i>, 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 <i>fixed</i> 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 <i>we have seen</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_165" id="Footnote_165"></a><a href="#FNanchor_165"><span class="label">[165]</span></a> "The price-level outside of New York City, for instance, affects the +price-level in New York City only <i>via</i> 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." (<i>Loc. cit.</i>, p. 172.)</p></div> + +<div class="footnote"><p><a name="Footnote_166" id="Footnote_166"></a><a href="#FNanchor_166"><span class="label">[166]</span></a> <i>Loc. cit.</i>, p. 50.</p></div> + +<div class="footnote"><p><a name="Footnote_167" id="Footnote_167"></a><a href="#FNanchor_167"><span class="label">[167]</span></a> W. C. Mitchell, <i>Business Cycles</i>, p. 306.</p></div> + +<div class="footnote"><p><a name="Footnote_168" id="Footnote_168"></a><a href="#FNanchor_168"><span class="label">[168]</span></a> <i>Ibid.</i>, p. 325.</p></div> + +<div class="footnote"><p><a name="Footnote_169" id="Footnote_169"></a><a href="#FNanchor_169"><span class="label">[169]</span></a> J. P. Norton, <i>Statistical Studies in the New York Money Market</i>, p. 71, +and chart opposite p. 72.</p></div> + +<div class="footnote"><p><a name="Footnote_170" id="Footnote_170"></a><a href="#FNanchor_170"><span class="label">[170]</span></a> <i>Ibid.</i>, chart facing p. 72.</p></div> + +<div class="footnote"><p><a name="Footnote_171" id="Footnote_171"></a><a href="#FNanchor_171"><span class="label">[171]</span></a> <i>Cf.</i> Mitchell, <i>loc. cit.</i>, chart, p. 298, and text, p. 295. As the ratio of <i>reserves</i> +to <i>money in circulation</i> was greater in 1911 than in 1894, and as the +ratio of <i>deposits to reserves</i> was also higher, we have a still wider variation +in the ratio of money in <i>circulation to deposits</i>—M:M´</p></div> + +<div class="footnote"><p><a name="Footnote_172" id="Footnote_172"></a><a href="#FNanchor_172"><span class="label">[172]</span></a> See the striking figures collected by A. P. Andrew for 1907. <i>Quart. Jour. +of Econ.</i>, Feb. 1908, p. 297.</p></div> + +<div class="footnote"><p><a name="Footnote_173" id="Footnote_173"></a><a href="#FNanchor_173"><span class="label">[173]</span></a> <i>Infra</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_174" id="Footnote_174"></a><a href="#FNanchor_174"><span class="label">[174]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_175" id="Footnote_175"></a><a href="#FNanchor_175"><span class="label">[175]</span></a> <i>Statist</i>, 1912, p. 577.</p></div> + +<div class="footnote"><p><a name="Footnote_176" id="Footnote_176"></a><a href="#FNanchor_176"><span class="label">[176]</span></a> "The Prospects of Money," British <i>Economic Journal</i>, Dec. 1914.</p></div> + +<div class="footnote"><p><a name="Footnote_177" id="Footnote_177"></a><a href="#FNanchor_177"><span class="label">[177]</span></a> <i>Cf.</i> Ashley, W. J., <i>Gold and Prices</i>, N. Y., 1912, pp. 21 <i>et seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_178" id="Footnote_178"></a><a href="#FNanchor_178"><span class="label">[178]</span></a> <i>Cf.</i> von Mises, "The Foreign Exchange Policy of the Austro-Hungarian +Bank," British <i>Econ. Jour.</i>, 1909, vol. 19. <i>Cf.</i> Keynes, <i>Indian Currency +and Finance</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_179" id="Footnote_179"></a><a href="#FNanchor_179"><span class="label">[179]</span></a> Conant, <i>Principles of Money and Banking</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_180" id="Footnote_180"></a><a href="#FNanchor_180"><span class="label">[180]</span></a> <i>Principles of Economics</i>, vol. I, pp. 432 <i>et seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_181" id="Footnote_181"></a><a href="#FNanchor_181"><span class="label">[181]</span></a> In the chapter on "Quantity Theory and International Gold Movements," +<i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_182" id="Footnote_182"></a><a href="#FNanchor_182"><span class="label">[182]</span></a> The Joint Stock Banks in England keep "till money" in cash, even +though their "reserves" are chiefly deposits at the Bank of England.</p></div> + +<div class="footnote"><p><a name="Footnote_183" id="Footnote_183"></a><a href="#FNanchor_183"><span class="label">[183]</span></a> Fisher, <i>loc. cit. passim</i>. <i>Vide</i> especially ch. 8.</p></div> + +<div class="footnote"><p><a name="Footnote_184" id="Footnote_184"></a><a href="#FNanchor_184"><span class="label">[184]</span></a> <i>Purchasing Power of Money.</i></p></div> + +<div class="footnote"><p><a name="Footnote_185" id="Footnote_185"></a><a href="#FNanchor_185"><span class="label">[185]</span></a> <i>Business Cycles</i>, pp. 580, 595-596.</p></div> + +<div class="footnote"><p><a name="Footnote_186" id="Footnote_186"></a><a href="#FNanchor_186"><span class="label">[186]</span></a> <i>Cf.</i> C. M. Walsh, <i>The Measurement of General Exchange Value</i>, pp. +480-481.</p></div> + +<div class="footnote"><p><a name="Footnote_187" id="Footnote_187"></a><a href="#FNanchor_187"><span class="label">[187]</span></a> On pp. 314-315, and elsewhere, Fisher indicates that <i>all</i> the causes affecting +prices operate <i>through</i> the factors in the equation of exchange. <i>Cf.</i> p. 74. +This would require a concrete equation of exchange throughout.</p></div> + +<div class="footnote"><p><a name="Footnote_188" id="Footnote_188"></a><a href="#FNanchor_188"><span class="label">[188]</span></a> Chapter on "Passiveness of Prices."</p></div> + +<div class="footnote"><p><a name="Footnote_189" id="Footnote_189"></a><a href="#FNanchor_189"><span class="label">[189]</span></a> <i>Loc. cit.</i>, p. 169.</p></div> + +<div class="footnote"><p><a name="Footnote_190" id="Footnote_190"></a><a href="#FNanchor_190"><span class="label">[190]</span></a> <i>Cf.</i> his <i>Silver Situation</i>. 1878 to 1891 do not give time enough for quantity +of money to dominate volume of credit, in his exposition!</p></div> + +<div class="footnote"><p><a name="Footnote_191" id="Footnote_191"></a><a href="#FNanchor_191"><span class="label">[191]</span></a> Mill, <i>Principles</i>, Bk. III, ch. 12, par. 1.</p></div> + +<div class="footnote"><p><a name="Footnote_192" id="Footnote_192"></a><a href="#FNanchor_192"><span class="label">[192]</span></a> Fisher, <i>loc. cit.</i>, p. 62.</p></div> + +<div class="footnote"><p><a name="Footnote_193" id="Footnote_193"></a><a href="#FNanchor_193"><span class="label">[193]</span></a> "A Compensated Dollar," <i>Quart. Jour. of Econ.</i>, Feb. 1913.</p></div> + +<div class="footnote"><p><a name="Footnote_194" id="Footnote_194"></a><a href="#FNanchor_194"><span class="label">[194]</span></a> The chapter on "Dodo-Bones," <i>supra</i>, and the chapter on "The Quantity +Theory and World Prices," <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_195" id="Footnote_195"></a><a href="#FNanchor_195"><span class="label">[195]</span></a> <i>Loc. cit.</i>, p. 156.</p></div> + +<div class="footnote"><p><a name="Footnote_196" id="Footnote_196"></a><a href="#FNanchor_196"><span class="label">[196]</span></a> <i>Ibid.</i>, p. 160.</p></div> + +<div class="footnote"><p><a name="Footnote_197" id="Footnote_197"></a><a href="#FNanchor_197"><span class="label">[197]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_198" id="Footnote_198"></a><a href="#FNanchor_198"><span class="label">[198]</span></a> 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."</p></div> + +<div class="footnote"><p><a name="Footnote_199" id="Footnote_199"></a><a href="#FNanchor_199"><span class="label">[199]</span></a> <i>Cf.</i> E. S. Meade, <i>Corporation Finance</i>, p. 376, and <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_200" id="Footnote_200"></a><a href="#FNanchor_200"><span class="label">[200]</span></a> 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. <i>Vide</i> Stevens, <i>Industrial Combinations and +Trusts</i>, p. 101.</p></div> + +<div class="footnote"><p><a name="Footnote_201" id="Footnote_201"></a><a href="#FNanchor_201"><span class="label">[201]</span></a> The foregoing had been written before the discussion in the <i>Annalist</i> 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 <i>Purchasing Power of Money</i>, 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). +</p><p> +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.</p></div> + +<div class="footnote"><p><a name="Footnote_202" id="Footnote_202"></a><a href="#FNanchor_202"><span class="label">[202]</span></a> <i>Miscellaneous Articles on German Banking</i>, Report of National Monetary +Commission, p. 175. <i>Cf. infra</i>, pp. 288-290.</p></div> + +<div class="footnote"><p><a name="Footnote_203" id="Footnote_203"></a><a href="#FNanchor_203"><span class="label">[203]</span></a> <i>Cf.</i> our chapter on "The Functions of Money," <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_204" id="Footnote_204"></a><a href="#FNanchor_204"><span class="label">[204]</span></a> 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, <i>Corporation Finance</i>, <i>passim</i>; Sullivan, +<i>American Corporations</i>, <i>passim</i>.) If, however, the stocks are paid for +in <i>goods and services</i>, 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 <i>barter</i> transaction, as a rule.</p></div> + +<div class="footnote"><p><a name="Footnote_205" id="Footnote_205"></a><a href="#FNanchor_205"><span class="label">[205]</span></a> <i>Purchasing Power of Money</i>, p. 152.</p></div> + +<div class="footnote"><p><a name="Footnote_206" id="Footnote_206"></a><a href="#FNanchor_206"><span class="label">[206]</span></a> <i>Ibid.</i>, pp. 352 <i>et seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_207" id="Footnote_207"></a><a href="#FNanchor_207"><span class="label">[207]</span></a> <i>Infra</i>, ch. on "Passiveness of Prices." <i>Weighted</i> averages of "person-turnovers" +will not save the situation here, if incomes stop entirely, since +the persons involved then drop out altogether. Moreover, <i>weighted</i> averages +would clearly depend on <i>incomes</i>, and hence on <i>prices</i>, and hence could not +depend on <i>habits</i> exclusively, or <i>causally explain</i> prices.</p></div> + +<div class="footnote"><p><a name="Footnote_208" id="Footnote_208"></a><a href="#FNanchor_208"><span class="label">[208]</span></a> <i>Loc. cit.</i>, pp. 152-153.</p></div> + +<div class="footnote"><p><a name="Footnote_209" id="Footnote_209"></a><a href="#FNanchor_209"><span class="label">[209]</span></a> <i>Ibid.</i>, p. 154. Italics mine.</p></div> + +<div class="footnote"><p><a name="Footnote_210" id="Footnote_210"></a><a href="#FNanchor_210"><span class="label">[210]</span></a> <i>Supra</i>, ch. on "Volume of Money and Volume of Credit." <i>Infra</i>, ch. on +"Bank Assets and Bank Reserves."</p></div> + +<div class="footnote"><p><a name="Footnote_211" id="Footnote_211"></a><a href="#FNanchor_211"><span class="label">[211]</span></a> <i>Cf.</i> Kinley, <i>Money</i>, pp. 145 and 205-206, for the discussion of various +moveable margins of this sort.</p></div> + +<div class="footnote"><p><a name="Footnote_212" id="Footnote_212"></a><a href="#FNanchor_212"><span class="label">[212]</span></a> Van Hise, <i>Concentration and Control</i>, p. 16. The tendency to accumulate +hoards when money is plentiful is notoriously strong in countries like +India.</p></div> + +<div class="footnote"><p><a name="Footnote_213" id="Footnote_213"></a><a href="#FNanchor_213"><span class="label">[213]</span></a> <i>Loc. cit.</i>, pp. 167-168.</p></div> + +<div class="footnote"><p><a name="Footnote_214" id="Footnote_214"></a><a href="#FNanchor_214"><span class="label">[214]</span></a> <i>Ibid.</i>, p. 164.</p></div> + +<div class="footnote"><p><a name="Footnote_215" id="Footnote_215"></a><a href="#FNanchor_215"><span class="label">[215]</span></a> <i>Cf.</i> Davenport's analysis of the causes governing volume of trade, <i>Economics +of Enterprise</i>, p. 272. </p></div> + +<div class="footnote"><p><a name="Footnote_216" id="Footnote_216"></a><a href="#FNanchor_216"><span class="label">[216]</span></a> <i>Loc. cit.</i>, p. 110.</p></div> + +<div class="footnote"><p><a name="Footnote_217" id="Footnote_217"></a><a href="#FNanchor_217"><span class="label">[217]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_218" id="Footnote_218"></a><a href="#FNanchor_218"><span class="label">[218]</span></a> <i>Cf.</i> also p. 315, <i>loc. cit.</i>, where this is placed as one of three main causes +of the historical rise in prices.</p></div> + +<div class="footnote"><p><a name="Footnote_219" id="Footnote_219"></a><a href="#FNanchor_219"><span class="label">[219]</span></a> That the overwhelming bulk of trade is in the cities will appear in our +chapter, <i>infra</i>, on "Volume of Money and Volume of Trades."</p></div> + +<div class="footnote"><p><a name="Footnote_220" id="Footnote_220"></a><a href="#FNanchor_220"><span class="label">[220]</span></a> On the average, in the United States, the banks have less money than +the people have. <i>Vide</i> Mitchell, <i>Business Cycles</i>, pp. 295 and 298.</p></div> + +<div class="footnote"><p><a name="Footnote_221" id="Footnote_221"></a><a href="#FNanchor_221"><span class="label">[221]</span></a> Based on arbitrary assumptions as to variability. <i>Cf.</i> his p. 477. +<i>Cf.</i> our chapter, <i>infra</i>, on "Statistics of the Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_222" id="Footnote_222"></a><a href="#FNanchor_222"><span class="label">[222]</span></a> 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." <i>Loc. cit.</i>, p. 166.</p></div> + +<div class="footnote"><p><a name="Footnote_223" id="Footnote_223"></a><a href="#FNanchor_223"><span class="label">[223]</span></a> <i>Cf.</i>, <i>infra</i>, our chapter on "Statistical Demonstrations of the Quantity +Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_224" id="Footnote_224"></a><a href="#FNanchor_224"><span class="label">[224]</span></a> <i>Common Sense of Political Economy</i>, p. 623.</p></div> + +<div class="footnote"><p><a name="Footnote_225" id="Footnote_225"></a><a href="#FNanchor_225"><span class="label">[225]</span></a> <i>Principles</i>, I, 432.</p></div> + +<div class="footnote"><p><a name="Footnote_226" id="Footnote_226"></a><a href="#FNanchor_226"><span class="label">[226]</span></a> <i>Loc. cit.</i>, pp. 432, 438-439.</p></div> + +<div class="footnote"><p><a name="Footnote_227" id="Footnote_227"></a><a href="#FNanchor_227"><span class="label">[227]</span></a> <i>Ibid.</i>, p. 439. <i>Cf.</i> our chapter, <i>supra</i>, on "Volume of Money and Volume +of Credit," where Taussig's view as to the relation of money and bank-credit +is analyzed.</p></div> + +<div class="footnote"><p><a name="Footnote_228" id="Footnote_228"></a><a href="#FNanchor_228"><span class="label">[228]</span></a> <i>Loc. cit.</i></p></div> + +<div class="footnote"><p><a name="Footnote_229" id="Footnote_229"></a><a href="#FNanchor_229"><span class="label">[229]</span></a> Virtually the same expression is to be found in Barbour, David, <i>The +Standard of Value</i>, 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, <i>Econ. of Enterprise</i>, 271-273.</p></div> + +<div class="footnote"><p><a name="Footnote_230" id="Footnote_230"></a><a href="#FNanchor_230"><span class="label">[230]</span></a> 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, <i>Principles of Money</i>, 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. +</p><p> +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.</p></div> + +<div class="footnote"><p><a name="Footnote_231" id="Footnote_231"></a><a href="#FNanchor_231"><span class="label">[231]</span></a> P. 50.</p></div> + +<div class="footnote"><p><a name="Footnote_232" id="Footnote_232"></a><a href="#FNanchor_232"><span class="label">[232]</span></a> Pp. 358-372, vol. I.</p></div> + +<div class="footnote"><p><a name="Footnote_233" id="Footnote_233"></a><a href="#FNanchor_233"><span class="label">[233]</span></a> <i>Loc. cit.</i>, p. 160. <i>Cf.</i> our chapter on "Barter."</p></div> + +<div class="footnote"><p><a name="Footnote_234" id="Footnote_234"></a><a href="#FNanchor_234"><span class="label">[234]</span></a> 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. <i>Cf.</i> Kemmerer, <i>Money and Credit Instruments</i>, +pp. 50-51, 58; Cairnes, J. E., <i>Essays in Political Economy</i>, 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., <i>Principles +of Economics</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_235" id="Footnote_235"></a><a href="#FNanchor_235"><span class="label">[235]</span></a> <i>Loc. cit.</i>, p. 51.</p></div> + +<div class="footnote"><p><a name="Footnote_236" id="Footnote_236"></a><a href="#FNanchor_236"><span class="label">[236]</span></a> <i>Meaning of Money</i>, p. 18.</p></div> + +<div class="footnote"><p><a name="Footnote_237" id="Footnote_237"></a><a href="#FNanchor_237"><span class="label">[237]</span></a> Price's address before Western Econ. Asso'n, Nov. 26, 1915; Holt's letter; +Dec. 2.</p></div> + +<div class="footnote"><p><a name="Footnote_238" id="Footnote_238"></a><a href="#FNanchor_238"><span class="label">[238]</span></a> <i>Loc. cit.</i>, p. 172.</p></div> + +<div class="footnote"><p><a name="Footnote_239" id="Footnote_239"></a><a href="#FNanchor_239"><span class="label">[239]</span></a> See our discussion of "money rates" and "interest rates," <i>supra</i>, in +the chapter on "Capitalization," and <i>infra</i>, in the chapters on "The Functions +of Money," and on "Credit."</p></div> + +<div class="footnote"><p><a name="Footnote_240" id="Footnote_240"></a><a href="#FNanchor_240"><span class="label">[240]</span></a> <i>Infra</i>, chapter on "Functions of Money," and <i>supra</i>, chapters on "Capitalization" +and "Dodo-Bones."</p></div> + +<div class="footnote"><p><a name="Footnote_241" id="Footnote_241"></a><a href="#FNanchor_241"><span class="label">[241]</span></a> <i>Cf.</i> our chapters on "Supply and Demand," and "The Origin of Money."</p></div> + +<div class="footnote"><p><a name="Footnote_242" id="Footnote_242"></a><a href="#FNanchor_242"><span class="label">[242]</span></a> New York City can always use idle funds, "at a price."</p></div> + +<div class="footnote"><p><a name="Footnote_243" id="Footnote_243"></a><a href="#FNanchor_243"><span class="label">[243]</span></a> Kemmerer, as well as Fisher, allows physical production and consumption +to dominate his "index" of trade variation. <i>Loc. cit.</i>, pp. 130-131; +Fisher, <i>loc. cit.</i>, p. 479. <i>Cf.</i> our discussion of their statistics, <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_244" id="Footnote_244"></a><a href="#FNanchor_244"><span class="label">[244]</span></a> This confusion of volume of trade and volume of production is a companion +of the confusion discussed on p. 307, <i>infra</i>, of quantity of money +with volume of money-<i>income</i>. The two confusions, found in virtually all +expositions of the quantity theory, give it most of its plausibility.</p></div> + +<div class="footnote"><p><a name="Footnote_245" id="Footnote_245"></a><a href="#FNanchor_245"><span class="label">[245]</span></a> <i>Loc. cit.</i>, ch. 12, and appendix to ch. 12.</p></div> + +<div class="footnote"><p><a name="Footnote_246" id="Footnote_246"></a><a href="#FNanchor_246"><span class="label">[246]</span></a> <i>Supra</i>, ch. on "Equation of Exchange."</p></div> + +<div class="footnote"><p><a name="Footnote_247" id="Footnote_247"></a><a href="#FNanchor_247"><span class="label">[247]</span></a> 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 <i>via</i> the other factors in +the equation. These figures were discontinued in 1912. In the <i>American +Economic Review</i> 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 <i>Purchasing Power of Money</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_248" id="Footnote_248"></a><a href="#FNanchor_248"><span class="label">[248]</span></a> <i>Loc. cit</i>., p. 485.</p></div> + +<div class="footnote"><p><a name="Footnote_249" id="Footnote_249"></a><a href="#FNanchor_249"><span class="label">[249]</span></a> <i>The Use of Credit Instruments in Payments</i>, Senate Document No. 399, +61st Congress, 2nd Session.</p></div> + +<div class="footnote"><p><a name="Footnote_250" id="Footnote_250"></a><a href="#FNanchor_250"><span class="label">[250]</span></a> 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 <i>proportions</i> of speculation and other elements in trade.</p></div> + +<div class="footnote"><p><a name="Footnote_251" id="Footnote_251"></a><a href="#FNanchor_251"><span class="label">[251]</span></a> The substance of the argument here presented first appeared in articles +in the <i>Annalist</i>, 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 <i>Annalist</i> 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. <i>Cf.</i> his article of +Feb. 21, 1916.</p></div> + +<div class="footnote"><p><a name="Footnote_252" id="Footnote_252"></a><a href="#FNanchor_252"><span class="label">[252]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_253" id="Footnote_253"></a><a href="#FNanchor_253"><span class="label">[253]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_254" id="Footnote_254"></a><a href="#FNanchor_254"><span class="label">[254]</span></a> <i>Cf.</i> our discussion of this topic in the statistical chapter, <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_255" id="Footnote_255"></a><a href="#FNanchor_255"><span class="label">[255]</span></a> <i>Loc. cit.</i>, pp. 153-154.</p></div> + +<div class="footnote"><p><a name="Footnote_256" id="Footnote_256"></a><a href="#FNanchor_256"><span class="label">[256]</span></a> <i>Discussions in Economics and Statistics</i>, I, 204. Quoted by Kinley, <i>loc. +cit.</i>, 152.</p></div> + +<div class="footnote"><p><a name="Footnote_257" id="Footnote_257"></a><a href="#FNanchor_257"><span class="label">[257]</span></a> 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 +<i>Introduction to the Theory of Statistics</i>. Professor H. L. Moore has made +extensive use of the method in his <i>Laws of Wages</i>, and his <i>Economic Cycles</i>. +</p><p> +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 <i>a priori</i> 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 <i>growing rapidly</i>, +has been avoided by Mr. Silberling by the use of successive <i>percentage</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_258" id="Footnote_258"></a><a href="#FNanchor_258"><span class="label">[258]</span></a> They get into clearings, however, <i>two</i> days after.</p></div> + +<div class="footnote"><p><a name="Footnote_259" id="Footnote_259"></a><a href="#FNanchor_259"><span class="label">[259]</span></a> Professor Kemmerer, also. See his index of variation of trade, <i>op. cit.</i>, +pp. 130-131.</p></div> + +<div class="footnote"><p><a name="Footnote_260" id="Footnote_260"></a><a href="#FNanchor_260"><span class="label">[260]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_261" id="Footnote_261"></a><a href="#FNanchor_261"><span class="label">[261]</span></a> Professor W. M. Persons informs me that Mr. Silberling's results are +in accord with calculations which he has made. <i>Vide</i> his article in the <i>Am. +Econ. Rev.</i> of Dec. 1916.</p></div> + +<div class="footnote"><p><a name="Footnote_262" id="Footnote_262"></a><a href="#FNanchor_262"><span class="label">[262]</span></a> <i>The Wealth and Income of the People of the United States</i>, New York, 1915.</p></div> + +<div class="footnote"><p><a name="Footnote_263" id="Footnote_263"></a><a href="#FNanchor_263"><span class="label">[263]</span></a> See our chapter, "Statistical Demonstrations of the Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_264" id="Footnote_264"></a><a href="#FNanchor_264"><span class="label">[264]</span></a> <i>Loc. cit.</i>, pp. 78-79.</p></div> + +<div class="footnote"><p><a name="Footnote_265" id="Footnote_265"></a><a href="#FNanchor_265"><span class="label">[265]</span></a> <i>Jour. of Polit. Econ.</i>, vol. v, p. 165.</p></div> + +<div class="footnote"><p><a name="Footnote_266" id="Footnote_266"></a><a href="#FNanchor_266"><span class="label">[266]</span></a> Even this is too high, for 1909, on the basis of our estimate for net income +in 1909, in the Appendix to this chapter.</p></div> + +<div class="footnote"><p><a name="Footnote_267" id="Footnote_267"></a><a href="#FNanchor_267"><span class="label">[267]</span></a> The extent of speculation in wholesale trade is discussed in this chapter, +<i>infra</i>. "Double counting" is discussed in the chapter on "Statistical Demonstrations +of the Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_268" id="Footnote_268"></a><a href="#FNanchor_268"><span class="label">[268]</span></a> <i>The Use of Credit Instruments</i>, p. 151.</p></div> + +<div class="footnote"><p><a name="Footnote_269" id="Footnote_269"></a><a href="#FNanchor_269"><span class="label">[269]</span></a> The figures for rent and wages are from W. I. King, <i>op. cit.</i> The other +figures are from the <i>Statistical Abstract of the United States</i>, unless otherwise +stated. King's estimates are for 1910. The other figures are for 1909. +Compare this list with my discussion in the <i>Annalist</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_270" id="Footnote_270"></a><a href="#FNanchor_270"><span class="label">[270]</span></a> Professor Fisher has estimated total real estate exchanges in the country +at less than 1% of the total 387 billions (<i>op. cit.</i>, 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 <i>Nature of Capital and +Income</i>. 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, +<i>loc. cit.</i>, p. 262). This is a little over 1%. What else is there? In his +article of March 13, 1916, in the <i>Annalist</i>, Professor Fisher failed to meet +my suggestion that a bill of particulars was called for!</p></div> + +<div class="footnote"><p><a name="Footnote_271" id="Footnote_271"></a><a href="#FNanchor_271"><span class="label">[271]</span></a> See the table of shares and approximate values in Pratt's <i>Work of Wall +Street</i>, 1912 ed., p. 187. This table covers the years, 1890-1911.</p></div> + +<div class="footnote"><p><a name="Footnote_272" id="Footnote_272"></a><a href="#FNanchor_272"><span class="label">[272]</span></a> Boston <i>Transcript</i>, "Tape Record of Sales Incomplete," May 6, 1916, +Pt. I, p. 12. The <i>Transcript</i> quotes as authority the New York <i>Commercial</i>. +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 <i>Boston Herald</i>, Sept. 26, 1916, p. 1.</p></div> + +<div class="footnote"><p><a name="Footnote_273" id="Footnote_273"></a><a href="#FNanchor_273"><span class="label">[273]</span></a> Hollander, J. H., <i>Bank Loans and Stock Exchange Speculation</i>, Senate +Document 589, 61st Congress, 2nd Session, p. 23.</p></div> + +<div class="footnote"><p><a name="Footnote_274" id="Footnote_274"></a><a href="#FNanchor_274"><span class="label">[274]</span></a> Pratt, <i>Work of Wall Street</i>, 1912 ed., p. 264.</p></div> + +<div class="footnote"><p><a name="Footnote_275" id="Footnote_275"></a><a href="#FNanchor_275"><span class="label">[275]</span></a> <i>Annalist</i>, Dec. 27, 1915, p. 719—"Selling Phantom Grain."</p></div> + +<div class="footnote"><p><a name="Footnote_276" id="Footnote_276"></a><a href="#FNanchor_276"><span class="label">[276]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_277" id="Footnote_277"></a><a href="#FNanchor_277"><span class="label">[277]</span></a> Report of the Hughes Commission, in appendix to Pratt's <i>Work of Wall +Street</i>, Rev. ed., p. 417. This report gives information regarding all the +organized exchanges in New York.</p></div> + +<div class="footnote"><p><a name="Footnote_278" id="Footnote_278"></a><a href="#FNanchor_278"><span class="label">[278]</span></a> L. Conant, Jr., "The United States Cotton Futures Act," <i>American +Economic Review</i>, March, 1915, p. 1.</p></div> + +<div class="footnote"><p><a name="Footnote_279" id="Footnote_279"></a><a href="#FNanchor_279"><span class="label">[279]</span></a> Hughes Commission, <i>loc. cit.</i>, p. 418.</p></div> + +<div class="footnote"><p><a name="Footnote_280" id="Footnote_280"></a><a href="#FNanchor_280"><span class="label">[280]</span></a> Taussig, <i>Principles of Economics</i>, I, p. 405; Kinley, <i>Report of the Comptroller</i> +for 1896, p. 89.</p></div> + +<div class="footnote"><p><a name="Footnote_281" id="Footnote_281"></a><a href="#FNanchor_281"><span class="label">[281]</span></a> This is probably more extensive in London than in the United States.</p></div> + +<div class="footnote"><p><a name="Footnote_282" id="Footnote_282"></a><a href="#FNanchor_282"><span class="label">[282]</span></a> <i>Loc. cit.</i>, p. 47.</p></div> + +<div class="footnote"><p><a name="Footnote_283" id="Footnote_283"></a><a href="#FNanchor_283"><span class="label">[283]</span></a> <i>Loc. cit.</i>, pp. 130-131. The very title, "<i>growth</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_284" id="Footnote_284"></a><a href="#FNanchor_284"><span class="label">[284]</span></a> 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. <i>Loc. cit.</i>, p. 136. <i>d.</i></p></div> + +<div class="footnote"><p><a name="Footnote_285" id="Footnote_285"></a><a href="#FNanchor_285"><span class="label">[285]</span></a> <i>Loc. cit.</i>, p. 136, <i>d.</i></p></div> + +<div class="footnote"><p><a name="Footnote_286" id="Footnote_286"></a><a href="#FNanchor_286"><span class="label">[286]</span></a> A recent discussion of these problems is to be found in Shaw, A. W., +<i>Some Problems in Market Distribution</i>, Harvard Univ. Press, 1915.</p></div> + +<div class="footnote"><p><a name="Footnote_287" id="Footnote_287"></a><a href="#FNanchor_287"><span class="label">[287]</span></a> <i>Op. cit.</i>, pp. 51-52.</p></div> + +<div class="footnote"><p><a name="Footnote_288" id="Footnote_288"></a><a href="#FNanchor_288"><span class="label">[288]</span></a> 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. <i>Cf.</i> our discussion of the +London "Money Market," <i>infra</i>, in Part III.</p></div> + +<div class="footnote"><p><a name="Footnote_289" id="Footnote_289"></a><a href="#FNanchor_289"><span class="label">[289]</span></a> <i>Ibid.</i>, p. 47.</p></div> + +<div class="footnote"><p><a name="Footnote_290" id="Footnote_290"></a><a href="#FNanchor_290"><span class="label">[290]</span></a> <i>Cf.</i> Jenks, <i>The Trust Problem</i>, Rev. ed., p. 29. The doctrine that these +costs are net social loss is challenged by the present writer in an article, +"Competition <i>vs.</i> Monopoly," in the New York <i>Independent</i>, of Oct., 1912.</p></div> + +<div class="footnote"><p><a name="Footnote_291" id="Footnote_291"></a><a href="#FNanchor_291"><span class="label">[291]</span></a> "Royal" has been estimated at $5,000,000; "Spearmint" at $100,000,000. +Mr. Guy C. Hubbard, of the <i>Dry Goods Economist</i>, New York, has given +the writer some exceedingly interesting data regarding the value, as bankable +collateral, of various trade-marks and firm names.</p></div> + +<div class="footnote"><p><a name="Footnote_292" id="Footnote_292"></a><a href="#FNanchor_292"><span class="label">[292]</span></a> <i>Cf.</i> our discussion of "The Reconciliation of Statics and Dynamics," +<i>infra.</i></p></div> + +<div class="footnote"><p><a name="Footnote_293" id="Footnote_293"></a><a href="#FNanchor_293"><span class="label">[293]</span></a> Significant in this connection, is the contention of recent students of +American agriculture, that the great need is better organization and credit, +facilities for <i>marketing</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_294" id="Footnote_294"></a><a href="#FNanchor_294"><span class="label">[294]</span></a> <i>Loc. cit.</i>, 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 <i>Elementary Principles +of Economics</i>, N. Y., 1912, pp. 499-500.</p></div> + +<div class="footnote"><p><a name="Footnote_295" id="Footnote_295"></a><a href="#FNanchor_295"><span class="label">[295]</span></a> Fisher does admit that the <i>character</i> 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 <i>amount</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_296" id="Footnote_296"></a><a href="#FNanchor_296"><span class="label">[296]</span></a> Part IV of this book gives a detailed analysis to the problems involved +in these contrasts.</p></div> + +<div class="footnote"><p><a name="Footnote_297" id="Footnote_297"></a><a href="#FNanchor_297"><span class="label">[297]</span></a> This thesis was set forth by the present writer at the 1915 meeting of +the American Economic Association. See <i>Papers and Proceedings</i>, Supplement +to March, 1916, <i>Amer. Econ. Rev.</i>, pp. 168-169.</p></div> + +<div class="footnote"><p><a name="Footnote_298" id="Footnote_298"></a><a href="#FNanchor_298"><span class="label">[298]</span></a> <i>Cf.</i> J. B. Clark, <i>Distribution of Wealth</i>, <i>passim</i>, and J. Schumpeter, +<i>Theorie der wirtschaftlichen Entwicklung</i>, pp. 1-101. See also the present +writer's "Schumpeter's Dynamic Economics," <i>Pol. Sci. Quart.</i>, Dec, 1915, +and A. S. Johnson, in <i>Quart. Jour. of Econ.</i>, May, 1914.</p></div> + +<div class="footnote"><p><a name="Footnote_299" id="Footnote_299"></a><a href="#FNanchor_299"><span class="label">[299]</span></a> <i>Principles</i>, Bk. III, ch. xviii, par. 1.</p></div> + +<div class="footnote"><p><a name="Footnote_300" id="Footnote_300"></a><a href="#FNanchor_300"><span class="label">[300]</span></a> <i>Theorie der wirtschaftlichen Entwicklung</i>, 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 +<i>does</i> in economic life, nor need it be a source of value for money. <i>Cf.</i>, +<i>infra</i>, 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 <i>Am. Econ. Rev.</i></p></div> + +<div class="footnote"><p><a name="Footnote_301" id="Footnote_301"></a><a href="#FNanchor_301"><span class="label">[301]</span></a> The materials in this appendix are taken from an article published in +the <i>Annalist</i> of Jan. 8, 1917, pp. 39, 53-54, and the New York <i>Times</i> Annual +Financial Review of Dec. 31, 1916, and are reprinted by the courtesy of the +New York Times Company.</p></div> + +<div class="footnote"><p><a name="Footnote_302" id="Footnote_302"></a><a href="#FNanchor_302"><span class="label">[302]</span></a> <i>Vide Annalist</i>, Feb. 7, 1916, pp. 183-184, and Feb. 21, 1916, p. 246.</p></div> + +<div class="footnote"><p><a name="Footnote_303" id="Footnote_303"></a><a href="#FNanchor_303"><span class="label">[303]</span></a> <i>Wealth and Income of the People of the United States</i>, p. 129.</p></div> + +<div class="footnote"><p><a name="Footnote_304" id="Footnote_304"></a><a href="#FNanchor_304"><span class="label">[304]</span></a> The justification of this procedure is argued more fully in my article +in the <i>Annalist</i> of Feb. 7, 1916, above referred to.</p></div> + +<div class="footnote"><p><a name="Footnote_305" id="Footnote_305"></a><a href="#FNanchor_305"><span class="label">[305]</span></a> The figures for railway gross receipts are taken from the <i>Commercial +and Financial Chronicle</i>, 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 <i>percentage</i> gains or losses +for the <i>same roads</i> 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 <i>Chronicle</i> 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 <i>New York Times</i>, +for the first <i>ten</i> months of 1915 and 1916 serve to justify this estimate for +the gain of 1916 over 1915. For the <i>Chronicle</i> data, see vol. 102, p. 930, +vol. 103, p. 2112, and <i>passim</i>. +</p><p> +The index of prices chosen is Dun's. (See especially <i>Dun's Review</i> of +May 11, 1907, Jan. 9, 1915, and later months, and the discussion of Dun's index +number in the <i>Bulletin of the United States Bureau of Labor Statistics</i>, +Whole Number 173, July, 1915, pp. 148 <i>et seq.</i>) 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. (<i>Vide</i> 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. +</p><p> +The figures for exports and imports are for <i>calendar</i> years. They were +obtained, for the years 1890-1909, from <i>Statistics of the United States, 1867-1909</i> +(National Monetary Commission Report), and, for the years since +1909 from the <i>Commercial and Financial Chronicle</i>. For 1916, November +and December are estimated.</p></div> + +<div class="footnote"><p><a name="Footnote_306" id="Footnote_306"></a><a href="#FNanchor_306"><span class="label">[306]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_307" id="Footnote_307"></a><a href="#FNanchor_307"><span class="label">[307]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_308" id="Footnote_308"></a><a href="#FNanchor_308"><span class="label">[308]</span></a> King's figures, for which he estimates a margin of error of 25% are +used for these years. (<i>Loc. cit.</i>, p. 129.) The export and import figures +used are for fiscal years.</p></div> + +<div class="footnote"><p><a name="Footnote_309" id="Footnote_309"></a><a href="#FNanchor_309"><span class="label">[309]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_310" id="Footnote_310"></a><a href="#FNanchor_310"><span class="label">[310]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_311" id="Footnote_311"></a><a href="#FNanchor_311"><span class="label">[311]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_312" id="Footnote_312"></a><a href="#FNanchor_312"><span class="label">[312]</span></a> 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."</p></div> + +<div class="footnote"><p><a name="Footnote_313" id="Footnote_313"></a><a href="#FNanchor_313"><span class="label">[313]</span></a> 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 <i>in</i>dependence of +the rest of the universe to justify us, for some purposes, in thinking only +of <i>inter</i>relations within the systems. The important thing is to make the +circle in theory as big as the circle in fact. <i>Cf. Social Value</i>, p. 152, n.</p></div> + +<div class="footnote"><p><a name="Footnote_314" id="Footnote_314"></a><a href="#FNanchor_314"><span class="label">[314]</span></a> In chapter XVI.</p></div> + +<div class="footnote"><p><a name="Footnote_315" id="Footnote_315"></a><a href="#FNanchor_315"><span class="label">[315]</span></a> <i>Cf.</i> our chapter, <i>infra</i>, on "The Quantity Theory and International +Gold Movements."</p></div> + +<div class="footnote"><p><a name="Footnote_316" id="Footnote_316"></a><a href="#FNanchor_316"><span class="label">[316]</span></a> Italics mine.</p></div> + +<div class="footnote"><p><a name="Footnote_317" id="Footnote_317"></a><a href="#FNanchor_317"><span class="label">[317]</span></a> <i>Loc. cit.</i>, p. 165.</p></div> + +<div class="footnote"><p><a name="Footnote_318" id="Footnote_318"></a><a href="#FNanchor_318"><span class="label">[318]</span></a> The resemblance of the view here maintained to that of Professor Laughlin +is at many points close. I am indebted to his <i>Principles of Money</i> for +many suggestions.</p></div> + +<div class="footnote"><p><a name="Footnote_319" id="Footnote_319"></a><a href="#FNanchor_319"><span class="label">[319]</span></a> <i>Loc. cit.</i>, p. 165, n. The doctrine is reiterated on p. 168.</p></div> + +<div class="footnote"><p><a name="Footnote_320" id="Footnote_320"></a><a href="#FNanchor_320"><span class="label">[320]</span></a> 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."</p></div> + +<div class="footnote"><p><a name="Footnote_321" id="Footnote_321"></a><a href="#FNanchor_321"><span class="label">[321]</span></a> For a history of this debate, with bibliography, see Laughlin's <i>Principles +of Money</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_322" id="Footnote_322"></a><a href="#FNanchor_322"><span class="label">[322]</span></a> It may be that in the brief discussion of elastic bank-notes on p. 173 +(<i>loc. cit.</i>), 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 <i>places</i> where prices are high, but also from +<i>times</i> 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." +</p><p> +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 <i>has to be moved</i>. +The farmers do not want to carry it; the speculators are ready to carry it; +and it must be sold. Expanding <i>trade</i>, at the season, is the cause of expanding +bank-notes. The influence of the <i>price</i> of wheat is exactly the reverse of +that which Fisher assigns. If the price of wheat is low in the crop-moving +season, <i>less</i> 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. +</p><p> +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 <i>Principles of Economics</i>, 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 <i>History of Prices</i>. +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.'" +</p><p> +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!</p></div> + +<div class="footnote"><p><a name="Footnote_323" id="Footnote_323"></a><a href="#FNanchor_323"><span class="label">[323]</span></a> See our chapter on the "Volume of Money and the Volume of Credit."</p></div> + +<div class="footnote"><p><a name="Footnote_324" id="Footnote_324"></a><a href="#FNanchor_324"><span class="label">[324]</span></a> How close the relation between loans and deposits is may be seen from +Professor Mitchell's chart, <i>Business Cycles</i>, 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 (<i>supra</i>, "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%. <i>Ibid.</i>, pp. 325 and 331. For a partially different series of years, +see the chart of J. P. Norton, <i>Statistical Studies in the New York Money +Market</i>, facing p. 104.</p></div> + +<div class="footnote"><p><a name="Footnote_325" id="Footnote_325"></a><a href="#FNanchor_325"><span class="label">[325]</span></a> Neither deposits nor loans vary <i>proportionately</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_326" id="Footnote_326"></a><a href="#FNanchor_326"><span class="label">[326]</span></a> <i>Supra</i>, p. 47.</p></div> + +<div class="footnote"><p><a name="Footnote_327" id="Footnote_327"></a><a href="#FNanchor_327"><span class="label">[327]</span></a> Italics mine.</p></div> + +<div class="footnote"><p><a name="Footnote_328" id="Footnote_328"></a><a href="#FNanchor_328"><span class="label">[328]</span></a> "Miscellaneous Articles on German Banking," in <i>Report of Nat. Mon. +Commission</i>, p. 175. Art. by Max Wittner and Siegfried Wolff.</p></div> + +<div class="footnote"><p><a name="Footnote_329" id="Footnote_329"></a><a href="#FNanchor_329"><span class="label">[329]</span></a> The figures are not easily compared, as the figures for giro-<i>transfers</i> do +not indicate the volume of giro-<i>accounts</i>, which is doubtless much smaller. +I know no estimates for the turnover either of notes or of bills of exchange. +To determine what <i>proportion</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_330" id="Footnote_330"></a><a href="#FNanchor_330"><span class="label">[330]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_331" id="Footnote_331"></a><a href="#FNanchor_331"><span class="label">[331]</span></a> <i>Vide</i> my criticism of his statistical fallacy in this connection, in the +<i>Annalist</i> 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, <i>loc. cit.</i>, pp. 306, and 374-375. See appendix to chapter +XIII of the present book.</p></div> + +<div class="footnote"><p><a name="Footnote_332" id="Footnote_332"></a><a href="#FNanchor_332"><span class="label">[332]</span></a> <i>Vide</i> ch. 16 for a more precise statement of this part of quantity theory +doctrine.</p></div> + +<div class="footnote"><p><a name="Footnote_333" id="Footnote_333"></a><a href="#FNanchor_333"><span class="label">[333]</span></a> <i>Purchasing Power of Money</i>, pp. 169-170.</p></div> + +<div class="footnote"><p><a name="Footnote_334" id="Footnote_334"></a><a href="#FNanchor_334"><span class="label">[334]</span></a> <i>Ibid.</i>, p. 170.</p></div> + +<div class="footnote"><p><a name="Footnote_335" id="Footnote_335"></a><a href="#FNanchor_335"><span class="label">[335]</span></a> <i>Ibid.</i>, p. 171.</p></div> + +<div class="footnote"><p><a name="Footnote_336" id="Footnote_336"></a><a href="#FNanchor_336"><span class="label">[336]</span></a> <i>Ibid.</i>, p. 172.</p></div> + +<div class="footnote"><p><a name="Footnote_337" id="Footnote_337"></a><a href="#FNanchor_337"><span class="label">[337]</span></a> <i>Ibid.</i>, p. 172. Italics mine.</p></div> + +<div class="footnote"><p><a name="Footnote_338" id="Footnote_338"></a><a href="#FNanchor_338"><span class="label">[338]</span></a> <i>Ibid.</i>, pp. 174-181.</p></div> + +<div class="footnote"><p><a name="Footnote_339" id="Footnote_339"></a><a href="#FNanchor_339"><span class="label">[339]</span></a> I call attention, in passing, to Fisher's confusion, in this sentence, of +"commodities" with "trade." This occurs frequently in his argument. +<i>Cf.</i> pp. 225-226, <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_340" id="Footnote_340"></a><a href="#FNanchor_340"><span class="label">[340]</span></a> The Capitalization theory is briefly outlined by Böhm-Bawerk, in the +critical and historical volume of his <i>Kapital und Kapitalzins</i> (English title +of the volume, <i>Capital and Interest</i>), in his criticisms of the theories of Henry +George and Turgot. It has subsequently been elaborated, and much improved, +by Fetter, in his <i>Principles of Economics</i>, and, more recently, has +been restated, with mathematical formulæ, by Fisher, in his <i>Rate of Interest</i>. +A good brief statement will be found in Seligman, <i>Principles of Economics</i>, +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 <i>American Economic Review</i>, 1912-13-14, and the <i>Quarterly Journal of +Economics</i>, 1913.</p></div> + +<div class="footnote"><p><a name="Footnote_341" id="Footnote_341"></a><a href="#FNanchor_341"><span class="label">[341]</span></a> Italics mine.</p></div> + +<div class="footnote"><p><a name="Footnote_342" id="Footnote_342"></a><a href="#FNanchor_342"><span class="label">[342]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_343" id="Footnote_343"></a><a href="#FNanchor_343"><span class="label">[343]</span></a> <i>E. g.</i>, Fisher, <i>Purchasing Power of Money</i>, p. 179.</p></div> + +<div class="footnote"><p><a name="Footnote_344" id="Footnote_344"></a><a href="#FNanchor_344"><span class="label">[344]</span></a> This confusion is a companion of the confusion between volume of +<i>goods in existence</i>, or volume of <i>production</i>, and volume of goods <i>exchanged</i>. +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.</p></div> + +<div class="footnote"><p><a name="Footnote_345" id="Footnote_345"></a><a href="#FNanchor_345"><span class="label">[345]</span></a> The fundamental causation is psychological, and calls for a theory of +<i>value</i>, as distinguished from exchange-relations.</p></div> + +<div class="footnote"><p><a name="Footnote_346" id="Footnote_346"></a><a href="#FNanchor_346"><span class="label">[346]</span></a> <i>Supra</i>, chapter on "Velocity of Circulation."</p></div> + +<div class="footnote"><p><a name="Footnote_347" id="Footnote_347"></a><a href="#FNanchor_347"><span class="label">[347]</span></a> 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," <i>Zeitsch. für Volkswirtschaft, Sozialpolitik +und Verwaltung</i>, XIII, 1904; discussions in <i>Schriften des Vereins für Sozialpolitik</i>, +1009, no. 132. A similar distinction runs through J. A. Hobson's +<i>Gold, Prices and Wages</i>, London, 1913. The present writer had worked out +the line of argument here presented before reading either of these discussions.</p></div> + +<div class="footnote"><p><a name="Footnote_348" id="Footnote_348"></a><a href="#FNanchor_348"><span class="label">[348]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_349" id="Footnote_349"></a><a href="#FNanchor_349"><span class="label">[349]</span></a> <i>Op. cit.</i>, p. 27.</p></div> + +<div class="footnote"><p><a name="Footnote_350" id="Footnote_350"></a><a href="#FNanchor_350"><span class="label">[350]</span></a> A possible alternative interpretation of Professor Fisher's conception is +suggested in two or three sentences in the passage of the <i>Purchasing Power +of Money</i> I have been discussing. On p. 175 he makes a distinction between +individual prices <i>relatively to each other</i> and the price-level. But +the distinction which he <i>discusses</i> in the passage as a whole is between +the price-level and individual prices <i>not</i> 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 <i>Elementary Principles</i> (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 <i>not</i>, on Professor Fisher's own scheme, a +factor in determining the relations of the prices of sugar and of wheat <i>inter +se</i>. 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.</p></div> + +<div class="footnote"><p><a name="Footnote_351" id="Footnote_351"></a><a href="#FNanchor_351"><span class="label">[351]</span></a> <i>Purchasing Power of Money</i>, pp. 175-179.</p></div> + +<div class="footnote"><p><a name="Footnote_352" id="Footnote_352"></a><a href="#FNanchor_352"><span class="label">[352]</span></a> 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, <i>Papers and Discussions</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_353" id="Footnote_353"></a><a href="#FNanchor_353"><span class="label">[353]</span></a> <i>Loc. cit.</i>, p. 14.</p></div> + +<div class="footnote"><p><a name="Footnote_354" id="Footnote_354"></a><a href="#FNanchor_354"><span class="label">[354]</span></a> <i>Cf. Social Value</i>, chs. 2 and 11, and "The Concept of Value Further +Considered," <i>Quart. Jour. of Econ.</i>, Aug., 1915. See also, <i>supra</i>, the chs. on +"Value," "Supply and Demand," "Cost of Production," and "Capitalization."</p></div> + +<div class="footnote"><p><a name="Footnote_355" id="Footnote_355"></a><a href="#FNanchor_355"><span class="label">[355]</span></a> 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, <i>infra</i>, the chapter on "The Functions of Money," and +Davenport, <i>Economics of Enterprise</i>, pp. 301-03.</p></div> + +<div class="footnote"><p><a name="Footnote_356" id="Footnote_356"></a><a href="#FNanchor_356"><span class="label">[356]</span></a> "Agricultural Credit in the United States," <i>Quart. Jour. of Econ.</i>, Aug., +1914, p. 708, n.</p></div> + +<div class="footnote"><p><a name="Footnote_357" id="Footnote_357"></a><a href="#FNanchor_357"><span class="label">[357]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_358" id="Footnote_358"></a><a href="#FNanchor_358"><span class="label">[358]</span></a> The Single Taxer could at least retort that this need not protect landlords +in countries, like England, which lend surplus capital abroad.</p></div> + +<div class="footnote"><p><a name="Footnote_359" id="Footnote_359"></a><a href="#FNanchor_359"><span class="label">[359]</span></a> <i>Cf.</i> Trosien, <i>Der landwirtschaftliche Kredit und seine durchgreifende +Verbesserung</i>, p. 29, cited by J. E. Pope, <i>loc. cit.</i>, p. 705, n.</p></div> + +<div class="footnote"><p><a name="Footnote_360" id="Footnote_360"></a><a href="#FNanchor_360"><span class="label">[360]</span></a> This was seen by Mill, (<i>Principles</i>, Bk. III, ch. viii, par. 4), and has been +especially emphasized by Laughlin, <i>Principles of Money</i>, ch. 10. <i>Cf.</i> A. C. +Whitaker's discussion in the <i>Quart. Jour. of Econ.</i>, Feb. 1904.</p></div> + +<div class="footnote"><p><a name="Footnote_361" id="Footnote_361"></a><a href="#FNanchor_361"><span class="label">[361]</span></a> <i>Supra</i>, p. 124, and ch. on "Dodo-Bones."</p></div> + +<div class="footnote"><p><a name="Footnote_362" id="Footnote_362"></a><a href="#FNanchor_362"><span class="label">[362]</span></a> Comptroller of the Currency estimates the State bank-notes in +1861 at 202 millions; in 1862, at 183 millions. <i>Report of the Comptroller of +the Currency</i>, 1915, vol. II, p. 37.</p></div> + +<div class="footnote"><p><a name="Footnote_363" id="Footnote_363"></a><a href="#FNanchor_363"><span class="label">[363]</span></a> W. C. Mitchell, <i>History of the Greenbacks</i>, ch. on "The Circulating +Medium," and <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_364" id="Footnote_364"></a><a href="#FNanchor_364"><span class="label">[364]</span></a> See Conant, <i>Modern Banks of Issue</i>, 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, <i>Der Credit</i> (vol. II of <i>Geld und Credit</i>), +pp. 247 <i>et seq.</i> The same period is studied in detail by Thos. Tooke in his +<i>History of Prices</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_365" id="Footnote_365"></a><a href="#FNanchor_365"><span class="label">[365]</span></a> <i>Money and Monetary Problems</i>, p. 105, and preceding.</p></div> + +<div class="footnote"><p><a name="Footnote_366" id="Footnote_366"></a><a href="#FNanchor_366"><span class="label">[366]</span></a> Nicholson, <i>loc. cit.</i>, 84ff.</p></div> + +<div class="footnote"><p><a name="Footnote_367" id="Footnote_367"></a><a href="#FNanchor_367"><span class="label">[367]</span></a> <i>Ibid.</i>, 76ff.</p></div> + +<div class="footnote"><p><a name="Footnote_368" id="Footnote_368"></a><a href="#FNanchor_368"><span class="label">[368]</span></a> <i>Cf.</i> Laughlin, J. L., <i>Principles of Money</i>, and Scott, W. A., <i>Money and +Banking</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_369" id="Footnote_369"></a><a href="#FNanchor_369"><span class="label">[369]</span></a> <i>Cf.</i> <i>infra</i>, our discussion of credit. It is not maintained that credit +needs to be based on <i>physical</i> goods, but it is maintained that credit is based +on <i>values</i>, which are generally not the value of a sum of gold.</p></div> + +<div class="footnote"><p><a name="Footnote_370" id="Footnote_370"></a><a href="#FNanchor_370"><span class="label">[370]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_371" id="Footnote_371"></a><a href="#FNanchor_371"><span class="label">[371]</span></a> <i>Infra</i>, the discussion of reserves in Part III.</p></div> + +<div class="footnote"><p><a name="Footnote_372" id="Footnote_372"></a><a href="#FNanchor_372"><span class="label">[372]</span></a> <i>Cf.</i> the chapter on "The Origin of Money," <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_373" id="Footnote_373"></a><a href="#FNanchor_373"><span class="label">[373]</span></a> See especially <i>History of the Greenbacks</i>, pp. 188ff.; 207-208; 275-279.</p></div> + +<div class="footnote"><p><a name="Footnote_374" id="Footnote_374"></a><a href="#FNanchor_374"><span class="label">[374]</span></a> 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, <i>J. P. E.</i>, 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 (<i>Purchasing +Power of Money</i>, 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 <i>lending out</i> 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. +</p><p> +Another effort to harmonize the facts with the theory consists in the +contention that <i>anticipated</i> 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! <i>Cf.</i> +Mill, <i>Principles</i>, Bk. III, ch. 12, par. 2, and Jos. F. Johnson, <i>Money and +Currency</i>, Rev. ed., p. 235. +</p><p> +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 (<i>loc. cit.</i>) +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. +</p><p> +At another point, Professor Fisher maintains (p. 263) that the rapid +changes in gold premium which came with news from the military operations +(<i>e. g.</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_375" id="Footnote_375"></a><a href="#FNanchor_375"><span class="label">[375]</span></a> Kemmerer, E. W., <i>Money and Credit Instruments in their Relation to +General Prices</i>, New York, 1907; Fisher, <i>Purchasing Power of Money</i>, New +York, 1911; subsequent yearly continuations of "The Equation of Exchange" +in the <i>American Economic Review</i>. The references here, as throughout, +are to the 1913 edition of Professor Fisher's book.</p></div> + +<div class="footnote"><p><a name="Footnote_376" id="Footnote_376"></a><a href="#FNanchor_376"><span class="label">[376]</span></a> <i>History of Prices.</i></p></div> + +<div class="footnote"><p><a name="Footnote_377" id="Footnote_377"></a><a href="#FNanchor_377"><span class="label">[377]</span></a> To this type would belong Professor Fisher's figures with reference to +the years, 1860-66 on p. 260 of his <i>Purchasing Power of Money</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_378" id="Footnote_378"></a><a href="#FNanchor_378"><span class="label">[378]</span></a> This relates particularly to Fisher's figures.</p></div> + +<div class="footnote"><p><a name="Footnote_379" id="Footnote_379"></a><a href="#FNanchor_379"><span class="label">[379]</span></a> <i>Loc. cit.</i>, p. 298.</p></div> + +<div class="footnote"><p><a name="Footnote_380" id="Footnote_380"></a><a href="#FNanchor_380"><span class="label">[380]</span></a> <i>Ibid.</i>, p. 297.</p></div> + +<div class="footnote"><p><a name="Footnote_381" id="Footnote_381"></a><a href="#FNanchor_381"><span class="label">[381]</span></a> <i>Cf.</i> our chapter, <i>supra</i>, on the "Equation of Exchange."</p></div> + +<div class="footnote"><p><a name="Footnote_382" id="Footnote_382"></a><a href="#FNanchor_382"><span class="label">[382]</span></a> These are the "finally adjusted" figures. <i>Loc. cit.</i>, 304.</p></div> + +<div class="footnote"><p><a name="Footnote_383" id="Footnote_383"></a><a href="#FNanchor_383"><span class="label">[383]</span></a> <i>Ibid.</i>, 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. <i>Cf.</i> our comments on this point, <i>infra</i>, 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. <i>Infra</i>, +ch. 24.</p></div> + +<div class="footnote"><p><a name="Footnote_384" id="Footnote_384"></a><a href="#FNanchor_384"><span class="label">[384]</span></a> <i>Report of the Comptroller</i>, 1896; <i>The Use of Credit Instruments in Payments +in the United States</i>, National Monetary Commission Report, Washington, +1910.</p></div> + +<div class="footnote"><p><a name="Footnote_385" id="Footnote_385"></a><a href="#FNanchor_385"><span class="label">[385]</span></a> I am indebted to the <i>Annalist</i> for permission to use here materials first +published in the <i>Annalist</i> 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," <i>Annalist</i> +Feb. 21, 1916; and "Over and Under Counting," <i>Ibid.</i>, March 13, 1916.</p></div> + +<div class="footnote"><p><a name="Footnote_386" id="Footnote_386"></a><a href="#FNanchor_386"><span class="label">[386]</span></a> Except checks deposited by one bank in another. Kinley's figures +exclude these in 1909, but not in 1896.</p></div> + +<div class="footnote"><p><a name="Footnote_387" id="Footnote_387"></a><a href="#FNanchor_387"><span class="label">[387]</span></a> The methods and data employed by Professor Fisher are described at +length in his <i>Purchasing Power of Money</i>, ch. XII, and Appendix to ch. XII.</p></div> + +<div class="footnote"><p><a name="Footnote_388" id="Footnote_388"></a><a href="#FNanchor_388"><span class="label">[388]</span></a> M´ is the <i>average</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_389" id="Footnote_389"></a><a href="#FNanchor_389"><span class="label">[389]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_390" id="Footnote_390"></a><a href="#FNanchor_390"><span class="label">[390]</span></a> 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!</p></div> + +<div class="footnote"><p><a name="Footnote_391" id="Footnote_391"></a><a href="#FNanchor_391"><span class="label">[391]</span></a> <i>The Use of Credit Instruments</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_392" id="Footnote_392"></a><a href="#FNanchor_392"><span class="label">[392]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_393" id="Footnote_393"></a><a href="#FNanchor_393"><span class="label">[393]</span></a> House Committee on "Money Trust." Feb. 28, 1913. Pp. 57, 78, 145.</p></div> + +<div class="footnote"><p><a name="Footnote_394" id="Footnote_394"></a><a href="#FNanchor_394"><span class="label">[394]</span></a> <i>Cf.</i> <i>supra</i>, and <i>infra</i> our discussion of the volume of trade, and <i>infra</i>, +our discussion of credit, particularly the analysis of bank-loans.</p></div> + +<div class="footnote"><p><a name="Footnote_395" id="Footnote_395"></a><a href="#FNanchor_395"><span class="label">[395]</span></a> <i>Vide</i> the opinion expressed by an official of a New York trust company, +quoted below, on p. 346.</p></div> + +<div class="footnote"><p><a name="Footnote_396" id="Footnote_396"></a><a href="#FNanchor_396"><span class="label">[396]</span></a> <i>Cf.</i> Horace White, <i>Money and Banking</i>, 5th ed., p. 364.</p></div> + +<div class="footnote"><p><a name="Footnote_397" id="Footnote_397"></a><a href="#FNanchor_397"><span class="label">[397]</span></a> Kirkbride and Sterret, <i>The Modern Trust Co.</i>, New York, 1905, pp. 59-60; +Cannon, <i>Clearing Houses</i>, <i>Nat. Mon. Com. Report</i>, p. 178; Conant, <i>Principles +of Money and Banking</i>, II, p. 244.</p></div> + +<div class="footnote"><p><a name="Footnote_398" id="Footnote_398"></a><a href="#FNanchor_398"><span class="label">[398]</span></a> 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 <i>State +Banks and Trust Companies</i>. 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.</p></div> + +<div class="footnote"><p><a name="Footnote_399" id="Footnote_399"></a><a href="#FNanchor_399"><span class="label">[399]</span></a> Fisher, <i>loc. cit.</i>, p. 444.</p></div> + +<div class="footnote"><p><a name="Footnote_400" id="Footnote_400"></a><a href="#FNanchor_400"><span class="label">[400]</span></a> P. 443. Other discussions of this investigation are in the <i>Journal of the +American Bankers' Association</i>, Jan. 1914, p. 487; <i>Ibid.</i>, Feb. 1915, p. 555; +<i>National Banker</i>, March, 1915.</p></div> + +<div class="footnote"><p><a name="Footnote_401" id="Footnote_401"></a><a href="#FNanchor_401"><span class="label">[401]</span></a> None of the cities covered in the figures given in the <i>Annalist</i> 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%. <i>Loc. cit.</i>, p. 180.</p></div> + +<div class="footnote"><p><a name="Footnote_402" id="Footnote_402"></a><a href="#FNanchor_402"><span class="label">[402]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_403" id="Footnote_403"></a><a href="#FNanchor_403"><span class="label">[403]</span></a> 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 <i>Annalist</i>. 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]."</p></div> + +<div class="footnote"><p><a name="Footnote_404" id="Footnote_404"></a><a href="#FNanchor_404"><span class="label">[404]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_405" id="Footnote_405"></a><a href="#FNanchor_405"><span class="label">[405]</span></a> <i>Vide</i> Rodney Dean, of the Fifth Avenue Bank, New York, "The Problem +of Collecting Transit Items," <i>Journal of the American Bankers' Association</i>, +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.</p></div> + +<div class="footnote"><p><a name="Footnote_406" id="Footnote_406"></a><a href="#FNanchor_406"><span class="label">[406]</span></a> Since the foregoing was written, my attention has been called by Mr. +Osmund Phillips, Financial Editor of the New York <i>Times</i>, and Editor of +the <i>Annalist</i>, 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 <i>reciprocal</i>, 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. +</p><p> +If, however, the Kansas City and Boston arrangements held in New York, +these collection items would be represented <i>twice</i> in New York clearings. +The fact that the items do not themselves get into the clearings remains. +</p><p> +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.</p></div> + +<div class="footnote"><p><a name="Footnote_407" id="Footnote_407"></a><a href="#FNanchor_407"><span class="label">[407]</span></a> 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 <i>balances</i> between +cities, or <i>within</i> 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 <i>country</i> +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 <i>balances</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_408" id="Footnote_408"></a><a href="#FNanchor_408"><span class="label">[408]</span></a> The whole thing is summed up on p. 25 of the Comptroller's <i>Report</i> for +1892.</p></div> + +<div class="footnote"><p><a name="Footnote_409" id="Footnote_409"></a><a href="#FNanchor_409"><span class="label">[409]</span></a> <i>Cf.</i> Kemmerer, <i>Money and Credit Instruments</i>, p. 117.</p></div> + +<div class="footnote"><p><a name="Footnote_410" id="Footnote_410"></a><a href="#FNanchor_410"><span class="label">[410]</span></a> <i>Annalist</i>, July 6, 1914, p. 8. The editor of the <i>Annalist</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_411" id="Footnote_411"></a><a href="#FNanchor_411"><span class="label">[411]</span></a> 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%." (<i>Jour. of American Bankers' Ass'n</i>, +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.</p></div> + +<div class="footnote"><p><a name="Footnote_412" id="Footnote_412"></a><a href="#FNanchor_412"><span class="label">[412]</span></a> <i>Loc. cit.</i>, p. 304.</p></div> + +<div class="footnote"><p><a name="Footnote_413" id="Footnote_413"></a><a href="#FNanchor_413"><span class="label">[413]</span></a> 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." <i>Cf.</i> our +discussion of the estimate of T, <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_414" id="Footnote_414"></a><a href="#FNanchor_414"><span class="label">[414]</span></a> Kemmerer does not do this, but takes total clearings for the country as +his index of variation. <i>Loc. cit.</i>, 118-120. His figures for "check circulation" +are, thus, more variable than Fisher's. In this, Kemmerer's results +are much to be preferred.</p></div> + +<div class="footnote"><p><a name="Footnote_415" id="Footnote_415"></a><a href="#FNanchor_415"><span class="label">[415]</span></a> I have taken the figures for clearings from Professor Fisher's table, <i>loc. +cit.</i>, p. 448.</p></div> + +<div class="footnote"><p><a name="Footnote_416" id="Footnote_416"></a><a href="#FNanchor_416"><span class="label">[416]</span></a> <i>Loc. cit.</i>, p. 304. <i>Cf.</i> our chapter on "Velocity of Circulation," <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_417" id="Footnote_417"></a><a href="#FNanchor_417"><span class="label">[417]</span></a> <i>Loc. cit.</i>, pp. 477-478.</p></div> + +<div class="footnote"><p><a name="Footnote_418" id="Footnote_418"></a><a href="#FNanchor_418"><span class="label">[418]</span></a> There is, of course, the further point, to be emphasized in the discussion +of T, <i>infra</i>, 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´.</p></div> + +<div class="footnote"><p><a name="Footnote_419" id="Footnote_419"></a><a href="#FNanchor_419"><span class="label">[419]</span></a> <i>Business Cycles</i>, p. 308.</p></div> + +<div class="footnote"><p><a name="Footnote_420" id="Footnote_420"></a><a href="#FNanchor_420"><span class="label">[420]</span></a> That volume of trade and volume of physical goods are virtually interchangeable +in Fisher's thought is strikingly illustrated on p. 195 of the +<i>Purchasing Power of Money</i>: "A doubling in the quantities of all commodities +<i>sold</i>, or (<i>what is almost the same thing</i>) a doubling of the quantities <i>consumed</i>." +Italics are mine.</p></div> + +<div class="footnote"><p><a name="Footnote_421" id="Footnote_421"></a><a href="#FNanchor_421"><span class="label">[421]</span></a> 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."</p></div> + +<div class="footnote"><p><a name="Footnote_422" id="Footnote_422"></a><a href="#FNanchor_422"><span class="label">[422]</span></a> <i>Vide</i> <i>Annalist</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_423" id="Footnote_423"></a><a href="#FNanchor_423"><span class="label">[423]</span></a> <i>Op. cit.</i>, 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 <i>undercount</i> 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. <i>Cf.</i> +Kemmerer, p. 105, and Kinley, in <i>Report of the Comptroller</i> for 1896 and in +the 1909 monograph, <i>passim.</i></p></div> + +<div class="footnote"><p><a name="Footnote_424" id="Footnote_424"></a><a href="#FNanchor_424"><span class="label">[424]</span></a> <i>Vide</i> the present writer's discussion in the <i>Annalist</i>, March 6, 1916, +p. 313.</p></div> + +<div class="footnote"><p><a name="Footnote_425" id="Footnote_425"></a><a href="#FNanchor_425"><span class="label">[425]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_426" id="Footnote_426"></a><a href="#FNanchor_426"><span class="label">[426]</span></a> <i>Statistics of Railways</i>, 1909, p. 71.</p></div> + +<div class="footnote"><p><a name="Footnote_427" id="Footnote_427"></a><a href="#FNanchor_427"><span class="label">[427]</span></a> Professor Fisher, in his <i>Annalist</i> article of Feb. 21, 1916, quotes Dean +Kinley (<i>The Use of Credit Instruments</i>, 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. (<i>Ibid.</i>, 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 <i>payments</i>, not <i>trade</i>. From the angle of volume of trade, +he finds duplications even in the retail deposits (<i>Jour. of Polit. Econ.</i>, vol. 5, +p. 165).</p></div> + +<div class="footnote"><p><a name="Footnote_428" id="Footnote_428"></a><a href="#FNanchor_428"><span class="label">[428]</span></a> <i>Annalist</i>, March 13, 1916, p. 344.</p></div> + +<div class="footnote"><p><a name="Footnote_429" id="Footnote_429"></a><a href="#FNanchor_429"><span class="label">[429]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_430" id="Footnote_430"></a><a href="#FNanchor_430"><span class="label">[430]</span></a> <i>Annalist</i>, Feb. 21 and March 13, 1916.</p></div> + +<div class="footnote"><p><a name="Footnote_431" id="Footnote_431"></a><a href="#FNanchor_431"><span class="label">[431]</span></a> <i>Loc. cit.</i>, p. 180.</p></div> + +<div class="footnote"><p><a name="Footnote_432" id="Footnote_432"></a><a href="#FNanchor_432"><span class="label">[432]</span></a> <i>Ibid.</i>, pp. 166-167; 187; 273.</p></div> + +<div class="footnote"><p><a name="Footnote_433" id="Footnote_433"></a><a href="#FNanchor_433"><span class="label">[433]</span></a> Pratt, <i>loc. cit.</i>, p. 166.</p></div> + +<div class="footnote"><p><a name="Footnote_434" id="Footnote_434"></a><a href="#FNanchor_434"><span class="label">[434]</span></a> <i>Ibid.</i>, p. 187.</p></div> + +<div class="footnote"><p><a name="Footnote_435" id="Footnote_435"></a><a href="#FNanchor_435"><span class="label">[435]</span></a> Emery, <i>Speculation on the Stock and Produce Exchanges</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_436" id="Footnote_436"></a><a href="#FNanchor_436"><span class="label">[436]</span></a> The banks, of course, are not borrowing stocks.</p></div> + +<div class="footnote"><p><a name="Footnote_437" id="Footnote_437"></a><a href="#FNanchor_437"><span class="label">[437]</span></a> Van Antwerp, <i>The Stock Exchange from Within</i>, New York, 1913, p. 290</p></div> + +<div class="footnote"><p><a name="Footnote_438" id="Footnote_438"></a><a href="#FNanchor_438"><span class="label">[438]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_439" id="Footnote_439"></a><a href="#FNanchor_439"><span class="label">[439]</span></a> 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 (<i>Pujo Committee Report</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_440" id="Footnote_440"></a><a href="#FNanchor_440"><span class="label">[440]</span></a> <i>Ibid.</i>, p. 166.</p></div> + +<div class="footnote"><p><a name="Footnote_441" id="Footnote_441"></a><a href="#FNanchor_441"><span class="label">[441]</span></a> This explains the estimates of Wall Street men that the Clearing House +reduces checks by two-thirds. For <i>their purposes</i>, the saving is almost that +much, of the items offered for clearings. <i>Cf.</i> Van Antwerp, <i>The Stock Exchange +from Within</i>, pp. 121-122.</p></div> + +<div class="footnote"><p><a name="Footnote_442" id="Footnote_442"></a><a href="#FNanchor_442"><span class="label">[442]</span></a> <i>Ibid.</i>, 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!</p></div> + +<div class="footnote"><p><a name="Footnote_443" id="Footnote_443"></a><a href="#FNanchor_443"><span class="label">[443]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_444" id="Footnote_444"></a><a href="#FNanchor_444"><span class="label">[444]</span></a> P. 34.</p></div> + +<div class="footnote"><p><a name="Footnote_445" id="Footnote_445"></a><a href="#FNanchor_445"><span class="label">[445]</span></a> <i>Annalist</i>, Aug. 14, 1916.</p></div> + +<div class="footnote"><p><a name="Footnote_446" id="Footnote_446"></a><a href="#FNanchor_446"><span class="label">[446]</span></a> N. J. Silberling, "The Mystery of Clearings," <i>Annalist</i>, Aug. 14, 1916, +p. 223.</p></div> + +<div class="footnote"><p><a name="Footnote_447" id="Footnote_447"></a><a href="#FNanchor_447"><span class="label">[447]</span></a> 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: +</p> +<p> +Market value of stocks and bonds bought, 1,644,630<br /> +Total deposits made during month, 1,475,502<br /> +Average borrowed from banks, 952,000<br /> +</p> +<p> +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 <i>average</i> bank loans for the month—over +two-thirds of the <i>total</i> deposits for the month. The house had a large bull +<i>clientèle</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_448" id="Footnote_448"></a><a href="#FNanchor_448"><span class="label">[448]</span></a> Kemmerer's main figures are merely <i>indicia</i> of variation, rather than +absolute magnitudes, for trade. On p. 136, <i>d.</i> (<i>loc. cit.</i>), 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.</p></div> + +<div class="footnote"><p><a name="Footnote_449" id="Footnote_449"></a><a href="#FNanchor_449"><span class="label">[449]</span></a> <i>Cf.</i> the discussion of the relation of P and T in the chapter on "The +Equation of Exchange."</p></div> + +<div class="footnote"><p><a name="Footnote_450" id="Footnote_450"></a><a href="#FNanchor_450"><span class="label">[450]</span></a> <i>Op. cit.</i>, p. 136.</p></div> + +<div class="footnote"><p><a name="Footnote_451" id="Footnote_451"></a><a href="#FNanchor_451"><span class="label">[451]</span></a> <i>Ibid.</i>, pp. 70-71.</p></div> + +<div class="footnote"><p><a name="Footnote_452" id="Footnote_452"></a><a href="#FNanchor_452"><span class="label">[452]</span></a> <i>Loc. cit.</i>, p. 487.</p></div> + +<div class="footnote"><p><a name="Footnote_453" id="Footnote_453"></a><a href="#FNanchor_453"><span class="label">[453]</span></a> 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." (<i>Loc. cit.</i>, 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. (<i>Loc. cit.</i>, 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. (<i>Op. +cit.</i>, p. 201.) <i>Cf.</i> Fisher's comments, <i>loc. cit.</i>, pp. 430; 460 <i>et seq.</i> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_454" id="Footnote_454"></a><a href="#FNanchor_454"><span class="label">[454]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_455" id="Footnote_455"></a><a href="#FNanchor_455"><span class="label">[455]</span></a> Menger, "Geld," <i>Handwörterbuch der Staatswissenschaften</i>; Carlile, <i>Evolution +of Modern Money</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_456" id="Footnote_456"></a><a href="#FNanchor_456"><span class="label">[456]</span></a> We should make a slight and unimportant qualification as to Kemmerer. +<i>Cf.</i> our chapter on "Dodo-Bones," <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_457" id="Footnote_457"></a><a href="#FNanchor_457"><span class="label">[457]</span></a> It seems necessary to point out this essential lack of correlation between +value and exchangeability, since Mr. Horace White, in his <i>Money and Banking</i> +(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." <i>Cf.</i> also Amasa Walker's contention that "exchangeable +value" is tautology, equivalent to "exchangeable exchangeability!" <i>Science +of Wealth</i>, 5th ed., p. 9. <i>Cf.</i> my article "The Concept of Value Further +Considered," <i>Quart. Jour. of Econ.</i>, Aug. 1915, pp. 696 <i>et seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_458" id="Footnote_458"></a><a href="#FNanchor_458"><span class="label">[458]</span></a> This is stated by Schumpeter, so far as land is concerned. <i>Vide Quarterly +Journal of Economics</i>, 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 "<i>Wert</i>" 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. "<i>Tauschwert</i>" is for him a relative value, though he is +finally driven to constructing what is virtually an absolute value notion, by +distinguishing "<i>äusserer Tauschwert</i>" from "<i>innerer Tauschwert</i>" in the case +of money, the latter being concerned exclusively with the causes affecting +prices <i>from the side</i> of money, ignoring changes in prices due to causes affecting +goods. (<i>Cf.</i> art. "Geld," in <i>Handwörterbuch der Staatswissenschaften</i>, +3d ed., pp. 592-593. He does not make this distinction in developing the +theory of saleability of goods, however. <i>Cf.</i> the chapter, <i>supra</i>, 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.)</p></div> + +<div class="footnote"><p><a name="Footnote_459" id="Footnote_459"></a><a href="#FNanchor_459"><span class="label">[459]</span></a> <i>Cf.</i> A. S. Johnson, "Davenport's Competitive Economics," <i>Quart. Jour. +of Econ.</i>, May, 1914, p. 431.</p></div> + +<div class="footnote"><p><a name="Footnote_460" id="Footnote_460"></a><a href="#FNanchor_460"><span class="label">[460]</span></a> 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."</p></div> + +<div class="footnote"><p><a name="Footnote_461" id="Footnote_461"></a><a href="#FNanchor_461"><span class="label">[461]</span></a> Ridgeway, <i>Origin of Metallic Currency</i>, p. 327; Carlile, <i>Evolution of +Modern Money</i>, 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, <i>Economic Principles of Confucius and his School</i>, vol. II, p. 437.</p></div> + +<div class="footnote"><p><a name="Footnote_462" id="Footnote_462"></a><a href="#FNanchor_462"><span class="label">[462]</span></a> Written in 1914.</p></div> + +<div class="footnote"><p><a name="Footnote_463" id="Footnote_463"></a><a href="#FNanchor_463"><span class="label">[463]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_464" id="Footnote_464"></a><a href="#FNanchor_464"><span class="label">[464]</span></a> <i>Cf.</i> Carlile, <i>Monetary Economics</i>, 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."</p></div> + +<div class="footnote"><p><a name="Footnote_465" id="Footnote_465"></a><a href="#FNanchor_465"><span class="label">[465]</span></a> <i>Cf.</i> Conant, <i>Principles of Money and Banking</i>, I, ch. 7, esp. p. 102.</p></div> + +<div class="footnote"><p><a name="Footnote_466" id="Footnote_466"></a><a href="#FNanchor_466"><span class="label">[466]</span></a> 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 (<i>The World's Gold</i>, 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 (<i>Business Cycles</i>, 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 (<i>Emplois Industriels des Métaux Précieux</i>, +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. +</p><p> +The Director of the Mint would assign a much higher proportion of the +annual output to coinage than would DeLaunay. +</p><p> +Earlier studies, by Soetbeer and Suess, seem quite out of harmony with +these conclusions. (Suess, Eduard, <i>The Future of Silver</i>, 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 (<i>Litteraturnachweis</i>, p. 285) as admitting that such a +contention may not be demonstrable, but at the same time holding that it +cannot be disproved. +</p><p> +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. (<i>American Economic Review</i>, +Sept. 1913.)</p></div> + +<div class="footnote"><p><a name="Footnote_467" id="Footnote_467"></a><a href="#FNanchor_467"><span class="label">[467]</span></a> <i>Cf.</i> our chapter on "Economic Value," <i>supra</i>, and "Social Value," <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_468" id="Footnote_468"></a><a href="#FNanchor_468"><span class="label">[468]</span></a> F. A. Walker, <i>International Bimet</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_469" id="Footnote_469"></a><a href="#FNanchor_469"><span class="label">[469]</span></a> See DeLaunay, <i>The World's Gold</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_470" id="Footnote_470"></a><a href="#FNanchor_470"><span class="label">[470]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_471" id="Footnote_471"></a><a href="#FNanchor_471"><span class="label">[471]</span></a> <i>Cf.</i> chapter on "Dodo-Bones," <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_472" id="Footnote_472"></a><a href="#FNanchor_472"><span class="label">[472]</span></a> Among the writers who have treated this topic, I would mention especially +Menger, "Geld," in <i>Handwörterbuch der Staatswissenschaften</i>; +Laughlin, <i>Principles of Money</i>; Scott, W. A., <i>Money and Banking</i>; Knies, +<i>Das Geld</i>; Walker, F. A., <i>Money and Political Economy</i>; Conant, <i>Principles +of Money and Banking</i>; Seligman, <i>Principles of Economics</i>; Johnson, J. F., +<i>Money and Currency</i>; von Mises, L., <i>Theorie des Geldes und der Umlaufsmittel</i>; +Helfferich, K., <i>Das Geld</i>; Simmel, <i>Philosophie des Geldes</i>; Davenport, +H. J., <i>Economics of Enterprise</i>. The difference between the standard of +value (common measure of values) function, and the medium of exchange +function is particularly well illustrated by Scott, <i>loc. cit.</i>, ch. 1. The legal +functions of money are especially treated by Knapp, <i>Staatliche Theorie des +Geldes</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_473" id="Footnote_473"></a><a href="#FNanchor_473"><span class="label">[473]</span></a> 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, <i>Das Geld</i>, I, 113ff.; Kinley, <i>Money</i>, 61-62; +Merriam, L. S., "Money as a Measure of Value," <i>Annals of the American +Academy</i>, vol. IV; Carver, "The Concept of an Economic Quantity," <i>Quart. +Jour. of Econ.</i>, 1907; Laughlin, <i>Principles of Money</i>, 1903, pp. 14-16; Davenport, +<i>Value and Distribution</i>, p. 181, n.; Anderson, <i>Social Value</i>, chs. 2 and +11, and "The Concept of Value Further Considered," <i>Quart. Journal of +Econ.</i>, 1915; Helfferich, <i>Das Geld</i>, 1903 ed., pp. 470-478; Scott, <i>Money and +Banking</i>, ch. 1.</p></div> + +<div class="footnote"><p><a name="Footnote_474" id="Footnote_474"></a><a href="#FNanchor_474"><span class="label">[474]</span></a> See Scott, <i>Money and Banking</i>, ch. 3.</p></div> + +<div class="footnote"><p><a name="Footnote_475" id="Footnote_475"></a><a href="#FNanchor_475"><span class="label">[475]</span></a> A further reason for preferring "common measure of values" is that +expression carries dearly the connotation of absolute values. "Relative +values" cannot be "measured," <i>Social Value</i>, pp. 26-27.</p></div> + +<div class="footnote"><p><a name="Footnote_476" id="Footnote_476"></a><a href="#FNanchor_476"><span class="label">[476]</span></a> Current text-books, following the Austrian doctrine, define production +as the creation of "utilities." This is incorrect. Production is the creation +of <i>values</i>. <i>Cf. Social Value</i>, pp. 119 and 189.</p></div> + +<div class="footnote"><p><a name="Footnote_477" id="Footnote_477"></a><a href="#FNanchor_477"><span class="label">[477]</span></a> This is the view of H. J. Davenport (<i>Economics of Enterprise</i>, pp. 301-302).</p></div> + +<div class="footnote"><p><a name="Footnote_478" id="Footnote_478"></a><a href="#FNanchor_478"><span class="label">[478]</span></a> 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 <i>Money and +Credit Instruments</i>, pp. 124-126, and 144.</p></div> + +<div class="footnote"><p><a name="Footnote_479" id="Footnote_479"></a><a href="#FNanchor_479"><span class="label">[479]</span></a> "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, <i>Principles of Money and Banking</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_480" id="Footnote_480"></a><a href="#FNanchor_480"><span class="label">[480]</span></a> <i>E. g.</i>, Cairnes, J. E., <i>Leading Principles of Political Economy</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_481" id="Footnote_481"></a><a href="#FNanchor_481"><span class="label">[481]</span></a> <i>One</i> "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. <i>Cf. supra</i>, the ch. on "The Capitalization Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_482" id="Footnote_482"></a><a href="#FNanchor_482"><span class="label">[482]</span></a> See von Mises, "The Foreign Exchange Policy of the Austro-Hungarian +Bank," British <i>Economic Journal</i>, 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 +(<i>Annalist</i>, Feb. 28, 1916, and <i>Theorie der wirtschaftlichen Entwicklung</i>), +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.</p></div> + +<div class="footnote"><p><a name="Footnote_483" id="Footnote_483"></a><a href="#FNanchor_483"><span class="label">[483]</span></a> <i>Cf.</i> the analysis of bank-loans in the United States, <i>infra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_484" id="Footnote_484"></a><a href="#FNanchor_484"><span class="label">[484]</span></a> Mitchell, <i>Business Cycles</i>, p. 146.</p></div> + +<div class="footnote"><p><a name="Footnote_485" id="Footnote_485"></a><a href="#FNanchor_485"><span class="label">[485]</span></a> <i>Journal of Political Economy</i>, XVI, May, 1908, pp. 273-298.</p></div> + +<div class="footnote"><p><a name="Footnote_486" id="Footnote_486"></a><a href="#FNanchor_486"><span class="label">[486]</span></a> 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 +<i>debts</i>. The State must preserve the continuity of juristic relations, between +debtors and creditors as elsewhere. Knapp holds that the <i>Zahlungsmittel</i> +(legal means of quittance, legal tender) function is the primary function of +money, and that it is not a concept subordinate to <i>Tauschmittel</i> (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! (<i>Schriften des Vereins für Sozialpolitik</i>, 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 <i>qualitative distinctions</i>, rather than with quantitative causal +conceptions. (<i>Cf.</i> my discussion in the chapter on "The Reconciliation of +Statics and Dynamics," <i>infra</i>, 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 <i>Theorie +des Geldes</i> (ch. on "Das Geld und der Staat"), and in his English article +on "The Foreign Exchange Policy of the Austro-Hungarian Bank," British +<i>Economic Journal</i>, 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," <i>supra</i>. 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. +</p><p> +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. +</p><p> +Recent German literature on money (<i>e. g.</i>, Fr. Bendixsen, <i>Geld und Kapital</i>, +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!</p></div> + +<div class="footnote"><p><a name="Footnote_487" id="Footnote_487"></a><a href="#FNanchor_487"><span class="label">[487]</span></a> <i>Economics of Enterprise</i>, p. 257.</p></div> + +<div class="footnote"><p><a name="Footnote_488" id="Footnote_488"></a><a href="#FNanchor_488"><span class="label">[488]</span></a> <i>Cf.</i> Böhm-Bawerk's <i>Capital and Interest</i>, <i>passim</i>, particularly his discussion of Hermann, for an exposition and criticism of the "use" theory of +interest.</p></div> + +<div class="footnote"><p><a name="Footnote_489" id="Footnote_489"></a><a href="#FNanchor_489"><span class="label">[489]</span></a> <i>Cf.</i> Clark, J. B., <i>The Distribution of Wealth</i>, pp. 210-245.</p></div> + +<div class="footnote"><p><a name="Footnote_490" id="Footnote_490"></a><a href="#FNanchor_490"><span class="label">[490]</span></a> This is not necessarily true among Asiatics, or on the East Side in New +York City.</p></div> + +<div class="footnote"><p><a name="Footnote_491" id="Footnote_491"></a><a href="#FNanchor_491"><span class="label">[491]</span></a> The adherent of the Ricardian analysis who would deny this may fight +it out with Clark, Fetter, and A. S. Johnson!</p></div> + +<div class="footnote"><p><a name="Footnote_492" id="Footnote_492"></a><a href="#FNanchor_492"><span class="label">[492]</span></a> 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 <i>never</i> mean any of these +things by "value," when used without qualification, in this book. I mean +always <i>social economic value</i>, conceived of as <i>absolute</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_493" id="Footnote_493"></a><a href="#FNanchor_493"><span class="label">[493]</span></a> 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 (<i>Money and Credit Instruments</i>, p. 38) that he can find no +evidence at all to support Laughlin's view of the matter. (See Laughlin, +<i>Principles of Money</i>, pp. 524 et seq.) J. M. Keynes, however, in his <i>Indian +Currency and Finance</i>, p. 5, says: "The Committee of 1892 did not commit +themselves; but the system which their recommendations established was +<i>generally supposed</i> [Italics mine.] to be transitional and a first step toward +the <i>introduction of gold</i> [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 <i>some</i> evidence at least for Laughlin's view. That his +view offers a complete explanation, I think unlikely. +</p><p> +Kemmerer's admirable <i>Modern Currency Reforms</i> (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 <i>a priori</i> reasoning and statistics for the United States. <i>Loc. +cit.</i>, 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!</p></div> + +<div class="footnote"><p><a name="Footnote_494" id="Footnote_494"></a><a href="#FNanchor_494"><span class="label">[494]</span></a> 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 <i>weighing</i> the gold of State banks.</p></div> + +<div class="footnote"><p><a name="Footnote_495" id="Footnote_495"></a><a href="#FNanchor_495"><span class="label">[495]</span></a> Legal tender can add to value of money only when it confers an option +on the <i>debtor</i>. In the case discussed, it is the <i>creditor</i> who has the option. +But options are not necessarily valuable.</p></div> + +<div class="footnote"><p><a name="Footnote_496" id="Footnote_496"></a><a href="#FNanchor_496"><span class="label">[496]</span></a> As Davenport has pointed out, money is really moneys—there is a +hierarchy. <i>Cf. Economics of Enterprise</i>, pp. 256-259.</p></div> + +<div class="footnote"><p><a name="Footnote_497" id="Footnote_497"></a><a href="#FNanchor_497"><span class="label">[497]</span></a> 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. <i>Cf.</i> W. C. Mitchell's discussion of the "Demand Notes," <i>History +of Greenbacks</i>, <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_498" id="Footnote_498"></a><a href="#FNanchor_498"><span class="label">[498]</span></a> <i>Cf.</i> Mitchell's account, (<i>Ibid.</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_499" id="Footnote_499"></a><a href="#FNanchor_499"><span class="label">[499]</span></a> <i>Cf.</i> my article in the <i>Annalist</i>, Feb. 7, 1916, "The Ratio of Foreign to +Domestic Trade," and the chapter, <i>supra</i>, on "The Quantity of Money and +the Volume of Trade."</p></div> + +<div class="footnote"><p><a name="Footnote_500" id="Footnote_500"></a><a href="#FNanchor_500"><span class="label">[500]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_501" id="Footnote_501"></a><a href="#FNanchor_501"><span class="label">[501]</span></a> <i>Cf. Social Value</i>, 183-184.</p></div> + +<div class="footnote"><p><a name="Footnote_502" id="Footnote_502"></a><a href="#FNanchor_502"><span class="label">[502]</span></a> <i>Cf.</i> Carver's contention that "the demand for money is a demand for +value." "Concept of an Economic Quantity," <i>Quart. Jour. of Econ.</i>, 1907.</p></div> + +<div class="footnote"><p><a name="Footnote_503" id="Footnote_503"></a><a href="#FNanchor_503"><span class="label">[503]</span></a> <i>Cf.</i> Laughlin's <i>Principles of Money</i>, p. 73.</p></div> + +<div class="footnote"><p><a name="Footnote_504" id="Footnote_504"></a><a href="#FNanchor_504"><span class="label">[504]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_505" id="Footnote_505"></a><a href="#FNanchor_505"><span class="label">[505]</span></a> No longer true of Europe, probably, since the huge war debts have been +incurred.</p></div> + +<div class="footnote"><p><a name="Footnote_506" id="Footnote_506"></a><a href="#FNanchor_506"><span class="label">[506]</span></a> The interest so defaulted is cumulative, like a preferred dividend, for +years after 1909. Wall Street speaks of this issue as a "half-bond."</p></div> + +<div class="footnote"><p><a name="Footnote_507" id="Footnote_507"></a><a href="#FNanchor_507"><span class="label">[507]</span></a> <i>Supra</i>, chapter on "Origin of Money."</p></div> + +<div class="footnote"><p><a name="Footnote_508" id="Footnote_508"></a><a href="#FNanchor_508"><span class="label">[508]</span></a> "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, <i>Work of Wall Street</i>, 1912 ed., p. 287. This, it need not be said, is +not always true!</p></div> + +<div class="footnote"><p><a name="Footnote_509" id="Footnote_509"></a><a href="#FNanchor_509"><span class="label">[509]</span></a> Veblen has elaborated the doctrine that stocks and bonds are much the +same. <i>Cf.</i> the discussion in Meade's <i>Corporation Finance</i> of the relation +of junior bonds and preferred stocks in reorganizations.</p></div> + +<div class="footnote"><p><a name="Footnote_510" id="Footnote_510"></a><a href="#FNanchor_510"><span class="label">[510]</span></a> 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," <i>Cf.</i> the chapter on "Dodo-Bones", +<i>supra</i>, and the chapter on "Economic Value."</p></div> + +<div class="footnote"><p><a name="Footnote_511" id="Footnote_511"></a><a href="#FNanchor_511"><span class="label">[511]</span></a> This would seem to be Davenport's view. See his article in the <i>Quarterly +Journal of Economics</i>, Nov. 1910.</p></div> + +<div class="footnote"><p><a name="Footnote_512" id="Footnote_512"></a><a href="#FNanchor_512"><span class="label">[512]</span></a> To a high degree, "good will," trade-marks, etc., are bankable assets.</p></div> + +<div class="footnote"><p><a name="Footnote_513" id="Footnote_513"></a><a href="#FNanchor_513"><span class="label">[513]</span></a> <i>Social Value</i>, 1911, <i>passim</i>, especially ch. XIII. Cooley, C. H., "Institutional +Character of Pecuniary Valuation," <i>Am. Jour. of Sociology</i>, Jan. +1913.</p></div> + +<div class="footnote"><p><a name="Footnote_514" id="Footnote_514"></a><a href="#FNanchor_514"><span class="label">[514]</span></a> <i>Cf.</i> my article, "Schumpeter's Dynamic Economics," <i>Political Science +Quarterly</i>, Dec. 1915, and the chapter on "Marginal Utility," <i>supra</i>. That +the new bank-credit, without the painful <i>preliminary</i> "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.</p></div> + +<div class="footnote"><p><a name="Footnote_515" id="Footnote_515"></a><a href="#FNanchor_515"><span class="label">[515]</span></a> 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. <i>Ibid.</i>, +p. 72. State banks own few stocks; trust companies own a good many.</p></div> + +<div class="footnote"><p><a name="Footnote_516" id="Footnote_516"></a><a href="#FNanchor_516"><span class="label">[516]</span></a> <i>Cf.</i> the chapter on "The Origin of Money," <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_517" id="Footnote_517"></a><a href="#FNanchor_517"><span class="label">[517]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_518" id="Footnote_518"></a><a href="#FNanchor_518"><span class="label">[518]</span></a> <i>Cf.</i>, <i>e. g.</i>, pp. 135ff. of Scott's excellent <i>Money and Banking</i>, Rev. ed., +New York, 1910.</p></div> + +<div class="footnote"><p><a name="Footnote_519" id="Footnote_519"></a><a href="#FNanchor_519"><span class="label">[519]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_520" id="Footnote_520"></a><a href="#FNanchor_520"><span class="label">[520]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_521" id="Footnote_521"></a><a href="#FNanchor_521"><span class="label">[521]</span></a> Almost all agricultural processes require more than six months from their +inception to the marketing of the product.</p></div> + +<div class="footnote"><p><a name="Footnote_522" id="Footnote_522"></a><a href="#FNanchor_522"><span class="label">[522]</span></a> This view would seem to correspond with the view of Babson and May +(<i>Commercial Paper</i>, 1912), and of W. A. Scott ("Investment vs. Commercial +Banking," <i>Proceedings of Investment Bankers' Association of America</i>, +1913, pp. 81-84). Both of these discussions appear in Moulton, <i>Money and +Banking</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_523" id="Footnote_523"></a><a href="#FNanchor_523"><span class="label">[523]</span></a> <i>Principles of Money and Banking</i>, II, p. 52.</p></div> + +<div class="footnote"><p><a name="Footnote_524" id="Footnote_524"></a><a href="#FNanchor_524"><span class="label">[524]</span></a> <i>Report of the Comptroller of the Currency</i>, vol. II, pp. 145 <i>et seq.</i></p></div> + +<div class="footnote"><p><a name="Footnote_525" id="Footnote_525"></a><a href="#FNanchor_525"><span class="label">[525]</span></a> Total collateral loans in New York City on that date were $719,327,596. +This is for national banks alone. <i>Report of Comptroller</i>, 1915, II, 144. There +is every reason to suppose that if trust companies and private banks were +included, the <i>proportion</i> of stock exchange collateral loans would be very +much higher.</p></div> + +<div class="footnote"><p><a name="Footnote_526" id="Footnote_526"></a><a href="#FNanchor_526"><span class="label">[526]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_527" id="Footnote_527"></a><a href="#FNanchor_527"><span class="label">[527]</span></a> This table is constructed on the basis of data in the <i>Report of the Comptroller</i> +for 1913, pp. 774-78.</p></div> + +<div class="footnote"><p><a name="Footnote_528" id="Footnote_528"></a><a href="#FNanchor_528"><span class="label">[528]</span></a> 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 <i>Report</i>, I, p. 30. Stock loans increase +from 66% to 71.2%, of collateral loans.</p></div> + +<div class="footnote"><p><a name="Footnote_529" id="Footnote_529"></a><a href="#FNanchor_529"><span class="label">[529]</span></a> The preceding argument would indicate that it is much too high.</p></div> + +<div class="footnote"><p><a name="Footnote_530" id="Footnote_530"></a><a href="#FNanchor_530"><span class="label">[530]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_531" id="Footnote_531"></a><a href="#FNanchor_531"><span class="label">[531]</span></a> These figures are taken from Conant, <i>Principles of Money and Banking</i>, +vol. II, p. 52.</p></div> + +<div class="footnote"><p><a name="Footnote_532" id="Footnote_532"></a><a href="#FNanchor_532"><span class="label">[532]</span></a> The term "commercial paper," as here used by Conant (whose source +is the <i>Comptroller's Report</i> 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. <i>Report of Comptroller</i>, 1913, p. 779.</p></div> + +<div class="footnote"><p><a name="Footnote_533" id="Footnote_533"></a><a href="#FNanchor_533"><span class="label">[533]</span></a> Taken by Conant (<i>Ibid.</i>, p. 51) from the <i>Économiste Européen</i> (April 29, +1904), XXV, p. 546.</p></div> + +<div class="footnote"><p><a name="Footnote_534" id="Footnote_534"></a><a href="#FNanchor_534"><span class="label">[534]</span></a> 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 <i>classes</i> of depositors from <i>representative</i> +banks in the community as a whole.</p></div> + +<div class="footnote"><p><a name="Footnote_535" id="Footnote_535"></a><a href="#FNanchor_535"><span class="label">[535]</span></a> <i>Supra</i>, chapters on "Volume of Money and Volume of Trade," and +"Statistical Demonstrations of the Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_536" id="Footnote_536"></a><a href="#FNanchor_536"><span class="label">[536]</span></a> 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. (<i>Supra</i>, p. 245.) The comparison +here is in any case rough. We do not need precise figures for the +argument.</p></div> + +<div class="footnote"><p><a name="Footnote_537" id="Footnote_537"></a><a href="#FNanchor_537"><span class="label">[537]</span></a> Pratt, <i>Work of Wall Street</i>, 1912 ed., p. 264.</p></div> + +<div class="footnote"><p><a name="Footnote_538" id="Footnote_538"></a><a href="#FNanchor_538"><span class="label">[538]</span></a> 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 (<i>Report</i>, 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. +</p><p> +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 +(<i>Ibid.</i>, 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. (<i>Ibid.</i>, p. 57.) There is, of course, no assurance +that this proportion holds with Kuhn-Loeb's deposits. +</p><p> +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. +</p><p> +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. +</p><p> +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. <i>Cf.</i>, <i>supra</i>, the chapter on "Statistical Demonstrations +of the Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_539" id="Footnote_539"></a><a href="#FNanchor_539"><span class="label">[539]</span></a> 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, +<i>Supra</i>, chapter on "Statistical Demonstrations of Quantity Theory."</p></div> + +<div class="footnote"><p><a name="Footnote_540" id="Footnote_540"></a><a href="#FNanchor_540"><span class="label">[540]</span></a> "The Mystery of Clearings," <i>Annalist</i>, Aug. 14, 1916, p. 198. <i>Supra</i>, +chapter on "Volume of Money and Volume of Trade."</p></div> + +<div class="footnote"><p><a name="Footnote_541" id="Footnote_541"></a><a href="#FNanchor_541"><span class="label">[541]</span></a> See any Congressional debate on "the Money Trust."</p></div> + +<div class="footnote"><p><a name="Footnote_542" id="Footnote_542"></a><a href="#FNanchor_542"><span class="label">[542]</span></a> <i>Pujo Committee Report</i>, Feb. 28, 1913, p. 130. <i>Cf.</i> also p. 138 (statements +of Messrs. Baker, Reynolds, Schiff, and Perkins), and p. 160 for +Statements regarding the testimony of Messrs. Morgan and Baker.</p></div> + +<div class="footnote"><p><a name="Footnote_543" id="Footnote_543"></a><a href="#FNanchor_543"><span class="label">[543]</span></a> I know no responsible writer who has charged that there is a monopoly, +or a tendency toward monopoly, in this matter.</p></div> + +<div class="footnote"><p><a name="Footnote_544" id="Footnote_544"></a><a href="#FNanchor_544"><span class="label">[544]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_545" id="Footnote_545"></a><a href="#FNanchor_545"><span class="label">[545]</span></a> Walker's version of the quantity theory, excluding credit transactions, +escapes much of this criticism. <i>Supra</i>, chapter on "Equation of Exchange."</p></div> + +<div class="footnote"><p><a name="Footnote_546" id="Footnote_546"></a><a href="#FNanchor_546"><span class="label">[546]</span></a> 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, <i>supra</i>, 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 <i>exchanges</i> that depresses prices. It is increase +in the floating <i>supply</i>. 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 <i>increase</i> 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. +</p><p> +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." +</p><p> +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," <i>Annalist</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_547" id="Footnote_547"></a><a href="#FNanchor_547"><span class="label">[547]</span></a> As May 9, 1901, when 3,336,695 shares were sold. Compare Mitchell's +stock barometer, 1890-1911, <i>Business Cycles</i>, p. 175, with records of share +sales for those years.</p></div> + +<div class="footnote"><p><a name="Footnote_548" id="Footnote_548"></a><a href="#FNanchor_548"><span class="label">[548]</span></a> <i>Purchasing Power of Money</i>, 1913 ed., p. 186. The same criticism applies +to Kemmerer, and Jevons. <i>Cf.</i> Kemmerer, <i>Money and Credit Instruments</i>, +pp. 70-71. It is applicable to most quantity theorists.</p></div> + +<div class="footnote"><p><a name="Footnote_549" id="Footnote_549"></a><a href="#FNanchor_549"><span class="label">[549]</span></a> <i>Ibid.</i>, 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." <i>Ibid.</i>, p. 155.</p></div> + +<div class="footnote"><p><a name="Footnote_550" id="Footnote_550"></a><a href="#FNanchor_550"><span class="label">[550]</span></a> <i>Cf.</i> our discussion, <i>supra</i>, in the chapter on the "Functions of Money," +of money in retail trade.</p></div> + +<div class="footnote"><p><a name="Footnote_551" id="Footnote_551"></a><a href="#FNanchor_551"><span class="label">[551]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_552" id="Footnote_552"></a><a href="#FNanchor_552"><span class="label">[552]</span></a> See pp. 428-432, <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_553" id="Footnote_553"></a><a href="#FNanchor_553"><span class="label">[553]</span></a> <i>Wealth of Nations</i>, Bk. II, ch. 2, ed. Cannan, I, pp. 187 and 290-291.</p></div> + +<div class="footnote"><p><a name="Footnote_554" id="Footnote_554"></a><a href="#FNanchor_554"><span class="label">[554]</span></a> <i>Theorie der wirtschaftlichen Entwicklung</i>, chs. 2 and 3.</p></div> + +<div class="footnote"><p><a name="Footnote_555" id="Footnote_555"></a><a href="#FNanchor_555"><span class="label">[555]</span></a> <i>Supra</i>, chapter on "Volume of Money and Volume of Credit."</p></div> + +<div class="footnote"><p><a name="Footnote_556" id="Footnote_556"></a><a href="#FNanchor_556"><span class="label">[556]</span></a> <i>Interviews on the Banking and Currency Systems of England, Scotland, +etc.</i>, Senate Document No. 405, 1910 (National Monetary Commission +Report), p. 25.</p></div> + +<div class="footnote"><p><a name="Footnote_557" id="Footnote_557"></a><a href="#FNanchor_557"><span class="label">[557]</span></a> This is clearly the opinion of European bankers, as indicated in their +statements to interviewers for the Monetary Commission. See, <i>e. g.</i>, statements +by the <i>Deutsche Bank</i>, <i>Ibid.</i>, pp. 374-375, and the <i>Crédit Lyonnais</i>, +<i>Ibid.</i>, pp. 224-226.</p></div> + +<div class="footnote"><p><a name="Footnote_558" id="Footnote_558"></a><a href="#FNanchor_558"><span class="label">[558]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_559" id="Footnote_559"></a><a href="#FNanchor_559"><span class="label">[559]</span></a> <i>Vide</i> Professor Taussig's history of the years, 1878-1890, in his <i>Silver +Situation</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_560" id="Footnote_560"></a><a href="#FNanchor_560"><span class="label">[560]</span></a> <i>Cf.</i> Mitchell's <i>Business Cycles</i>, pp. 495-496; and <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_561" id="Footnote_561"></a><a href="#FNanchor_561"><span class="label">[561]</span></a> <i>Cf.</i> the chapter, <i>supra</i>, on "The Quantity Theory and International +Gold Movements."</p></div> + +<div class="footnote"><p><a name="Footnote_562" id="Footnote_562"></a><a href="#FNanchor_562"><span class="label">[562]</span></a> "The Prospects of Money," British <i>Economic Journal</i>, Dec. 1914.</p></div> + +<div class="footnote"><p><a name="Footnote_563" id="Footnote_563"></a><a href="#FNanchor_563"><span class="label">[563]</span></a> <i>Cf.</i> Conant's discussion, <i>Principles of Money and Banking</i>, I, ch. 7.</p></div> + +<div class="footnote"><p><a name="Footnote_564" id="Footnote_564"></a><a href="#FNanchor_564"><span class="label">[564]</span></a> This would seem to be Mitchell's view. <i>Cf. Business Cycles</i>, p. 494.</p></div> + +<div class="footnote"><p><a name="Footnote_565" id="Footnote_565"></a><a href="#FNanchor_565"><span class="label">[565]</span></a> <i>Cf.</i> chapter XIII.</p></div> + +<div class="footnote"><p><a name="Footnote_566" id="Footnote_566"></a><a href="#FNanchor_566"><span class="label">[566]</span></a> <i>Cf.</i> the chapter on "The Functions of Money," <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_567" id="Footnote_567"></a><a href="#FNanchor_567"><span class="label">[567]</span></a> <i>Money and Credit Instruments</i>, p. 80.</p></div> + +<div class="footnote"><p><a name="Footnote_568" id="Footnote_568"></a><a href="#FNanchor_568"><span class="label">[568]</span></a> <i>Ibid.</i>, p. 82. Italics mine.</p></div> + +<div class="footnote"><p><a name="Footnote_569" id="Footnote_569"></a><a href="#FNanchor_569"><span class="label">[569]</span></a> 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. <i>Vide</i> the +chapters, <i>supra</i>, on the equation of exchange and on statistics of the quantity +theory.</p></div> + +<div class="footnote"><p><a name="Footnote_570" id="Footnote_570"></a><a href="#FNanchor_570"><span class="label">[570]</span></a> Published by the National City Bank of New York. <i>Vide</i> also Bagehot. +<i>Lombard Street</i>, introductory chapter, and Withers, <i>The Meaning of Money</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_571" id="Footnote_571"></a><a href="#FNanchor_571"><span class="label">[571]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_572" id="Footnote_572"></a><a href="#FNanchor_572"><span class="label">[572]</span></a> <i>Principles of Economics</i>, <i>passim</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_573" id="Footnote_573"></a><a href="#FNanchor_573"><span class="label">[573]</span></a> <i>Theorie der wirtschaftlichen Entwicklung.</i></p></div> + +<div class="footnote"><p><a name="Footnote_574" id="Footnote_574"></a><a href="#FNanchor_574"><span class="label">[574]</span></a> The writer has ventured some tentative predictions as to conditions +following the present War in the New York <i>Times</i> Sunday magazine of +Dec. 10, 1916, pp. 10-11.</p></div> + +<div class="footnote"><p><a name="Footnote_575" id="Footnote_575"></a><a href="#FNanchor_575"><span class="label">[575]</span></a> 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. <i>Vide</i> N. Y. +<i>Times</i> Sunday magazine, Dec. 10, 1916, pp. 10-11.</p></div> + +<div class="footnote"><p><a name="Footnote_576" id="Footnote_576"></a><a href="#FNanchor_576"><span class="label">[576]</span></a> 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 <i>Quarterly Journal of Economics</i>, 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.</p></div> + +<div class="footnote"><p><a name="Footnote_577" id="Footnote_577"></a><a href="#FNanchor_577"><span class="label">[577]</span></a> <i>Cf.</i> my review-article, "Schumpeter's Dynamic Economics," <i>Pol. Sci. +Quart.</i>, Dec. 1915, p. 645.</p></div> + +<div class="footnote"><p><a name="Footnote_578" id="Footnote_578"></a><a href="#FNanchor_578"><span class="label">[578]</span></a> <i>Distribution of Wealth</i>; <i>Essentials of Economic Theory</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_579" id="Footnote_579"></a><a href="#FNanchor_579"><span class="label">[579]</span></a> <i>Theorie der wirtschaftlichen Entwicklung</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_580" id="Footnote_580"></a><a href="#FNanchor_580"><span class="label">[580]</span></a> <i>Cf.</i> my <i>Social Value</i>, pp. 139-140, n.</p></div> + +<div class="footnote"><p><a name="Footnote_581" id="Footnote_581"></a><a href="#FNanchor_581"><span class="label">[581]</span></a> <i>Purchasing Power of Money</i>, ch. 4.</p></div> + +<div class="footnote"><p><a name="Footnote_582" id="Footnote_582"></a><a href="#FNanchor_582"><span class="label">[582]</span></a> <i>Theory of Business Enterprise.</i></p></div> + +<div class="footnote"><p><a name="Footnote_583" id="Footnote_583"></a><a href="#FNanchor_583"><span class="label">[583]</span></a> <i>Vide</i> my discussion of Professor Patten's <i>Reconstruction of Economic +Theory</i> in the <i>Political Science Quarterly</i> of March, 1913, and the <i>American +Economic Review</i>, Supplement to the March number, 1913, pp. 90-93.</p></div> + +<div class="footnote"><p><a name="Footnote_584" id="Footnote_584"></a><a href="#FNanchor_584"><span class="label">[584]</span></a> <i>Cf.</i> Schumpeter, <i>loc. cit.</i>, pp. 1-101, and <i>passim</i>. 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 <i>The Purchasing +Power of Money</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_585" id="Footnote_585"></a><a href="#FNanchor_585"><span class="label">[585]</span></a> 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 <i>immediately</i>, 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 <i>loans</i>—Veblen's theory of crises rests, +as we shall see, in part on this fact. +</p><p> +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 <i>prices</i> +(whence, indirectly on values), and leaving prices free to change readily in +other cases. (<i>Cf.</i> my discussion in <i>Quart. Jour, of Economics</i>, 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 <i>immediate</i>, and not merely <i>derived</i>, +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 (<i>Am. Econ. Rev.</i>, March, +1914, pp. 115-116).</p></div> + +<div class="footnote"><p><a name="Footnote_586" id="Footnote_586"></a><a href="#FNanchor_586"><span class="label">[586]</span></a> <i>Loc. cit.</i>, ch. IV. <i>Vide</i> Veblen's discussion of Fisher in the <i>Pol. Sci. +Quart.</i> of 1908, and his discussion of Clark in the <i>Quart. Jour. of Econ.</i>, +Feb. 1908.</p></div> + +<div class="footnote"><p><a name="Footnote_587" id="Footnote_587"></a><a href="#FNanchor_587"><span class="label">[587]</span></a> Chapter on "Volume of Money and Volume of Trade."</p></div> + +<div class="footnote"><p><a name="Footnote_588" id="Footnote_588"></a><a href="#FNanchor_588"><span class="label">[588]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_589" id="Footnote_589"></a><a href="#FNanchor_589"><span class="label">[589]</span></a> <i>Psychologie Économique</i>, vol. I, pp. 77-78.</p></div> + +<div class="footnote"><p><a name="Footnote_590" id="Footnote_590"></a><a href="#FNanchor_590"><span class="label">[590]</span></a> Nor do I see any method for bringing into our equilibrium picture the +control which the environment retains over values by its power to <i>eliminate</i> +those groups whose choices vary too widely from the norms of "survival-necessities." +Vide Giddings, <i>Principles of Sociology</i>, ed. 1905, p. 20; Carver, +<i>Essays in Social Justice</i>, <i>passim</i>. 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 <i>social values</i>, both of the group in question and of other +groups.</p></div> + +<div class="footnote"><p><a name="Footnote_591" id="Footnote_591"></a><a href="#FNanchor_591"><span class="label">[591]</span></a> <i>Cf.</i> H. C. Emery's discussion of "manipulation" in his <i>Speculation in +the Stock and Produce Exchanges</i>, pp. 171ff.</p></div> + +<div class="footnote"><p><a name="Footnote_592" id="Footnote_592"></a><a href="#FNanchor_592"><span class="label">[592]</span></a> <i>Cf.</i> Dewey, <i>Essays in Logical Theory</i>; Bergson, <i>Time and Free Will</i>, +<i>passim</i>, and <i>Creative Evolution</i>; James, <i>Problems of Philosophy</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_593" id="Footnote_593"></a><a href="#FNanchor_593"><span class="label">[593]</span></a> <i>Cf.</i> Bagehot's discussion in <i>Lombard Street</i> 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, +<i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_594" id="Footnote_594"></a><a href="#FNanchor_594"><span class="label">[594]</span></a> <i>Cf.</i> my article on "Schumpeter's Dynamic Economics" in <i>Political +Science Quarterly</i>, Dec. 1915, and ch. XXIII, <i>supra</i>.</p></div> + +<div class="footnote"><p><a name="Footnote_595" id="Footnote_595"></a><a href="#FNanchor_595"><span class="label">[595]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_596" id="Footnote_596"></a><a href="#FNanchor_596"><span class="label">[596]</span></a> 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.</p></div> + +<div class="footnote"><p><a name="Footnote_597" id="Footnote_597"></a><a href="#FNanchor_597"><span class="label">[597]</span></a> <i>Cf.</i> our discussion, <i>supra</i>, of the relation of credit to futurity.</p></div> + + + + + +<hr style="width: 100%;" /> + +<h3>TRANSCRIBER'S NOTES</h3> + + +<p>Footnotes have been moved from the middle of a paragraph to the end +of this HTML version. Also, some of the page references in the index +have been corrected. The following misprints have been corrected:</p> + +<div class="blockquot"><p> + "thing" corrected to "think" (page 124)<br /> + "theorrists" corrected to "theorists" (page 155)<br /> + "$75,00,000.00" corrected to "$75,000,000.00" (page 208)<br /> + "theory theory" corrected to "theory" (page 330)<br /> + "practive" corrected to "practice" (page 428)<br /> + "this held" corrected to "thus held" (page 442)<br /> + "in in" corrected to "in" (page 476)<br /> + "clasess" corrected to "classes" (page 509)<br /> + "legarthic" corrected to "lethargic" (page 573)<br /> + "enchancement" corrected to "enhancement" (page 591)<br /> + "74-71" corrected to "64-71" (ftn. 55)<br /> + "equilibbrium" corrected to "equilibrium" (ftn. 86)<br /> + "Instrnmeuts" corrected to "Instruments" (ftn. 163)<br /> + "reguularly" corrected to "regularly" (ftn. 545)<br /> + Missing text added in footnotes 412, 468, 595.<br /> +</p></div> + + +<p>Other than the changes listed above, printer's inconsistencies +in spelling and hyphenation have been retained.</p> + + + + + + + + + +<pre> + + + + + +End of Project Gutenberg's The Value of Money, by Benjamin M. 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