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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..6833f05 --- /dev/null +++ b/.gitattributes @@ -0,0 +1,3 @@ +* text=auto +*.txt text +*.md text diff --git a/34823-8.txt b/34823-8.txt new file mode 100644 index 0000000..0daeb96 --- /dev/null +++ b/34823-8.txt @@ -0,0 +1,22225 @@ +Project Gutenberg's The Value of Money, by Benjamin M. Anderson, Jr. + +This eBook is for the use of anyone anywhere at no cost and with +almost no restrictions whatsoever. You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: The Value of Money + +Author: Benjamin M. Anderson, Jr. + +Release Date: January 2, 2011 [EBook #34823] + +Language: English + +Character set encoding: ISO-8859-1 + +*** START OF THIS PROJECT GUTENBERG EBOOK THE VALUE OF MONEY *** + + + + +Produced by Curtis Weyant and the Online Distributed +Proofreading Team at http://www.pgdp.net (This book was +produced from scanned images of public domain material +from the Google Print project.) + + + + + + + + + + HARVARD COLLEGE + LIBRARY + + FROM THE + + QUARTERLY JOURNAL + OF ECONOMICS + + + + THE MACMILLAN COMPANY + NEW YORK · BOSTON · CHICAGO · DALLAS + ATLANTA · SAN FRANCISCO + + MACMILLAN & CO., LIMITED + LONDON · BOMBAY · CALCUTTA + MELBOURNE + + THE MACMILLAN CO. OF CANADA, LTD. + TORONTO + + + + + THE + VALUE OF MONEY + + BY + + B. M. ANDERSON, JR., PH. D. + ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY + AUTHOR OF "SOCIAL VALUE" + + + New York + THE MACMILLAN COMPANY + 1917 + + _All rights reserved_ + + + + COPYRIGHT, 1917 + BY THE MACMILLAN COMPANY + Set up and electrotyped. Published May, 1917. + + + + To + + B. M. A., III + AND + J. C. A. + + WHO OFTEN INTERRUPTED THE WORK + BUT NONE THE LESS INSPIRED IT + + + + +PREFACE + + +The following pages have as their central problem the value of money. +But the value of money cannot be studied successfully as an isolated +problem, and in order to reach conclusions upon this topic, it has been +necessary to consider virtually the whole range of economic theory; the +general theory of value; the rôle of money in economic theory and the +functions of money in economic life; the theory of the values of stocks +and bonds, of "good will," established trade connections, trade-marks, +and other "intangibles"; the theory of credit; the causes governing the +volume of trade, and particularly the place of speculation in the volume +of trade; the relation of "static" economic theory to "dynamic" economic +theory. + +"Dynamic economics" is concerned with change and readjustment in +economic life. A distinctive doctrine of the present book is that the +great bulk of exchanging grows out of dynamic change, and that +speculation, in particular, constitutes by far the major part of all +trade. From this it follows that the main work of money and credit, as +instruments of exchange, is done in the process of dynamic readjustment, +and, consequently, that the theory of money and credit _must be a +dynamic theory_. It follows, further, that a theory like the "quantity +theory of money," which rests in the notions of "static equilibrium" and +"normal adjustment," abstracting from the "transitional process of +readjustment," touches the real problems of money and credit not at all. + +This thesis has seemed to require statistical verification, and the +effort has been made to measure the elements in trade, to assign +proportions for retail trade and for wholesale trade, to obtain +_indicia_ of the extent and variation of speculation in securities, +grain, and other things on the organized exchanges, and to indicate +something of the extent of less organized speculation running through +the whole of business. The ratio of foreign to domestic trade has been +studied, for the years, 1890-1916. + +The effort has also been made to determine the magnitudes of banking +transactions, and the relation of banking transactions to the volume of +trade. The conclusion has been reached that the overwhelming bulk of +banking transactions occur in connection with speculation. The effort +has been made to interpret bank clearings, both in New York and in the +country outside, with a view to determining quantitatively the major +factors that give rise to them. + +In general, the inductive study would show that modern business and +banking centre about the stock market to a much greater degree than most +students have recognized. The analysis of banking assets would go to +show that the main function of modern bank credit is in the direct or +indirect financing of corporate and unincorporated _industry_. +"Commercial paper" is no longer the chief banking asset. + +It is not concluded from this, however, that commerce in the ordinary +sense is being robbed by modern tendencies of its proper banking +accommodation, or that the banks are engaged in dangerous practices. On +the contrary it is maintained that the ability of the banks to aid +ordinary commerce is increased by the intimate connection of the banks +with the stock market. The thesis is advanced--though with a recognition +of the political difficulties involved--that the Federal Reserve Banks +should not be forbidden to rediscount loans on stock exchange +collateral, if they are to perform their best services for the country. + +The quantity theory of money is examined in detail, in various +formulations, and the conclusion is reached that the quantity theory is +utterly invalid. + +The theory of value set forth in Chapter I, and presupposed in the +positive argument of the book, is that first set forth in an earlier +book by the present writer, _Social Value_, published in 1911. That book +grew out of earlier studies in the theory of money, in the course of +which the writer reached the conclusion that the problem of money could +not be solved until an adequate general theory of value should be +developed. The present book thus represents investigations which run +through a good many years, and to which the major part of the past six +years has been given. On the basis of this general theory of value, and +a dynamic theory of money and exchange, our positive conclusions +regarding the value of money are reached. On the same basis, a +psychological theory of credit is developed, in which the laws of credit +are assimilated to the general laws of value. + +In a final section, the constructive theory of the book is made the +basis for a "reconciliation" of "statics" and "dynamics" in economic +theory--an effort to bring together the abstract theory of price +(_i. e._, "statics") which has hitherto chiefly busied economists, and +the more realistic studies of economic change (_i. e._ "dynamics") to +which a smaller number of economists have given their attention. These +two bodies of doctrine have hitherto had little connection, and the +science of economics has suffered as a consequence. + +This book was not written with the college student primarily in mind. +None the less, I incline to the view that the book, with the exception +of the chapter on "Marginal Utility," is suitable for use as a text with +juniors and seniors in money and banking, if supplemented by some +general descriptive and historical book on the subject, and that the +whole book may very well be used with such students in advanced courses +in economic theory. I think that bankers, brokers, and other business +men who are interested in the general problems of money, trade, +speculation and credit, will find the book of use. Naturally, however, +it is my hope that the special student of money and banking, and the +special student of economic theory will find the book of interest. The +book may interest also certain students of philosophy and sociology, who +are concerned with the applications of philosophy and social philosophy +to concrete problems. + +My obligations to others, running through a good many years, are very +great. With Professor E. E. Agger, I talked over very many of the +problems here discussed, in the course of two years of close association +at Columbia University, and gained very much from his suggestions and +criticisms. Professor E. R. A. Seligman has read portions of the +manuscript, and given valuable advice. Professor H. J. Davenport has +given the first draft an exceedingly careful reading, and his criticisms +have been especially helpful. Professor Jesse E. Pope supervised my +investigations in the quantity theory of money in 1904-5, in his seminar +at the University of Missouri, and gave me invaluable guidance in the +general theory of money and credit then. More recently, his intimate +first hand knowledge of European and American conditions, both in +agricultural credit and in general banking, has been of great service to +me. Mr. N. J. Silberling, of the Department of Economics at Harvard +University, has been helpful in various ways, particularly by making +certain statistical investigations, to which reference will be made in +the text, at my request. Various bankers, brokers, and others closely in +touch with the subjects here discussed have been more than generous in +supplying needed information. Among these may be especially mentioned +Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the +_Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H. +Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston, +various gentlemen in the offices of Charles Head & Co., and Pearmain and +Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr. +W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate +Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee +Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade, +DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of +the Bankers Trust Company, New York. My greatest obligations are to two +colleagues at Harvard University. Professor F. W. Taussig has given the +manuscript very careful consideration, from the standpoint of style as +well as of doctrine, and has discussed many problems with me in detail. +Professor O. M. W. Sprague has placed freely at my service his rich +store of practical knowledge of virtually every phase of modern money +and banking, and has read critically every page of the manuscript. None +of these gentlemen, of course, is to be held responsible for my +mistakes. I also make grateful acknowledgment of the aid and sympathy of +my wife. + +In the course of the discussion, frequent criticisms are directed +against the doctrines of Professors E. W. Kemmerer and Irving Fisher, +particularly the latter, as the chief representatives of the present day +formulation of the quantity theory. Both their theories and their +statistics are fundamentally criticised. I find myself in radical +dissent on all the main theses of Professor Fisher's _Purchasing Power +of Money_, and at very many points of detail. To a less degree, I find +myself unable to concur with Professor Kemmerer. But I should be sorry +if the reader should feel that I fail to recognize the distinguished +services which both of these writers have performed for the scientific +study of money and banking, or should feel that dissent precludes +admiration. I acknowledge my own indebtedness to both, not alone for the +gain which comes from having an opposing view clearly defined and ably +presented, but also for much information and many new ideas. My general +doctrinal obligations in the theory of money and credit are far too +numerous to mention in a preface. My greatest debt in general economic +theory is to Professor J. B. Clark. + + B. M. ANDERSON, JR. + + HARVARD UNIVERSITY, March 31, 1917. + + + + +ANALYTICAL TABLE OF CONTENTS + + +_PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE_ + + +CHAPTER I + +ECONOMIC VALUE + PAGE + Problem of value of money special case of general theory of + value; present chapter concerned with general theory 1 + + Formal and logical aspects of value: value as quality; value + as quantity; value and wealth 5-6 + + Absolute _vs._ relative conceptions of value: value of money + _vs._ "reciprocal of price-level"; value prior to exchange; + value and exchangeability; do prices correctly express + values? 6-12 + + Doctrine so far in accord with main current of economic + opinion 12-14 + + Causal theory of value new: marginal utility, labor theory, + etc., rejected 14-16 + + Social explanation required: "individual" a social product, + both in history of individual and in history of race 16-19 + + And above individual impersonal psychic forces, law, public + opinion, morality, economic values 19-20 + + Three types of theory have dealt with these: theory of + extra-human objective forces; extreme individualism; + social value theory 20-21 + + Illustrated in jurisprudence, ethics, and economic theory 21-26 + + Law, morals, and economic values generically alike, but have + _differentiæ_ 26-28 + + But not differentiated on basis of states of consciousness + of individual immediately moved by them, because many + minds in organic interplay involved 28-33 + + Economic social value (a) of consumers' goods and services: + "utility" and scarcity; "marginal utility"; social + explanation of marginal utility; marginal utilities the + conscious _focus_ of economic values of consumers' goods; + but only minor part of these values; individuals, classes + and institutions heavily weighted by legal, moral, and + other social values, in power over economic values of + consumers' goods 33-38 + + Economic social value (b) of labor, land, stocks, bonds, + "good will," etc.; based only in part on values of + consumers' goods; partially independent, directly + influenced by contagion, and centers of power and + prestige 38-41 + + Pragmatic character of theory 41-43 + + Relation of social values to individual values 43-45 + + +CHAPTER II + +SUPPLY AND DEMAND, AND THE VALUE OF MONEY + + _Hiatus_ between general theory of value and theory of value + of money 46-47 + + Partly because former has been developed by different writers + from those who have developed latter 47-49 + + But chiefly because supply and demand, cost of production, + etc., _assume_ fixed value of money, and are theories of + _price_, rather than _value_ 49 + + Supply and demand useful but superficial formula, common + property of many value theories 49-50 + + Crude and unanalyzed in Smith and Ricardo; first made precise + by J. S. Mill, who gives essentials of modern doctrine 49-51 + + Böhm-Bawerk's pseudo-psychology spoils Mill's clean-cut + doctrine 51-52 + + Supply and demand assumes fixed _value_ of money-unit, and + hence inapplicable to money itself 52-56 + + But supply and demand does _not_ assume fixed _price-level_ 56-57 + + Cairnes _vs._ Mill 57-58 + + Mill's unsuccessful effort to apply supply and demand to + money 59-62 + + Walker's attempt 62 + + Supply and demand in the "money market" 62-63 + + +Chapter III + +COST OF PRODUCTION AND THE VALUE OF MONEY + + Types of cost theory: modern cost doctrine is "money costs" + doctrine, and inapplicable to value of money 64 + + Labor cost: Smith; Ricardo; Ricardo's confession of failure; + "real costs" in Senior and Cairnes; Mill's "money-outlay" + cost doctrine, and Cairnes' criticism; but "money-cost" + has survived 64-67 + + Because "real cost" doctrine does not square with facts 67-69 + + "Money-cost" of producing money-metal 69-70 + + Austrian cost doctrine runs still in money terms, assuming + value, money, and fixed value of money 70-71 + + "Negative social values" as "real costs" note, 71 + + +CHAPTER IV + +THE CAPITALIZATION THEORY AND THE VALUE OF MONEY + + Money as "capital good," and "money-rates" as rentals 72-73 + + Capitalization theory; formula; capital value passive + resultant of annual income and rate of discount 73-74 + + But in case of money, rental and rate of discount not + independent variables 74-76 + + And in case of money, capital value not passive shadow, + but active cause of income 76 + + Capitalization theory assumes money, and fixed value of + money 76-77 + + Assumed fixed value of money absolute, and not relative 77-78 + + Capitalization theory, in current formulation, inapplicable + to value of money 78-79 + + +CHAPTER V + +MARGINAL UTILITY AND THE VALUE OF MONEY + + Marginal utility theory usually thinly disguised version of + supply and demand, and hence inapplicable to money 80 + + View that money is unique in having no utility _per se_ 81-83 + + Marginal utility and "commodity theory" of money-value 81-82 + + Quantity theorists and marginal utility of money 81-82 + + Money an instrumental good, and marginal utility no less + applicable here than elsewhere; marginal utility invalid + as general theory of value, hence invalid when applied to + money 82-120 + + Wieser's theory of value of money 83-88 + + A circle in reasoning 88-90 + + Schumpeter's similar circle 100 + + But Schumpeter's general utility theory, though inapplicable + to value of money, in form avoids a causal circle 90-98 + + Schumpeter's _conspectus_; different from Böhm-Bawerk and + most utility theorists 90-92, 113-120 + + Defects and limitations of Schumpeter's general theory 90-98 + + Schumpeter's substitutes for social value concept 98-99 + + Von Mises sees circle of Wieser and Schumpeter 100 + + Seeks to avoid it by construing utility theory as historical, + instead of static, theory 101 + + But this departs from fundamentals of utility theory; other + difficulties 101-110 + + Kinley's doctrine 110-111 + + General criticism of utility theory 111-115 + + Davenport, Wicksteed, Fisher, Perry 113-120 + + +_PART II. THE QUANTITY THEORY_ + + +CHAPTER VI + +THE QUANTITY THEORY OF PRICES. INTRODUCTION + + Preliminary statement of quantity theory, and of critical + theses to be developed in following chapters. Virtually + every contention and every assumption of quantity theory + to be challenged 123-129 + + +CHAPTER VII + +DODO-BONES + + Quantity theory doctrine that valueless objects can serve as + money; Nicholson's assumption: money made of dodo-bones 130-131 + + Fisher's view also 130 + + And Ricardo's 131-132 + + Will dodo-bones circulate? Dodo-bones and poker chips; + circular reasoning 132 + + Both medium of exchange and standard of value must be + valuable 133 + + Is inconvertible paper an exception? 133-134 + + Doctrine that money gives legal claim to things in general 134 + + Kemmerer's assumptions; money made of commodity, once + valuable, now used only as money 135 + + Commodity theory requires present commodity value 135 + + Historical _vs._ cross-section view: possibility that such + money would circulate 135-136 + + Value not tied up with marginal utility or commodities: + social value theory; derived values often become + independent of original presuppositions, in economic + as well as legal and moral spheres 136-139 + + But this no basis for quantity theory: social psychology, + not mechanics 139 + + "Banker's psychology" _vs._ psychology of blind habit: + India, Austria, United States; monetary phenomena of war + times; "credit theory" of Greenbacks 139-142 + + Question-begging definitions 142-143 + + Assumptions of quantity theory: blind habit and fluid prices 143-144 + + Extreme commodity theory denies that money-use adds to value + of money; usually not true; analysis of money-functions 144-150 + + Hypothetical case in which whole value of money comes from + commodity value 150-152 + + Money must have value apart from monetary employments, but, + in general, gains additional value from employment as + money 152-153 + + +CHAPTER VIII + +THE "EQUATION OF EXCHANGE" + + Fisher leading, most consistent, most uncompromising + quantity theorist: wide acceptance of his views 154 + + Taussig _vs._ Fisher 155 + + Fisher and dodo-bone doctrine: logical part of quantity + theory; Fisher's value concept 155-156 + + "Equation of exchange": analysis of Fisher's version, + typical of all 156-171 + + In what sense equality between two sides of equation? + Meaning of "T" 158-161 + + No "goods side" to equation; both sides sums of money; + equal because identical; equation meaningless 161-162 + + All factors in equation highly abstract 162-163 + + "P" and "T" cannot both be given independent definitions: + P defined as _weighted_ average, with T in denominator; + and must be changed from year to year, as elements in T + change, even though no prices change 164-166 + + This makes circular theory: _problem_ defined in terms of + _explanation_ 165-166 + + Causal theory associated with equation of exchange 166 + + Equation amplified to include credit; not acceptable to + Nicholson or Walker, and caricature of conditions in + Germany and France 166-170 + + Book-credit, bills of exchange, etc., excluded 167-170 + + Why a one-year period? 170-171 + + +CHAPTER IX + +THE VOLUME OF MONEY AND THE VOLUME OF CREDIT + + Mill thought credit acts on prices like money, and that + this reduces quantity theory tendency to indeterminate + degree; Fisher holds volume of money _in circulation_ + governs volume of credit, so that quantity theory stands 172 + + Fisher's arguments for fixed ratio, _money_ to + bank-deposits 172-173 + + Argument a _non-sequitur_, even if contentions true 173-177 + + Contentions untrue: no fixed ratio between _reserves_ and + deposits, or reserves and demand liabilities, either in + America or Europe 177-182 + + Taussig's views; virtually surrender of quantity theory in + modern conditions 182-185 + + Bulk of quantity theorists in between Fisher and Taussig, + but nearer to Fisher's view than to Taussig's 185 + + +CHAPTER X + +"NORMAL" VS. "TRANSITIONAL" TENDENCIES + + Quantity theory qualified by distinction between "normal" and + "transitional" effects of change in quantity of money, etc. 186 + + Meaning of distinction, and extent of qualification hard + to determine: is "normal period" real period in time? + How long is "transitional period"? Is it realistic, or + hypothetical? Is equation of exchange realistic? + Concrete _vs._ hypothetical price-levels 186-189 + + Legitimate and illegitimate abstraction 189-190 + + Causation and temporal order 190-191 + + Fisher admits very slight qualification of "normal theory" 192 + + Mill's quantity theory "short run" theory; Taussig's "long + run" theory; radically different logic in the two 192-193 + + Fisher's theory sometimes "long run" and sometimes "short + run" 194-195 + + +CHAPTER XI + +BARTER + + Quantity theory spoiled if resort to barter possible and + important 196 + + Extent of barter and other flexible substitutes for money and + bank-credit; simple barter; different methods of corporate + consolidations; flexibility, with state of money-market; + clearing-house arrangements in speculative exchanges; + offsetting book-credits 197-200 + + Barter made easier under money economy, by measure of + value function of money 201 + + Bills of exchange; foreign trade 201 + + +CHAPTER XII + +VELOCITY OF CIRCULATION + + Velocity conceived by quantity theory as causal entity, + independent of quantity of money and prices; necessary + assumption for law of proportionality 203 + + "Coin-transfer" _vs._ "person-turnover" concepts 203-204 + + Velocity really non-essential by-product, meaningless + average 204-205 + + Doctrine that velocity independent of money; habit and + convenience; hoarding; hoarding by banks 205-209 + + Velocity and volume of trade; vary together 209-214 + + Value of money causally governs velocity 214-215 + + +CHAPTER XIII. + +THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION + + Quantity theory doctrine that volume of trade, and volume + of money (and credit), are independent; trade governed + by physical and technical conditions, not money 216-219 + + View that quantity of money vitally affects production and + trade 219 + + Walker, Sombart, Withers, Price, Holt 219-222 + + Increase of money increases trade, even on static theory: + increase of money increase of capital; lowered margin + in exchanges; money-rates and interest; money tool of + exchange; elasticity of demand for money-service; in + Arizona and New York City 222-225 + + _Trade_ distinguished from _production_ and from _stock_ 225-226 + + Trade chiefly speculation; Fisher's $387,000,000,000 of + trade in U. S. in 1909 analyzed; index of variation in + trade; figure based on Kinley's returns from 12,000 + banks; double-counting 227-230 + + Figure largely represents speculation; statistics of total + wealth of U. S.; small rôle of wholesale and retail + deposits; "all other deposits" bunched in speculative + centers, especially New York; trifling "deposits" in + country banks; evidence of bank-clearings: clearings + and stock speculation; clearings and ordinary business 230-241 + + Measurement of "ordinary trade" 241-248 + + Volume of stock speculation 248-251 + + Commodity speculation 251-252 + + Unorganized speculation 252-254 + + Bill and note speculation 255 + + Fisher's and Kemmerer's indicia of trade variation wholly + misleading 255-257 + + Production waits on trade; selling costs _vs._ "cost of + production"; "good will"; are banks useless? 257-262 + + "Normal _vs._ transitional": statics _vs._ dynamics; money + and credit make static assumptions possible; very little + trade in "normal equilibrium" or static state; volume + of trade depends on transitions and dynamic changes; + functional theory of money and credit must be dynamic + theory; abstraction from money by static theory; no + static theory of money and credit possible; quantity + theory misses whole point of money-functions 262-266 + + +APPENDIX TO CHAPTER XIII + +THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES + + Ambiguity of "domestic trade": figures comparable with + export and import figures cannot include turnovers; net + income of United States, minus imports on retail basis, + counted as domestic trade; exports on retail basis + counted as foreign trade; net income for 1910; index of + variation for other years; cautions and qualifications; + ratio of foreign to domestic trade, 1890-1916 267-278 + + +CHAPTER XIV + +THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT + + Interdependence of trade, and money (and credit); + increasing trade causes increase of money and credit 279-281 + + Quantity theory doctrine: Fisher _vs._ Laughlin 281-282 + + Quantity theory has no explanation of elastic bank credit: + "Currency Theory" of deposits 282-285 + + Loans and deposits 285-288 + + Bills of exchange 288-290 + + Summary of quantity theory doctrine 290-291 + + +CHAPTER XV + +THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES" + + Heart of quantity theory: price-level cannot change without + prior change in money, deposits, trade, or velocities: + independently rising price-level, unable to alter trade + or velocities, would drive money away, and so be unable to + sustain itself; individual prices can rise independently, + but other prices must fall to compensate 292-295 + + Criticism: argument impressive only because it assumes an + _uncaused_ rise in general price-level; when causes + assigned, prices can independently rise, compelling + modification in other factors in "equation of exchange"; + "transitional" and "normal" effects: instances 295-299 + + Quantity theory conflicts with supply and demand: supply + and demand holds good: particular prices and price-level 299-300 + + Generalization of conflict to include cost of production, + capitalization theory, imputation theory 300 + + Capitalization theory _vs._ quantity theory; different + psychological assumptions of the two theories 300-306 + + Cost of production _vs._ quantity theory; money-_income_ + _vs._ quantity of money 306-308 + + Quantity theory false, granting all its assumptions 308-310 + + Doctrine that price-level independent of particular prices, + and presupposed by them, false; absolute value of money, + not price-level, presupposed; price-level may change + with value of money constant, through changes in absolute + values of goods 310-314 + + +CHAPTER XVI + +THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS + + Quantity theory holds that gold movements depend on + price-_levels_; but price-level mere average, cause + of nothing 315-316 + + Some prices, rising, tend to repel gold, but most prices + have no such effect 316-317 + + Some prices, rising, bring in gold 317-319 + + Gold movements and money-rates 319-320 + + +CHAPTER XVII + +THE QUANTITY THEORY _vs._ GRESHAM'S LAW 321-323 + + +CHAPTER XVIII + +THE QUANTITY THEORY AND "WORLD PRICES" + + Types of quantity theory: world's volume of _gold vs._ + quantity of _money_ in given country; standard _vs._ + token money; abandonment of dodo-bone theory and + "equation of exchange" 324-326 + + Credit does not rest on money: measure of values _vs._ + reserves; loans and wealth; value of money _vs._ + price-level 326-328 + + Loose relation of reserves and credit in world as whole; + no proportionality of quantity of gold to value of gold; + no quantity theory needed to assert that value of gold + related to its quantity 328-330 + + +CHAPTER XIX + +STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY +OF A BURIED CITY + + Criticism of quantity theory statistics yields constructive + conclusions; Mitchell and Greenbacks; Kemmerer's and + Fisher's statistics of "equation of exchange"; Kemmerer's + criticism of earlier statistics 331-335 + + Kemmerer's and Fisher's figures all wrong except for volume + of money and deposits, and prices in base year; if correct, + would not prove quantity theory 335-337 + + Fisher's statistics, resting on Kemmerer's, chiefly studied: + their relation to Kinley's "deposits" figures 337-338 + + M´V´ calculated: errors in calculation; New York very + incomplete in Kinley's figures; private banks and trust + companies; clearings and "deposits," in New York and + outside; "total transactions" and clearings; Fisher + exaggerates country checks by at least 116 billions, for + 1909; major part of all "check deposits" in New York City 348-353 + + New York as "clearing house" for United States: extent of, + and influence of on New York clearings, much overestimated; + bulk of New York clearings and New York "deposits" grow + out of New York business 353-361 + + Index of variation for M´V´ wrongly weighted; V´ wrongly + calculated for all years; which upsets calculation of V 361-363 + + Volume of trade: greatly exaggerated by bank transactions, + which include vast deal of duplications in checks, loans + and repayments, etc. 363-368 + + Fisher's reply; _under_counting offsets _over_counting 368-369 + + Main items of undercounting in clearing houses of speculative + exchanges; measurement of, in New York Stock Exchange, and + Chicago Board of Trade; swamped by call loan transactions, + which exceed security sales 369-381 + + Price-indexes of Kemmerer and Fisher, dominated by wholesale + prices, have no relevance to their "equations of exchange" 381-383 + + In general, their figures bury speculation and New York City 383 + + +PART III. THE VALUE OF MONEY + + +CHAPTER XX + +RECAPITULATION OF POSITIVE DOCTRINE + + Recapitulation of constructive theses of Parts I and II, + and program of Parts III and IV 387-396 + + +CHAPTER XXI + +THE ORIGIN OF MONEY, AND THE VALUE OF GOLD + + Problem stated 397-401 + + Value _vs. saleability_: degrees of saleability; theory + of saleability; "buying price" _vs._ "selling price"; + indirect exchange in barter economy; development of + commodity of superior saleability into money 401-406 + + Money never unique 406-407 + + Origin of gold money: ornament; store of value; social + prestige of prodigality and of ornament; love of + approbation, sex-impulse, and competitive display; + elastic value-curve of gold; industrial employments + of gold 407-413 + + Distribution of wealth and power, and value of gold 413-416 + + +CHAPTER XXII + +THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY + + Classification 417-418 + + Measure of values (standard of value) distinguished + from medium of exchange; former does not add value + to money metal, latter does 418-424 + + Reserve function 424 + + Money as "bearer of options"; distinguished from store of + value; the _dynamic_ function of money _par excellence_; + explanation of low rates on call loans, and short loans, + and low yield of high grade bonds, which share "bearer of + options" function; "pure rate" of interest _vs._ "money + rates": Austria; the New York money market 424-432 + + Legal tender; the _Staatliche Theorie_ 432-436 + + Standard of deferred payments; which functions add to + value of money metal? 436 + + Relation of money rates to capital value of money 436-442 + + Agio when coinage is restricted: India _vs._ Western World 442-450 + + Equilibrium of gold in arts and gold as money: difficulties + of marginal analysis; the money-market phenomena 450-458 + + +CHAPTER XXIII + +CREDIT + + Analysis rather than definition: "futurity" not essence + of credit; credit part of general value system; stocks + as credit instruments; juridical and accounting phases 459-462 + + Confidence; involved in general value phenomena as well + as credit; social psychology of confidence; contagions; + influence of centers of prestige; nothing unique in + credit; selling _vs._ borrowing 462-469 + + Definition of credit; credit _vs._ credit transaction; + credit and exchange; bulk of credit grows out of + dynamic conditions 469-474 + + Functions of credit; increasing saleability of + non-pecuniary wealth; corporate organization; + limits of credit expansion 475-478 + + Consideration of objections: that personal loans do not + rest on wealth; public loans; that value behind loan + would not exist if loan were not made 478-484 + + Schumpeter's "heresies"; his view of the function of the + banker: "dynamic credit"; America _vs._ Continental + Europe 484-488 + + Peculiarities and functions of bank credit; technique of + banking: capital; assets; reserves; "liquidity"; money + market 488-496 + + +CHAPTER XXIV + +CREDIT--BANK ASSETS AND BANK RESERVES + + Traditional view that liquid commercial loans normal and + dominant type of bank asset disproved; cannot exceed + 11-1/2 per cent of assets of American banks; analysis of + bank assets: "other loans and discounts"; stock collateral + loans; loans on "other collateral security"; + stocks and bonds held by banks; classes of banks; various + combinations; excluding real estate loans, more + than half of credit extended by State and national + banks and trust companies is to stock market; rapid + development of stock collateral loans: New York; + Europe 498-512 + + Activity of different types of loans: banking assets get + liquidity chiefly from stock market, and from produce + speculators 512-516 + + Credit extended to Wall Street not at expense of ordinary + commerce; country banks and Wall Street 516-518 + + Federal Reserve Banks should rediscount stock collateral + loans; "Money Trust" a trust in financing corporations, + not ordinary commerce; panics and Federal Reserve System 520 + + Quantity theory, putting all exchanges on a par, grotesque: + volume of trade and prices in the stock market 520-523 + + Direct and indirect financing of corporations by banks; + "margin dealer" as "banker" 523-526 + + Adam Smith's view of banker's functions, and of safe bank + loans 526 + + Correct on basis of facts of his day, but corporate + organization and organized stock market have made + smelting house as liquid as consumers' goods 527 + + Division of labor in banking: America _vs._ Germany 527-528 + + Agriculture in money market 528-529 + + Reserve problem: special case of problem of liquid assets; + many flexible substitutes for cash 529-532 + + Causal relation runs from deposits to reserves; gold + production and reserve-ratio 532-535 + + No static law or "normal ratio" possible; reserve function + entirely dynamic function; reserve not needed in "static + state"; illustrated by London money market; "ideal + credit economy" 536-544 + + +_PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS_ + + +CHAPTER XXV + +THE RECONCILIATION OF STATICS AND DYNAMICS + + Theory of money as focus of general economic theory, + exhibiting interdependence of doctrines; basis of + further unification of statics and dynamics in higher + synthesis 547-548 + + Statics _vs._ dynamics, normal _vs._ transitional, and + related contrasts; illustrations; divergent lines of + doctrine: tariffs, wars, overproduction, extravagance, + etc. 548-552 + + Statics quantitative; dynamics qualitative 552-553 + + Statics and dynamics both abstract 553-554 + + Dynamics and "friction" 554-555 + + "Theory of prosperity" and dynamics 555-556 + + Statics and cross-section analysis; statics as + price-theory; dynamics as value-theory 556-560 + + Generalization of statics: price-theory applied to + dynamic phenomena: capitalization; costs; "taxonomy;" + "discounting" dynamic changes; money the static + measuring-rod: wide scope of money-measure; + measurement of non-economic values 560-569 + + Generalization of dynamics: all values, whether of wheat + or "good will," have social psychological explanation; + technological and biological factors, and the static + equilibrium; business cycles 569-575 + + Business man _vs._ economic theorist, and value-theory; + manipulation of values and prices 575-578 + + Statics and time 578-580 + + Immaterial capital 580-582 + + Statics and dynamics have not different subject-matter 583-586 + + Equilibrium of all social values: statics and dynamics + of the law: social forces and social control 586-589 + + Summary of Part IV 589-591 + + + + +PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE + + + + +THE VALUE OF MONEY + + + + +CHAPTER I + +ECONOMIC VALUE + + +The problem of the value of money is a special case of the general +problem of economic value. The present chapter is concerned with the +general theory of value, while the rest of the book will consider the +numerous peculiarities and complications which make money a special +case. The main proof of the theory here presented is to be found in a +previous book[1] by the present writer. A number of periodical articles +by several writers which have since appeared, in criticism or in further +development of the theory, have at various points led to shifting +emphasis and clearer understanding on the author's part, and the present +exposition, without seeking explicitly to meet many of these criticisms, +or to embody the new developments, will none the less be different +because of them. To one writer in particular, Professor C. H. Cooley, +the theory is indebted for restatement, amplification, and important +additions.[2] On the whole, however, the theory presented in this +chapter is substantially the theory presented in the earlier book. The +theory is set forth in the present chapter with sufficient fullness to +make the present volume independent of the earlier book. + +Value has long been recognized as the fundamental economic concept. +There have been many and divergent definitions of value, and many +different theories as to its origin. It is the belief of the present +writer--not shared by all his critics!--that the definition of value +which follows, and the conception of the function of value in economic +theory involved in it, conform to the actual use of the term in the main +body of economic literature. The theory of the _causes_ of value here +advanced is new, but the definition of value, and the conception of the +relation of value to wealth, to price, to exchange, and to other +economic ideas, seem to the present writer to conform to what is +implied, and often expressed, in the general usage of economists.[3] + +It is important to separate sharply two questions: one, the theory of +the causes of value, and the other, the definition of value, or the +question of the formal and logical aspects of the value concept. The two +questions cannot be wholly divorced, but clarity is promoted by +considering them separately. We shall take up the formal and logical +aspects of the matter first. + +Value is the common quality of wealth. Wealth in most of its aspects is +highly heterogeneous: hay and milk, iron and corn-land, cows and calico, +human services and gold watches, dollars and doughnuts, pig-pens and +pearls--all these things, diverse though they be in their physical +attributes, have one quality in common: Economic Value.[4] By virtue of +this common or generic quality, it is possible to add wealth together to +get a sum, to compare items of wealth with one another, to see which is +greater, to get ratios of exchange between items of wealth, to speak of +one item of wealth, say a crop of wheat, as being a percentage of +another, say the land which produced it, etc. This common quality, +value, is also a _quantity_. It belongs to that class of qualities which +can be greater or less, can mount or descend a scale, without ceasing to +be the same quality,--like heat or weight or length. Such qualities are +_quantities_. There is nothing novel in the statement that a quality is +also a quantity. It is implied in every day speech. We say that a man is +tall, or heavy, or that the room is hot--qualitative statements; or we +may say exactly how tall, or how heavy, or how hot--quantitative +statements. The distinction between qualitative analysis and +quantitative analysis in chemistry implies the same idea. Thus we may +speak of a piece of wealth as having a definite quantity of value, or +say that the value of the piece of wealth is a definite quantity. We may +then work out mathematical relations among the different quantities of +value, sums, ratios, percentages, etc. + +Ratios of Exchange are ratios between two quantities of value, the +values of the units of the two kinds of wealth exchanged.[5] A good many +economists, particularly in their chapters on definition, have defined +value as a ratio of exchange. This is inaccurate. The ratio of exchange +presupposes _two_ values, which are the terms of the ratio. The ratio is +not between milk and wheat in all their attributes. It is between milk +and wheat with respect to one particular attribute. Compare them on the +basis of weight, or cubic contents, and you would get ratios quite +different from the ratio which actually is the ratio of exchange. The +ratio is between their values. + + [Illustration: + Ratio of Exchange + Milk ------------------------- Wheat + \ / + \ / + \ Value Value / + \ / + \ / + \ / + \ / + Social Mind + ] + +In the diagram above, something of what is to follow is anticipated, +since the cause of value is indicated. Wheat is shown to be exerting +an influence on milk, and milk exerts an influence on wheat. The +comparative strength of these two influences determines the ratio of +exchange between them. But these two influences are not ultimate. The +ratio of exchange is a relation, a _reciprocal_ relation. It works both +ways. But behind this relativity, this scheme of relations between +values, there lie two values which are absolute. These values rest in +the pull exerted on wheat and on milk by the human factor which is +fundamental, which in our diagram we have called the "social mind." +Values lie behind ratios of exchange, and causally determine them. The +important thing for present purposes is merely to note that value is +prior to exchange relations, that it is an absolute quantity, and not, +as many economists have put it, purely relative. The ratio of exchange +is relative, but there must be absolutes behind relations. + +A _price_ is merely one particular kind of ratio of exchange, namely, a +ratio of exchange in which one of the terms is the value of the money +unit.[6] In modern life, prices are the chief form of ratio of exchange, +but it is important for some purposes to remember that they are not the +only form. + +Values may simultaneously rise and fall. There may be an increase or +decrease in the sum total of values. Ratios of exchange cannot all rise +or fall. A rise in the ratio of the value of wheat to the value of milk +means a fall in the ratio of the value of milk to the value of wheat. +Both may have fallen in absolute value, but both cannot simultaneously +rise or fall with reference to one another. This is the truism regarding +ratios of exchange which many economists have inaccurately applied to +value itself in the doctrine that there cannot be a simultaneous rise or +fall of values. There can be a simultaneous rise or fall of values, but +not a simultaneous rise or fall of ratios of exchange. + +There can be a general rise or fall of prices. Goods in general, other +than money, may rise in value, while money remains constant in value. +This would mean a rise in prices. Or, money may fall in value while +goods in general are stationary in value. This would also mean a rise in +prices. In either case, more money would be given for other goods, and +the ratio between the value of the money unit and the value of other +goods would have altered adversely to money. There are writers to whom +the term, value of money, means merely the average of prices (or the +reciprocal of the average of prices). For them, a rise in the average of +prices is, _ipso facto_, a fall in the value of money. This view will +receive repeated attention in later chapters. The view maintained in the +present book is that the value of money is a quality of money, that +quality which money shares with other forms of wealth, which lies +behind, and causally explains, the exchange relations into which money +enters. Every price implies _two_ values, the value of the money-unit +and the value of the unit of the good in question. + +Value is prior to _exchange_. Value is not to be defined as "power in +exchange." Certain writers[7] who see the need of a quantitative value, +which can be attributed to goods as a quality, still cling to the notion +that value is relative, that two goods must exist before one value can +exist, and that value is "power in exchange," or "purchasing power." The +power is conceived of as something more than the fact of exchange, and +as a cause of the exchange relations, but is, none the less, defined in +terms of exchange. This position, however, does not really advance the +analysis. It is a verbal solution of difficulties merely. To say that +goods command a price because they have power in exchange is like saying +that opium puts men to sleep because it has a dormitive power. +Physicians now recognize that this is no solution of difficulties, that +it is merely a repetition of the problem in other words. If we wish to +explain exchange, we must seek the explanation in something anterior to +exchange. If value is to be distinguished from ratio of exchange at all, +it cannot be defined as "power in exchange." + +To seek to confine value to exchange relations, moreover, makes it +impossible to speak of the value of such things as the Capitol at +Washington City, or the value of an entailed estate, or of values as +existing _between_ exchanges. Nor can we make the price which a good +would command at a given moment the test of its value, except in the +case of the highly organized, fluid market. Land, at forced sale, +notoriously often brings prices which do not correctly express its +value. Moreover, even for wheat in the grain pit, the exchange test is +valid only on the assumption that a comparatively small amount is to be +sold. If very much is put on the market, the situation is changed, and +the value falls. In other words, if "bulls" cease to be "bulls," and +shift to the other side of the market, the very elements which were +sustaining the value of the wheat have been weakened, and of course its +value falls. "Power in exchange" is a function of two factors, (1) value +and (2) saleability. A copper cent has high saleability, with little +value, while land has high value with little saleability.[8] Some things +have value with no saleability at all. In a socialistic community, where +all lands, houses, tools, machines, etc., are owned by the state, and +where such "prices" as exist are authoritatively prescribed, value and +exchange would have no necessary connection. Values would remain, +however, guiding the economic activity of the socialistic community, +directing labor now here, now there, determining the employment of lands +now in this sort of production, now in that. Exchange is only one of the +manifestations of value. More fundamental, and more general, including +"power in exchange," but not exhausted by it, is the power which objects +of value have over the economic activities of men. This is the +fundamental function of values. The entailed estate, which cannot be +sold, still has power over the actions of men. The care which is taken +of it, the amount of insurance which an insurance company will write on +it, etc., are manifestations and measures of its value. The same may be +said of the Capitol at Washington.[9] + +In the fluid market, prices correctly express values. Assuming that the +money-unit is fixed in value, variations in prices in the fluid market +correctly indicate variations in values. The great bulk of our economic +theory, the laws of supply and demand, cost of production, the +capitalization theory, etc., do assume the fluid market, and a fixed +value of the dollar.[10] Our economic theory is static theory, in +general, and abstracts from the time factor and from "friction." In +fact, values change first, and then, more or less rapidly, and more or +less completely, prices respond. In the active wholesale and speculative +markets, where the overwhelming bulk of exchanging takes place, the +prices respond quickly. Static theory is thus adequate for the +explanation of these prices, for most practical purposes, so long as the +changes in prices are due to changing values of goods, rather than to +changing value of the money-unit. Moreover, the distinction between +value and price is, in a fluid market, where the value of money is +changing slowly, often not important. In the assumption of money, and of +a fixed value of money, the absolute value concept is already assumed. +No harm is done, however, if the economist does not explicitly refer to +this, but goes on merely talking about money-prices. Very many economic +problems indeed may be solved that way. This is why the inadequate +character of the conceptions of value as "ratio of exchange" or +"purchasing power" has not prevented these notions from being +serviceable tools in the hands of many writers. But there are many +problems for which these conceptions are not adequate, because the +implicit assumption of a fixed value of money cannot be made. Among +these problems is the problem of the value of money itself, which +constitutes the subject of this book. For that problem, an absolute +value concept is vital. + +If, in our diagram above, we substitute for "social mind" the more +general expression, "human factor," we should find that our value +concept is the common property of many writers. We should find it +fitting in with the absolute value notion of Adam Smith and of +Ricardo.[11] The "human factor" which _explains_ the absolute value is, +for them, labor. We should find it fitting in with the "socially +necessary labor time" of Marx: the value of a bushel of wheat is the +amount of labor time which, on the _average_, is required to produce a +bushel of wheat. It is an absolute value. It is a causal coefficient +with the absolute value, similarly explained, of the bushel of corn, in +explaining the wheat-price of corn. Our concept will fit in exactly with +the "social use-value" of Carl Knies, according to whom the economic +value of a good in society is an _average_ of its varying use-values to +different individuals in the market. This average is an absolute +quantity. The absolute values of units of two goods, thus explained, +causally fix the exchange ratio between the goods. Knies' value-theory, +it may be noticed, is explicitly modeled on that of Marx, to whom he +refers, the difference being that Knies takes an average of individual +use-values, while Marx takes an average of individual labor-times, as +the causal explanation.[12] Our value concept will fit perfectly with +Professor J. B. Clark's "social marginal utility" theory of value. +Indeed, the present writer gratefully acknowledges that the concept is +Professor Clark's rather than his own, and that all that is necessary +for its explanation has been set forth by Professor Clark.[13] +Professor Clark's _causal_ theory of value, his explanation of this +absolute quantity of value as a _sum_ of individual marginal utilities, +we have elsewhere[14] criticised as involving circular reasoning, like +all marginal utility theories, in so far as they offer causal +explanations. But his statement of the logical character of value, of +the relation of value to wealth, of value to price, of value to +exchange, of the functions of the value concept in economic theory, and +of the functions of value in economic life,--Clark's doctrines on these +points we have accepted bodily, and in so far as the present writer has +added anything to them it has been by way of elaboration and defence. + +The concept of value here developed is explicitly adopted by T. S. +Adams, David Kinley, W. A. Scott, W. G. L. Taylor, L. S. Merriam, and A. +S. Johnson, among American writers, to name no others. All of these +writers would concur in the formal and logical considerations[15] as to +the nature of value here presented, whatever differences might appear +among them as to the causal explanation of value. + +The value concept here presented performs the same logical functions as +the "inner objective value" of Karl Menger, Ludwig von Mises, and Karl +Helfferich, discussed in our chapter on "Marginal Utility," below, and +is, in its formal and logical aspects, to be identified with that +notion. It is essentially like Wieser's "public economic value," +discussed in the same chapter.[16] That there should remain critics[17] +who consider the present writer a daring innovator, who is thrusting a +personal idiosyncracy in terminology upon economic theory, is striking +evidence that men often talk about books which they have not read! The +reader who accepts, provisionally, the doctrine so far presented, as a +tool of thought which will aid us in the further progress of the +argument, may do so with the full assurance that he is accepting a tried +and tested concept, which has seemed necessary to very many indeed of +the great masters of the science.[18] + +So far, the writer feels himself in accord with the main current of +economic thought. When we come to a causal explanation of the value +quantity, however, earlier theories appear unsatisfactory. The labor +theory of value has long since broken down, and has been generally +abandoned. The reasons for this will appear in the chapter on "Cost of +Production." The effort to explain value by marginal utility, by the +satisfactions which individuals derive from the last increment consumed +of a commodity, has likewise broken down, as will appear in the chapter +on "Marginal Utility." In general, it may be said that the effort to +pick out feeling magnitudes,[19] either of pleasure or pain, in the +minds of individuals, and combine them into a social quantity, leads to +circular reasoning. Thus, the utility theory: It is not alone the +intensity of a man's marginal desire for a good which determines his +influence on the market. If he has no money, he may desire a thing ever +so intensely without giving it value. If he is rich, a slight desire +counts for a great deal. In other words, utility, backed by _value_, +gives a commodity value. But this is to explain value by value, which is +circular. So with the theory of average labor _time_. How shall we +average labor time? The problem is easy if we confine ourselves, say, to +wheat. If one bushel of wheat is produced with ten hours' labor, a +second with eight hours' labor and a third with six hours' labor, the +average is eight hours, and we may fix the value of the bushel of wheat +according. But suppose we wish to compare the labor engaged in making +_hats_ with the labor engaged in raising wheat. How can such labor be +compared? Hats are, in their physical aspects, incommensurable with +wheat. The one quality which they have in common, relevant to the +present interest, is _value_. Given the value of the wheat and the value +of the hats, you may compare and average out the labor engaged in +producing them. But if value must be employed as a means of averaging +labor, it is clear that average labor can be no explanation of value. +This is not the only flaw in the labor-time theory, but it illustrates a +vice which it has in common with all those theories which start with +individual elements, and seek to combine them into a social quantity. +The whole method of approach is wrong. It makes two abstractions, +neither of which is legitimate: first, it abstracts the individual from +his vital and organic connections with his fellows, and then, second, it +takes from the individual, thus abstracted, only a small part, that part +immediately concerned with the consumption or production of wealth. In +this process of abstraction, very much of the explanation of value is +left out. The _whole_ man, in his _social_ relations, must be taken into +account before we can get an adequate theory of value. We turn, then, to +a brief discussion of society and the individual, and to a discussion of +those individual activities and social relations which are most +significant in the explanation of economic value. + + * * * * * + +All mental processes are in the minds of individual men. There is no +social "oversoul" which transcends individual minds, and there is no +social "consciousness" which stands outside of and above the +consciousnesses of individuals. So much by way of emphatic concurrence +with those critics of the social value theory[20] who persist in +foisting upon the theory the notion that there is a social oversoul, or +that the "social organism" is some so far unclassified biological +specimen. To say that economic value is a social value, the product of +many minds in organic interplay, is not to say that economic value is +independent of processes in the minds of individual men, or that it +results from any mysterious behavior of a social oversoul. + +The human animal is born with certain innate instincts and capacities. +Human animals of different races and different strains are in highly +important points different in their instincts and capacities. But the +human animal is not born with a _human mind_. Nor could the human +animal, apart from association with his fellows, ever develop a human +mind. "The human mind is what happens to the human animal in a social +situation."[21] Of course, without the care of adults, the infant would, +in general, promptly perish. But, more fundamental for our purposes, is +the fact that all the important stimuli which play upon the child during +his first two years, when the human mind is being developed, are social +stimuli. So true is this, that the child's commerce with physical things +runs in social terms. The child interprets the physical objects about +him _personally_, attributes life and human attributes to them, holds +conversation with them, praises and blames them, makes companions of +them. This _animism_ of the child, so puzzling to an old-fashioned +psychology, is readily explained by social psychology. It is a social +interpretation of the universe. It follows naturally from the principle +of apperception: the interpretation of the unknown in terms of the +known; the extension of accumulated experience to the interpretation of +new experiences. The first experiences of the human animal are social +experiences. + +In the history of human society, a similar generalization is possible. +The human _individual_ is found, not in primitive life, but late in the +scale of social evolution. Individuality is a social product. The savage +is not a free, self-conscious person, who can set himself off against +the group, and feel himself an isolated centre of power. His life is +wrapped up in the group life. In the great barbarian states like Ancient +Egypt or China, the life of the individual was so controlled by social +tradition, and innovation was so ruthlessly crushed out that +individuality had little scope. Greece and Judea gave larger scope to +individual variation, but the individual still felt himself bound up +with his group, and was stoned, given hemlock, or crucified if he +challenged the existing social order too seriously. The break-up of the +Greek city states, as independent sovereignties, and their subjection to +the universal sway of Rome, made it possible for the cultured Greek to +set himself up in opposition to the State; the coming of Christianity, +substituting personal relations with deity, for the communal worship +which had preceded it, gave the individual a vital interest apart from +the life of the group about him, so that he could still further feel +independent of his immediate social environment. The development by the +Roman lawyers of the _Jus Gentium_, the law which is common to all +nations as distinguished from the particular law of a given group, +emphasized the doctrine of the Christian religion and of the Stoic +philosophy of a humanity which transcends the limits of a given +state,[22]--a notion which tended to free the individual from dependence +on his immediate associates. But note that in all this we have merely a +widening and multiplying of social relationships, and that the +individual gains freedom from one set of social relationships only by +coming into others. The Christian gains freedom from his immediate +surroundings because he feels himself in communion with "angels and +archangels and all the glorious company of Heaven." Francis Bacon could +survive his degradation in the England of his day because he could leave +his "name and memory ... to foreign nations and to the next age." + +Bagehot, in his _Physics and Politics_, Tarde, and Baldwin, to name no +others,[23] have shown how tremendously responsive human beings are to +suggestion, how wide is the sway of imitation in human life, how +fashion, mode, custom, etc., make and mold the individual. Cooley,[24] +with an improved psychology, has amplified the analysis, tracing the +development of the individual mind in interaction with the minds of +those about him, making still clearer the sweep and pervasiveness of +social factors in framing the very self of the individual. In what +follows, I assume the results of these investigations. They constitute +the starting point from which we set out on the quest of a theory of +economic value. + +So much for the individual. He is a social product. But what of society? +Objective, external, constraining and impelling forces, which are not +physical, which are seemingly not the products of the will of other +individuals with whom the individual holds converse, meet the individual +on every hand. There is the Moral Law, sacred and majestic, which stands +above him, demanding the sacrifice of many of his impulses and desires. +There is the Law, external to him and to his fellows, in seeming, +failure to obey which may ruin his life. There is Public Opinion, which +presents itself to him as an opaque, impersonal force, before which he +must bow, and which he feels quite powerless to change. There are +Economic Values ruling in the market place, directing industry in its +changing from one sort of production to another, bringing prosperity to +one individual and bankruptcy to another, not with the caprice of an +individual will, but with the remorseless impersonality of wind and +tide. He who conforms to them, who anticipates their mutations, gains +great wealth--but no business man dare set his personal values against +them. There are great Institutions, Church and State and Courts and +Professions and giant Corporations and Political Parties, and +multitudinous other less formal or smaller institutions, which go on in +continuous life, though the men who act within them pass and change. +Their Life seems an independent life, and the individual who tries to +change their course finds that his efforts mean little indeed, as a +rule. There is a realm of Social Objectivity, a realm of organization, +activity, purpose and power, not physical in character, not mechanical +in nature, which is set in opposition to individual will, purpose, +power, and activity. How is the individual related to this objective +social world? + +Three main types of theory have sought to answer this question. On the +one hand, there is a type of theory, doubtless the oldest type, a type +which arises easily in a period when social changes are slow, which sees +in the objective social world something really separate and distinct +from individual life, having a non-human origin, and deriving its power +from something other than the human will. On the other hand, there is an +extreme individualism, which emphasizes individual separateness, which +posits as a _datum_ the individuality which we have seen to be a social +product, and thinks of the objective social realm as a mere mechanical, +mathematical summing up of individual factors, or as a something which +individuals have consciously made, by contract or agreement, or what +not. Finally, there is a type of theory, to which the present writer +would adhere, which finds a false antithesis in the contrast thus +sharply made between society and individual, which holds that the +individual is not, in his psychological activity, so much set off from +the activities of his fellows as the contrast would indicate, but rather +shares in the give and take of a larger mental life. This larger mental +life is completely accounted for when all the individuals are completely +accounted for, but it cannot be accounted for by considering the +individuals _separately_. No individual is completely, or primarily, +accounted for until his _relations_ to the rest of the group are +analyzed. Thinkers who start out with the individuals separately +conceived, and then seek to combine them in some arithmetical way, +abstract from those organic social relations which constitute the very +heart of the phenomenon we are seeking to explain. The parts are in the +whole, but the whole is not the _sum_ of the parts. The relationships +are not arithmetical, additive, mechanical, but are vital and organic. +Men's minds _function_ together, in an organic unity.[25] + +The first two of these types of theory (perhaps because individuals are +_physically_ sharply marked off from one another, and go on in +_biological_ functioning in obvious separateness) have falsely +accentuated the self-dependence and separateness of individual _minds_. +The second type of theory, which has sought to work out the whole thing +on the basis of this false conception of the individual, has largely +failed to see the objective social realities, or has, with +methodological rigor, denied their existence. This second type of +thinking has especially characterized a good deal of economic theory, +which rests on the philosophy and psychology of David Hume.[26] We will +set our doctrine in clearer light if we contrast three parallel types of +theory which have appeared with reference to the nature of morality, of +law, and of economic value. For each of these phenomena, we have +theories which represent all three of the types of social thinking to +which we have referred. + +In the theory of morals, we have, at one extreme, doctrines like those +of Kant and Fichte, according to whom morality is a matter of +obligation, independent of the human will, independent of consequences, +inherent in the nature of things. Man's mind can find out what the moral +law is, but man's mind has nothing to do with the making of the moral +law. The same notion is involved in the ideas of "natural rights," +"justice though the heavens fall," and the like. The conception is +strikingly brought out in the question about which old theologians +sometimes debated: is Right right because God enjoins it, or does God +enjoin Right because it is Right? Whether or not Right is supreme over +God, these old theologians never questioned that Right is supreme over +all human wishes and desires, and in no sense an outcome of them. At the +other extreme, we have the moral doctrine of the Sophists, for whom each +man's _will_ was right for him--a doctrine which reappears in every +individualistic and anarchistic age. For this doctrine, there are no +valid social standards of right and wrong. There is nothing binding on +the moral agent but his own will. In between, is the moral doctrine of +such thinkers as Friedrich Paulsen, or John Dewey, who represent the +reigning type of moral theory to-day. For them, morality is a purely +human matter. It grows out of the needs and interests of men. What is +good at one time and place is not necessarily good at another time and +place. There are no immutable moral principles, valid throughout the +ages. None the less, morality is not a private matter, about which men +may do as they please. Morality is the product of an organic society, +the product of the interplay of many minds. To a given individual, the +moral law is, indeed, an external constraining and impelling force. It +is the will of the rest of the group. It may be his own will too, but if +it is not, it overrides his personal preference, He, on the other hand, +is part of the group which constrains and guides every other individual. +There are, in fact, many sets of moral values: on the one hand, the +social moral values _par excellence_, which the group will _enforce_ in +various ways; and then, for each individual, his own moral values, which +may correspond qualitatively more or less with the group values, or may +antagonize them. But the Moral Law is the will of the group. It is no +simple composite of the moral values of individuals. It has its organic +interrelations with all phases of social life. Economic changes modify +it, legal changes modify it, religious values modify it, all phases of +social life are expressed in it. + +In legal theory, we find these three types of doctrine also. The first +type is clearly indicated in the general attitude of American and +English courts, especially toward the common law, though it influences +their interpretation of all law. The law is something which the mind of +man may find out, but may not make. If a new situation arises, the court +"finds" the law--in theory the principle "discovered" by the court was +in the common law at the beginning. Of course, we know that the judge +invents the rule he makes, to fit a novel case, but the judge himself +will not admit it. The theory of the law and the theory of morality have +developed in close connection, and the notion of "natural right" is a +juristic as well as a moral idea. At the other extreme, we have from +certain recent students of law the doctrine that "The Law" is a myth, +that there is nothing but the particular opinion of a particular judge +at a particular time. Individualism cannot go so far in legal theory as +to give every individual in society a chance to put his oar in, and have +a separate law for himself! The social and institutional character of +law is too obvious to permit that. But individualism has gone so far in +legal theory as to deny all objectivity to law except in a given +decision in a particular case. In between these two extreme views, +appear the views of writers like Savigny, or Professor Munroe Smith, for +whom the law is a changing product of social psychology, volitional[27] +rather than intellectual in character, objective enough to the +individual who violates it, or the judge who seeks to pervert it, but +none the less not outside the minds and interests of men. In Professor +Munroe Smith's phrase, law is "that part of the social order which by +virtue of the social will may be supported by physical force."[28] I +venture to describe this type of legal theory as the "social value" +theory of the law. In the chapter on "The Reconciliation of Statics and +Dynamics," _infra_, I have cited certain opinions of Mr. Justice Holmes +which apply it, and even bring into it the notions of the marginal +analysis. + +There are, similarly, three types of economic theory. At the one extreme +we have theories of "intrinsic" value, which would place economic value +outside the wills of men. The mediæval discussions of "just price" often +illustrate this notion. It creeps not infrequently into judicial +opinions,--to which such notions are essentially congenial! The working +economist of our own day has found little use for it, but in periods +when economic change was slow it suggested itself not unnaturally to +men, as an explanation of the seeming impersonality of market phenomena, +and as a practical idea for combatting extortion and injustice. +Something of the idea is involved in a sentence of Shakspere's:[29] + + "But value dwells not in particular will; + It holds his estimate and dignity + As well wherein 'tis precious of itself + As in the prizer." + +At the opposite extreme would be those economists, as Professor +Davenport and Jevons, who find no value for a good except in the minds +of individual men, so that there may be as many different values as +there are different men. That something social and objective exists in +the market place can hardly be denied, but when pressed for an account +of it, these writers reduce it to a bare, abstract, mathematical +ratio.[30] Each individual mind is shut up within its own limits, +inscrutable to other minds, and there can be no psychological phenomena +which include activities in many minds, for this view. In between these +two extremes, is the social value theory of the present writer. Economic +value is not intrinsic in goods, independent of the minds of men. But it +is a fact which is in large degree independent of the mind of any given +man. To a given individual in the market, the economic value of a good +is a fact as external, as objective, as opaque and stubborn, as is the +weight of the object, or the law against murder. There are individual +values, marginal utilities, of goods which may differ in magnitude and +in quality from man to man, but there is, over and above these, +influenced by them in part, influencing them much more than they +influence it, a social value for each commodity, a product of a complex +social psychology, which includes the individual values, but includes +very much more as well. Our theory puts law, moral values, and economic +values in the same general class, _species_ of the _genus_, social +value, alike in their psychological "stuff" and character, to be +explained by the same general principles, even though differentiated in +their functions, and in the extent to which they depend on various +factors in the social situation. They are parts of a social system of +motivation and control. They are the _social forces_, which govern, in a +social scheme, the actions of men. + +It may be well to suggest rough _differentiæ_ which mark off these +values from one another. Legal values are social values which will be +enforced, if need be, by the organized _physical_ force of the group, +through the government. Moral values are social values which the group +enforces by approbation and disapprobation, by cold shoulders and +ostracism or by honor and praise. Economic values are values which the +group enforces under a system of free enterprise, by means of profits +and losses, by riches or bankruptcy. The group may, under a communistic +or socialistic system, rely in whole or in part upon the machinery of +the law; in which case economic values appear not in their own form as +immediately guiding production, but as "presuppositions" of some of the +legal values. + +The differentiation of these types of social value may also run in +terms of their _functions_,[31] though it is not so easy to mark them +off here, since their functions overlap. The function of economic values +is to guide and control the economic activities of men, to send labor +from one industry to another, to cause one sort of thing to be produced +or another, to supply the motive force which _impels_ industry. Legal +and moral values also directly affect industry, often working to check +the results which the economic values alone would lead to--as when the +law forbids the production and sale of liquor, or checks child labor, +etc. The law, on the other hand, does not, primarily, in its influence +on industry, seek _positively_ to determine its direction. The law +forbids the production of liquor, but does not decree the production of +bread. The law may seek to affect industry positively, by protective +tariffs, for example, which aim at the building up of certain +industries, but its effects are here indirect, reached through +modifications in the economic values. Economic values, on the other +hand, do not primarily aim at the regulation of the conduct of men +outside the market place, or the shop or the farm, etc. Economic values +are not primarily concerned with making men be good husbands or good +neighbors, or brave soldiers. Economic values may be used, in part, for +these purposes, as when a father-in-law uses his wealth as a lever to +make his son-in-law behave--or, indeed, as a bait to get a son-in-law! +It is hard to find a phase of social life which is not touched by all +types of social values, but it is possible, roughly, to mark off those +phases of social life which are subject to primary regulation by one or +the other sort of social value. + +The differentiation is easier when we look at the social _institutions_ +which have to do primarily with the one or the other sort of value. +Courts and legislatures are easily marked off from stock exchanges and +banking houses. There is not so clearly an institutional nucleus for +moral values, since the church has lost its control over the moral +situation. + +When we view the matter from the standpoint of the _objects_ of value, +_differentiæ_ also appear. The main type of object of moral value is +modes of conduct; the "type object" of economic value is physical things +which men eat, wear, drink, etc., even though _quantitatively_ the major +part of the sum total of economic values attach to other things, +instrumental goods, lands, labor, and social relations, like franchise +rights, good will, which in the main reflect the values of consumers' +goods;[32] objects of legal value are in large degree the same as +objects of moral value, namely, modes of conduct, but moral values +attach to a wider group of objects, and legal values attach to certain +forms of conduct which are morally indifferent. + +It is not so easy to make the differentiation when we view the thing +from the standpoint of the consciousness of men who are at the centre of +the situation, to whose consciousness the social values are presented. +We may put at the very forefront of the economic value of oranges the +gustatory feelings or desires of those who consume them; at the +forefront of the moral value of a heroic rescue by a fireman the thrill +that runs through the onlookers. Qualitatively, these psychological +states are different, as those who have experienced both will know. But +it is difficult indeed to put the difference into words. When it comes +to a legal value, say the legal value of a given contract right which a +man seeks to enforce in court, it is not easy to find any particular +emotion or state of consciousness which is peculiar or appropriate to +it. The value is so highly institutionalized and impersonal, that it +seems to the court and lawyers and even the litigants to be merely a +question of fact to be intellectually analyzed. Its roots are deep in +human emotions, but not in the emotions, primarily, of those who are +handling the transaction. Perhaps the jurist has states of consciousness +we know not of. There may be a distinctively legal emotion. It seems to +crop out at times when one questions, in conversation with a judge or +lawyer, the infallibility of the courts. But the law does not derive its +power therefrom! Rather, the law derives its power from the general +consent and acquiescence and support of the mass of men, who turn over +to experts the details of administering it, and who support The Law in +general, rather than the rule of the _corpus delicti_, with their +emotional sanction. + +I think that we have here a clue to a vital point for our theory. We +need not expect to find the major part of the explanation of any of +these social values in the conscious emotions of those who are moved by +them. In the case of the orange or the heroic act, we are, indeed, close +to pretty simple human feelings and desires. In general, in the case of +moral values, the individual emotion and the social value are +_qualitatively_ comparable, since moral values rarely take on a highly +institutional character. They are more free from class or institutional +control than other social values. This need not be true. Thus, the +plantation negro need not feel any personal shame in the moral +delinquency which he none the less hides from the "white folks" whose +values he must more or less conform to. But, on the whole, moral values +are much more "participation values,"[33] shared by the whole group in +common, than are economic values or legal values. When we pass beyond +the simple case of a consumption good, and get into the realm of the +more institutional economic values, we lose all guidance from the clue +of satisfactions in consumption. Just what emotion, for example, is +appropriate in the presence of the four and a half per cent convertible +bond of the Chesapeake and Ohio Railway Co.? If it be answered that +ultimately that bond represents satisfactions in consumption, since the +owner of it may spend the income for consumers' goods, or since the +railroad in question carries coal which goes to Italy to be used in a +cruiser which will sink an Austrian warship, thereby giving consumers' +satisfactions to individuals in Italy, so that the value of the bond is +ultimately reducible to specific satisfactions of given individuals, we +may still hold that those satisfactions do not constitute the value of +the bond, as such. Moreover, the same is true of the legal values. +Ultimately, very specific human emotions are affected by the rule of the +_corpus delicti_, or the rule governing pleas in _estoppel_. Both in +legal and in economic values we have an elaborate and complex system of +social psychological character, which can by no means be reduced to +elementary desires or feelings of individuals, even though when the +whole story is told, no part of the system will be found outside the +minds of individual men. The point has been well put by Professor C. H. +Cooley: "It would be as reasonable to attempt to explain the theology of +St. Thomas Aquinas, or the _Institutes_ of Calvin, by the immediate +working of religious instinct as to explain the market values of the +present time by the immediate working of natural wants."[34] I think +that any attempt to differentiate the various kinds of social value on +the basis of the type of emotion in the minds of those who have most +immediately to do with them, or to explain them primarily by those +emotions, is foredoomed. The law does not get its power from the emotion +of the judge who gives a decision, nor does the value of a rare painting +rest chiefly in the intensity of desire of the few rich connoisseurs who +compete for it. Back of the judge, giving _validity_ to his decision, +stands the will of the group; back of the rich connoisseurs stand the +legal and other social values concerned with the distribution of wealth, +by virtue of which they are able to make their wants felt in the market. +Both judge and connoisseur are focal points, through which stream the +social forces affecting the values in question. Both are important. But +the emotions and ideas of neither exhaust the psychological causation +involved in the values. + +This is very much more apparent when we consider the values that arise +in the great speculative markets, say in the wheat pit, or the stock +exchange. Those who buy and sell are primarily interpreters, students, +of impersonal, social forces, seeking to adjust themselves to them, to +forecast them, in such a way as to derive profit from them. Their +choices and decisions are also factors. Indeed, it is possible to view +the matter in such a way as to make their decisions the whole story. In +the same way, it is possible to make the mind of the judge the final +explanation of the legal value. But the speculators themselves are under +no such illusion. They know very well that if they run counter to the +facts they will lose money. And the judge knows very well that the range +of arbitrary choice which he can exercise without impeachment, or at +least without reversal by a higher court, is very limited. Nor is even +a Supreme Court of the United States free to do its arbitrary will. Just +because it is so conspicuous, and because its doings are so important, +it has manifested more respect for judicial tradition, and more +responsiveness to the tides of public sentiment, than any other court in +the Federal Judiciary.[35] + +The head of a great banking house makes a decision regarding an +underwriting operation. On his decision depends the question of whether +or not the securities are issued. On the issue of the new securities +depends, in part, the values of the existing securities of the +corporation in question, and the nature of the future employment of +thousands of men and great quantities of land and capital. Tremendous +power is concentrated in the hands of this banker. But it is not _his_ +power! He cannot exercise it in an arbitrary or capricious way. He +approaches his problem in much the same spirit that the judge approaches +a disputed question of law. He analyzes the factors involved. He +considers the condition of the money-market, the question of the +probable ease or difficulty of marketing the new securities to +investors, the prospects of the business of the corporation in question, +the probable future demand for its products, the stability of that +demand, the personnel of the management of the corporation, the attitude +of the government toward it, the nature of its other outstanding +securities, with special reference to the proportion of bonds to stocks, +and the amount of "fixed charges" against its earnings. He may also take +into account other enterprises of similar character which he has +connections with, and the question of whether or not building up the +corporation in question may injure other corporations to which he has +responsibilities. He looks far into the future, seeking to conserve his +prestige, and unwilling to assume responsibility for an issue which +investors will later lose faith in. Proximately, his decision is +tremendously important, and his thoughts and feelings are of immense +significance, but ultimately, _they_ are determined by all manner of +social considerations, and _always_, _the degree to which they count_ in +determining values depends on his weight in the economic situation, +which rests (1) on his _prestige_, _i. e._, the massing of beliefs and +hopes of many men, (2) on his _wealth_, which rests in the legal and +moral values governing distribution, and (3) on his institutional +relationships, which again are psychological facts, partly legal in +character. He is as much a social instrument as is the judge. Both may +abuse their power. Both do at times abuse their power. But the +significant point is that the power both have is social power, and is in +no sense proportional to the intensity of their own emotions. It arises +from the emotional power in the minds of many men. + +It would be easy to elaborate the points in which morals, laws, and +economic values are alike, and to show in detail that the theory of +economic value is merely a special case of the general theory of social +value. For our present purposes, however, it is enough to have +illustrated the general doctrine, and to have set up the economic values +as true social forces. It may be noticed that the effort to +differentiate the different kinds of value is not altogether successful. +They are not in watertight compartments in social life. It is a +commonplace among students of ethics that moral values grow, in greater +or less degree, out of economic factors. Indeed, the "economic +interpretation of history" has as its central theme the doctrine that +morality, law, and ideal values in general are governed by the economic +situation. This is a one-sided view. Moral and legal values are +influenced and modified by economic forces. Legal and moral values do, +in part, derive their power from economic values. But on the other hand, +economic values likewise derive part of their power from legal and moral +values. The "social mind" is an organic whole, in which no factors exist +"pure," and in which there is constant give and take. The effort to +explain moral values by a single principle, as sympathy, legal values by +another simple principle, as fear, and economic values by a different +simple principle, as utility, is foredoomed. It has been given up by the +students of law and morals, and should be abandoned by the students of +economics. + +Let us consider more narrowly the main factors affecting and explaining +economic social values. Let us take, first, the simplest case, that of +goods and services which minister directly to human wants, goods and +services "of the first order." Goods of this sort would be oranges, +bread, clothing, jewels. Services of this sort would be the services of +the barber, the valet, the physician, the preacher, the teacher, the +actor. I abstract, in discussing these values, from the complications +that grow out of the friction in retail trade, and the existence of many +customary prices, and prices fixed by other than economic values, in the +case of teachers, or preachers. I shall concentrate attention upon such +things as oranges, bread, clothing, and jewels. The _focus_ of the +values of these things, and an essential condition of their existence, +is their utility, that is to say, their power to satisfy human wants. +Utility as used in economics does not mean usefulness in any moral +sense. From the standpoint of the economist, whiskey and opium are as +useful as bread, if they satisfy wants equally intense. And the +economist is not concerned with the general utility of things considered +in their totality. Air is more useful than jewels, but a carat of air is +not as useful as a one-carat diamond. Air exists in such abundance that +it does not need to be economized. Scarcity with reference to the +extent of the wants involved is also essential to economic value. A +combination of the ideas of utility and scarcity gives us the simple +notion for which the formidable name of "marginal utility" has been +devised. The marginal utility of a good to a man is the power the last, +or "marginal," unit of the good which the man consumes has to give him +satisfaction, or, viewed from the standpoint of the man, is the +intensity of his desire[36] for, or of his satisfaction in, the final +unit consumed. So far, our account of the value of the orange will seem +perfectly acceptable to those accustomed to traditional discussions of +the problem in the text-books. The difference is that many text-books +stop at this point, leaving the impression that with the definition of +marginal utility the whole value problem has been solved. For the social +value theory, the conception of marginal utility is barely a starting +point. Indeed, it is not even a starting point. We shall have to look +both in front of it and _behind it_. Recognizing that marginal utilities +to individuals are essential to economic values of consumption goods, we +shall have to point out other things which are also essential, and we +shall have to explain the factors determining these marginal utilities +themselves. + +The last point may be considered first. Men's desires are socially +determined. Even the simplest, most instinctive, wants of human nature +are, in their concrete manifestations, the product of social culture in +overwhelming degree. Consider sex and hunger. We do not enjoy our food +when our neighbors pick their teeth with their forks. This would not +trouble a chimpanzee, whose _instinctive_ equipment in the matter of +hunger is vastly more like that of a man than is the _actual_ hunger +impulse of a highly civilized man like that of a savage. Civilized men +will often starve rather than eat human flesh. Even when moral scruples +are overcome, actual physical revulsion may prevent it. Men of different +times and places wish food of special sorts, served in special ways. +They wish to eat in the company of their fellows, but only of those +fellows who can know and obey the ritual that is appropriate to the time +and place. This is true of humble folk as of those who "dress for +dinner." The ritual differs for the two sorts of people. But there is a +spirit, a type of conversation, a code of etiquette, which prevails at +the mealtime of virtually all men, and too serious digressions therefrom +will take away the appetites of all. About the mealtime and the festal +board have gathered a great host of traditions, ideals, and social +activities, till they have become in verity an institution, and not the +least important, by any means, of social institutions. Out of the simple +instinct of sex, we have evolved many of the most precious things of our +civilization, and between the sex impulse of the animal and the sex +impulse of the gentleman who is seeking to marry the one woman in all +the world, there is a difference so great that comparison between the +two is difficult. + +Here we have wants which grow out of the most elementary things in human +nature, wants which are intense and universal, but which vary, in their +concrete manifestations, enormously from age to age and from place to +place. When we come to the wants which change more quickly, the fact +that social factors dominate needs no arguing. Fashion, mode, custom, +obviously account for the concrete wants that exist in clothing, +ornamentation, amusement, housing, etc. If we wish to know what women +will be wanting to wear six months hence, we do not go to women +individually and ask them. We could not find out that way. They would +not know. We go rather to the theatre, and study the stage and the +boxes, to the famous designers of women's dress, to the metropolitan +centres of various sorts, to the "radiant points of social control"[37] +from which emanate the suggestions which pass in imitative waves through +the women of the country in the next few months. The laws of imitation +have been elaborately developed by Bagehot, Tarde, Baldwin, Ross, LeBon, +Cooley, and others, and I content myself here with referring to their +writings. The wants of women--and men--are socially given, grow out of a +give and take, a social process. And in this social process, it is not +true that each man counts one! Rather, a few lead, and many follow. +There are centres of prestige which count overwhelmingly. + +Certain wants are competitive.[38] Where social status depends on having +as good a house as one's neighbors, and where social leadership depends +on having a better house than one's neighbors, there is no limit to +men's desires for better houses. With each improvement which one +introduces, each feels the desire to improve, however contented he might +have been had the other not made the improvement. To this we shall recur +in our discussion of the origin of money, in explaining the value of +gold. + +So much for the human wants which stand as the focus of economic values +in the case of articles of immediate consumption. + +But, given these wants, and given their marginal intensities, we are +only at the beginning of our explanation of the economic values of the +consumption goods. It is again not a case of each want counting one, to +the extent of its intensity. There are again, by virtue of the legal and +moral values governing the distribution of wealth, _centres_ of power. +The wants of some men count for nothing, however intense they may be. +The pauper, the prisoner, the beggar--popular proverb about "beggars and +horses" understands them, however much the "marginal utilitarian" may +forget that their wants count for nothing.[39] The slightest whim, on +the other hand, of the man who has inherited millions may count heavily +in giving values to goods. For the explanation of the values of +consumption goods, then, we need both the socially determined marginal +utilities of individuals, and the socially determined _weight_ which +these individuals have in our economic system. This _weight_ would +involve a very elaborate explanation. Many factors affect it. We call +attention here, however, especially to the fact that it rests in large +part on the legal and moral values and institutions concerned with the +distribution of wealth. Changes in the distribution of wealth are as +important as changes in the wants themselves in giving the explanation +of changes in values. The economic social values of consumption goods +include not merely the values of those goods _to_ the individuals who +consume them, but also the values _of_ the individuals themselves in the +social scheme of things. + +What of the values of instrumental goods, of goods of "higher orders," +of labor, of stocks and bonds, of lands, of franchise rights and good +will? + +It is the one great contribution of the Austrian economists to have +shown that the causation in value runs, primarily, from consumption +goods to the goods of higher "orders" which are concerned with their +production, and that these values of instrumental goods, etc., are +derived and secondary values. The value of wheat is based on the value +of bread, the value of land on the value of wheat. The value of the +stock of United States Steel rests in part on the value of iron lands, +which rests on the value of ore, which rests on the value of pig iron, +which rests on the value of steel rails, which rests on the value of the +service of transporting building materials, which rests on the value of +a building, which rests on the value of the services which a dentist +performs in an office in the building. This is the main line of +causation. This is the first approximation which gives us a clue, +without which we should find problems insoluble. But is it not clear +that this cannot be the whole story? At every step complications enter. +The whole thing cannot be got out of the value of the dentist's +services, and the other consumers' goods and services, which are +indirectly aided by the property to which title is given by ownership of +U.S. Steel stock; nor is the value of the stock to be fully explained by +the value of the property to which it gives title. + +At every step, we meet the complication that men must estimate and +calculate, for one thing. And rarely indeed can men see all the steps, +the end from the beginning. Take first a very simple case, wheat land. +The value of the wheat land of to-day rests on the value of wheat, but +it is the wheat of to-morrow and for many years to come; the wheat of +to-morrow rests for its value on the value of the bread of the day after +to-morrow. Sometimes the differential between goods at two consecutive +steps in the productive process is pretty constant. Wheat and flour vary +pretty closely together. The differential is not strictly fixed even +there. But bread and wheat land have a much looser connection in their +variations. If land could produce no wheat or corn or other good that +would satisfy human wants, and if it could not itself satisfy human +wants, it would ordinarily have no value.[40] But the connection +between the value of the bread and the value of the land is loose and +uncertain, while the connection between the value of the land and the +intensity of the wants actually satisfied by the bread produced from it, +is absolutely _nil_. Whether the bread saves a starving man or feeds the +pet pigeons of a millionaire, is a matter of indifference so far as the +value of the land (or of the bread) is concerned. + +We take the values of consumption goods, and break them up, attributing +part to the labor that immediately produced them, part to the raw +materials that entered into them, part to the machine that fashioned +them, and so on. We then break up the value attributed to the raw +material, attributing part to the labor that worked in producing it +immediately, part to the machine that fashioned it, part to the rawer +material of which it was made. And so with the values of the machines. +Ultimately we get back to the values of labor, or of land, or of +securities giving title to complexes of lands, machines, etc.--values +which we do not further break up. But at every step, we find additional +factors. We find these derived values becoming independent, substantial, +standing in their own right. Moral and legal values affect them +directly, as in the case of patriotic support of government securities, +moral antagonism to the securities of the Distillers' Securities +Corporation, or the influence of court decisions, legislation and +elections on security values. Such values rest, in large degree, on the +massing of _beliefs_ and hopes, not concerned with specific +satisfactions of wants, but with the existence of _future_ economic +values. These beliefs and hopes again have their social explanation. It +is not a case where each man counts one. There are centres of prestige +and power, bankers and financial magnates, whose opinions and decisions +count heavily, and waves of optimism and pessimism, which affect the +whole group. We shall discuss these matters more fully in connection +with the analysis of credit, at a later point of our study. For the +present, it is enough to point out that the whole thing cannot be +explained on the basis of the values of consumers' goods, and that the +values of consumers' goods are only in small part explained by the +intensities of the wants they serve. + +In summary: Economic value is the common quality of wealth, by virtue of +which it is possible to compare divers kinds of wealth, and treat wealth +quantitatively, getting ratios of exchange, sums of wealth, etc. Value +is a quantity, _i. e._, a quality which has degrees of intensity. Ratios +of exchange are ratios between values. Price is a particular sort of +ratio of exchange, namely, a ratio in which one of the terms is the +value of the money-unit. Prices correctly express values on the +assumption of the fluid market, and on the assumption that the value of +the money-unit does not vary. + +The value quality is psychological in character. It rests in human +minds. But not in the minds of individuals thought of separately. +It is a complex of many individual mental activities, highly +institutionalized, and including legal and moral values, hopes and +beliefs and expectations, as well as the immediate intensities of men's +wants for consumption goods. + +The ultimate test of scientific theory must be practice. If a theory +aids in manipulating facts, if it leads to the discovery of ways of +doing things which are better than old ways, if it solves problems which +have hitherto remained unsolved, or carries the solution of problems +farther than has hitherto been the case, it is a good theory. It need +not be the best possible theory. It need not be a final theory. The +chief claim for the present theory of value is that it not only unlocks +all the doors that earlier theories have unlocked, but also others which +have resisted the old keys. The man who goes into the modern stock +market armed with marginal utility and the quantity theory is like the +man who would fight Hindenburg with bows and arrows. Bows and arrows are +effective in the hands of expert archers, and the great figures in the +history of economics have done wonderful things with marginal utility, +"real costs," and the quantity theory. But the social value theory is +offered as a better weapon. + +The writer believes that the problem of the value of money has not been +solved by the older theories of value. He believes that the social value +theory will solve it. He proposes on the basis of the social value +theory to make clearer the nature of credit phenomena, and to assimilate +the laws of credit to the general laws of value. He proposes with the +social value theory to bring together in a higher synthesis two +divergent types of economic theory, the "static" and the "dynamic." He +thinks that a rigorous and consistent application of the absolute +concept of value will clarify confusions at various points in the +general body of price theory, as the laws of supply and demand, etc. + +He offers the social value theory as the only way of giving a +_psychological_ explanation to the demand-curve, and a marginal _value_ +explanation of marginal demand-_price_. Demand-curves are social value +curves, on the assumption of the fixed social value of the dollar. The +utility theory, as will appear in the chapter on "Marginal Utility," has +failed to give psychological magnitudes corresponding to _any_ point on +the demand-curve. In general, he offers the social value notion as the +justification for the assumption of a quantitative value which, as we +shall see, underlies the whole of our current price analysis. + +The theory here outlined has been, as stated, developed and defended +more fully in a previous book. For the rest, the author would have it +judged by its usefulness or failure as a tool of thought in the +investigations which follow. + + NOTE. It has seemed best not to break the main course of the + argument of this chapter for the elaboration of one point on + which there has appeared to some critics to be vagueness in the + exposition of the social value theory in my earlier volume, + namely, the relation of social values to the individual values + of those who are moved by the social values. Social values have + as their function the guidance and control of the activities of + men. But men are also moved by their own individual feelings, + interests, and desires. + + What is the relation between these two sets of factors? In what + has gone before, it has been made clear that social values + present themselves to the individual as opaque, objective + facts, largely beyond his control, to which he must adjust + himself. They represent the minds of other men, acting in + corporate and organic ways, putting pressure on him, or + offering him lures. Now the individual reckons with these + social values in the same way that he reckons with any other of + the facts affecting the economy of his life. He must adjust + himself to them in the same way that he must, if he is a + blacksmith, adjust himself to the technical qualities of the + iron he is manipulating. This does not mean that he is passive + before them, any more than he is passive before the iron. He + rather seeks to carry out his personal purposes and desires by + actively adapting himself to objective facts, whatever they be. + This means that different individuals will react in different + ways to the same social value. The fear of the law will keep + one man from burning dead leaves in the street where it will + not keep another man from murder. A given degree of social + pressure will make one man crease his trousers, while another + man will not even know that the pressure to crease one's + trousers exists! There are great individual variations in + responsiveness and sensitiveness to social pressure. In part, + these variations are due to inborn qualities. In larger part, + they are due to social education, and to social status. Thus, + the fact that one man will work all day in a ditch in response + to the lure of a dollar and a half, while another will not + work in the ditch for a hundred dollars a day, may rest in + slight degree on the greater inborn sensitiveness of the latter + to the physical pain of labor, but rests primarily on the fact + that the latter doesn't need the money, and has a social + standard, growing out of his class-associations and education, + which would make him ashamed to be seen in the ditch. Indeed, + we may think of the social standard in question as a social + value acting _on_ him, rather than _in_ him. He fears ridicule. + The same degree of social power, luring men toward the ditch, + exists in the dollar in each case, but the response is very + different in the two cases. + + Later formulations of the utility theory and the labor cost + theory, as represented by the theory of Schumpeter, which we + shall discuss in the chapter on "Marginal Utility," give us, in + a scheme of purely static equilibrium, a picture of the + adjustment of the individual values to the social values. As we + shall see, they give us no account whatever of the social + values. They do not explain causation at all. But they do show + that there is a tendency for the individual marginal utilities + of consumption to become proportional to the social values of + the goods consumed by each individual; and for the individual + marginal disutilities in production to become proportional to + the social values of the rewards that come to producers. The + scheme is highly unrealistic. It has been emphatically + repudiated by Böhm-Bawerk, so far as the disutility equilibrium + is concerned. ("Ultimate Standard of Value," _Annals of the + American Academy_, Vol. V, pp. 149-209.) But it is worth + something, not as explaining social values or market prices, + but rather, as showing how individuals _conform_ to social + values and market prices. _Cf. Social Value_, pp. 43-44, n. 2, + and 148. + + The theory that individual marginal utilities and disutilities + are proportional to market values is unrealistic enough, in the + light of the analysis of individual utilities which we have + given, even for the utilities. It is quite impossible to make + anything of importance of it from the side of individual + disutilities. The length of the working day is not fixed for + each worker by a comparison of his own labor pain with the + satisfactions he expects from his wages. It is fixed by + conditions largely external to him, and the whole group works + the same number of hours, with the machine. The law may limit + the working day. Trades-union effort may do it. Opportunities + for alternative employment may do it, for the labor force of a + factory as a whole. But the theory, which really must rest in + the notion that each individual has many options, and that the + working period is flexible, cannot mean much. The prosperity of + the laborer does more to limit the working day than does his + suffering! + + The reactions of individuals as consumers or producers on the + social values modify the social values. But, as we have shown, + the primary explanation of the social values is not to be found + in the individual utilities and disutilities of those who react + to them. Utilities and labor pains are parts, but minor parts, + in the explanation of social values. + + + + +CHAPTER II + +SUPPLY AND DEMAND, AND THE VALUE OF MONEY + + +The theory of the value of money is a special case of the general theory +of economic value. To the layman, this would seem to go without saying. +To the student of the literature of the subject, however, who has +noticed the wide divergence between the method of approach to the +general problem of value and the method of approach to the problem of +the value of money, in most treatises which include both these topics, +the proposition will sound unusual if not heretical. Most text-books in +English to-day will offer the marginal utility theory as the general +theory of value. The same books commonly present the quantity theory of +the value of money. Whether or not the two theories are consistent may +wait for later discussion, but that the quantity theory of money is a +_deduction from_ the utility theory of value, and a _special case_ of +the utility theory of value, will not, I believe, be contended by +anyone. Certainly in its origin, the quantity theory is much the older +theory. The same is true for those writers who seek to explain value in +general on the basis of cost of production, and who at the same time +offer the quantity theory to explain the value of money. The two +theories may or may not be consistent, but in any case, they are +logically and historically independent, neither being a deduction from +the other. Older writers (as Walker and Mill), whose treatment of the +general theory of value runs in terms of "supply and demand," have +stated that the quantity theory is merely a special case of the law of +supply and demand, and the statement is occasionally met in present-day +writings, though one of the most recent and best known of the +expositions of the quantity theory, Professor Fisher's _Purchasing Power +of Money_, very explicitly repudiates this doctrine.[41] But it may be +easily shown, and will be shown later, that the quantity theory, and the +present-day formulation of the law of supply and demand, are in no way +logically dependent upon each other. This lack of connection between two +bodies of doctrine which should be in a most intimate and essential way +related to each other, may well throw suspicion on the current +treatments of both topics. In any case the lack of connection raises a +problem, and calls for explanation. + +Part of the explanation may be sought in the fact that the writers who +have developed the general theory of value have not been, in general, +the writers who have most elaborated the theory of the value of money. +The theory of money has been for a long time a more or less isolated +discipline. In Ricardo, we have an elaboration of the labor theory of +value, and we also have the quantity theory of money. But it is not +clear that Ricardo added anything to the quantity theory. He found it, +in much the form in which he used it, in the writings of predecessors, +among them Locke and Hume. Ricardo makes large use of the quantity +theory as a premise, but apparently feels the theory to be so +self-evident that it needs little exposition or defence at his hands. +John Stuart Mill is a clear exception to the general statement. Cairnes, +likewise, did treat both topics in considerable detail, but while his +interest in the general theory of value was that of the theorist, his +treatment of money was primarily in the spirit of the publicist, and his +interest was less in the justification of the theory--which he again +seems to feel needs little defence--as in its application. A similar +statement may be made with reference to Jevons. He worked out his +general theory of value for its own sake; his utterances on the theory +of the value of money must be sought scattered through his practical +writings on money. Alfred Marshall's _Principles_ (Vol. I) says almost +nothing about the theory of money; his opinions on that subject are to +be found in some _ex cathedra_ replies to questions from a Parliamentary +Commission. The most important discussions in England of the value of +money are to be found in the long polemic between the Currency and the +Banking Schools, by writers who would not be listed among the makers of +the general theory of value. In the United States to-day, with the +exceptions of Professors Fisher and Taussig, the writers who have been +interested in the general field of economic theory have done +comparatively little with the value of money (_e. g._, Professors Clark +and Fetter), and the writers who have been most interested in the value +of money have usually not written largely on the general theory of value +(_e. g._, Professors Laughlin, Scott, Kinley). Professor Kemmerer might +well be included as an illustration of this last statement. His primary +interest is in money, rather than general theory, even though he does +precede his theory of the value of money with an exposition of the +utility theory of value. In German, a similar situation obtains. +Böhm-Bawerk has touched the theory of money scarcely at all. Menger has +written an important article on "Geld" in the _Handwörterbuch der +Staatswissenschaften_, but the important thing about this article is the +theory of the origin of money, and the reader will find little on the +problem of the value of money. Wieser has recently taken up the value of +money (in articles published in 1904 and 1909), but no trace of his +views has as yet manifested itself in the English literature on money, +and the writer may here express the opinion that Wieser's contributions +to the theory of money are not likely to be very influential, or to add +to his reputation.[42] Austrian writers on the value of money, as Wieser +and von Mises, have recognized more clearly than anyone in America or +England, the essential dependence of the theory of the value of money on +the general theory of value. The German writer on money who has +attracted most attention recently, however, G. F. Knapp, troubles +himself about the general theory of value not at all. + +But the main explanation of the hiatus between the two bodies of +literature and doctrine is to be sought in something more fundamental. +Neither utility nor costs nor supply and demand furnishes an adequate +basis from which the quantity theory, or any other theory of the value +of money can be deduced. The cost theory, and the supply and demand +theory, in their present-day formulation, are really not theories of +value at all, but are theories of _prices_, theories which presuppose +_value_, and _money_, and a _fixed value of money_. And the utility +theory, as usually presented, is either a theory of barter relations, or +else (more commonly) speedily settles down into the grooves of supply +and demand, leaping by means of a confusion of utility curves and +demand-curves (or sometimes by a deliberate identification of them, _e. +g._, Flux and Taussig[43]) to the treatment of market prices. I shall +take up these points in order. + +A historical summary of the development of the notions of supply and +demand will aid the exposition. It may be noticed, first of all, that +supply and demand is really a very superficial formula even though an +exceedingly useful one. By virtue of its superficial character, it +antagonizes few other theories, and it has been the common property of +almost all schools of value theory. Cost theories and utility theories, +labor theories, or social value theories, all find use for it, in one +form or another. It is really quite neutral and colorless, so far as the +ultimate questions of value-causation are concerned. The more +fundamental causal factors offered by one theory or another are commonly +supposed to operate _through_ supply or demand, in price-determination. +Adam Smith seems to see this more clearly than does Ricardo. Ricardo, +indeed, sometimes thought of demand and supply as forces antithetical to +the forces of labor-costs which he was considering. In ch. xxx of his +_Principles of Political Economy and Taxation_ (ed. McCulloch, pp. +232ff.) he holds that his natural value ultimately rules, except (p. +234) in the case of monopolized articles. Supply and demand govern the +prices of monopolized articles and of all articles in the short run. I +do not find in Ricardo any clear statement to the effect that cost of +production operates _through_ influence on supply. Neither Adam Smith +nor Ricardo felt the need of very much precision in the definition of +supply and demand. Smith does, indeed, distinguish "effectual" from +"absolute" demand, in a well-known passage (ed. Cannan, I, p. 58), +defining effectual demand as the demand of the effectual demanders, +_i. e._, these who are willing to pay the "natural price" of the +commodity. The term "supply" he does not use in this passage, but speaks +of the "quantity which is actually brought to market," and gives as the +law of market price that it is determined by the "proportion" between +this quantity and the effectual demand. That much is wanting in this +analysis will be sufficiently clear when the views of J. S. Mill and +Cairnes are considered. Ricardo offers even less than Smith in the way +of definition. The reader may compare the pages in _Ricardo's Works_ +cited above, and the discussion of the demand for labor on p. 241 in the +same volume. + +In J.S. Mill, a clean-cut notion first appears. The doctrine that price +is determined by a ratio between effectual demand (_i. e._, the wish to +possess combined with the power to purchase) and supply (_i. e._, the +quantity available in the market), is sharply criticised. How have a +ratio between two things not of the same denomination? "What ratio can +there be between a quantity and a desire, or even a desire combined with +a power?" To make supply and demand comparable, demand must be defined +as "quantity demanded," and then the difficulty arises that the quantity +demanded will vary with the price, which seems to present a case of +circular reasoning if demand is to be a determinant of price. The +solution which Mill develops for this difficulty really gives us our +modern conception, virtually complete except that Mill does not present +it in the useful diagrammatic form and does not whisper the magic word, +"margin." There is a demand-schedule, which, plotted, would give a +demand-curve. At such and such prices, such and such quantities are +demanded, or will be purchased. There is a supply schedule, presenting a +supply situation of similar character (though not so clearly indicated). +The price reached is that price which _equalizes_ amount demanded and +amount supplied. A higher price will lead to competition among sellers, +forcing down the price, a lower price will lead to competition among +buyers, forcing up the price. The notion of a _ratio_ between supply and +demand is replaced by the notion of an _equation_ between them. The +present writer wishes to remark, in this connection, that Böhm-Bawerk's +elaborate analysis, with his "marginal pairs," etc., has not advanced +one step beyond this conception of Mill's, that it is really less +satisfactory than Mill's analysis, because of the impedimenta of +pseudo-psychology it has to carry, and because of its confusion of +utility schedules with demand schedules.[44] In our present-day +expositions, as presented in the diagrams, we are accustomed to say that +price is fixed when marginal supply-price and marginal demand-price are +equal, putting the stress on the ordinate, rather than on the abscissa, +on the identity of the dollars paid or received, rather than on the +identity of the goods given or received. But this is merely another way +of stating the same equilibrium which Mill perceived--when marginal +demand and supply prices are equal, amount supplied and amount demanded +will be equal, and conversely. + +One point is to be added, making explicit what is implicit in the modern +theory of supply and demand. Supply and demand doctrine assumes _money_, +and a _fixed value_ of money. That there should be a given schedule of +money-prices for varying quantities of a good, is possible only if there +be a given value of the money-unit. + +That the modern doctrine of supply and demand necessarily involves the +assumptions of value, of money, and of a fixed value of money, may be +proved by the following considerations: + +Supply-situation, represented by the supply-curve, and demand-situation, +represented by the demand-curve, are conceived of as antithetical and +independent causal forces, whose equilibrium determines both "supply and +demand" (in the sense of quantities supplied and demanded) and price. +Mill's doctrine that supply and demand determine price gets out of the +circle that demand (amount demanded) is itself dependent on price, only +by making both demand in this sense and price _results_, rather than +causes, and by putting the causation back into the more complex factors +which I call "supply-situation" and "demand-situation." The two +independent causes, then, are summed up in the supply-curve and the +demand-curve. But, first, these curves are expressed in money. And +second, a change in the value of money would affect _both_ of them +proportionately. But a theory which is concerned with supply and demand +as independent and antithetical must abstract from factors which give +them a _common_ movement, without modifying their _relation_ to each +other. A change in the value of money would lead the supply-curve to +move to the right, and the demand-curve to move to the left, the change +in each being proportionate, and the amount supplied, and amount +demanded, would remain unchanged. Changes in the value of money must, +therefore, be abstracted from. + +Again, we must precise the notion of an _increase_ in demand, or of +supply. Increase in demand may mean mere increase in amount demanded, +consequent upon a lower price, consequent, _i. e._, upon a lowering of +the supply schedule. In this sense, increase in demand is a passive +fact, a result rather than a cause. On the other hand, if the increase +in demand is an increase in the amount demanded at the _same_ price, if +it means a change in the demand-situation, represented by the moving to +the right of the demand-curve, we have a causal factor in increase in +demand, a factor which raises the price and compels new supply to come +into the market. We may distinguish these two meanings as increase in +demand in the active and in the passive senses. _Mutatis mutandis_, we +may speak of increase of supply in the active and passive senses. These +distinctions have been made before, but it has not been clearly seen +that these distinctions, and the connected doctrines, involve the +assumption of a fixed value of money. But consider: it is the current +doctrine that increase in demand in the active sense, the demanding of +a greater amount at the same price, the moving of the demand-curve to +the right, not only raises the price, but also tends to _increase the +supply_. But this is true only if the _cause_ of the increase in demand +is not a cause which simultaneously works on supply, neutralizing that +tendency. If the increase in amount demanded at a given price be due to +a lowered value of money, then the same lowered value of money will +reduce the supply available at that price _pro tanto_, and the new +equilibrium, _cæteris paribus_, will be at a higher price, to be sure, +but with the same amount supplied and demanded. "Demand" is a term which +carries the connotation of motivating power in economic theory. Through +demand run the forces which regulate production and supply. The function +of increased demand is to induce increased supply. But the value +concept, and the assumption of a fixed value of money, are needed to +preserve this part of the doctrine. Without them we have no way of +distinguishing a _real_ increase in demand in the active sense, which +does modify the adjustments in production, and alter the proportions of +different supplies, from a _nominal_ increase in demand in the active +sense, which merely raises a money-price, without affecting supply.[45] + +Another approach will lead to the same conclusion. Demand and +supply-curves are not to be understood merely in terms of brute, +physical quantities. They are rather curves expressing economic +_significances_, manifesting _psychological_ forces which lie behind +them. No considerations of mere physical quantity will explain why one +demand-curve should be "elastic" and another inelastic,--each curve has +its own peculiarities, which are not mechanical in their nature. +Demand-curves express the diminishing economic significance of goods as +their quantity is increased. How economic significance is to be +interpreted need not be argued here. I have elsewhere undertaken to show +that the utility theory of value does not explain the economic +significance which demand-curves express--that demand-curves are not +utility curves. My own theory is that demand-curves are to be explained +only in terms of a social psychology, that demand-curves are +social-value curves. But my argument at this point does not rest on the +particular type of causal theory of value one chooses. It is enough that +the demand-curve be recognized as expressing economic significance, and +diminishing economic significance.[46] But for the demand-curve to +express variation in economic significance of a good, there is need for +a unit in which to express that variation. That unit is the economic +significance of the dollar, itself assumed to be invariable--as all +measures must be assumed to be invariable if measurement is to mean +anything. If the unit chosen vary in the course of a given +investigation, the curve tells you nothing at all. + +Another way of reaching the same conclusion is to say that an increase +in demand in the active sense will lead to an increase in supply only if +there be no corresponding increase in demand for the alternative +employments of the sources of that supply, that, _e. g._, an increased +demand for wheat will lead to increased production of wheat only if +there be not a corresponding increase in the demands for corn and other +crops which can be raised on land and with labor and capital that would +otherwise produce wheat. This is only another phase of the argument that +went before, that an increase in demand due to a falling value of money +would lead to a corresponding shift in the supply-curve. It is not quite +the same argument, however, because that was an argument concerned with +short run tendencies, resting on the assumption that the holders of +supply would immediately react to a change in the value of money, +whereas the argument just presented rests on the longer adjustments, +based on the law of costs, as worked out by the Austrians. This point +will be made clearer in the next chapter. + +Yet another, and perhaps simpler, approach to the same conclusion is by +pointing out that an individual, deciding to buy, must take account of +the prices of other things in his budget--that individual +demand-schedules would be different if market prices of other +things--which depend on the value of money--were different. + +The doctrine that supply and demand (and cost of production, the +capitalization theory, and other elements in the current price-analysis) +presuppose a fixed value of money, must be sharply distinguished from +the doctrine of Professor Fisher (_Purchasing Power of Money_, ch. 8), +and others, that a fixed _general price level_ is assumed by supply and +demand, etc. I should deny that a fixed general price level is assumed. +The point rests in the distinction between value as _absolute_ and value +as _relative_. For my theory, it is perfectly possible for the general +price level to rise, with the value of money constant, because of a rise +in the values of _goods_. In a later chapter, on "The Passiveness of +Prices," I shall examine the doctrine of Professor Fisher more closely, +and set these two views in clearer contrast. For the present, it is +enough to point out one vital difference between a rise in prices due to +a fall in the value of money and a rise in prices due to a rise in the +values of goods, with the absolute value of money unchanged: in the +latter case, there is an increase in the psychological stimulus to +industry, an increase in economic power in motivation, which energizes +and increases production. In the latter case, especially when the fall +in the value of money is rapid, and the rise in prices is clearly due to +that cause (as in the case of Confederate paper, or the French +_Assignats_), we find a reverse effect on industry. Intermediate cases, +where money is falling in value, but where goods are also rising, give +us intermediate results. + +In what follows, I shall from time to time refer to this distinction. In +my own exposition, I shall always use "value of money" in the absolute +sense, as distinguished from the mere "reciprocal of the price +level,"--a practice which I have sought to justify in the chapter on +"Value," and in other places there referred to.[47] + +The modern theory of supply and demand, then, assumes money, and a fixed +value of money. It is, therefore, obviously unfitted as an instrument to +solve the problem of the value of money. If supply and demand concepts +are to be applied to this problem, they must be of a different sort. +This was pointed out by Cairnes[48] who criticised Mill's formulation, +and pointed out that Mill departed from it in three capital doctrines: +in the theory of the value of money, in the theory of wages, and in the +theory of international values. By the demand for money, Mill means, not +the amount of _money_ demanded, but the quantity of goods offered +against money--a very different conception. (Mill, _Principles_, Bk. +III, ch. viii, par. 2.) In what sense a quantity of goods can equal a +quantity of money, or in what sense there can be a ratio between goods +and money, (to recur to Mill's former problem as to the ratio between +things not of the same denomination) Mill does not make clear, nor is it +defensible to speak of either a ratio or an equation on the basis of +Mill's system, since Mill had no absolute value concept. Cairnes seeks +to reconstruct the notion of supply and demand, in such fashion as to +make it possible to apply it universally, and takes up the question of +the comparability of supply conceived as a quantity of goods, and +demand, conceived, not as a quantity of goods, but as desire combined +with the ability to pay. He concludes that in both supply and demand +there is a physical, as well as a mental, element. Demand he defines as +the desire for a commodity backed by general purchasing power; supply as +the desire for general purchasing power, backed by the offer of a +commodity. Thus he thinks he has made the two of the same denomination, +so that comparison may be instituted between them, and the ideas of +equation, ratio, and proportion made legitimate. By "general purchasing +power," Cairnes seems to mean money and the representatives of money. It +is not an abstract power, since it is the "physical" element in demand, +comparable with, and of the same denomination with, the physical element +in supply, a commodity. Cairnes' solution of Mill's difficulty seems to +me to be merely verbal, however. First, in what way is the desire for +general purchasing power in the mind of one man comparable with the +desire for a commodity in the mind of another man? I pass over the +supposed difficulty that knowledge of other men's emotions is +impossible,[49] and emphasize simply the point that price offer, either +by demander or supplier, is no test of the intensity of desire where +there are inequalities in the distribution of wealth. But second: in +what sense is general purchasing power, money and money-funds, of the +same denomination as a commodity? Cairnes emphasizes the physical +character of both. But surely they are not comparable on the basis of +any physical attributes--weight, bulk, etc. Certainly if we look at the +concept of demand here given, the physical aspect is simply +irrelevant--gold money goes by weight, but what of paper money and +credit instruments? And in what sense is even gold money physically of +the same denomination with, say, wheat, or hay or base-ball tickets? Not +physical quantities, but economic quantities, are relevant here; not +weight or bulk, but _value_. By means of a concept of value, as the +homogeneous quality of wealth, present in each piece of wealth in +definite, quantitative degree, could Cairnes bring about comparability +between the "physical" elements in supply and demand. But not otherwise. +Only significances, values, are relevant here. Supply and demand +presuppose value. + +It will be interesting to consider the effort to solve the problem of +the value of money by means of supply and demand on the lines employed +by Mill, where demand for money is defined as quantity of goods to be +exchanged, and supply of money as quantity of money times rapidity of +circulation, and where physical quantities are treated as the relevant +factor, no value concept of the sort here contended for being +presupposed. This is, essentially, Mill's method. There is, in this +conception, first the difficulty that "quantity of goods to be +exchanged" is not a true quantity at all, but is a mere collection of +things of different denominations, dozens of eggs, pounds of butter, +gallons of milk, etc., incapable of being funded into a quantity.[50] +There is, second, the difficulty that increasing the amount of any one +of the items in this heterogeneous composite need not increase the +"demand" for money, in the sense that it increases the "pull" on money, +or tends to increase the supply of money. Yet, under the general +doctrine of supply and demand, an increase in demand should be a +stimulus to increase in supply. Indeed, it is easy to construct a case +where an increase in the quantity of one of the items in this composite, +the others remaining unchanged, would actually tend to _repel_ money, to +reduce the _supply_ of money. Suppose that one item in America's stock +of goods, say cotton, is much increased in quantity, and suppose that +cotton has a highly inelastic demand-curve, so that the increased +quantity sells for less money than the original quantity.[51] Suppose, +too, that cotton is our chief article of export, and that the bulk of +our cotton is exported. Would not the "balance of trade" tend to turn +against us, so that gold would tend to leave the country, and the supply +of money be reduced? There is nothing in the situation assumed to raise +the prices of other goods,[52] so that they could exert a counteracting +"pull" on money. Europeans, to be sure, having less to pay for cotton, +could demand more of other things, and Americans paying less for cotton +could demand more of other things. But, on the other hand, American +producers of cotton, receiving less for their cotton--receiving +precisely as much less as the others had more--could then demand less of +other things, exactly as much less as the others are able to demand +more. The original tendency for gold to leave the country, and the +tendency for gold to leave the money-form and be used in the arts, would +remain unneutralized. An "increase of demand for money," in Mill's +sense, would in this case present the remarkable phenomenon of driving +money away. Physical quantities are irrelevant. Psychological +significances are what count. + +It is interesting to note, in this connection, that some striking +contradictions in quantity theory reasoning on any formulation, whether +connected with the notions of supply and demand or not, are involved in +this hypothesis. The illustration above gives a case where a lowered +price level leads money to flow away from your country. But, on the +quantity theory explanation of foreign exchange, it is _rising_ price +levels which drive gold away, and _falling_ price levels which attract +gold![53] + +Mill's effort to apply the notion of demand and supply to the value of +money is, then, (1) not an application of his formal doctrine of supply +and demand, and (2), is a failure, leads to results contradictory to the +general law of supply and demand, as soon as we take account of the +peculiarities of individual commodities, and cease to look at +commodities in one huge lump. Psychological forces, rather than +physical quantities, are what count. Whether or not the supply and +demand notion of Cairnes, reinterpreted by putting a quantitative value +concept into it, could serve as a means of approach to the value of +money, I shall not here argue. No one so far as I know has attempted to +do the thing that way, and my own theory is best developed by another +method. It is interesting to note, however, another somewhat different +effort to apply the supply and demand formula. General Walker does so, +including among the factors determining the demand for money, not only +the quantity of goods to be exchanged, but also the _prices_[54] +prevailing. Since by value of money Walker means merely the reciprocal +of the price-level, this is the clearest possible case of a vicious +circle. It would be a circle even if he were trying to explain the +absolute value of money, as distinguished from the reciprocal of the +price-level, since the former is one of the determinants of the latter. +Value of money and values of goods determine prices; prices and quantity +of goods determine demand for money; demand and supply of money +determine value of money,--a hopeless circle. + +I know no sense in which the terms, demand and supply of money, can have +relevance to the problem of the value of money. There is one sense in +which the terms can be used which fits in with the modern supply and +demand-curves, and that is the sense in which they are used in the money +market. Demand for money comes from borrowers; supply of money from +lenders. The price paid is a money-price, the curves express the short +time money-rates, the rental of money, in terms of money, for stated +periods of time. There is a relation, later to be investigated, between +the rental of money, the money-rate, and the value of money, but the two +are in no sense the same. It should be noted, too, that we are here +concerned with "money-funds" rather than with money in the strict +sense,--distinctions and relations in this connection properly belong at +another stage of our inquiry. Whenever the terms, demand and supply of +money, appear in the following pages, they will be used in the sense +developed in this paragraph. + +Demand and supply are superficial formulæ. They cannot touch a problem +so fundamental as that of the value of money. + + + + +CHAPTER III + +COST OF PRODUCTION AND THE VALUE OF MONEY + + +When the cost theory was a labor theory, as with Ricardo, the +expression, cost of production of money, could have a definite meaning. +It meant the labor-cost of producing the money metal. Even in this form, +it is recognized that cost of production has a looser connection with +value in the case of money than in the case of most commodities, because +the supply of money metal is large and durable, and the annual +production affects it slowly. But cost of production theories, in the +form of labor theories, or labor-abstinence-risk theories, have little +standing in modern economic theory. Ricardo himself saw the break-down +of the pure labor theory; and Cairnes, Ultimus Romanorum, so limited and +modified the "real costs" doctrine as to leave little validity in it, +even on his own showing. The prevalent doctrine of cost of production +runs in terms of "money-costs"--and hence is of no use when the problem +of the value of money itself is to be solved. + +A brief historical sketch of the cost theory will be helpful. Costs are +sometimes conceived as a cause of value, and sometimes as a measure of +value. Often these two aspects are mixed, and writers shift from one +notion to the other. This is particularly true of the labor theory. In +Adam Smith the contention sometimes is that labor is unvarying in value, +hence an admirable measure of values, and an excellent standard of +long-time deferred payments. Smith compares wheat and silver from the +standpoint of the constancy of their relation to labor, and concludes +that wheat is the better standard in the long run, because it remains +more nearly fixed with reference to labor than does silver. Sometimes +Smith thinks of labor as a cause of value, and thinks of the labor that +enters into the production of a good as the significant thing. At other +times, the labor that goods will command or purchase is the significant +thing--and here one is not clear whether he thinks of labor as a cause +or as a measure. Whether labor is to be funded as labor-pain, or as +labor-time, Smith does not state. Sometimes labor seems to be considered +as homogeneous in its efficiency. At other times, he makes comparison +between different kinds of labor as to their efficiency, and compares +the efficiency of labor in different occupations. One can find nearly +anything one pleases in Adam Smith on these points. At times he speaks +of "labor and expense," rather than labor alone, as governing prices. + +Labor-cost to the laborer would take the form of labor-pain or +labor-time. To the employer, it would take the form of outlay in wages. +Adam Smith never makes any definite statement of point of view here, and +shifts back and forth from one to the other. He recognizes variations in +labor-pain, in danger, etc., in different kinds of labor when discussing +wages. + +Ricardo elaborated the labor theory of value, and tried to think it +through. He was too keen a logician to shift view-points with Smith's +facility, and he tried to make a completed system.[55] There is some +shifting from the theory of labor as a cause of value to labor as a +measure of value, as in the following passage: "If the state charges a +seigniorage for coinage, the coined piece of money will generally exceed +the value of the uncoined piece of metal by the whole seigniorage +charged, because it will require a greater quantity of labour, or, +which is the same thing, the value of the produce of a greater quantity +of labour, to procure it." (_Works_, McCulloch ed., 213.) In general, +however, Ricardo developed a causal theory of value, quantity of labor +being the basis of the absolute values of goods, their _relative_ values +depending on the relative amounts of labor involved in the production of +each. I shall not go into the matter fully, but shall call attention to +the rock on which the system split, as Ricardo himself admits. A greater +or less proportion of capital works with labor in producing different +things, and the value of product, in that case, varies not merely with +the labor, but also with the amount of capital, and the length of time +the capital is employed. How say, then, that labor alone governs value? +How reduce labor-cost and capital-cost to homogeneous terms? James Mill +tried to do it for him by making capital merely stored up or petrified +labor, which gives up its value again in production. But this doesn't +meet the difficulty, because there is a _surplus_ value, over and above +that explained by all the labor, including the labor which produced the +machine, and the labor which produced the raw materials which entered +into the machine, etc. The case of wine is a particularly obstinate +case. Wine increases in value merely with the passage of time, at a rate +which corresponds to the profit on capital. Ricardo finally, in +correspondence with McCulloch, definitely abandons the case, stating +that there are many exceptions to the proportionality between exchange +value and labor-cost. "I sometimes think that if I were to write the +chapter on value again which is in my book, I should acknowledge that +the relative value of commodities was regulated by two causes instead of +one, namely, by the relative quantity of labor necessary to produce the +commodities in question, and by the rate of profit for the time that the +capital remained dormant." (Davenport, _Value and Distribution_, p. +41.) But this is a "dualistic" rather than a "monistic" explanation--one +element is a money-expense, or at all events a pecuniary item, while the +other is a "real cost" item. The two are incommensurate and +incommensurable. + +Senior seeks to supply the unifying principle. "Abstinence" and labor +have pain as a common element, and so are commensurable. Costs, reduced +to labor and abstinence, become homogeneous again. Monism is restored. +Cairnes completes the doctrine by adding risk to the real cost elements: +a triune cost concept, sacrifice being the generic fact in the three +manifestations. + +With John Stuart Mill, in general, we have an entrepreneur view-point. +Money-expenses of production, entrepreneur outlay, plus wages of +management, or including wages of management, are the factors with which +Mill reckons. He is no longer concerned with psychological ultimates, or +real costs. Cairnes criticised Mill sharply for this. No distinction is +more fundamental he holds, than that between costs or sacrifice on the +one hand, and rewards on the other. Labor, abstinence and risk are +sacrifices; wages, interest, profits are rewards. None the less, in cost +doctrine, as in supply and demand doctrine, it is Mill's view which has +prevailed. Cost as conceived by Mill is a superficial, pecuniary notion. +It tells little as to ultimate causation. But it is virtually only as a +pecuniary doctrine, costs from the entrepreneur view-point, that the +cost doctrine is met in modern theory. + +Why is this? Well, first, the real-cost doctrine simply does not square +with the facts. The hardest labor does not produce the most valuable +goods. Value in fact does not vary either with labor-pain or labor-time. +In fact, whatever the explanation, it would seem to be truer that the +relation is an inverse relation. Nor does the abstinence that pinches +hardest produce the largest amount of capital. And while there is some +correlation between risks and profits, the correlation is at best low +and is not a correlation between psychological sacrifice and profits. +Even "marginal abstinence" for a Rothschild or a Rockefeller causes no +pain. It is absurd to seek to find a common element in the "abstinence" +of a rich man and the pain of a poor and aged laborer. I pass over the +supposed difficulty that abstinence is, in general, suffered by one set +of minds, and labor-pain by a different set of minds, and hence, since +men cannot compare their own emotions with the emotions of other men, +there is no comparability. This subjectivistic psychology would, of +course, make it equally impossible to fund labor-pains of different +laborers, or to get any common denominator at all.[56] It is enough to +point out that differences between rich and poor, between successful and +unsuccessful, between efficient and inefficient, (apart from acquired +differences which may be smoothed out by the "stored up +labor-of-training" principle) make labor-pain, and marginal labor-pain, +vary greatly from value, and make labor-pain, abstinence and risk quite +incommensurable, and quite without fixed relation to value. Cairnes saw +this in part, and developed his doctrine of non-competing groups to deal +with it. Labor-pain and value vary together only when we are comparing +goods produced by laborers within a competing group. Laborers in one +group do not compete with laborers in another group. There is perfect +competition in the capital market, however, and so capital costs +("abstinence") are perfectly correlated with value, to the extent that +capital enters. Cairnes seems to think that the whole difficulty with +his real cost doctrine comes from the failure of competition. In fact, +however, it comes also from the inequalities in wealth. And even in his +highly competitive capital market it is equally true that abstinence, or +even marginal abstinence (a term which Cairnes does not use) has no +constant relation to amount of capital accumulated, value produced, or +interest received. The cost theory breaks down at every point when it +runs in labor-abstinence-risk terms. So generally has this been +recognized, that the cost theory has generally given way to the utility +theory, and cost doctrine when it appears in modern economics is either +the very superficial money-outlay notion of Mill, or else the Austrian +cost doctrine, later to be discussed, which is still a pecuniary +concept. I have elsewhere undertaken to show (_Social Value_, chs. 3-7, +and the ch. on "Marginal Utility," _infra_) that these defects of the +"real-cost" theory, are just as much in evidence in the utility theory. +The failure of the real cost theory of value is by no means a +vindication of the utility theory. Both have the same vice--the effort +to combine into a homogeneous sum a lot of individual psychological +magnitudes measured in money, when the money-measure has a different +psychological significance for each individual, and so comparison and +addition are impossible. But in any case, the real cost doctrine of the +Classical School has failed, and so cannot serve as the basis of the +theory of the value of money. + +Obviously the money-outlay cost theory of Mill cannot explain the value +of money itself. The marginal cost of producing twenty-three and +twenty-two hundredths grains of gold will always be a dollar, however +the dollar may vary in value. Indeed, in general, the assumption of a +constant value of the money-unit is implied in the monetary cost +concept. Cost curves are _supply_-curves and the reasoning already given +as to the need for assuming constant value for money in the supply and +demand concept will apply here. Costs function in value-determination +only by checking supply. Rising costs tend to mean a lessened supply. +But if the cost-curve is rising _because_ of a fall in the value of +money, then the demand-curve will be rising also, and production will +not be checked. The general law as to the relation of cost to demand and +supply assumes a fixed value of the unit of cost, the dollar. + +To the Austrian economists we owe a rational theory of costs which gives +the money-outlay concept more than a merely empirical basis. First, they +see in costs not causes, but results. Value causation comes ultimately, +not from the side of supply, but from the side of demand. I shall not +now undertake a criticism of their explanation of demand. I have +elsewhere criticised their confusion of demand-curves and +utility-curves, and pointed out that marginal utility gives no +explanation of demand. I shall recur to the utility theory of value at a +later point. For the present, it is enough to point out that the +Austrian theory of costs is independent of their utility vagaries, and +rests best on the notion of supply and demand, as expressed in the +modern curves, with the assumption of a fixed value of the money-unit. +Costs consists of entrepreneur money outlay of various kinds, chiefly +wages, interest, and rent. Rent is, for the Austrians, as much a cost as +any other item of entrepreneur outlay. But these items of cost are not +ultimate data. They are rather reflections of the positive values of the +products. Value runs from finished product to agents of production, +labor, and instrumental goods, and land. Avoiding needless complications +from a discussion of interest as a factor in cost--a doctrine on which +the Austrians, say Wieser and Böhm-Bawerk, are not agreed,--it is enough +to point out that high wages or high rents, which limit production in +any given industry or establishment, are high _because_ the land and +labor in question have _alternative_ uses, because other industries, or +other competitors in the same industry, bid for them. Cost-curves, +then, are reflections of demand-curves. The cost-curve of wheat, _e. +g._, is what it is because of the demand-curve for corn, for cattle, and +for every other commodity that could be produced with the same labor and +land. Cost doctrine thus becomes part of the general doctrine of supply +and demand, and runs in pecuniary terms, assuming money, and a fixed +value of money, and hence is incapable of serving as a theory of the +value of money itself. + +That some vaguer form of cost doctrine, where the unit of cost is, not +money, but some composite commodity of things used in the production of +the standard money metal, or a unit of abstract value, might be worked +out, is doubtless true. Gold production, like other industry, is part of +the general economic scheme, and there is some sort of equilibrium +reached which draws labor and capital now away from, and now back to, +the gold mine. To bring this equilibrium into the general scheme of the +modern theory of costs, however, in terms precise enough to make a +satisfactory theory of the value of money, is a thing which has not so +far been done, and I do not have high hopes of its early accomplishment. +In any case, such a theory must rest upon a positive theory of value. +Cost doctrine is negative, and can never be fundamental.[57] + + + + +CHAPTER IV + +THE CAPITALIZATION THEORY AND THE VALUE OF MONEY + + +Money is capital. A dollar is a capital-good. Money is, moreover, a +durable form of capital, which gives forth its services bit by bit, and +indeed, in a community where the state bears the burden of wear and +tear, never ceases to give forth those services. In any case, from the +standpoint of a given individual, so long as there is a limit of +tolerance prescribed for legal tender, it is a matter of accident if he +ever incurs a loss from the wastage of the capital instrument, money, +through wear and tear. Moreover, the fact that money is "fungible," and +that its use is to be found in a process which commonly returns to the +owner, not the same coin, but a different coin, we may, in general, +abstract from the wear and tear of the dollar, and look upon the dollar +as a capital instrument which promises its owner, if he chooses to use +it as capital, a perpetual annuity. The nature of this money service +will be more fully described later. For the present it is sufficient to +say that exchange is a productive process, that exchange creates values, +in as true a sense as manufacturing does, and that money facilitates +exchange in as true a sense as coal facilitates manufacturing. There is, +at any given time, a demand-curve for this money service, manifesting +itself in the money market, a demand for the short time use of money as +a tool of exchange, and the "prices" which come out of the interaction +of demand and supply in the money market are the short time "money +rates" including the "call rates." These are properly to be conceived, +not as pure interest on abstract capital, but as rents[58] which are to +be attributed to money as a concrete tool. + +Now, in general, when such rents appear, they may be capitalized. And +the price of the instrument of production that bears these rents, will +be the sum of the rents, discounted at the prevailing rate of interest, +with considerations of risk, etc., allowed for. The reasoning of the +capitalization theory is really quite simple. Take, for example, a piece +of urban site land, which is expected to bring a perpetual annuity of +one hundred dollars. The whole economic significance of the land is +contained in its services, present and prospective. The possession of +land under certain circumstances brings other services, as social +prestige, than the services which can be alienated to a lessee. But in +this case I am abstracting from considerations of that sort, and also +from the factor of risk. The whole value of the piece of land under +consideration comes from the value of the one hundred dollars a year. +But these annual incomes are not all equally valuable, even though all +expressed as one hundred dollars. The first one hundred dollars is due +one year hence, the tenth ten years hence, the thousandth, a thousand +years hence. The principle of perspective comes in--I abstain from any +detailed discussion of the theory of interest, simply stating that in a +general way I agree with the contention that _time_ constitutes the +essence of the phenomenon, or rather, the tendency to discount the +future. The capital price of the land is the sum of an infinite +convergent series of the "present worths" of the incomes. The formula +is as follows: capital price of land = $100/1.05 + $100/(1.05)^2 + +$100/(1.05)^3 ... + $100/(1.05)^n when the rate of interest is 5%. The +limit of this series, assuming the series to be infinite, is $2000, and +a simple formula for calculating it under the assumptions, is to divide +$100, the annual income, by .05, the rate of interest. Given the annual +income, given the prevailing rate of interest, the capital price is +determined. The relation may be illustrated, roughly, by the figure of a +candle, a disk, and the shadow of the disk on the wall. The disk +represents the annual income, the shadow on the wall the capital value, +and the distance between the flame and the disk the rate of interest. +Increase the distance between the flame and the disk, the rate of +interest, and the shadow becomes smaller; shorten the distance, and the +shadow is increased. Similarly, enlarge the disk, and the shadow is +enlarged. The capital value varies directly with the annual income, and +inversely with the rate of discount. Now my purpose here does not +involve a detailed examination of the validity or limitations of the +capitalization theory. For the present, the only question is, has this +theory any application at all to the problem of the value of money? It +offers itself as a general theory of the values of durable bearers of +income. Money is a durable bearer of income. + +The capitalization theory, however, is of no use for the purpose in +hand. Money does not obey the general law in the relation which the +magnitude of the income bears to the rate of interest. In general, the +income and the rate of discount are independent variables. Their +influence, operating in opposite directions, fixes the capital value, +increasing income increasing the capital value, increasing discount rate +reducing it. In the case of money, however, the two factors are not +independent. The short time money rate is not, to be sure, identical +with the long time rate of interest, which is the rate of discount for +the purpose in hand. But the two tend to vary together in the long run +average in fact, and they are related in the _expectation_ of those who +are concerned in the capitalization process. + +In our chapter on the "Functions of Money," in Part III, it will be +shown that normally there tends to be a difference between the money +rates and the long time interest rates, the long time rates tending to +be higher than the rates on short loans, the rate on very short loans +being lower than the rate on somewhat longer short time loans, and the +call loan rate being lowest of all. The explanation of this must be +deferred till we have analyzed the functions of money. But the important +thing, for present purposes, is that the money rates, though lower than +the "pure rate" of interest, tend to vary, in long time averages, with +that "pure rate,"[59] and that, consequently, the income from renting +money, and the discount rate to be applied in capitalizing that income, +are not independent magnitudes, but tend to vary together. They thus +tend to neutralize one another. If money rates go up, and if they are +expected to stay up long enough to justify (on the ordinary +capitalization theory) a rise in the capital value of money, we have a +counteracting influence in the long time interest rate, which also +rises, and tends to pull down the capital value of money. To recur to +our illustration of the candle and the disk, as the disk increases in +diameter, the distance between the candle and the disk grows greater, +and so the _shadow_ tends to remain the same. + +There is a further difficulty, to which attention will be called more +fully in later chapters, particularly the chapter on "Dodo Bones," and +the chapter on the "Functions of Money." In other cases, in general, the +capital value is, as the capitalization theory requires it to be, a true +shadow, a passive function of the income and the discount, of the disk +and the distance between the candle and the disk. In the case of money, +however, the income is causally dependent, in part, upon the capital +value. Money can function as money only by virtue of having value. The +shadow becomes substance in the case of money. It is the _value of +money_ which makes possible the _money work_. The capitalization theory, +thus, if applicable at all, must be radically modified before being +applied. We shall subsequently, in the chapters above referred to, take +account of this fundamental complication. For the present, we can state +it merely as a problem: how can we construe the interaction of the +income value of money and the capital value of money in such a way as to +avoid a circular theory? + +But further, the capitalization theory, as heretofore formulated, like +the doctrines of supply and demand and cost of production, assumes +_money_, and a _fixed absolute value_ of money. This assumption must be +made if we are to be able to predict, on the basis of the capitalization +theory, that a given annual income, at a given rate of discount, will +give a specified capital value. This may be shown by the following +considerations: If men anticipate that the value of the income, which is +a fixed sum of dollars, is to grow less in the future, then the present +worth of the bearer of that income will shrink to an extent greater than +the "pure rate" of interest would call for. The principle of +"appreciation and interest" comes in. The nominal interest, in times of +falling value of money, tends to exceed the pure rate by an amount which +compensates for the loss in value of future income as the dollar falls +in value. We have here, however, a principle different from the +principle of time discount. It is not the influence of time, which makes +a _given_ value appear smaller as it is further removed in time, but it +is an anticipated lessening in the value of the income itself, that +counts. In terms of our candle and disk illustration, it is a factor +affecting the size of the disk, rather than a factor affecting the +distance between the disk and the candle. For the purposes of +calculation, the two elements in the nominal rate of interest may be +lumped together, and the nominal rate, rather than the pure rate, may be +taken as the rate of discount for capitalization purposes. But for +theoretical purposes, the two must be kept distinct. The capitalization +theory rests on the assumption of a fixed value of the money unit. + +That the fixed value of the money unit assumed is an absolute value, and +not a mere "reciprocal of the price level," may be proved by some +further considerations regarding relations among these same factors. +Assume a fall in the rate of interest. Then, on the capitalization +theory, prices of lands, stocks and bonds, houses, horses, and all items +of wealth which give forth their services through an appreciable period +of time, will rise, and with them the average of prices, or the general +price level, will rise.[60] If one hold the _relative_ conception of +value, according to which the value of money necessarily falls when +prices rise, because the two are merely obverse phases of the same +thing, then this rise in the price level is, _ipso facto_, a fall in the +value of money. But we have seen that a fall in the value of money +means, on the "principle of appreciation and interest," a rise in the +interest rate! Hence, we would have proved that a fall in the interest +rate causes a rise in the interest rate--which is absurd. If, however, +we recognize that prices can rise without a fall in the value of money, +if, _i. e._, we use the absolute conception of value, this difficulty +disappears. The capitalization theory and the theory of appreciation and +interest can be reconciled only on the basis of the absolute conception +of value. + +The capitalization theory, then, in its present formulation, assumes +money, and a fixed absolute value of money. It is, therefore, +inapplicable to the problem of the value of money itself. + +In general, none of the polished tools of the economic +analysis,--neither cost of production, the capitalization theory,[61] +nor the law of supply and demand,--is applicable to the problem of the +value of money. The reason is that they get their edge from money +itself. The razor does not easily cut the hone. It is to this fact, I +think, that we owe the widespread and long continued vogue of a theory +so crude and mechanical as the quantity theory. In the next chapter we +shall show that the utility theory of value--which we shall not +recognize as a polished tool!--has also failed to give us help in +explaining the value of money. + + + + +CHAPTER V + +MARGINAL UTILITY AND THE VALUE OF MONEY + + +A good many writers have attempted to apply the marginal utility theory +to the value of money. Among these, I may particularly mention Friedrich +Wieser, Ludwig von Mises, Joseph Schumpeter, and, in America, David +Kinley, and H. J. Davenport. + +The marginal utility theory is ordinarily merely a thinly disguised +version of supply and demand doctrine. As usually presented in the +text-books, we have an analysis of the phenomenon of diminishing utility +of a given commodity to a given individual, illustrated by a diagram, in +which the ordinates represent diminishing psychological intensities. +Often a money measure is given to these diminishing intensities, and the +curve is presented as the demand schedule of a given individual. Then, +with little further analysis, a leap is made to the market, and it is +assumed that the market demand-curve, of many individuals, differing in +wealth and character, is a utility-curve, and value in the market is +"explained" by means of marginal utility. I need not here repeat my +criticisms of this procedure.[62] It gives simply a confused statement +of the doctrine of supply and demand. The analysis of utility which +precedes the discussion of market demand is wholly irrelevant, and +merely mixes things up. That such a conception is of no use in solving +the problem of the value of money has been sufficiently indicated in the +chapter on supply and demand. + +Sometimes the contention is made that money is unique among goods in +having "no power to satisfy human wants except a power _to purchase_ +things which do have such power."[63] This contention, in Professor +Fisher's view, precludes the application of the marginal utility theory +to the problem of the value of money, and he makes no use of marginal +utility in his explanation. Indeed, in the passage from which this +quotation is taken, Professor Fisher says that the quantity theory of +money rests on just this peculiarity of money. Not all writers who +contend that money has no utility _per se_, however, have felt it +necessary to give up the marginal utility theory as a theory of money, +as we shall later see. + +On the other hand, writers of the "commodity school" (or "metallist +school"), writers who see the source of the value of money in the metal +of which it is made, can apply the utility theory readily to the value +of money, making the value of money depend on the marginal utility of +gold, or the standard metal, whatever it is. To the writers of this +school, it is incredible that anything which has no utility should +become money. Money must be either valuable itself, or else a +representative of some valuable thing. The value of money comes from the +value of the standard of value, and that value may, so far as the logic +of the situation is concerned, be as well explained by marginal utility +as the value of anything else. Typical of this view is Professor W. A. +Scott's discussion in his _Money and Banking_[64], though the emphasis +there is not on marginal utility as the explanation of the value of the +standard, but on the value (conceived of as an absolute quantity) of the +standard as essential to the existence of money, and the performance of +the money functions. Professor Scott attacks vigorously and effectively +Nicholson's exposition of the quantity theory,[65] where the assumption +is made that money consists of dodo-bones (the most useless thing +Nicholson could think of). Most quantity theorists would share +Nicholson's view that dodo-bones would serve as well as anything else +for money--or, to put the thing less fantastically, that the substance +of which money is made is irrelevant, that the only question is as to +the quantity, rather than the quality, of the money-units, and the +quantity of the money-units, not in pounds or bushels or yards, but in +abstract number merely. For writers who seek the whole explanation of +the value of money in its monetary application, and who see that money, +_qua_ money, cannot administer directly to human wants, the view that +Professor Fisher expresses, namely, that money has no utility, and is +unique among goods in this respect, seems on the surface, to have +justification. On the surface merely, however. Money is not unique among +goods in being wanted only for what it can be traded for. Wheat and corn +and stocks and bonds and everything else that is speculated in is +wanted, by the speculators, only as a means of getting a +profit[66]--they are remoter from the wants of the man who purchases +them than the money profit he anticipates. Ginsing, in America, has +value, though consumed only in China. And there are people, particularly +jewelers, who often want money as a raw material for consumption goods. +The difference is at most a difference of degree--and of slight degree +indeed in the case of such things as bonds, which count on the "goods" +side of the quantity theory price equation, but which really are in all +cases remoter than money itself from human wants. Money really stands, +for the purpose in hand, on the same level as any other instrumental +good.[67] It does not give forth services directly, as a rule. Neither +does a machine, or an acre of wheat land, or goods in a wholesaler's +warehouse. Exchange is a productive process, an essential part of the +present process of production. Money is a tool which enormously +facilitates this process. It has its peculiarities, no doubt. One of +them is--and money is not unique in this as will later appear--that it +must have _value_ from non-monetary sources[68] before it can perform +its own special functions, from some of which it draws an increased +value. But there seems to me to be nothing in the contention quoted from +Professor Fisher, to justify setting money sharply off from all other +things, or to justify the view that marginal utility is inapplicable to +the value of money, if it be applicable to the value of anything at all +that is not destined for immediate consumption. I do not believe that +the marginal utility theory is valid for any class of goods, not even +those for immediate consumption. Where marginal utility theory is,--as +in the conventional text-book expositions--merely another name for +supply and demand theory, it is, as already shown, not applicable to the +value of money, and it is useful in the surface explanation of +market-prices of goods. But where marginal utility theory really seeks +to get at value fundamentals, it is precisely as valid for money as for +goods of other sorts--invalid, in my judgment, in both places, and for +the same reasons in both. + +Among the writers who would apply the utility theory to money, while +still insisting that money, as such, has no utility, are Wieser, +Schumpeter--who accepts Wieser's theory in its main outlines--and von +Mises, who develops a notion very different from that of the other two. + +Wieser's doctrines are set forth in two expositions, separated by five +years, the second representing a considerable development in his +thought, though resting in part on the first. The first is an address +upon the occasion of his accession to the professorship at the +University of Vienna, in 1904, and is published in the _Zeitschrift für +Volkswirtschaft, Sozialpolitik und Verwaltung_, vol. 13 entitled, "Der +Geldwert und seine geschichtlichen Veränderungen." The second is a +discussion, partly written and partly spoken, "Der Geldwert und seine +Veränderungen" (written), and "Ueber die Messung der Veränderungen des +Geldwertes" (spoken), in _Schriften des Vereins für Sozialpolitik, +Referate zur Tagung_, no. 132, 1909. For the purpose in hand, a brief +statement of one or two points would suffice to show the futility of +Wieser's effort to get an explanation of the value of money _via_ +marginal utility, but I think that readers may be interested in a fuller +account of Wieser's doctrine, just because it is Wieser's, and so shall +undertake to give a more systematic account of it. For brevity, in the +exposition which follows, I shall refer to the first article as "I," and +to the second as "II."[69] + +Wieser holds that it is possible to have money wholly apart from a +commodity basis (I, p. 45), citing the Austrian _Staatsnoten_ as a case +in point. The reason for giving them up is that they do not circulate in +foreign trade. Gold fulfills its international money-functions the more +easily because of its various employments, but, after it is thoroughly +historically introduced, as money, it could fulfill its money functions +even if all these employments be thought away (46). Wieser gives no +argument for this contention, and its validity will be examined +later.[70] There are, he says, two sources for the value of gold, the +money use and the arts use, interacting. Money is further removed from +wants, not only than consumption goods, but also than production goods, +which are but consumption goods in the seed. The latter are technically +destined for definite goods. But money may be used to procure whatever +good you please, in exchange. (The absoluteness of this distinction, +also, may be questioned. Pig iron is almost as unspecialized as money in +its relation to wants, since tools enter into the production of almost +every service that human wants require, from surgical operations, +through instrumental music, to wheat and horse-shoes. On the other hand, +money is not the only thing by means of which other things are +purchased. The extent of barter in modern life will wait for later +discussion.[71] I do not think that _any_ sharp distinction between +money and all other things is valid.) Wieser complains of the older +economics which treats money as a commodity. And he contends that as +money and commodities show a contrast in their essence (_Wesen_), they +should also manifest a contrast in the laws of their values, even though +the fundamental general theory of value applies to both (I, 47). He +finds in representatives of money (_Geldsurrogate_) and in velocity of +circulation of money, factors which are lacking in commodities. (Again a +question must be interjected by the writer. Are not corporation +securities essentially like _Geldsurrogate_ from this angle? And do not +goods vary greatly in the number of times they are exchanged? What of +the speculative markets, where more sales are made in an active market, +at times, than there are commodities or securities of the type dealt in +in existence?) The value of money is essentially bound up with the +money-service. Wieser indicates that he is not talking about the +subjective value of money, but its objective value, using the popular +meaning of the term, which, he says, is not strictly logical, but is +useful: the relation of money to all other goods which are exchanged, +the purchasing power of money. This depends on goods as well as on +money. In the second article, Wieser refines and elaborates his +conception of the objective value of money, seeking to get away from the +notion of relativity which is involved in the conception of purchasing +power, and to get an absolute conception, which shall be a causal factor +in the determination of general prices, rather than a mere reflection of +them. It is to be a coefficient with the objective values of goods in +determining prices. A change in general prices may be caused by a change +in the value of money, and may be caused by a change in the values of +goods (II, p. 511). In explaining this objective value concept (which, +in its formal and logical aspects, is in many ways similar to the +absolute social value concept maintained by the present writer, though, +in the present writer's judgment, inadequately accounted for by Wieser, +so far as a psychological causal theory is concerned) Wieser objects to +the term, "objective value" which he had used in the earlier article. He +prefers "volkswirtschaftlicher Wert." (This term is perhaps best +rendered "public economic value," for present purposes, to distinguish +it, on the one hand, from individual or personal value, and, on the +other, from the social economic value concept of the present writer. At +the same time, the connotation of a communistic or authoritive value +must not be read into the term. It is, in its formal and logical +aspects, really the most common of all the value notions, and may, best +of all perhaps, be translated simply "value," or "economic value," or +"absolute value." But for the present discussion, we shall call it +"public economic value.") This public economic value, in the case of +goods, is not a mere objective relation between a good and its +price-equivalent. It is a subjective (psychological) value, like +personal value. If one wishes to call it objective value, one is using +objective in the sense of the general subjective as distinguished from +the personal individual idiosyncracy (II, p. 502). The objective +exchange value of goods (here Wieser uses "objektiver Tauschwert" as the +equivalent of his "volkswirtschaftlicher Wert" above mentioned) is the +common subjective part of the individual valuations leaving out the +remainder of individual peculiarities ("der allgemein subjective Teil +der persönlichen Wertschätzungen mit Verschweigung des individual +eigenartig empfundenen Restes").[72] Wieser does not seem to me to think +out clearly the distinction between absolute and relative value in this +connection. He wishes to get something more fundamental than a mere +relation between goods and money; he wishes a psychological phenomenon. +He wishes to have a value of goods which can be set over against the +value of money, the two, in combination, determining prices. And yet, he +wishes somehow to get these out of the prices themselves. "We must seek +a concept of the public economic value of money which, to be sure, +proceeds from the general price-level (_Preisstand_), but which excludes +from its content everything that comes purely from the value of goods" +(II, 511). To the public economic value of money, however, Wieser gives +no independent definition. The definition runs in terms of the values of +the goods. "The value of money rises when the same inner values (_innere +Werte_) of commodities are expressed in lower prices; it falls, when +they are expressed in higher prices" (II, 511-12). "Inner value" of +goods is not defined, but I take it that Wieser uses it as meaning +essentially the same thing as the public economic value already +described--an absolute value. (_Cf._ the usage of Menger and von Mises, +_infra_, in this chapter, with respect to the terms, "inner" and "outer" +value.) The definition is not strictly circular, perhaps, but at least +it is pretty empty. Nothing appears to give the value of money, as +distinct from its purchasing power, an independent standing. The reason +for this will later appear. It should be noted, however, that the +definition is not in terms of prices or purchasing power. Prices might +remain unchanged, in Wieser's scheme, and yet the value of money sink, +if the inner values of goods should sink. + +The value of money, thus defined, is to be explained by marginal +utility. But money has no marginal utility of its own, it has no +subjective use-value, but only a subjective exchange value,--derived +from the use-value (marginal utility) of the commodity purchased with +the marginal dollar (II, 507-8). This subjective-exchange value of money +is the personal value of money, as distinguished from its public +economic value, and is the cause of the public economic value. The +personal value of money changes (1) with the volume of one's personal +income, (2) with the intensity of one's need for money, and (3) with +market prices. The personal value of money is directly influenced and +measured only in exchanges for consumption goods. Expenditures of other +kinds affect it only indirectly by leaving less for consumption +expenditures. The laborer always reckons with the personal value of +money, but not the business man, in his business calculations. As in the +case of goods, we pass from personal to public economic value (II, 509). +The personal value of money depends on the relation between an +individual's money income, and his real income, in terms of goods. The +public economic value of money depends on the money income of the +community as a whole, and its real income. (II, 516-18). Money income +grows faster than real income, through the extension of the money +economy. Money income is not, like real income, dependent on quantity. +The mere extension of the money economy increases the volume of money +income, lowers the personal value of money, lowers its public economic +value, and raises prices. Witness the effect on a rural community of +bringing it into the great market, where all costs are reckoned in money +and rising costs compel rising prices. Hence, there is a tendency for +the public economic value of money to sink, and this has been the +historical fact (I, II, 519-520.) + +Criticism of this theory is almost superfluous. There are elements in +Wieser's discussion, not here presented, which have very considerable +importance, and which will be presented in a later chapter when the +criticism of the quantity theory is taken up. Wieser deals some heavy +blows to the quantity theory. But his constructive doctrine presents the +clearest possible case of the Austrian circle. The value of money +depends, not on its subjective use-value, its own marginal utility--it +has none. The value of money depends on its subjective value in +exchange, the marginal utility of the goods which are exchanged for it. +But these depend on prices. And prices depend, in part, on the value of +money itself! This circle, present in every form of the Austrian theory +which seeks a causal explanation of value and prices by means of +marginal utility,[73] though often less obviously present, is here quite +glaring. The distinction between volume of money income and quantity of +money is, on the other hand, an important one, and will be emphasized +when the quantity theory is taken up.[74] One further point in Wieser's +doctrine calls for comment. It is strange indeed to find an Austrian +seeing in a rise in money costs a _cause_ of a general rise in prices. +The Austrian doctrine is rather that rising money costs are +_reflections_ of rising general prices. Wieser's doctrine that the +extension of the money economy to rural regions, compelling the farmer +to reckon all his costs in money and so to raise his prices, has been +adequately criticised by von Mises, who points out that Wieser sees only +half the phenomenon; that eggs and butter are, indeed, higher in price +in the rural region when it comes into contact with the city, but that +they are correspondingly lower in the city from the same cause. On the +other hand, the doctrine of costs is not the whole point in Wieser's +notion of the extension of the money economy as a cause of higher +prices, and we shall deal with the doctrine again, in a different +connection. + +By devitalizing the marginal utility theory, by stating it in such a way +that it makes no causal assertions, and in such a way that it leaves the +real value problem untouched, it is possible to free it from the circle +just pointed out. Schumpeter does so state it. + +Schumpeter's theory of value,[75] though he attributes it to +Böhm-Bawerk, seems to the present writer to be essentially different. +Böhm-Bawerk undertakes to explain the value (objective value in +exchange) of each good by its _own_ marginal utility to different +individuals, buyers and sellers of the good--indeed, by its marginal +utility to _four_ individuals, the two "marginal pairs."[76] He sees at +points that the prices of other goods are sometimes factors, making +marginal utility give way to "subjective value in exchange," as the +determinant of an individual's behavior toward a given good in the +market--as in his much discussed overcoat illustration.[77] But +Böhm-Bawerk never gets out of the circle which this reaction of the +market-prices on the individual subjective values involves. Schumpeter +seems to rise to a higher conspectus picture, which, in form, avoids the +circle. His picture is that of a vast equilibrium, in which, instead of +attributing the market value of each good to its own marginal utility, +you explain the exchange ratios[78] of every good to every other good, +all at once, by reference to a total situation: _given_ the number of +goods of each class, given the number of individuals in the market, +given the _distribution_ of each class of goods among the individuals, +given the utility-_curves_ (not marginal utilities) of each good to each +individual, an equilibrium will be reached, through trading, in which +ratios between marginal utilities of each kind of good to each +individual are inversely proportional to the abstract ratios (ratios of +exchange) between the same goods, each measured in its own unit. The +ratios are abstract ratios, between pure numbers, so far as the market +ratios are concerned; the ratios in the mind of each individual are +concrete ratios, between marginal utilities. The scheme, thus stated, +says nothing as to the _causal_ relation between marginal utility and +market ratios; it merely states certain _mathematical_ relations between +each individual system of marginal utilities on the one hand, and the +abstract market ratios on the other. By avoiding _assertions_ as to +causation, it avoids a causal circle. In such a situation, marginal +utilities and market ratios are, in reality, alike resultants, +_effects_, of the given quantities of goods, distribution of goods, +numbers of buyers and sellers, and individual utility-_curves_--not +_marginal_ utilities. To this picture, one may add--what Schumpeter does +not add--the curves showing time-preferences of each individual for each +sort of good, and (an element which Schumpeter does include) the curves +of _dis_-utility for the individuals who produce each kind of good. The +system, it may be noted, is as good a proof of _real cost_ doctrine as +it is of utility doctrine. + +Such a picture, I submit, avoids the circle which is presented in all +other formulations of the Austrian theory of value. I wish, however, to +indicate its limitations as a theory of value, and the impossibility of +any application of it to the problem of the value of money. (1) Its data +are inaccessible: nobody could possibly know all the utility-curves and +all the time-preference curves (and disutility of labor-curves, etc.) of +all goods to all individuals in, say, the United States. To explain +market ratios by utility-curves is a case of _ignotum per ignotius_, so +far as practical application is concerned. Moreover, the scheme is so +difficult to visualize that it is useless as a tool of thought--as one +will find who tries to think it through, without the aid of higher +mathematics, for ten goods, and ten persons, with unequal distribution +of wealth, and different utility curves, time-preference curves, and +disutility-curves for each kind of good to each individual. (2) The +scheme must assume smooth curves and infinitesimal increments in +consumption, which is a fiction so far as the individual psychology is +concerned. Without this assumption, the point-for-point correspondence +between individual and market ratios does not exist. It is only in +social-value curves, or in demand-curves in the big market (which are +social-value curves, expressed in money),[79] that you have, as a matter +of fact, the right to smooth out your curves. (3) The theory must assume +the frictionless static state, in which marginal adjustments are +perfectly accomplished, and equilibrium really reached. Without this +assumption, again the point-for-point inverse correspondence of market +ratios and individual ratios fails. But this makes it quite impossible +to apply the doctrine to any functional theory of the value of money, or +to bring money in any realistic way into the scheme. As will be shown +more fully in later chapters, money functions in bringing about just +the absence of friction which static theory assumes. That is what money +is _for_. The functional theory of money, therefore, cannot abstract +from friction and dynamic change.[80] It is, of course, possible, on +this scheme to pick out any one of the goods in the system, say the +1-1000th part of a horse, call it the "money-unit," and determine a set +of money-prices. These "money-prices" are already given in the scheme in +the ratios between the abstract numbers of this unit and the abstract +numbers of the units of all other goods. But this is meaningless, so far +as a theory of money is concerned. It abstracts entirely from the +_differences_ in _salability_[81] of goods, on which the theory of money +must rest. It gives us no clue to that part of the value of the +money-article which comes from its money-functions. + +(4) The theory has no bearing on the problems of supply and demand. +Demand-curves are curves, not of utility, but of money-prices. They are +concerned, not with a _system_ of ratios among goods in general, but +with the absolute money-prices of particular goods, one at a time. The +modern demand-curves and supply-curves, representing the demand and +supply doctrine first made precise by J. S. Mill,[82] are concerned with +the money-prices of particular goods, and the "equation of supply and +demand"--amount supplied and amount demanded--gives an equilibrium in +which only one price is determined. Austrian theory, in Böhm-Bawerk's +hands, and in the hands of practically all adherents of the Austrian +School, including Davenport,[83] has been offered as really bearing on +the explanation of demand, and as giving a psychological account and +explanation of the demand-curve. The scheme of Schumpeter has simply no +bearing at all on this vital point. The equilibrium picture in which +_all_ goods are involved supplies no data from which to construct any of +the magnitudes above or below the margin of the demand and supply-curves +of any given good. One reason why this is so will appear from the point +made with reference to "money-prices" in the preceding paragraph. For +Schumpeter's scheme, the significance of the article chosen as "money" +would be as much a problem as anything else, when the conditions are +laid down. It would vary in the process of reaching the equilibrium. Its +ratios with all other things would, thus, fluctuate until the +equilibrium was reached. But, as we have seen, in the chapter on "Supply +and Demand," curves of supply and demand must assume a fixed +significance of the money-unit. It may be further noticed, as marking +off Schumpeter's scheme from supply and demand analysis, that in +Schumpeter's scheme, the individual is the centre of interest, and his +reactions _toward all kinds of goods_ is emphasized; whereas in supply +and demand analysis, the _good_--one good--is the centre of interest, +and the price-offers streaming toward it from all kinds of individuals +is emphasized. The two bodies of doctrine are quite distinct. + +(5) The theory has no bearing on the explanation of entrepreneur +cost--money-outlay, "opportunity cost," alternative positive values, or +what not. It finds no place for the modern cost doctrine. It does not in +any way open the path to the Austrian theory of costs. Costs, for +Austrian theory, as, in general, for modern theory, are reflections of +_demand_ for the employment of the agents of production in alternative +uses. Thus, it costs a great deal to raise wheat in Illinois, because of +the rival demand for the land to produce corn. Labor costs are high in +ordinary manufacturing, because of the rival demand for labor in the +munitions factories, etc. As Schumpeter's theory can give no account of +the _demand_ for labor in the munitions factories, it follows that it +can give no account of the _cost_ of labor in the other factories. +Instead, indeed, of giving us the modern cost doctrine, we see +Schumpeter's scheme reviving the old _real cost_ doctrine, running in +terms of sacrifices in production.[84] + +(6) The foregoing paragraph gives emphasis to the point with which we +started, namely, that Schumpeter's theory is not a _causal_ theory, but +merely a theory which gives mathematical relations in a static picture. +For the general theory of the Austrians, this real cost doctrine is +anathema. Values are positive. The emphasis is put on positive wants, as +_causes_ which guide and motivate industry. The _clue_ to all values is +in the values of _consumption_ goods, which are in direct contact with +the utilities which are the source of value. From the values of +consumption goods, we _derive_ the values of production goods, labor, +etc., which are goods of "second, third and fourth _ranks_" and whose +values are merely reflected from the causal marginal utilities of the +consumption goods they are destined to create. None of this causation is +brought into Schumpeter's conspectus picture. On the contrary, with the +bringing in of disutility of production, we have the doctrine of the +earlier English School revived. The equilibrium picture is as good a +proof of the one theory as of the other. If we assume the utility-curves +constant, and allow the cost-curves to vary, then causation would be +initiated by the cost-curves.[85] + +(7) Such an equilibrium picture leaves untouched the vital question +which any theory must answer which means to be of practical use in +concrete situations: what are the real _variables_ in the situation, and +what factors are constant? What causes are _likely_ to produce changes +in market prices? The individual-utility curves, which in Austrian +theory are commonly treated as the only variables, except quantities of +goods,--in the strict static picture there are no variables at all!--are +really, when conceived of as individual, as growing out of the mental +processes of each individual separately, the most _constant_ factor in +the situation. For, on the principle of the inertia of large numbers, +each unit of which is moved by its own peculiar causes, changes in the +utility-curves of one man will be offset by opposite changes in the +utility-curves of another, and so the general system will remain much +where it was. Of course, if a rich man changes his curve, a poor man's +change will not offset it in the market, but this is to emphasize the +_distribution of wealth_ rather than the utility-curves. It is only when +you get changes of a sort that the individualistic psychology, and the +"pure economic" explanation factors, of the Austrians find no place for, +that you can predict a change in the general price-system. It is only +changes in fashion or mode, in general business confidence,[86] in moral +attitude toward this or the other sort of consumption or production, in +the distribution of wealth, changes in taxes and other laws--causes of a +general social character--that you can count on to produce important +changes in values. Of course, changes in the adequacies of supplies +would be taken account of on either interpretation. + +(8) The scheme under consideration gives no value concept which the +economist can make any particular use of. It gives only ratios between +marginal utilities in the mind of the same individual, and abstract +market ratios. It gives no _quantitative_ value, which can be attributed +to goods as a quality,[87] a homogeneous quality of wealth by means of +which diverse sorts of wealth may be compared, funded, etc. Such a +concept is, however, necessary for the economic analysis, and Schumpeter +is driven to creating substitutes for it of various sorts, notably +_Kaufkraft_ and _Kapital_. _Kaufkraft_, as Schumpeter uses the term, is +not derived from marginal utility, but is an abstraction from the idea +of money. It is not a quantity of money alone, nor even of money and +credit, but is a fund of "abstract power," which depends not alone on +the quantity of money and credit in which it is embodied, but also on +the prices of goods.[88] This _Kaufkraft_ is needed to give the causal +"steam," the "motivating power," which the social value concept +connotes, but which ratios in the market lack. Similarly, _Kapital_ is +conceived of as an agent, a dynamic force, distinguished from +accumulations of concrete productive instruments, by means of which the +entrepreneur gets control of land, labor and instrumental goods.[89] +Other functions of the quantitative value are shouldered on a +hard-worked and unusually defined concept, _Kredit_, which leads +Schumpeter into certain "heresies"[90] regarding credit, which are +mostly harmless in themselves, but which will arouse misunderstanding +and opposition. "_Præter necessitatem entia non multiplicanda sunt_," +and the social value concept, which covers by inclusion the notion of +market ratio--market ratios being ratios between social values--and +which does all the work that Schumpeter attributes to _Kapital_ and +_Kaufkraft_, and most of the new work which he attributes to _Kredit_, +is to be preferred,[91] if only on grounds of intellectual economy. +"Capital" is then saved for more usual meanings, and economy in +terminology is also effected. Schumpeter also departs, as shown, from +the abstract market ratio notion in erecting a causal theory of value, +in which "marginal utility" is used as the equivalent of a quantitative +value, and is traced by the Austrian imputation process back to the +original factors of production. He even speaks of labor as having +"utility," whereas labor,[92] unless used in domestic service, has, not +utility, but only value. + +In the marginal utility scheme above outlined there is no place +for money, on the assumptions laid down. It is a scheme of barter +relations. The utilities which come into equilibrium are not +subjective-exchange-values, which, as Schumpeter, with Wieser, contends, +are the only subjective values money has, but are real subjective use +values--marginal utilities. The scheme, assuming as it does, perfect +exchangeability of all goods, with infinitesimal increments in +consumption, has no place for money. There really is no money service to +be performed. Schumpeter, indeed, speaks of money as a mere "Schleier," +which does not touch the essence of the phenomena, and such it is on his +assumptions. In a similar situation, Professor Irving Fisher gives up +the effort to find a psychological explanation of the value of +money,[93] and offers the quantity theory as a mechanical principle, +additional to the psychological barter scheme. Schumpeter, however, does +lip service still to the need for a psychological explanation. His +answer runs in Wieser's terms--indeed, he attributes it to Wieser. The +_Preis_ of money[94]--Schumpeter does not use Wieser's absolute value +concept, but lets his value of money run in purely relative terms--the +price of money in goods depends on the subjective value of money. This +subjective value of money rests on the experience of each individual in +making purchases--rests on the prices of consumption goods, determined +by the relation between real income and money income. The circle is as +clear as day. + +Ludwig von Mises sees this circle, and tries to avoid it. In von Mises +there seem to me to be very noteworthy clarity and power. His _Theorie +des Geldes und der Umlaufsmittel_ is an exceptionally excellent book. +Von Mises has a very wide knowledge of the literature of the theory of +money. He has a keen insight into the difficulties involved. He +recognizes fully that, so far, the utility school has failed to solve +the problem (119-120). His theory is as follows: Individual valuations +(93) constitute the basis of the objective exchange value of money. But +while for other goods, subjective use-value and subjective +exchange-value are different concepts, for money the two coincide, and +both rest on the objective value of money (94). This seems to be our old +circle in unmistakable form, but Mises thinks he has an escape, as will +later appear. No function of money is thinkable which does not rest on +its objective exchange value. The subjective value of money rests on the +subjective use-values of the goods for which it can be exchanged (95). +Money, at the beginning of its money-functioning, must have objective +exchange value from other causes than its money-function, but it can +remain valuable, even though these causes fall away, exclusively through +its function as general instrument of exchange (111). He gives no +argument in support of this contention, but refers with approval to +Wieser (_loc. cit._), and to Simmel (_Philosophie des Geldes_, 115ff.). +Hence, the important consequence that in the value of money of to-day a +historical component is contained. Herein is to be found a fundamental +contrast between the value of money and the values of other goods +(119-120.). The individual valuation of money rests on the objective +exchange value of money of _yesterday_. This individual value of money +is the explanation, on the money side, of the objective value of money +of to-day. Going back, step by step, you come ultimately to the +subjective use-value of the money-stuff in its non-monetary +employment--a temporal _regressus_. This opens the way to a theory of +the value of money based on marginal utility. This avoids the circle of +explaining the objective value of money of to-day by the subjective +exchange value of money of to-day, which in turn rests on the +contemporary objective value of money. + +I find this particularly interesting, since it employs a device which +had once suggested itself to me as a means of escape from the Austrian +circle, but which reflection led me to abandon. I have discussed the +whole matter in my _Social Value_, and therefore venture a quotation +from that book.[95] + +"How are we to get out of our circle:[96] The value of a good, A, +depends, in part, upon the value embodied in the goods, B, C, and D, +possessed by the persons for whom good A has 'utility,' and whose +'effective demand' is a _sine qua non_ of A's value? The most convenient +point of departure seems to be the simple situation which Wieser has +assumed in his _Natural Value._[97] Here the 'artificial' complications +due to private property and to the difference between rich and poor are +gone, and only 'marginal utility' is left as a regulator of values. But +what about value in a situation where there are differences in +'purchasing power'? How assimilate the one situation to the other? + +"A _temporal regressus_, back to the first piece of wealth, which, we +might assume, depended for its value solely upon the facts of utility +and scarcity, and the existence of which furnished the first 'purchasing +power' that upset the order of 'natural value,' might be interesting, +but certainly would not be convincing. In the first place, there is no +unbroken sequence of uninterrupted economic causation from that far away +hypothetical day to the present, in the course of which that original +quantity of value has exerted its influence. The present situation does +not differ from Wieser's situation simply in the fact that some, more +provident than others, have saved where others have consumed, have been +industrious where others have been idle, and so have accumulated a +surplus of value, which, used to back their desires, makes the wants of +the industrious and provident count for more than the wants of others. +And even if these were the only differences, it is to be noted that +private property has somehow crept in in the interval, for Wieser's was +a communistic society. And further, an emotion felt ten thousand years +ago could scarcely have any very direct or certain quantitative +connection with value in the market to-day. Even if there had been no +'disturbing factors' of a non-economic sort, the process of 'economic +causation' could not have carried a value so far. It is the living +emotion that counts! Values depend every moment upon the force of live +minds, and need to be constantly renewed. And there would have been, of +course, many 'non-economic' disturbances, wars and robberies, frauds and +benevolences, political and religious changes--a host of historical +occurrences affecting the weight of different elements in society in a +way that, by historical methods, it is impossible to treat +quantitatively.[98] + +"What is called for is, not a temporal _regressus_, which, starting with +an hypothesis, picks up abstractions by the way, and tries to synthesize +them into a concrete reality of to-day, but rather, a _logical analysis_ +of existing psychic forces, which shall abstract from the concrete +social situation the phases that are most significant. This method will +not give us the whole story either. Value will not be completely +explained by the phases we pick out. But then, we shall be aware of the +fact, and we shall know that the other phases are there, ready to be +picked out as they are needed for further refinement of the theory, as +new problems call for further refinement. And, indeed, we shall include +them in our theory, under a lump name, namely, the rest of the +'presuppositions' of value. + +"Our reason for choosing a logical analysis of existing psychic forces +instead of a temporal _regressus_--instead, even, of an accurate +historical study of the past--is a two-fold one: first, we wish to +coördinate the new factors we are to emphasize with factors already +recognized, and to emerge with a value concept which shall serve the +economists in the accustomed way--it is illogical to mix a logical +analysis with a temporal _regressus_. But, more fundamental than this +logical point, is this: the forces which have historically _begot_ a +social situation are not, necessarily, the forces which _sustain_ it. +The rule doubtless is that new institutions have to win their way +against an opposition which grows simply out of the fact that we are, +through mental inertia, wedded to what is old and familiar. We resist +the new _as_ the new. Even those who are most disposed to innovate are +still conservative, with reference to propaganda that they themselves +are not concerned with. The great mass of activities of all men, even +the most progressive, are rooted in habit, and resist change. When, +however, a new value has won its way, has become familiar and +established, the very forces which once opposed it now become its surest +support. Or, waiving this unreflecting inertia of society, as things +become actualized they are seen in new relations. What, prior to +experiment, we thought might harm us, we find beneficial after it has +been tried, and so support it--or the reverse may be true. The psychic +forces maintaining and controlling a social situation, therefore, are +not necessarily the ones which historically brought it into being."[99] + +Since the foregoing was written, I have found that another theorist, +Professor Alvin S. Johnson, had also given consideration to the same +idea, as a means of escape from the Austrian circle. Professor Johnson +refers to the notion briefly in his review of _Social Value_ (_Am. Econ. +Rev._, June, 1912, p. 322), holding that the doctrine is logically +tenable, though rejecting it on psychological grounds. "The value of a +thing newly created can be explained only with reference to values +antecedently existing." That there is a continuity in the value system, +as in the whole social-mental life of men, I should be the last to deny. +But it is not the antecedently existing values, _as_ antecedently +existing, that give value to the new piece of wealth. The antecedent +values function only as _persisting_, as _contemporary_ social forces. +We do not find the motivating power of existing values in the ashes of +burnt out desire! It seems to me very essential to distinguish the two +methods of approach to the problem. It is possible to state a historical +sequence--if you know it,--showing how values have historically come and +gone. But for an equilibrium picture, of the sort that our price theory +demands, where there is a mechanical balancing of contemporary factors +(as in Marshall's balls in the bowl illustration), such an account is of +no use. Existing social forces have their history. But, at a given +moment, they are what they are, and what they _were_ at a different time +adds no ounce of weight to the power they now exert. If a quantitative +account of value is called for--and price-theory is essentially +concerned with the measurement of values--we must bring measure and +measured into contemporary balance. The historical account is one +thing; the cross-section analysis is another. "Static theory" is a +mechanical abstraction from the organic cross-section picture, which, by +making it superficial, is able to make it exact. + +It seems to me that this distinction must be kept clear if progress in +the science is to be made. At every point, divergent conclusions are +reached if the two view-points are merged. The distinction between +statics and dynamics is, in a general way, the same as the distinction +here made between the historical and the cross-section view. It is no +answer to the Ricardian theory of land-rent for Carey to point out that +historically, in new countries, the uplands are cultivated first, and +the more fertile river-valleys later. Ricardo is talking about statics, +and Carey about dynamics. Carey does not answer Ricardo, because he is +talking about a different problem. The utility theorist especially has +no right to leave the static view-point. All the elementary laws on +which the utility theory is based are static laws. The law of satiety, +of diminishing utility, is a static law, and the utility theorists are +careful to point out that it holds only for an individual at a given +time. It rests on nerve fatigue. Give the nerve time to rest, and +utility does not sink. On the contrary, the dynamic law of wants is that +wants expand. As old wants are satisfied, new wants arise, so that, in +the course of time, _marginal_ utilities do not sink--the competition of +new wants forces up the margins of the old wants. Moreover, with time, +tastes change, habits are formed, and the same wants may grow more +intense--as in the case of olives or whiskey. All this has been seen by +the creators of the utility theory. Thus, Wieser: "The want as a whole +of course retains its strength so long as a man retains his health; +satisfaction does not weaken but rather stimulates it, by constantly +contributing to its development, and, particularly, by giving rise to a +desire for variety. It is otherwise with the separate sensations of the +want. These are narrowly limited both in point of time and in point of +matter. Anyone who has just taken a certain quantity of food of a +certain kind will not immediately have the same strength of desire for a +similar quantity. Within any single period of want every additional act +of satisfaction will be estimated less highly than a preceding one +obtained from a quantity of goods equal in kind and amount." (_Natural +Value_, p. 9.) A similar statement is in Taussig's _Principles_ (I, +124), "In such cases, however, the tastes of the purchasers may be said +to have changed in the interval. At any given stage of taste and +popularity, the principle of diminishing utility will apply." +Illustrations could be multiplied. + +It is true that _future_ marginal utilities come into the utility theory +scheme, but they come in, not as future utilities, but as "_present +worths_" of future utilities, or as "present anticipated feelings" in +Jevons' phrase[100] suffering a discount, usually, in the process. But I +am not aware of any writer among the founders of the utility school, who +has sought to bring past utilities into the scheme. The past is dead. +Its effects persist in the present only in present processes. A _memory_ +is a _present_ psychological fact. + +Consider further. Is it the prices of yesterday that determine the +subjective value of money to an individual, if the prices of yesterday +are different from the prices of to-day, _and the individual knows it_? +In so far as we have the clear, intelligent economic mind, seeking its +interests--and the marginal utility theory assumes this type of +mind--the tendency is to bring all the factors in the problem into the +present. If prices change slowly, so that the individual can count on +essentially the same situation to-day that he had yesterday, doubtless +he will not take the trouble to recast his value system. There is a +tremendous lot of trouble in bringing about, in the individual's mind, +the rational equilibration of values--trouble which the Austrian theory +commonly abstracts from, but which should be recognized in the analysis, +and accorded its own marginal significance in the scale. To throw the +emphasis on inertia, however, and to assume that men do not readjust +their margins to meet changed conditions, is to depart from the +fundamentals of the Austrian theory. If the price-situation is a rapidly +changing one, men do rapidly readjust their estimates of money. If money +is fluctuating rapidly in value--as, say, during a time when there is +depreciated paper money, whose future depends on military events, the +adjustments may be very rapid indeed. I quote the following from the +news columns of the _New York Times_, of April 4, 1914, p. 2: "Jaurez, +Mexico, Apr. 3.--After the hysterical outbursts last night that greeted +the news of the fall of Torreon, this city was preternaturally calm +to-day.... The silent gentleman with the dyed mustache who spins the +marble at the roulette wheel in the Jaurez Monte Carlo, conducted by +Villa's officers for the benefit of the rebel treasury, seemed the only +person who was not excited. When the crowd of players suddenly deserted +him on the sound of the bugle call of victory, he gave the marble +another whirl from sheer force of habit, but none returned.... In an +hour, however, play was faster and more furious than ever, for holders +of Constitutionalist money early realized that their currency had +suddenly increased in value, and that they were somewhat richer than +before." I do not question the fact, however, that men are slow in +making calculations, and that society is often unconscious of changed +conditions, and often readjusts less rapidly than occasion requires. +There is a vast deal of inertia, of blind habit, of custom, etc. But +emphasis on these factors is not marginal utility theory! Factors like +these are emphasized by a functional psychology, and by a social +psychology--not by an individualistic psychology which rests on the +assumption of rational calculation. It is not _past_ utilities that +explain present subjective values of money when these subjective values +are out of harmony with the present market facts, but rather _present_ +habits, present customs, present disinclination to readjust, etc. There +is a big difference, psychologically, between the mental processes +through which one arrived at one's present state of mind, and the +present state of mind itself. The original "commodity utility" of the +money metal, in the far away time before the money use affected its +value, is surely no longer a factor. Certainly not on the basis of an +individualistic psychology of the Austrian type. All the individuals who +experienced that original utility are long since dead! Not even memories +of the original utilities persist. + +When writing the passage in _Social Value_, quoted above, I did not +suppose that I was dealing with a notion that anyone else would ever +take seriously. My purpose in discussing it was chiefly to throw into +sharp relief the contrast between the historical and the cross-section +viewpoints, and to make clear that my own theory was based on analysis +of existing psychological forces. Since finding, however, that two +writers for whose views I have so much respect have independently +developed the same idea, and have taken it seriously, I have felt it +worth while to give it this extended consideration. + +Von Mises, like Wieser, needs an absolute value of money in his +thinking. He does not call the concept by that name, but, following +Menger[101] speaks of the "inner objective value of money" and the +"outer objective value of money." (Mises, p. 132.) The latter is the +purchasing power of money, a relative concept, exactly expressed in the +price-level. The inner objective value of money is designed to cover the +causes of changes in prices which originate on the money-side of the +price relation alone.[102] This inner objective value of money performs +the same logical function in the theory of money that the absolute +social value concept of the present writer does, even though the +psychological explanation lying behind it is very different. + +Von Mises considers the quantity theory at length, noting a number of +defects in it, chief of which is the fact that it has no psychological +theory of value behind it, that it does not account for the _existence_ +of the value of money, and at most gives a law for _changes_ in a value +whose existence is taken for granted. The details of this criticism, +however, need not be here presented. The quantity theory is to be +treated in detail at a later point of our study. + +The writer who has most definitely stated the relation of utility to the +functions of money, is David Kinley (_Money_, ch. viii). He would +explain the value of money, by (a) its utility as a commodity, and (b) +its utility in the money-employment, the employments reaching a marginal +equilibrium. The utility of the money metal in its commodity use calls +for no analysis. But what is meant by the utility of money as money? +Where the writers so far discussed have denied that money as money has +any utility, Dean Kinley finds a utility in the money-function itself: +money facilitates exchange, and exchange, by transferring goods from +those who do not need them to those who do need them, increases the +utility of those goods. Money, as money, thus produces utility.[103] The +utility of money is the extra utility which comes into being by virtue +of its use, as compared with what would exist in a state of barter. The +marginal utility of money is the utility of money in the marginal +exchange--the exchange which would be effected by means of barter if +money were any more difficult to procure. The marginal utility of money, +then, is not the whole of the marginal utility of the good for which it +is exchanged, but rather is the differential part of that utility which +is created by means of the use of money in exchange. The marginal +utility of money, thus, appears in separate services of money. Money is +a durable good, which gives forth its services bit by bit. The value of +money is based on these separate services, it is "the capitalized value +of the service rendered in the marginal exchange." + +This conception is, it seems to me, much truer to the spirit of the +general marginal utility theory than the theories of Wieser, Schumpeter, +or von Mises. If the utility theory at large were valid, the application +here would be valid. To Dean Kinley's conception of a marginal utility +of the money service, I offer simply the objections which I offer to the +utility theory at large--objections indicated in what has gone before, +and in my _Social Value_. The application of the capitalization theory +to the value of money I have already discussed in a previous chapter, +and shall again consider in the chapter on "The Functions of Money." + +I conclude that the marginal utility theory has not solved the problem +of the value of money. The reason, however, is simply that it has not +solved the general problem of value. The marginal utility theory, in so +far as it seeks to make marginal utility the _cause_ of value, is +circular. The effect of a given man's wants upon the value of the goods +he wants depends, not on the marginal intensity of those wants alone--a +penniless prisoner may desire a marble palace ever so intensely without +affecting its value--but also upon the value of the wealth possessed by +the individual who experiences the wants. But this is to explain value, +not by marginal utility alone, but by value as well--a circle. Or, if we +leave the standpoint of absolute values, and look at the matter in terms +of prices, the same situation presents itself. The price which an +individual is willing to pay for a good depends on his income,--which +commonly rests on prices--and on the prices he has to pay for other +goods which enter into his budget. His price-offer, expressive of the +marginal utility of a horse to him, is made with consideration of the +price of a buggy, of harness, of feed, of the wages of the servant who +cares for the horse, the price of a barn, and of the other things that +the possession of the horse involves. And not these alone: less +immediately, but still vitally, his whole budget enters. Higher prices +for theatre tickets or for food or for clothing will reduce his +price-offer for a horse. Further, his price-offer for the horse will be +tremendously influenced by his opinion as to the permanent market price +of horses. He will not be willing to pay a price for the horse which he +cannot expect to get back if he should decide later to sell the horse. +The direct influence of market price on individual demand-price is very +great indeed. Marginal utility (subjective use-value) very frequently +gives place to subjective value-in-exchange in the determination of an +individual's marginal demand-price--which means that the market controls +the individual instead of the individual controlling the market. With +sellers, it is _generally_ subjective-exchange-value, rather than +marginal utility, that determines supply-price-offer. The sellers, in so +far as they are producers, have little need for the great mass of their +stocks. They will sell them, rather than keep them, at almost any price. +The reason they ask high prices is simply that they think the market +will give them the high prices. The individual price-offers, in the +aggregate therefore, presuppose the whole market situation--presuppose a +general value and price system already fixed and determined. Each +individual price offer presupposes many other prices, though not, of +course, the whole market. Since, then, much of the market situation is +assumed in the determination of each particular price, by the Austrian +method, it is obviously circular reasoning to think that the +determination of each price separately by this method will supply data +for a summary of the market situation as a whole. In the one form in +which the utility theory avoids a circle,--that presented by Schumpeter, +and discussed in an earlier part of this chapter--it is not a causal +theory. Marginal utility is not a cause of market prices, but rather, +marginal utilities and market prices are alike resultants, effects, of +more fundamental factors. No writer[104] who has presented the utility +theory in this form has tried to apply it to the value of money, and +even if it could be so applied, it would not give a causal explanation +of the value of money in terms of marginal utility. In most of the +efforts to apply the utility theory to money, the circle becomes so +obvious that one marvels that able theorists should for a moment fail to +see it. + + + + + +PART II. THE QUANTITY THEORY + + + + +CHAPTER VI + +THE QUANTITY THEORY OF PRICES. INTRODUCTION + + +The quantity theory, in its usual formulations, is a theory, not of the +value of money, in the absolute sense of value, but of the general +price-level, the average price of goods exchanged for money. It is not a +psychological theory. It does not deal with psychological quantities, or +psychological forces. It is a mechanical theory, concerned simply with +quantities, and the relations between them. The essence of the quantity +theory comes out in the following brief statement: given a number of +units of money; given a number of units of goods to be exchanged; assume +these two numbers to be independent[105] of each other; assume all the +goods to be exchanged for all the money; then the average price will be +a simple function of the quantities of goods and of money respectively, +such that an increase in the amount of money will increase the average +price per unit of goods proportionately, if goods remain unchanged in +amount, or an increase in goods will lower the price per unit +proportionately, money being assumed to remain unchanged in amount. The +qualification is commonly added that if goods have to be exchanged more +than once, the effect is the same on prices as if there were an added +number of goods equal to the added number of exchanges, and that if +money is used more than once in exchanging a given number of goods, the +effect is the same as if there were proportionately more money. Both +quantity of goods and quantity of money are commonly defined as actual +quantity multiplied by "rapidity of circulation." Rapidity of +circulation, however, for both money and goods, is commonly thought of +as a constant, so that the original formula remains unaffected by the +qualification, so far as a prediction as to the effect of increase or +decrease of money or goods on prices is concerned. Involved in the +quantity theory, and explicitly stated by many writers, is the doctrine +that the substance of which money is made is irrelevant, that it is the +number, and not the quality or size of the money-units that counts. "In +short, the quantity theory asserts that (provided velocity of +circulation and volume of trade are unchanged) if we increase the +_number_ of dollars, whether by renaming coins, or by debasing coins, or +by increasing coinage, or by any other means, prices will be increased +in the same proportion. It is the number, and not the weight, that is +essential. This fact needs great emphasis. It is a fact which +differentiates money from all other goods and explains the peculiar +manner in which its purchasing power is related to other goods. Sugar, +for instance, has a specific desirability dependent on its quantity in +pounds. Money has no such quality. The value of sugar depends on its +_actual quantity_. If the quantity of sugar is changed from 1,000,000 +pounds to 1,000,000 hundredweight, it does not follow that a +hundredweight will have the value previously possessed by a pound. But +if money in circulation is changed from 1,000,000 units of one weight to +1,000,000 units of another weight, the value of each unit will remain +unchanged." (Irving Fisher, _Purchasing Power of Money_, pp. 31-32.) To +the same effect is Nicholson's exposition, in which the money is assumed +to consist of dodo-bones, the most useless substance that Nicholson +could think of. For the quantity theory, prices are determined by the +_numbers_ of goods and dollars that are to be exchanged for one another, +and not by the _values_ of the goods and dollars;--indeed, for the +quantity theory, "value" commonly has no meaning apart from the prices +which are supposed to be adequately explained by the mechanical +relations of numbers. + +In the critical study which follows, virtually every doctrine and every +assumption of this preliminary statement will be challenged. I shall +deny, first, that the quantity of goods to be exchanged and the quantity +of money to be exchanged for the goods, are independent quantities, +maintaining, rather, that an increase in either of them tends normally +to be accompanied by an increase in the other. Quantity of goods and +quantity of money _exchanged_ are not simple physical stocks, given +data. Rather, they are consequences of human choices and human +relationships, and vary from a large number of highly complex +psychological causes, many of which are common to both. I shall deny, +second, that "rapidity of circulation," either of goods or of money, is +a simple constant, independent of quantity of goods or of quantity of +money. I shall maintain, rather, that rapidity of circulation of money +is a phenomenon which calls for psychological explanation: that the +rapidity of money really means the _activities of men_; that these +activities are complex, and obey no simple law; that instead of being an +independent factor, constant, in the situation, the rapidity of +circulation of money is bound up with the quantity of money, the +quantity of goods to be exchanged, the rapidity of circulation of goods, +and the prices of the goods, and that the rapidity of circulation of +goods is likewise causally dependent on the factors named--or better, on +the causes which control them; that rapidity of circulation, whether of +money or of goods, is not a causal factor independent of prices, but +rather in part depends on prices. In the third place, I deny the +doctrine that the question as to _what_ the money-unit is made of is +irrelevant. On the contrary, I shall maintain that the _quality_ of +money, rather than its quantity, is the determining factor. I shall not +maintain that only money made of or redeemable in valuable bullion can +circulate, nor shall I maintain that the value of money depends wholly +on the value of its bullion content when money is made of valuable +metal. I recognize that value can come from other sources. But I shall +maintain that value from some source other than the monetary employment +is an essential precondition of the monetary employment, even though +recognizing that that monetary employment may, in a way later to be +analyzed, add to the original value of the money. The doctrine that only +physical quantities, or abstract numbers, of goods are relevant I shall +challenge especially, maintaining, on the contrary, that the +psychological significances, the values, of goods are the really +important thing, so that an increase in the number of one sort of goods +may have a very different effect on the average of prices from an +increase of the same number of units of some other good, and so that an +increase in the number of goods exchanged under one set of conditions +may have a very different effect on prices--or may be accompanied by a +very different movement in prices, for the question of causal relations +is a complicated one--from the change in prices that might accompany the +same increase in the amount exchanged of same goods under other +circumstances. Finally, the doctrine of the quantity theory that the +price-level is a passive result of the other factors named: quantities +of goods and money, and their respective velocities; that prices cannot +initiate a change in the situation, will also be challenged. I shall +undertake to show that the first change in the situation may appear in +prices themselves, and that the quantities of goods exchanged, and of +money, and their velocities, may then be altered to correspond with the +change in prices. + +I shall further maintain, as against the whole spirit of the quantity +theory, that it does not seize hold of essentials in the causes lying +behind prices. I shall contend that the factors with which it deals, +instead of being independent _foci_ to which converge the causes +governing the price-level, and through which causation flows in one +direction, are really not true "factors" at all, but rather are blanket +names for highly complex and heterogeneous groups of facts concerning +which few general statements are possible. Quantity of goods exchanged, +for example, may be in some of its parts caused by rising prices, in +others of its parts may be causing falling prices and is chiefly caused +by _fluctuating_ prices. The net change in prices in this case is not +the result of any one movement from "quantity of goods" as a whole. +Changes in the price-level are not one result, but rather, are the +mathematician's average of many changes, due to a host of causes, in +many individual prices. The quantity theory is an effort to simplify +phenomena highly complex. Of course, the simplification of complex +phenomena in thought is a laudable scientific goal, but when the +simplification goes so far as to group things only superficially +related, and to leave out the really vital elements, it is worthless. +Value theory, with all the value left out, is like Hamlet with no actor +for the title rôle. Simplification in the explanation of general prices +has gone as far as we can legitimately take it when we seek to summarize +all the factors involved in the _foci_ of, on the one hand, the value of +money, and, on the other hand, the values of the particular goods. The +general price-level is an average of many concrete prices. Each of these +individual prices has a concrete causal explanation. The _general_ +price-level has, not a few simple causes, but an infinite host of +causes. Indeed, the general price-level has no real existence. It is a +convenient mathematical concept, by means of which we may summarize the +multitude of concrete facts. It is useful as a device for measuring +changes in the value of money, on the assumption that changes in the +values of goods neutralize one another. This assumption is never +strictly true, and often is demonstrably false. The general price-level +is neither a cause nor a result. Particular prices, in general, are +results of two causes, namely, the value of money and the value of the +good in question, and particular prices may then become causes, changing +the quantity of money involved in a given set of exchanges. Neither +quantity of money, nor quantity of goods exchanged, nor rapidity of +circulation, nor general price-level is a simple, homogeneous quantity, +obeying definite laws. + +I shall also undertake to show that in many important cases the quantity +theory leads to conclusions regarding the price-level which contradict +other laws of prices, notably the capitalization theory, the cost of +production doctrine, and the law of supply and demand. I have previously +pointed out that these three doctrines are inapplicable to the problem +of the value of money itself. On the assumption of a value of money, +however,--using value in the absolute sense--they are applicable to the +problem of prices, and, since the price-level is merely an average of +particular prices, they should be applicable to the problem of the +price-level also. It will be shown, in the course of the criticism which +follows, first that the quantity theory contradicts each of these +doctrines, in certain situations, and second, that in these cases, the +conclusions based on the cost theory, the supply and demand theory, and +the capitalization theory are right, and the conclusions based on the +quantity theory are wrong. It has been maintained by certain writers, as +Knut Wicksell[106] and Irving Fisher,[107] that cost of production and +supply and demand are inapplicable to the problem of the general +price-level. I shall maintain the contrary, holding that while these +doctrines are inapplicable to the problem of the _value_ of money, they +_are_ applicable to the problem of general prices, on the assumption of +a fixed value of money. By the value of money I mean its absolute[108] +value, and not--what the quantity theorists commonly mean--its +"purchasing power," or the "reciprocal of the price-level." + +I shall undertake to show that no sound conclusion reached on the basis +of quantity theory reasoning is the peculiar property of the quantity +theory school; that every valid conclusion which may be based on the +quantity theory may also be deduced from the theory maintained in this +book, and, indeed, that most of them may be deduced from several other +theories of money, notably the commodity or bullionist theory. I shall +show a number of false and misleading doctrines which logically spring +from the quantity theory, and shall undertake to show that the quantity +theory fails to give an adequate basis for several important parts of +the theory of money, among them Gresham's Law, the theory of +international gold movements, and the theory of elastic bank-notes and +deposit-currency. + +So much for the theses to be maintained. The detailed proof of these +contentions will best be given in connection with a critical account of +various versions of quantity theory doctrine. Attention will be given in +this summary to the expositions of Nicholson, Mill, Taussig, and +Kemmerer, and very special attention to I. Fisher, though some other +writers will also be taken into account. + + + + +CHAPTER VII + +DODO-BONES + + +Must money have value from some source outside its money-functions? It +is a part of the quantity theory that this is unnecessary. I have cited, +in the preceding chapter, Irving Fisher and J. S. Nicholson to this +effect. Nicholson's statement is interesting and picturesque, exhibiting +the quantity theory in all the nakedness of its poverty, and I shall +present it at some length. "For simplicity," to isolate his phenomenon, +he assumes a hypothetical market, in which the following conditions +obtain: (1) No exchanges are to be made unless money (which he assumes +to consist of counters of a certain size made of dodo-bones) actually +passes from hand to hand. No credit or barter. (2) The money is to be +regarded as of no use whatever except to effect exchanges, so that it +will not be withheld for hoarding, _i. e._, will be actually in +circulation. (3) There are ten traders in the market, each with one kind +of commodity and no money, and one trader with all the money (one +hundred pieces), and no commodities. Further, let this moneyed man put +an equal estimation on all the commodities. Now let the market be opened +according to the rules laid down; then all the money will be offered +against all the goods, and, every article being assumed of equal value, +the price given for each article will be ten pieces, and the general +level of prices will be ten. It is perfectly clear that, under these +suppositions, if the amount of money had been one thousand pieces, the +price-level would have been one hundred per article, etc. Under these +very rigid assumptions, then, it is obvious that the value of money +varies exactly and inversely with the amount put into circulation.--The +rapidity of circulation he regards as coördinate, in fixing the +price-level, with the volume of money. To illustrate this, he assumes +again his hypothetical market, and "dodo-bones," assuming as before that +one merchant has all the money (one hundred pieces), and that ten have +commodities of equal value. Instead, however, of the merchant with the +money desiring all the commodities equally, he is made to desire only +the whole of that of trader one, who in turn desires the whole of number +two's stock; and so on to the ninth merchant, who wants the commodity of +number ten, _who wants the dodo-bones_. In this case, each article will +be exchanged only once, as formerly, but the money will change hands ten +times, and the price of each article will be one hundred instead of ten. +"We now see that, under these circumstances, with the same quantity of +money, and the same volume of transactions, the level of prices is ten +times as great as before, and the reason is that every piece of money is +used ten times instead of once." Whence he concludes: "The effect on +prices must be the same when, in effecting transactions, one piece of +money is used ten times as when ten pieces of money are used once."[109] + +Ricardo, too, expresses the dodo-bone theory very explicitly. "If the +state charges a seigniorage for coinage, the coined piece will generally +exceed the value of the uncoined piece of metal by the whole +seigniorage, because it will require a greater quantity of labour, or, +which is the same thing, the value of the produce of a greater quantity +of labour, to procure it. + +"While the state alone coins, there can be no limit to this charge of +seigniorage; for, by limiting the quantity of the coin, it can be raised +to any conceivable value. It is on this principle that paper money +circulates; the whole charge for paper money may be considered a +seigniorage. Though it has no intrinsic value, yet, by limiting its +quantity, its value is as great as an equal denomination of coin, or of +bullion in that coin."[110] + +Would the dodo-bones circulate? Nicholson chose the illustration to +throw into the sharpest relief the absence of any value from a +non-monetary employment. Nobody has any use for them as dodo-bones. What +economic force is there, then, to make them circulate? Nicholson says +nothing about an _agreement_ among the traders, _assigning_ a +significance[111] to the dodo-bones, so that they might function in the +same way that poker chips do--indeed, any such notion would vitiate his +illustration, for he proposes to explain an adjustment of prices by +natural economic laws. Why then, will any of the traders give up his +valuable commodities for the worthless dodo-bones? Will you say that he +will take them, not because he wants them himself, but because he knows +that others will take them from him? But why would the others want them? +Because they in turn can unload them on still others? But this seems a +plain case of the vicious circle. It is, in effect, saying that the +dodo-bones will circulate because they will circulate. A will take them +because B will take them; B will take them because C will take them, C +because ... N will take them; N takes them because A will take +them.[112] I do not deny that if the traders used the dodo-bones as +counters, agreeing that such dodo-bones should represent some other +commodity chosen as a standard of values, that the dodo-bones would +circulate. But, in that case, they would be, not primary, +self-sustaining money, but merely representative, or token money. And +just here let me lay down two general propositions[113] respecting the +two main functions of money: to serve as a standard, or common measure, +of values, the article chosen must, as such, be valuable. The thing +measured must be either a fraction or a multiple of the unit of +measurement. But this quantitative relation can exist only between +_homogeneous_ things. The standard, or measure, of values, then, must be +like the commodities whose values it is to measure, at least to the +extent of having _value_.[114] The second proposition is respecting the +medium of exchange. The medium of exchange must also have value, or else +be a representative of something which has value. There can be no +exchange, in the economic sense--I abstract from disguised benevolences, +accidents, and frauds--without a _quid pro quo_, without value balancing +value, at least roughly, in the process. Now when it is remembered that +the intervention of the medium of exchange, taking the place of barter, +really breaks up a single exchange under the barter system into two or +more independent exchanges, and that the medium of exchange is actually +received in exchange for valuable commodities, it follows clearly that +the medium of exchange must either have value itself, or else represent +that which has value. These two propositions seem almost too obvious to +require the statement, but they contradict the quantity theory, and they +are not, on the surface, reconcilable with certain facts in the history +of inconvertible paper money. It is necessary, therefore, to state +them, and to examine further some of the phenomena which seem to +contradict them. If they are true, Nicholson's dodo-bones will perform +neither of the primary functions of money. They have no value, +_per se_--they cannot, then, measure values; they are neither valuable +nor titles to valuable things--they are not _quid pro quo_ in exchange, +and will not circulate. + +I shall not pause long to discuss the doctrine that money needs no value +itself, because it is really a sort of title to, or claim on, or +representative of, goods in general. The notion, first, would not pass a +lawyer's scrutiny. There are no such indefinite legal rights. A system +of legally fixed prices, with a socialistic organization of society, +would be necessary to give it definiteness--and in such a situation +there would be no room for a quantity theory of prices! Economic goods, +as distinct from money, are not generally "fungible" to the extent that +would make them indifferent objects of legal rights. Besides, whether or +not the thing is logically thinkable, it is legally false. Legal factors +enter into the economic value of money, as will later be shown, but it +is economic, and not legal, value, which makes money circulate. +Helfferich has taken the trouble to give the notion of money as a mere +title to things in general a somewhat more fundamental analysis, and I +would refer the reader who is not satisfied by the foregoing on this +point to his discussion.[115] + +I wish to make very clear precisely how much I mean by the foregoing +argument that circular reasoning is involved in saying that A will take +the dodo-bones because B will take them. The same question arises for B, +and for the others. The real question is as to the cause for any general +practice of the sort. Why should A _suppose_ that B will take them? +What could bring about such a system of social relations that a general +expectation of this sort could arise? + +Kemmerer undertakes to give an answer in a hypothetical case by the +following ingenious assumption (_Money and Credit Instruments_, p. 11): +the money consists of an article which formerly had a high commodity +value, which has lately entirely disappeared, but the money continues to +circulate, through the influence of custom, and because of the demand +for a medium of exchange. + +In this illustration Kemmerer recognizes the historical fact that money +has originated from some commodity which had value because of its +significance as a commodity. Historically, a great many different +commodities have served, and gold and silver finally emerged victors for +reasons which need not just now concern us. These historical facts, +coupled with the idea that value is, essentially, "something +physical,"[116] or coupled with the notion that value arises only from +marginal utility, or from labor, have been accepted by the Commodity or +Metallist School as sufficient proof that standard money is only +possible when made of some valuable commodity. Professor Laughlin seems +to think of the whole thing as depending on the value of gold bullion, +and to recognize the money-employment as a factor in affecting the value +of money only in so far as it draws gold away from the arts, and so +raises its value there by lessening the supply.[117] If money originated +in a commodity, how is it possible for the commodity value to be +withdrawn, and for money still to retain its value? + +This brings us to a question I have raised before, namely, whether the +genetic, or historical account of a social situation, and the +cross-section analysis of the same situation, necessarily agree.[118] Is +it possible that when a commodity basis was necessary to start the +thing, and when even in the modern world gold bullion, interconvertible +with gold coin, remains the ultimate basis of the money-systems of all +great commercial peoples, that you could withdraw the commodity support +and keep money unchanged in value? Or could you even have any value left +at all? Now in answer, I propose to admit the possibility of so doing. +The forces which a cross-section analysis reveals are not necessarily +identical with those which a theory of origins sets forth. Once the +thing is set going, the forces of inertia favor it. A new theory, fixed +in the minds of the people, say the quantity theory itself, might give +them such confidence in their money that its value might be maintained. +A fiat of the government, making the money legal tender, supplemented by +the loyalty of the people, might keep up its value. I think there is +reason to believe that this is a source of no little importance of value +for the German paper money to-day, and, to a less extent, of the notes +of the _Banque de France_. All these possibilities I admit. Value is not +physical, but psychological. And the form of value with which we are +here concerned, economic value _par excellence_, is a phenomenon of +social, rather than individual psychology. Many and complex are the +psychical factors lying behind it. Belief, custom, law, patriotism, +particularly a network of legal relationships growing out of contracts +expressed in terms of the money in question, the policy of the state as +to receiving the money for public dues, the influence of a set of +customary or legally prescribed prices, which tie the value of money to +a certain extent to the values of goods--factors of this character can +add to the value of money, and can, conceivably, even sustain it when +the original source of value is gone. Social economic value does not +rest on marginal utility. In general, utility is essential, as one of +many conditions, before value can exist, even though the intensity of +the marginal want served by a good bears no definite relation to its +value. But in the case of the value of a money of the sort here +considered, marginal utility is in no sense a cause of the value. +Rather, the marginal utility[119] of such money to an individual is +wholly a reflection of its social value, and changes when that social +value changes. It is quite consistent with the general theory of +economic value which I have set forth in _Social Value_, for me to admit +possibilities of this kind. The value of money in such a case has become +divorced from its original presuppositions. The paper, originally +resting on a commodity basis, or the coins originally valued because +they could be transformed into non-monetary objects of value, have +become objects of value in themselves. Analogous phenomena are common +enough in the general field of values, and are less common in the field +of economic values proper than one might suppose. Thus, most moral +values tend to become independent of their presuppositions. Moral values +of modes of conduct have commonly arisen because those modes of conduct +were, or were supposed to be, advantageous in furthering other ends. +Morality, in its essence, is _teleogical_. Yet so far have the moral +ideals become ends in themselves that it is possible to have great +thinkers, like Kant and Fichte, setting them up as eternal and +unchangeable categorical imperatives, regardless of consequences. Thus +Fichte declares, "I would not tell a lie to save the universe from +destruction." Older still is the dictum, "_Fiat justitia, ruat coelum._" +Yet truth and justice, in the history of morals, and, in the view of +most moral thinkers to-day, are of value primarily because they tend to +preserve the universe from destruction, and would never have become +morally valuable had they had the other tendency! Legal values manifest +this tendency even more--one needs only to point to our vast body of +technical rules of procedure in criminal cases, which persist long after +their original function is gone, and after they have become highly +pernicious from the standpoint of the ends originally aimed at. In the +sphere of the individual psychology the phenomenon is very common. The +miser's love for money is a classical example. The housewife who so +exalts the cleanliness of her home that the home becomes an unhappy +place in which to live, is an often-described type. The man who retires +from business that he may enjoy the gains for the sake of which he +entered business often finds that the business has become a thing of +value in itself, and longs to be back in the harness, while many men, +long after economic activity is no longer necessary, continue the +struggle for its own sake. Activities arise to realize values. The value +of the activity is derived from the value aimed at. But consciousness is +economical, and memory is short. The activities become habits. The +habits gather about themselves new psychological reactions. The +interruption of habitual activities is distasteful. Life in all its +phases tends to go on of its own momentum. The activities tend to become +objects of value in themselves, whether or not their original _raison +d'être_ persist. In both the social and the individual sphere, apart +from blind inertia and mechanical habit, active interests tend to +perpetuate the old activities, whose _raison d'être_ is gone. The judge +who continues to apply the outgrown absurdities of adjective law may do +it from timidity or from being too lazy to think out the new problems +whose solution must precede readjustment to present social needs, but +the criminal lawyer who can free his guilty client by means of these +technicalities has an active interest in their perpetuation. The +individual who would readjust his conduct in the light of changed +interests finds that active opposition is met in the emotional +accompaniment of the old habits. The economic society may wish to be +free from a money whose original value is gone, but there is a powerful +debtor interest which approves of that money, and whose support tends to +maintain its value. + +All these possibilities I admit. My own theory of value, which finds the +roots of economic value ramifying through the total social psychological +situation, rather than in utility or labor-pain alone, involves +possibilities like these. But--and this is a point I wish especially to +stress--we are out of the field of mechanics, and in the field of social +psychology, when we undertake to explain the value of money that way. No +longer is there any mathematical necessity about the matter. There is no +such _a priori_ simplicity as the quantity theory deals with. Factors +like these might maintain the value of money for a time, and then wane. +These factors might vary in intensity from day to day, with changing +political or other events, leading the value of money to change from day +to day, quite irrespective of changes in its quantity.[120] In so far as +you have a people ignorant of the nature of money and of monetary +problems, a people in the bonds of custom, with slightly developed +commercial life, whose economic activities run in familiar grooves +unreflectively, you will most nearly approximate a situation like that +which Professor Kemmerer assumes. But that means that what might be true +in India, or to a less degree in Austria--countries to which the +quantity theorists are accustomed to refer--need not at all be true in +the United States. Here everybody was talking about the theory of money +in 1896--not necessarily very intelligently!--and here, moreover, such +phrases as "good as gold," and propositions like that which came from +Mr. J. P. Morgan in his testimony before the Pujo Committee that "gold +is money, and nothing else," would seem to indicate that a very great +part of our people might utterly distrust such a money as Professor +Kemmerer describes. The banker's tendency to look behind for the +security, to test things out, to seek to get to bed-rock in business +affairs, holds with a great many people. An overemphasis on this is +responsible for the doctrine of Scott[121] and Laughlin[122] that the +sole source of the value of inconvertible paper money is the prospect of +redemption, and that inconvertible paper money differs from gold in +value by an amount which exactly equals the discount at the prevailing +rate of interest, with allowance for risk, for the period during which +people expect the paper money to remain unredeemed. We have not the +banker's psychology to any such extent as that. Apart from the fact that +the money function adds to the value of money, under certain +circumstances,--a point to be elaborated shortly--other, non-rational +factors, contagions of depression and enthusiasm, patriotic support, +"gold market" manipulations, etc., entered to break the working of the +credit theory of paper money as applied to the American Greenbacks. I +may here express the opinion that the credit theory is the fundamental +principle in the explanation of the value of the Greenbacks, however. +But we have not the banker's psychology to any such extent as the +extreme forms of that theory would assume. "Uncle Sam's money is good +enough for me," is a phrase I have heard from the Populists,--who, by +the way, were pretty good quantity theorists! "The government is behind +it." There are plenty of men for whom that assurance would be enough. +Indeed, the general notion that in some way, not specified, perhaps not +yet known to anybody, the government will do what is necessary to +maintain the value of its money is a ground which might well influence +even the most sophisticated banker. I think such a general confidence in +the English government has clearly been a factor in the price of +Sterling exchange since the balance of trade turned so overwhelmingly +against England in the present War.[123] Our monetary history, I may +add, has been in considerable measure a struggle between these two +opposing psychological reactions on that point. The utter breakdown of +the _fiat_ theory came in Rhode Island, and in connection with the +Continental Currency, in the days before the Constitution was adopted. +On the other hand, I do not believe that those who put a banker inside +every one of us can prove that their principle has been a complete +explanation at any stage of our monetary history. But clearly +considerations like these take away all mathematical certainty from the +matter. + +The foregoing analysis makes clear, I trust, that the notion that the +money function alone can make an otherwise valueless money circulate is +untenable. There must be value from other sources as well. All that is +conceded is that there need not be a physical commodity as the basis of +the money. Value is not necessarily connected with a physical commodity. + +There is a disposition on the part of many quantity theorists to beg the +question at the outset, to assume money as circulating, without +realizing how much this assumption involves. The assumption involves the +further assumption that there are _causes_ for the circulation of money. +But the same causes which make money circulate will also be factors in +the determination of the _terms_ on which it circulates, _i. e._, the +prices. To seek then, by a new principle, the quantity theory, to +explain these prices without reference to these causes, is a remarkable +procedure. There is sometimes a disposition to do the thing quite simply +indeed: define money as the circulating medium, and, _by definition_, +you have it circulating! A rather striking case of this, which is either +tautology or circular reasoning, appears in Fisher's _Purchasing Power +of Money_ (p. 129): "Take the case, for instance, of paper money. So +long as it has the _distinctive characteristic of money,--general +acceptability at its legal value_,--and is limited in quantity, its +value will ordinarily be equal to that of its legal equivalent in gold." +(Italics mine.) + +It is not quite easy to construct, even ideally, a social psychology +which would perfectly fit the quantity theory. One would have to assume +that money circulates purely from habit, without any present _reason_ at +all. The assumption must be that the economic life runs in steady +grooves, so that quantity of goods exchanged will always be the same, or +at least, that it will always be the same proportion of the goods +produced--there must be no option of speculative holding out of the +market allowed the holder of exchangeable goods. The individuals must +have constant habits as to the _proportions_ of the money they receive +to be spent and to be held for emergencies. All the factors affecting +"velocity" of both money and goods must be constant--Professor Fisher +maintains very explicitly that velocities, both of money and of +bank-deposits are fixed by habit (_loc. cit._, p. 152),--and, in any +case, the assumption is necessary. A thoroughly mechanical situation +must be assumed, where there is the rule of blind habit. Given such a +mechanism, you pour in money at one end, and it grinds out prices at the +other end, automatically. But, strangely enough, in this social +situation where blind habit rules, prices are perfectly fluid! In India, +or in other countries where the assumptions of the quantity theorist +come most nearly to realization, so far as the general rule of habit is +concerned, one finds also many customary prices. In a country completely +under the rule of habit, the prices would, as a matter of +_psychological_ necessity, be also fixed. What might then be expected to +happen in such a country, if an economic experimenter should disturb +them in their habitual quantity of money? Which habits would give way, +those relating to prices, or those to velocities, or those relating to +quantities of goods exchanged?[124] I shall not trouble to solve this +problem, as it seems to me not the most useful way to approach the +problem of the value of money, but I submit it to the consideration of +advocates of the quantity theory. My present purpose is accomplished in +pointing out the psychological assumptions which the quantity theory +makes: a psychology of blind habit, in a situation where the price-level +is free from control by customary prices. + +Now at another point I wish to mediate between the quantity theorists +and their extreme opponents. Representatives of the Metallist of +Commodity School--like Professor Laughlin, and Professor Scott in his +earlier writings--seem to deny that the money-employment has any direct +effect in increasing the value of money. The money-employment affects +the value of money only indirectly, by withdrawing the money metal from +the arts, so raising the value of the money metal, and consequently +raising the value of the coined metal. The quantity theory, on the other +hand, would utterly divorce the value of money from causal dependence on +the stuff of which the money is made. Both these views seem to me +extreme. Unless money has value from some source other than the money +employment, it cannot be used as money at all. Nobody will want it. On +the other hand, the money use is a valuable use. Exchange is a +productive process. Money, as a tool of exchange, enables men to create +values. And you can measure the value of the money service very easily +at a given time if you look at the short time "money-rates," _i. e._, +rates of discount on prime short term paper. These are properly to be +considered, not interest on abstract capital, but the rent of a +particular capital-good, namely, money. The money is hired for a +specific service, namely, to enable a man to get a specific profit in a +commercial transaction. Money is not the only good which can be thus +employed, and which is paid for for this purpose. Ordinarily a man will +pay for money for this purpose. Sometimes, however, one needs the +temporary use of something else more than one needs money, and the +holder of money pays a premium for the privilege of temporarily holding +the other thing. I refer especially here to the practice of "borrowing +and carrying" on the stock exchange. The "bear" sells stock which he +does not possess, and must deliver the stock before he is ready to close +his transaction by buying to "cover." He goes to a "bull" who has more +stock than he can easily "carry," and who is glad to "lend" the stock in +return for a "loan" of its equivalent in money. Ordinarily the bull is +glad to pay a price for the money, as it is of service to him. +Sometimes, however, the situation is reversed, and the service which the +temporary loan of the stock performs for the hard-pressed bears is +greater than the service which the money performs for the bulls, and the +payment is reversed. When the bull pays a premium to the bear, for the +use of the money, the amount paid is called "carrying charge," "interest +charge for carrying," "contango," (London) or (in Germany) "_Report_." +This is the usual case. But sometimes the bear pays the bull a premium +for the use of the stock, and the charge is then called "premium for +use," "backwardation," (London) or "_Deport_" (Germany).[125] Money is, +thus, not the only thing which has a "use" in addition to the ordinary +"uses" which are the primary source of its value.[126] In the case of +other things, however, this kind of "use" is unusual. In the case of +money it is the primary use. The essence of this use is to be found in +the employment of a quantum of _value_ in highly saleable form in +facilitating commercial transactions. Commercial transactions, in this +sense, are not limited to ordinary buying and selling. I think it best +to defer further analysis of the money service to a later chapter, on +the functions of money, which will best be preceded by a consideration +of the origin of money. For the present, it is enough to note that money +has certain characteristics which enable it to facilitate exchanges, and +to pay debts, better than anything else, and that this fact makes an +addition to its value. It is possible, I think, to measure this addition +to value rather precisely in certain cases. Thus, in the case of the +American Greenbacks, we find them at a discount, say from the beginning +of 1877 on, as compared with the gold dollar in which they were to be +redeemed in Jan. 1879. I think it safe to contend that the country was +practically free from doubt as to their redemption after the early part +of 1877. The discount steadily diminished as the time of redemption +approached. Laughlin's theory is thus far beautifully vindicated. The +central fact governing the value of the Greenbacks during this period +was the prospect of redemption. But, and here I think we see the +influence of the money-use, the discount was not as great as would have +been called for by the prevailing rate of interest, as measured by the +yield on other obligations of the Federal Government, at this time. And +the discount completely disappeared some little time before the actual +redemption. I see no cause for the absence of a discount in the later +months of 1878 except the additional value which came from the money +use. This additional value is, ordinarily, not very great. And money is +not alone in possessing it. In extraordinary circumstances it may become +quite large. Thus, in 1873, in the midst of the panic, the gold premium +fell sharply. At this time the significance of the Greenbacks as a legal +tender, a means of final payment of obligations (_Zahlungs_- or +_Solutions-mittel_), as distinguished from medium of exchange +(_Tauschmittel_), attained an unusual significance. In ordinary times, +the marginal value of this function of money sinks to zero, but in +emergencies it may become very great. In ordinary times, during the +Greenback period, uncoined gold bullion, or gold coin used, not as +money, but simply by weight in exchanges, played an important rôle, +competing with the Greenbacks in various employments, particularly as +bank reserves, and as secondary bank reserves, and so reducing the +marginal value of the money-employment of the Greenbacks themselves. +Gold bullion is not the only thing which can thus serve, however. +To-day, and generally, securities with a wide market, capable of being +turned quickly into cash, without loss, or capable of serving as the +basis of collateral loans, up to a high percentage of their value, have +a much higher value, for a given yield, than have other securities, +equally safe, but less well-known and less easily saleable. The +"one-house bond" (_i. e._, the bond for which only one banking house +offers a ready market) must yield a great deal more to sell at a given +price than the bond of equal security which is listed on the exchanges, +and has a wide market. Part of this is in illustration of another +function of money, the "bearer of options" function, which enables the +holder to preserve his wealth, and at the same time keep options for +increasing its amount when bargains appear in the market. Foreign +exchange performs many of these functions of money in European +countries, particularly Austria-Hungary.[127] + +The notion that the whole value of gold coin rests on its bullion +content arises most easily in a situation where free coinage has long +been practiced, and where there are no legal obstacles to the melting +down of coin for other uses. Where free coinage is suspended, the +peculiar services which only money can perform--or rather, the services +which money has a differential advantage in performing--may easily lead +to an agio for coined over uncoined metal. The mere fact that coined +metal is of a definite fineness well known and attested is often of some +consequence, though the attestation of well-known jewelers may give this +advantage to metal bars as well, for large transactions. But for smaller +transactions, nothing can easily take the place of money. A high premium +on small coins, apart from redemption in standard money, may easily +arise from the money-use alone. And standard coin may well attain, in +greater or less degree, a premium. If it is scarce, as compared with the +amount of business to be done, this premium may well be greater than if +it is abundant. But that an indefinite premium is possible, or that this +premium varies exactly and inversely with the quantity, I see no reason +at all for supposing. If the premium be great enough, men, especially in +large transactions, will make use of the uncoined metal--just as they +did use gold in this country during the Greenback period. The advantages +of money are not absolute. Money is simply more convenient for many +purposes than other things. The possibility of a premium is limited by +the possibility of substitutes. It is further limited by the fact that a +high premium would awaken a distrust which would bring the premium to +destruction, by destroying trade, and so destroying the money-use on +which the premium is based. + +A detailed discussion of the Indian Rupee since 1893 lies outside the +scope of this chapter. I think it may be well, however, to recognize at +this point that the limitation in the quantity of the rupee, through +abrogation of free coinage, was a factor in the subsequent rise in its +value. It was not the only factor, by any means. But it was a factor. It +may be also recognized as a factor in the value of Austrian paper money. + +The doctrine just laid down, as to the influence of the money-use in +adding to the value of money, is in no sense the same as the quantity +theory. For one thing, it is easily demonstrated that the value-curve +for the uses of money is not described by the equation, _xy_ = _c_. This +curve expresses, in terms of value, the idea of proportionality which is +an essential part of the quantity theory. Put in terms of the money +market, we have a demand-curve for money, not for the long-time +possession of money, but for its temporary use--a rental, rather than a +capital value, is expressed in the price which this curve helps to +determine. This curve is highly elastic. When money-rates are low, +transactions will be undertaken which will not be undertaken when the +rate is a little higher. In the second place, the method of approach is +very different. It is not the whole volume of transactions which must +employ money, but only a flexible part. In the third place, the +money-use is here conceived of as a source, not of the whole value of +money, but only of a differential portion of that value. In the fourth +place, the argument runs in terms of the absolute value of money, and +not in terms of the level of prices. + +It is not the legal peculiarity of money, as legal tender, which is +necessarily responsible for this agio when it appears. In the first +place, not all money is legal tender. In the second place, we find the +same phenomenon in connection with "bank-money" at times--I would refer +especially to the premium on the _marc banko_ of the Hamburg Girobank. +(_Cf._ Knapp, _Staatliche Theorie des Geldes_, p. 136.) The legal tender +peculiarity may, however, in special circumstances be a source of a very +considerable temporary agio. + +It is possible, however, to frame a hypothetical case in which, barring +temporary emergencies, the money-use will add nothing to the value of +money, and in which the whole value of money will come from the value of +the commodity chosen as the standard of values. Assume that the standard +of value is defined as a dollar, which is further defined as 23.22 +grains of pure gold. Assume, however, that no gold is coined. Let the +circulating money be made of paper. Let this paper be redeemable, not in +gold, but in silver, at the market ratio, on the day of redemption, of +silver to gold. This will mean that varying quantities of silver will be +given by the redeeming agencies for paper, but always just that amount +required to procure 23.22 grains of gold. Let us assume, further, that +the government issues paper money freely on receipt of the same amount +of silver. Assume, further, that the government bears the charges which +the friction of such a system would entail, by opening numerous centres +of issue and redemption, by providing insurance against fluctuations in +the ratio of silver to gold for a reasonable time before issue and after +redemption, meeting transportation charges, brokerage fees, etc. In such +a case, the standard of value would not be used as money at all. It +would have no greater value than it would if it were not the standard of +value--abstracting from the fact that in the one case it might be used +in its uncoined form as a substitute for money more freely than in the +other. In any case, it would form no part of the quantity of money. Its +whole value would come from its commodity significance. The value of the +paper money, however, would be tied absolutely to the value of gold. As +gold rose in value, the paper money would rise in value, and vice versa. +The quantity of money would be absolutely irrelevant as affecting its +value. The quantity of silver would be likewise irrelevant. The +causation as between quantity of money and value of money would be +exactly the reverse of that asserted by the quantity theory. A high +value of money would mean lower prices. With lower prices, less money +would be needed to carry on the business of the country. Paper would +then be superabundant. But in that case, paper would rapidly be sent in +for redemption, and the quantity of money would be reduced.[128] The +value of money would control the quantity of money. The standard of +value, which was not the medium of exchange, would control the value of +money, and so the level of prices, in so far as the level of prices is +controlled from the money side. + +In this hypothetical illustration, we have the extreme case of what the +Commodity or Metallist School seems to assert. In this case, barring +temporary emergencies too acute to admit of increasing the money-supply +by the method described, their theory that the value of money comes +wholly from the commodity value of the standard, would offer a complete +explanation. I offer this illustration as the antithesis of the +dodo-bone illustration of Nicholson. That illustration sets forth the +extreme claims of the quantity theory, and purports to be a case in +which the quantity theory would work perfectly. The case illustrative of +the commodity theory clearly brings out the fact that that theory rests +on exclusive attention to the standard of value function of money. The +dodo-bone theory gives exclusive attention to, but very imperfect +analysis of, the medium of exchange function. But I submit that the +extreme case of the commodity theory, in the illustration I have given, +is a thinkable and consistent system. It would work--even though not +conveniently. Indeed, it resembles in essentials the plan actually +proposed by Aneurin Williams, and later by Professor Irving Fisher[129] +for stabilizing the value of money. Substitute a composite commodity for +gold, and gold for silver, in the illustration, and you have the +essentials of that plan. The dodo-bone hypothesis, however, as I have +been at elaborate pains to show in the foregoing, is unthinkable. It +would not work. It is, thus, possible to construct a system for which +the commodity theory would offer a complete explanation. It is not +possible to do this for the quantity theory. + +But the limiting case for the commodity theory is not the actual case. +Standard money is also commonly a medium of exchange. Standard money is +particularly desirable in bank and government reserves. Its employment +in these and other ways is a valuable employment, and adds directly to +its value both as money and in the arts. There is a marginal equilibrium +between its values in the two employments. The notion that the only way +in which the money employment adds to the value of money is an indirect +one, by withdrawing gold from the arts, so lessening its supply and +raising its value there, may be proved erroneous by this consideration: +what, in that case, would determine the margin between the two +employments? What force would there be to withdraw gold from the arts at +all? Why should more rather than less be withdrawn? There must be +ascending curves on both sides of the margin. Gold money in small amount +has a high significance per unit in the money employment. A greater +amount has a smaller significance per unit. The marginal amount of gold +put to work as money has a comparatively low significance in that +employment--a significance just great enough to secure it from the +competing employments in the arts. + + * * * * * + +We conclude, then, that money must have value to start with, from some +source other than the money function, and that there must always be some +source of value apart from the money function, if money is to circulate, +or to serve as money in other ways. But this is not to assert the +doctrine of the commodity school, that its value must arise from the +metal of which it is made, or in which it is expected to be redeemed. +Nor is it to deny that the money function may add to the original value. +On the contrary, the services which money performs are valuable +services, and add directly, under conditions which we shall analyze more +fully in a later chapter on the functions of money, to the value derived +from non-pecuniary sources. Value is not physical, but psychical. And +value is not bound up inseparably with labor-pain or marginal utility. + + + + +CHAPTER VIII + +THE "EQUATION OF EXCHANGE" + + +In Professor Irving Fisher's _Purchasing Power of Money_[130] we have +the most uncompromising and rigorous statement of the quantity theory to +be found in modern economic literature. We have, too, a book which +follows the logic of the quantity theory more consistently than any +other work with which I am acquainted. The book deals with the theory +more elaborately and with more detail than any other single volume, and +sums up most of what other writers have had to say in defence of the +quantity theory. Professor Fisher's book has, moreover, received such +enthusiastic recognition from reviewers and others as to justify one in +treating it as the "official" exposition of the quantity theory. Thus, +Sir David Barbour cites Professor Fisher as the authority on whom he +relies for such justification of the theory as may be needed,[131] while +Professor A. C. Whitaker declares that he adopts "without qualification +the whole body of general monetary theory" for which Professor Fisher +stands.[132] Professor J. H. Hollander has recently referred to +Professor Fisher's work on money and prices as a model of that +combination of theory and inductive verification which constitutes real +science.[133] The _American Economic Review_ presents as an annual +feature Professor Fisher's "Equation of Exchange." + +Not all, by any means, of those who would call themselves quantity +theorists would concur in Professor Fisher's version of the +doctrine--Professor Taussig, notably, introduces so many qualifications, +and admits so many exceptions, that his doctrine seems to the present +writer like Professor Fisher's chiefly in name. But there is no other +one book which could be chosen which would serve nearly as well for the +"platform" of present-day quantity theorists as _The Purchasing Power of +Money_. Partly for that reason, and partly because the book lends itself +well to critical analysis, I shall follow the outline of the book in my +further statement and criticism of the quantity theory, indicating +Professor Fisher's views, and indicating the points at which other +expositions of the quantity theory diverge from his, setting his views +in contrast with those of other writers. We shall find that this method +of discussion will furnish a convenient outline on which to present our +final criticisms of the quantity theory, and parts of the constructive +doctrine of the present book. + +First, Professor Fisher presents in the baldest possible form the +dodo-bone doctrine. The quality of money is irrelevant. The sole +question of importance is as to its quantity--the number of +money-units.[134] I shall not here discuss this point, as a previous +chapter has given it extended analysis, except to repeat that it is in +fact an essential part of the quantity theory. If the _quality_ of money +is a factor, a necessary factor, to consider, then obviously we have +something which will disturb the mechanical certainty of the quantity +theory. Professor Fisher is thoroughly consistent with the spirit of his +general doctrine on this point. + +Second, Professor Fisher has no absolute value in his scheme. By the +value of money he means merely its purchasing power, and by its +purchasing power he means nothing more than the fact that it does +purchase: the purchasing power of money is defined as the reciprocal of +the level of prices, "so that the study of the purchasing power of money +is identical with the study of price levels." (_Loc. cit._, p. 14.) In +this, again, Professor Fisher is absolutely true to the spirit and logic +of the quantity theory doctrine. The equilibration of numbers of goods, +and numbers of dollars, in a mechanical scheme, gives prices--an average +of prices, and nothing else. Any psychological values of goods or of +dollars would upset the mechanism, and mess things up. They are properly +left out, if one is to be happy with the quantity theory. Fisher, in +discussion of Kemmerer's _Money and Credit Instruments_, has criticised +the exposition of the utility theory of value with which Kemmerer +prefaces his exposition of the quantity theory, as "fifth wheel." I +agree thoroughly with Fisher's view in this, and would add that the only +reason that it has made Kemmerer little trouble in the development of +his quantity theory is that he has made virtually no use of it there! +The two bodies of doctrine, in Kemmerer's exposition, are kept, on the +whole, in separate chapters, well insulated. Coupled with this purely +relative conception of the value of money, however, there is, in +Fisher's scheme, an effort to get an absolute out of it: the general +price-level is declared to be independent of, and causally prior +to,[135] the particular prices of which it is an average. I mention this +remarkable doctrine here, reserving its discussion for a later +chapter.[136] + +A further feature of Professor Fisher's system, to which especial +attention must be given, is the large rôle played in it by the "equation +of exchange." This device has been used by other writers before him, +notably by Newcomb, Hadley, and Kemmerer, receiving at the hands of the +last named an elaborate analysis. But Fisher, basing his work on +Kemmerer's, has made even more extensive use of the "equation of +exchange," and has given it a form which calls for special +consideration.[137] The "equation of exchange," on the face of it, makes +an exceedingly simple and obvious statement. Properly interpreted, it is +a perfectly harmless--and, in the present writer's opinion, +useless--statement. It gives rise to complications, however, as to the +meaning of the algebraic terms employed, which we shall have to study +with care. The starting point is a single exchange: a person buys 10 +pounds of sugar at seven cents a pound. "This is an exchange transaction +in which 10 pounds of sugar have been regarded as equal to 70 cents, and +this fact may be expressed thus: 70 cents = 10 pounds of sugar +multiplied by 7 cents a pound. Every other sale and purchase may be +expressed similarly, and by adding them all together we get the equation +of exchange _for a certain period in a given community_."[138] The money +employed in these transactions usually serves several times, and hence +the money side of the equation is greater than the total amount of money +in circulation. In the preliminary statement of the equation of +exchange, foreign trade, and the use of anything but money in exchanges +are ignored, but later formulations of the equations are made to allow +for them. "The equation of exchange is simply the sum of the equations +involved in all individual exchanges in a year.... And in the grand +total of all exchanges for a year, the total money paid is equal in +value to the total value of the goods bought. The equation thus has a +money side and a goods side. The money side is the total money paid, +and may be considered as the product of the quantity of money multiplied +by its rapidity of circulation. The goods side is made up of the +products of quantities of goods exchanged multiplied by their respective +prices." + +Letting M represent quantity of money, and V its velocity or rapidity +of circulation, p, p´, p´´, etc., the average prices for the period of +different kinds of goods, and Q, Q´, Q´´, etc., the quantities of +different kinds of goods, we get the following equation: + + MV = pQ + p´Q´ + p´´Q´´ + etc.[139] + +"The right-hand side of this equation is the sum of terms of the form +pQ--a price multiplied by the quantity bought."[140] The equation may +then be written, + +MV = [Greek: S] pQ (Sigma being the symbol of summation). + +The equation is further simplified[141] by rewriting the right-hand +side as PT, where P is the weighted _average_ of all the +p's, and T is the _sum_ of all the Q's. "P then represents in +one magnitude the level of prices, and T represents in one +magnitude the volume of trade." + +It may seem like captious triviality to raise questions and objections +thus early in the exposition of Professor Fisher's doctrine. And yet, +serious questions are to be raised. First, in what sense is there an +equality between the ten pounds of sugar and the seventy cents? Equality +exists only between _homogeneous_ things. In what sense are money and +sugar homogeneous? From my own standpoint, the answer is easy: money and +sugar are alike in that both are _valuable_, both possess the attribute +of economic social value, an absolute quality and quantity. The degree +in which each possesses this quality determines the exchange relation +between them. And the degree in which each other good possesses this +quality, taken in conjunction with the value of money, determines every +other particular price. Finally, an average of these particular prices, +each determined in this way, gives us the general price-level. The value +of the money, on the one hand, and the values of the goods on the other +hand, are both to be explained as complex social psychological forces. +But when this method of approach is used, when prices are conceived of +as the results of organic social psychological forces, there is no room +for, or occasion for, a further explanation in terms of the mechanical +equilibration of goods and money. Professor Fisher, as just shown, very +carefully excludes this and all other psychological approaches to his +problem of general prices, and has no place in his system for an +absolute value. In what sense, then, are the sugar and the money equal? +Professor Fisher says (p. 17), that the equation is an equation of +values. But what does he mean by values in this connection? Perhaps a +further question may show what he _must_ mean, if his equation is to be +intelligible. That question is regarding the meaning of T. + +T, in Professor Fisher's equation, is defined as the sum of all the Q's. +But how does one sum up _pounds_ of _sugar_, _loaves_ of _bread_, _tons_ +of _coal_, _yards_ of _cloth_, etc.? I find at only one place in +Professor Fisher's book an effort to answer that question, and there it +is not clear that he means to give a general answer. He needs units of Q +which shall be homogeneous when he undertakes to put concrete figures +into his equation for the purpose of comparing index numbers and +equations for successive years. "If we now add together these tons, +pounds, bushels, etc., and call this grand total so many 'units' of +commodity, we shall have a very arbitrary summation. It will make a +difference, for instance, whether we measure coal by tons or +hundred-weights. The system becomes less arbitrary if we use, as the +unit for measuring any goods, not the unit in which it is commonly sold, +but the amount which constitutes a 'dollar's worth' at some particular +year called the base year" (p. 196). If this be merely a device for the +purpose of handling index numbers, a convention to aid mensuration, we +need not, perhaps, challenge it. The unit chosen is, in that case, after +all a fixed physical quantity of goods, the amount bought with a dollar +in a given year, and remains fixed as the prices vary in subsequent +years. That it is more "philosophical" or less "arbitrary" than the more +common units is not clear, but, if it be an answer, designed merely for +the particular purpose, and not a general answer, it is aside from my +purpose to criticise it here. If, however, this is Professor Fisher's +_general_ answer to the question of the method of summing up T, if it is +to be employed in his equation when the question of _causation_, as +distinguished from _mensuration_, is involved, then it represents a +vicious circle. If T involves the price-level in its definition, then T +cannot be used as a causal factor to explain the price-level. I shall +not undertake to give an answer, where Professor Fisher himself fails to +give one, as to his meaning. I simply point out that he himself +recognizes that the summation of the Q's is arbitrary without a common +unit, and that the only common unit suggested in his book, if applied +generally, involves a vicious circle. + +What, then, is T? Perhaps another question will aid us in answering +this. What does it mean to _multiply_ ten pounds of sugar by seven +cents? What sort of product results? Is the answer seventy pounds of +sugar, or seventy cents, or some new two-dimensional hybrid? One +multiplies feet by feet to get _square_ feet, and square feet by feet to +get cubic feet. But in general, the multiplication of _concrete_ +quantities by _concrete_ quantities is meaningless.[142] One of the +generalizations of elementary arithmetic is that concrete quantities may +usually be multiplied, not by other concrete quantities, but rather by +_abstract_ quantities, pure numbers. Then the product has meaning: it is +a concrete quantity of the same denomination as the multiplicand. If the +Q's, then, are to be multiplied by their respective p's, the Q's must be +interpreted, not as bushels or pounds or yards of concrete goods, but +merely as abstract numbers. And T must be, not a sum of concrete goods, +but a sum of abstract numbers, and so itself an abstract number. Thus +interpreted, T is equally increased by adding a hundred papers of +pins,[143] a hundred diamonds, a hundred tons of copper, or a hundred +newspapers. This is not Professor Fisher's rendering of T, but it is the +only rendering which makes an intelligible equation. + +We return, then, to the question with which we set out: in what sense is +there an equality between the two sides of Professor Fisher's equation? +The answer is as follows: on one side of the equation we have M, a +quantity of money, multiplied by V, an abstract number; on the other +side of the equation, we have P, a quantity of money, multiplied by T, +an abstract number. The product, on each side, is a _sum of money_. +These sums are equal. They are equal because they are _identical_. The +equation asserts merely that what is _paid_ is equal to what is +_received_. This proposition may require algebraic formulation, but to +the present writer it does not seem to require any formulation at all. +The contrast between the "money side" and the "goods side" of the +equation is a false one. There is no goods side. Both sides of the +equation are money sides. I repeat that this is not Professor Fisher's +interpretation of his equation. But it seems the only interpretation +which is defensible. + +A further point must be made: Sigma pQ, where the Q's are interpreted as +abstract numbers, is a summary of concrete money payments, each of which +has a causal explanation, and each of which has effected a concrete +exchange. Mathematically, PT is equal to [Greek: S] pQ, just as 3 times +4 is equal to 2 times 6. But from the standpoint of the theory of +causation, a vast difference is made. Three children four feet high +equal in aggregate height two men six feet high. But the assertion of +equality between the three children and the two men represents a high +degree of abstraction, and need not be significant for any given +purpose. Similarly, the restatement of [Greek: S] pQ as PT. One might +restate [Greek: S] pQ as PT, defining P as the _sum_ (instead of the +average) of the p's, and T as the weighted average (instead of the sum) +of the Q's. Such a substitution would be equally legitimate, +mathematically, and the equation, MV = PT equally true. [Greek: S] pQ +might be factorized in an indefinite number of ways. But it is important +to note that in PT, as defined by Professor Fisher,[144] we are at three +removes from the concrete exchanges in which actual concrete causation +is focused: we have first taken, for each commodity, an average, for a +period, say a year, of the concrete prices paid for a unit of that +commodity, and multiplied that average by the abstract number of units +of that commodity sold in that year; we have then summed up all these +products into a giant aggregate, in which we have mingled hopelessly a +mass of concrete causes which actually affected the particular prices; +then, finally, we have factorized this giant composite into two numbers +which have no concrete reality, namely, an average of the averages of +the prices, and a sum of the abstract numbers of the sums of the goods +of each kind sold in a given year--a sum which exists only as a pure +number, and which, consequently, is unlikely to be a causal factor! It +may turn out that there is reason for all this, but if a _causal_ theory +is the object for which the equation of exchange is designed, a strong +presumption against its usefulness is raised. Both P and T are so highly +abstract that it is improbable that any significant statements can be +made of either of them. As concepts gain in generality and abstractness, +they lose in content; as they gain in "extension" they lose (as a rule) +in "intension." On the other side of the equation, we also look in vain +for a truly concrete factor. V, the average velocity of money for the +year, is highly abstract. It is a mathematical summary of a host of +complex activities of men. Professor Fisher thinks that V obeys fairly +simple laws, as we shall later see, but at least that point must be +demonstrated. Even M is not concrete. At a given moment, the money in +circulation is a concrete quantity, but the average for the year is +abstract, and cannot claim to be a direct causal factor, with one +uniform tendency. Of course Professor Fisher himself recognizes that his +central problem is, not to state and justify, mathematically, his +equation[145]--that is a work of supererogation, and the statistical +chapters devoted to it seem to me to be largely wasted labor. Professor +Fisher recognizes that his central problem is to establish _causal_ +relations among the factors in his equation of exchange. It is from the +standpoint of its adaptability as a tool in a theory of causation that I +have been considering it. It should be noted that "volume of trade," as +frequently used, means not numbers of goods sold, but the money-price of +all the goods exchanged, or PT. It is in this sense of "trade" that +bank-clearings are supposed to be an index of volume of trade. The +sundering of the p's and Q's really is a big assumption of many of the +points at issue. Indeed, it is absolutely impossible to sunder PT. It is +always the p aspect of the thing that is significant, Fisher himself +finally interprets T, statistically, as billions of _dollars_.[146] As a +matter of mathematical necessity, either P must be defined in terms of T +or T defined in terms of P. The V's and M and M´ may be independently +defined, and arbitrary numbers may be assigned for them limited only by +the necessity that MV + M´V´ be a fixed sum.[147] But P and T cannot, +with respect to each other, be thus independently defined. The highly +artificial character of T has been pointed out by Professor E. B. +Wilson, of the Massachusetts Institute of Technology, in his review of +Fisher's _Purchasing Power of Money_ in the _Bulletin of the American +Mathematical Society_, April, 1914, pp. 377-381. "Various consequences +are readily obtained from the equation of exchange, but the +determination of the equation itself is not so easy as it might look to +a careless thinker. The difficulties lie in the fact that P and T +individually are quite indeterminate. An average price-level P means +nothing till the rules for obtaining the average are specified, and +independent rules for evaluating P and T may not satisfy [the equation.] +For instance, suppose sugar is 5c. a pound, bacon 20c. a pound, coffee +35c. a pound. The average price is 20c. If a person buys 10 lbs. of +sugar, 3 lbs. of bacon, and 1 lb. of coffee, the total trading is in 14 +lbs. of goods. The total expenditure is $1.45; the product of the +average price by the total trade is $2.80; the equation is very far from +satisfied." Wilson thinks it necessary, to make the matter straight, to +define T, arbitrarily as (MV + M´V´)/P in which case, the equation is +true, but so obviously a truism that no one would see any point in +stating it. T no longer has any independent standing. Fisher has, +however, an escape from this status for T, but only by reducing P to the +same position. He defines P as the _weighted_ average of the p's (27), +and fails, I think, to see how completely this ties it up with T. The +only method of weighting the p's that will leave the equation straight +is to weight the different prices by the number of units of each kind of +good sold, namely, T. Thus, in Wilson's illustration, we would define P +as [(5c.×10) + (20c.×3) + (35c.×1)]/14 P is then 10-5/14 c., while T is +14. PT is, then, equal to $1.45, which is the total expenditure, or MV + +M´V´. Be it noted, here, that P is defined in terms of T, _i. e._, P is +defined as a fraction, the denominator of which is T. No other +definition of P will serve, if T is to be defined independently. + +But notice the corollary. P must be differently defined each year, for +each new equation, as T changes in total magnitude, and as the elements +in T are changed. The equation cannot be kept straight otherwise. +Suppose that the prices remain unchanged in the next year, but that one +more pound of coffee, and two less pounds of sugar are sold. P, as +defined for the equation of the preceding year would no longer fit the +equation. P, as previously defined, would be unaltered, since none of +the prices in it had changed. P, defined as a weighted average with the +weights of the first year, would, then, still be 10-5/14 cents. The T in +the new equation is 13. The product of P and T is $1.34-9/14. But the +total expenditure, (MV + M´V´) is $1.70. The equation is not fulfilled. +To fulfill the equation, it is necessary to get a new set of weights for +P, in terms of the new T of the new equation. From the standpoint of a +_causal_ theory, this is delightful. P is the _problem_. But you are +not allowed to _define_ the problem until you know what the +_explanation_ is! Then you define the problem as that which the +explanation will explain! + +Fisher, however, appears unaware of this. At all events, he does not +mention it. And he ignores it in filling out his equation statistically, +for he assigns one set of weights to the particular prices in his P +throughout.[148] + +The causal theory with which the equation of exchange is associated is +as follows: P is passive. A change in the equation cannot be initiated +by P. If P should change without a prior change in one of the other +factors, forces would be set in operation which would force it back to +its original magnitude. M and T are independent magnitudes. A change in +one does not occasion a change in the other. An increase or decrease in +M will not cause a change in V. Therefore, an increase in M must lead to +a proportionate increase in P, and a decrease in M to a proportionate +decrease in P, if the equation is to be kept straight. Changes in T have +opposite proportional effects on P. + +Before examining the validity of the causal theory, and the arguments by +which it is supported, it will be best to state the more complex formula +which Professor Fisher advances as expressing the facts of to-day. The +original formula ignored credit, and ignored the possibility of resort +to barter. It also failed to reckon with certain complications which +Fisher deals with as "transitional" rather than "normal." + +The formula which includes credit is as follows: + + MV + M´V´ = PT + +Here, MV and PT have the same significance as before. M´ is the average +amount of bank-deposits in the given region for the given period, and +V´ is the velocity of circulation of those deposits. M, money, consists +of all the media of exchange in circulation which are _generally_ +acceptable, as distinguished from those which are acceptable under +particular conditions, as by endorsement. M excludes money in bank +reserves and government vaults. Money, specifically, includes gold and +silver coin, minor coins, government paper money, and bank-notes; M´ +consists of deposits transferable by check. This version would not +satisfy such a writer as Nicholson,[149] who would limit money to gold +coin, and would include in M´ not only deposits, but also bank-notes, +and other credit instruments. I may suggest here, what I shall later +emphasize, that Fisher's "money," though he doubtless is using the most +common definition of money, is really a pretty heterogeneous group of +things, concerning which it is possible to make few general statements +safely. In economic essence, _e. g._, bank-notes are much more like +deposits than like gold, and if one wishes to separate money and credit, +bank-notes belong with M´ rather than with M. But we must take the +theory as we find it! Again, credit is by no means exhausted when +bank-deposits are named. Why should not book-credits, and bills of +exchange be included? Why not postal money-orders, why not deposits +subject to transfer by the giro-system? M´ is defined[150] as "the total +deposits subject to transfer by check," and would, thus, exclude the +giro-system of Germany. It is surely a very provincial equation of +exchange, with which Fisher and Kemmerer seek to set forth the universal +laws of money! Fisher's reason for excluding book-credits is that +book-credits merely postpone, and do not dispense with, the use of money +and checks.[151] Book-credits, unlike deposits, have no _direct_ effect +on prices (_Ibid._, 82, n.; 370), but only an indirect effect, by +increasing the velocity of money. (_Ibid._, 81-82; 370-371.) +Book-credit, indeed "time-credit" in general thus has no direct effect +on prices, and is properly excluded from the equation of exchange. These +distinctions seem to me highly artificial. In the first place, the use +of checks, in part, merely postpones the use of money: money is moved +back and forth from one part of the country to another, and from one +bank to another, to the extent that checks fail to offset one another, +and in the case of book-credit, while there is less of this offsetting, +there is a good deal of it, especially between stockbrokers in different +cities, and in small towns and at country stores, and particularly in +the South, where the country storekeeper and "factor" are also dealers +in cotton, etc., and where they advance provisions during the year to +the small farmers, receiving their pay, in considerable degree, not in +money, but in cotton, which they credit on the books in terms of money +to the customer--a point which Fisher mentions in an appendix. (_Ibid._, +p. 371.) The difference on this point is a difference in degree +merely.[152] Further, Fisher makes the same point with reference to +deposits subject to check that he makes with reference to book-credits, +namely, that their use increases the velocity of money. To say that one +has a _direct_ effect on prices, and the other only an indirect effect +is absolutely arbitrary. If buying and selling are what count, if prices +are forced up by the offer of money or credit for goods, and forced down +as the amount of money and credit offered for goods is reduced, then one +exchange must count for as much as any other of like magnitude in fixing +prices. The same is true of transactions in which bills of exchange or +other credit devices serve as media of exchange. Of course these +considerations do not render the equation of exchange, as presented by +Fisher, untrue. The equation simply states that the money and +bank-deposits used in paying for goods in a given period are equal to +the amount paid for those goods in a given period. It makes no assertion +concerning payments for other goods, and makes no assertion as to the +amount of other transactions which are paid for in other ways. General +Walker, presented with the problem of credit phenomena, simplifies the +thing even more.[153] He rules out all exchanges which are effected by +credit devices, counting only those performed by coin, bank-notes and +government paper money, and insists that the general price-level is +determined in those exchanges in which money alone (as thus defined) is +employed. His equation--if he had considered it worth while to use +one--would then have been simply + + MV = PT + +where T would be merely the number of goods exchanged by means of money. +One could make a similar equation, equally true, by defining money as +gold coin, and reducing T correspondingly. Is there any reason for +limiting the equation at all?[154] Is there any reason for supposing +that any one set of exchanges is more significant for the determination +of the price-level than any other set of exchanges? Does not the logic +of the quantity theory require us to include all exchanges which run in +terms of money?--If one wishes a complete picture of the exchanges, some +such equation as this would be necessary: + + MV + M´V´ + BV´´ + EV´´´ + OV´´´´ = PT, + +where B represents book-credit, V´´ the number of times a given average +amount of book-credit is used in the period, E bills of exchange, and +V´´´ their velocity of circulation, and O all other substitutes for +money, with V´´´´ as their velocity of circulation. Even then we have +not a complete picture, if direct barter or the equivalents of barter +can be shown to be important. + +For the present, I waive a discussion of the comparative importance of +these different methods of conducting exchanges. The situation varies +greatly with different countries. Fisher's and Kemmerer's equations are +at best plausible when presented as describing American conditions, are +much less plausible when applied to Canada and England, and are +caricatures when applied to Germany and France. + +So much for the statement of the equation of exchange, except that it is +important to add that the period of time chosen for the equation is one +year. Just why a year, rather than a month or two years or a decade +should be chosen, may await full discussion till later. I shall venture +here the opinion that the yearly period is not the period that should +have been chosen from the standpoint of Fisher's causal theory, and +that it probably was chosen, if for any conscious reason at all, because +of the fact that statistical data which Fisher wished to put into it are +commonly presented as annual averages. The question now is, however, as +to the use to be made of the equation in the development of a causal +theory. + + + + +CHAPTER IX + +THE VOLUME OF MONEY AND THE VOLUME OF CREDIT + + +John Stuart Mill, who first among the great figures in economics gives a +realistic analysis of modern credit phenomena, thought that credit acts +on prices in the same way that money itself does[155] and that this +reduces the significance of the quantity theory tendency greatly, and to +an indeterminate degree. The quantity theory is largely whittled away in +Mill's exposition of the influence of credit. In Fisher we have a much +more rigorous doctrine. The quantity of money still governs the +price-level, because M governs M´. The volume of bank-deposits depends +on the volume of money, and bears a pretty definitely fixed ratio to it. +Just how close the relation is, Professor Fisher does not say, but the +greater part of his argument, especially in ch. 8,[156] rests on the +assumption that the ratio is very constant and definite indeed. At all +events, the importance of the theory, as an explanation of concrete +price-levels, will vary with the closeness of this connection, and the +invariability of this ratio. It is not too much to say _that the book +falls with this proposition_, to wit, that M controls M´, and that there +is a fixed ratio between them. We would expect, therefore, a very +careful and full demonstration of the proposition, a care and fullness +commensurate with its importance in the scheme. But the reader will +search in vain for any proof, and will find only two propositions which +purport to be proof. These are: (1) that bank reserves are kept in a +more or less definite ratio to bank deposits; (2) that individuals, +firms and corporations preserve more or less definite ratios between +their cash transactions and their check transactions, and between their +cash on hand and their deposit balances.[157] + +If these be granted, what follows: the money in bank-_reserves_ is no +part of M! M is the money in circulation, being exchanged against goods, +not the money lying in bank-vaults![158] The money in bank-vaults does +not figure in the equation of exchange. As to the second part of the +argument, if it be granted, it proves nothing. The money in the hands of +individual and corporate depositors is by no means all of M. It is not +necessarily the greatest part. The money in circulation is largely used +in small retail trade, by those who have no bank-accounts. A good many +of the smallest merchants in a city like New York have no bank-accounts, +since banks require larger balances there than they can maintain. +Enormous quantities of money are carried in this country by laborers, +particularly foreign laborers. "The Chief of the Department of Mines of +a Western State points out that when an Italian, Hungarian, Slav or Pole +is injured, a large sum of money, ranging from fifty dollars to five +hundred or one thousand, is almost always to be found on his person. A +prominent Italian banker says that the average Italian workman saves two +hundred dollars a year, and that there are enough Italian workmen in +this country, without considering other nationalities, to account for +three hundred million dollars of hoarded money."[159] I do not wish to +attach too great importance to these figures, taken from a popular +article in a popular periodical. It is proper to point out, too, that +these figures relate to hoarded money, rather than to M, the money in +circulation. But in part these figures represent, not money absolutely +out of circulation, but rather, money with a sluggish circulation. And +they are figures of the money in the hands of poor and ignorant elements +of the population. Outside that portion of the population--larger in +this country than in any other by far[160]--which keeps checking +accounts, are a large body of people, the masses of the big cities, the +bulk of rural laborers, especially negroes, the majority of tenant +farmers, a large proportion of small farm owners, especially nominal +owners, and not a few small merchants in the largest cities, who have no +checking accounts at all. A very high percentage of their buying and +selling is by means of money. Kinley's results[161] show that 70% of the +wages in the United States are paid in cash, and, of course, the +laborers who receive cash pay cash for what they buy. (Not necessarily +at the _time_ they buy!) Money for payrolls is one of the serious +problems in times of financial panics.[162] To fix the proportion +between money in the hands of bank depositors and non-depositors is not +necessary for my purposes--_a priori_ I should anticipate that there is +no fixed proportion. But it is enough to point out that money in the +hands of depositors is not the whole of Fisher's M. Of what relevance is +it, then, to point out, even if it were true, that an unascertainable +portion of M tends to keep a definite ratio to M´, when the thing to be +proved is that the _whole_ of M tends to keep a definite ratio to M´? +Fisher's argument is a clear _non-sequitur_. If it proves anything, it +proves that a sum of money,[163] not part of M, and another sum of +money, an unknown fraction of M, each independently, for reasons +peculiar to each sum, tends to keep a constant ratio to M´. This gives +us _l'embarras des richesses_ from the standpoint of a theory of +causation! Two independent factors, bank-reserves and money in the hands +of depositors, each tending to hold bank-deposits in a fixed ratio, and +yet each moved by independent causes! By what happy coincidence will +these two tendencies work together? Or what is the causal relation +between them? And if, for some yet to be discovered reason, Professor +Fisher should prove to be right, and there should be a fixed ratio +between M as a whole and bank-deposits, would it not indeed be a miracle +if all three "fixed ratios" kept together? Bank-deposits, indissolubly +wedded to three independent variables[164] (independent, at least, so +far as anything Professor Fisher has said would show, and independent +in large degree, certainly, so far as any reason the present writer can +discover), must find their treble life extremely perplexing. May it not +be that Professor Fisher has pointed the way to the real fact, namely, +that bank-deposits are subjected to a multitude of influences, no one of +which is dominant, which prevent any fixed ratio between bank-deposits +and any other one thing? At a later point, I shall maintain that this +is, indeed, the case. + +Be it noted further, however, that even if we grant a fixed ratio, on +the basis of Fisher's argument, between M and M´, Fisher has offered no +jot of proof that the causation runs from M to M´. He simply assumes +that point outright. "Any change in M, the quantity of money in +circulation, _requiring as it normally does a proportional change in +M´_, the volume of deposits subject to check." (_Ibid._, p. 52, Italics +mine.) For this, no argument at all is offered. A fixed ratio, so far as +causation is concerned, might mean any one of three things: (a) that M +controls M´; (b) that M´ controls M; (c) that a common cause controls +both. Fisher does not at all consider these alternative possibilities. I +shall myself avoid a sweeping statement as to the causal relations among +the factors in the equation, because I do not think that any of the +factors is homogenous enough, as an aggregate, to be either cause or +effect of anything. But if a generalization concerning these magnitudes +were required, I should be disposed to assert that the third alternative +is the most defensible, and that to the extent that M and M´ vary +together it is under the influence of a common cause, namely, PT! That +is to say, that the volume of bank-deposits and the volume of money tend +to increase or decrease in a given market--and Fisher's theory is a +theory of the market even of a single city[165]--_because of_ increases +or decreases in PT (considered as a unitary cause rather than as two +separate factors) in that market. But I shall not put my proposition in +quite that form, as I find the factors in the equation of exchange too +indefinite for satisfactory causal theory. + +So much for the validity of Fisher's argument, assuming the facts to be +as he states them. Are the statements correct? Do banks tend to keep +fixed ratios between deposits and reserves? Do individuals, firms, and +corporations tend to keep fixed ratios between their cash on hand and +their balances in bank? Regarding this last tendency, Professor Fisher +says in a footnote on p. 50, "This fact is apparently overlooked by +Laughlin." I think it has been generally overlooked. I have found no one +who has discovered it except Professor Fisher. Certainly no depositor +whom I have consulted can find it in his own practice--and I have put +the question to "individuals, firms, and corporations." The further +statement which Professor Fisher adduces in its support does not prove +it, namely, that cash is used for small payments, and checks for large +payments.[166] It would be necessary to go further and prove that large +and small payments bear a constant ratio to one another, and further, +that velocities of money and of bank-deposits employed in these ways +bear a constant relation. If Fisher has any concrete data, of a +statistical nature, to support the doctrine of a constant ratio between +bank-balance and cash on hand in the case of individual depositors, he +has failed to put them into his book. Nor is there any statistical +evidence offered in the case of banks. It should be noted here that +finding a general average for a whole country or community would not +prove Fisher's point. General averages give no concrete causal +relations. Fisher's argument, moreover, starts with individual banks and +individual deposit-accounts (pp. 46 and 50) and generalizes the +individual practice into a community practice. He would have to offer +data as to individual cases. + +While general averages could not _prove_ the contention of a constant +ratio between reserves and deposits for individual banks, general +averages can _disprove_ the contention. A constant general average would +be consistent with wide variation in individual practices, on the +principle of the "inertia of large numbers." But if the general average +is _inconstant_, it is impossible that the individual factors making it +up should be constant. This disproof is readily at hand, both for the +ratio of deposits to reserves in the United States, and for the ratio of +demand obligations to reserves among European banks (most of which do +not make large use of the check and deposit system). + +For the United States, from 1890 to 1911, taking yearly averages, we +have a variation in the ratio of reserves to deposits of over 73% of the +minimum ratio. The ratio was 26% in 1894, and 15% in 1906. "The +juxtaposition of these extreme variations shows how inaccurate is the +assumption that the deposit currency may be treated as a substantially +constant multiple of the quantity of money in banks."[167] For New York +City, the annual average percentage of reserves of Clearing House banks +to net deposits varies from 24.89% in 1907 to 37.59% in 1894.[168] The +extreme variations[169] in weekly averages are (for the sixteen years, +1885-1900) 20.6% in August, 1893 and 45.2% in February, 1894. These +figures are extreme, since the number of occurrences is small for them, +but there are numerous occurrences of deviations from the mean as wide +apart as 24% and 42%.[170] The yearly fluctuation in all these ratios is +very great. + +The ratio of money held by the banks and money held by the people also +shows wide variation, and considerable yearly fluctuation. There is a +further complication, for the United States, of varying proportions of +the total monetary stock held by the Federal Treasury. As between the +banks and the public, the banks held about a third in 1893 (average for +the year), and nearly half in 1911.[171] Whatever may be the relations +between money in the hands of the people, money in banks, and volume of +deposits, in "the static state," there is no statistical evidence +whatever to justify the notion of fixed relations among them in real +life.[172] We shall later show that there can be no static laws whatever +governing the relations of credit and reserves.[173] + +For European banks, the case is equally clear. European bankers deny +any intention of keeping any definite reserve ratio. This appeared very +clearly in the "Interviews" obtained for the Monetary Commission with +leading European bankers.[174] The Banque de France increased its gold +reserves, between 1899 and 1910, by 75%, but increased its discounts and +advances during the same period by only 5%.[175] J. M. Keynes[176] +points out that the reserves of the great banks of the world, and of +Treasuries which act as central banks, have absorbed an enormous part of +the gold produced in the fifteen years before the War, increasing their +holdings from about five hundred million pounds sterling in 1900 to one +billion pounds sterling at the outbreak of the War. "The object of these +accumulations has been only dimly conceived by the owners of them. They +have been piled up partly as the result of blind fashion, partly as the +almost _automatic consequence_, in an era of abundant gold supply, of +the particular currency arrangements which it has been orthodox to +introduce.... The ratios of gold to liabilities vary very extremely from +one country to another, without always being explicable by reference to +the varying circumstances of those countries.... The contingencies, +against which a gold reserve is held, are necessarily so vague that the +problem of assessing the proper ratio must be, within wide limits, +indeterminate. It is natural, therefore, that bankers, who must act one +way or the other, should often fall back on mere usage or accept _that +amount of gold as sufficient_ which, _if they are chiefly passive, the +tides of gold bring them_. [Italics mine.] At any rate, the management +of gold reserves is not yet a science in most countries. There is no +ideal virtue in the present level of these reserves. Countries have got +on in the past with much less, and under force of circumstances could do +so again." + +It will be noticed that Keynes, in the passage cited, is speaking of +_gold_ reserves, while Fisher's contention relates to all kinds of money +available for reserves, which in this country would include gold, silver +dollars, greenbacks, and, for many State banks, the notes of national +banks. He is also talking of the relation of reserves to demand +_liabilities_, which for most great European banks are primarily notes, +rather than of reserves to deposits. But as an exposition of the theory +of the ratio of reserves to deposits (the chief liability of American +banks), it is applicable to American conditions, and as a statement of +the facts, it of course gives a basis for testing Fisher's doctrine +generally. I do not think that Fisher's fixed ratio, as between reserves +and deposits, or even the ratio which more moderate quantity theorists +might seek to find between gold and demand liabilities, will find any +justification in the facts of banking history.[177] + +A factor which has developed on a grand scale in recent years has tended +still further to weaken any tendency that may be supposed to exist +toward a fixed ratio between money-reserves and demand-liabilities. I +refer to the gold exchange-standard, in India, the Philippines, and +elsewhere, and to the practice of the great banks of the continental +countries of Europe, particularly the Bank of Austria-Hungary, of +holding foreign gold bills, rather than gold exclusively, as reserve to +cover note issue. In the case of the Austro-Hungarian Bank, which has +carried this practice to the extreme, all possibility of a fixed ratio +between gold reserves and demand-liabilities has vanished. The ratio is +highly flexible. When bills are cheap, _i. e._, when the exchange is "in +favor" of Austria-Hungary, the Bank buys bills with gold; when bills +are high, when the exchanges have turned "against" Austria-Hungary, the +Bank sells bills for gold. Commonly, the holder of a note of the +Austro-Hungarian Bank does not ask for it to be redeemed in gold, but in +foreign exchange. The reason for this practice on the part of the Bank +is primarily economy. A large holding of gold would represent idle +capital--a heavy burden for the Bank of a debt-ridden and poorly +developed country. Foreign bills, however, serve equally well for +maintaining the value of the bank-notes, and at the same time bear +interest.[178] A similar practice has been employed by the Reichsbank, +by the National Bank of Belgium,[179] by virtually all the debtor +countries of Europe, and the great trading countries of Asia. + +Confidence in these conclusions is much increased by a study of the +views of Professor Taussig.[180] Professor Taussig is, in his initial +formulations of his doctrine, a quantity theorist. In a situation where +only money is used, credit being excluded, in effecting exchanges, he +would hold that the quantity theory correctly accounts for prices. He is +fond of the old formulation, as a first approximation, even in dealing +with the complex facts of modern banking. But he does not dodge the +complex facts, and his theory becomes, substantially, first, a general +formula, and second, an elaborate body of qualifications and exceptions, +the latter making up the major part of the theory. His doctrine +regarding the relation of money and credit is as follows: there is, in +the long run, a real _limitation_ on elastic credit instruments in the +quantity of _specie_. (This is very different from the assertion that +there is a _fixed_ ratio between _deposits_ and _money_ in circulation, +including paper, bank-notes, etc., in money. The present writer has no +quarrel with the doctrine that the gold supply of the _world_ imposes +_outside_ limitations on the _possible_ expansion of credit.) The +limitation, Taussig holds, comes in two ways: (1), in the connection +between prices in any one country, and prices in the world at large; +(2), in various links of connection between the volume of deposits (and +of notes elastic like deposits) and the quantity of specie. I shall +consider at a later point the relation between prices in different +countries.[181] I shall there maintain that the quantity theory, which +explains gold movements on the basis of price-_levels_ in different +countries, is inadequate; that not price-levels, but particular prices, +of goods most available for international trade, are of primary +importance, and that of these particular prices, one, namely the "price +of money," or the short time money-rate, is most significant of all. For +the present, I wish to analyze the linkages which Taussig finds between +elastic credit instruments and specie, and to see how far they would go, +not in proving Taussig's point (with which I have little quarrel) but in +proving Fisher's contentions. The points involved are: (a) _Direct +necessity_ constrains the bankers to keep _some_ cash on hand.[182] This +fixes a _minimum limit_ (Taussig's contention), but does not at all +suggest a "normal ratio" (Fisher's contention). (b) _Binding custom_, as +to the proper amount of reserve that banks should carry, particularly +important in connection with the Bank of England, but also in evidence +in the Banque de France and the Reichsbank. Here again, however, +minimal, rather than fixed, ratios are suggested. Limitations on the +_expansion_ of credit these customs may impose, but they by no means +determine a normal, or average amount of credit expansion--in England +least of all, since there is so large a flexible element in the deposits +of the Joint Stock Banks, whose reserves are largely secret. The +statement _supra_ quoted from Keynes, together with the testimony of +European bankers, may be considered in connection with this point, also, +as to the factors determining the reserve policies of the great European +banks. The extent to which custom really binds is doubtful. (c) _Direct +regulation by law_, peculiar to the United States. Here again, a +minimum, rather than a fixed ratio, is indicated. Some _limitation_ on +credit expansion by the banks is caused by this at times, but Fisher's +argument would require vastly more. (d) _The interaction in the use of +deposits, notes, and other constituents in the circulating medium._ The +point involved here is that different kinds of business call for +different kind of media. Small retail business is not done with hundred +dollar bills, nor are stocks and bonds bought with pennies. Limiting the +size of bank-notes to five pounds in England compels the use of a large +amount of gold for smaller transactions, and keeps a larger amount of +gold in use than would otherwise be the case. Expanding business draws +cash from the banks for circulation, trenching on reserves. That +Professor Taussig has a point here is not to be doubted, but how closely +it limits the expansion of credit will depend on the degree to which +different kinds of media of exchange really _are_ thus specialized. In a +country like the United States, where checks may be used for virtually +any transaction of over a dollar, and where small change for less than a +dollar will be increased by the Government to meet the demands of trade, +the point would not seem to involve a practically serious limitation. + +Finally, Professor Taussig recognizes a coefficient with the quantity of +specie in the _temper of the business community_. Whether or not +deposits are to expand, depends not only on reserves, but also on the +attitude of borrowers. + +Taussig concludes: "Thus there is only a rough and uncertain +correspondence of bank expansion with bank reserves; much play for ups +and downs which have no close relation to the amount of cash in bank +vaults, _and still less direct relation to the amount of money afloat in +the community at large_. Where bank media, whether in the form of +deposits or notes, are an important part of total purchasing power, the +connection between general prices and quantity of 'money' is irregular +and uncertain." (Italics mine.) + +This conclusion would be of little service in supporting Fisher's +rigorous contentions! Our constructive theory concerning the relations +of reserves and deposits, or reserves and demand liabilities, must wait +for later discussion, in the chapter on "Bank Assets and Bank Reserves" +in Part III. It will there be maintained that there are no "normal" or +"static" laws governing the percentage of reserves to demand +liabilities, or to deposits, that the reserve function of money is a +_dynamic_ function, and that its whole explanation must be found in +dynamic considerations. For the present, I am content to have analyzed +two widely divergent views, one the extreme view of Professor Fisher, +representing the quantity theory in its utmost rigor, and the other, the +view of Professor Taussig, who virtually surrenders the quantity theory +in complex modern conditions. + +In between these two writers, verging more toward Fisher than toward +Taussig, will be found, with great individual variation, the rest of the +quantity theorists. The quantity theory, as an instrument of prediction, +becomes important only to the extent that Fisher's view is maintained. + + + + +CHAPTER X + +"NORMAL" VS. "TRANSITIONAL" TENDENCIES + + +The Quantity Theory, as a causal theory, is, then, little altered by the +passage from a hypothetical, creditless economy to the actual world, +where a vast deal of credit is used,--particularly in Professor Fisher's +hands. Of the different kinds of credit, only deposits subject to check +are recognized as directly influencing prices, and deposits subject to +check are controlled by the volume of money. The causal theory[183] +remains, then, as follows: if M be increased, it will increase M´ +proportionately; it will not change the V's; it cannot increase T; to +keep the equation straight, therefore, P must rise in proportion to the +rise in M. A decrease of M, reducing M´ proportionately, leaving V's and +T unchanged, must proportionately reduce P. P is passive. A change in P +cannot sustain itself, unless it be due to a prior change in T, the V's, +M or M´. + +This theory is set forth with the qualification that these effects are +the "normal" effects of the changes in question. The proportion between +quantity of money and price-level is not strictly maintained during +"transition periods." I now approach the most difficult question which I +shall have to answer as to the meaning of Fisher's terms. The same +problem arises for all quantity theorists. Precisely what is the +distinction between "transition periods" and "normal periods"? What +limitations and qualifications does he admit to the rigorous statement +of his theory so far given? I may first express the opinion that the +line shifts greatly in his own mind, or at least shifts greatly in the +exposition. I do not find an explicit statement in which definitions are +given. The matter is chiefly discussed by Fisher in ch. 4,[184] which is +called "Disturbance of Equation and of Purchasing Power during +Transition Periods." There we find, as I have stated, no definitions, +but the initial statements would suggest the following: a transition +period is the period following a change in any one of the factors in the +equation during which a readjustment among all the others is taking +place; the normal period is the period preceding such a change, or +following the transition after such a change, and is characterized by +the fact that all the factors are at rest, in stable equilibrium. +Equilibria during transition periods are unstable. During the +transition, the relations among the factors vary: M and M´ need not keep +their fixed ratio; P need not be wholly passive; M and P need not keep +the same proportion. But until M and M´ get back into the normal ratio, +until P becomes proportional to M (in the proportion prior to the +initial disturbance), there is no rest; the equilibrium is unstable. How +long is a transition period? How realistic is the notion of a transition +period? Is the transition period a theoretical device, to aid in +isolating causes, or is it supposed to be a real period in time? Is the +normal period a real period in time, or is it merely a theoretical +hypothesis? It is not easy to answer these questions. Thus (p. 72) the +seasonal fluctuations are declared to be "normal and expected," and, at +the same time, one gets the impression that Fisher considers them +illustrations of his "transitions," in which the normal theory does not +strictly hold (pp. 72, 169). What is described chiefly in the chapter on +transition periods is the business cycle--a theory of the business +cycle, based primarily on the notion that the failure of interest to +rise as fast as prices rise causes the "boom," and that the draining of +bank reserves precipitates the crisis. I shall not discuss this theory, +as a theory of business cycles, further than to say that Wesley +Mitchell's study would indicate that the interest rate is a minor +factor, and that, while as a theoretical possibility, the drains on bank +reserves may check prosperity if something else doesn't do it first, +practically something else always does come in ahead, so far as his +studies have gone.[185] My interest here is primarily in seeing the +limitations Fisher imposes on his theory, and the qualifications he +admits. If the business cycle is the typical transition period, during +which his normal theory doesn't hold, when does the normal theory hold? +When are the "normal periods"? There is no concrete period during which +prices are neither rising nor falling, during which no important changes +are taking place among the factors.[186] At times, Fisher seems to +indicate that the normal period is imaginary (pp. 56, 159). Is, then, +the contrast between a realistic "transition period" and a hypothetical +"normal period" or are both hypothetical? Is the equation of exchange, +too, a mere hypothesis? It should be, if it is to set forth a merely +hypothetical theory. But no, Fisher insists on putting concrete data +into it, and, indeed, gives an elaborate statistical "proof" of the +equation. It, at least, is realistic. I confess that my certainty as to +Fisher's meaning grows less, as I study his book with greater care. If +the typical transition period be the business cycle, then the normal +period could come only once, say, in ten years--or whatever period, +regular, or irregular, one chooses to assign to the business cycle. The +concrete price-levels for the greater part of the time are then +surrendered to other causes. And the one-year cycle described in the +equation of exchange is quite irrelevant. The equation of exchange +should cover the whole business cycle, to fit in with the theory. +Indeed, a realistic equation of exchange would then have no meaning at +all, as the average price-level during the business cycle, played upon +by a host of causes other than the factors described in the quantity +theory, would not be the same as the average price-level which _would +have_ obtained had only the "normal" causes been in operation.[187] + +The distinction between "normal" and "transition" _periods_ suggests a +dangerous fallacy: namely, that during one period one sort of causation +is working, with the other in abeyance. In fact, whatever causes there +are are working all the time. The only legitimate thing is to abstract +from one set of causes, and see what the other set, if left to +themselves, will bring about. But this sort of abstraction has many +dangers, one of which is that the causes abstracted from are frequently +thought of as non-existent. The chemist, in his laboratory, can in +actual physical fact abstract impurities from his chemicals, and see +what they will do. He can even perform experiments in what is +practically a vacuum. But the economist has no right to _think in +vacuo_! All that he has a right to do is to assume the factors which he +does not wish to study _constant_. And even that he must not do if (1) +changes in the factors which he wishes to study do in fact lead to +changes in the factors abstracted from, or (2) if the factors which he +wishes to study can only change _because_ of prior or concomitant +changes in the factors from which he is abstracting. Is it, for example, +legitimate to assume an increase in M´ apart from its usual +accompaniment, an increase in PT? + +The notion, too, that causation can be seen in a state of stable +equilibrium should be critically analyzed. Causation is only _revealed_ +by a _course of events_, when mechanical causation is involved. The +relation of cause and effect may be a contemporaneous relation in fact, +and it is possible, where conscious, psychological phenomena are +involved, to discern causal relations among the elements in a mental +state by direct introspection. It is the not uncommon practice, also, in +the theory of mechanics, or in theoretical economics, where the method +of investigation is deductive rather than inductive, to abstract from +the temporal sequence, and to construe causal relations as timeless, +logical relations. But even here, the cause of a _change_ in the general +situation precedes the change in time, and it is only by abstraction +that the time element is left out. If there is no question as to the +causal relations, this abstraction is legitimate, but if all that one +knows about the situation be that in a stable equilibrium certain +constant ratios obtain, then the question as to which term in the ratio +is cause and which is effect remains unanswered. In Fisher's situation, +then, assuming that it be true--which I shall deny--that the only stable +equilibrium is that which the normal theory requires, it still remains +true that the causal relations among the factors can only be revealed by +a study of the transitions, by seeing the temporal sequence of changes +in the factors of the equation. Even if it be granted that M, M´ and P +tend to keep a constant relation to one another, the quantity theory +falls if, for instance, it can be shown that a change may first occur in +P, spread to M´, and finally reach M last of all, leading to a new +normal equilibrium which is stable. I shall later show cases of this +sort.[188] + +The abstract formulation of Fisher's contrast will not, I believe, give +us an answer as to the extent to which he thinks his quantity theory +realistic. I find myself particularly in genuine uncertainty as to the +point mentioned above: would an actual equation of exchange for the +whole business cycle, made up of the averages of M, M´, V, V´, P and T +for the whole period, exhibit the "normal" relations among these +factors? Or would this "normal" relation only emerge concretely at some +moment of time in the course of the cycle when the abnormal causes +affecting the price-level happened to offset one another? Or is it true +that no actual figures which might be found, either for a moment of +time, or as averages for any given period, will exhibit the relations +required, and that only a hypothetical equation, based on the figures +for M, M´, V, V´, P and T that _would have been realized_ had there been +no "disturbing" causes, will show these "normal" relations? If, as +Fisher at times indicates--as in his reference to Boyle's Law (p. +296)--he is stating only an abstract tendency, which may be neutralized +by other tendencies in the situation, so far as concrete results are +concerned, then it is this last doctrine which we must take, and the +concrete equation of exchange has little if any relevance. If, moreover, +this last interpretation be given, then the whole of Fisher's elaborate +statistical "proof" is pointless. The only sort of statistical proof +which would be relevant would be of a much subtler sort, not a mere +filling out of the equation of exchange by means of annual figures, but +an effort to disentangle and measure the _importance_ of his tendency, +as compared with other tendencies. But we have the other tendencies +merely mentioned in qualitative terms, and we never find any definite +statement, of mathematical character, as to how important they are. + +It seems pretty clear, however, that on the whole, despite occasional +suggestions that his theory is abstract, Fisher means his theory to be +the overwhelmingly important point in the explanation of actual +price-levels. He is particularly insistent on the high degree of the +generality of his contention that P is passive. Thus: "So far as I can +discover, _except to a_ LIMITED _extent during transition periods, or +during a passing season_, (_e. g._, _the fall_) (capitals mine, italics +Fisher's), there is no truth whatever in the idea that the price-level +is an independent cause of changes in any of the other magnitudes, M, +M´, V, V´, or the Q's."[189] On p. 182 he enumerates in a series of +propositions his general normal theory, and adds, as the first sentence +of proposition 9: "Some of the foregoing propositions _are subject to_ +SLIGHT _modification during transition periods_." (Italics and capitals +mine.) And the general drift of the argument, particularly in chapter 8, +where the heart of Fisher's causal theory is presented, would indicate +that the concessions he is disposed to make are very slight, indeed. + +The question as to how long a _time_ is required, in Fisher's view, for +a transition to occur, and for his normal tendencies to dominate, is +nowhere made clear. The quantity theory, in the hands of some writers, +is a very long run theory, for others, it is a short run theory. Thus, +Taussig would make the "run" exceedingly long.[190] Mill makes it a +short run theory. "It is not, however, with ultimate or average, but +with immediate and temporary prices, that we are now concerned. These, +as we have seen, may deviate widely from the standard of cost of +production. Among other causes of fluctuation, one we have found to be, +the quantity of money in circulation. Other things being the same, an +increase of the money in circulation raises prices, a diminution lowers +them. If more money is thrown into circulation than the quantity which +can circulate at a value conformable to its cost of production, the +value of money, so long as the excess lasts, will remain below the +standard of cost of production, and general prices will be sustained +above the natural rate."[191] I pause to note that it is really strange +that a single name should describe theories so different, resting on +such essentially different logic. Long run or short run theories, all +are "quantity theories," whether "money" be defined as gold, or as all +manner of media of exchange, or as only those media of exchange which +pass from hand to hand without endorsement. Fisher would doubtless call +his theory a long run theory. From the standpoint of the notion that +"prices ... lag behind their full adjustment and have to be pushed up, +so to speak, by increased purchases,"[192] however, we get a short run +quantity theory doctrine. The logic of these two is very different. The +short run doctrine seeks to explain the actual process of price-making +in the market. Money is offered against goods, and the actual quantities +on each side determine the momentary price-level, concretely. Or, when +credit is considered, money and credit offered against goods, at a given +time, or in a given short period, determine the actual price-level +reached. This is the logic of the equation of exchange--actual money +paid is necessarily equal to actual money received. The long run +doctrine is fundamentally based on a different notion. Surrendering the +actual or average of price-levels to other causes, in part, it still +asserts that, given time enough, and barring new disturbing tendencies, +a price-level will ultimately be reached which will bear it out. I find +no recognition, on Fisher's part, of the fact that these two doctrines +are different, and, in fact, I find them blended and confused in the +course of his argument. He would doubtless maintain that his is a long +run doctrine. But how long is the "run"? Sometimes it seems to be, as +already shown, a whole business cycle. Sometimes a passing season, as +the fall. When he undertakes to apply his theory to a practical proposal +for regulating the value of money, he relies on the quantity theory +tendency to bring about adjustments so quickly that it is worth while to +make _monthly_ adjustments in anticipation of it.[193] When discussing +the changes in gold premium on the Greenbacks during the exciting times +of the Civil War, he relies so thoroughly on his theory that he will not +allow even the rapid change of four per cent in a single day following +Chickamauga to occur except in conformity with the quantity theory. This +last statement is so remarkable that I must quote Fisher himself: "It +would be a grave mistake to reason, because the losses at Chickamauga +caused greenbacks to fall 4% in a single day, that their value had no +relation to their volume. This fall indicated a slight acceleration in +the velocity of circulation, and a slight retardation in the volume of +trade" (263). It would be indeed remarkable if the changes in the gold +market, which got war news before the newspapers got it, and where +changes in gold premium occurred before the rest of the country could +possibly react to the war news, should be controlled by V and T! I had +not supposed that the most rigorous of short run quantity theorists +would make any such demands on his theory as that. Indeed, I had not +supposed that the quantity theory would feel called on to explain the +gold premium, as such, except in so far as the gold premium is an index +of general prices. + +Finding it impossible to limit Fisher to any single statement of the +quantitative importance of his normal theory as compared with the other +tendencies at work, but concluding that, on the whole, he considers it +of high importance, I shall now proceed to an analysis of the reasoning +by which he seeks to justify it as a _qualitative_ tendency. I shall +maintain that, however long or short the period required, however strong +or weak the tendency he defends, the reasoning by which he seeks to +justify it is unsound, and that even as a qualitative tendency, the +quantity theory is invalid. At a later part of the book, as in an +earlier part,[194] I shall undertake to find the modicum of truth which +the quantity theory contains, and shall show that no quantity theory is +needed to exhibit this modicum of truth. + + + + +CHAPTER XI + +BARTER + + +In the statement of the quantity theory, the proviso is commonly made +that all exchanges must be made by means of money, or of money and +bank-credit. Barter is excluded by hypothesis. If resort to barter were +possible, then people might avert the fall in prices due to scarcity of +money, or increase in trade, by dispensing with money in part of their +transactions, and the proportional decrease in prices which the quantity +theory calls for would be lacking. Is this assumption true? Is barter +banished from the modern world, or does it remain reasonably possible, +and, to a considerable degree, actual? + +Fisher maintains the thesis--the failure of which he admits would spoil +the quantity theory[195]--that barter is practically impossible, and +negligible in modern business life. "Practically, however, in the world +to-day, even such temporary resort to barter is trifling. The +convenience of exchange by money is so much greater than the convenience +of barter, that the price adjustment would be made almost at once. If +barter needs to be seriously considered as a relief from money +stringency, we shall be doing it full justice if we picture it as a +safety valve, working against a resistance so great as almost never to +come into operation, and then only for brief transition intervals. For +all practical purposes and all normal cases, we may assume that money +and checks are necessities for modern trade."[196] + +This contention seems to me untenable. I think it can easily be shown +that barter remains an important factor in modern business life, +especially if one extends the term barter, a little, to cover various +flexible substitutes for the use of money and checks in effecting +exchanges. Clearly from the standpoint of the present issue, such an +extension of the meaning of barter is legitimate, as any such +substitutes would equally spoil the proportionality in the supposed +relation between prices and money, or prices and trade. + +Where does one find barter? Well, not to be ignored would be the +advertisements which fill many columns of such a paper as the New York +_Telegram_ in the course of a week; "Wanted: to trade a well-trained +parrot for a violin"--a trade that might, or might not, be a wise one! +There is a good deal of such simple barter among the people. Then, +perhaps more important, is the regular practice of sewing machine, +piano, automobile, and other similar companies of taking part of the +payment for a new machine, piano,[197] or automobile in the similar +thing which the owner is discarding. The old machine, piano, etc., are +then repaired, repainted, and sold again. This is a very extensive +practice. Again, there are companies which combine the business of +wrecking old houses and building new ones, who regularly take the old +materials as part of their pay. This is a highly important feature of +the organized building trade in great cities, and is frequently done in +small towns. The building trade is no negligible matter. The +"horse-trade" still thrives in rural regions, and barter of various +kinds, of live stock, of grain and hay, of fresh and cured meat, and of +labor, is an important feature in rural life in many sections. Much of +agricultural rent in the South is still paid in kind, under the "share +system." Much labor, especially farm and domestic labor, is still paid +for partly in kind. Where payments for labor are made in orders on +company stores, we have again what is virtually barter, from the +standpoint of the point at issue. _Real estate_ transactions make large +use of barter. Farms are exchanged for one another, with some cash (or +more usually, a promissory note) "to boot." The writer has repeatedly +heard real estate men say to customers: "I can't sell it for you very +easily, but I can trade it off, and maybe you can sell what you trade it +for." This is perhaps more frequent in rural real estate transactions, +and in the smaller cities, than in large cities, but it is very +extensive in New York City.[198] + +Again, when corporations are to be combined, various plans are possible. +There may be a merger; there may be a holding corporation; there may be +a lease. If the money market is easy, one of the former methods will be +used,--most frequently, for legal reasons, the holding corporation, if +there are any valuable franchises involved. But mergers and holding +corporations commonly involve buying out the interests which are to be +absorbed, and call for the use of checks. If the money market is tight, +therefore, the promoter of the combination may frequently find the lease +the more advantageous form of consolidation.[199] The great advantage of +the lease is that, when the money market is tight, it involves no +_financial plan_, no underwriting, no outlay of "cash." This is, +therefore, an equivalent of barter, so far as the point at issue is +concerned. Even where a holding corporation is formed, however, there +may be considerable barter: the stockholders of the corporation which is +absorbed may receive payment for their stocks, in whole or in part, in +the securities of the holding company, rather than in checks. An era of +financial consolidation, such as we have been passing through, and +through which we have not by any means gone, though the movement toward +_monopoly_ has been in great degree checked, presents a great deal of +this sort of barter, or equivalents of barter.[200] A striking thing to +notice here, moreover, is the flexible margin between use of bank-credit +and barter, a margin depending primarily upon the condition of the money +market, and particularly upon the money-rates. + +Not yet has the most important element in modern barter been mentioned. +I refer to the "clearing-house" arrangements of the stock and produce +exchanges. Under these arrangements, brokers who have sold ten thousand +shares of Westinghouse El. and M. Common during the day, and bought +seven thousand shares, buying and selling being in smaller lots, with a +number of different houses, no longer are obliged to deliver ten +thousand shares, receiving therefor $700,000, and to receive seven +thousand shares, paying therefor $490,000. Instead, they deliver three +thousand shares only to the clearing house, and receive from the +clearing house only $210,000 when the transaction is, from the +standpoint of the particular broker involved, completed. This is a far +remove, in technical perfection, from primitive barter, but it is +barter, and it saves the using of a vast deal of bank-credit as between +brokers. How important it is, from the standpoint of the stock exchange, +may be judged from the following statement in Sprague's _Crises Under +the National Banking System_: "A much more fundamental change in the +organization in the New York money market came with the establishment of +the stock exchange clearing house in May, 1892. It led to a very +considerable reduction in the _clearing-house exchanges of the banks_ +and also, and more important, in the volume of certified checks. +[Italics mine.] Overcertification of checks ceased to be a factor of the +first magnitude in the banking methods of the city. Had not this +arrangement for stock-exchange dealings been set up, it is probable that +it would have been necessary to close the stock exchange in 1893 and in +1907, and it is also probable that the volume of business transacted in +the years after 1897 could not have been handled." (P. 152.) + +The same arrangements have been widely introduced in other stock +exchanges, and in the produce exchanges.[201] + +In general, with reference to barter, this point is significant. The +money economy has made barter _easier_ rather than harder. It has made +possible a host of refinements in barter, which make it at many points +more convenient and cheaper than check or money exchanges. It is common +to find our present methods of conducting foreign trade described as a +"system of refined barter," which indeed, from the standpoint of the +present issue, it is: bills of exchange are neither money nor +bank-credit! Where bills of exchange are used in internal trade +extensively--as in Germany, where they pass from hand to hand in several +transactions before being discounted at banks[202]--we have a highly +important substitute for money and deposits, which functions as +barter,--flexibility of substitutes for money and deposits is strikingly +evident. The feature of the money economy which has thus refined and +improved barter is the _standard of value_ (_common measure of value_) +function of money.[203] This standard of value function, be it noted, +makes no call on money itself, necessarily. The _medium of exchange_ and +"_bearer of options_" functions of money are the chief sources of such +additions to the value of money as come from the money-use. But the fact +that goods have money-prices, which can be compared with one another +easily, in objective terms, makes barter, and barter-equivalents, a +highly convenient and very important feature of the most developed +commercial system. And so we reject another essential assumption of the +quantity theory.[204] + + + + + +CHAPTER XII + +VELOCITY OF CIRCULATION + + +For the quantity theory, it is important to treat velocity of +circulation of money and of deposits, as self-contained entities, really +independent factors. This is true of Fisher's theory. It is particularly +necessary that V and V´ should vary from causes unconnected with M and +M´. The V's are to be a sort of inflexible channel, through which M and +M´ run in their influence on the passive P, which is to rise or fall +proportionately with them. If an increase of M or M´ should lead to a +reduction in the V's, if people, having more money available, should be +less assiduous in using every bit of it in effecting exchanges, then P +would not rise in proportion to the increase in M. Complete +demonstration of Fisher's thesis, therefore, requires the proof of the +negative proposition that V does not change as a consequence of changes +in M or M´. This proof Fisher finds in the contention that the V's are +fixed by the habits and conveniences of individuals, whence they are not +influenced by such a cause as a change in the amount of money.[205] + +V is defined,[206] not as the number of times a given dollar is +exchanged in a given year (the "coin-transfer" notion), but as a social +average based on the average number of coins which pass through _each +man's_ hands, divided by the average amount held by him (the +"person-turnover" concept of velocity.) V´ is similarly defined. Fisher +asserts that both concepts, if correctly employed, lead to the same +result. I would point out one important difference between them here: +if money is _short-circuited_, if, _i. e._, a part of the economic +community loses its incomes, or finds its incomes reduced, then the +"velocity of money," on the "coin-transfer" basis is reduced, provided +the "person-turnover" average remains the same, while on the +"person-turnover" basis the velocity will remain unchanged. It is +clearly the "coin-transfer" concept which is fundamental, from the +standpoint of the equation of exchange, and Fisher feels justified in +using the other method only because he considers it an equivalent of the +"coin-transfer" concept. I shall later show cases where the distinction +between the two concepts is all-important, particularly in the case +where T is reduced by the elimination of _middlemen_.[207] + +The conception of velocity of circulation as a real, unitary entity, a +_cause_, in the process of price-determination, is, I suppose, almost as +old as the quantity theory itself. It is an essential part of the +quantity theory. To me "velocity of circulation" seems to be a mere +name, denoting, not any simple cause or small set of causes, which can +exert a specific influence, but rather a meaningless abstract number, +which is the non-essential by-product of a highly heterogeneous lot of +_activities of men_, some of which work one way, and others of which +work in another way, in affecting prices. It is at best a passive +_resultant_ of conflicting and divergent tendencies, and has, to my +mind, no more _causal_ significance than the average of the abstract +numbers of yards gained by both sides, heights and weights of players, +kick-offs, and minutes taken out for injuries, would have on the result +of the Yale-Harvard game. The real causes of changes in prices lie +deeper! I should expect V and V´ to be the most highly flexible factors +in the equation of exchange, and should expect to be able to keep the +equation straight, in a great variety of situations, by allowing the V's +to vary. + +Before undertaking detailed analysis of the causes governing V, I shall +discuss Fisher's specific argument, typical of the quantity theory, that +an increase of money cannot change the V's. "As a matter of fact, the +velocities of circulation of money and deposits depend, as we have seen, +on technical conditions, and bear no discoverable relation to the +quantity of money in circulation. Velocity of circulation is the average +rate of 'turnover,' and depends on countless individual rates of +turnover. These, as we have seen, depend on individual _habits_. Each +person regulates his turnover to suit his individual _convenience_.... +In the long run, and for a large number of people, the average rate of +turnover, or what amounts to the same thing, the average time money +remains in the same hands, will be closely determined. It will depend on +density of population, commercial _customs_, rapidity of transport, and +other technical conditions, but not on the quantity of money and +deposits nor on the price-level." (Italics mine.[208]) He proceeds to +assume that money is doubled with a _halving_ of the V's, instead of a +_doubling_ of P. Everybody now has on hand twice as much money _and +deposits_ as his convenience has taught him to keep on hand. He will +then try to get rid of this surplus, and he can only do it by buying +goods. But this will increase somebody else's surplus, and he will +likewise try to get rid of it. This will raise prices. "_Obviously_ this +tendency will continue until there if found another adjustment of +quantities to expenditures, and the _V's are the same as +originally_."[209] The foregoing argument rests in part, it will be +seen, on the assumption that a fixed ratio between M and M´ obtains, +else the increase of _money_ in everybody's hands would not mean a +corresponding increase in their _deposits_. I have already criticised +this doctrine. For the contention that the V's will finally be _just the +same_ as before, I find no specific argument at all--"_obviously_" +presumably making that unnecessary. + +As the point immediately at issue is that V's will be _unchanged_ by the +increase in M (otherwise P would not increase _proportionately_--let us +see if considerations can be adduced which will make this a little less +"obvious." First, it will be noticed that Fisher, in the foregoing, in +one sentence speaks of the matter as resting on _habit_, and in the next +sentence, on _convenience_. He speaks, also, of business _custom_. Now +it is important to note that habit and custom, on the one hand, and +considerations of convenience on the other, do not necessarily coincide. +Many habits and customs are highly inconvenient. And it is not at all +likely that habit and custom should govern so highly complex a thing as +the ratio between cash on hand and the price-level. Rather, in so far as +custom and habit rule, one would expect them to relate to a simpler +matter, namely, the _amount of cash on hand_. If the amount of cash kept +on hand should remain controlled by habit, while the amount of money is +increased, then V, instead of remaining unchanged, would actually be +increased, unless the habits should be broken in on. I shall show in a +moment that considerations of convenience would probably lead to a +reduced V, in so far as individual turnover is concerned. But which +tendency will prevail? Well, that will depend on the degree to which +custom and habit rule as compared with considerations of +convenience--_i. e_., there would be no rule valid for all communities. +That convenience would lead to a larger amount of money on hand--and I +am following Fisher's temporary hypothesis that there has been no rise +in prices prior to the movement to restore the V's to their old +magnitudes--will appear from considerations like these. Few men have as +much on hand as they would like to have, including both their cash in +hand and their deposit balances. Most people have the tendency to hoard, +though it is usually held in check by necessity. If money on hand be +increased suddenly, without prices being increased, and without any +prospect of increased incomes in the future--and there is nothing in +Fisher's provisional hypothesis to call for increased incomes, as they +could, in fact, come only from an increase in prices--why might not +there be a considerable saving of money, with a corresponding reduction +in V? If it be objected that people, in saving their money, will in +considerable degree put it into the banks, and that the banks, with +larger reserves, will increase loans and deposits, I would urge, that it +is on the part of banks that this tendency to increase hoards in times +of abundant money is particularly marked, and for proof would point to +the figures quoted from Keynes[210] for the great banks and treasuries +of Europe in the last fifteen years. It is not necessary for my purpose +at this point to do more than show that there is reason to expect an +increase in money to _change_ the V's. Fisher's argument rests on the +contention that the V's will be neither increased or reduced--otherwise +an increase in money will not _proportionately_ raise prices. The appeal +to habit and custom in the matter is particularly unsatisfactory. Custom +and habit could not possibly regulate things so complex as velocities of +money and bank-deposits. + +Whatever be the ultimate effect of an increase in money, the immediate +effect is commonly to reduce the money-rates. Banks have less inducement +to pay interest on deposits, and charge lower rates for loans. Now +merchants, especially small merchants, are often embarrassed in making +change for customers. The man who has tried to make payment with a ten +dollar bill in a country store has not infrequently put the storekeeper +to much inconvenience. To offer a ten dollar bill, or even a five dollar +bill, to a storekeeper on Amsterdam Avenue in New York City may well +mean that the one clerk in the establishment, or the proprietor's wife +will run out with the bill to three or four neighboring stores before +finding change with which to break it. If money is more abundant, if +money-rates are easier, for a time, it may easily happen that many small +merchants will experience the superior convenience of having a more +adequate amount of change in the till, and will, even after the +money-rates have risen--if they do rise again to the old figure--find a +new reason for keeping more cash on hand. There is a marginal +equilibrium between the interest on the capital invested in cash in the +till, and the wages of the clerk,[211] whose active legs assist the +velocity of money. Not only banks and small dealers, however, find it +advantageous to increase their supply of ready funds, held idle for +special occasions. The United States Steel Corporation has kept as much +as $50,000,000.00 to $75,000,000.00 in idle cash or idle deposits, as a +means of being independent of banks in times of emergency.[212] The +motive for accumulating reserves and hoards, either of cash or deposit +accounts, is at all times strong. In times of financial ease, it may +easily find the difficulties which ordinarily repress it give way, and, +by being gratified, grow stronger. + +I conclude that there is positive reason for expecting an increase of +money to reduce the velocity of money. + +Horace White, in his _Money and Banking_, in the earlier editions, +speaks of the velocity of money, "_alias_ the state of trade." Is not +this the truth? Is not money circulating rapidly, when business is +active, and slowly when business is dull? Is not the velocity of +circulation a highly flexible and variable average, a _cause_ of +nothing, and an index of business activity? Or, better, perhaps, are not +the V's and T both governed, in large degree, by more fundamental causes +which are largely the same for both? Fisher would admit something of +this for transition periods. Even for normal adjustments, he admits that +an increase in T, unaccompanied by an increase in M, leads to some +increase in the V's, though he doesn't say how much.[213] He denies, +however, that an increase in the V's will increase T.[214] In general, +it is clear that he regards the V's and T as governed by different +causes. The control of the V's by T is not the only or the chief control +of the V's. The V's can increase greatly without an increase of T, in +his scheme. That this is so, will appear from a comparison of the list +of causes which he gives as governing the V's and T respectively: + +Causes governing V's: + + 1. Habits of the individual. + (a) As to thrift and hoarding. + (b) As to book credit. + (c) As to use of checks. + + 2. Systems of payments in the community. + (a) As to frequency of receipts and disbursements. + (b) As to regularity of receipts and disbursements. + (c) As to correspondence between times and amounts + of receipts and disbursements. + + 3. General causes. + (a) Density of population. + (b) Rapidity of transportation. + +Compare this list with the causes governing T:[215] + + 1. Conditions affecting producers: + Geographical differences in Natural Resources; the + division of labor; knowledge of technique of production; + accumulation of capital. + + 2. Conditions affecting consumers: the extent and + variety of human wants. + + 3. Conditions connecting consumers and producers: + (a) Facilities for transportation. + (b) Relative freedom of trade. + (c) _Character_ of monetary and banking systems. (Not + their _extent_.) + (d) Business confidence. + +These two lists are quite different, and indicate that in Fisher's mind +the magnitudes, T and the V's, in general obey different laws. The only +factor in both lists is facilities for transportation ("rapidity of +transportation," in the first list). Strangely enough, T, though later +recognized as having influence on the V's[216] is not included in these +lists in ch. 5. The "character of the monetary and banking systems" in +the second list is evidently not the same as "use of checks" in the +second list, though it will doubtless affect that factor, as also the +"habits as to thrift and hoarding," in some degree. "Business +confidence," which is, in the view I am maintaining, as in the view, I +should take it, of Horace White, the great variable affecting both T and +the V's, does not appear in the first list. Indeed, one wonders why +business confidence appears in either list, if only "normal," and not +merely "transitional" causes are to be considered, but it appears from +the fuller discussion on p. 78 that Fisher is not thinking of business +confidence as a _variable_ at all--his normal theory has nothing to do +with _variables_--but as a thing which either is or is not present, a +sort of Mendelian unit, not a thing of degrees.[217] It will be noted, +further, that most of the causes which Fisher lists as affecting T are +really causes affecting _production_--they would be just as important +under a socialistic as under an exchange economy. + +Now I propose to show, on the basis of Fisher's own list of causes, that +most, if not all, of the factors affecting the V's, will also affect T, +_and in the same direction_. He admits this as to transportation +facilities. It is surely true of thrift and hoarding. The miser neither +circulates money nor buys goods. It is emphatically true--though +Fisher's theory, as will later appear, is obliged to deny it,--of both +book credit and banking facilities. Without the use of credit, much of +the business now done simply would not be done at all. For Fisher, and +the quantity theory in general, the contention would be simply that the +same business would be done _on a lower price-level_. I reserve a full +discussion of this fundamental point till later, noting here, in +passing, that the function of banks is to assist in effecting transfers, +that that is why, from the social standpoint, banks are encouraged, and +that the extension of banking would be folly if they did not, in fact, +do this. As to book credit, let us suppose that, for example, in the +great cotton section of the South the stores should cease to give +advances of supplies on credit to negroes and small white farmers, +pending the "making" of the crop. The outcome would be starvation for +many of them, and no cotton crop at all. Under a system of private +enterprise, the very division of labor itself, including the +specialization of the capitalist, involves credit, and it is difficult +to conceive a form of credit which does not either dispense with the use +of money, or increase its "velocity." Admittedly, the division of labor +increases trade. + +The three factors listed under "Systems of payment in the community" +also affect trade. To the extent that receipts are frequent, regular, +and synchronous with outgo, we have a smoothly working economic system, +which facilitates commerce. + +Finally, density of population enormously increases trade. The +concentration of men in cities is essential for modern factory +production, and the great cities have necessarily grown up about good +harbors, or at strategic points for connecting lines of railroads. It +seems almost trivial to insist on so obvious a point, but Fisher seems +totally to ignore it, for he says: "We conclude, then, that density of +population and rapidity of transportation have tended to increase prices +by raising velocities. _Historically this concentration of population in +cities has been an important factor in raising prices in the United +States._"[218] (P. 88. Italics mine.) + +This is an astounding proposition. It is not merely that the +concentration of population in cities has _tended_ to raise prices +through raising velocities. It is a statement that this has been an +important historical cause of the actual increase in prices. For +Fisher's own theory, if the same cause had tended to increase T,[219] +that would have offset the rising V's on the other side of the equation, +and left prices little affected. But he sees in the V's an independent +cause here, divorces them from their connection with T, and follows his +logic fearlessly where it leads. I do not see how one could more +strikingly illustrate the essential vice of erecting the V's into causal +entities. + +In concluding the discussion of the rôle of velocity of circulation, I +think it worth while to mention Fisher's own efforts to measure them. I +examine his statistics in a later chapter. I do not regard the points at +issue as points which can properly be handled by inductive methods, +primarily. I do not accept his conclusions with reference to the +magnitudes of V, the velocity of money, partly because I do not accept +his doctrine that "banks are the home of money" (p. 287).[220] He finds +for V a fairly constant magnitude during the thirteen years from 1896 to +1909, the range being from 19 to 22, the figures for all the years +except 1896 and 1909 being interpolations.[221] For V, however, which is +much the more important magnitude, from the standpoint of his equation +of exchange for the United States, since deposits do so much more +exchanging than does money, he finds a wide range of variation, from 36 +to 54, and he states: "We note that the velocity of circulation has +increased 50% in thirteen years and that it has been subject to great +variation from year to year. In 1899 and 1906 it reached maxima, +immediately preceding crises" (285). I think Fisher's own statistical +results show that V´, at least, is a child of the "state of +trade."[222] Critical analysis of these statistics show that they +greatly underestimate the variability of the V's.[223] + +In summary: V and V´ are not, as Fisher contends, independent of the +quantity of money. Instead of resting on "technical conditions," and +having large elements of constancy and rigidity, they are highly +flexible, and vary, on the whole, with the same highly complex and +divergent sets of causes which govern the volume of trade. The biggest +factor affecting the variations of the V's on the one hand, and volume +of trade on the other is business confidence--a factor which Fisher's +normal theory is not concerned with, so far as it is considered as a +variable, but which, more than anything else, does affect the concrete +figures which go into the equation of exchange, either for a single +year, or for an average of a good many years. The V's are not true +causal entities, but merely abstract summaries of a host of +heterogeneous facts. I have indicated before, and shall later +demonstrate more fully, that the same is true of T. Even the "normal" +causes governing the V's, however, are factors which likewise affect T, +and in the same direction. + +Among the factors affecting both V and T, there is one which sometimes +makes them move in opposite directions, and that is the _value of money_ +itself. This is so well stated in Wicksteed's interesting criticism of +the quantity theory that I content myself with a quotation:[224] "Again, +the history of paper money abounds in instances of sudden changes, +within the country itself, in the value of paper currency, caused by +reports unfavorable to the country's credit. The value of the currency +was lowered in these cases by a doubt as to whether the Government would +be permanently stable and would be in a position to honor its drafts, +that is to say, whether this day three months, the persons who have the +power to take my goods for public purposes will accept a draft of the +present Government in lieu of payment. It is not easy to see how, on the +theory of the quantity law, such a report could affect very rapidly the +magnitudes on which the value of the note is supposed to depend, viz., +the quantity of business to be transacted, and the amount of the +currency. Nor is it easy to see why we should suppose that the frequency +with which the notes pass from hand to hand, is independently fixed. On +the other hand, the quantity of business done by the notes, as distinct +from the quantity of business done altogether, and the rapidity of the +circulation of the notes may obviously be affected by sinister rumors. +Two of the quantities, then, supposed to determine the value of the unit +of circulation, are themselves liable to be determined by it." + + + + +CHAPTER XIII + +THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION + + +In proving that an increase of money must proportionately increase +prices, it is necessary to prove that the volume of trade is independent +of the quantity of money and credit instruments by means of which trade +is carried on. Money on the one hand, and quantity of goods to be +exchanged on the other, are the two great independent magnitudes, whose +equilibration mechanically fixes the average of prices. This notion, as +to the essence of the quantity theory, finds expression in Taussig,[225] +"The statement of a quantity theory in relation to prices assumes two +independent variables: total money or purchasing power on the one hand, +total supply of goods or volume of transactions on the other." Taussig, +though he would maintain that this independence holds, so far as money +and trade are concerned, admits that it breaks down so far as trade and +elastic bank credit, bank-notes and deposits, are concerned. Trade and +elastic bank-credit are largely _inter_dependent.[226] This concession +on Taussig's part means virtually giving up the quantity theory for +Western Europe and the United States and Canada, though Taussig still +sees something left of the quantity theory tendency in view of the +"irregular and uncertain" connection which he finds between money and +bank-credit.[227] Fisher, however, makes no such surrender. He is quite +as uncompromising as to the independence of _deposits_ and trade as he +is with reference to the independence of _money_ and trade. He does, +indeed, make the concession that increasing trade tends to increase +deposits _indirectly_, by increasing the ratio of M´ to M, by modifying +the habits of the people as to the use of checks as compared with cash +(p. 165),[228] but he denies stoutly that there is any _direct_ relation +between them. (P. 168.) Trade acts only _via_ a modification of the +ratio between M and M´, and M still remains controlled, not by trade, +but by quantity of money. As to any control over T by M´, he repudiates +it explicitly, (P. 163.) Increasing M´, either through an increase of M, +or through an increase in the normal ratio between M and M´, will have +no effect on T,--or, for that matter, on the V's. The introduction of +credit, therefore, leaves the quantity theory intact: an increase of M, +increasing M´ proportionately, leaving the V's unchanged, and having no +effect on T, must exhaust its influence on P, raising P proportionately, +if the equation of exchange is to remain valid. + +The argument set forth to prove that T is not influenced by M or M´ is +as follows: "An inflation of the currency cannot increase the products +of farms or factories, nor the speed of freight trains or ships. The +stream of business depends on natural resources and technical +conditions, not on the quantity of money. The whole machinery of +production, transportation and sale is a matter of _physical capacities +and technique_, none of which depend on the quantity of money. The only +way in which quantities of trade appear to be affected by the quantity +of money is by influencing trades accessory to the creation of money and +to the money metal.... From a practical or statistical point of view +they amount to nothing, for they could not add to nor subtract one-tenth +of 1% from the general aggregate of trade." (_Loc. cit._ p. 155. Italics +mine.) Something similar is said on p. 62, where "transitional" +influences of M on T are being discussed: "But the amount of trade is +dependent, _almost entirely_, on other things than the quantity of +currency, so that an increase of currency cannot, _even temporarily_, +very greatly increase trade. In ordinarily good times practically the +whole community is engaged in labor, producing, transporting, and +exchanging goods. The increase of currency of a "boom" period cannot, of +itself, increase the population, extend invention, or increase the +efficiency of labor.[229] These factors pretty definitely limit the +amount of trade that can reasonably be carried on. So, although the +gains of the enterpriser-borrower may exert a psychological stimulus on +trade, though a few unemployed may be employed, and some others in a few +lines induced to work overtime, and although there may be some +additional buying and selling which is speculative, _yet almost the +entire effect_ of an increase in deposits must be seen in a change in +prices. Normally the _entire_ effect would so express itself, but +transitionally there will be also _some_ increase in the Q's." (Pp. +62-63. Italics mine.) + +Fisher is here exceedingly uncompromising, even where transitional +periods are concerned, and it is not necessary, in order to do his +position full justice, to make much distinction between "normal" and +"transitional" effects in my counter-argument. I shall, however, take +account of the distinction as I proceed, in justice to other, more +moderate, quantity theorists. + +It is a familiar doctrine that the quantity of money is irrelevant, that +things go on in much the same way whether money is abundant or scarce, +the only difference being that in the one case prices are high and in +the other, low; that, in particular, it is a gross fallacy to connect +the rate of interest with the amount of money, since (as many writers +would put it) the rate of interest depends on the amount of _capital_ +rather than _money_. At the opposite extreme, we have writers like +Brooks Adams (_Law of Civilization and Decay_), who see the fate of +nations and the progress of civilization resting on the abundance or +scarcity of money. Fisher takes the first position in its extremest +form.[230] + +The truth, I think, is intermediate. The effects of the New World +discoveries of gold and silver after the voyage of Columbus on trade and +industry were tremendous. Trade was enormously increased. Walker, in his +_Inter__national Bimetallism_,[231] asking, from the standpoint of a +quantity theorist, why prices only increased 200% while money increased +470%, admits that the chief reason was the increase in trade, due in +large part to the very increase in money itself. Sombart, in his _Der +Moderne Kapitalismus_,[232] finds in this influx of money a tremendous +source of capitalistic accumulations, (a) for the Conquistadores, (b) +for the handicraftsmen whose prices rose faster than their costs, (c) +for tenants whose rents were fixed in money, (d) for landowners, whose +rents were fixed in kind [a point not obviously true], and (e) for +bankers, as the Fugger. An increase of capital, savings that would +otherwise not have been made, must have profoundly modified the whole +industrial system, and greatly increased both industry and commerce. If +it be objected that effects of this sort are not usual, that they came +in a world which had been starved for money, and which, by means of the +enormous increase in money was able to pass from a "natural" to a money +economy, I reply that the difference between such a case and the usual +effects of an increase of money are in degree rather than in kind. The +world of Columbus' day was in part on a money economy, and the world +to-day, despite Professor Fisher's emphatic denial,[233] still employs a +great deal of barter, or equivalents of barter. I shall revert to this +point later. But even this consideration would not rob Sombart's points +of their significance for modern conditions. Further, we have an even +more striking case, on Walker's own showing, in the effects of the +Californian and Australian[234] gold discoveries in the 19th Century on +trade, industry, and speculation.[235] + +Nor is the tremendous agitation over bimetallism, involving a literature +so great that no man could dream of reading it all, involving great +political movements, Presidential campaigns, great Congressional +debates, repeated legislation, international conferences, etc., for +twenty years, to be explained on any other ground than that the world +felt practical, important, and unpleasant effects on industry and trade +from the inadequacy of the money supply. + +The view of Hartley Withers[236] is interesting here. He says: "any such +great addition to currency and credit would have a great effect in +stimulating production, and so would lead to a great addition to the +number of real goods which humanity desires and consumes when it can get +them.... Trade would be more active." On p. 23 he speaks of the enormous +expansion of trade made possible by paper representatives of gold. On p. +83 he speaks of the attitude of the money-market toward gold, which the +orthodox economist is apt to think of as a survival of Mercantilism. +Withers thinks that the money market is right in a large degree. + +As illustrating Withers' statement about the views of "practical men" on +this point, the following extract from a recent address by Theodore +Price, quoted with approval in a "market letter," written by Byron W. +Holt,[237] is interesting: "The fact seems to be that the exigencies of +war in Europe are leading to an extension of credit such as would not +have been possible in peace, because the hesitant conservatism of +bankers would have then prevented it, and we are finding that instead of +working harm it is doing good, because huge masses of fixed capital are +thereby made productive, and are circulating with the increased velocity +that always quickens enterprise and accelerates the wheels of +industry.... All the precedents of history indicate that accelerated +activity will come with peace and continue until the exuberance of +success has led men to build faster than the world has grown and to +demand credit upon the basis of future rather than of present values." + +What is the essential causation in the matter? Well, viewed merely as a +matter of mechanical equilibration, the quantity theory view is not +strictly true, by any means. For a given country--and Fisher's quantity +theory is always a theory for a given country, and, indeed, for any +separate market, even a single city[238]--an increase of banking credit +means an increase in non-monetary capital, because, to a greater or less +extent it dispenses with the use of gold, which goes abroad, bringing +back wealth in other forms in exchange. Adam Smith saw this clearly, +and phrased it strikingly, likening gold and silver coins to the +wagon-roads of Scotland, which are necessary for transportation, but +which none the less prevent the use of the roadways for raising grain; +whereas bank credit is like a wagon-road through the air, which restores +the roadbeds to cultivation. Increased non-monetary capital, other +things equal, should mean increased trade. + +But, more fundamentally, an increase in gold itself within the country, +if not bought by the export of an equivalent amount of other goods, _is +an increase of capital_. Not all capital is money, but standard coin is +capital. Money is a tool of exchange, and exchange is part of the +productive process. More money means more exchanging. That is what money +is for. Part of the mechanism is in the money rates, which go down as +money becomes more abundant, making it profitable to effect exchanges +which would not have been profitable had the money rates been higher. +Granted that the money-rates and the general rate of interest tend, in +the long run, to keep--I will not say at the same figure[239]--a certain +fairly definite relation to one another, it still does not follow that +the new "normal" equilibrium will give us an interest rate which is the +same as the general rate of interest was before the influx of gold. On +the strictest static theory, this is not to be expected. Because the +total amount of capital in the country is increased, and this means a +lowered interest rate all around, in the marginal employment of capital. +The margin of the use of capital will be lowered everywhere, including +the margin for the use of money. This means permanently lowered money +rates in the country, even though the permanent level be higher than the +initial money rates immediately following the access of new gold. I +have put the argument in terms that suggest the productivity theory of +interest, because it is more simply stated that way. I do not accept the +productivity theory, as a fundamental explanation of interest, but for +many purposes, the results to be obtained by it coincide with the +psychological time theories,--which also, in their present form, seem to +me imperfectly developed. I need not try to construct a theory of +interest here, however, as the familiar theories lead to no trouble at +this point. It is enough to point out that the increased amount of +capital, meaning better provision for present wants--wants concerned +with gold in the arts and with money for productive exchanges, as well +as goods generally since part of the new gold will be exported for other +things--will lessen the pressure of present as compared with future +wants, and so lessen the rate of interest on the time-preference theory. +The final outcome will be an extension of the marginal use of money, and +a greater volume of exchanges. Of course, the increase in the supply of +any kind of capital good, apart from a prior increase in the demand for +its services, will, on the mechanical view of economic causation, +necessarily lead to some fall in its capital value. Gold money will be +no exception to this rule. As to how much the increase in its quantity +will lead its capital value to fall, however, we are unable to say. For +the quantity theory, the fall will be in proportion to the increase. For +the theory just outlined, the fall will depend on the elasticity of +demand for gold in the arts, and on the elasticity of "demand" for +money, meaning by demand for money simply the demand for the short-time +use of money as a tool of exchange, a demand which governs _directly_, +not the capital value of money, but rather the "money-rates." The +relation between the money rates and the capital value of money will +best be discussed at another point.[240] We have no reason at all to +suppose that either of these demands[241] exhibits the tendency to obey +the law of proportional variation which the quantity theory requires of +money. + +It is further important to note that as a country gets more abundant +capital, there seems to be a tendency to extend the use of money rather +more than the use of many other capital goods. Where the interest rate +is 10 and 12%, as in Arizona and New Mexico, money, even when brought +in, tends to leave in large degree to bring in other forms of capital +which the situation calls for more imperatively. The early American +colonies, needing money pressingly, and making shift with a great +variety of substitutes for good metallic money, thoroughly acquainted +with the advantages of a money-economy from their European experience, +and having "habits" as to the carrying and using of money which they had +brought with them from Europe, still found it impossible to keep a great +deal of metallic money, in view of the still greater importance of other +forms of capital. It is in the most highly developed commercial +communities, commercial centres, and _par excellence_, in the +speculative centres, that the demand for the money-service is most +elastic.[242] A country where the rate of interest is low, loses other +forms of capital, and gains money, in the process of reëquilibration, as +compared with a new and undeveloped section, although the new section +also extends the margin of the money service, in effecting a greater +number of exchanges, when money is increased. + +And this leads to a vital distinction, which quantity theorists almost +always lose: the distinction between the volume of _production_, and +the volume of _trade_. Even in the mechanical system of causation which +they describe, it is true only of production and transportation that +_technical_ and _physical_[243] factors are of primary significance, and +that money is of minor significance. For trade and commerce, money is +always highly important. To the extent that a region is primarily given +over to the primary productive activities, mining, and agriculture, such +trading as is necessary can be done by means of a small amount of money, +supplemented by barter and long-time book-credit. A region or a city +whose chief business is _commerce_, however, needs a large part of its +capital in the form of money, and of banking capital, which is largely +invested in money for banking reserves. _Trade_, as distinguished from +industry (and it is after all trade that is under discussion), is helped +or hindered as its tools are more or less abundant. These considerations +would suggest that the elasticity of the demand for the use of money is +greater than the elasticity of demand for the use of capital in almost +any other form. Production is, indeed, limited by labor supply and +natural resources, in considerable degree. _Trade_,[244] however, even +from the standpoint of mechanical causation, is limited chiefly by the +relation between the profits to be made in commercial transactions, and +the "price" that must be paid for the money and credit that are required +to put them through. There are enormous numbers of transfers that could +be made to advantage if there were no cost at all involved. They are not +made, because exchanging requires pecuniary capital. Let the pecuniary +capital increase, however, and sub-marginal exchanges become worth +while, the general margin is lowered. Commerce is the most highly +flexible and elastic portion of the whole productive process. The +elasticity of demand for commercial capital is, thus, greater than the +elasticity of demand for any other form of capital. + +How widely the volume of trade differs from the volume of production, +and how great is the element of speculative transactions in trade, will +best appear, I think, from an analysis of the figures which Fisher +gives[245] for the volume of trade in the United States. His figure for +the volume of trade in the year 1909 is $387,000,000,000.00, three +hundred and eighty-seven billions of dollars! This figure is reached by +equating the figures he has reached for MV plus M´V´ to PT, and assuming +P to be one dollar, by making the "unit" of T, arbitrarily, a dollar's +worth of each sort of commodity, at the prices of 1909. I have already +commented on the legitimacy of this method of summarizing T,[246] and +need not say more here, beyond calling attention to the fact that +"volume of trade," as commonly used, does in fact mean, not T alone, but +PT. Fisher for years other than 1909, however, makes use of a different +method of getting at T: he takes certain indicia of _relative_ amounts +of trade, compares them with the same indicia for 1909, and estimates +the trade for other years as being such a percentage of the trade for +1909 as their indicia are of the indicia of 1909. The indicia chosen +are: (1) quantities of certain commodities, cotton, fruit, cattle, etc., +_received at_ principal cities of the United States, taken as typical of +the variations of the internal _commerce_ of the United States; (2) +quantities of 23 articles of import and 25 articles of export, for each +year, taken as typical of variations in the foreign trade of the United +States; (3) sales of stocks. These three indicia, weighted in a manner +to be described in a moment, are then averaged. There is a second +element in the index, made up by taking the figures for railroad +_tonnage_, and the figures for _receipts on first class mail_, which are +averaged. The first average and the second average are then combined +into a third average, which is the final index. The relation between +this index for every year other than 1909 and the same index for the +year 1909 determines the amount of T for each year--the two indicia, +together with the figure, $387,000,000,000.00, giving the required +amount by the "rule of three." I shall not go into details with the +method of constructing these averages, but I wish to make clear the +comparative _weight_ given to each element in the final index: The first +three elements count _twice_ as heavily as the last two, and so +constitute the biggest factor. In the first average, based on the first +three elements, the item taken as typical of internal trade is _weighted +by 20_, the item taken as typical of foreign trade is _weighted by 3_, +and sale of stocks _by 1_. It appears from Fisher's figures (p. 479), +that the one really big _variable_ among all the indicia is the sale of +stocks, but the weight given it is so small that it makes virtually no +difference in the final result. Thus, as between 1898 and 1899, stock +sales increased over 50%, but total trade, as shown by Fisher, increased +only 5%. In the following year, stock sales _decreased_ over 21%, but +total trade, on Fisher's figures, _increased_. The following year, 1901, +stock sales virtually doubled, but Fisher's final figure shows only an +increase around 13%. Two years later, in 1903, stock sales fell off +about 40%, from the figures for 1901, but again, as compared with 1901, +total trade on Fisher's figures shows an appreciable gain. The influence +of stock sales on Fisher's index is, virtually, negligible. The +dominating factor is the _receipts_ of selected staples, cattle, +cotton, rice, pig iron, etc., in the principal cities of the United +States. There is not a _single year_ in which his final figure for T +does not move in harmony with this factor (p. 479). He gets, thus, for +the volume of trade through the fourteen years under consideration, a +surprising steadiness, and a pretty uniform progressive development. + +In defence[247] of his method of weighting, Fisher says, simply: "These +weights are, of course, merely matters of opinion, but, as is well +known, _wide differences in systems of weighting make only slight +differences in the final averages_." (Italics mine.)[248] + +Are these figures valid? Well, first one is struck with the absolute +magnitude assigned to T. The figures seem vastly greater than would have +been anticipated. The method of calculating it, for 1909, I shall +discuss in detail in the chapter on "Statistical Demonstrations of the +Quantity Theory." For the present, it is enough to note that the +absolute magnitude is derived from figures collected by Dean David +Kinley for the National Monetary Commission,[249] of deposits, exclusive +of deposits made by one bank in another, made in about 12,000 banks (out +of 25,000) on March 16, 1909. These deposits were classified as (1) +money (with subdivisions) and (2) checks and other credit instruments. A +cross-classification divided them into (1) retail deposits; (2) +wholesale deposits; (3) all other deposits. Kinley's object was to +determine the extent to which checks are used, as compared with money, +in payments, particularly in wholesale and retail business. Fisher's +total, briefly, was obtained as follows: Kinley's figures, for the one +day, were increased to make an allowance for the non-reporting banks; +they were further increased on the assumption that March 16 was below +the average for the year; the figure finally obtained for the day was +then multiplied by 303, assumed as the number of banking days in the +year, and the product, 399 billions, was taken as representing the total +circulation of money and checks in trade. For some reason not made +clear, this total was subsequently reduced to 387 billions. Counting the +average price, P, as $1, T was considered to be 387 billions.[250] + +In the statistical chapter to follow, it will be shown that this +estimate is a very decided exaggeration. Deposits made in banks greatly +overcount trade. Very many payments represent duplications, loans and +repayments, taxes, etc., and are in no sense trade. This is true of all +classes of deposits, wholesale and retail, as well as "all other." But +for the present, I am concerned with the question, not of the absolute +magnitude of the volume of trade, but rather, the questions of its +character, of the elements that enter into it, and, above all, of the +extent to which it is physically determined by technical conditions of +production, and the extent to which it is flexible, a matter of +speculation, etc. + +We may approach this question from the angle of several bodies of +statistical information. First, the question may be raised: what is +there in the country which could be bought and sold enough in the course +of a year to give us anything like so great a total? The subtractions +which we shall find it necessary to make will still leave us an enormous +total. + +The United States Census Bureau[251] in 1904 reached the conclusion that +the _total wealth_ of the country was only $107,000,000,000. Of this, +over $62,000,000,000 was in real estate; $11,000,000,000 in railroads; +street railways, over $2,000,000,000; telephone, telegraph, water and +light, and similar enterprises total nearly $3,000,000,000 more. None of +these things enter into ordinary wholesale and retail trade. The items +that one would ordinarily think of are agricultural products, +$1,900,000,000; manufactured products, $7,400,000,000; mining products, +$400,000,000. Can these things be exchanged often enough in the course +of a year to account for $387,000,000,000! + +These figures are for 1904,[252] whereas Fisher's figures are for 1909. +If the Census Bureau had taken an inventory in 1909, the figures would +doubtless be larger. The inventory for 1912 made by the Census Bureau +does show a very considerable increase, the largest item being due to a +rise in real estate values. The figures for agricultural, manufacturing, +and mining products are, also, figures for a given time rather than for +total production through the year. But, making all the allowance one +pleases, it is quite incredible that one should reach a figure of +$387,000,000,000 by taking only the exchanges necessary to bring raw +materials through the various stages of production to the consumer. The +greater part of the $387,000,000,000 is to be explained in another way! + +A detailed analysis of Kinley's figures, on which the estimate of total +trade is based, leads clearly to the same conclusion. Kinley's figures +for the banks that reported on March 16, 1909, are as follows: + + Retail deposits 60 millions + Wholesale deposits 124 millions + "All other" deposits 502 millions + +The "all other deposits" are vastly greater than retail and wholesale +deposits combined! Notice, too, with reference to the question as to how +often goods need to be turned over in getting to the consumer: wholesale +trade uses only about twice as much money and checks as does retail +trade. Goods are not, if these figures are in any way typical of actual +trade, turned over many times in the process of reaching the consumer. +The "necessary," or "physically determined" number of exchanges, in the +routine of trade, is small, per item. + +Retail deposits of 60 millions make up less than one-eleventh of the +total. Retail and wholesale deposits together make up about +three-elevenths. What is the other eight-elevenths, represented by the +"all other deposits"? It will help if we see where these "all other" +deposits are located. If we find them scattered evenly throughout the +country, in rural regions as well as in cities, we might be at a loss. +If, however, we find them bunched in the big speculative centres, we may +conclude that speculation accounts for a large part of them. We do in +fact find this. + +The following figures show the different classes of deposits (1) in the +South Atlantic States; (2) in reserve cities; (3) in New York City +alone: + + _South Atlantic States:_ _Per Cent._ + + Retail deposits $ 3,300,000 19.0 + Wholesale deposits 4,900,000 29.0 + "All other" deposits 8,900,000 52.0 + + _Reserve Cities (including New York City):_ + + Retail deposits $ 24,000,000 5.6 + Wholesale deposits 78,000,000 18.2 + "All other" deposits 326,000,000 76.1 + + _New York City:_ + + Retail deposits 9,000,000 3.7 + Wholesale deposits 34,000,000 14.0 + "All other" deposits 198,000,000 82.2 + +It is difficult, with Kinley's figures, to get figures which exclude +returns from cities of substantial size, except for a State like Nevada, +where the mining and divorce industries complicate the figures. As near +an approach as can be made, perhaps, is to take the State of Louisiana, +excluding New Orleans from the totals. Even here, however, we include +five cities of over ten thousand, among them Shrevesport, with 28,000 +people. The following figures are for the State and national banks in +Louisiana, exclusive of New Orleans: + + Retail deposits $179,915 24.1 + Wholesale deposits 246,647 33.1 + "All other" deposits 318,915 42.8 + +We cannot tell, in these figures for Louisiana, how many banks are +represented, or what the average figures per bank are. For the whole +State of Arkansas, however, including five cities of over 10,000, with +two over 20,000, and one of 45,000, we can get an average for ninety +reporting banks. Even here we do not know where these banks are located +within the State; though it is probable that they are in the larger +places, and so exceed the average deposits for the banks in the State as +a whole, to say nothing of the average for the smaller places. The +ninety banks are almost wholly State and national banks. + + _Arkansas:_ _Per Cent._ + + Retail deposits $232,017 25+ + Wholesale deposits 231,614 25+ + "All other" deposits 456,544 49+ + +The average for all deposits, per bank, in Arkansas is $10,224; the +average for all the 11,492 banks reporting for the whole country is, +approximately, $60,000; the average for the 659 banks reporting from New +York State is $502,136; the average for the banks in New York City alone +is doubtless much higher, but cannot be stated, as Kinley's figures do +not tell how many banks reported by cities.[253] + +The "all other deposits" in Arkansas are 27.8% cash, and 72.2% checks; +the "all other" deposits in the country as a whole are only 4.1% cash, +with 95.9% checks; the "all other deposits" of New York City are only 1% +cash, with 98.9% checks. + +Several facts are very clear from these comparisons: (1) the proportion +of "all other deposits" increases very rapidly as we get closer to the +great centres of speculation, and is lowest in rural regions; (2) the +great bulk of all the deposits is in the cities. The average for +Arkansas banks, for example, is only one-sixth the average of the whole +country, and is only one-fiftieth the average for the banks of New York +State. It is a much smaller fraction of the average for New York City, +but we cannot give an exact figure. The totals reported from the rural +regions are trifling, as compared with the totals reported from the big +cities. This, as will be made clear in the chapter on "Statistical +Demonstrations of the Quantity Theory," is not because the country +reports were less complete that the city reports. New York was probably +less complete than the country as a whole. It is simply because the +activity of country accounts is small, the amount of trading in the +country districts small, and (as shown) the _average_ for country banks +is small. (3) The character of the "all other" deposits in Arkansas +differs substantially from that of the "all other" deposits in New York +City, as indicated by the fact that the proportion of cash is high in +Arkansas--substantially higher, in fact, for the "all other" deposits in +Arkansas than for all deposits, or even for retail deposits, in the +country as a whole. The percentage of checks in total retail deposits in +the United States, in Kinley's figures, was 73.2; the percentage of +checks in the "all other" deposits in Arkansas was 72.2. We may count +these Arkansas "all other" deposits as, in considerable degree, deposits +made by farmers. What were the "all other deposits" made in New York +City? + +Dean Kinley's list of the miscellaneous elements that enter into the +"all other deposits," given on p. 151, contains only two that might be +expected to bulk large in New York without appearing in Arkansas. These +are: _brokers_, _and stock and bond financial corporations_. Of course, +theatres, hotels, publishing houses, railroads, public funds, "those +who have no specific business," and rich churches, will all be +absolutely much larger in New York City than in Arkansas. But these +things may be found in many places, scattered throughout the cities of +the country, without making anything like such "all other" deposits as +New York shows. It is not New York's foreign commerce that does it, +because that is represented in New York's "wholesale deposits," which +make up only 14% of New York City's total deposits for the day. It +cannot be the supposed "clearing house" function of New York City,[254] +whereby banks in different parts of the country pay their balances due +one another in New York exchange, because such transactions would appear +in New York chiefly in the figures for deposits made by one bank in +another, and these figures are excluded from Kinley's totals. It cannot +be the deposits of the "idle rich" for current expenses that swell New +York's "all other deposits" so greatly--these could not equal the total +retail deposits of the city, which are only 3.7% of the total in New +York. Moreover, similar deposits are made in many other cities, without, +in proportion to population, making any such totals. Figures, moreover, +for the aggregate yearly income of the United States, and for the +distribution of that income between rich and poor, make it clear that +any such items must be bagatelles in comparison with these enormous +figures. The only explanation that will really explain is the +speculative and investment and financial transactions that centre in New +York, and, in less degree, in the other great financial cities of the +country. + +This is Dean Kinley's opinion. In the "all other" deposits he makes a +50% allowance for speculative transactions. "A large proportion of +deposits in this 'all others' class undoubtedly represents speculative +transactions, all of which, or practically all of which, are settled +with credit paper."[255] It is also the opinion of General Francis A. +Walker, expressed concerning similar figures from earlier +inquiries.[256] + +Various kinds of evidence converge toward this conclusion. Thus, the +evidence of clearings, total items presented by banks to the clearing +houses of the country. New York clearings are usually nearly twice as +great as total clearings for the rest of the country. New York clearings +fluctuate in general harmony with transactions on the New York Stock +Exchange. This has been commented on many times. The extent to which it +holds has recently been carefully measured by Mr. N. J. Silberling, +whose results appear in the _Annalist_ for August 14, 1916, under the +title, "The Mystery of Clearings." Mr. Silberling applies the +"coefficient of correlation" to the problem, getting in one significant +figure a measure of the extent to which two variables, as share sales on +the New York Stock Exchange and New York clearings, vary together. This +coefficient has been used enough by economists not to require detailed +explanation here. It is a figure always between +1 and -1. +1 indicates +that the two variables in question are perfectly correlated, whereas 0 +indicates no correlation whatever. -1 indicates an inverse correlation, +such that two variables vary exactly and inversely with reference to one +another.[257] + +Mr. Silberling's studies show the following correlations: New York share +sales (numbers of shares, not values) to New York clearings, using +weekly figures, for the years 1909-10, r = .628. This is a high +correlation. Limiting the observations to the middle weeks of the month +for the same period, he gets r = .731(46). The reason for taking only +middle weeks in the month is that thereby the disturbing factor of +monthly settlements is avoided. The monthly settlements may be for stock +transactions, or may be for other things, but as they are not dependent +on the stock transactions _of the week_ in which they occur, their +effect is to lessen the evident degree of connection between stock +sales and clearings. Thus the middle weeks show a closer correlation +between the two variables than do all the weeks taken as they come. If +figures for the month were taken, this complication would be smoothed +out, and a fairer result might be expected to appear. The middle weeks, +eliminating monthly settlements, probably eliminate more other things +than they do share sales (which are in large degree paid for in 24 +hours[258]), and so exaggerate somewhat the relation between shares and +clearings. Monthly figures avoid both complications, though they lose +something of the concrete causation. An intermediate figure might be +expected for the monthly correlation, and this we find: r = .718(23). + +A striking single fact in connection with these figures, giving them +point as less extreme variations could not do, is found in the behavior +of clearings when the Stock Exchange was closed, during the crisis of +1914. At that time, New York clearings, which had been about twice as +great as country clearings, fell suddenly _below_ country clearings. +When the Stock Exchange was opened, the old proportions suddenly +reappeared. + +That speculation spreads far beyond New York, New York being the centre +for dealings in securities, etc., which involve the whole country, is, +of course, well known. The extent of this Mr. Silberling seeks to +measure by correlating clearings outside New York with New York share +sales. His weekly correlation for these two variables for 1909-10 gives +r = .368(103), and the correlation for the mid-weeks gives a higher +figure, r = .424(46). The monthly correlation shows r = .257(23), a +lower figure, "which is perhaps due in part to the fact that the bulk of +the outside monthly clearings show relatively moderate fluctuations, +because of their diverse composition, and are less sensitive than the +periods of shorter length." + +Seeking an index of the variations of that trade which is, in Professor +Fisher's phrase, governed by "physical capacities and technique"--a law +which Professor Fisher,[259] as we have seen, would apply to the great +total of 387 billions which he has constructed--Mr. Silberling chooses +the gross earnings of the principal railways as the best available test. +Railways deal with all manner of other enterprises. He correlates this +with clearings outside New York. "The question might arise at once +whether changes in traffic are strictly concomitant with changes in +payments involved by it, and therefore with the clearings resulting. The +preliminary hypothesis that a 'lag' ensued between traffic and the bulk +of the payments was first tested by correlating the railway figures with +clearings of one month[260] and two months later, but no correlation was +obtained. The direct month-to-month correlation yielded, however, a +result r = .524(23)." This suggests that outside clearings are, in +substantial degree, an index of physical trade, but Mr. Silberling calls +attention to certain chance agreements between railway traffic and +speculation in cotton and produce and grain, speculation in the crops +which are in current movement, and regularly recurring concomitances +between traffic and speculation in March, when the railway traffic +revives after the February lull, and when there is a large mass of +dealing in Spring deliveries in Chicago. In view of the facts later to +be developed, with reference to the small actual value of the necessary +physical exchanges (partially covered already) as compared with +clearings, this query is well put. We may easily have here a "spurious" +correlation. Taking it at its face value, however, and taking the +correlation as indicating the influence of physical trade on bank +transactions, we get the following results, when _total clearings for +the country_ are compared with (a) New York share sales, and (b) with +railway gross earnings: (a) r = .607(23); (b) r = .356(23). "Physically +determined trade" is at best a minor factor in that total "trade" +represented by bank transactions! + +Mr. Silberling has buttressed his results with a consideration of +various alternative possibilities which might give them a different +interpretation. I need not, for present purposes, go further into his +figures.[261] Taken in conjunction with the other data presented, and to +be presented, together with the theoretical discussion of the nature of +trade, and its relations to money and credit, which the present volume +contains, they give the present writer abundant confidence in the thesis +that the great bulk of trade in the United States is SPECULATION, rather +than that sort of trade which is determined "by physical capacities and +technique." + +The figures given above, of the inventory of wealth at a given moment of +time, by the Bureau of the Census, show only trifling magnitudes, as +compared with the estimated 387 billions of deposits made in 1909, of +items which could enter into ordinary trade, as distinguished from +speculation and dynamic readjustments. An effort to calculate ordinary +trade on the basis of figures running through the year may throw further +light on the problem. Railway, gross receipts for the year ending June +30, 1909, were less than two and a half billions. This is six-tenths of +1% of the total. Receipts of the Western Union Telegraph Company were +$30,451,073--less than one-hundredth of 1%. The Post Office in the +fiscal year ending in 1909 took in $203,562,383. This is something over +one twentieth of 1%. These are gigantic sums. But they are insignificant +indeed in this computation. Millions of smaller items simply do not +count at all--ten million items of $387 each would give only 1%. The +total net income of the United States, as estimated by W. I. King for +1910, including all forms of income, dividends, interest, wages, rents, +profits, salaries, etc., is $30,500,000,000[262]--around 7% of the 387 +billions. + +Let us sum up the major items of ordinary trade. From Kinley's figures, +we may get some idea of the proportions of wholesale and retail trade to +the total for 1909, assuming that the deposit figures indicate that +total. Retail deposits make up less than one-eleventh of the total, and +wholesale deposits about two-elevenths. The figures were: retail, 60 +millions, wholesale, 124 millions, and "all other," 502 millions. But +the "all other" deposits were lower than normal. New York City was, in +the first place, probably less complete than the rest of the country, in +the figures returned, and, in the second place, New York City, as shown +by the clearings of March 17 (the next day, when checks deposited in New +York would get into the clearings) was 28% below normal. The rest of the +country was within 3% of normal.[263] Not to refine matters too much, we +shall, on the assumption that the variable element in New York deposits +is connected with the Stock Exchange (as shown by Mr. Silberling's +correlations and other considerations), and on the assumption that +deposits connected with the stock market appear in the "all other" +deposits, add a little over 20% of New York's total of 198 millions, or +40 millions, to the "all other" deposits for the country, leaving the +wholesale and retail deposits unchanged. What error there is in this is +favorable to the wholesale and retail deposits. Our proportions, then, +are: retail, 60, wholesale, 124, "all other," 542, total, 726. If the +retail deposits correctly represented retail trade, we could then say +that retail trade was a little less than one-twelfth of the whole, and +wholesale trade about one-sixth. But there are many speculative +transactions engaged in by wholesalers, and a good many by retailers. +The writer knows a small delicatessen dealer on Amsterdam Avenue, in New +York, who frequently speculates in eggs and canned goods. A colleague in +the Harvard Graduate School of Business Administration is authority for +the statement that speculation in canned goods and some other things is +quite common among retailers, particularly "hedging" by the use of +"futures," in canned goods. Speculation among wholesalers is very +extensive. The same is true of manufacturers. The same authority cited +some cotton manufacturers whose profits from cotton speculation are +greater than their profits from manufacturing. We shall see reason to +suppose that a very substantial part of manufacturers' deposits were +included in the wholesale deposits. That the figures for retailers' +deposits exaggerate the retail trade may appear from several +considerations: (1) The proportion of checks to cash reported is too +high: 73.2%. Dean Kinley allows 5% of the checks deposited to be +"accommodation checks,"[264] cashed for customers, rather than taken in +in trade. (2) If retail deposits are taken as exactly representative of +retail trade, we should get a retail trade for the year of over 32 +billions (1/12 of 387 billions), which would exceed the total income of +the country as calculated by King for 1910. Dean Kinley reached the +conclusion that the retail deposits reported in 1896 also exceeded the +probable retail expenditures.[265] Of course, not all of retail trade is +in consumption goods. Hardware stores, lumber stores, and some other +retail establishments sell, not only to householders for domestic use, +but also things which enter into further production, and so do not come +out of annual income. If we include in retail trade various items which +were not included there in Kinley's figures, such as hotels, theatres, +newspaper receipts from subscription and street sales, physicians' fees, +etc.--all those items which enter into the domestic budget, including +domestic service, we should still not be justified in reaching a total +as great as the total income of society, since there would then be no +allowance for savings, which we should not count in trade, or for life +insurance, which we shall count separately. The items sold at retail +which enter into further production cannot make a great total, since +large producers buy such things at wholesale. Total retail trade, +therefore, and, in addition all the other items in the domestic budget, +must be held below the figure for total national income. Suppose, to be +very liberal, we allow 29 billions[266] for all these items, under the +general head of "retail trade." + +For wholesale trade, if we take the figures at face value, the estimate +would be 65-3/4 billions (124/726 of 387 billions, or 17% of 387 +billions). But we have seen that there is a great deal of speculation +among wholesalers. Not all of their deposits, by any means, represent +receipts from ordinary business. Moreover, there is much overcounting +here, several checks being used for one transaction, especially where +wholesalers have branch houses, and checks connected with loans and +repayments, and transfers of funds from one bank to another. How much we +should subtract for this there is no way to tell. In the case of retail +figures, we have the additional check of the figures for total net +income, but there is no such check here. We shall, therefore, make no +subtraction, but shall content ourselves with pointing out that we are +allowing many billions[267] to "ordinary trade" to which it is not +entitled, which will much more than offset errors in the opposite +direction which the reader may find in our computations. + +Do manufacturers' receipts from first sales belong in the wholesale +deposits, or must they be counted as a separate item? Dean Kinley does +not say. In his list of items, as reported by banks, that go in the "all +other" deposits,[268] he does not mention manufacturers, and the item is +far too important not to have been mentioned by so careful a writer had +he supposed that it belonged there. If manufacturers' first receipts +belong, not in the wholesale deposits, but in the "all other" deposits, +then we should expect manufacturing cities to show a high percentage of +"all other" deposits as compared with wholesale deposits. The city of +Pittsburg should be a good test case. The figures there, for State and +national banks and trust companies, are: + + _Per Cent._ + Retail deposits $1,061,420 9.6 + Wholesale deposits 3,368,004 29.7 + "All other" deposits 6,672,378 60.6 + +For Pittsburg, the percentage of "all other" deposits is lower decidedly +than the percentage for the country as a whole (about 75%), much lower +than for cities where there is active speculation, as Chicago and St. +Louis, to say nothing of New York, and is closer to the percentage of +the South Atlantic States, 52%, than to the average for the country. The +wholesale deposits of Pittsburg, however, rise to 29.7%, as against an +average for the country of 17%. There is nothing in these figures to +suggest that manufacturers' first receipts are exclusively in the "all +other" deposits. I should think it safe to hold that a substantial part +of them were included in wholesale deposits, and so already accounted +for in our estimate. The total value of products manufactured in 1909 +was $20,672,051,870. I shall allow $5,672,051,870 of this to have been +already accounted for in our estimate of wholesale trade, and count 15 +billions of it as a separate item. If there is an error here, it is very +much more than offset by our failure to subtract anything from the +wholesale figures for speculation. I think it probable that much more of +the figures for manufactures should be assigned to the wholesale figures +than I have assigned. + +To these figures, we may add a number of other items, absolutely great, +but insignificant, in comparison with the 387 billions not only, but +also with the figures for retail and wholesale trade already reached. +These are: total farm value of farm products (not nearly all of which is +sold off the farm) $8,760,000,000; total mineral products, +$1,886,772,843; total mill value of lumber, $684,479,859; total life +insurance premiums (much of which is savings, and in no proper sense +trade), $748,027,892; total fire, marine, casualty and miscellaneous +insurance, $362,555,850; total wages and salaries, $14,303,000,000; +total land rent, $2,673,000,000;[269] and the items for railway gross +receipts, post office, telegraph, already mentioned. The total of these +items, together with retail and wholesale trade and manufactures, is +$141,860,618,000. This is only 36.6% of the total of 387 billions. It +leaves over 245 billions unexplained. What can the 245 billions +represent? There is really no way in which ordinary trade can make up +more than a very few more billions, so far as I can see. There remain no +items as big as 1% of the total, and, as we have seen, small items, of +hundreds of dollars each, are like "infinitesimals of the second +order"--they simply do not count at all when such staggering figures are +involved.[270] + +There remains, then, a total of 245 billions of check and money payments +which are for something other than the ordinary trade of the country. +What do these payments represent? Much of this total represents +overcounting and duplications of various kinds, which we shall consider +in a later chapter. Much of it also represents speculation and dealings +other than speculative in securities. When we seek to find actual +figures of transactions in any field, retail, wholesale, or speculative +markets, or anything else, it is exceedingly difficult to find anything +that approaches the amounts indicated by the banking transactions +connected. I do not think that a record of all sales would show retail +sales or wholesale sales anything like so great as the figures as we +have allowed for them on the basis of the retail and wholesale deposits. +When we look at the recorded figures of transactions on the speculative +exchanges (or at estimates which competent observers make when records +are not available), the figures, though very large, do not begin to +equal the banking figures with which we have to deal. The New York Stock +Exchange in 1909 showed sales, recorded on the ticker, of nearly 215 +million shares of stock, with an approximate value of over 19 +billions[271] of dollars. This was not an extraordinary year. In 1901 +nearly 266 million shares were sold, in 1905, over 263 millions, in +1906, over 284 millions. A number of other years have approached the +figures for 1909. If stock sales be a good index of general speculation, +1909 is a very satisfactory year from which to have got figures, as +showing neither extreme speculation, nor extreme dullness--which latter +was the case in 1896 when Kinley's other big investigation was made. The +figures for shares sold, however, do not exhaust the business done at +the New York Stock Exchange. "Odd lots," _i. e._, sales of less than 100 +shares, are not recorded on the ticker. Mr. Byron W. Holt estimates that +from 25 to 30% would be added if they were counted. DeCoppet and +Doremus, of New York, who handle at least as much of the "odd lot" +business as any other New York house, have given me the following +information about the "odd lot" business: (1) the volume of odd lot +sales is, roughly, from 20 to 25% of the volume of hundred share sales; +(2) the odd lot business fluctuates in conformity to the hundred share +market; (3) the odd lot speculator is just as likely to be a "bear" as +is the hundred share speculator, and, in general, odd lot business is +like the hundred share business. If we take the figure on which these +two estimates agree, 25%, we may add 53-3/4 million shares to our 215, +getting 268-3/4 million shares for 1909, with a value of about 24 +billions. Bond sales recorded would add about 1 billion more. There are, +further, some unrecorded sales, indeterminate in amount, but sometimes +very substantial, when brokers have a number of "stop loss" orders. They +match these before the market opens, and, if the prices are reached in +the actual trading, these sales become effective automatically, without +getting on the ticker. How extensive this is cannot be stated. It may +sometimes add very substantially.[272] Thus, on the floor of the New +York Stock Exchange we have dealings in excess of 25 billions for 1909. +This is nearly as large as the figure we have assigned, on the basis of +the bank figures, to total retail trade of the country, and it may well +exceed the retail trade in fact. Recorded sales on other stock exchanges +do not, in the aggregate for the country, bulk very large. For 1910, +when New York shares reached 164 millions, the total for Boston, +Philadelphia, Chicago, and Baltimore was something over 21 million +shares.[273] The New York Curb has had "million share" days, but the +average value of shares is low. But the dealings on the floors on the +exchanges and "curbs" are far from all of the dealings in securities! +Only securities which have been admitted by the authorities are dealt in +on the exchanges. The volume of unlisted securities is enormous. +Moreover, not all, by any means, of the sales of listed securities take +place on the floors of the exchanges. The bond expert of a large banking +house in Boston informs me that the "over-the-counter" business in +Boston, both for stocks and for bonds, much exceeds the business in the +Boston Stock Exchange, and others among Boston brokers have expressed +the same opinion. The statement has been repeatedly made in the +financial press that of the bonds listed on the New York Stock Exchange, +ten are sold over the counter for one sold on the floor. Evidence on +this point is not to be had in definite figures, of course, but I have +found no one in Wall Street who regards it as extravagant. A single big +bank in New York sold $550,000,000 in bonds in 1911--more than half the +recorded bond sales on the Stock Exchange.[274] I should not know how +to estimate the volume of outside dealings within many billions of +"probable error." If ten billions of listed bonds are sold over the +counter in New York alone, we may well suppose that the volume of +over-the-counter sales of listed and unlisted securities at least is not +smaller than the recorded sales on the floors of the exchanges. But this +is all guess work. There are no definite data. + +For produce, cotton, and grain speculation we have, in general, +estimates rather than records. For the Board of Trade, in Chicago, there +is one quite striking piece of information. That is that the Federal War +Tax of 1 cent per hundred dollars on grain and provision futures on the +exchanges produced $2,000,000 in Chicago alone in 1915.[275] For the +purposes of the tax, deliveries within thirty days were counted, not as +futures, but as "spot" transactions. The tax was collected almost wholly +on grain. If the above figure is correct, then it is clear that dealings +in these futures of over thirty days aggregated 20 billions of dollars +worth. This gives no estimate of spot transactions, which are, however, +very great. All this trading involved less than 400,000,000 bushels of +grain received at Chicago--a little over a billion bushels were received +at all primary markets. The grain received at Chicago was, thus, (at +80 c. per bushel), sold sixty-two times over in these futures, and an +unknown number of times in spot transactions. There are further enormous +spot transactions in provisions of various kinds at Chicago. + +Chicago is the great centre, of course, for this kind of speculation in +the United States. It may well be the world's chief market, so far as +futures are concerned, though evidence to establish such a thesis is not +at hand. London and Liverpool are gigantic centres of commodity +speculation. But we have numerous cities in the United States where such +speculation is very great. St. Louis, Kansas City, Minneapolis, New +Orleans, and other cities are active speculative centres. New York, +while small in its volume of grain and produce speculation as compared +with Chicago, is the world's centre for cotton speculation, and the +world's centre for futures in coffee, though yielding precedence to +Havre, Santos and Hamburg,[276] ordinarily, in the volume of spot coffee +transactions, and though handling only a very small amount of spot +cotton. The volume of cotton sold in an ordinary year in New York is +50,000,000 bales,[277] though only about 160,000 bales are ordinarily +received there, in a year.[278] In the five years preceding 1909, the +sales on the New York Coffee Exchange averaged over 16 million bags of +250 pounds each.[279] In 1915, 32 million dollars were deposited as +margins in connection with this speculation in coffee, and in ordinary +years this runs from 25 to 30 millions, according to the Treasurer of +the Exchange. The relation between the margins put up and the total +pecuniary volume of trading is not indicated, but in most exchanges the +actual depositing of margins is a small fraction of the pecuniary +magnitude of the turnovers. Both the Cotton and the Coffee Exchanges are +international centres. The Coffee Exchange now handles large +transactions in sugar, also. + +Contacts between the organized exchanges and ordinary business are very +numerous. Producers in every line who can do so protect themselves by +"hedging" in the exchanges which deal in their raw materials. This is a +commonplace, so far as millers are concerned. The writer has found +millers in a town off the main lines of the railroads in Missouri who +regularly sell short a bushel of wheat on the St. Louis Merchants' +Exchange for every bushel they buy to grind. The business man who does +not sometime take a "flier" in the market for other than hedging +purposes is rare! But, apart from the organized markets there is an +immense volume of speculation. If a wholesaler buys only what he can +sell to retailers, it is not speculation. But if he buys in excess of +the anticipated demands of his retailers, expecting to sell the excess +at an advance to other wholesalers, he is speculating. If a farmer buys +cattle to feed, he is not speculating, but if he buys them thinking to +sell them at an advance in a short time, and does so, the transactions +are speculative. The line is not easy to draw, in practice. Intention is +shifting and uncertain. There is chance in every industrial, commercial, +and agricultural operation. But for the point at hand, the test is +simple: do more exchanges take place than are necessary, under the +existing division of labor, to advance the materials of industry through +the stages of production, and get things finally to the consumer? If so, +the excess of exchanges is speculative. Trading between men in the same +stage of production is speculation. It represents trading to smooth out +dynamic changes, to bring about readjustments which would have been +unnecessary had conditions really been static, and had the initial plans +of enterprisers been adequate. Trading in anticipation of further +trading with men in the same stage of production is speculative. This +sort of thing, in the wholesale business, especially, is exceedingly +common. This has been noted by Professor Taussig, and made by him an +important point in the theory of crises. Dean Kinley[280] called +attention to it as a matter of importance in connection with his +investigation in 1896. The coming of cold storage, and the development +of the canning industry have, I am informed by a colleague in the +Harvard Business School, enormously increased this speculation among +both wholesalers and retailers, and it is very important in most +wholesale lines. There is short-selling in materials for construction +purposes, and in metals, apart from organized exchanges, and, where +possible, contractors in the building trade often protect themselves by +means of future contracts with speculators who are selling short. + +Land speculation, in varying volume, is found in every part of the +country. There is speculation in leases, in options on real estate, and +in options on leases.[281] It may be noticed, too, that sales of +"rights," of puts and calls and straddles, and other contract rights, +are regular factors in the organized exchanges. Wherever profits are to +be made by leveling values as between different places or different +times, speculation arises, and, with dynamic change, this means +everywhere, in every business, and all the time! The shifting of labor +and capital from industry to industry, leveling returns to capital and +labor, involves an enormous amount of trading that would not occur in a +"normal equilibrium." Much of this the Stock Exchange does. That is what +it is for. But much of it has to do with unincorporated industry, and a +vast deal of speculative exchanging takes place to this end apart from +the organized exchanges. + +Speculation in bills and notes, by note-brokers and particularly by +dealers in foreign exchange, occurs on a large scale, and accounts for a +great deal of the banking figures. This has nothing to do with +physically determined trade. From the standpoint of Professor Fisher's +"equation of exchange," it must be barred, if the contention that +"trade" is determined by "physical capacities and technique" is to be +adhered to. Speculation in demand finance bills is barred in any case, +since "money against checks," and "checks against checks," are excluded +by his definition.[282] But as an explanation of no small part of our +unexplained 245 billions of dollars, these items must be brought in. +They are "double counting" from the standpoint of Professor Fisher's +equation. They are, however, speculation. An official in a great New +York banking house, in charge of the foreign exchange department, writes +that in times when exchange rates are fluctuating, enormous quantities +of drafts on Europe will be bought and sold, during a period of a couple +of weeks or months, whereas under other conditions such transactions +might amount to little with the same volume of imports and exports. The +part of this which is between banks, a very big item, would not count in +the 245 billions, but to the extent that foreign exchange brokers +outside the banks participate, their activity helps to explain our 245 +billions. + +If it be true that speculation, including all manner of readjustment to +dynamic changes, makes up the overwhelming bulk of trade in the country, +then Fisher's _indicia_ of variation in trade, weighted as they are, are +totally misleading. The same is true of Kemmerer's _indicia_ of "growth +of business."[283] These are: population, tonnage entered and cleared, +exports and imports of merchandise, postal revenues, gross earnings of +railways, freights carried by railways, receipts of the Western Union +Co., consumption of pig iron, bituminous coal retained for consumption, +consumption of wheat, consumption of corn, consumption of cotton, +consumption of wool, consumption of wines and liquors, market values of +reported sales on the New York Stock Exchange. Only the last of these is +in any sense an index of speculation. It is swallowed up by being put on +a par with the other fourteen items. Its influence on the final index, +made by averaging the others is, as inspection shows, virtually _nil_. +Out of the twenty-six years his figures cover, the general index moves +counter to the share sales 14 times! Utterly random figures would have +come nearer to the facts in the case. It is particularly striking that +Professor Kemmerer, whose total figures, as Professor Fisher's, rest for +their absolute magnitude on Kinley's investigation,[284] should assign +89% of his estimated trade (183 billions in 1890) to wholesale +commodities,[285] (with 3% to wages, and 8% to securities), when +Kinley's figures show that wholesale deposits are a minor fraction of +the total! + +The constancy in the figures of these two writers for trade from year to +year, a general steady, upward growth, does indeed suggest that trade is +determined "by physical capacities and technique," and that it does +stand as a great, independent, inflexible factor, independent of money +and deposits, constituting a real causal coefficient with them in +determining prices. If, however, speculation is as big a factor as our +analysis would indicate, then trade is a highly flexible thing, varying +enormously from year to year, moved by a multiplicity of causes, among +them _fluctuations_ in particular prices, and the ease and tightness in +the money market--the quantity of money and deposits. + +But quite apart from speculation, it is not true that trade is a mere +matter of physical capacities and technique, a passive function of +production. Rather, one would almost have to reverse the relation. +Production waits on trade! + +Production, as now carried on, is primarily conducted in the expectation +of _sale_, and of profitable sale. Trade does not go of itself, +automatically. Rather, it is a highly difficult matter, calling for the +highest order of ability, and the labor of innumerable men. In general, +I think it safe to say that in ordinary times, the manufacturer loses +vastly more sleep over the question of how he shall market his output, +than he does over the question of how he shall produce it. A clerk in +the Westinghouse Air Brake Company, engaged in the accounting +department, spoke recently to the writer of the "productive end" of the +business. On inquiry, it developed that he meant the selling department! +He stated that the manufacturing department also, in the language of the +employees, in that corporation, would also be termed "productive," but +that the selling department was _the_ productive department. + +If one reflects a little as to the proportion of "costs" that go into +selling, as compared with technical "production," I think my point will +be clearer. Advertising has developed so enormously that it needs little +discussion. It has been stated that the "Sapolio" people once tried, +after their reputation seemed thoroughly established, to stop +advertising, with such disastrous results that very extraordinary +efforts were required to reëstablish the brand. Number 2 wheat is not +advertised, in the great magazines, but innumerable brands of flour get +newspaper and magazine advertising,--some of them in such a periodical +as the _Saturday Evening Post_, and even those which are locally +consumed are commonly advertised in the local press. Nor is it only +finished products, of the sort that must be sold to the fickle public, +that involve these heavy selling costs. The writer has in mind a +corporation producing a high-grade type of glazed retort, in the +production of which it has virtually a monopoly, since the clay with +which it is made does not coexist with the skill to make it in any other +place. The particular product is an indispensable part of many important +technical processes. Substitutes made of other clays, and by other +companies, are known by the trade to be unsatisfactory. The buyers are +all highly trained business men. Here, if anywhere, selling costs should +be slight. But the chief selling agent of the corporation has found it +necessary, in order to keep the business going, to incur huge expenses +for entertaining his customers, finds it necessary to incur great +travelling expenses, to use only the most expensive hotels, and, +incidentally, to drink a great deal more than his personal inclinations +would call for, in keeping the business for his house. I waive +discussion of the extraordinary fees which a trust promotor makes, in +effecting a consolidation of big business units,--a process of exchange. +I am speaking now of the ordinary costs involved in ordinary trade. The +army of travelling salesmen, the body of stenographers, who write +letters, with various "follow-ups," in the effort to get more business, +the growing complexities of such letter writing, in which all suspicion +of "circularizing" must be allayed, one-cent stamps being absolutely +taboo!--these things are the commonplaces of business. They are in the +primers in the "commercial colleges" and "schools of commerce." Only the +orthodox economist, with his doctrine of the impossibility of general +overproduction, is ignorant of them! + +This feature of modern business has been much elaborated in a recent +book which has not received the attention it merits--though its strength +is rather in criticism than in constructive doctrine. I refer to +Dibblee, _The Laws of Supply and Demand_.[286] Dibblee makes an +interesting contrast between commercial and manufacturing cities, +maintaining that the former necessarily outgrow the latter--a contention +which London, New York, Chicago and other places strikingly illustrate. +He presents a truly remarkable fact about London:[287] a recent report +of the Commission on London Traffic states that there were in London 638 +factories registered as coming under the Factory Acts, with an average +horse-power of 54. The total power employed within the London area under +the Factory Acts, chiefly used in newspaper printing, was 34,750 +horse-power--just one-half of what is required for the steamship, +Mauretania! This is the greatest city in the world. What do its millions +do for a living?[288] The town of Oldham,[289] he asserts, with 100,000 +inhabitants, has spindle capacity enough to supply more than the regular +needs of the whole of Europe in the common counts of yarn. To _market_ +the output of Lancashire, "the merchants and warehousemen of Manchester +and Liverpool, not to mention the marketing organization contained in +other Lancashire towns, have a greater capital employed than that +required in all the manufacturing industries of the cotton trade." +Accurate estimates of the proportion of "selling costs" to costs of +technical production are doubtless impossible, for the general field of +trade, and precision is unnecessary for my purposes. Dibblee's +conclusion, after contrasting retail and wholesale prices, and analyzing +the expenses incurred in selling prior to the wholesale stage, is that +the cost of marketing is at least equal to "real cost of production," +occasionally only slightly below it, and often far above it (62).[290] +If one considers how large the item of "good will" often bulks in the +value of "going concerns"[291]--good will being in large degree often +just a capitalization of prior costs of this nature--Dibblee's estimate +need not be exaggerated. Trade connections, trade-marks that have +reputation, etc., often represent enormous output in thought, work, and +expense. Selling costs may, like other costs, be divided into "prime" +and "overhead" costs. Some of the latter lead to long-time consequences, +pay for themselves only in the long run. These may be "capitalized" in +"good will."[292] Of course, not all good will is got at a cost. Much of +it is adventitious. + +In the light of the doctrine that trade is independent of money and +credit, one wonders why it should be thought necessary to extend +branches of American banks to the South American markets which we are +now reaching out toward. And why have Americans, from the beginning, +been constantly increasing commercial banks?[293] It is easy to sneer at +the efforts of the successive frontiers in our history to provide +themselves with banks of issue as based on a delusion, the delusion that +bank-notes are "capital," and to say that their real need was, not more +bank-credit, but more real capital. They needed more tools and +live-stock, doubtless, but is that the whole story? And were their banks +of no assistance in getting the additional capital of various sorts? And +was it a matter of no consequence that they had an abundant medium of +exchange? It seems almost childish to put such questions, but the +quantity theory has as its logical corollary that to multiply banks is +quite useless and wasteful, since the only result is to raise prices. If +increasing bank-credit cannot increase trade or production, this +corollary is inevitable. Indeed, the case may be more strongly stated. +Quite apart from the wasted labor of bank-clerks and the waste of +banking capital, the effect of increasing bank-development, on quantity +theory reasoning, is harmful. If increasing bank-credit is to raise +prices without increasing trade, then, on quantity theory reasoning, it +must _depress_ business. The reason is that rising prices in a given +region make that region a bad place to buy in, and so curtail its +exports. This is, indeed, the quantity theory explanation of +international trade, to which attention is later to be given. The +country which is expanding its banking facilities most rapidly will +suffer most in competition in the world markets. This is why the United +States have so little foreign trade! It also explains the rapid strides +that China and Central Africa have recently made in capturing the +world's markets. I submit that there is no flaw in this argument, if the +premise of the independence of volume of trade and volume of bank-credit +be granted. It follows from the quantity theory. That it is no +caricature of Fisher's argument will appear, I think, from the following +quotation,[294] which very nearly states what I have just been saying, +though it does not draw the conclusion that banking is a bad thing: "The +invention of banking has made deposit currency possible, and its +adoption has undoubtedly led to a great increase in deposits and +consequent rise in prices. Even in the last decade the extension in the +United States of deposit banking has been an exceedingly powerful +influence in that direction. In Europe deposit banking is in its +infancy."[295] Happy Europe, troubled only by war! It is greatly to be +hoped, in the interests of American agriculture, that the efforts to +increase agricultural credit facilities will fail! + +We are driven to one of the most fundamental contrasts in economic +theory, which appears under various guises and in different forms: +statics _vs._ dynamics; transition _vs._ equilibrium, theory of +prosperity _vs._ theory of goods; normal tendency _vs._ "friction."[296] +Perhaps Professor Fisher, and the quantity theorist in general, would +dismiss many of these considerations as not applicable to the general +principle, which is a "normal" or "static" or "long run" law, not +subject to considerations of this sort. It is scarcely open to Fisher to +defend himself this way, because of his exceedingly uncompromising +statement regarding even "transitional" relations between volume of +trade and money and credit. I shall not reply to anyone who offers such +an objection by a general tirade against "static economics." I believe +thoroughly in the method of economic abstraction, and in reaching +general principles by ignoring, provisionally, in thought the "friction" +and "disturbing tendencies" which often make the first approximations +look somewhat unreal. But I raise this question: to what feature of our +economic order do we chiefly owe it that we can make such abstractions? +By virtue of what does friction disappear? What is it that makes our +abstract picture of economic life, as a fluid equilibrium, with its nice +marginal adjustments, its timeless logical relations, correspond as +closely as it does to reality? The answer is: MONEY and CREDIT.[297] + +It is the _business_, the _function_, of money and credit, as +instruments of exchange, to bring about the fluid market, to overcome +friction, to effect rapid readjustments, to give verisimilitude to the +static theory, to make the assumptions of the static theory come true. +Where exchange is easy and friction slight, there will not be two prices +for the same good in the same market. Speculators, seeking profits of +fractions of a point, will prevent that. By multiplying exchanges, they +will level off values and prices. Because money and credit have done +their work so thoroughly in the "great market," it is possible for men +to talk about static theory, and to work out economic laws in +abstraction from friction, transitions, and the like. + +In the static state, all speculation is banished. There are no +price-fluctuations to be smoothed out, no new prospects to be +"discounted," no uncertainties to be guarded against by "hedging." +Seasonal goods will, of course, have to be carried over from one season +to the next, but this will involve merely warehousing and the use of +capital--"time speculation," involving many sales, does not come in. One +sale to the capitalist who carries the seasonal goods, with a sale by +him to the man who means to use them, will suffice. It has been shown +before that the great bulk of trade is speculation. But speculation is +banished from the static state. Speculation is a function of dynamic +change, waxing and waning with the degree of uncertainty that exists, +the new conditions to which readjustments have to be made, the +"transitions" that have to be effected. In other words, the laws +governing the volume of trade are dynamic laws, laws of "transition +periods," and so the whole notion which underlies the quantity theory, +of "normal periods," "static" relations, etc., is here irrelevant. +Volume of _trade_, as distinguished from volume of _production_, is +controlled by the number and extent of the "transitions" that have to be +made. The chief work of money and credit is done _in_, and _because of_, +"transition periods." Assume a normal equilibrium accomplished, and you +have little trading left to do. It will still be necessary, if you have +the division of labor, and private enterprise, for goods to pass through +as many different hands as there are different independent enterprisers +in the stages of production, and on, through merchants, to the consumer. +It will still be necessary to pay wages, rents, dividends and interest. +But there will be no selling of lands, of houses, of factories, of +railroads, or of securities representing these. By hypothesis these are +already in the hands best qualified to hold them. The "static +equilibrium" presents "mobility without motion, fluidity without +flow."[298] The static picture is a picture of completed adjustment, +where no one has an incentive to change his work, or his investments, +because he has already done the best that he can for himself. It is, +therefore, a picture of a situation where there is little incentive for +those exchanges which make up the great bulk of the volume of trade in +real life. + +Hence the curious phenomenon that very much of static theory has been +developed in abstraction from _money_ and _credit_. Mill's theory of +international values, for example, abstracts from money. "Since all +trade is in reality barter, money being a mere instrument for exchanging +things against one another, we will, for simplicity, begin by supposing +the international trade to be in form, what it is in reality, an actual +trucking of one commodity against another. So far as we have hitherto +proceeded, we have found the laws of interchange to be essentially the +same, whether money is used or not; money never governing, but always +obeying, those general laws."[299] Other writers have similarly held +that money is a mere cloak, covering up the reality of the economic +process. Schumpeter, for example, holds that money is, in the static +analysis, merely a "Schleier," and that "man nichts Wesentliches +übersicht, wenn man davon abstrahiert."[300] _On the static +assumptions_, of the fluid market, with friction, etc., banished, money +is, indeed, anomalous and inexplicable. It is a cloak, a complication, a +vexatious "epi-phenomenon." There is nothing for it to do, and there can +be, consequently, no "functional theory" developed for it. Static theory +may be ungracious in ignoring its own foundation. But static theory is +grotesque when it seeks to support its own foundation! Static theory is +possible only on the assumption that the work of money and credit has +been done. What, then, shall we say of static theory which seeks to +explain the work of money and credit? Yet precisely this is what is +undertaken by the quantity theory, with its "normal" or "static" laws of +money and credit. A functional theory of money and credit must be a +dynamic theory. To talk about the laws of money, "after the transition +is completed" is to talk about the work money will do after it has +finished working. For a functional theory of money and credit, we must +study the obstacles that exist to prevent the fluid market. We must +study friction, transitions, dynamic phenomena. + +To this problem we shall come in Part III. For the present, I am content +to have disproved the quantity theory contention that the volume of +trade is independent of the quantity of money and credit. + + + + +APPENDIX TO CHAPTER XIII + +THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES[301] + + +The word, "trade," as used in connection with statistics of foreign and +domestic trade has been irritatingly ambiguous. Few writers, in speaking +of domestic trade, have meant the same thing by trade that they have +meant by the word when speaking of foreign trade, and hence we have had +many pointless efforts to institute comparisons between the two, and +some very misleading statements about the matter. Thus, figures have +been offered which would show that the foreign trade of the United +States is only a fraction of 1% of the domestic trade. This conclusion +is reached by taking the figures for banking transactions discussed in +Chapters XIII and XIX as representative of domestic trade, and comparing +them with the annual figures for exports and imports. This procedure is +fallacious for several reasons:[302] the figures thus reached for +domestic trade exceed even the total trading within the country, as +shown in Chapter XIX. In the second place, as shown in Chapter XIII, the +bulk even of these deposits which do represent real trading grow chiefly +out of speculation. Even in ordinary trade, goods are counted several +times before reaching the final consumer. It is clear, therefore, that +even an accurate figure for total trading within the country would have +little relevance when we are seeking a figure to compare with exports +and imports. Nor, if a comparison of the actual trading in which +foreigners participate with the trading exclusively between Americans is +sought, can we take the export and import figures as representative of +the foreign trading--they do not include a multitude of highly important +transactions in which foreigners participate. Very much of the business +of the New York Cotton Exchange, the New York Stock Exchange, the +Chicago Board of Trade, and other speculative markets represents foreign +buying and selling, especially arbitraging transactions, and the other +"invisible items" of foreign trade need merely to be mentioned for the +economist to recognize the fallacy of a comparison which omits them. + +What figures are relevant when we wish to compare foreign and domestic +trade? First we must make clear the purpose for which the comparison is +to be made. If we are concerned with the calls made by foreign and +domestic trade on the money market, we should make use of a different +method of comparison than that which will be here employed. The purpose +of the comparison here undertaken is to determine how much of our +American labor, land and capital is at work producing for the foreign +consumer, as compared with the land, labor and capital in America +producing for the American consumer. The comparison here undertaken is +concerned with the question which is usually uppermost in the minds of +those who undertake such a comparison, namely, _how important_ is our +foreign market to us? Obviously, for such a comparison as this, we +should not count a given case of eggs twelve times merely because it +changed ownership twelve times in getting from farm to breakfast table. +Items of export and import count only _once_ in the figures for export +and import. We must find a figure for domestic "trade" in which items +count only once, allowing no turnovers of the same goods to swell the +total, if we wish to make our figures comparable. + +The method proposed for making this comparison, for a long series of +years, is a modification of the method used by the writer in an article +in the _Annalist_ of Feb. 7, 1916. A figure based on the bank deposits +of _retail merchants_ in Kinley's 1909 investigation was there taken as +properly comparable with the export and import figures. The final sale +to consumer by retailer is "the one far off divine event" toward which +the whole productive process moves. Everything else in production and +exchange looks forward to this. Ultimately, from the demand of the final +consumer comes all the demand that is directed toward the agencies of +production, even though the laborer sees his immediate market in the +person of the employer, and the capitalist or landlord sees his +immediate market in the person of the active business man. The figure +reached for retail trade by the method then employed was $34,500,000,000 +for 1909. This figure was too high, as shown in Chapter XIII above, and +the figure reached now for retail _deposits_ by the same method is +$32,000,000,000. Even this figure is too high, however, as I there +concluded, to represent retail _trade_, and I shall use it only as a +check on King's figure for _the total income of the United States in +1910_, which I shall use as a base figure instead of my own. King's +figure for the total income of the United States in 1910 is +$30,500,000,000.[303] I take this figure as including all that the +American people spend for consumption, with retailers, physicians, +hotels, theatres, etc., and also their net savings for the year. Part of +this they spent for foreign products. The rest they spent at home. This +residue spent at home gives us a figure which we may properly compare +with the amount the foreigner spends in America, as indicating the ratio +of foreign to domestic trade for the purpose in hand. We subtract, in +other words, from the figure for total income the figure for _imports_. +Then we compare the residue with the figure for _exports_, and get our +ratio of foreign to domestic trade. The export and import figures must +first, however, be reduced to a _retail_ basis. That is, assuming that +wholesale prices are two-thirds of retail prices, we add 50% to the +figures for exports and imports (which are wholesale figures) before +making the subtraction and the comparison. The ultimate consumer, both +in Europe and America, pays for imports and exports on a _retail_ +basis.[304] This method, applied to the figures for 1910, gives us a +ratio of about 10:1 for domestic to foreign trade--the lowest percentage +for foreign trade which we shall find for any year in the period +investigated, 1890-1916. + +This comparison is still unfavorable to foreign trade. Domestic trade, +in our figures, includes savings and investments, including investments +made by Americans abroad. Import figures are marred by undervaluations, +exports are not all counted, and the figures for exports and imports do +not include foreign investments in America. American investments abroad +should not be counted as part of domestic trade. Moreover, our figures +take no account of travellers' expenditures, or of services performed by +professional men of one country for men in another, or of certain other +"invisible items." But while this makes our percentage for foreign trade +too low for all years, it probably does not greatly upset the results +for yearly variations in the ratio except for the year 1916, when the +figure for domestic trade is left decidedly too high, and the ratio for +foreign trade is too low, as compared with previous years. + +For years other than 1910, indirect calculations must be resorted to for +domestic trade. I have substantial confidence in the rough accuracy of +the figure chosen for 1910 in view of the convergence of two widely +different sets of data. My figure for retail deposits in 1909 is +$32,000,000,000. King's figure for total income is $30,500,000,000 for +1910. King's figure seems to me a better figure to use for the purpose +in hand. I use my own merely as a rough check on his. For years other +than 1910, the figure for net income is calculated as a percentage of +King's figure for 1910, by means of an "index of variation." It is +assumed that the net income of 1905, for example, bears the same +relation to the index for 1905 that the absolute figure for net income +of 1910 bears to the index for 1910, and net income for 1905 is then +computed by "the rule of three." The index of variation chosen is +_railway gross receipts_ weighted by _wholesale prices_. I think that +railway gross receipts are, on the whole, the most dependable and easily +manageable index of physical volume of production that we have, though +recognizing difficulties, later to be discussed, in using them for the +purpose in hand. Railroads touch virtually every kind of business in the +country. Variations in the _pecuniary_ volume of production and +consumption, however, if due to rising or falling _prices_, rather than +to changing physical volume, would not be indicated by changes in +railway gross receipts. The same volume of transportation might +represent widely varying pecuniary values of goods transported. Railway +rates do not vary from year to year with prices of goods, even though +high-priced goods are normally charged higher rates than low-priced +goods. The index, therefore, must include _prices_ as well as physical +volume of transportation. For 1910, therefore, railway gross receipts +and an index of prices are multiplied together, and counted as 100%. The +same thing is done for railway gross receipts and prices for other +years, and the results reduced to percentages of the result for 1910. +The figure for net income in any other year is then readily computed as +a percentage of the figure for 1910. The results, for the years +1890-1916, appear in the tables below.[305] + +It may be noticed that my figures for net income in 1900 and 1890 do +not correspond very closely with the figures for the same years as +independently estimated by King. My figure for 1900 is $12,900,000,000, +where his is $17,965,000,000; for 1890, my figure is $9,300,000,000, +where his is $12,082,000,000. I am inclined to the view that the figures +in my tables come closer to the facts for these years than do his +figures, assuming that _his figure_ for 1910 is correct. It will be +noticed that on his figures there was an increase of about 50% from 1890 +to 1900, and an increase of only about 66% in the decade following. This +seems to be an unlikely relation. One would expect a much greater rate +of increase for the decade 1900-10, as compared with the preceding +decade, than King's figures show. The period from 1890 to 1900 included +the terrible panic of 1893 and the prolonged depression ensuing. The +panic in 1907 was trifling in comparison, and recovery, as shown by our +index numbers in the tables below, was very much quicker. Moreover, +falling prices characterized much of the earlier decade. The highest +prices of the whole ten years were in 1891. The period from 1900 to 1910 +is a period of rapidly rising prices, on the whole. On the basis of our +general knowledge of the two periods, one would expect a greater +percentage gain by far for the second decade, and I therefore trust the +results of the index of variation here chosen, which show that. Similar +results are obtained by applying to the base figure for 1910 an index +of variation derived from Kemmerer's and Fisher's figures for trade[306] +and prices. My figure for 1890 may, moreover, be checked by comparison +with the figure given by C. B. Spahr in _The Present Distribution of +Wealth in the United States_ (p. 105) for the net income of the country +for that year: $10,800,000,000. It may be that my figure for 1890 is too +low, but I have not sought to "doctor" it by an arbitrary "correction +factor" to make it correspond more closely than it does with the other +estimates. It is striking enough that a figure derived from an index of +variation, twenty years away from its base, should come as close as this +to figures calculated from wholly different data. + +One brief comment may be made on the significance of these figures. It +may be questioned if figures showing the proportions of our industry +devoted to supplying goods for the foreign market correctly indicate the +importance of the foreign market to us. It may be urged that if we +should lose our foreign market, we should merely turn to producing more +for the domestic market, and that the loss would not be the whole of our +receipts from foreign trade, but merely the cost of transition, and the +loss that comes from shifting to production to which we are less suited. +This is, doubtless, true. But the loss reckoned this way may well be +greater than the loss reckoned on the basis of my figures! It is equally +true, moreover, that our domestic trade is not important to the extent +indicated by my figures, since if we lose part of our domestic trade, +our producers will turn to supplying more for the foreign market. But +one must not regard the cost of transition as a negligible matter! The +cost may easily be prolonged depression. Certain parts of our foreign +trade are really vital to us, both on the import and (to a less degree) +on the export side. The most important practical use to which the +figures here given may be put are in connection with short-run problems. +Foreign trade is so important to us that any sudden alteration in its +amount may bring great adversity or great prosperity--as the course of +the present War abundantly testifies.[307] + +An application of our method to the years 1850 and 1860 gives a +percentage for foreign trade of 12.7 in 1850, and 16.0 in 1860.[308] + +Certain other cautions are needed in presenting these figures. For one +thing, variations in railway rates will make a given volume of gross +earnings mean different things in different years as to the physical +volume of traffic. In the writer's opinion, which is confirmed by +Professor W. Z. Ripley, there is no possible way of making allowance for +this, as the cross-currents affecting railway rates are altogether too +numerous and obscure. Nor has any effort been made to allow for +variations in the proportions of freight and passenger receipts, or of +different classes of freight traffic. + +Again, the proportions of railway traffic connected with foreign trade +may vary greatly, and it may happen that a big increase in railway gross +receipts is due to increasing foreign trade, primarily. There is reason +to suppose that much of the increase of 1916 is to be explained that +way. This makes our comparison for 1916 particularly adverse to foreign +trade, since we count as domestic trade what is really foreign trade. +The figures, however, are presented as they stand. Moreover, for 1916, +the great increase in foreign trade is in _exports_. Merchandise imports +are not much greater than in previous years.[309] Our exports have been +chiefly paid for by "invisible items," gold and securities, and short +term credits. These do not appear anywhere in our figures. A substantial +source of error appears from this cause in our 1916 figure. I should +think it safe to put the ratio for foreign trade to domestic trade for +1916 at above 20%, instead of the 17.9% our table shows. + +The reader will wish to know for a given year how much of the increase +or decrease is due to physical growth of business, as represented by +railway gross receipts, and how much is due to changes in prices. To +give this information, and to make it easy for a critic to check the +results, a table showing the index numbers from which the figures for +net income are computed is subjoined.[310] + + TABLE I[311] + + 1 2 3 4 + Ratio of + Domestic Trade of Foreign Trade of Foreign + Calendar Net Income United States = United States = to + Years of the Net Income minus Exports at Retail Domestic + United Imports at Retail Prices Trade + States Prices + + 1890 $ 9,300,000,000 $ 8,100,000,000 $1,300,000,000 16.1% + 1891 10,400,000,000 9,200,000,000 1,400,000,000 15.2% + 1892 10,000,000,000 8,700,000,000 1,400,000,000 16.1% + 1893 10,100,000,000 8,900,000,000 1,300,000,000 14.6% + 1894 8,300,000,000 7,300,000,000 1,200,000,000 16.5% + 1895 8,400,000,000 7,200,000,000 1,200,000,000 16.7% + 1896 7,900,000,000 6,900,000,000 1,500,000,000 21.8% + 1897 8,000,000,000 6,900,000,000 1,600,000,000 23.2% + 1898 9,100,000,000 8,200,000,000 1,900,000,000 23.2% + 1899 10,900,000,000 9,700,000,000 1,900,000,000 19.6% + 1900 12,900,000,000 11,700,000,000 2,200,000,000 18.8% + 1901 14,600,000,000 13,300,000,000 2,200,000,000 16.5% + 1902 15,600,000,000 14,200,000,000 2,000,000,000 14.1% + 1903 17,700,000,000 16,200,000,000 2,200,000,000 13.6% + 1904 18,000,000,000 16,500,000,000 2,200,000,000 13.3% + 1905 19,600,000,000 17,800,000,000 2,400,000,000 13.5% + 1906 21,500,000,000 19,500,000,000 2,700,000,000 13.8% + 1907 26,600,000,000 24,500,000,000 2,900,000,000 11.8% + 1908 23,000,000,000 21,300,000,000 2,600,000,000 12.2% + 1909 27,600,000,000 25,400,000,060 2,600,000,000 10.2% + 1910 30,500,000,000 28,200,000,060 2,800,000,000 9.9% + 1911 29,600,000,000 27,300,000,000 3,100,000,000 11.4% + 1912 33,800,000,000 31,100,000,000 3,600,000,000 11.6% + 1913 34,800,000,000 32,100,000,000 3,700,000,000 11.5% + 1914 32,600,000,000 29,900,000,000 3,200,000,000 10.7% + 1915 35,400,000,000 32,700,000,000 5,300,000,000 16.4% + 1916 49,200,000,000 45,800,000,000 8,200,000,000 17.9% + + + TABLE II. INDEX NUMBERS FROM WHICH THE FIGURES FOR + NET INCOME ARE DERIVED + + 1 2 3 4 + Composite Net Income[312] + Dun's Prices R. R. Gross Index, R. R. Gr. of the United + Calendar with base Receipts, Rcts. multiplied States in + Years in 1910 reduced to by Prices. billions of + base of (Column 1 × dollars: + 1910 column 2.) 100:30.5::(3):$ + + 1890 76.5 39.8 30.8 $ 9.3 billions + 1891 81.5 42.0 34.2 10.4 + 1892 75.6 43.5 32.8 10.0 + 1893 77.3 42.9 33.2 10.1 + 1894 71.5 38.1 27.2 8.3 + 1895 68.0 40.7 27.8 8.4 + 1896 63.8 40.6 25.9 7.9 + 1897 62.2 42.4 26.4 8.0 + 1898 66.4 45.1 29.9 9.1 + 1899 72.3 49.6 35.8 10.9 + 1900 78.1 54.0 42.1 12.9 + 1901 80.6 59.4 47.8 14.6 + 1902 84.0 62.6 51.3 15.6 + 1903 83.1 70.1 58.2 17.7 + 1904 84.0 70.3 59.0 18.0 + 1905 84.0 76.4 64.2 19.6 + 1906 88.1 85.0 70.5 21.5 + 1907 94.0 92.9 86.3 26.6 + 1908 92.4 81.8 75.6 23.0 + 1909 99.0 91.7 91.0 27.6 + 1910 100.0 100.0 100.0 30.5 + 1911 98.1 99.0 97.0 29.6 + 1912 104.1 106.9 111.0 33.8 + 1913 101.7 112.5 114.0 34.8 + 1914 102.5 104.5 107.0 32.6 + 1915 106.0 110.0 116.0 35.4 + 1916 125.0 129.0 161.2 49.2 + + + + +CHAPTER XIV + +THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT + + +In the argument so far I have said nothing of the reverse relationship, +the dependence of the volume of money and the volume of credit on trade. +The two are indeed _inter_dependent. Interdependence suggests circular +theory, and is often a phrase to cover circular reasoning.[313] In the +case of the relation under discussion, however, I have, I trust, already +abundantly protected myself against the charge of circular reasoning by +_denying_ that either volume of money and credit on the one hand, or +volume of trade on the other hand, is a true cause at all. Both are mere +abstract names, designating highly heterogeneous individual occurrences, +which, _individually_ are cause or effect. In general, both volume of +money and credit, on the one hand, and volume of trade on the other +hand, are results of common causes, which are the _veræ causæ_ of +economic phenomena--values, psychological phenomena. The whole thing is +to be explained immediately and primarily in terms of social +relationships and mental processes,--in terms of social values. + +To show that increasing trade tends to increase money and credit is not +difficult. If one may venture a hypothetical illustration--and the sort +of hypothetical illustrations, like the dodo-bone case, of which +quantity theorists are fond make one hesitate to do so--let us assume a +communistic community, isolated from other markets, with a developed +system of production, including an extensive use of gold in the arts. +Let the communistic régime gradually pass over to an individualistic +régime. Assume that the inhabitants are acquainted with the use of gold +as money, and that their government is willing to coin it freely. As +individualism spreads, and trade grows, will not more and more gold be +taken to the mints? I am not here concerned with the principles +determining the apportionment of gold between the money employment and +the arts. It is enough to show that expanding trade tends to increase +the volume of money. + +Assume that the money supply meets difficulties in its expansion. Is +there not at once an incentive to extend credit? The seller finds his +customers unwilling to buy for cash, in amounts as great as before. In +order to sell as much as before (assuming that the use of credit is +known, to avoid trouble with historical origins), he extends +credit,--which, when practiced generally, lightens the strain on the +money supply. + +I have so far said nothing of the case where there are stocks of the +money metal to be got from outside markets. But if a country is +expanding its trade, does not money come in? The quantity theorists +would, indeed, admit this, in general, though their reason is a bad one, +namely: that expanding trade lowers prices, and lower prices make the +market attractive to foreign buyers, who then send in money for the +goods. I shall later discuss this aspect of the theory.[314] For the +present, I merely interject the question as to the probability of an +expansion of trade when prices are falling. Increasing _stocks_ of +particular goods may well mean lower prices for these goods and if they +be articles of export the lower prices may well increase the export +trade, and bring money in. But this increase in _stocks_ of articles of +_export_ is very different from total _trade_ within the country; and +lower prices in articles of export are very different from a generally +lower price-level.[315] + +Will expanding trade in a country increase credit? I come here to one of +the striking features of Fisher's doctrine--a feature in which I think +he is fundamentally true to the quantity theory. He finds no way in +which expanding trade can directly increase credit. Expanding trade can +increase credit, (a) only by changing the habits of the people, so as to +alter the ratio, M to M´, or (b) by reducing the price-level, and so +bringing in money from abroad, whence, as M is now increased, M´ rises +proportionately. "An increase in the volume of trade in any one country, +say the United States, ultimately increases the money in circulation +(M). In no other way could there be avoided a depression in the +price-level in the United States as compared with foreign countries. [He +should say, from the standpoint of his theory, that increasing trade +will cause a fall in the price-level, and so bring in more money.] _The +increase in M brings about a proportionate increase in M´._[316] Besides +this effect, the increase in trade undoubtedly has some effect in +modifying the habits of the community with regard to the _proportion_ of +check and cash transactions, and so tends somewhat to increase M´ +relatively to M; as a country grows more commercial the need for the use +of checks is more strikingly felt."[317] In a footnote to this +paragraph, he defines the issue still more sharply. "This is very far +from asserting as Laughlin does that 'The limit to the increase in +legitimate credit operations is always expansible with the increase in +the actual movement of goods'; see _Principles of Money_,[318] New York +(Scribner), 1903, p. 82. We have seen, in Chapter IV, that deposit +currency is proportional to the amount of money; a change in trade may +indirectly, _i. e._, by changing the _habits_ of the community, +influence the proportion, but, except for transition periods, it cannot +influence it directly."[319] + +My own explanation of the causal sequence whereby expanding trade brings +money into a country would be radically different from that given by +Fisher in the first quotation. I should expect, first, that rising +_prices_ would encourage rising trade; I should then expect the rising +volume of trade, with higher prices, to lead borrowers to need, and +secure, larger loans from the banks, with, as loans and deposits rise in +proportion to reserves, some slight increase in "money-rates," just +enough to draw to the country the extra gold which bankers felt +desirable to add to their reserves. I should expect the causal sequence +to be the exact reverse of that which Fisher indicates. With falling +prices, or waning volume of trade--which would usually come +together,[320]--I should expect loans to be reduced, deposits to be +reduced, money-rates to fall, and gold then to leave the country again. +I should expect this sort of thing to happen normally, and not +infrequently, and I should expect gold to come in and go out many times +in the course of a business cycle. This would seem to be the sort of +explanation which our modern theory of _elastic_ bank-credit would give +in connection with this problem. I shall not here go into details with +the theory of elastic bank-credit. The theory has been too well +established in the debates between the "Currency School" and the +"Banking School"[321] in regard to bank-notes to need elaboration and +defence here, and the essential identity of deposits and elastic +bank-notes from this angle is one of the commonplaces of the literature +of banking. What I am here concerned with is the highly significant fact +that Fisher's "normal" theory finds no place for this highly important +phenomenon. The quantity theory has no explanation of elasticity to +give. On the basis of the quantity theory, and for all that the quantity +theory can say, the Currency School was right! Fisher offers us, +virtually, a "currency theory" of deposits. "Suppose, as has actually +been the case in recent years, that the ratio of M´ to M increases in +the United States. If the magnitudes in the equations of exchange in +other countries with which the United States is connected by trade are +constant, the ultimate effect on M is to make it less than what it would +otherwise have been, by increasing the exports of gold from the United +States or reducing the imports. In no other way can the price-level of +the United States be prevented from rising above that of other nations +in which we have assumed this level and the other magnitudes in the +equation of exchange to be quiescent." (P. 162.) If "bank-notes" be +substituted for "M´", in this quotation, we have here a perfect +statement of the position of the "Currency School" in that great debate. +Must this old issue be fought all over again? And yet, I defy any +consistent quantity theorist to find any flaw in Fisher's argument on +this point. There is no place for a theory of elastic bank-credit +within the confines of the quantity theory. Fisher's recognition of this +seems full and complete. He relegates all mention of elastic bank-credit +to "transitions." The footnote quoted above, in which Laughlin's +(somewhat extreme) doctrine based on the theory of elasticity is stated, +denies categorically that there is any validity in it, except for +transition periods. There is nowhere in the book any explanation of the +theory of elasticity.[322] The references to it are few and grudging, +and _always_ in connection with the notion of transitions. The most +important statement regarding elasticity (less than a page long) is on +page 161, where again transitional influences are under discussion. What +is a theory of money worth which can offer no explanation of so +fundamental, important, and notorious a feature of modern money and +banking? + +There is a further, related, feature of banking for which the quantity +theory can find no explanation. Among the items in a bank's balance +sheet, the quantity theorist seizes upon reserves on the assets side, +and deposits on the liability side, and builds his theory on the +supposed close relation between them. We have seen that this close +relation does not, in fact, exist. The range of variation is +enormous.[323] But there is one close relation in the balance sheet of +the bank concerning which the quantity theory is silent, and that is the +relation between deposits and _loans_. For individual banks and for +banks in the aggregate, for long run periods and for short run periods, +for reasons that are clear and inevitable, these two magnitudes (or for +banks of issue on the Continent of Europe, _notes_ and loans), vary +closely together. The relationship between them is the only relationship +which does stand out as clearly beyond dispute, among all the items in +the banking balance sheet. No assumptions of a "static state" are needed +for its demonstration! The relation varies, of course. As banks increase +or reduce their capital, as their reserve-percentages rise or fall, as +they increase or decrease their holdings of bonds, we find reasons which +alter the proportion between deposits and loans. But, despite this, the +variation, as shown by figures for the United States, is slight. Assume, +for example, a statement showing "loans and discounts" of $1,000,000, +deposits, $1,000,000, cash reserve, $200,000. Reserves are then 20% of +deposits, and loans are 100% of deposits. If reserves be increased by +$100,000 and loans and discounts reduced, to compensate, by $100,000, we +have a 50% variation in the ratio of reserves to deposits, with only a +10% variation in the ratio of loans and discounts to deposits. Since +cash reserve is much the smaller item, almost always, the same absolute +variation in it will affect it, in percentage, vastly more than it will +affect loans and discounts. It is strange that a theory should seize on +this highly variable ratio of reserves to deposits, and ignore the much +more constant ratio[324] of loans and discounts to deposits. + +That this close relation between deposits and loans should obtain +follows naturally from the theory of elastic bank-credit. The two are +built up together. When there are expanding business and rising prices, +men borrow more from the banks; as they borrow, they receive deposit +credits; the individual who receives the deposit credit may check +against it, but it is redeposited by another man, and so, while the +deposits of one bank need not grow out of its loans, still, for banks in +general, deposits are large because loans are large. For a given bank, +the relation holds closely, because the bank lends, in general, to +active business men, who will have income as well as outgo, and whose +income will, on the average, at least balance their outgo. Thus, +_through loans_, deposits are linked with volume of trade and prices. +Trade and deposits wax and wane together.[325] On the other hand, in the +absence of rising prices and increasing trade, reserves may increase +greatly without forcing an increase in deposits. Loans cannot increase +without an increase in deposits. The linkage between deposits and trade +is definite, causal, positive, statistically demonstrable. The linkage +between reserves and deposits is, at most, negative--if reserves get too +low, deposits and loans may be checked in their expansion. But this--to +the extent that it is true, which we leave, for detailed analysis, for +Part III--gives a very much looser relation indeed than the direct +relation between loans and deposits. + +The quantity theory has offered no explanation of this relation between +loans and deposits. What explanation could a theory offer, which rests +in the notion that volume of trade on the one hand, and volume of money +and bank-credit on the other hand, are independent magnitudes?[326] I do +not mean that quantity _theorists_ are silent regarding the relation of +loans and deposits. I mean that they do not attempt, in any discussion I +have found, to apply the quantity _theory_ to the explanation of that +relation. What shall we say of a theory which, ignoring these easily +proved, easily explained, and vital facts regarding bank-credit, offers +as its sole explanation of volume of bank-credit a theory so untenable +as that of a fixed ratio between volume of bank-credit and volume of +money _in circulation_, with causation running from money to deposits? + +Professor Fisher says little about bills of exchange. Here, surely, we +have a credit instrument which grows directly out of trade, in general, +and whose volume expands and contracts with trade. When banks discount +bills of exchange, and issue notes, or grant deposit credits, against +such discounted bills, the connection of bank-credit and volume of trade +is obvious. The same thing holds largely, however, when promissory notes +are discounted. Such notes are usually given by those who plan to use +the credits granted in commercial or speculative transactions. The bill +of exchange differs from the promissory note in practice, however, in +that it itself is often a medium of exchange, without going into the +bank's portfolio. "The bill of exchange, therefore, before it gets to +the bank _usually_[327] performs a series of monetary transfers, for the +small dealer naturally prefers to pass on the bill, if possible, in +making a payment, instead of handing it over to his bank, which would +either deduct a certain percentage in the way of discount, or else +accept the bill at its face value, crediting the customer with the +amount on the date of maturity, while business men (other than bankers) +are in the habit of taking bills of exchange as they would cash."[328] +This quotation describes conditions in Germany. The same authorities (p. +176) give figures showing a rapid development in the volume of bills of +exchange, rising from about 13 billions of marks in 1872 to about 31 +billions in 1907. These figures show that bills of exchange are a big +factor in German business life,--a conclusion that is strengthened when +they are compared with the figures for giro-transfers on pp. 188-189 of +the same article, or with the figures for note issue on p. 209.[329] In +the United States, of course, the use of bills of exchange has become +comparatively unimportant in domestic commerce,[330] though there is a +movement to revive them, since the new Federal Reserve system has come +in. Their chief importance is in connection with foreign trade. Is it +possible that Professor Fisher's reason for wishing to minimize foreign +trade[331] is the unconscious desire to get rid of the annoying bills +of exchange, which so obviously tend to make bank-credit and volume of +trade interdependent, and which further spoil the quantity theory by +serving as a flexible substitute for both money and deposits? + +I regret the necessity for this elementary exposition of familiar +things. But Fisher's theory has no place for these familiar things--and +Fisher has merely made very explicit the logic of the quantity theory! + +As applied to modern conditions, the quantity theory is obliged to +assert--and Fisher does assert: + + (a) that there is a causal dependence of bank-credit on money, + and "normally" a fixed ratio between them; + + (b) that velocity of circulation of money and credit + instruments are independent of quantity of money and credit + instruments; + + (c) that, in general, money and volume of credit (taken + together), velocities, and trade, are independent magnitudes, + each governed by separate laws, though Fisher concedes _some_ + reaction of trade on velocities; + + (d) in particular, that volume of money and credit has no + influence on trade, and that trade has no direct influence on + volume of credit. + + All these doctrines are necessary if the contention that an + increase of money will proportionately raise prices is to be + maintained, or if it is to be maintained that a decrease in + trade will proportionately raise prices. I have analyzed each + of these contentions, and I find justification for none of + them. + +Not yet, however, have we reached the least tenable aspect of the +quantity theory. There remains the contention that prices are passive, +that a change, _originating_ in prices, and involving a change in the +average price, or the general price-level, cannot maintain itself--that +P is a passive function of the other five magnitudes of the equation of +exchange. To this central fortress of the quantity theory we shall +devote the next chapter. + + + + +CHAPTER XV + +THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES" + + +Is the price-level passive? Is it true that while change may occur from +causes outside the equation of exchange in volume of money, volume of +trade, and velocities of circulation, a change in the price-level from +causes outside the equation is impossible? Must the average of prices be +a passive function of M, the V's, M´ and T? Such is the general +contention of the quantity theory, and such, very explicitly, is +Fisher's contention. The price-level is always effect, and never cause +(with slight modifications of the doctrine for transition periods) in +its relations to the other magnitudes in the equation of exchange. + +Now in one sense, it is my own contention that the price-_level_ can +never be a _cause_ of anything. The price-level is an _average_. +Averages may be _indicia_ of causation, but they are not themselves +causes. They are not, in reality, anything _at all_. Causation is a +matter which pertains to the particulars of which the average is made. +But this is not the doctrine of the quantity theory. The quantity theory +does, in certain connections, assign causal influence to the level of +prices, particularly in the theory of foreign exchange, where the +explanation of international gold movements rests on the doctrine that a +price-level in one country, higher than the price-level of another +country, drives money away.[332] It will be seen, in a moment, that +Fisher relies on this principle to prove that the price-level of a +country cannot rise without an increase of money--if it did so rise, it +would drive out the money, and so be forced down again. The point at +issue may be stated in terms of particular prices. The quantity theory +is that, while particular prices may rise from causes affecting them, as +compared with other prices, without a change in money, velocities, etc., +still there cannot be a rise in the general average, because other +prices will be obliged to go down to compensate. The issue is as to the +possibility of a rise in particular prices, uncompensated by a +corresponding fall in other particular prices, without a _prior_ +increase in money, or velocities, or decrease in trade. I take up the +issue in this form. I shall maintain that particular prices can, and do, +rise, without a _prior_ increase in money or bank-deposits, or change in +the volume of trade, or in velocity of money or deposits and also +without compensating fall in other particular prices. Putting it in +terms of Fisher's equation, I shall maintain, as against Fisher, that P +can rise through the direct action of factors _outside_ the equation of +exchange, that as a _consequence of such rise_ the other factors +readjust themselves, and that a new equilibrium is reached which, in the +absence of new disturbances from causes outside the equation, tends to +be as permanent and stable as the old equilibrium was. + +In the argument which follows, I shall respect thoroughly the +distinction between "normal" and "transitional" effects. I do not think +that this distinction is properly drawn by Fisher. In my discussion of +the relation between the volume of bank-credit and the volume of trade, +and in other connections, I have shown that Fisher leaves out of his +normal theory most of the concrete factors which do affect both the +concrete magnitudes, and the long run _averages_, of the factors in his +own equation. But for the present, I shall meet him on his own ground, +give his distinctions their fullest weight, and carry my argument +through the "transition" to a point where no further change among the +factors in the equation can be expected as a consequence of the initial +change assumed. + +Fisher's argument to show the passiveness of prices takes the form of a +_reductio ad absurdum_. "To show the untenability of such an idea let us +grant for the sake of argument that--in some other way than as effect of +changes in M, M´, V, V´, and the Q's--the prices in (say) the United +States are changed to (say) double the original level, and let us see +what effect this will produce on the other magnitudes in the +equation."[333] Then, if the equation of exchange is to be maintained, +either M or M´ or their velocities must be increased, or trade must be +reduced. But he holds that none of these is possible. (1) Money will be +reduced. High prices drive money away to other countries. Nor can gold +come in via the mints. "No one will take bullion to the mints when he +thereby loses half its value."[334] On the contrary, men will melt down +coin. Nor will high prices stimulate mining. Rather, by raising the +expenses of mining, they will discourage mining. (2) Bank-deposits +cannot increase. Bank-deposits depend on the amount of money, and as +that is reduced, they must be reduced, to keep their normal ratio to the +volume of money. (3) The appeal to velocities is no more satisfactory. +These have been already adjusted to individual convenience.[335] (4) Nor +can trade be decreased. Since the average person will not only pay, but +also receive, high prices, there is no reason why he should reduce his +purchases. "_The price-level is normally the one absolutely passive +element in the equation of exchange._"[336] + +"But though it is a fallacy to think that the price-level in one +community can, in the long run, affect the money in _that_ community, it +is true that the price-level in one community may affect the money in +_another_ community. This proposition has been repeatedly made use of in +our discussion, and should be clearly distinguished from the fallacy +above mentioned. The price-level in an outside community is an influence +outside the equation of exchange of that community, and operates by +affecting its money in circulation and not by directly affecting its +price-level. _The price-level outside New York City, for instance, +affects the price-level in New York City only_ via _changes in the money +in New York City_."[337]... + +"Were it not for the fanatical refusal of some economists to admit that +the price-level is in ultimate analysis effect and not cause, we should +not be at so great pains to prove it beyond cavil." To explain this +"fanatical refusal," Fisher alludes to the "fallacious idea" that the +equation of exchange cannot determine the price-level, because the +price-level has already been determined by other causes, usually alluded +to as "supply and demand." He urges, however, that supply and demand, +cost of production, etc., relate, not to the price-level, but only to +particular prices: that the price-level is a factor prior to, and +independent of, the particular prices, and is presupposed by theories +like supply and demand, cost of production, etc.[338] + +The _reductio ad absurdum_, at first blush, looks impressive. One +obvious criticism suggests itself, however, and it will be found to give +a clue to a much more fundamental criticism: is it reasonable to assume +a doubling of _all_ prices? Above all, must the assumption involve the +doubling of the price of gold bullion? Part of the argument to show that +gold bullion would not be minted rests on that assumption. But, more +fundamental, for such an all round doubling of prices, no _cause_ could +be assigned. Of course the hypothesis of an increase in prices without +any cause is absurd, and Fisher easily disposes of it. But suppose we +assign some _concrete causes_, outside the equation of exchange, which +might affect prices, and see how the thing works then! + +Fisher states on p. 95 that "other elements in the equation of exchange +than money and commodities[339] cannot be transported from one place to +another." And in the passage quoted above he maintains that price-levels +in one country can influence price-levels in another country, or even +price-levels in one city can influence price-levels in another city, +only _via_ changes in money, in the second country or city. But other +elements in the equation are _directly_ transferable, in fact. +_Deposits_, _e. g._, in London, to the credit of New York bankers, may +be transferred to Paris, directly, by _cable_ or by _letter_, and +_prices_ are constantly being directly passed from one country or market +to another by the same media. Let us suppose a strong case, to put our +principle in relief. Assume an island, which produces a staple widely +used, whose chief centre of production is outside the island. Assume +that this staple, an agricultural product, rises greatly in price, owing +to a blight, which promises to be permanent, in the main producing +region. The blight does not affect the island, however. Let this product +be the main product of our island, which we shall assume to be small. +Let the island have communication with the outside world by boat only +once in three months. Let it be, however, in constant communication by +cable. Word comes by cable of the rise in the price in the staple. The +staple at once rises in the island. No new money has come in to cause +it. Will this be a rise in the price-level? Will there be compensating +reductions in the prices of other things to leave the price-level +unchanged? What prices can fall? Not the prices of goods that have been +imported to the island, surely. They will rather tend to rise, because +everybody on the island will feel richer than before, and will be +disposed to buy more freely. Meanwhile, merchants and bankers on the +island will be more ready to extend credit than before, so that they +will be able to buy more freely. What else can fall? Not the prices of +the land! Rather, the land will rise in price greatly, because the +increased price of the staple, expected to be permanent, will promise +bigger rents, and the price of the land, being a _capitalization_ of the +annual rental, will rise very much more than anything else--it will rise +to the extent of the capitalized price of the increase in the rents. +Wages, likewise, will rise, since the price of the product of labor has +risen. And the capital instruments in use in producing the staple will +also rise, though not so much as land and wages, inasmuch as they can be +brought in from outside at the end of three months. What is there that +can fall--except, perhaps, such goods as are exclusively designed for +the construction of poorhouses! A significant particular price +rises--that is the first step; then, from causes familiar to all +students of economics, other related prices rise; there is a general +_sympathetic_ rise in prices, the _price-level_ has risen independently, +from causes _outside the equation of exchange_. But now, can this rise +sustain itself? Well, what can bring it down? When the ship comes, at +the end of three months, it will bring in additional supplies of the +articles of import, and they will go down to their old level. Will they +go any lower than the old level? What is there to cause them to do so? +The outside price-level should be higher now, rather than lower, since +the _stock_ of the staple in question is reduced, and nothing else +increased to compensate. Nor can any reason be assigned why other prices +on the island: the staple in question, lands, wages, etc., should fall +at all from the level they reached when the news first came. + +Incidentally, our ship may also bring in more gold. The bankers, finding +their deposits expanding, may feel it well to cable orders for more gold +to increase their reserves, especially as they have been subject to +somewhat unusual calls for cash for hand to hand circulation--though +this last need they might well have been meeting by expanding their note +issue. + +Is there anything else to be said? Is not the new equilibrium stable? +And is not the causal sequence precisely the reverse of that assigned by +the quantity theory? _First_. a rise in prices; _second_, an expansion +of credit, book-credit, notes and deposits; _third_, money comes in. If +anyone is particularly anxious about the equation of exchange in this +process, he may add to my expansion of credit an increase in velocities +to keep it straight! + +I may add that I see nothing in the "transition" I have described to +cause trade to be reduced. Rather, I should expect the rising prices to +make trade more active--or better, I should expect the rising _values_ +of goods, etc., of which rising prices are the symptom, to make trade +more active, particularly as there would be an increase in speculation +to bring about readjustments, and to "discount" the prosperity. Nor can +I find any reason why trade should be reduced below the old level in the +new normal equilibrium. It would make no difference, however, if trade +were reduced either transitionally or normally, since the point at issue +is the possibility of a rise in prices originating from causes outside +the equation of exchange, and compelling a readjustment of a permanent +character in the other factors of the equation. The quantity theorist +is at liberty to make this readjustment in any way he pleases. My point +is made if he has to make the readjustment, and if the price-level stays +up! + +I have put my illustration in an extreme form to throw the whole thing +in relief, and to make the demonstration free from a host of +complexities. But is not the causal process essentially the same if we +substitute, say, the Southern States for our island, and cotton for our +staple? So long as the telegraph bringing news of the ruin of cotton +production in India and Egypt, with the higher price of cotton, can come +in ahead of the money that the quantity theorist might imagine rushing +in a race with it on the train to be offered for the cotton, my point is +made. In point of fact, there would be a general rise in prices and +wages in the South, which, leading to an expansion of credit, would only +gradually and in no definite ratio lead to an increase in money drawn +from outside. Buyers outside would pay, not with money, but with checks +drawn on New York, and Southern bankers would use their discretion as to +how much actual cash they would bring in. With the elastic note issue of +our Federal Reserve system, I see no reason to anticipate that money +would be drawn to the South in an amount proportionate to the increase +in prices. Even if it were, the causation would not run from money to +prices, and that is the point at issue. If _rising_ prices can cause +increasing money, the whole quantity theory is upset, whatever the +proportions involved. + +It will be noted that my illustration might be put partly in the form of +the supply and demand argument. Increasing demand for cotton in the +South leads to higher price of cotton; higher price of cotton makes +cotton-growers richer, and enables them to increase their demand for +imported goods, for land, and for labor. Supply and demand comes into +conflict with the quantity theory, and does not suffer in the conflict! +Supply and demand determine particular prices, and particular prices +determine the price-level! + +Now I wish to generalize this point. I shall show that the quantity +theory conflicts with most of our doctrines of prices, as worked out in +our systems of economics. I shall show that, in important cases, the +quantity theory conflicts with the law of supply and demand, with the +doctrine of cost of production, with the capitalization theory, and with +the doctrine of imputation as worked out by the Austrians, whereby the +prices of labor, land, and other agents of production rise or fall with +the prices of the consumption goods which they produce. I shall show the +conflict in important cases, and shall show also, in those cases, that +it is not the quantity theory which can be sustained. + +The general form of the conflict may be stated for all these theories. +They are theories of the _relations_ of particular prices, concerned +with showing that individual prices are so related that they tend to +_vary together_. A rise in one price, according to these theories, tends +to bring about _rises_ in others, and _vice versa_. The quantity theory, +on the other hand, asserts a relation among individual prices such that +a rise in one tends to bring about a _fall_ in others--it requires a +_compensatory_ fall at one point, if there has been a rise somewhere +else. + +Let us take some cases. I shall take, first, the conflict between the +quantity theory and the capitalization theory, as I can use the +illustration just given in connection with it. I have, in a preceding +chapter, given a statement of the capitalization theory. It is a theory +concerned with the prices of long-time goods and income-bearers, as +lands, houses, capital goods of various sorts that give forth their +services through a series of years, stocks, bonds, etc. The prices of +things of this sort, according to the capitalization[340] theory, depend +on two factors: one, the money income expected from the income-bearer, +the other, the prevailing rate of interest. This money income, except in +the case of bonds, commonly depends on the prices of the products of the +income-bearer, or (in the case of stocks) of the products of the +concrete capital-goods to which the income-bearer gives title. If we may +follow the Austrian division of goods into higher and lower "orders," or +"ranks," we may say that the prices of the goods of higher ranks are the +capitalizations of the prices of the goods of lower ranks specifically +produced by them. Thus, concretely, if the price of wheat rises, we may +expect the prices of land to rise, if the rate of interest remains the +same. If the price of steel rises, we may expect the stocks of the U. S. +Steel corporation to rise, also. If the prices of smokeless powder, and +other war munitions soar, we may expect the prices of the stocks of the +corporations involved to do precisely what they have done in the recent +course of the stock market. All this, on the assumption that the rate of +interest does not change, and that the risk factor remains constant. If +these factors vary, the results will not present the mathematical +exactitude that the formula calls for, but the general tendency will +remain the same. On the other hand, if the incomes remain unchanged, +but the rate of interest rises, then we may expect the capitalized +prices to fall, and if the rate of interest falls, we may expect the +capitalized prices to rise. From the standpoint of the present +discussion, I suppose it might be fairest and best to state the +capitalization theory on this point as Fisher himself states it. In his +_Elementary Principles of Economics_ (ed. 1912) after giving a table +showing in figures the difference made in different capital prices by +different rates of interest (p. 125) he states (126): "If the value of +the benefits derivable from these various articles continues in each +case uniform, but the rate of interest is suddenly cut down from 5% to +2-1/2%, there will result a general increase in the capital values, but +a very different increase for the different articles. The more enduring +ones will be affected the most." And in his book, _The Rate of +Interest_: "The orchard whose yield of apples should increase from +$1,000 worth to $2,000 worth would itself correspondingly increase in +value from, say, $20,000 to something like $40,000 and the ratio of the +income to the capital value, would remain about as before, namely, 5%." +(P. 15.) On the next page, he generalizes his notion: "One cannot escape +this conclusion (as has sometimes been attempted) by supposing the +increasing productivity to be universal. It has been asserted, in +substance, that though an increase in the productivity of one orchard +would not affect the total productivity of capital, and hence would not +appreciably affect the rate of interest, yet, if the productivity of all +the capital in the world could be doubled, the rate of interest would be +doubled. It is true that doubling the productivity of the world's +capital would not be entirely without effect upon the rate of interest; +but this effect would not be in the simple direct ratio supposed. +Indeed, an increase of the productivity of capital would probably result +in a decrease, instead of an increase, of the rate of interest. _To +double the productivity of capital might more than double the value of +the capital._" (_Rate of Interest_, p. 16.)[341] Fisher reiterates this +doctrine in his reply to Seager, in the _American Economic Review_, +Sept. 1913, pp. 614-615. + +Now my concern here is not with the points at issue as between Fisher +and Seager: the "impatience" vs. the "productivity" theories of +interest. For the present, I shall accept Fisher's doctrine on that +point as true.[342] I am here interested in Fisher's doctrine that a +doubling of the general productivity of capital would double, or more +than double, the prices of capital instruments, including land. How is +such a general rise in prices possible, if the quantity theory be true? +Is not this a rise in general prices from causes outside the equation of +exchange? That Fisher means the _money-prices_ of capital goods when he +speaks of capital-values is perfectly clear. In the second quotation, he +speaks of "capital-value of $40,000", and in general, his definition of +value runs in terms of _price_ (_e. g., Purchasing Power of Money,_ pp. +3-4, and _Elementary Principles_, p. 17). Fisher has no absolute value +concept in his system. We have in the passages cited two doctrines, both +of which contradict the quantity theory: (1) that a reduction in the +rate of interest will raise capital-prices (which are the largest factor +by far in the price-level), and (2) that an increase in the product of +capital goods means, not only more money paid for the products, but also +more money paid for the production-goods. Incidentally, the general +imputation theory would call for more money paid to laborers as well. +How can all this be, on the quantity theory? And what can the poor +equation of exchange do in such a case, if money does not increase, if +bank-credit is limited by money, if velocities of circulation are fixed +by individual habits and convenience, if trade _increases_ as a +consequence of the increased number of goods produced, and if prices +rise? It will not help much to assume that the productivity of gold +mines is doubled also. The quantity of money does not depend very much +on the annual production of gold. Besides, money need not, from the +standpoint of the quantity theory, be made of gold. It might be +irredeemable Greenbacks, fixed in quantity by law, or even dodo-bones! +Would not the capitalization theory apply in the Greenback Period? I +shall not try to solve the riddle. I am not responsible for it! + +The conflict between the capitalization theory and the quantity theory +may be more simply stated. Assume that the prices of consumers' goods +and services rise, quantity of money and volume of exchanges remaining +unchanged. On the quantity theory, other prices, the prices of +producers' goods and services, lands, and securities, would have to come +down enough to compensate, in order that the price-level might remain +unchanged. For the capitalization theory, however, the prices of lands, +securities, and long time capital goods in general would have to rise, +since the incomes on which they are based have risen. Wages of labor +engaged in making consumers' goods would also have to rise, on the +general imputation theory. + +The quantity theory conflicts with the capitalization theory. The +quantity theory as presented by Fisher conflicts with the capitalization +theory as presented by Fisher. Which theory is true? Would prices rise +thus, or would they be held down in some way by the limitations on the +quantity of money? I hold that I have already proved, in the reasoning +given in connection with my hypothetical island, and in the case of the +South with its cotton, that the capitalization theory tendency would +prevail. The prices of products rise, and then the prices of the labor, +land, and other capital goods which have produced them, rise, the rise +in the prices of the capital goods behaving in accordance with the laws +of the capitalization theory, and all of the rises after the initial +rise in products being in accordance with the imputation theory of the +Austrians. + +This conflict suggests an interesting point. Various elements in our +economic theory, added from time to time by different writers, have +necessarily come from different philosophical and sociological +view-points, and have behind them different philosophical, +psychological, and sociological assumptions. The quantity theory, +developing, as shown in the chapter on "Supply and Demand and the Value +of Money," largely in isolation from the general body of economic +theory, has a background of psychological and sociological assumptions +quite different from that of many other doctrines. In the chapter on +"Dodo-Bones," I stated these assumptions. The quantity theory rests in a +psychology of blind habit. It assumes a rigidity in the social system +such that it might be likened to a machine, with a hopper into which +money is poured, which grinds out prices at the other end. I set this in +contrast with the psychological assumptions underlying the commodity +theory of money. That theory rests on the "banker's psychology." It +assumes a highly reflective and calculating attitude on the part of +economic men, with the disposition to look behind appearances for the +security, to test things out, to get to bedrock in business affairs. Now +the capitalization theory likewise assumes this banker's psychology. In +its refinements, as represented by the mathematical formulæ in the +appendices of Fisher's _Rate of Interest_, it assumes a degree of +precision in business calculation which few experts in bond departments +apply, and which the highly fluid and alert dealers in Wall Street +certainly have not time for, even if they had that degree of +mathematical knowledge! In practice, it need not be said, particularly +in the case of the prices of lands, the capitalization theory finds its +predictions very imperfectly realized! But the two theories, resting in +such divergent psychological assumptions, may be expected, _a priori_, +to conflict. That they do conflict is not remarkable. + +I shall show a similar conflict between the quantity theory and the law +of costs. In general, the quantity theorist thinks that he has +reconciled his theory with cost theory by pointing out that reduced +costs manifest themselves in increasing production, which means +increasing trade, which should, on the quantity theory, mean lower +prices.[343] I need not, for my purposes, analyze this doctrine in +detail, though I am disposed to consider it an accident that the two +theories converge at this point. For the present, I shall analyze a case +where reducing costs actually come as a consequence of the _reduction_ +in the volume of trade, and inquire whether such a case will lead, as +the cost theory would assert, to lowered general prices, or, as the +quantity theory would assert, to _higher_ general prices. The case is +that where by improved methods of handling goods, it is possible to +dispense with middlemen. Concretely, assume that retailers of milk get +in direct touch with dairymen, so that middlemen are eliminated, and +that as a consequence the price of milk is reduced two cents a quart. +What of the general price-level? T (trade) is reduced. There are less +exchanges. Volume of trade does not mean volume of goods _produced_, but +volume of _exchanges_. With a reduced trade, the quantity theory must +assert that prices of commodities other than milk must, on the average, +rise, not merely enough to compensate for the fall in milk, but more +than that, enough to compensate for the reduced trade as well. But how +can the other prices rise? Well, a point comes up obviously: the buyers +of milk save two cents a quart. They can spend it for something else. +This will raise the prices of other things. But, on the other hand, the +middlemen now have less to spend. They have _exactly as much less_ as +the others have _more_, the extra money that milk buyers have being, in +fact, the money that the middlemen would otherwise have had. The one +offsets the other. There is, then, no reason for the average of other +prices to rise. Suppose we carry the process one step further. After a +while, the middleman will find other work to do. Then they will have +incomes again to spend. But in going to work again, they will be engaged +in production, and so will, in general, be increasing the volume of +trade. The quantity theorist could not expect a rise in prices from +this! + +And here we are given a clue to a fundamental confusion in the quantity +theory, a confusion which, accepted by the reader, gives the quantity +theory much of its plausibility. I refer to the confusion between +_volume of money_, and volume of _money-income_.[344] The two need not +be the same. The two generally are not the same. In the case I have +described, the one has changed without a change in the other. Now if one +wishes to view the process of price-causation from the standpoint of +money offered for goods,--an essentially superficial,[345] but +frequently useful, view-point--it is clearly money-_income_, rather +than mere quantity of money in the country that is important. Into the +determination of volume of money-income, however, come factors of a high +degree of complexity, among them, prices for which there is no possible +place within the confines of so simple and mechanical a doctrine as the +quantity theory. + +In passing, I notice a point to which I called attention in discussing +Fisher's factors in the equation of exchange. I refer to his definition +of velocity of circulation as the average of "person-turnovers" of +money.[346] In the illustration given, there is no reason to suppose +that this average is changed. The middlemen simply drop out of the +average. They have no money to turn over! But velocity of circulation, +defined as "coin-transfer," (_cf._ _supra_, p. 204) has clearly changed. +The course of money has been short-circuited. It goes through fewer +hands in the course of a given period. This last concept of velocity of +circulation is clearly the one that must be used, if the equation of +exchange is to be kept straight. But this fact should make it clear that +velocity of circulation, instead of being the inflexible thing that +Fisher has described, resting in individual habits and practices, a true +causal factor in the price making process, is really a highly flexible +thing, in large degree a passive function of trade and prices. + +With this distinction between volume of money and volume of +money-income[347] clearly held, we are prepared to go further in our +attack on the quantity theory, granting the quantity theorist all his +most rigorous assumptions, and still demonstrating that prices can vary +independently, without prior change in quantity of money, volume of +trade, or velocity of money. Let us assume the extreme case of the +quantity theory: a closed market; no credit; no barter; a fixed supply +of money; a fixed volume of trade; a fixed set of habits affecting +velocity, namely, that everyone spends, in the course of the month, all +that he has accumulated by the first of the month. The quantity theorist +could not ask a more iron-clad set of assumptions than this! If the +quantity theory is not valid here, if the price-level is not absolutely +fixed, helpless to change, with these assumptions, then the quantity +theory, even as a minor tendency, must be surrendered, and the quantity +theorist must admit that the whole line of thought has been fallacious. +But is the price-level passive? Suppose we assume a combination of +employers of maid-servants, which forces down the wages of maid-servants +from $20 to $10 per month. Assume further that there is no alternative +employment for the maid-servants, so that they all remain at work.[348] +So far, we have made a change in _one_ price, the price of domestic +service. What of the general average of prices, the price-_level_? Well, +so far, the price-level is down. If nothing else takes place, we have +reduced the price-level by reducing one price. What else can take place? +Two things: (1) the masters now have $10 per month each more to spend +for other things than before. That tends to raise prices in their other +channels of expenditure. (2) The maid-servants now have $10 each less to +spend,--the same ten dollars! That lessens prices in the lines of their +expenditure. These last two changes exactly neutralize one another. The +first change, in the price of domestic service, remains unneutralized. +The general price-level is, then, lowered--by a cause acting from +outside the equation of exchange, directly on prices. The first change +comes in one price. In the final adjustment, that change remains +unneutralized. How is this possible? Is the equation of exchange still +valid? As a mathematical formula, yes. As expressing a causal theory, in +which prices are effect, and money, trade, and velocity causes, no. The +equation is kept straight by a reduction in velocity. _Because_ the +wages of maid-servants are reduced, _less_ money goes through their +_hands_; $10 per month per maid are short-circuited. But the _cause_ is +with the _prices_. The price-level, even under these absolutely rigorous +assumptions, is not passive. + +In general, I conclude that the price-level, under the laws governing +particular prices, supply and demand, cost of production, the +capitalization theory, the imputation theory, etc., can vary of its own +initiative, independently of prior changes in the quantity of money, or +of volume of trade, or other factors that the quantity theory stresses; +and that these changes in the price-level (or in the particular prices +which govern the price-level) can maintain themselves, and compel a +readjustment in trade, credit, money and velocities, to correspond. This +conclusion strikes at the very heart of the quantity theory, and, if +valid, leaves the quantity theory disproved. More fundamentally, I +should put it, prices can change because of changes in the psychological +values of goods. These values are _social_ values, and are to be +explained only by a social psychology. But for the present it has seemed +best to me, as a means of attracting sympathetic attention from a wider +circle of economists, to make use of the less debated doctrines of the +science in attacking the quantity theory. It is not necessary to rest +the case on my own special theory of value. Supply and demand, cost of +production, the capitalization theory, the imputation theory--the +general laws of the concatenations and interrelations of prices--are +quite adequate for the confutation of the quantity theory. They are laws +concerned with particular prices, and the price-level is nothing but the +average of particular prices. Whatever explains, really explains, the +particular prices, also explains the price-level. + +Fisher, as we have seen, is not of this opinion. Although he has defined +the price-level as an average of particular prices[349] he none the less +exalts this average into a causal entity, prior to and master of the +particular prices out of which it is derived, of which it is a mere +average.[350] This average, he maintains, is presupposed in the +determination of all particular prices.[351] This seems to me a wholly +untenable position. _Ex nihilo nihil fit._ There cannot be _more_ in the +average than there is in the particulars from which it is derived. In +point of fact, there is necessarily vastly less. All the concrete +causation is lost. The average, in itself, is nothing but a _statement_, +a summary of _results_. I know nothing more metaphysical in the history +of economic theory than this hypostasis of an average.[352] + +I reject Fisher's notion that the average of prices is an independent +entity. But I do not consider that the idea lying behind this untenable +doctrine is absurd. Cost of production, supply and demand, and the other +price theories _do_ presuppose something more fundamental. They do +presuppose _money_, and the _value_ of money, as has been shown at +length in Part I. The trouble with Fisher's notion comes in his +definition of the value of money in purely relative terms as the +_reciprocal of the price-level_, and his contention that the study of +the value of money is identical with the study of price-levels.[353] +Value is not a mere exchange relation.[354] Rather, every exchange +relation involves _two_ values, the values of the two objects exchanged. +These two values _causally_ determine that exchange relation. In the +case of particular prices, then, we must consider not only the value of +goods, but also the value of money. And the causes determining the +general price-level will therefore include not alone the values of +goods, but also the value of money. In the foregoing arguments by which +I have shown that the price-level can vary independently of the other +factors in the quantity theory scheme, I have been concerned only with +changes in the values of goods, measured by a constant unit of value. If +the value of money should also be varying, the concrete results on the +price-level would have been different. On the face of things, there was +nothing in the cases I discussed to require us to suppose that the value +of money would also vary. The argument ran on the assumption of a fixed +value of money. I have shown, in earlier chapters, that the assumption +of a fixed value of money is fundamental to the laws of supply and +demand, cost of production, and the capitalization theory. In point of +fact, this assumption is rarely true--never strictly true. For causes +which are in considerable degree independent of the causes governing the +values of goods (as the causes governing their values are in +considerable degree independent of one another), the value of money +varies, now in the same direction as the values of goods in general, now +in an opposite direction. Further, money itself does not escape the +general laws of concatenation of values. The value of money has causes +which are bound up with the values of other goods. Thus, when prices are +rising and trade expanding, there is a tendency--commonly a minor +tendency--for money also to rise in value, and so prices do not go +quite as high as they would have gone had money remained constant. This +tendency arises from the fact that there is more work for money to do in +a period of active trade and rising prices. Gold also tends to rise in +value in the arts, with prosperity. The reverse tendency manifests +itself when prices are falling: money tends, in some measure, to fall in +value with the goods,[355] and so prices do not fall as far as they +would fall if money remained constant. But in general, the causes +governing the values of goods, and the causes governing the value of +money, are sufficiently independent to justify us in studying each +separately, in abstraction, on the assumption that the other is +unchanged. Hence, supply and demand, cost of production, and the other +price theories, which assume a fixed value of money, are proper tools of +thought for the study of the prices of goods. + + + + +CHAPTER XVI + +THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS + + +The quantity theory explanation of international gold movements is as +follows: if money comes into a country, it raises prices. If the +price-level of the country is raised more rapidly than the price-levels +of other countries are rising, then the country becomes a bad place in +which to buy and a good place in which to sell; its exports fall off, +its imports increase, and finally the inflow of money is checked, and, +perhaps, money flows out again. The equilibrium of the gold supplies of +different countries is thus dependent on the price-levels of the +countries involved. The quantity of gold in a country determines its +price-level, and no more gold can stay in a country, on this theory, +than that amount which keeps its price-level in proper relation to the +price-levels of other countries. It is not necessarily asserted that the +price-levels of all countries must be equal--the facts too obviously +contradict that. But when this precise statement is not made, the +substitute statement of some "normal" relation between the price-level +of one country and that of another becomes a very vague one, and the +theory becomes pretty indefinite. + +I am here concerned chiefly with one contention: the price-_level_, the +average of prices, is not a _cause_ of anything--not of gold movements +or anything else. It is a mere summary of many concrete prices. Some of +these concrete prices have highly important influence on international +gold movements, tending, if they are low, to bring gold in, and if they +are high, to repel gold. Others work in the opposite direction, tending +if they are low to attract less gold than if they are high. Finally, +among all the prices affecting international gold movements, the one +which is most significant is commonly not included in the price-level at +all: I refer to the "price of money," the short-time interest rate. + +Let me elaborate each point. First, it is true that high prices of +articles which enter easily into international trade tend to repel gold +from the country--meaning by "high prices" prices that are higher than +the prices of the same goods abroad. This relates, however, not to the +general price-level, but only to a comparatively small set of prices. +Most prices in a country are not prices of articles of international +trade. High wages may, indeed, draw in immigrants. But high land rents, +and high prices of land cannot bring in land. Nor do high land prices +send away much gold to other countries for the purchase of land there. +Indeed, within a single country, the differences in the relation between +land yield and capital value of land are enormous. The following figures +are taken from an article by J. E. Pope:[356] In Yazoo Co., Mississippi, +farm lands are sold at $10 to $25 per acre. The average gross income per +acre is $28. In Cass Co., Iowa, the land prices are from $100 to $125 +per acre while the gross income amounts to only $11 per acre, if only +crops and dairy products are taken into account, and to $20 if the sales +of live stock are included. In Oglethorpe Co., Georgia, the average +price is from $10 to $25 per acre, and the average income $10. In +Paulding Co., Ohio, land is sold at from $75 to $100 per acre, and the +average income per acre, including returns from live stock sold, is $15. +Why should not landowners in Cass County, Iowa, sell their comparatively +unproductive land, at a high price, and go, with their money, to Yazoo +County, Mississippi? The answer is simply, that they would have to go +_with_ their money, and they prefer to stay at home! Absentee +landlordism is not generally popular with men who are seeking paying +investments. Land stands at one extreme. But then land is the very +biggest item in an inventory of wealth, and, while not _as land_, +actively bought and sold,[357] it is a big element in the values of many +active securities. The principle holds in less degree of many other +things, however. The securities of a local corporation, say a gas plant, +find their best market at home, as a rule, unless the city be large. If +they are held by foreign capitalists, they still find a very restricted +market in the foreign country. Only those who have investigated at first +hand will feel free in buying them--unless, indeed, they are guaranteed +in some way by a big and well-known house. Prices of personal and +professional services vary enormously in different sections of the same +country, to say nothing of variations between different countries, and +there is a very slow movement indeed toward bringing about higher +salaries for rural preachers in Kansas because the salaries of London +preachers have risen, or because of increased demand for preachers in +Germany. Great numbers of commodities are too bulky to move far. Their +prices vary with little relation to similar prices elsewhere. But the +principle needs no more elaboration. If the reasoning be simply that men +tend to buy where things are cheap, and to sell where things are dear, +it is clear that that establishes a very loose relation indeed between +the price-levels of different countries. + +The second point is that some prices, by rising, actually bring in gold +from abroad, while by falling they tend to release gold. I am not here +referring to the case discussed in the chapter on "Supply and Demand," +where a commodity, cotton, with an inelastic demand, is doubled, the +doubled quantity selling for a less aggregate price, and so bringing in +less money from abroad. That case would bear considerable +generalization. I am referring here to the case where _credit_ is built +on the value of long time goods, as lands, or railroads. Concretely, let +us suppose an increase in railroad rates allowed by the Public Service +Commission of Missouri. This is, in itself a rise in prices. It will, +further, on the capitalization theory, make the prices of stocks of the +roads operating in the State rise also, and give a margin of additional +security for bond-issues. This will make it possible for these roads to +float foreign loans (or would have done so before the War), and so will +tend to turn the exchanges in our favor. Gold will tend to come in, not +to go out. Similarly if the prices of dairy products, or truck gardens, +or orchards, or orange groves rise, leading to a rise in the prices of +the lands involved, foreign capital will tend to come in as loans--_i. +e._, the exchanges will turn more favorable to us, and the gold movement +tend to turn our way. I suppose, by the way, that something of a point +could be made against the Single Tax at this point: destroying land +values would lessen the security which a community could offer outside +lenders. The Single Tax would, thus, hamper the development of countries +which need capital from outside. Men who wish to use their own capital, +under their own management, might, as the Single Taxers claim, be +tempted to come in, if they could be free from taxation on the capital +they bring with them; but _lenders_, who wish a good margin of security, +would find less inducement to lend.[358] This is a digression, but one +feature of it is pertinent: though the foreigner does not care to +migrate from his high-priced land to _low_-priced land elsewhere, he is +often willing to trust a _loan_ to the owner of _high_-priced land +elsewhere. I will not venture the generalization that high-priced land +necessarily attracts loans, and tends to turn the gold movements in +favor of the country where prices are high. The point has been made that +if lands are being exchanged frequently, the new buyer tends to exhaust +his credit resources in paying for the land: _i. e._, puts so large a +mortgage on it that he has little margin of security to offer for +working capital.[359] I shall not here undertake to determine how far as +a matter of fact, in different places, the one tendency outweighs the +other. It is enough to point out that in many cases, where this factor +is absent (as in the case of the railroads cited), rising prices +attract, and do not repel, foreign gold, and that for none of these +cases is the consequence of rising prices for the gold movements to be +explained in the simple way that the quantity theory doctrine would +require. + +Finally, the international movements of gold[360] are enormously moved +by the short-time rate of interest. The raising of the Bank Rate in +England, supplemented, when necessary, by "borrowing from the market" by +the Bank of England, as a means of making the Bank Rate effective, +quickly turns the course of the exchanges. This is, as has been pointed +out, a more effective device when used by the English money-market than +when used by borrowing countries, since the borrower, by offering higher +rates, is not always able to borrow more, whereas the lender, by +demanding higher rates, is usually able to reduce his loans. But the +difference is one of degree, and in point of fact a rise in the short +time rates in New York City is commonly an effective means of bringing +in gold from abroad. It is true that this is not the only factor. I have +been at pains to point out how other factors work. I am as far as +possible from denying the powerful influence of the "balance of trade" +as treated by the older economists on international gold movements, when +both visible and invisible items are included. But my point is, first, +that these invisible items are numerous and flexible, and that a big +factor in their determination is the short time rate of interest; and +second, that the balance of physical items, even, depends, not on the +price-level as a whole, but merely on the prices of those particular +goods which enter into foreign trade. It is perfectly possible, and, +indeed, is very common, for rising prices in a country to lead to +expanding trade and expanding bank-credit, which causes bankers to wish +to expand their reserves, which leads them to raise their rates on short +time loans, which leads gold to come in from abroad. More simply still, +the bankers may merely offer an attractive rate to the foreign bankers, +and establish credits abroad, against which they draw "finance bills," +which influence the gold movements in the desired manner. + + + + +CHAPTER XVII + +THE QUANTITY THEORY _vs._ GRESHAM'S LAW + + +There is a pretty obvious conflict between the quantity theory and +Gresham's Law. The latter is, essentially, a "_quality_" theory of +money. For the quantity theory, dodo-bones, or anything else will do. +"It is the number, and not the weight, that is essential"![361] For +Gresham's Law, the weight makes all the difference in the world, if it +is a question as between full weight and light weight coins, and, in +general, the _value_ of the thing of which money is made, considered in +its commodity aspect, is the starting point of that doctrine. + +The quantity theorist seeks, indeed, to harmonize the two. His theory is +that Gresham's Law manifests itself only when there is a _redundancy_ of +the currency due to the issue of paper money, or overvalued metal. In +such a case, prices rise, he holds, and then the undervalued metal, or +the metallic currency, which count no more than the paper or the +overvalued metal in circulation, tend to leave the country, to another +country where prices are lower, or tend to leave the money use for the +arts. But the quantity theorist must maintain that it is only _via_ +increased issue, with consequent rising prices, that Gresham's Law comes +into operation. If there are a million dollars of gold in circulation, +and a half million of irredeemable paper is added, then only half a +million of the gold (or rather a little less than half) will leave. If +more than that left, prices would fall, because of the scarcity of +money, and then the gold would come back, because it would be worth +more in concurrent circulation with the paper than it would be worth as +money abroad, or in the arts. On the quantity theory, there can be no +difference in the value of gold and paper, in such a case, after enough +gold has left to balance the paper that has been issued. Falling prices +would prevent it. + +But Gresham's Law is not held by any such fetters! And the facts of +monetary history, in important cases, show Gresham's Law controlling, +despite the quantity theory. I will refer briefly to two such cases. + +The first centres about the suspension of specie payments by the +Northern banks and the Federal Treasury on January 1, 1862. This +suspension was not accompanied by any increase of money. Rather, there +was a _decrease_,[362] shortly following, in the amount of paper money. +The banks in New York, and certain other States, were bound so strictly +by their charters, and by the State laws, that they dared not leave +their notes unredeemed. Speculators, buying notes at a discount--for +virtually all bank-notes fell to a discount--were able to present them +to the banks in these States and demand gold, which led to a very +profitable business. The banks protected their gold by ceasing to issue +notes, or by reducing the volume of note issue. Certified checks were +used to a considerable extent instead. There was certainly no increase, +and probably a reduction, a considerable reduction, in the volume of +bank-notes in circulation. The only other paper money in circulation was +the Demand Notes of the Federal Government, which were not increased +after the date of the suspension, and which were in any case small in +volume as compared with the total amount of money. On the quantity +theory version of Gresham's Law, there was nothing to drive gold out. +Gold was _not pushed out_ by redundant currency. Rather, it _left_, +leaving a monetary vacuum behind. Coincidently, strangely enough, prices +_rose_. The vacuum in the money supply was so serious, that the +subsequent first issue of the Greenbacks brought a welcome relief. +Throughout the whole of the first year of the suspension, the volume of +money was less than it had been in the preceding year. None the less, +the gold stayed out of general circulation. It did not come back from +abroad. And prices _rose_.[363] + +A similar episode, the obverse of this, occurred when the Bank of +England _resumed_ specie payments in the early '20's. Then gold came +back, the currency was increased, and, coincidently, _prices fell_.[364] + +I conclude that the conflict between Gresham's Law and the quantity +theory is real and fundamental, and that in cases where different +_qualities_ of money are in concurrent circulation, the undervalued +money will leave, regardless of the question of quantity. + + + + +CHAPTER XVII + +THE QUANTITY THEORY AND "WORLD PRICES" + + +Some writers, who would call themselves quantity theorists, would +repudiate many of the doctrines for which Fisher stands, and which the +historical quantity theory involves. The recognition which Fisher's book +has received from quantity theorists generally, justifies me in treating +his book as the "official" exposition of the modern quantity theory, +and, indeed, it is easy to show that Fisher is fundamentally true to the +quantity theory tradition. With many writers, the disagreement with +Fisher would be a mere matter of degree; they would hold that Fisher has +set forth the central principle, that his qualitative reasoning is +correct, but that the relations among the factors in his equation are +less rigid than he maintains. As I reject even the qualitative reasoning +by which Fisher defends his doctrine, and reject even the qualitative +tendency which he maintains, my criticisms will apply as well to the +position of this group of writers, though I should have less practical +differences with them, to the extent that they admit qualifications and +exceptions to Fisher's doctrine. + +There is, however, a group of writers who seem to feel that the quantity +theory remains sufficiently vindicated if it can be shown that an +increase in _gold production_ tends to raise prices throughout the +world, while a check on gold production tends to lower prices, and who +rest their case on the necessity which bankers find of keeping reserves +in some sort of relation to the expansions of bank-credit. + +A view of this sort is presented by J. S. Nicholson, whose statement of +the application of the quantity theory to the modern world differs +almost _toto coelo_ from his original statement in the dodo-bone +illustration already discussed. Nicholson[365] declares that in our +modern society "the quantity of _standard_ money, other things remaining +the same, determines the general level of prices, whilst, on the other +hand, the quantity of _token_ money is determined by the general level +of prices." Nicholson's reasoning is, substantially, as follows: +Although the bulk of exchanging is carried on by means of credit +devices, there is still a certain part of exchanging, especially in the +matter of paying balances, for which standard money only can be used. He +regards the whole credit system as based on standard money, and says +that for any given level of prices there is a minimum amount of standard +money, absolutely demanded. If the volume of standard money falls below +this minimum, the price-level will fall to such a point that the volume +of standard money is again adequate. He takes, moreover, a world-wide +view, declaring that it is the relation between the volume of gold money +throughout the world and the demand for standard money throughout the +world which determines the relative values of money and commodities. +"The measure of values or the general level of prices throughout the +world will be so adjusted that the metals used as currency, or as the +basis of substitutes for currency, will be just sufficient for the +purpose. We see then, that the value of gold is determined in precisely +the same manner as that of any other commodity, according to the +equation between supply and demand." + +In the consideration of this doctrine, let us note several points in +which it differs fundamentally from the quantity theory proper, and from +the situation assumed in the dodo-bone illustration. First, it is not a +quantity theory of _money_. Money is not regarded as a homogeneous +thing, each element having the same influence on prices. Rather, _token_ +money is the child of prices. This doctrine would in no way fit in with +the logic of the equation of exchange, as presented by Fisher. Further, +the dodo-bone idea is entirely gone. _Gold_, a commodity with value in +non-monetary employments, is under discussion, and it is the quantity of +gold that is counted significant. This recognizes, if not the need, at +least the _existence_, of a commodity standard. Nicholson definitely +avows the necessity for the _redemption_ of representative money, even +going so far as to say that "all credit rests on a gold basis,"[366] +that all instruments of exchange derive their value from the volume of +standard money which supports them, and that if this basis were cut away +the whole structure would fall. Nicholson recognizes, further, that gold +has value independent of its use as money.[367] + +In evaluating Nicholson's doctrine, I wish to point out, first, the +inaccuracy of the statement that all credit rests on a gold basis. It is +true that credit instruments are commonly drawn in terms of standard +money, which is commonly gold. International credit instruments may even +specify gold, and the same thing happens at times within a country. But +commonly, in this connection, gold functions, not as the value basis +lying behind the credit instrument, the existence of which justifies the +extension of the credit, but rather as the _standard of deferred +payments_, by means of which the credit instrument may be made definite. +The real basis of the value of a mortgage is not a particular sum of +gold, but rather the value of the farm, expressed in terms of gold. The +basis of a bill of exchange is not a particular sum of gold, but rather +is the value of the goods which changed hands when the bill of exchange +was drawn,[368] supplemented by the other possessions of drawer, drawee, +and the endorsers through whose hands it has gone. Even a note unsecured +by a mortgage, or not given in payment for a particular purchase, is +based, in general, on the value of the general property of the man who +gives it, and on the value of his anticipated income.[369] So +throughout. Credit transactions, for the most part, originate in +exchanges, and carry their own basis of security in the goods and +securities which change hands, not in that small fraction of the world's +wealth, the stock of gold, which could, Coin Harvey asserted in the +middle '90's, be put in the Chicago grain-pit! And now let me extend +this idea. Although coin made from the standard of value is a great +convenience, there is yet no vital need, in theory, for a single dollar, +pound or franc made from the standard of value. If gold should cease +entirely to be used as a medium of exchange, or in bank or government +reserves, if the gold dollar should become a mere formula, so many +grains of gold, without there being any coins made of it, still, so long +as that number of grains had a definite, ascertainable value, +commensurate with the value of some other commodity which could be used +as a means of paying balances and redeeming representative money, the +gold dollar could still serve as a measure and standard of values. In +the situation I have assumed, silver bullion, at the market ratio, could +perform all the exchange and reserve functions now performed by gold, +even though not so conveniently.[370] Nicholson's description of the use +of gold as a reserve, while calling attention to an important fact, has +led him into the error of supposing that what may be true of gold, the +_medium of exchange_, and _reserve for credit operations_ is necessarily +true of the _standard of value as such_. + +Nicholson is correct, however, in looking to the standard of value for +part of the explanation of changes in prices. And, _since it so happens_ +that a considerable part of the value of the standard of value comes +from its employment as medium of exchange and reserve, he is correct in +looking to its use as money as part of the explanation of its value. His +error comes, however, in failing to see that independent changes in the +values of goods may also change the price-level, and that variations in +the demand for gold as a commodity may also change the value of gold, +and so change the price-level. + +Further, in so far as Nicholson clings to the notion of prices as +depending on a mechanical equilibration of physical quantities, he is +subject to the criticisms given before of the general quantity theory, +and in so far as he clings to the identity of the value of gold with the +reciprocal of the price-level,--the relative conception of value--he is +subject to the criticisms already urged. + +Again, even for a single country, the connection between volume of +reserves and volume of credit is very loose and shifting. A thousand +factors besides volume of standard money in a country determine the +expansions and contractions of credit, and the long run average of +credit. For the whole world, this connection is even looser. To assume a +fixed ratio between them for the whole world, one would have to assume +that all the world was simultaneously, and normally, straining its +possibility of credit expansion to the utmost, so that the minimum +ratio--a notion which is far from precise[371]--should also be the +normal maximum, and so that no country, in expanding its credit, could +draw in new reserves from other countries which had more quiescent +business conditions. + +Nicholson's notion of the world price-level, moreover, is subject to the +criticisms I have made in the chapter on "The Quantity Theory and +International Gold Movements." How can the world level have a close +connection with the volume of gold, if different elements in the world +price-level, the price-levels of different countries, can vary so widely +and divergently as compared with one another? Even granting--which I do +not grant, and which I maintain I have disproved--that the price-level +in one country has a close connection with its stock of gold, would it +not be true that the average price-level for the world would vary +greatly, with the same world stock of gold, depending on which countries +had the gold? + +There is nothing in Nicholson's doctrine which seems to me to justify in +any degree the doctrine that prices, in a single country, or in the +world at large, show any tendency to _proportional_ variation with the +quantity of money, or with the world's stock of gold. + +Is it not true, then, that there is _some_ sort of relation between gold +production and world prices? It is. Gold is like other commodities. Its +value tends to sink as its quantity is increased. As its value sinks, +prices tend to rise. As to the elasticity in the value-curve for gold, I +think it will be best to reserve discussion till a later chapter,[372] +in Part III. We shall there find reason for thinking that gold has much +greater elasticity in this respect than most other commodities. That its +value should fall _proportionately_ with an increase in its quantity, I +should not at all conclude. Even if its value did sink proportionately +with an increase, prices would rise proportionately only if the values +of goods remained unchanged. + +But why do we need a _quantity theory_ of _money_, with all its +artificial assumptions, and its law of strict proportionality, to enable +us to assert the simple fact that gold, like other commodities, has a +value not independent of its quantity? What theory of money would deny +it? Surely not the commodity or bullionist theory. For that theory, +which seeks the explanation of the value of money in the value of gold +in the arts, it would go without saying that an increase in the supply +of gold for the arts would lower its value there and consequently, its +value as money. Surely the theory which I shall maintain in Part III of +this book will not deny that increased gold production tends to lower +the value of money, and consequently to raise prices. With the "quantity +theorist" who is content with this conclusion, I have no quarrel--unless +he claims this obvious truth as the unique possession of the quantity +theory! + + + + +CHAPTER XIX + +STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY OF A +BURIED CITY + + +In the following chapter, as in most of the preceding chapters, +constructive doctrine is aimed at, even though the discussion takes, in +considerable part, the form of critical analysis of opposing views. We +shall seek to set forth the facts, as far as may be, regarding the +relations of banking transactions to trade, the relations of clearings +to amounts deposited in banks, the relation of New York City clearings +to country clearings, and of New York bank transactions to bank +transactions in the rest of the country. We shall seek to ascertain the +extent of variability in that highly elusive magnitude, "velocity of +circulation," particularly "V´." We shall indicate something of the +bearing of index numbers of prices on the theory of the value of money +as here presented. In reaching conclusions on these and related matters, +we shall build on the investigations of Dean Kinley, on the very +interesting statistical studies of Kemmerer and Fisher based on Kinley's +figures, on investigations more recently made by the American Bankers' +Association regarding the relation of bank transactions and bank +clearings, on figures from reports by the Comptroller of the Currency, +as well as on other sources. One purpose of the chapter is to criticise +the statistics which purport to prove the quantity theory. The bulk of +the chapter is given to this. But the work of Fisher and Kemmerer thus +criticised yields rich rewards for the study. The conclusions they have +drawn from their figures are, in the judgment of the writer, untenable, +but the figures themselves are of immense interest and importance. + +The controversy over the quantity theory has been waged with many +weapons. Theory, history, and statistics--to say nothing of +invective!--have been freely employed. In large measure, the statistical +studies have been concerned with the direct comparison of quantity of +money and prices, in their variations from year to year. One of the best +of these studies, that of Professor Wesley C. Mitchell, in his _History +of the Greenbacks_ (followed by his _Gold, Prices and Wages under the +Greenback Standard_), has, to the minds of many students, including the +present writer, put it beyond the pale of controversy that the +fluctuations in the gold premium, and in the level of prices, in the +United States during the Greenback period, both for long periods and for +daily changes, were not occasioned by changes in the quantity of +money,[373] but rather, primarily, by military and political events, and +other things affecting the credit of the Federal Government, together +with changes affecting the values of gold and of goods. Professor +Mitchell's discussion is so detailed and thorough, that what controversy +remains relates, not to his facts, but rather to the possibility of +interpreting those facts in harmony with the quantity theory, by +repudiating the notion that the direct comparison of gold premiums or of +prices with quantity of money gives a valid test.[374] + +Recent defenders of the quantity theory have undertaken the examination +of more complex statistics than those concerned with the simple +concomitance of quantity of money and prices. Two of these studies, the +first by Professor Kemmerer[375] and the second by Professor Fisher, +are so elaborate, have commanded such general attention, and have been +accepted by so many students as conclusive demonstrations, that I feel +it proper to give them detailed examination. I do this especially +because highly important facts for our construction argument emerge from +this critical examination. Kemmerer's and Fisher's studies reach +high-water mark in the effort to give statistical demonstrations of the +quantity theory. If they are invalid, then I know no other attempts +which many students would suppose to be possible substitutes. The theory +involved in both these studies is clearly stated by Professor Kemmerer: +"A study of this kind, to be of any value, must cover the monetary +demand as well as the monetary supply. Any test of the validity of the +quantity theory consisting merely of a comparison of the amount of money +in circulation with the general price-level is as worthless as would be +a test of the power of a locomotive by a simple reference to its speed +without taking into account the load it was carrying or the grade it was +moving over." This criticism of many previous studies is, in general, I +think, valid, though I should except from this list such detailed +studies as that of W. C. Mitchell, who takes account, as far as may be, +of all the variables involved, and who considers day by day and week by +week changes. I think the older studies of Tooke,[376] may also be +excepted. In point of fact, if one wishes to know how much reliance may +be placed in the quantity theory as a basis for prediction, when one +knows that money is increasing, the simple comparison of money and +prices is a fair test. If the "other things" which must be "equal" are +so numerous and complex that the quantity theory cannot manifest itself +in a direct comparison, much of its significance _as a basis of +prediction_ is gone. + +It is perfectly true, however, that studies running through long +periods, which give simply figures for general prices and figures for +quantity of money, omitting volume of trade, are not very relevant +either for proof or disproof.[377] And the conception underlying the +studies of Kemmerer and Fisher, that not merely money and prices, but +also volume of bank-credit, volume of trade, velocity of monetary +circulation, and velocity of bank-credit, must be measured, undoubtedly +represents a big advance in the conception of the statistical problem +involved. The mere stating of the problem is an intellectual achievement +of no mean order, and the ingenuity and scholarship involved in seeking +data for concrete measurement of these highly elusive elements must +command the admiration of every student of monetary problems. Volume of +trade, velocity of money and velocity of bank-credit had been generally +supposed, until these studies were undertaken, to be beyond the reach of +the statistician. There can be no doubt at all that the efforts to +measure them, or to measure variations in them, by Kemmerer and Fisher, +have greatly advanced our general knowledge of the phenomena of money +and credit. + +With great admiration for the magnificence of the problem undertaken, +and for the industry, ingenuity and scholarship which have been devoted +to its solution, I have nevertheless reached the conclusion that the +figures assigned by these writers to the magnitudes of their "equations +of exchange" are, with the exceptions of the figures for money and +deposits, widely at variance from the real facts in the case, and +second, that if they were correct, they could in no sense be said to +constitute proof of the quantity theory. + +In the critical analysis which follows, chief attention will be devoted +to Fisher's statistics. His is the later study, and it follows, in main +outlines, the methods laid down by Kemmerer. He has employed Kemmerer's +statistics in considerable part, amplifying them for later years, using +some data not available when Kemmerer wrote, and undertaking a fuller +solution of certain problems than Kemmerer did. I shall, however, from +time to time make reference to Kemmerer's figures, and show points of +difference between the two studies. + +Let me first briefly state the second point of my criticism of these +studies: namely, that even if the statistics are correct, they do not +constitute proof of the quantity theory. The statistics purport to be +concrete data filling out for different years the equation of +exchange.[378] But the equation of exchange, as we have seen, does not +prove the quantity theory. The quantity theory is a _causal_ theory, and +causation involves an order _in time_. The concrete figures for the +equation do not prove that. Even Kemmerer's concluding chart on p. 148, +showing a rough concomitance between "relative circulation" and general +prices does not show that changes in relative circulation are _causes_ +of changes in general prices. The causation might be the reverse for +anything his figures tell us. Fisher himself recognizes this, in +considerable degree: "As previously remarked, to establish the equation +of exchange is not completely to establish the quantity theory of money, +for the equation does not reveal which factors are causes and which are +effects."[379] Again: "But, to a candid mind, the quantity theory, in +the sense in which we have taken it, ought to appear sufficiently +secure without such checking. Its best proof must be _a priori_."[380] + +The main criticism here, however, relates to the figures themselves, +rather than to their meaning. The figures given by Professor Fisher are +concrete magnitudes to fill out his equation of exchange, MV + M´V´ = +PT[381] for the years since 1896. Thus, for 1909, the figures are: M = +1.61 billions; M´ = 6.68 billions; V = 21.1; V´ = 52.8; P = $1; T = 387 +billions.[382] + +Now in what follows, I shall challenge all these estimates except P for +1909, V for 1896 and 1909, and M and M´ for all years. The figures for M +and M´, being the results of fairly simple computations based on +Governmental statistics, need not be questioned. P for 1909 is +arbitrarily placed at $1.00. V for 1896 and 1909, for reasons which will +later appear, is better based than for other years, though Kemmerer and +Fisher have differed greatly in their estimates for V, the former +placing it at 47 and the latter at 18 or 20.[383] My criticisms with +reference to V, however, will relate to the years other than 1909 and +1896. + +The sources from which these absolute magnitudes are drawn are, +primarily, two investigations by Dean David Kinley, one in 1896 and the +other in 1909, in coöperation with the Comptroller of the Currency.[384] +The purpose of these investigations was to ascertain the proportions of +checks and money in payments in the United States. Banks of all kinds, +national and State banks, trust companies, private banks, etc., were +requested by the Comptroller to supply data for a given day (March 16 in +1909) showing what their customers deposited on that day. They were +asked to classify these deposits as cash, on the one hand, and as +checks, drafts, etc. on the other. They were also asked to give a cross +classification of the same deposits, as "retail deposits," "wholesale +deposits," and "all other deposits." In 1909, over 12,000 banks of all +kinds, out of about 25,000 banks, replied, and of these replies 11,492 +were in available form. These replies showed a total of deposits of over +688 millions of dollars. Of this total, 647 millions were in checks, so +that checks made up 94.1% of the whole. About 60 millions of this total +were retail deposits, about 125 millions were wholesale deposits, and +the rest, about 503 millions, were classed in the "all other" category. +Kinley's use of these figures, _for his purpose_, seems to me in every +way conclusive and safe. He was interested merely in the question of the +_proportions_ of checks and money in _payments_, retail, wholesale, and +"_all other_." The absolute magnitudes of the elements in the equation +of exchange he was not trying to measure. Professor Fisher's use of the +figures presents a different problem.[385] + +Let us consider, first, Professor Fisher's estimate of M´V´, taken +together. M´V´ is considered to be equal to the total amount (in +dollars) of checks deposited during the year.[386] To get this, for +1909, Kinley's figure, above, for checks deposited in 11,492 banks on +March 16, 1909, is used. This figure is 647 millions. As half the banks +had not reported, an estimate for the non-reporting banks was obtained +from Professor Weston, who had aided Dean Kinley in the investigation, +and who had access to the original data. Professor Weston estimated the +total checks deposited during the day at 1.02 billions.[387] The +question then arose as to whether this day was typical for the year. +Professor Fisher found New York City bank clearings of March 17 (the day +after, on which these checks would get into the clearings) to be 28% +below the average for the year. He assumed the rest of the country to be +half as abnormal as New York City, and increased the 1.02 billions to +1.20 billions, getting what he conceived to be the daily average of +checks deposited in the United States in 1909. Multiplying this figure +by 303, the number of banking days in New York City (and so, presumably, +a fair average for the number of banking days in the country), he +obtained 364 billions for the checks deposited in 1909. This figure he +considered to be M´V´, the volume of bank deposits,[388] multiplied by +its velocity of circulation. To obtain V´, therefore, his problem was +simple: he divided the figure for M´V´ by the figure for M´ previously +obtained from government statistics, and obtained V´. + +Now I wish to call attention to three important errors involved in this +calculation of M´V´ for 1909. (1) The assumption that the total check +circulation is the same as the volume of checks actually used in _trade_ +is a violent one. _Payments_ may be tax payments, loans and repayments, +gifts, what not. Many checks may be used in a single transaction. Surely +not all of this is properly to be counted in the M´V´ of the equation of +exchange. But this topic is better discussed in connection with the +estimate for T, and I reserve its fuller discussion till then. (2) The +assumption that the rest of the country was abnormal in its clearings on +March 17, 1909, is a pure assumption, which investigation does not +verify. The rest of the country was, in fact, nearly normal! The error +that comes for the year from increasing the total on this assumption +amounts to at least 31 billions! The total for the year, on Professor +Fisher's method of computation, with the correction to make the +assumption regarding outside clearings correspond with the facts, is 333 +billions, instead of 364 billions! As the figure for 1909 is a basic +figure, on which figures for other years are calculated, this error is +extremely significant.[389] + +(3) A yet more serious error in this computation is the assumption that +New York City was complete in Kinley's figures, while the rest of the +country was incomplete. This error, as we shall see, largely neutralizes +the error above, so far as the "finally adjusted" figure for 1909 is +concerned, but it makes a vital difference in the figures for other +years, as will appear, since it affects the "weighting" of New York +clearings and outside clearings in the index of variation by means of +which M´V´ for years other than 1909 is determined. The assumption that +New York is complete, in Kinley's figures, and that all of the extra +hundreds of millions added by Professor Weston in his estimate for the +non-reporting banks belongs to the country outside New York, is made by +Professor Fisher both on pp. 444-445, in estimating M´V´ for 1909, and +on p. 446, in finding an index of variation for M´V´. The only reason +given, so far as I can find, is the following: "This figure, _being for +New York_, [Italics mine], is probably nearly complete." (_Loc. cit._, +p. 446.) With this as a basis, Professor Fisher proceeds in his +calculations to treat the figure for New York, 239 millions, as +absolutely complete, and gives the rest of Professor Weston's 1.02 +billions for the day, or 786 millions, to the country outside. The error +above mentioned, of assuming the rest of the country to be abnormally +low on March 17 in its clearings, still further increases the amount +assigned to the rest of the country in the total figures for the +year.[390] The conclusion finally is that New York had deposits of 93 +billions in checks for the year, while the rest of the country had +deposits of 271 billions in checks. As New York clearings for the year +were 104 billions, while clearings for the rest of the country were only +62 billions, Professor Fisher concludes that New York clearings +overcount New York check deposits, and outside clearings greatly +undercount outside check deposits, so that, in the index of variation of +check deposits, for years other than 1909 and 1896, New York clearings +should be given a weight of only 1, while outside clearings should be +weighted by 5. "That is, on the basis of 1909 figures, five times the +outside clearings plus once the New York clearings should be a good +barometer of check transactions." (P. 447.) All this rests on the +assumption that New York figures for March 16, 1909, were complete, and +the only reason assigned is, "being from New York!" + +Now the figures from New York were not complete. And New York clearings +do not overcount New York check deposits. Outside clearings do not +undercount outside check deposits nearly to the extent that Professor +Fisher assumes. For each of these three statements I shall offer what +would seem to be conclusive evidence, and I shall attempt to get an +estimate of the real relation between New York check transactions and +check transactions for the rest of the country. + +First, the figures for New York were far from complete. It may be noted +that Dean Kinley, in his volume for 1909,[391] is very careful to +repudiate the assumption that the cities were complete more than the +country: "Moreover, it is a mere assumption that the non-reporting banks +are mainly the small banks in the country districts. _A great many city +banks also did not report._" (Italics mine.) That this is true for New +York is abundantly evident from figures there given for the private +banks and the trust companies, not to consider at all the State and +national banks. New York shows only $1,751 in checks deposited in the +"all other deposits" in private banks! This is a city which includes +among its private bankers J. P. Morgan & Co., Kuhn, Loeb and Co., J. & +W. Seligman & Co., and others! Figures from these banks appear nowhere +in Kinley's totals, since deposits made _by_ these banks in other banks +are also excluded from Kinley's figures.[392] Of course, exact figures +cannot be given to show how much New York would be increased had the +private banks made full reports. We have no reports of any kind from +these institutions. Every feature of their business is kept from the +lime light, as far as possible--a practice which is much to be +regretted, since it arouses hostility and suspicion, where a statement +of the facts in the case would frequently entirely dispel them. We have, +however, some information regarding the magnitude of their deposits, +meaning by deposits, not what Kinley means in this investigation, +namely, checks, etc., _deposited_ on a given day, but rather, deposits +in the balance sheet sense of demand obligations to depositors. In Nov. +1912, J. P. Morgan and Co. held deposits of $114,000,000, exclusive of +49 millions on deposit with their Philadelphia branch of Drexel & Co. +About half of these were deposits of interstate corporations. Kuhn-Loeb +held, on the average, for the six years preceding 1913 over 17 millions +of deposits of interstate corporations. What their aggregate deposits +were, we do not know. These figures are obtained from the report of the +Pujo Committee.[393] Morgan's deposits were equalled by only three banks +and two trust companies in New York (as of April 3, 1915), and +Kuhn-Loeb's deposits for interstate corporations alone exceeded the +total deposits of any one of the great majority of the New York Clearing +House banks and trust companies. Of course, large deposits in the +balance sheet sense need not mean large deposits made on a given day. +Private bankers' deposits may be inactive. But we know, first, that half +of these figures for Morgan, and the whole of the figures given for +Kuhn-Loeb, represent the deposits of active business corporations, +engaged in interstate business. They are not mere trust funds lying +idle, or awaiting investment in securities. What the rest are we can +only conjecture. That they are deposits of men and firms connected with +the Stock Exchange in some way is highly probable. The whole drift of +the statistics presented in this book, and of the argument developed in +this book, would serve to show that such deposits are likely to be more +than ordinarily active.[394] I refrain from assigning any figures as to +the amount of checks deposited in private banks in New York on March +16, 1909. It must have run high into the millions.[395] It certainly +exceeded the two thousands, or less, reported to Kinley! The figures for +New York were, thus, incomplete. + +But the trust companies were also incomplete. The national banks in New +York reported checks totaling 186.5 millions, for all three classes of +deposits; the State banks reported only 38.1 millions; the trust +companies only 14.2 millions. With aggregate deposits, as shown by their +balance sheets, exceeding the deposits of national banks[396] the New +York City trust companies reported, as deposited on March 16, 1909, less +than half as much as the State banks, less than a tenth as much as the +national banks, and only 6.8% of the two combined--5.9% of the total +from all three classes of institutions! + +These figures are hard to reconcile with the assumption that the trust +companies in New York were complete on that date. + +It is, of course, possible that the trust companies, though having large +deposits, have inactive deposits. This is sometimes held to be the case. +But that the difference is so great in activity of deposit accounts +between banks and trust companies is hardly credible. I have looked into +this matter with considerable care, and have secured information and +opinions from men intimately acquainted with the trust companies of New +York from the inside. The only available quantitative measure of the +activity of deposits would seem to be the volume of a bank's clearings. +This is not perfectly accurate, by any means, but it is the best +available test. Through the courtesy of a Vice President of one of the +largest New York trust companies, I have obtained figures from an +official of the Clearing House, which show that in New York trust +company clearings run from 20 to 25% of the whole. On this basis, the +trust company figures for 1909 were incomplete to the extent of from 33 +millions to 46 millions, on the day in question. These clearings +figures, however, are for the year, 1915, and not for the period before +May, 1911, when the trust companies were admitted to the Clearing House. +Prior to that time they did not deal directly with the Clearing House, +but _through_ the member banks. Do these figures, therefore, represent +the situation as it existed in 1909? The possibility was entertained +that entering the Clearing House had made a difference in the reserve +policy of the trust companies, and so had made them change the character +of their business, in such a way as to bring about greater activity of +accounts. This question was put to the official of the trust company +before mentioned, and his reply is that the State law regarding reserves +(passed after the Panic of 1907) had already brought about this change +in reserve policy, and so no difference was made upon entering the +Clearing House. + +The same gentleman, by the way, replying to a question regarding the +deposits in private banks in New York, and the influence of such +deposits on clearings, writes: "The actual figures could not be obtained +from the Clearing House..., consequently can only say that deposits made +with these houses add to the Clearing House totals very large sums." + +There is one piece of evidence which would seem to negative these +conclusions regarding the trust companies. In the Report of the New York +State Superintendent of Banks, for Dec. 31, 1907, p. xxxv, is a +statement that during the two years, 1903-05, the trust companies of New +York cleared only 7% as much as the banks. The statement relates, +however, to a period during which the trust companies not only had no +Clearing House membership, which of course was true up to 1911, but also +had largely withdrawn from the privilege of clearing _through_ member +banks.[397] Under these circumstances, even 7% would seem quite high. +Inquiry was made of the Honorable Clark Williams, who was State +Superintendent of Banks at the time the report was made, as to the +source of the figures.[398] Mr. Williams, in reply, defends the figures +as correct for that period, but authorizes the writer to quote him as in +no way surprised at the percentages given above, 20 to 25% of the total +clearings, in view of developments and changes in trust company +business. + +I conclude that the trust company figures for March 16, 1909, were +exceedingly incomplete. The national bank figures were probably more +nearly complete than any others, first because they are large, and +second, because national banks would feel more obligation than other +banks to reply to questions from the Comptroller. The State bank +figures, 38.1 millions, as against national bank figures of 186.5 +millions, were probably incomplete also, to a considerable extent, +though State banks are not dominating factors in New York City. That +they should exceed the figures for trust companies is surely evidence of +the incompleteness of the trust company figures. The private banks are +incomplete, with absolute certainty, since they are virtually not +represented at all. + +Further evidence that the New York figures were incomplete, however, +will appear in the data regarding our second thesis, namely, that New +York clearings do not overcount New York check deposits. The aggregate +check deposits reported from New York, on the date in question, is 239 +millions. Clearings for that day were 268 millions,[399] substantially +exceeding the reported check deposits. Now do clearings exceed check +deposits in New York City? + +Evidence with reference to outside clearings, in connection with bank +transactions, we now have in very definite and abundant form, and it +will be convenient to approach the question of New York clearings, +first, indirectly, _via_ country clearings. We shall, therefore, take up +first the thesis that clearings outside New York do not undercount bank +deposits outside New York nearly as much as Professor Fisher thinks. +According to his estimate, checks deposited during the year in banks +outside New York (exclusive of checks deposited by one bank in another) +were 271 billions. (_Loc. cit._, 446.) Outside clearings were only 62 +billions, and his conclusion is that the ratio of deposits to clearings +is 4.4 to 1, or, in other words, that outside clearings amount to less +than 22.8% of outside check deposits. + +Now an extensive investigation, covering the period from June, 1913, to +Oct. 1914, inclusive, has been made by the American Bankers' +Association, through Mr. O. Howard Wolfe, Secretary of the Clearing +House Section. This investigation covered cities of various sizes, in +various parts of the country. Its results are immensely more trustworthy +than any results based on a single day, as Professor Fisher's results +are, could be, even had Professor Fisher's method been otherwise +correct. An account of this investigation is to be found in the +_Annalist_ of Dec. 7, 1914.[400] This investigation involves, for the +period in question, a comparison of "total bank transactions" in each +city with the clearings of that city, together with a summary covering +all the cities. "Total bank transactions" consist of all debits against +deposit liabilities of each member of the Clearing House, whether they +come through the Clearing House or over the counter. They include +payrolls, for example, which, of course, never get into clearings. They +include drafts on deposits of one bank in another. In a letter to the +Editor of the _Annalist_, Mr. Wolfe states that "total bank transactions +include all debits against deposit liabilities, whether by check, draft +or charge ticket. The only exceptions are certified checks and certain +cashier's checks, both of which to an extent represent a duplication." +For the period in question, clearings amounted, on the average, for all +cities, to 40% of "total transactions." The cities did not include New +York City, as stated. + +Now we cannot apply this 40% at once to the question in hand. Professor +Fisher's 22.8% relates to the relation between clearings and checks and +drafts _deposited_, _excluding_ items deposited by banks, and excluding, +of course, cash deposited. What is the relation between Kinley's +"deposits" and Wolfe's "total transactions"? + +It is clear that "total transactions" must, in a period of time, +_exceed_ Kinley's "deposits" very considerably. In a general way, what +goes out of a bank, and what comes into a bank, must approximately equal +one another in a period of time. In a general way, a depositor finds his +income and his outgo balancing. Of course, some accumulate, paying in +more than they withdrew, but in general such accounts are made with +savings banks. The business man borrows from his bank, getting a +"deposit credit" (without "depositing" in Kinley's sense), then checks +against his "deposit," then receives checks in payments to himself, +"deposits" them, building up his deposit balance again, and then checks +against his deposit balance, in favor of the bank, to pay off his loan. +What comes in and what goes out--abstracting from the growth of a +rapidly expanding bank--balance. But notice, in the case cited above, +that "total transactions" include more items than Kinley's "deposits" +show. When the bank makes a loan, and gives a deposit credit, this does +not, usually, show in Kinley's deposits. When, however, the loan is paid +off by a check to the bank, it does show in "total transactions." +Moreover, when a man deposits cash in the bank, it does not show in +Kinley's figures for checks deposited. When, however, he withdraws cash +from the bank, or his check to another is "cashed," it does appear in +"total transactions." Further, checks deposited to the credit of one +bank in another do not appear in Kinley's figures. Checks drawn, +however, by one bank on another do appear in total transactions. How +great the difference is between "total transactions" and "deposits" in +the banks outside New York we cannot say precisely. The cash items +alone, on the basis of Kinley's figures, would make a difference of +about 9%.[401] To allow 11% excess to "total transactions" over +"deposits" for the other reasons listed, is surely not to make an +exaggerated allowance. We thus count "deposits" in Kinley's sense, for +the banks outside New York City, as 80% of "total transactions." Since, +then, clearings are 40% of "total transactions," they will be 50% of +"deposits." This figure is more than twice as great as Professor +Fisher's figure of 22.8%. Even if we counted deposits as equalling total +transactions, Professor Fisher's estimate would be clearly very much too +low. + +How, then, do we stand? On Professor Fisher's showing, the overwhelming +bulk of checks deposited were in the country outside New York--271 +billions for the year, outside, as against 93 billions in New York City. +If the ratio (50%) for outside clearings to deposits was the same for +1909 that it was in 1913-14 for the outside banks, we shall have to +revise this radically. We have 62 billions of country clearings in 1909; +we would have, then, 124 billions[402] of country check deposits! If +Fisher's total figure for the country is correct, 353 billions as +"finally adjusted," the balance, or 229 billions, would belong to New +York! New York clearings, 104 billions, would thus be less than half of +New York deposits! If we count outside clearings for 1909 as only 40% of +outside check deposits, outside deposits would be, for 1909, only 155 +billions, as against Professor Fisher's 271 billions, _a difference of +116 billions_! I am sure that his error in estimating outside check +deposits is at least as great as that, and that we cannot assign to New +York City less than a major part of the total check deposits of the +whole country. + +This result fits in with the figures actually reported to Dean Kinley, +corrected to fit the known facts about March 17 clearings, better than +Professor Fisher's estimate, by a good margin. According to Professor +Fisher's estimate, New York City checks deposited are only 25.5% of the +total. Kinley's actual figures give 239 millions to New York City, and +408 millions to the country outside. But New York clearings were 28% +below normal on March 17, while country clearings were only 2.45% below +normal. Adding 28% to the figure for New York checks, we get 306 +millions. Adding 2.45% to the outside checks, we get 418 millions. Of +the total, 724 millions, New York checks would be, then, 42.3%. We have +shown reasons for considering New York deposits to be very incomplete +for March 16, particularly as regards the private banks and trust +companies. Comparison of the New York figures with the results indicated +by the ratio of country clearings to country deposits would thus +indicate that New York was much less complete than the country as a +whole. Even so, I need to add but 7.3% of the total to Kinley's actual +figures for New York, corrected in the light of next day clearings, to +give New York half of the check deposits. Professor Fisher must subtract +16.8% of the total from the actual figures for New York, as corrected in +the light of next day's clearings, in order to get his figure of 25.5%. +To vary as widely from the actually reported figures as Professor Fisher +does, I should have to assign 59.1% of total check deposits to New York +City. I refrain from making an exact estimate. I am content with the +conclusion that something more than half of the checks deposited in 1909 +were in New York. This seems to be too clear for serious controversy. + +The indirect approach to the relation between New York clearings and New +York deposits, _via_ the study of outside clearings in 1913 and 1914, +taken in conjunction with the figures for check deposits in 1909, would +seem to make it quite clear that New York clearings do not exceed New +York deposits, or, indeed, constitute a substantially higher percentage +of them than is the case with country clearings and deposits.[403] +Logically, assuming the correctness of the estimate for checks +deposited, the case is complete: we have a simple problem in arithmetic: +given country clearings for 1909, 62 billions; given the ratio of +country clearings to country deposits (and a minimum for this ratio is +clearly given, in the 40% which country clearings are of "total +transactions"), we can fix a maximum for country deposits, which is 155 +billions. Then, given our estimate of 353 billions for total check +deposits, we subtract the maximum possible for country deposits from it, +and get a minimum possible for New York City of 198 billions of check +deposits. Comparing this with the known clearings of 104 billions in New +York, we find that New York clearings constitute, as a maximum possible, +52.5% of New York check deposits. If the reasons given for holding check +deposits in the country to be less than total transactions are accepted, +the ratio of clearings to deposits in New York City is lower. + +Indirect calculations, however, even when logically complete, ought to +be checked up by other methods, when possible. We have some further +data, drawn from an earlier period, 1890-91-92, which suggest the same +conclusion. + +The reason commonly offered for holding that New York clearings +exaggerate local New York transactions, as compared with country +clearings and country transactions, is that New York is the clearing +house for the country. Country banks send their idle cash there; country +banks pay other banks by drafts on their New York balances; country +banks send out of town checks to New York for collection; business men +in St. Louis pay business men in Chicago with New York exchange, etc. +These items are supposed greatly to swell New York clearings. + +Now several of these reasons are not at all valid. Cash shipped back and +forth between New York and the interior does not get into clearings. +Secondly, New York, because of the charges made for collecting out of +town checks, has tended to lose much of the collection business. Chicago +probably does a great deal more of it than New York does.[404] However, +even if checks on out of town banks were sent largely to New York for +collection, they would not get into the clearings. New York banks send +checks on country banks directly to country correspondents. Checks on +out of town banks sent in for collection do swell clearings in Boston +and Kansas City, where arrangements have been made, to the advantage of +all concerned, to have the clearing houses handle this business. But New +York has not made provision for it.[405] The only checks that get into +New York clearings will be checks drawn on New York banks.[406] + +These checks will be of two kinds: (1) checks drawn by individuals and +firms on New York banks. These checks will commonly be drawn by people +in New York, and, in so far as they come from out of town, will +represent business between New York and other places, hence, New York +business. (2) Drafts by banks on their New York balances. These will be +of three kinds: (a) drafts sold, especially by country banks, to their +customers who need to make payments in other cities. Many of these will +represent payments to New Yorkers for transactions between New York and +the country, hence New York business, and will appear in the check +deposits of individuals, firms, and corporations in New York, (b) There +will also be drafts from one country bank, on New York, to another +country bank, in which New York is truly being used as a clearing +house, New York exchange taking the place of an intercity shipment of +cash.[407] (c) Drafts by New York banks on New York banks, to avoid +deficits at the Clearing House, or--especially in the case of private +bankers, between whom and brokers the line is hard to draw,--for general +purposes. + +Now, fortunately, we have some data, trustworthy, even though old, for +the volume of bank-drafts on New York, and, more important, for the +proportion of drafts on New York to drafts on banks in other cities. +These figures are, as stated, from the three years, 1890, 1891, and +1892. For the purpose in hand, however, they are relevant, since then, +as now, New York clearings were nearly twice as great, on the whole, as +country clearings, and if this excess of New York clearings is due to +that cause, it should have manifested itself in these figures. If the +proportion of these drafts on New York to the total of bank-drafts was +greater than the proportion of New York clearings of total clearings, we +might find reason for supposing that New York clearings were unduly +swelled by this fact. But in fact, drafts on New York are not out of +proportion. The figures are virtually complete for drafts drawn by all +the national banks on national and other banks for the years in +question. They will be found in the Comptroller's _Reports_ for the +three years, under the caption, "Domestic Exchanges." For 1890 the +figures are: + + Drafts on (000,000 omitted) + New York $ 7,284 (63.07%) + Chicago 1,084 ( 9.30%) + St. Louis 188 ( 1.64%) + Other reserve cities 2,537 (21.88%) + Other cities 464 ( 4.02%) + Total 11,550 ( 100%) + +The Comptroller (_Report_ of 1890, p. 19) gives an estimate for drafts +drawn by State and private banks of an additional 6,089 millions. He +does not try to apportion these among New York and the other cities. +There is no reason to suppose that the percentage for these banks of +drafts drawn on New York would be higher than for national banks, and +there is some reason for supposing that they would be lower: namely, +that these institutions would lack the incentive supplied by the +National Bank Act for depositing reserves in a Central Reserve City. The +Comptroller's figures probably do not include the great private banks in +New York, which deposit in New York commercial banks, and draw huge +checks against their deposits. These checks, probably, however, chiefly +represent stock exchange collateral loans to brokers, and so appear in +brokers' deposits as well as in New York clearings--represent New York +deposits. I do not use this estimate in my computations. If I did, the +results, so far as proportions are concerned, would be the same, since I +could do nothing but assign the same proportions to them. It will be +seen that my argument rests on the proportions, chiefly. + +Now what difference would be made if we wiped out all these draft +transactions, and reduced clearings to correspond? New York clearings in +1890 were 37,660 millions; country clearings were 21,184 millions. Let +us subtract the drafts on New York from New York clearings, and the +drafts on other places from the country clearings. The result is: New +York clearings, 30,376 millions; country clearings, 16,918 millions. New +York clearings still retain their former status! New York clearings are +still nearly twice as great as country clearings! It is not the bank +drafts used in making New York the "clearing house" for the country that +swell New York clearings as compared with the rest of the country! It is +something else! The main explanation, as we have in part seen, and shall +further see, is a mass of speculative transactions, chiefly Stock +Exchange transactions, and loan transactions connected therewith! New +York clearings grow out of New York business, primarily. + +The figures for the other two years vary little from those of 1890. What +variation there is shows a growth of drafts on interior cities, and a +decline of drafts on New York. New York showed 63.07% of these drafts in +1890, 61% in 1891, and 60.77% in 1892.[408] + +As we have seen, the only checks or drafts that get into New York +clearings are those drawn on New York banks. The checks on New York +banks probably almost all represent business in which one party is a New +York individual, firm, or corporation. The drafts by out-of-town banks +will contain all the items, virtually, that represent "clearings" +through New York. Not all of these, by any means, will represent such +clearings. A very substantial part of them will represent exchange sold +to customers to make payments in New York. We exaggerate the "clearing +through New York" when we subtract all these drafts from New York +clearings. Since, however, we treat country clearings in the same way, +no error results, so far as the proportions between them are concerned. + +The two sets of data converge. Both from the figures of 1913-14, in +conjunction with estimated check circulation in 1909, and from the +figures of 1890-92, can we conclude that New York clearings do not +overcount New York transactions. The conclusion would seem to be +inevitable that New York is really as important in our volume of banking +transactions as its clearings would indicate. This may be qualified by a +recognition of the possibility that New York clearings are more +efficient in handling check deposits than are clearings in other cities. +Some scattering data from national banks for single days at a time +indicate that a higher percentage of checks is cleared in New York than +elsewhere in the country,[409] and one observation for five national +banks for a ten-day period shows 67% of checks deposited cleared.[410] +These checks include deposits made by other banks, as do the figures of +Kemmerer's observations. But there are no direct observations covering +New York for a long enough period, or for enough institutions, to +warrant any definite conclusions.[411] + +The error of assuming clearings of March 17 in the country outside New +York to be abnormally low, swelled Professor Fisher's total figure for +check circulation by 31 billions, as we have seen. On the other hand, +the error of assuming New York City to be complete in Kinley's figures +tended to make the total smaller than it would have been, since New York +City was 28% below normal, and an increase of 28% applied to half of +Professor Weston's figure of 1.02 billions, gives about 70 millions more +for the day, or 21 billions more for the year, than when the 28% +increase is applied to only a quarter of Professor Weston's figure. +These two errors roughly neutralize one another, and we may accept +Professor Fisher's "finally adjusted" estimate of 353 billions[412] for +the year as roughly approximating the amount of checks deposited.[413] +How "rough" an estimate one gets by taking a single day as the basis for +a year need not be here discussed. I should be disposed to think that an +indirect calculation, _via_ clearings, in view of our more extensive +knowledge of the relation of clearings to "total transactions," might +well be worth more, so far as deposits outside New York are concerned. +Since, however, we lack any extended figures for the relation of +transactions and clearings in New York, and since even for the country +we are obliged to make guesses as to the relation of "checks deposited" +to "total transactions," I refrain from trying to improve further on +Professor Fisher's estimate for checks deposited in 1909--even though +questioning that "check deposits" and M´V´ are identical. + +What, however, shall we say of M´V´ for other years? In the calculation +of this, Professor Fisher relies on the absolute figures for 1909 (and +1896, similarly calculated), together with an "index" based on New York +and country clearings. In this index he weights country clearings by +5,[414] and New York clearings by 1. The result is, of course, that +country clearings dominate the index. But New York clearings are much +more variable than country clearings. The range of variation in New York +clearings for the years 1897 to 1908, inclusive, is from 33.4 billions +in 1897, to 104.7 billions, in 1906; the latter figure being more than +three times as great as the former. The range in country clearings is +from 23.8 billions, in 1897, to 57.8 billions, in 1907, the latter +figure being 2-10/23 as great as the former. But more significant is the +degree of _year by year_ variability. The country clearings, with the +exception of 1908, always rise,--a steady, if not quite symmetrical, +increase. New York clearings, however, go up and down, 42 billions in +1898, 60.8 billions in 1899, 52.6 billions in 1900, 79.4 billions in +1901, 66.0 billions in 1903, 104.7 billions in 1906, 87.2 billions in +1907, 79.3 billions in 1908. New York clearings are highly variable in +both directions, while country clearings vary almost wholly in one +direction, with a maximum difference of 6.4 billions between any two +consecutive years, and with an average yearly variation of only 3.5 +billions.[415] When country clearings are weighted by 5, almost all of +the high degree of variability of New York clearings is covered up, and +volume of checks deposited for years other than 1909 and 1896 is thrown +hopelessly away from the facts. It is too large by far in most years. In +1905, 1906 and probably 1901 it is too small. It does not vary nearly +enough. As V´ for years other than 1909 and 1896 is determined, for +Professor Fisher's equation, by dividing the M´V´ thus estimated by the +M´ for the year, it is clear that V´ as estimated by Professor Fisher is +very much less variable than it is in fact. It is pretty variable even +in his figures, but his figures do not nearly show how variable it +is.[416] + +Again, this undue weighting of country clearings, swallowing up New +York, vitiates Professor Fisher's estimates for V, the velocity of +money, for years other than 1909 and 1896. One of the elements in the +calculation of V is the estimated V´.[417] Since V´ is wrong, V will +also be wrong. V is probably much more variable than Professor Fisher's +figures would indicate. With great admiration for the ingenuity of +Professor Fisher's speculations regarding V, I find too many elements of +conjecture, and too many arbitrary assumptions, to give me confidence in +the figure for any year. I refrain from going into any general criticism +of his method of calculating V, however, contenting myself with the one +clear point that, to the extent that the values of V for years other +than 1909 and 1896 depend on the estimated M´V´ for those years, they +are less variable than they ought to be.[418] + +The same conclusion regarding Professor Fisher's estimates for V´ have +been reached, by a different method, by Professor Wesley C. Mitchell. +He, too, concludes that V´ is, in fact, more variable than Professor +Fisher would indicate.[419] + +I conclude, therefore, that neither V´ nor V has been correctly +calculated, for years other than 1909 and 1896. I pass now to a +consideration of T, the volume of trade, after which I shall consider P, +the price-level, in the equation of exchange. + +Let us first recall the point made in the chapter on "The Equation of +Exchange," that P and T, the price-level and the volume of trade, are +not independent even in idea. If one is given an independent definition, +the other cannot be given an independent definition. If the equation is +to be true, then P must be weighted by the numbers of each item (as +hats) exchanged. P is not a mere average, but is a _weighted_ average, +and T is always the denominator in the formula for P. In developing +statistics for P and T, therefore, this fact must be kept in mind, and +the elements entering into each must coincide, and vary together year by +year. + +In our chapter on "The Volume of Money and the Volume of Trade," we +showed that the great bulk of trade is speculation. We showed that the +_indicia_ of variation which Fisher[420] and Kemmerer have constructed +for trade, dominated by inflexible physical items of consumption and +production, give wholly misleading results for every year except the +base year. They give a steadily growing, inflexible figure, with little +variation from its steady path. Trade, if chiefly speculation, is highly +flexible, varies enormously from year to year, waxes and wanes. This +point need not be further developed. At best Fisher's figure for trade +can be accepted only for one year, 1909. + +Is, however, the figure for 1909, 387 billions, an acceptable figure? Is +it not decidedly too large? It is made up, it will be recalled, by +taking the figures for MV and M´V´, adding them together to get one side +of the equation, and declaring them equal to PT. P is then declared to +be $1, by the arbitrary device of taking as the unit of T one dollar's +worth of every sort of good at the prices of 1909. T is, then, 387 +billions, since MV plus M´V´ equals 387 billions. The theory underlying +this is that deposits made in banks correctly represent trade.[421] Our +criticisms as to the absolute magnitude assigned to T (and hence to MV +plus M´V´) will rest in large measure in challenging this assumption. It +is our contention[422] that deposits made in banks very greatly +overcount trade. + +Deposits made in banks include taxes and other public revenues; they +include loans and repayments, and interest-payments; they include gifts +and benevolences, money sent by parents to children away from home, +pensions, payments of insurance losses, annuities, dividends on stocks, +payments to and from savings and loan associations, fines, contributions +to churches, and other non-commercial organizations, etc., etc. None of +this represents trade. + +But further, whether payments are in trade or not, many times indeed +does it happen that several checks are drawn in connection with the same +transaction. Professor Kemmerer, entertaining this possibility, thought +it might be neutralized by cases where the same check passes through +several hands, making payments in several different transactions. He +calls this, however, a "gratuitous assumption of unverifiable +accuracy,"[423] and makes no claim to have given the matter careful +study. + +In general, I think it safe to hold that the case where a single check +passes through several hands is not important.[424] It will happen +chiefly with small checks in small places, or with small checks paid to +laborers. It is the pecuniary magnitude of checks, rather than their +number, that counts here. I am informed by several bankers that large +checks are almost universally deposited at once. This is for several +reasons: (1) The recipient of the check wishes to make sure that it is +good. (2) It is unlikely that the check is of the right size for another +transaction, unless the recipient is a mere agent for a third party, in +which case he should (but commonly does not) pass it on to his +principal, if double counting is to be avoided. (3) Every person who +handles sums of any size wishes a record of the transaction, and his own +canceled check is a receipt which he would not have if he passed on the +check of another. + +This last point will go far toward explaining why bank transactions may +multiply without a corresponding multiplication of trade. The banks do +the bookkeeping for modern business in increasing degree. Checks are +records, of high legal value. A colleague recently told me that he, in +his own capacity, had just drawn a check to himself, as trustee, +transferring a sum from one account to another. Another colleague, with +eight different bank accounts, estimates that over 50% of the deposits +in three of them represent transfers from other accounts. This kind of +duplication, where trust relations are involved, is enormous. +Intercorporate relations and separate bank accounts within a corporation +complicate it still further. + +A check is drawn by a subsidiary corporation to its dividend account, +and deposited; a check on this dividend account[425] is then deposited +in the general account of the parent corporation; a third deposit, of +the same funds, is then made in the dividend account of the parent +corporation; a fourth deposit of the same funds is made in a trust fund +which holds stock in the parent corporation; a fifth deposit in the +personal account of the beneficiary of the trust fund; a sixth deposit +may be made of a check on this fund in the personal account of the +beneficiary's wife. The first three of these deposits, at least, will be +made of the total dividend of the subsidiary corporation. _Not one_ of +these six deposits represents _trade_. Payments of wages and rents +should count as trade, but payments of interest and dividends stand on a +separate footing. When a man has bought a stock or a bond, he has +already bought all the income which is to come from them, and to count +the interest and dividends as separate items is double counting. They +are _payments_, but not _trade_. Even if the dividend payment be counted +as trade, however, it is counted _six_ times. + +There is enormous overcounting as a consequence of the combinations of +corporations, each of which retains its own numerous bank accounts. The +Interstate Commerce Commission calls attention to great duplications +from this cause in connection with railway income accounts.[426] Even +within single corporations the duplications[427] are very great. Thus, +the local agent of a railroad deposits his receipts in a local bank. His +check, or, more usually, the draft of the bank, is subsequently +deposited in a bank at headquarters. Subsequent disbursements, in places +away from headquarters, particularly of wages, will frequently be +preceded by deposits in other local banks. This duplication will be true +of telegraph, telephone, insurance and other companies which have +scattered agencies, including the wholesale trade. Advertising agencies +will illustrate it. _All_ checks between agent and principal, customer +and broker, etc., will illustrate it. There is a great deal of double +counting in stock transactions from this source. Thus, a Boston broker +takes orders, with a check for margin, for execution in New York. The +order is executed by a New York broker, who deals with another New York +broker, who represents a Louisville broker, who represents a Louisville +client. Now to the extent that any checks at all pass between the Boston +broker and his client, the Boston broker and the New York broker, the +other New York broker and the Louisville broker, or the Louisville +broker and his client, we have overcounting. Only the check between the +two New York brokers is properly counted. It is, of course, well known +that a small percentage of the dealings of a customer of a brokerage +house is represented by checks between broker and customer. Professor +Fisher states this to be about 5%.[428] It is, however, 5% of +overcounting! Moreover, through keeping "open accounts," with irregular +settlements of "margins" only, the Boston broker and the New York broker +reduce markedly the checks passing between them. There is a back and +forth flow of items which in large degree cancel one another, since the +Boston broker sells in New York as well as buys there, and the New York +broker, to a less degree, both buys and sells Boston securities, through +his Boston correspondent. But not all by any means is canceled, and +_all_ the checks that pass in this way represent double counting. The +total is large. + +_Public funds_ are included in the deposits reported to Kinley. Taxes +are not _trade_. Double, triple and multiple counting comes as revenues +are received by local authorities, transferred to State accounts, +subsequently redistributed to local accounts, or to the treasurers of +State institutions, transferred from one bank to another, etc. The State +of Massachusetts scatters its deposits in banks all over the State, and +makes transfers from one account to another. The City of Boston has many +bank accounts. The Federal Treasury deals largely with banks over the +country. + +Whenever a retail store has branches, duplications are likely to occur. +"Chain stores" make great overcounting. "Kiting" swells bank deposits. + +Replying to these contentions, Professor Fisher has urged that there is +large _undercounting_, also, and that the undercounting balances the +overcounting. I have myself called attention to a good deal of +undercounting in the chapter on "Barter." A substantial amount of +ordinary trade is carried on by means of partially offsetting +book-credit, time bills of exchange, simple barter, etc. The amount +might even run high, as compared with ordinary trade, when the clearing +arrangements in the stock and produce exchanges are taken into account. +But it is impossible to figure out anything at all in this line which is +to be compared with the great gap between the 141 billions of trade we +were able to find,[429] and the 387 billions Professor Fisher assigns to +trade. The gap of over 245 billions is much too great. Besides, in our +141 billions, we have counted barter items, book-credit items, time-bill +of exchange items, etc., already. + +The main item of undercounting must be in connection with the clearing +arrangements in the speculative exchanges. This would seem to be +Professor Fisher's view, as well.[430] Data are at hand for the two +great exchanges of the country which enable us to measure, with some +precision, the amount of the undercounting--_i. e._, to tell the extent +to which checks are dispensed with in the trading of these two great +exchanges. The two exchanges are the Chicago Board of Trade and the New +York Stock Exchange. + +For the New York Stock Exchange, figures are taken from Pratt's _Work of +Wall Street_, 1912 ed., pp. 166-167, 180, 273. The figures are for the +big year, 1901, when 266 million shares were sold, more than in 1909 by +51 millions of shares, and when the Stock Exchange Clearing House should +have done better, in the magnitude of the undercounting, than it did in +1909. Figures since 1901 are, Pratt states,[431] not available. Pratt +also gives figures for 1893, but does not give data as to the percentage +of stocks handled by the Clearing House, so that comparison with the +1901 figures cannot be made. + +In 1901, 265,944,659 shares were sold. Of these, 15% were "X-Clearing +House," _i. e._, not on the list of stocks handled through the Stock +Exchange Clearing House. This 15% was paid for in full by check. The +bond sales are not cleared, and so another billion dollars of checks is +required for this item.[432] If we assume (on the basis of the estimates +given to the writer by DeCoppet & Doremus, and Mr. Byron W. Holt, for +recent years) that 25% of the 100 share sales would be added if "odd +lots" were counted, we have another large item that does not go to the +Clearing House. "Private clearings" reduce the number of checks in +connection with odd lots, but not so effectively as is the case with +hundred share sales put through the Clearing House. So far the Clearing +House has done nothing. What did it do with the 85% of the stocks in +hundred share lots offered for clearing? + +The figures are perfectly definite. The 85% of the 266 million shares +sold was 226 million shares. The "share balance" remaining after the +Clearing House had done its best was 134 million shares.[433] The number +of shares sold, then, for which checks did not have to pass as a result +of the clearing process was 93 millions. In terms of dollars, we may put +the same figures. The estimated money-value of the 266 million shares +sold was 20.5 billions;[434] 85% of this is 17,425 millions. The +certifications required to pay for the 134 million share balance was +10,930 millions. The saving in checks was, thus, 6,495 millions of +dollars. This is the full extent to which the Stock Exchange Clearing +House undercounts recorded share sales. This is less than 1.7% of +Professor Fisher's 387 billions! To offset this, however, we have +_over_counting in the 5% of checks for all dealings on the Exchange +which pass between brokers and customers, as shown, and all the checks +between brokers and out-of-town brokers. We shall also find items of +_over_counting which vastly more than offset this undercounting, in +_loan_ transactions between brokers, and between banks and brokers, to +which we shall shortly give attention. + +This six and a half billions in checks saved on account of sales of +stocks is no small matter, absolutely. But this, though measuring the +extent of undercounted _sales_, by no means measures the services of the +Clearing House to the Stock Exchange. Not merely stocks _sold_ have to +be cleared. Stocks _borrowed_ are also cleared. Borrowing of stocks is +not _trade_, but borrowing of stocks requires the passage of money and +checks. When stocks are borrowed, money is _loaned_. A bear sells short. +He has to deliver next day. He accomplishes this by having his broker +"borrow" the stock he needs from a broker representing a bull, who is +long on the stocks, and who needs money to "carry" them. The bull, who +lends the stock, receives dividends from the bear, as they accrue, and +pays the bear interest on the money lent. An enormous lot of this takes +place. Moreover, to some extent, these transactions are increased +artificially, in order that the broker may make his "clearing sheet" +misleading, and avoid revealing his position with reference to the +market.[435] Loans of stock and sales of stock appear alike in the +transactions of the Clearing House. Moreover, apart from the necessities +of the bears for stocks to deliver, we have the necessities of the +bulls for money to carry their stocks. If a broker who has borrowed +largely from the banks finds his customers turning to the bear side of +the market, he has an excess of funds. He may repay his loans, but they +may be, in part, time loans, and in any case, he may find it just as +well, if he can make a small fraction of 1% in interest, to lend to +another broker, among whose customers the bulls are increasing. A vast +deal of money is thus transferred, on collateral security, by means of +"loaning stocks." Brokers prefer to borrow money from one another in +this manner, since no margins are required, in general, whereas banks +would require margins. These various reasons make a vast deal of +"borrowing and carrying" transactions, and a regular place is set aside +for them on the Floor--Post 4, commonly called the "Money Post." At this +post, also, the banks, through brokers, lend on call, and the published +call rates are established there. Of this, however, we shall have more +to say later. + +The extent to which this loaning of stocks takes place at the "Money +Post," as compared with the loaning done privately, varies. It makes no +difference, however, from the standpoint of the volume of these +transactions that go to the Clearing House whether they are put through +at the "Money Post" or outside. The loans made by the _banks_ at the +"Money Post" do not affect the Stock Exchange Clearing House +totals.[436] Formerly the "Money Post" was a place where the position of +the bears could be gauged in a given stock. If the demand for a stock +was great, the bulls could take heart, and increase the pressure. To +avoid giving away this information, however, borrowing is done on a +large scale privately, at present.[437] Of course, if the pressure gets +too strong, it will manifest itself at the money post anyhow, since +bears borrowing particular stocks will forego all or part of the +interest, or even pay a premium for the stock.[438] + +Now it is possible, from the figures given for the total clearings of +the Stock Exchange Clearing House, in conjunction with the figures of +recorded sales, and the percentage of "X-Clearing House" sales, to get a +fairly accurate idea of the magnitude of these stock borrowing +operations between brokers. The total number of shares offered for +clearing by "both sides" in 1901 was 926,347,300! This is double the +actual amount, since both buyer and seller report the same transaction +to the Clearing House, the former with a "receive from" sheet, and the +latter with a "deliver to" sheet. Half this amount, or 463,173,650 +shares, represents the actual number of shares to be handled. As we have +seen, 226 millions of this (85% of the recorded sales of 266 millions) +represents sales. The rest, or 237,173,650, represents borrowing of +stocks.[439] Borrowing exceeds actual sales, if the figures for 1901--a +year of enormous sales--are representative. We have, now, an +explanation of the prevailing opinion among brokers that the Stock +Exchange Clearing House dispenses with the major part of the checks that +would otherwise be required. _For their purposes_, it does make a vast +difference. Pratt's figures[440] show that, without the Clearing House, +certifications of $27,995,896,400 would have been required; that +certifications of $17,065,042,800 were obviated[441] by the Clearing +House, leaving the balance of $10,930,853,600 of certifications which +had to be used. This balance, as we have seen, is the major portion of +what would have had to be paid anyhow for the stocks actually sold and +offered for clearing. The saving on the actual sales is only 6.5 +billions. But the saving to the brokers was, of course, much greater. +Even six and a half billions is no slight matter for any purpose except +the explanation of our 245 surplus billions! Pratt gives an estimate at +another place of the certifications required by the Stock Exchange +sales, reaching virtually the same conclusion that we have reached by a +somewhat different combination of his figures. He indicates that 14 +billions of certifications were required, counting in the bonds, in +1901.[442] This compares with the 20.5 billions estimated value of +stocks sold, and approximately one billion of bonds. This leaves 7.5 +billions of certifications obviated on sales. This takes no account of +the "odd lots." If they run to an additional 25%, we have five billions +more which are not put through the Clearing House. My information is, +however, that "private clearings" reduce the checks in connection with +these, though not so efficiently as is the case with the big Clearing +House. + +Do the figures that get into the "all other" deposits from those +connected with the Stock Exchange undercount sales made there? Not yet +have we taken account of an item which swamps all that we have +considered. I refer to loan transactions by the banks, particularly call +loans. The volume of these is enormous. At the "Money Post" alone, the +figures average between 20 millions and 25 millions a day.[443] The +range is from 10 to 50 millions. The major part of these loans are not +made on the Floor of the Exchange, however, but privately, between banks +and brokers. Even on the Floor, no records of the loans are kept, and +only estimates are available. For the loans made privately, no figures +are attainable at all. The total must be enormous. One authority writes, +in a letter, "The total amount of money loaned at the post varies +considerably, depending upon the rate. For instance, when money is under +3%, loans are largely made directly between the banks and the brokers, +but when it gets over 3% and gets strong, more loans are made at the +post. Some national banks make all their loans there right along, so I +understand." My information from an officer of the National City Bank is +that it lends the major part of its demand money on the floor of the +Exchange. The other chief lenders, according to the Pujo Report,[444] +are the National Bank of Commerce, The Chase National, the Hanover +National, J. P. Morgan and Co., and Kuhn-Loeb. The same report states +that the bulk of such loans are made directly between banks and brokers, +and not at the "Money Post." + +How do these transactions affect Kinley's figures for deposits, and so +Fisher's total of 387 billions? The small dealer deals, usually, with +one bank. When he borrows, he gets a "credit" on his deposit account, +but makes no "deposit" that would get into Kinley's figures. But +stockbrokers deal with many banks. They have one bank which "certifies" +for them, and with which they regularly keep a "balance." But for their +loans, they deal with whatever bank gives them the best rate, or has the +funds to spare. In time of tight money, they shift their loans with +great frequency. They borrow also from one another. "Money" is "worth +money" in New York, and idle funds will be lent by whomever has them for +whatever the market will pay, on collateral security on call. When a +broker deposits money in his bank borrowed from another bank or another +broker, he gets a deposit credit which does get into Kinley's +figures--he deposits a certified check, or a bank draft. The following +has been described as a typical transaction by the bond expert of a +Boston banking house, and has been amplified by several Wall Street men +with whom I have discussed it. A, whose home bank is Bank W, has +borrowed, on call, $500,000 from Bank X. Bank X calls the loan. A finds +Bank Y willing to lend him enough to pay it off. Before he can get the +new loan from Bank Y, however, he must get his collateral released by +Bank X. Before he can do that, he must pay off the loan at Bank X. His +recourse, then, is to Bank W, his regular bank, which certifies for him, +and with which he keeps his balance. Bank W gives him a certified check +(either an overcertification, or a "morning loan" transaction), for +$500,000, with which he pays off the loan at Bank X. He then takes the +collateral from Bank X to Bank Y, and makes a new loan. He gets a draft +from Bank Y, which he deposits with Bank W, and then draws another check +against his deposit with Bank W to pay off the "morning loan," in case +the transaction took that form. Here are three checks for this loan +transaction, two of which get into clearings, and one of which gets into +"all other deposits." But the checks may be multiplied. A, instead of +getting a new loan at Bank Y, may call a loan from broker B, who may +then call a loan from broker C, who may go to Bank Y to get the funds he +needs to pay B. Here are two new checks in the series, both of which get +into the "all other" deposits. Checks fly about recklessly in Wall +Street, and men will turn over money many times, if an eighth of 1%, or +less, can stick by the way, on a good sum, for a few days! This is +strikingly illustrated by a fact which caught my attention in the +monthly bank statement of a brokerage house which I was allowed to +examine. The deposits made during the month, and the checks drawn during +the month, balanced to within five hundred and fifty dollars out of +several millions. The broker said of this: "It would be true even for a +single day, and it would be true for a year. The bank requires us to +keep a minimum balance; it is to our interest not to keep more than +that. If we have more at the end of the day, we lend it out; if we have +less, we borrow to make up the deficiency. We try to have just that +balance, and no more, to our credit at the bank at the end of every +day." The handling of funds by a brokerage house is a fine art, +involving both technical skill and a philosophic grasp of the factors of +the "money market." Are rates going up? Then it is well to reduce call +loans, and borrow more on time. If lower rates are anticipated, more +call money will be employed--with the possibility of a "squeeze" if too +much is taken that way. Hidden dangers must be foreseen. The sums +borrowed are enormous, and brokers' profits depend in very substantial +degree on their skill in borrowing as cheaply as possible, and in +utilizing their funds to the utmost. + +It is here, I think, in loan transactions between banks and brokers and +between brokers, that we have a major part of the explanation of the +huge deposit figures for New York City, and for the tremendous influence +of stock sales on clearings, which Mr. Silberling's[445] figures show. +This is the opinion of Professor O. M. W. Sprague, who first called my +attention to the volume of call loans, and rapid shifting of call loans, +in New York, and it is the opinion of every Wall Street man with whom I +have discussed the matter. The actual pecuniary magnitude of the share +sales and bond sales is not enough to do it. The mass of connected loan +transactions, however, substantially greater in volume than the actual +sales of securities, is, with the security sales, enough to do it. + +When the call rate is high, which will particularly happen when bank +reserves are low, the shifting in loans will be much increased. One bank +will have money to lend one day, but the next day will have to call it, +to meet heavy demands at the Clearing House, while some other bank will +have the surplus funds to lend. The brokers, by bidding up the rate, +will tempt the temporary lending even of small surpluses, if their +necessities are great. The volume of "all other deposits" and of bank +clearings will be swelled by this much beyond ordinary. That this should +not be revealed to ordinary statistical tests is due to the fact that +speculation tends to fall off at such a time, so that the other factors +in the stock exchange operations tend to reduce daily deposits and bank +clearings. Mr. Silberling has applied to this problem the technique of +a refinement of the correlation method, the method of partial +correlation, with the result of confirming this view.[446] + +I conclude, therefore, that stock exchange transactions, instead of +being undercounted in bank deposits, are very greatly overcounted.[447] +The big item that does it is loan transactions between brokers and +brokers and between brokers and banks. + +The evidence from the Chicago Board of Trade, with reference to the +extent of clearings within the exchange there, comes in a letter from +the Secretary of the Board of Trade to Professor Taussig. The only +clearing house transactions are in connection with "futures." All +"spot" transactions are paid in full by check. All futures other than +those offset by clearing are paid in full by check. The total amount put +through the Clearing House in 1915 was 118 millions, of which the +balances paid were 41 millions (saving checks to the extent of 77 +millions). This 77 millions is a trifle indeed as compared with the gap +of 245 billions we are trying to fill! It is a trifle also as compared +with the business done on the Board of Trade. The Secretary estimates +that commodities to the value of $375,000,000 actually arrived on the +exchange in 1915. On the average, the figure would be $350,000,000. For +the Stock Yards "it is approximately the same--last year was +$375,000,000. Of fruits, vegetables, poultry, butter, eggs, etc., sold +in South Water Street, it is claimed by their statisticians, the value +is $350,000,000, or a total of about eleven hundred millions _arriving_ +[Italics mine] yearly at this great market place, all of which is paid +for by checks, and when the ownership changes, the change of ownership +is always paid by check." How many times the goods change hands, cannot +be stated on the basis of records of the Board of Trade. The Secretary +contents himself with saying that they are "sold and resold many times." +We have discussed this, on the basis of reputed figures of the Federal +tax on grain futures in 1915, in our chapter on "Volume of Money and +Volume of Trade." In any case, it is clear that the 77 millions of +checks economized, though absolutely great, is relatively a bagatelle. +It is, moreover, more than compensated for by loan transactions. The +Secretary estimates that for a sixty-day period, when grain is coming +in, from two to four millions will be lent by the banks daily on +_arriving_ grain. How great the loan transactions on subsequent sales +will be we can only conjecture. + +While able to find, then, important cases of trade and speculation +which dispense with the use of checks, I cannot find anything of +magnitude sufficient to aid Professor Fisher's case, and I find, on the +other hand, enormous overcounting in every field where business and +banks meet, as well as in the relations of banks to non-commercial +depositors. + +I conclude, therefore, with reference to the figures of Fisher and +Kemmerer[448] for volume of trade, that they are much exaggerated for +the base year, and that for every other year they are wholly wrong, both +because of their excessive magnitude, and because the index of variation +has been wrongly chosen. + +The discussion of P, the price-level, in the statistics of Kemmerer and +Fisher need not be extended. P, for the equation of exchange, and for +the quantity theory, is a _weighted_ average, each price that goes into +it being weighted by the number of exchanges involving the commodity of +which it is the price. The weighting of P should correspond to the +elements in T, the volume of trade, and should vary from year to year, +as the elements in T change.[449] Now Kemmerer's P is weighted as +follows: wages, 3, security prices, 8, wholesale prices, 89.[450] If our +conclusions with reference to the composition of the volume of trade, as +developed in the chapter on "Volume of Money and Volume of Trade," are +valid, this weighting gives us a P which has no relevance to the +equation of exchange. The wholesale items should have a weight of not +more than one-sixth of the total for 1909. Certain commodities, as wheat +and cotton, in which there is heavy speculation, should be given great +weight, and securities should have, probably, the greatest weight of +all. If "trade" is to be extended to cover transactions in bills of +exchange and loan transactions (as it is by Kemmerer),[451] then P +should contain these things, weighted more than all else put together, +particularly if call loans are included. The weights should be radically +altered from year to year. We should then get a P which would fit the +"equation of exchange"--though what else it would be good for is hard to +say! The same criticism applies to Fisher's P. It is dominated by +wholesale prices.[452] It therefore has no relevance to an equation of +exchange in which only one-sixth at the very most of the items are +wholesale items. Neither Fisher nor Kemmerer alter their weights in P at +all, to correspond to yearly alterations in the composition of T. + +As _indicia_ of changes in the _absolute value_ of money, Kemmerer's and +Fisher's index numbers, or other index numbers of numerous wholesale +prices, with a substantial weighting of wages, are probably better than +an index dominated by stocks. Stocks fluctuate more widely than +wholesale prices and wages, their values are more affected by variations +in business confidence, and by variations in the rate of interest. For +measuring _the value of money_, the index numbers here criticised are +very good. But for the purpose for which they are chosen, namely, to +fill the equation of exchange, and to measure variations in a +_price-level_ of the sort the quantity theory and the equation of +exchange are concerned with, they are simply irrelevant. If it were +really true that such an index number varied with the quantity of money, +then the quantity theory would be effectively disproved! + +Now, in general summary of our criticisms of the figures of Kemmerer +and Fisher: they have systematically buried New York City, and +systematically covered up speculation. All the errors converge in this +direction. The _indicia_ of trade cover up speculation and the other +things that go on in New York, and other financial centers. The +_indicia_ of prices do likewise. Fisher weights New York clearings only +1, while weighting country clearings 5, in his index of variation of +check transactions. He also counts New York returns for March 16, 1909, +as complete, and gives all of his estimate for non-reporting banks to +the country. Kemmerer does not do this, but he does exaggerate the +importance of money, as compared with checks, and does not allow the +velocity of money to vary at all in his figures, thus getting a much +greater constancy in the figure for total circulation of money and +checks than is proper, and covering up the flexibility and variability +which New York gives to our system.[453] In general, our task in this +chapter has been an archæological excavation--we have rediscovered a +buried city. + + + + +PART III. THE VALUE OF MONEY + + + + +CHAPTER XX + +RECAPITULATION OF POSITIVE DOCTRINE + + +The chapters which have gone before have been, in considerable degree, +concerned with the analysis of unsuccessful efforts to solve the problem +of the value of money, as the quantity theory, or the attempts to apply +the notions of supply and demand, marginal utility, and cost of +production, to the problem. Not all that has gone before has been, even +in form, primarily critical. The chapter on "Economic Value" lays the +foundation for the main constructive theory of the book, and in +virtually every chapter some portion of our positive doctrine has been +developed. In the doctrines criticised, elements of truth have been +noted, and in showing the errors of the doctrines considered, +constructive doctrine has been presented by way of contrast. The +theories criticised, moreover, even where they have gone astray in +solving problems, have at least the merit of _stating_ problems, and so +have aided in clearing the way for theories better based. + +It is the task of the present chapter to present, in a series of theses, +the main constructive results so far attained. No effort will be made to +follow the order of the exposition which has preceded. A summary of that +will be found in the detailed analytical table of contents. Rather, we +shall seek to draw from what has preceded the positive doctrine which is +scattered through the preceding chapters, and to present it by itself, +as a basis for the more systematic formulation of constructive theory +which the following chapters are to contain. + +1. The theory of the value of money is a special case of the general +theory of value. + +2. Value is a phenomenon of psychological nature. Not physical +quantities, but psychological significances, are relevant when the +problem of value and price causation is involved. + +3. Value is not a ratio of exchange, or "purchasing power," but is an +absolute quantity, prior to exchange. It is the fundamental and +essential attribute or quality of wealth, the common or homogeneous +element present amidst the diversities of the physical forms of wealth, +by virtue of which comparisons may be instituted among different kinds +of wealth, and different items of wealth may be added to make a sum, put +into ratios of exchange, and so on. + +4. Economic value is a _species_ of the _genus_, _social value_, +coördinate with legal value, and moral value. It is part of a system of +social motivation and control.[454] Psychological in character, it none +the less presents itself to an individual as an objective, external +force, to which he must adapt himself. + +5. Individual prices have two coöperating causes: (a) the social +economic value of the money-unit, and (b) the social economic value of +the unit of the good in question. + +6. The average of prices, or the "price-level," is a mere mathematical +summary of the particular prices. The causation involved in the average +of prices is nothing more than the causation involved in the particular +prices. + +7. The value of money is to be distinguished from the "reciprocal of the +price-level," or the "purchasing power of money." The value of money is +an absolute quantity, one of the factors, determining each particular +price. Particular prices and general prices may change because of +changes in the values of goods, with no change in the value of money. +Or, particular prices and general prices may change because of changes +in the value of money, with goods remaining constant in value. + +8. The absolute value of money, assumed constant, is presupposed by the +great body of present day price theory, as supply and demand, cost of +production, and the capitalization theory. These theories are, +therefore, inapplicable to the problem of the value of money. + +9. But supply and demand, cost of production, the capitalization theory, +and other laws concerned with the concatenation and interrelations of +prices, being applicable to the problem of particular prices, are also +applicable to the problem of general prices. (Chapter on "The +Passiveness of Prices.") + +10. The general price-level, as a consequence of changes in particular +prices, growing out of changes in the values of goods, may rise or fall, +without antecedent changes in the value of money, or the quantity of +money, or the volume of credit, or the volume of trade, or in the +"velocities of circulation" of money or credit. (Chapter on "The +Passiveness of Prices.") + +11. The general laws of prices, supply and demand, cost of production, +the capitalization doctrine, the imputation doctrine, etc., conflict +with the quantity theory. In the cases where they conflict, the first +named doctrines are correct, and the quantity theory is wrong. (Chapter +on "The Passiveness of Prices.") + +12. The value of money, being a special case of economic value, is +subject to the same general laws. This means, from the standpoint of my +theory, that the theory of social value is applicable to the problem of +the value of money. + +13. This is not the same as saying that the whole value of money is to +be explained by the social value of gold bullion, conceived of as a mere +commodity. A hypothetical case was constructed in the chapter on +"Dodo-Bones," in which gold is the standard of value, but is not +employed as a medium of exchange or in reserves, where the whole value +of money is to be explained by the value of gold bullion, conceived of +as a commodity. + +14. But, in general, money gets part of its value from its monetary +employments. (Chapter on "Dodo-Bones.") + +15. The additional value which comes to gold bullion as a consequence of +its employment as money, is itself to be explained on social value +principles. It grows out of the social value of the services which money +performs. + +16. The functions of money remain to be examined in detail. And the +relation between the value of particular services of money and the +capital value of money, has not yet been analyzed. There is a relation +between the two--a relation which varies under different +conditions--even though it has been shown in the chapter on the +"Capitalization Theory" that the relation is not the simple one which +holds between the values of services and the capital value of ordinary +income-bearers. There must be an increment to the value of gold bullion +as a consequence of its being coined, however, since otherwise there +would be no force leading it to be coined. + +17. This increment in value to bullion, as a consequence of coinage, +becomes evident when free coinage is suspended. An agio of coin over +uncoined bullion may easily appear. + +18. But this is not to assert the doctrine of the quantity theory. +Because + +19. The money service presupposes the existence of value for money from +some source other than the monetary employment (chapter on +"Dodo-Bones"); and + +20. Hence the monetary employment can explain only a differential +portion of the value of money. + +21. The proposition that money must have value from some source other +than the monetary employment does not mean, necessarily, that money must +be made of precious metals, or be convertible into precious metals. The +value of money is, indeed, most stable and best sustained when such is +the case. But it is possible for money made of paper to have value apart +from the prospect of redemption--though no clear case has been made, in +the writer's opinion, for the view that this has historically occurred. +But as a hypothetical possibility, my theory holds that paper money may +attain a value of its own, growing out of various factors which a social +psychology can explain, including law, patriotism, and custom. Social +values in every sphere are imperfectly rationalized. Values which in +their origin are secondary and derived may become substantial and +independent of their "presuppositions." This is true of legal and moral +values. It is true of the capital value of land. It may be true of paper +money. This matter has been discussed in the chapters on "Economic +Value" and on "Dodo-Bones." The social value theory has not the +limitations of the utility theory in dealing with such cases, nor is it +tied to a metallist or bullionist interpretation. Legal, moral, and +patriotic factors, and the influence of social custom, all fall readily +into the social value doctrine. + +22. The "measure of values" function, and the "standard of deferred +payments" function, need not require the actual use of money, and need +not add to the value of money. The function of "medium of exchange," and +other functions to be analyzed in a later chapter on that topic, do +involve the actual employment of money, and are sources of value for +money. + +23. The quantity of money and credit are matters of high importance in +economic life. They affect vitally the smooth functioning of production +and exchange. While not accepting the extreme view of those writers who +see in scarcity or abundance of money the primary cause of the ebb and +flow of civilization, I maintain that the quantity of money and credit +does make a vast difference, and that the quantity theory contention +that, after a transition is effected, the only consequence of a change +in the quantity of money is a proportional change in the price-level, is +wholly indefensible. (Chapter on "Volume of Money and Volume of Trade.") + +24. Very much of economic theory has been developed in abstraction from +money. For economic statics, with its delicate marginal adjustments, on +the assumption that friction is banished, that the market is fluid, that +labor and capital and goods are mobile, etc., money does appear a +needless complication. But the static assumptions are only possible +because money and credit have smoothed the way. It is the business, the +function, of money and credit to overcome "friction," to effect +"transitions," to make it possible for "normal" tendencies to manifest +themselves. (Chapter on "Volume of Money and Volume of Trade.") + +25. The main work of money and credit is in effecting "transitions," +bringing about readjustments, enabling society, with little shock, to +adapt itself to dynamic change. The great bulk of the actual exchanging +that takes place is speculation, and would not occur if economic life +were in static equilibrium. This is true both as a matter of theory and +as a matter of statistics. More than half of the checks deposited in the +United States are deposited in New York City, where "wholesale" and +"retail" deposits are a small factor. Bank clearings fluctuate in close +conformity with stock exchange transactions. Great banks, and the bulk +of banking transactions, are everywhere found in the speculative +centres. (Chapters on "Volume of Money and Volume of Trade," and "The +Rediscovery of a Buried City.") + +26. Hence a functional theory of money must be essentially a dynamic +theory: must rest in a study of "friction," "transitions," and the like. +And, + +27. Hence a theory of money like the quantity theory, concerned with +"long run tendencies" and "normal equilibria" and "static adjustments" +touches the real problem of the value of money not at all. + +28. An increase of money tends to increase trade. (Chapter on "Volume of +Money and Volume of Trade.") + +29. An increase of credit tends to increase trade. (Same chapter.) + +30. An increase of trade tends to increase the volume of credit, and, +where the money supply is flexible, tends to increase the money supply +also. (Chapter on the "Volume of Trade and the Volume of Money and +Credit.") + +31. Production waits on trade. The problem of marketing in the modern +world is often more important than the problems of production in the +narrower sense. Selling costs are probably greater than strict "costs of +production." "Volume of trade," far from being dependent on "physical +capacities and technique," is almost indefinitely flexible, with +changing tone of the market, with changing values, and with other +changes, including changes in the volume of money and credit. (Chapter +on "Volume of Money and Volume of Trade.") + +32. The relation between the volume of money and the volume of credit is +exceedingly flexible. The relation between the world's volume of credit +and the world's volume of gold is likewise exceedingly loose, uncertain, +and flexible. (Chapters on "Volume of Money and Volume of Credit," and +"The Quantity Theory and World Prices.") + +33. "Velocity of circulation" is a blanket name for a complex and +heterogenous set of activities of men. It is a passive resultant of many +causes, and is itself a cause of nothing. The safest generalization +possible concerning it is that it varies with the volume of trade and +with prices. + +34. Barter remains an important factor in modern economic life, and is a +flexible substitute for the use of checks and money, increasing when the +money market "tightens." It is greatly facilitated by the "common +measure of values" function of money. + +35. The general criticism of the mechanistic scheme of causation +involved in the quantity theory has, as its positive corollary, the +doctrine that psychological explanations must be given--that the +phenomena are intricate and complex, as intricate and complex as the +play of human ideas and emotions, and the network of social +relationships. + +36. This means that the theory of value, and of the value of money, as +here presented, cannot assume the simple form, or the mathematical +precision, which have made the quantity theory so alluring. It means, +further, that the present study, as in part pioneer work, will lack +finish and definiteness in many places, will contain errors and gaps, +and will leave many problems unsolved, and many distinctions undrawn. At +many points, the analysis is confessedly incomplete, and the problems +imperfectly thought through--often inadequately _stated_, if seen at +all. + +In what follows, these theses, with doctrines yet to be developed, will +be woven together into a systematic theory of money and credit. + +The study of the functions of money, in relation to its value, will best +be approached, I think, through a study of the origin of money. In this, +I shall base my conclusions chiefly on the work of Karl Menger and W. W. +Carlile, who seem to me to have done most in this field. + +On the basis of the general theory of value developed in the first +chapter, and the results of the two chapters which are to follow on the +origin and functions of money, I shall reach my main conclusions as to +the laws of the value of money. On the basis of this theory of value, +and of the theory of the functions of money, I shall also try to develop +a psychological theory of credit, and to assimilate credit phenomena to +the general phenomena of value. The development which the theory of +credit has had, at the hands of men whose chief interest was that of the +jurist or accountant, is valuable and important. I do not wish to +discredit what has been done. Many important doctrines concerning credit +have been developed. The general theory of elastic bank-credit, worked +out in the controversy between the "Currency" and the "Banking" Schools, +is of the highest importance. This theory I have discussed in the +chapter on "The Volume of Trade and the Volume of Money and Credit." I +still feel, however, that there are gaps in the prevailing ideas on +credit which only a social psychology can fill. I shall undertake to +construe credit as a part of the social system of motivation and +control, and to differentiate it from other parts of that system by an +analysis of its functions. I think, too, that the theory of the relation +of credit and money is in especially unsatisfactory shape, particularly +with reference to the factors governing reserves. + +A final chapter, in Part IV, will undertake to bring together the +various points in our discussion which deal with the theory of +prosperity, and will seek to bring the notions of "theory of prosperity +_vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._ +transitional tendencies," and certain other similar contrasts, into a +higher synthesis, which will, to be sure, not rob these contrasts of +their significance, but will rather find certain generic principles +which they share, and so make it possible to measure considerations in +one sphere in terms of considerations in the other sphere. In very large +degree, students of dynamics and students of statics have been talking +at cross-purposes, missing the force of one another's arguments, and +have been quite unable, even when understanding one another, to come to +agreement, precisely because they have lacked principles by means of +which they could compare in any quantitative way the forces which each +studies. A higher synthesis, which would give static and dynamic +theories common ground, would seem to be a desideratum of high +importance. Such a synthesis would go far toward unifying the science of +economics. I believe that the theory of money and credit, approached +from the angle of the social value theory, will meet this need. + + + + +CHAPTER XXI + +THE ORIGIN OF MONEY, AND THE VALUE OF GOLD + + +This chapter is not concerned with history or anthropology for their own +sake. The present writer has made no independent historical or +anthropological researches, in connection with the question of the +origin of money. The chapter is primarily concerned with giving an +exposition of the theories of two writers, Karl Menger and W. W. +Carlile.[455] It is not important, for my purposes, whether either +writer has presented a theory which anthropology will accept as a +correct account of actual origins. The theories do throw light on +present functioning, and seem to me to be correct as analytical +theories, whether historically adequate or not. There are two main +questions with which the chapter is concerned: + +(1) How did money come to be? + +(2) Why should gold and silver have passed all rival commodities in the +competition for employment as money? + +Viewing these questions from the standpoint of present functioning, +rather than from the standpoint of historical origins, we may restate +them as follows: + +(1) Why should men accept small disks of metal, or paper representatives +of these metal disks, for which, _as_ metal, they have no use, or at all +events far in excess of the amount which they can make use of as metal, +in return for economic commodities which they can use? The social +utility of a money economy may well be granted, without giving an answer +to this question. Granting that social economic life works better by +far when men do accept these disks of metal in payments, the question +still remains not merely as to why the practice started, but also as to +why it continues. Granted that it is to the individual, as well as to +the social advantage, that each individual should accept these metal +disks in excess of his personal need for the metal, _if he is assured +that he can pass them on to others at will_ in return for the goods he +wishes to consume, the question still remains as to why the individual +should have this assurance, as to why the general practice should +continue. Menger quotes Savigny as holding that the thing is downright +"mysterious," and the Aristotelian answer of social convention +(sometimes interpreted as "social contract") is, in effect, a confession +that the thing does baffle explanation on the ordinarily understood laws +of exchange. The convergence of individual and social advantage, which +English economic theory has done so much to emphasize, is less clear by +far in connection with money than with the case where A trades a sheep +(of which he has a surplus) to B for a quantity of grain (of which B has +a surplus), while A has not enough grain, and B has not enough sheep. +This exchange is clearly to the advantage of both A and B, and the +practice of making such exchanges is clearly to the general advantage. +But in the case of money, A trades sheep (of which he may not have an +excess, so far as his capacity to consume is concerned) for disks of +metal which he probably does not intend to consume at all. The social +advantage of a general practice of the sort is easily established, but +it is not clear that it is to A's advantage, _unless we assume the +practice general_. But there are many practices which could be shown to +be socially advantageous if all men practiced them, and, indeed, +individually advantageous, if generally practiced, which can, none the +less, not be made a general practice. If thieves would cease stealing, +we could dispense with a vast expense now incurred in police and safe +deposit vaults and heavy locks, etc., and with a small fraction of the +savings could give pensions to the thieves which would surpass by far +their present incomes! Individual and social advantage would converge. +But for many reasons the practice could not be instituted, and would +break down quickly if instituted. Very powerful social pressure indeed +is needed to make an advantageous social institution--like +morality--work, so long as individuals sometimes find advantage in +breaking the general practice, even though the general practice, _on the +part of other people_, is of advantage to every individual. Now it is +clear that the institution of money is to the social advantage. It is +clear that it is to the advantage of every individual who has money that +everyone else should be ready to accept it in unlimited amount, in +return for his goods and services. But it is not clear, on the surface, +why everyone should be ready to take metal disks in unlimited amount in +return for goods and services. People will not take coal or horses or +hay or land or white elephants in unlimited amount in return for goods +and services. Why should there be such a general practice regarding +metal disks or pieces of paper? + +This question, to one who has always lived in a money economy, may seem +childish. Such questions regarding anything to which we have grown +accustomed seem childish to those who have not been used to raising +them. Why does the sun rise? Why does seed-corn sprout? But these also +are proper scientific questions, the answer to which is of high +practical importance! The answer to the question just raised regarding +money will go far toward explaining the functions of money, and the +theory of the functions of money, together with the general theory of +social value, will give an answer to the question as to _how the money +function adds to the value of money_. The answer which I shall give on +the first question will in large measure follow the lines laid down by +Menger. + +(2) The second question needs little revision, when stated from the +standpoint of present functioning, rather than of historical origin. We +have more recent history to deal with in connection with this question, +and Carlile, in his answer, offers substantial historical and +anthropological proofs. It is still, however, present functioning that +is important, and the question may be restated thus: + +Why are gold and silver, and particularly gold, the standard money of +the great part of the world to-day? The principles of social psychology +which Carlile employs in explaining the historical development, are also +important in explaining the present attitude of mankind toward gold and +silver, and will serve, together with the general theory of social +value, to answer the question as to the value which money receives from +the employment of the money metal _as a commodity_. + +It is worthy of note that neither of these questions has been seriously +raised or discussed by most recent writers of the quantity theory type. +Professors Kemmerer[456] and Fisher give no attention to them at all. +Both assume money as circulating, as the starting point of the argument, +without noticing how much is involved in the assumption. Neither, +moreover, gives an _analysis_ of the functions of money. Considerations +drawn from the question as to the origin and functions of money are hard +to bring into the quantity theory scheme. If money circulates, there are +causes for it. Fully to understand those causes, would be to understand +also the _terms_ on which money circulates, that is to say, the +_prices_. But then a quantity theory would be superfluous! And if the +quantity theory answer should not be obviously in harmony with the +answer already given by the theory of origin and functions, then doubt +would be cast on the quantity theory explanation. The quantity theorists +do well to avoid mixing up with their discussion considerations drawn +from the general theory of value, and from the theory of the origin and +functions of money. + +The answer to the first question rests primarily in the fact that there +are differences in the _saleability_ of goods. Value and saleability are +not the same thing. A copper cent has high saleability; a farm has low +saleability.[457] Some valuable things cannot be exchanged at all. The +Capitol at Washington cannot be exchanged, yet has value. Under a +communistic or socialistic régime, exchange, as we now know it, would +largely or wholly cease. An entailed estate cannot be sold, yet has +value. If society should really come to the stable equilibrium of the +"static state," most of the exchanges of lands,[458] securities, and +other long-time income-bearers would cease, but they would still be +valuable. I have developed these notions in my article on "Value" in +the _Quarterly Journal of Economics_, Aug. 1915, and have referred to +them again in the chapter on "Value" in the present book, and so need +not expand the discussion here. Exchangeability and value are different +characteristics of goods. Value is an essential precondition of +exchangeability, but can exist without it. Value is, however, commonly +increased by exchangeability. But the theory of exchangeability is a +separate matter, and cannot be deduced from the theory of value alone. + +Menger points out the difference between "buying price" and "selling +price." You can buy a piano for $400. If you try the next minute to sell +it for $375 you will probably fail. You may pay ten thousand dollars for +a farm. The income of the farm may increase. The tax assessment may +increase. The capital value of the farm may increase. And yet, you may +have to wait for a long time before you find a buyer who will pay you +ten thousand dollars for it. One buys pianos or farms, as a rule, only +when one wishes to use them, or when one has such special knowledge of +the market that one knows pretty definitely where purchasers can be +found for a resale, at a profit. Even in such highly organized markets +as the stock and produce exchanges, one cannot usually buy in quantity +and sell immediately without some loss. "Buying price" and "selling +price" of such a stock as Industrial Alcohol Preferred are sometimes +five points apart, at a given time. The forced sale of land in +bankruptcies, or for taxes, notoriously often bring prices far below the +price which would correctly express the value of the land. It is only in +the ideal fluid market assumed by static theory, where adjustments are +instantaneous, where causal-temporal relations have become timeless +logical relations, that values are perfectly expressed in prices.[459] + +All these difficulties were enormously greater in days of primitive +barter, before money and organized markets had been evolved. The +difficulties of barter have been much elaborated in the literature of +money. I shall recur to the topic in my chapter on the "Functions of +Money." Part of the trouble arises from the "want of coincidence" in +barter--the failure to find the man who has what you want, and who at +the same time wants what you have. Goods have high or low saleability, +depending, in considerable degree, on the _universality_ of the desire +for them. They may have high _value_ if only a few rich men desire them, +provided they be scarce. The paintings of old masters would be a case in +point. Incidentally, the difference between buying price and selling +price is often enormous in this case, and the making of a sale may well +involve long and expensive negotiations. The difficulties of exchange +here arise not alone from the limited market, however, but also from the +fact that each painting is a unique, and a unique of high value. A good +might have high saleability despite the fact that the ultimate demand +for it comes from only a few rich men, if it could be easily subdivided +and standardized. + +Menger enumerates a number of circumstances connected with a good which +increase its saleability. Among them are the following: + +1. Widespread and intense desire for the thing (to which should be +added, adequate wealth on the part of those who desire it). + +2. Scarcity of the commodity in question. + +3. Divisibility of the commodity. + +4. Considerable development of the market. + +5. That the demand for the article should be more than local. + +6. That it be cheaply transportable. + +7. That commerce between localities in the article be unrestricted. + +8. That demand for the article be constant, not fluctuating, in time. + +9. That the article be durable. + +10. That it be uniform in quality, so that standardization is easy. + +In general, Menger's list meets the requirements often laid down for a +good _medium of exchange_. In general, to the extent that any commodity +meets these tests, it will be _saleable_. Commodities will vary +indefinitely in the extent of their saleability. + +Starting with the distinction between value and saleability, and with +the analysis of the circumstances affecting saleability, we may now +undertake to see how money tends to develop out of a barter economy. +Suppose that a man, in a barter economy, has a good of low saleability, +which he wishes to trade for some other specified commodity. He finds no +one who possesses the commodity he wants who is willing to trade with +him. But if he can trade his article of low saleability for some other +commodity of higher saleability, _still not the thing he wants_, he has +yet made progress, he has got _one step nearer_ the object which he does +want. It will be possible now, perhaps, to trade the new article, of +higher saleability, for the commodity he wants. If not, he can trade it +for some article of still higher saleability, which he can finally +trade for the article he wants. By several indirect exchanges, he +finally reaches his object. Incidentally, it is erroneous to distinguish +money and barter economies as economies based on direct and indirect +exchange. The barter economy may well involve much more indirection than +the money economy, in many cases. + +If there be in the market some one commodity which has a conspicuously +higher degree of saleability than any other, the more sagacious men in +the market will make it a point to get hold of it and accumulate it in +excess of their anticipated consumption of it. They will do this, +because they will see that they can thereby get other things which they +do need more easily than in other ways. With the accumulation of a given +kind of highly saleable goods, in excess, by a few men in the group, in +the expectation that the surplus will subsequently be used to buy other +goods,--as yet perhaps not specifically determined--we have, not money, +but a big step toward money. At first only a few grasp the great idea. +They succeed and become wealthy. Then others see the advantage of the +thing, and imitate them. The prestige of the wealthy and successful men +would induce imitation even if the advantage were not clearly seen. Then +a tradition and a custom grows up. With the growth of tradition and +custom, picking out one or a small number of things as particularly +desirable objects to accumulate because of their saleability, with the +practice of accumulating these articles in excess of intended +consumption, money becomes an accomplished fact. There is no need for +agreement or legislation. Money is not, in its origin, certainly, a +matter of law or conscious public planning. + +With the development of a highly saleable article into money, moreover, +we have further a great increase in that saleability itself. The +quality which made the practice possible becomes greatly enhanced by the +practice. Menger thinks that this leads to an absolute difference +between money and goods, the money article, which formerly was merely +superior to other goods in saleability, now becomes absolutely saleable. +The absoluteness of this distinction, which would make it a distinction +in kind, rather than in degree, seems to me not to be sound. I think +that the distinction remains a distinction of degree. For one thing, the +development of money, while it adds to the saleability of the +money-commodity, _also adds to the saleability of other goods_. _Two_ +things must be exchanged, in order that _one_ may be! It is the business +of money to facilitate exchange, to overcome the difficulties of barter, +to bring about the fluid market. And it does this not merely by acting +as a medium of exchange. The fact that goods can be _priced_ in terms of +money, can have a common measure of value, makes barter itself easier, +as I have shown in my chapter on "Barter" in Part II. There are many +articles in trade at the present time whose saleability is not much less +than that of money, in ordinary times. Wheat in the grain pit is surely +highly saleable. Stocks and bonds are. If it be objected that in the +wheat market there is always some difference between buying price and +selling price, if considerable quantities are involved, it may be +answered that the same is true in the "money market" The man who has +just negotiated a three months' loan of five hundred thousand dollars at +3-1/2% may well have trouble in turning that loan over to someone else +immediately without shaving 1/4% from the money-rate! Besides, it is not +true that values remain unchanged when a big buyer shifts from the bull +to the bear side of the market. Buying price is higher than selling +price in that case partly because _his economic power_ has ceased to +sustain the value of the wheat, and the price would not correctly +express the value if it remained uninfluenced by that fact. + +Further, as we shall see when we come to the analysis of credit, one +chief function of modern credit is to increase the _saleability of +goods_, and to enable men to use the value of their goods in effecting +exchanges without actually alienating their property in the goods. It +seems to me that the drift of modern systems of exchange is toward +closing up the gap between money and goods, in respect of saleability, +rather than to widen it.[460] But this is to anticipate later +discussion. + +It is not necessary, in answering our second question, as to the reasons +why gold and silver have become the standard money of the world, to go +far in the study of primitive moneys. Wheat has almost never been money. +The value of wheat sinks rapidly with increase in supply, and is very +unstable. Wheat meets some other tests that fit it for money, as easy +divisibility, ease in standardization, and even has some degree of +durability, though subject to deterioration and waste with keeping, and +involving expense in keeping. Carlile and Ridgeway think that wheat was +used to some extent among the Greeks in Southern Italy as money, at one +time.[461] But this was possible because there was a regular export +trade in wheat--the same thing that made tobacco available as money in +Virginia. In general, however, commodities which minister to easily +satiable wants are ill-adapted for money. And that is especially true of +current stocks of goods currently consumed. + +The accumulation of money, moreover, implies a stage of human +development where the accumulation of _capital_ is possible. It implies +foresight, the suppression of present wants in the interest of future +wants, and almost always money has been a commodity well suited to serve +as provision against future contingencies. Cattle, slaves, knives, +fish-hooks, cooking implements, and similar things have been money. The +"store of value" function manifests itself early. + +But very early a different sort of commodity comes in. Articles of +_ornament_ early begin to take the place of articles that minister to +more animal wants. It seems strange that articles meeting wants which +are commonly counted frivolous and fanciful should distance those +obviously necessary in the race for a place as money. It seems strange +that the nations now at war should seem more concerned about their gold +supplies than about their wheat supplies.[462] But it is none the less a +fact that men in all ages have been enormously concerned about ornament. +In warm regions, ornament has commonly preceded clothing. Very early, +necklaces, bracelets, rings, earrings, nose-pendants, etc., became +objects of exceedingly great desire. And very early, gold and silver +were used for such purposes, and men made long expeditions for them and +fought wars for them in very early times, before the money economy was +developed far. Other ornaments than those made of gold and silver have +also become money. Wampum, polished shells, iron ornaments, etc., have +all been money. The Karoks of California were accustomed to use strings +of shell ornaments as money. When this was supplanted by American +silver, they used strings of silver coins as ornaments, dressing their +women lavishly with rows of silver dimes, quarters, and half-dollars! +Ornament and money are freely _inter_changeable in primitive life. +To-day, in the Western world, the thing is more specialized and +differentiated, and the interchange of money and ornament is largely +confined to jewelers, bankers, especially international bankers, gold +brokers, and the mints, _through_ whom the rest of society make the +interchange. In India, however, the peasant's hoard takes the form of +bracelets, bangles, and earrings for his wife and daughters, and the +peasant himself seems to regard them in the double light of provision +for future needs, and as conferring social distinction. They are both +ornament and savings bank, and are superior to a savings bank from the +standpoint of effective saving, since the natives would spend what they +put in the bank, but only famine can make them dispose of the ornaments +of their women.[463] Saving is a practice not easily started. There are +powerful motives in human life making for prodigality. Social prestige +comes to the man whose hospitality is lavish. Social expectation, which +is the most powerful steady motive power in human life, makes powerfully +for prodigality. Thrift is a virtue little esteemed among primitive men, +and none too highly esteemed among the masses in most countries. The +grudging person, the tightwad, the man who fails to do his share of the +treating, the woman who entertains her guests with inadequate fare--none +of these enjoy high social esteem. To offset this, a motive equally +powerful must manifest itself. It would be considered mean and +contemptible for the Hindu to put money away instead of spending it on +feasts at marriages and funerals, and in hospitality on other festive +occasions. But he gains, instead of losing, in social esteem and +prestige, if he decorates his women with gold and silver. Later, the +advantage of such a practice as a matter of provision against future +wants would get into men's minds, and would become an added incentive to +maintain and increase the practice. Thus the frivolous and fanciful side +of men's nature furnishes a powerful lever for the development of both +money and capital. In the store of value function we find one of the +earliest and most significant functions of money. Carlile offers a +wealth of evidence to show this interchangeability of money and ornament +among many peoples, at different stages of culture. + +Three powerful elements of human nature work together in sustaining the +value of the metals which become widely used as ornament: + +(1) love of approbation; + +(2) the sex impulse; + +(3) the spirit of rivalry, or competition. + +In these three we have, perhaps, the firmest basis which it is possible +to construct for the value of anything! When religion is added, as has +often been the case with the precious metals, the basis becomes solid +indeed! Modern social psychology has increasingly made clear the power +of the first. Social expectation can take the raw stuff of human nature, +and mold it into almost any form it pleases. Original, hereditary +differences remain. Some raw stuff is so inferior that no high social +organization can be built out of it. Some stuff cannot respond very +effectively to the social stimuli. But _qualitatively_, the tendency is +for men to become what society expects. Individuals succeed more or less +in meeting social expectation. But the very elements of individual +aspiration and ambition, the very self of the individual, are molded to +the social pattern, and, with the same racial stock, vary almost +indefinitely from time to time and from place to place, with the +_mores_. If ornament confers distinction,--and almost everywhere it +does--men will seek to possess ornaments. + +Commonly it is for the sake of the other sex that men seek ornaments. +Ornaments are an aid in wooing! Men gain wives by being able to give +them ornaments.--Not that this is the whole story!--And social +expectation, almost everywhere, requires that men decorate the wives +that they have won. Wives usually reinforce social expectation in this +matter. + +Further, the desire for ornament is competitive. One's women must be +_better_ ornamented than the women of one's neighbors, if _distinction_ +is to be gained thereby. But this sets a faster pace for the neighbors, +and the standard of social expectation is raised as to the necessary +amount of ornament. It is the same sort of competition that arises among +armed nations. A new battle-ship for one requires that all increase +their naval strength. New armies in Germany call for new armies in +France. A vicious circle is created. The desire for ornament, unlike the +desire for food, becomes insatiable. And hence, the value-curve for the +metal used as ornament sinks very slowly, being reduced, not by +satiation of want, but by limitation of economic resources. I need not +elaborate these notions further. They are of the same sort that Veblen +has developed in his _Theory of the Leisure Class_. They rest on +fundamentals in human nature, however much they differ from the +psychology of the "economic man." They give assurance, I think, that, +unless radical change in tastes and fashions come in, which displace +gold and silver from their position as ornaments and as means of +display, we may expect the value of gold to maintain itself at a high +level regardless of great increase in quantity. I do not share the view +which Carlile himself seems, at times, to express[464] that gold does +not sink in value with the increase in quantity. It seems to me easily +demonstrable that it has sunk, and does sink. But I should expect the +value of gold to survive the shock that might come if gold were entirely +displaced from monetary use vastly better than any commodity which +serves wants of a different character could stand a similar shock. The +demonetization of silver has, of course, not entirely displaced silver +from the monetary employment. It has, however, made it necessary for the +arts to absorb a greatly increased proportion of the new silver,[465] +and not a little of the old silver. The demonetization of silver, +moreover, was accompanied and followed by a great increase in silver +production. But silver has stood the shock amazingly well.[466] + +It is, of course, thinkable that the attitude of mankind, under new +social conditions, and with new tastes and fashions, may change, with +reference to gold and silver. Love of approbation and distinction, the +sex impulse, and the spirit of rivalry, are eternal elements in human +nature. But their manifestations may change. There have been times when +love of distinction gratified itself in poverty and filth and +asceticism. Almost anything may be exalted into a social ideal. Society +may even reach ideals of such a sort that a man may gain social approval +and the love of woman in high competition with his fellows in the +service of mankind! But even here gold and silver may have a place. They +are beautiful, as we now see beauty, and beauty itself is good! The +world is better if it has beauty in it. + +It is just as well to conclude at this point what I shall have to say +regarding the value of gold as a commodity.[467] The same quantity of +gold and silver may have widely varying values, depending on the +distribution of wealth and power. It is not alone intensity of +individual desire that controls values, but also the social weight of +those who manifest the desire. And this depends on the legal and other +institutional values concerned with social organization. The point is +strikingly illustrated by Walker's[468] account--designed for another +purpose--of the effect on the values of gold and silver of the conquests +of the great Eastern empires by Alexander the Great and the Romans. The +production of gold and silver, for the great Eastern empires, was like +the rearing of the pyramids in Egypt. All power was centered in the +hands of a few despots. Control of vast masses of laborers was in their +hands. The social values--it is difficult to classify them as legal, +economic and religious, since all three are blended--gave little weight +indeed to the desires of the masses, and tremendous weight to the +slightest whims of the despot. Thus, since the love of gold and silver +was intense in these despots, and since religious considerations also +called for the accumulation of great treasuries of gold and silver, +enormous numbers of laborers, living miserably, toiled in the mines to +produce them, and amazing stores of gold and silver were accumulated. +The precious metals had, in these Eastern empires, a high value per +unit, since so large a portion of the social energy of motivation +attached itself to them. With the conquests by Greeks and Romans, +however, a great change came. The old, gold-loving despots lost their +power. The conquerors had vastly less love for gold and silver for their +own sake. Moreover, the leaders among the conquerors had very much less +power in their own social systems than had the oriental despots. Their +soldiers were in considerable degree free mercenaries, who had a right +to a share in the spoils, and who cared much less for hoards of precious +metals than for many other things. In the new régime, the social centre +of gravity was changed. There remained few who loved great stores of +precious metals who had power enough to accumulate them. Mining on the +old basis was impossible. Though slavery persisted, more and more of +the labor of slaves went into the production of things that the masses +of men could consume. Gold and silver sank enormously in value. + +Radical readjustments in the distribution of wealth in our own day, +might well make substantial changes in the value of gold, without any +change in its quantity. That a more equal distribution of wealth and +power, however, would lower the value of gold now, as in the case just +discussed, is not so clear. The masses in the Western countries are +already fed and clothed, as a rule, even in times of adversity, and +usually increasing income for them means increasing expenditure to +satisfy less pressing wants, and particularly to satisfy wants connected +with social esteem. The laborer's wife gets an expensive cab for her +baby when she can afford it. The negroes have gold fillings put in their +front teeth--sometimes when the teeth are sound! The practice of giving +wedding rings, and even engagement rings, is spreading among the poor. +Our American rural poor, of pioneer stock, have had less concern for +gold and silver ornament than the masses of the Asiatics and recent +European immigrants. But among the rural poor in America, as city +standards spread, the tendency to use gold and silver ornaments seems to +be increasing, while we may with considerable confidence expect, I +think, that the rise of the immigrant to better economic conditions will +mean a larger use of gold and silver on his part. Gold leaf on ceilings +and radiators would cease, doubtless, except for public buildings, if +great fortunes disappeared, and the use of gold, at least, for plate, +would be impossible in an economic democracy.[469] Silver might well +gain in value at the expense of gold if there were radical changes in +the distribution of wealth. It is notorious that prosperity among the +agricultural masses of India is promptly followed by absorption of gold +in that country. I venture no concrete conclusions on this point, beyond +the general conclusion that a redistribution of wealth, with no change +in the quantity of gold, might well be expected to alter the value of +gold. + +It may be added that the general impoverishment of Europe, growing out +of the present World War, will probably lower the marginal value of gold +in the arts (and hence as money) in considerable degree. From this cause +alone, to say nothing of causes growing out of the money-employment of +gold, and growing out of the values of goods other than gold, we might +expect higher prices after the War than before the War, for articles of +consumption.[470] + + + + +CHAPTER XXII + +THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY + + +In preceding chapters, I have spoken of the "money-service" as a source +of additional value of money, under certain conditions. Before money can +function as money at all, it must have value from some non-monetary +source.[471] But, given this prior value, money performs valuable +services. These valuable services, in certain cases, add to the value of +money. Moreover, the fact that money, when made of a metal used in the +arts, lessens the amount available for use in the arts, raises the +marginal value of that metal there, and consequently raises its value in +monetary form as well. It is now necessary to analyze the money-service, +and to see in precisely what ways it does affect the value of money. And +first, we must notice that the money-service is not simple, but +compound; that in fact there are several services of money, in many ways +distinct from one another; that not all money can perform all of these +services; that most of them may be performed by things other than money, +that these services are not all equally important as sources of the +value of money, and that the same service varies, from time to time and +from place to place, in its significance from this angle; and finally, +that one of these services which is of the greatest social importance, +namely, the "common measure of values" function, does not add to the +value of money at all. + +I shall not now undertake a history of theories of the functions of +money. Many of the points which follow are common property of many +writers.[472] The nature of some functions has been more clearly +explained than that of others. I have not found in the literature of the +subject any very clear statements, moreover, as to the relations of +different functions to the value of money. I shall try in what follows, +by a series of hypothetical cases, to isolate each function of money, as +far as may be, and shall try, by varying my hypotheses, to indicate +variations in the influence of the different functions on the value of +money. + +The functions of money have been variously described and named. The +following list seems most satisfactory to me: + +1. Common measure of values (standard of value). + +2. Medium of exchange. + +3. Legal tender for debts (_Zahlungs-_ or _Solutions-mittel_). + +4. Standard of deferred payments. + +5. Reserve for credit instruments, including reserve for government +paper money. + +6. Store of value. + +7. Bearer of options. + +The common measure of value function rests in the intellectual needs of +man. It grows out of the necessity for calculation, for bookkeeping, for +understanding what is going on. Any object of value may be used to +measure the value of anything else, just as any object of weight--say +an irregular mass of iron--may be put in the balance against some other +object, and the relation between the absolute weights of the two objects +thus more or less definitely ascertained.[473] But it helps little, in +getting at the aggregate weight of a collection of objects, to know that +A among them is heavier than B, while D is lighter than F. To get a +knowledge of the situation adequate for quantitative manipulation, it is +best to compare all of the objects with some _one_ object, chosen as the +standard of weight, or common measure of weights. Thought is thus +immensely simplified. If we may imagine the calculations of a dealer in +a rural region, where no common measure of values is used, it will help +to make clear the nature of this function. Let us suppose that he deals +in nails, wire, cotton cloth, eggs, butter, hams, sugar, and moonshine +whiskey, and that his customers also make and use most of these things, +using him as a central clearing house in their rude division of labor. +Without a common measure of values, it is necessary for him to keep in +mind the price of every commodity in terms of every other commodity. If +there are twelve commodities, this means 66 ratios which he must +remember, according to the formula for permutations and combinations. In +general, in such a situation, there would be the following ratios: (n - +1) + (n - 2) + (n - 3) + ... (n - (n - 1)). Let him choose, however, one +of his commodities, say eggs, as the common measure of values, and he +needs to bear in mind only eleven prices, namely, the prices of each of +the other eleven articles in eggs. Thinking is immensely simplified. In +general, with a common measure of values, dealers need bear in mind only +(n - 1) prices. Suppose that at the end of the day, after considerable +trading, our dealer finds the following changes in his stock: + + _He has gained_ _He has lost_ + 8 doz. eggs 12 lbs. nails + 3 gallons whiskey 8 lbs. wire + 4 hams 13 lbs. butter + 5 yards cloth 10 lbs. sugar + +Has his trading been profitable? How can he tell? Reduce all the items +in both columns to their equivalents in eggs, however, and the answer is +very easy. No complicated business is possible without this common +measure, and common language, of values. + +Be it noted that this common measure of values does not necessarily +involve the use of a medium of exchange. The practice of _thinking_ in a +common measure is what is involved. If the article chosen be eggs, which +all are accustomed to use, the service of a common measure might easily +be performed without the practice of indirect exchange, assuming that +other physical difficulties of barter to which I shall shortly refer, +were absent. Indeed, as I have pointed out in the chapter on "Barter" in +Part II, a great deal of barter goes on in modern life, made very much +easier by the fact that we have a common language of values, a common +measure of values. For the easy working of the system, it is important +that the common measure of value be an article with whose value the +group is well acquainted. The frequent testing of this value in actual +exchanges vastly facilitates this. But actual exchange is not necessary +for the performance of the measure of value function. We have cases +where the measure of values and the medium of exchange are different. +Thus, in the Homeric poems, we find indications that cattle served as a +measure of values, even though payments were made in gold. The +Virginians commonly _thought_ in pounds, shillings and pence, even when +using tobacco as a medium of exchange. The need for a common measure of +values would manifest itself in any complex socialistic society, even +though exchange were largely dispensed with. No systematic plans for +utilizing the resources of such a society would be possible, no +bookkeeping would be possible, without some such device. + +For this function, I prefer the term, "common measure of values," to the +term often used instead, "standard of values." The latter term, as used +in connection with the expression "standard money," sometimes carries +the connotation of "money of ultimate redemption," and its main function +is thought of as serving in reserves. The reserve function is a separate +function, however. It is common to have money made of the standard metal +in reserves. But this need not be the case. I would refer once more to +the hypothetical illustration developed in the chapter on "Dodo-Bones": +gold, not coined, as the "standard of value"; paper as the medium of +exchange; silver bullion, at the market ratio with gold, as the reserve +for redemption of the paper. This may suggest that a distinction may +properly be drawn between measure of values, and ultimate standard +money. The paper money, in this case, would be the thing of which the +masses would ordinarily _think_, so long as the system worked smoothly. +And the paper could serve as a measure of values. The case is not unlike +the case where a "standard yard," or "standard pound" is kept for +ultimate reference in a government bureau, while yardsticks or pound +weights in the shops and warehouses do the actual measuring. The cases +do not, indeed, run on all fours. The measurement of weights and lengths +involves physical manipulation; the measurement of values is an +intellectual operation, made by comparing two objects of value. The +comparison may be made in actual exchanges; it may be made by an +accountant's estimate; it may be made by comparing the results of +several exchanges, in sorites form, only one of which involves the +ultimate standard measure. The yardsticks actually used may vary more or +less, by accident or design, by variations of temperature, etc., from +the standard yard. The paper dollars, under a smooth working of the +system described, would be held closely to the ultimate standard, and +would, in any case, not vary as compared with one another at the same +time and place. + +When the medium of exchange diverges in value from the ultimate +standard, as in the case of the American Greenbacks during the period +from 1862 to 1879, we have, sometimes, shifting relations among the +functions. The Greenbacks were the measure of value most commonly in +use. They were legal tender for debts, except where gold was specified +in the contract. They were commonly the standard of deferred payments. +To a considerable extent, however, gold was used in reserves, and even +as a medium of exchange. People _thought_ in both standards. And +finally, gold remained an ultimate standard to which the Greenbacks were +referred, and by which variations in their value were measured. The +terms, "primary standard" (gold) and "secondary standard" (Greenbacks), +have been employed to aid in straightening out this confusion.[474] I +think, on the whole, that the term, "common measure of values" describes +the function which I wish to emphasize more clearly than the term, +standard of values, and I shall, in general, employ it for that +purpose.[475] + +The medium of exchange function grows out of the physical difficulties +of barter, rather than out of intellectual needs. The discussion in the +preceding chapter of the origin of money has emphasized the nature of +the difficulties which a medium of exchange meets. A has an ox, which he +wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor +nor grocer cares to take the ox, however, and, besides, no one of them +could supply A with all three of the things he wishes to get. Moreover, +even if A should meet a man who had all three things, he would not care +to give up the ox for them, since the ox is worth more than all three. +If there be a medium of exchange, however, A may sell his ox to the +butcher, and take his pay in that medium, which will be something easily +and minutely divisible, buy coat and sugar and shoes, and take the +surplus of his medium of exchange home, waiting for another occasion. +The medium of exchange function overcomes the difficulties arising from +low saleability of many goods, due to limited number of possible buyers, +lack of divisibility, etc., etc. + +The common measure of values aids greatly in determining the prices, the +terms, at which exchanges may be made; the medium of exchange makes +possible exchanges which could not be made at all in its absence. + +The measure of value function does not add to the value of money. The +medium of exchange function is commonly a cause of additional value for +money. The source of this extra value is the gains that come from +exchange. + +Exchange is an essential part of the productive process, where you have +division of labor with private ownership of the instruments of +production, and private enterprise. Values[476] may be created by +changing the forms, the time, the place, or the ownership of goods. All +these operations are necessary in an economic system like our own. Those +who possess money are in a position to take toll, in values, from those +who wish to get rid of the goods which they have produced, and to get +hold of the goods which they wish to consume. The holders of money do +this by means of the money, and under the laws of economic imputation, +these gains are attributed to the money itself, first in the form of a +rental value, and sometimes, under conditions later to be discussed, as +increments to capital value. + +Before giving full discussion to this topic, it will be well to consider +certain other functions, which are, or may be, sources of value for +money. + +The reserve for credit instruments function cannot be fully discussed +till we take up credit. Provisionally, it may be said that it is a +source of absolute value for money, _per se_, even though the effect on +prices may be that, owing to a rise in the values of goods, the prices +rise. The fact of credit may even tend to lessen the absolute value of +money itself, by lessening the value that comes to money from the medium +of exchange function. On the other hand, credit increases exchanges, +making possible a vast mass of transactions which without it would not +occur at all. Of course, in our hypothetical case above, where the +reserve for credit instruments is silver bullion, the reserve for credit +instruments function does not add to the value of money at all. + +The "bearer of options" function of money is also a source of value for +money. It is a valuable service. The man who holds money, waiting his +chance in a fluctuating market, anticipates a gain which justifies him +in holding his capital without return upon it. Money is not alone in +performing this service. High grade bonds also perform it. They bear a +lower yield per annum to compensate. The service of bearing options is +itself a part of the yield, and is itself capitalized, in their case. +Two 5% bonds, each equally secure, but one of which has a wide market, +while the other has a restricted market, will have a very unequal value. + +This "bearer of options" function is often identified with the "store of +value" function. The two are properly distinguished. If a man has in +mind a definite contingency, at a definite future time, for which he +wishes to hold a store of value, he may well find that a high yield +bond, or a loan upon real estate, or many other productive investments, +will serve him better than money or bonds with wide market. So far as +money is concerned, the "bearer of options" function is much more +important than the "store of value" function to-day. The reserve of +value in liquid form, for undated emergencies (like the War Chest at +Spandau, or the big reserve accumulated between 1900 and 1913 by the +_Banque de France_), would, from the point of view of this distinction, +come under the "bearer of option" function, rather than the "store of +value" function. The important thing about the distinction is that for +one purpose a high degree of saleability in the thing chosen is +necessary, while in the other, such is not the case. The most common +case of the "bearer of options" function arises when men hold money, +liquid securities of low yield and stable value, short loans, call +loans, or bank-deposits, waiting for special opportunities in the +market. + +The medium of exchange function would exist in a society where business +goes always in accustomed grooves, where uncertainty is banished, and +where most of the assumptions of static economic theory are realized. +If we push static assumptions to the limit, and assume "friction" of all +sort gone, assume that all goods can flow without trouble or expense to +the places and persons where their values are highest, etc., even the +medium of exchange function would disappear. But if we make our static +assumptions a bit more realistic, leaving the "friction" of barter, but +banishing the need for readjustment, and the uncertainties that grow out +of dynamic changes (whether caused by growth of population, or changes +in laws and morals, or in fashions and tastes, or in technical methods, +or by accidents of various kinds), then the medium of exchange function +will still remain. Given dynamic changes, we have need for a vast deal +more of readjustment, and a vast deal more of speculation. I have shown +in the chapter on "The Volume of Money and the Volume of Trade" that the +great bulk of trading in the United States to-day is speculation, which +increases or decreases with the amount of dynamic change, with its +accompanying uncertainty and need for readjustment. The major part of +the medium of exchange function arises from this. The whole of it arises +from factors which purest static theory is accustomed to abstract from. +The _whole_ of the "bearer of options" functions arises from dynamic +change. _This is the dynamic function_ of money _par excellence_. It is +commonly treated by economists as an unusual and unimportant function. +Merged with the store of value function, it is frequently treated as of +historical, rather than present, importance. In my own view, it is of +high present importance.[477] I should count it as in considerable +degree a _function_ (using function in the mathematician's sense) of +"business distrust"[478] waxing and waning in importance as business +distrust increases and decreases. In past ages, this function was +primarily concerned with consumption, money and other goods being held, +at the loss of interest, as a safeguard against personal danger and as a +means of subsistence in emergency. Increasingly to-day, it is concerned +with _acquisition_ of wealth in _commercial_ transactions. When war and +domestic violence were the main cause of social disturbance, the +consumption aspect was most prominent. That aspect came strongly to the +fore at the outbreak of the present war. The heavy selling of +securities, which closed the bourses of the world, grew out of men's +efforts to get money and bank-credit as a "bearer of options" for the +old reasons. The old reasons explain in large measure the accumulation +of gold by the _Banque de France_, and by the German Government, +referred to above. But to-day, in general, the main purpose of those who +use money, or other things, as a "bearer of options" is to make gains, +or avoid losses, in industry and trade. The man who, in a given state of +the market, is afraid to lend, or afraid to invest, foregoes the income +which lending and investing promise, and holds his money. The man who +sees uncertainty and fluctuation in the market, and expects them to give +him bargains in time, foregoes income for a time, and holds his money. +The man who has investments of whose future he is uncertain, and who +fears to try any other investment for a time, sells what he has, +foregoes income, and holds his money. It is not always possible, in +discussing the money functions, to preserve the distinctions between +money and credit, or money and "money" in the money-market sense. How +much difference is made by these distinctions will best be discussed in +our chapter on "Credit." + +The significance of the "bearer of options" function is especially +manifest, I think, in connection with call loans. The "call rate" is +commonly well below the regular "discount rate," or rate for thirty-day, +sixty-day, or ninety-day paper. The explanation is to be found, I think, +in the fact that the lender of call money does not entirely dispense +with its service. He reserves a part of the "bearer of options" +function. To be sure, he will, in practice, have to wait an hour or two, +or even more for it,[479] and this may well mean that he cannot take +full advantage of an option. But the right to demand money on even +twenty-four hours' notice is more available than a high-grade bond, as a +means of meeting rapidly changing situations. This principle will +explain, too, I think, why money-rates in general, including even +ninety-day paper, are usually lower than the long-time interest rate on +safe farm mortgages, or on real estate mortgages in a city. The +thirty-day rate will commonly be lower than the sixty- or ninety-day +rate--though exceptions can easily be found, if the thirty-day period is +to cover a time of active business, which is expected to grow less +active during the second or third month. The influence of the bearer of +options functions is not the only influence at work on the rates. If it +be objected that the long-time interest rate on high grade railroad +bonds or government securities is sometimes lower than current +money-rates, or just as low, the answer is that these bonds also share +the "bearer of options" function, and that the interest rate on them is, +like the money-rate, lower than the "pure rate" of interest. +Writers[480] have been accustomed to look for the "pure rate" of +interest, _i. e._, an interest unmixed with insurance for risk, in the +highest grade of government securities. I think that this is a mistake. +I think that the "pure rate" should be sought in long-time loans, of +assured safety, which lack a general market. Such loans, _at the time +they are made_, should represent the "pure rate" _for that time_.[481] + +I shall recur to the question of the money-rates, and the question of +the relation of the money-rates to the general rate of interest, in the +chapter on "Credit." + +For the present I would call attention to the interesting case of +Austria, where the money-rates are normally very low, because the volume +of commerce and speculation is small, and the volume of banking capital, +politically fostered, is large; and where, on the other hand, the +general rate of interest on long-time loans is high, owing to the +scarcity of capital in industry and agriculture, as distinguished from +commerce.[482] This case may illustrate, incidentally, that even as a +"long run" or "normal" tendency, an excess of currency in a country may +lead, not, as the quantity theorists contend, to high prices, but rather +to low money-rates. Austria presents simply a striking case of what I +should regard as the general tendency. The money-rates and the +interest-rates tend to approach one another to the extent that paper +representatives of many different industries get into the "money +market"--to the extent that industrial investments in general become +saleable enough for it to be safe to finance them by means of short-time +banking credit. When banks lend on collateral security of corporation +stocks to the buyers of those stocks, they are, in effect, financing the +corporation itself.[483] Industries differ widely in the extent to which +they depend on the money market for their finances. The difference +depends often less on the nature of the industry than on the type of the +industrial organization. An individual farmer cannot get the bulk of his +credit that way! But there is no reason why a well-organized +corporation, assuming it successful in agriculture, might not draw on +the money market, even if not so freely as a manufacturing corporation +does. + +For the contention that the money-rates for short periods are lower on +the average than the rates on longer loans, and that the call rates are, +on the average, well below all time rates, there is abundant statistical +evidence. From 1890 to 1899 in New York City, the average rate on 4- to +6-month paper was 5.99%; the average rate on 60- to 90-day paper was +4.58%; the average call rate was 3.29%. In the same city, for the period +from 1900 to 1909, the averages were: 4- to 6-month paper, 5.61%; 60- to +90-day paper, 4.78%; call rate, 4.05%.[484] This last figure for call +loans represents an average of quotations at the "Money Post" at the +Stock Exchange. While normally the call rates are well below this, +occasional high figures, like those in 1907, pull this average up. The +high rates at the "Money Post," however, are not always representative. +Banks frequently do not charge their regular customers as much as the +quoted rates. + +Even more detailed evidence for our thesis is to be found in W. A. +Scott's investigation of New York money-rates, for the period, +1896-1906.[485] He studies _two_ sets of quotations for call loans, +those at the Stock Exchange "Money Post" and those at the banks and +trust companies; _seven_ sets of quotations (five of which appear +regularly) under the head of "time loans," namely, 30-, 60-, 90-day, and +4-, 5-, 6-, and 7-month; and _three_ under the head of "commercial +paper," namely, double name choice 60- to 90-days, and two varieties of +single name paper. + +He finds a clear tendency for the rate to vary with the length of the +loan, although noting many exceptions. "The difference between these +quotations rarely exceeds one-half of one percent, and the general rule +seems to be that the influence of time in raising the rate grows less as +the length of the loan increases. For example, there is apt to be a +greater difference between the quotations of 60-and 90-day paper than +between 90-day and four months. Likewise there is a greater difference +between 90-day and four months than between 4-months and 5-months +paper." + +The call rate, though much more variable than all time rates, and +sometimes high above them, is, on the average, well below them. For the +period, 1901-06, the averages are: call loans, 3.3%; time loans, 4.5%. + +The declining influence of differences in time as the length of the +loans increases, is what our theory would require. If the "bearer of +options" functions of short loans is the explanation of the lower rate +on them, it is a factor which would count for less and less as the +length of the loan increases. A month's difference is all-important, +when the month involved is proximate, say the difference between 10 and +40 days. But it is of virtually no importance, from the standpoint of +the man who wishes to meet sudden and indeterminate emergencies, +whether the note he holds matures in eleven months or twelve months. The +difference between a one-year loan and a five-year loan might, on the +other hand, still be important from the angle of bearing options. The +factor should cease to have any meaning at all, or at least any +appreciable meaning, when the difference is between, say, twenty and +twenty-five years. + +I have no statistical evidence that the one-year loan can normally +expect a lower rate than the five-year loan. At times, short time +financing may be even more expensive than long time financing. But such +study as I have given to quotations of short-term notes of corporations, +as compared with the longer term bonds of the same corporations, would +leave the distinct impression that short-term notes fare better in the +security market, and yield less return. A complication arises, here, of +course, that the short-term note may often lack the safety which a first +mortgage bond of the same corporation would have. + +The legal tender for debts function calls for a brief discussion. +Whatever gives legal quittance from contract obligation, or from legal +obligation as for taxes, performs this function. "Legal tender" money, +in the strict sense, is not alone in performing this function. Usually a +government will by law or administrative practice with the force of law, +bind itself to accept forms of money which it will not compel other +creditors to accept. Thus, silver certificates, without being "legal +tender," are a means of legal quittance from obligations to the Federal +Government. Sometimes governments will receive only gold at the customs +house. This was true in the Greenback period, when Greenbacks were +"legal tender," but not good for payments of customs duties. The reader +who is interested in refinements of the legal distinctions among +different kinds of money will find the thing elaborately worked out by +G. F. Knapp, in his _Staatliche Theorie des Geldes_.[486] But "legal +tender" money is not always an adequate means of quittance. If the +contract calls for corn, or wheat, or Northern Pacific stock, the best +legal tender money is a poor substitute! Witness the "Corner" in +Northern Pacific in 1901. It is doubtless true, as Davenport[487] points +out, that all contracts, whatever they call for, may be ultimately met, +under the common law, by money damages, but that does not mean that a +man can maintain his solvency or position in business by offering money +when Northern Pacific is designated in his contract. Doubtless even +there money will free him, _at a price_, but Northern Pacific stock is +at least more convenient for the purpose! A man does not need money to +get free from debts, even when money is required by the contract. He can +turn in whatever he has in an assignment for the benefit of his +creditors, and get free _via_ the bankruptcy court. In other words, the +legal tender function of money, while it does distinguish money from +other goods as a matter of _degree_, does not erect an absolute +difference of _kind_. + +Under a smoothly working monetary system, where all forms of money are +kept at a parity by constant and ready redemption, and where people have +no doubt that this redemption will occur, the legal tender quality which +attaches to part of the money is a matter of no consequence. It adds +nothing to the value of the money. In times of stress, the legal tender +quality may be a source of a considerable temporary value. This is +especially likely to be true of an inconvertible money. The legal tender +quality of the Greenbacks led to a very considerable fall in the gold +premium in the Panic of 1873. I have mentioned this point in the chapter +on "Dodo-Bones," where part of this discussion has been anticipated. In +general, the legal tender quality may be recognized as a factor in +sustaining the value of money, if as a consequence of this quality men +take the money when they would not otherwise take it, or take it on +terms which they would otherwise not agree to. Where, however, the money +is money which they are glad to get in any case, the legal tender +quality is a matter of supererogation. + +The standard of deferred payments function, as distinguished from the +legal tender function and the medium of exchange function, does not add +to the value of money. Of course, if the standard of deferred payments +is actually used in making the deferred payment, then it finally becomes +assimilated to the other two functions. But it is quite possible to +divorce them completely. Suppose, for example, that the standard named +in a contract in the Greenback Period was gold, but that payment was +made in Greenbacks at the market ratio. Or, suppose that the standard of +deferred payments should be a composite of commodities, the tabular +standard, with the understanding that the index number on the day of +payment should determine the amount of money to be paid. In neither of +these cases does the standard of deferred payments function supply any +reason for an increase in the value of the thing which serves as the +standard. + +In general, the standard of deferred payments and the measure of value +functions do not, _per se_, add to the value of money. The legal tender +function may or may not do so. The medium of exchange function, the +store of value function, the reserve for credit function, and the bearer +of options function, normally do occasion an added value which is to be +attributed to money, either as a capital increment, or as a rental. + +The question remains, however, as to the relation of the rental value, +and the capital value, of money. This question is not easy to answer. +As I have already shown, in the chapter on "Capitalization" and +elsewhere, various complications present themselves in the case of +money. (1) In the case of money, the rental, and the prevailing rate of +interest at which rentals are discounted to make a capital value, are +not independent variables, but tend to vary together. Thus, whereas +increased rentals would in the case of most income-bearers tend to give +a higher capital value, this is offset, in the case of money, by the +fact that rentals are subject to a higher discount. (2) In the case of +income-bearers generally, the magnitude of the income, or rental, is +causally prior to the capital value. The capital value, in our +illustration of the candle, the disk and the shadow on the wall, is the +shadow, while the rental is the disk. This is the general relation +insisted upon by the Böhm-Bawerk-Fetter-Fisher line of capital and +interest theory. Productivity theories of capital have been criticised +on the ground that capital value is not productive, that only concrete +capital-instruments are productive, and that they produce, not value, +but goods, that these goods receive value from the market, which is +reflected back, but discounted, to the capital instruments which +produced them, so that, in value-causation the line of causation is +precisely the reverse of the line of technological causation. Capital +instruments produce consumption goods, but the value of the consumption +goods is the cause of the value of the capital instruments. In the case +of money, however, this is not true. It is the _value_ of the money, the +capital value, which does the work that makes a rental value. The value +of the money is a precondition of the money-function. So far as money is +concerned, both "productivity theories" and "use theories" seem +vindicated. There is a "use," an "enduring use" in addition to the +"uses."[488] (3) The capitalization theory, as hitherto formulated, +assumes money and a value of money. It is a part of the general body of +price theory for which this assumption has been shown to be needed. + +With reference to the second, at least of these points, however, it has +been shown that money is not unique. Diamonds, and all other goods which +have as part of their function the conspicuous display of wealth, +likewise perform this function _because_ they have value. This gives +them an additional value. Diamonds are bought for this purpose, when +they would not otherwise be bought, or when they would not otherwise be +bought in such quantity. This additional value makes diamonds still more +effective as a means of displaying wealth, with a further increment in +their value, etc. We seem, here, to have an endless, and vicious, circle +in value causation, the value mounting indefinitely, building upon +itself, a sort of "pyramiding" process. But the limitation comes from +several angles. In the first place, _as_ diamonds rise in value, from +whatever cause, a smaller and smaller number of diamonds is required to +display a given amount of wealth! The increase in the value makes each +diamond so much more effective for the purpose in hand that it tends to +cut under the cause of the increase. These two tendencies come into some +sort of equilibrium. I suppose that by making strict enough assumptions, +and limiting the problem rigidly, it would be possible for the +mathematician to work out a formula for this equilibrium, letting the +increment in value grow feebler with each rebound, till at last it is +dissipated in infinitesimals. In the second place, diamonds are not +alone in performing this service. They must compete with other precious +stones, with the precious metals, with limousines and Turkish rugs, +with servants and livery, with houses and lots in restricted +neighborhoods, with opera boxes and memberships in clubs which confer +prestige, with a very wide range of goods, for the detailed discussion +of which I would refer again to Veblen's _Theory of the Leisure Class_. +The _differential_ advantage of diamonds, when it is borne in mind that +the conspicuous display of wealth is not the _only_ purpose, as a rule, +for which any of these things are bought, that the concrete diamond, or +other good bought, is a _bundle_ of valuable services,[489] of which the +displaying of wealth is only one, is not, necessarily very great. For +many people, other forms of wealth do better. And, as a rule, diamonds +would not perform that service satisfactorily alone. A large number of +diamonds, without proper "setting," in clothing, servants, house, opera +box, etc., would excite ridicule, and fail[490] in their purpose of +gaining social prestige. They must be part of a complex of goods of the +same sort, to accomplish their purpose. + +Now it is the _differential_ advantage of diamonds which makes possible +the extra value, in this use. If all wealth were equally serviceable in +conspicuous display, if cattle and barns and shares in a coal mine or +slaughter-house or glue factory could display themselves as well as +diamonds can, and if possession of these things conferred prestige as +much as possession of diamonds does, this differential advantage of +diamonds would disappear, and with it all extra value from that cause. +Diamonds are members of a _class_ of goods, a restricted, but still +large class, which possess this advantage. We may apply the old +Ricardian rent analysis here, arranging goods in a series from the +standpoint of their capacity to perform this additional service. Bread +would, for the purpose in hand, be a "no-rent" good. Ford automobiles +are probably nearly no-rent goods now! That the differential factor is a +_cause_ of value in land, as the Ricardian doctrine seems to hold, is +not, I think, true. If all land were of equal quality, and of equal +accessibility to the market, all land would still bear a rent, if it +produced goods which had value, and if the land were sufficiently +restricted in quantity.[491] But here is a case where the differential +factor is an actual _cause_ of value. If all wealth were equally +effective in displaying itself, no form of wealth could gain in value as +a means of display. + +This proposition calls for one important qualification. The fact that +wealth, in general, confers prestige is, undoubtedly, a source of +stimulus in wealth creation and acquisition, and a big source of the +value[492] of total wealth. It is probable, however, that it is so great +a stimulus to production that it defeats itself so far as the values of +_units_ of goods are concerned. It stimulates production, which reduces +the marginal values that arise from other causes. Thus, while a source +of additional value to the _aggregate_ of wealth, it probably reduces +the values of given items. + +I have dwelt at length on the case of diamonds, because principles +applying there will give us important clues to the case of the value of +money. + +Money, by being valuable, is so far equipped to perform the money +service. But its _differential_ advantage over other valuable things +comes from its superior _saleability_. Its original value comes from +non-monetary causes, and has been sufficiently explained in the chapter +on "Dodo-Bones" and in the chapter on the "Origin of Money." The extra +value which comes from the money functions rests chiefly in its superior +_saleability_. Saleability is itself a cause of additional value. But +here again we may arrange goods in a series, starting with the least +saleable, and ending in money. Money has an advantage, but its advantage +is not absolute. Under a system of free coinage, gold bullion is +virtually on a par with coin, and even without free coinage, bullion is +for many purposes as good, and for foreign exchange may be better. +Modern credit, moreover, as has been indicated before, tends to add to +the saleability of all goods, and so to lessen the differential +advantage of money. + +Here, again we may see the principle that the extra value that comes +from the differential advantage tends to limit itself. As the money-use +adds to the value of money, a smaller amount of money is required to do +the money work, and hence the source of the increment of value is cut +under. This principle will partly explain why the rental of money cannot +be capitalized in the same way that the rental of land can be. +Increasing the capital value of land is not the same as increasing the +productive power of land. But increasing the capital value of money does +mean an addition to the power of a dollar to do money work. It tends, +moreover, to lessen the work that there is for money to do, both by +reducing the total amount of trading, and by increasing the incentive to +the use of substitutes for money. Only a part of the value of the +services of money, thus, can be added to the capital value of money. +There is a further point which is important, as differentiating money +from diamonds: much more of the value of the services resting on the +value of diamonds can be added to the capital value of the diamonds than +is the case with money. The reason is that diamonds may give forth a +continuous flow, _in the same hands_, of the service of conspicuous +display of wealth. Money, however, can perform most of its services for +a given owner _only once_. For a given owner, it can serve only once as +a medium of exchange. For one owner, it can serve only once as legal +tender for debts. It can serve indefinitely as a store of value, or as +"bearer of options." In these cases, however, the relation between value +of service and capital value does work out in accordance with the +capitalization theory. The money thus held brings in no money income. It +is held thus only if the services which it performs are equivalent to +the income which would come if it were alienated, and something which +would bring in a money income were purchased in its place. Money may +have added to its capital value the value that is created by _one_ +marginal exchange, but the whole series of values which a dollar may +create in exchanges cannot be capitalized, if only because the same +owner cannot get them all. This holds strictly true only so long as no +credit arrangements exist. If loans of money can be made, then the +lender can take toll on successive exchanges, and get an income which +may be capitalized in part, subject to the limitation already discussed, +that increasing capital value of money cuts into the rental, and so, in +large measure, destroys its own source. + +Where money is not freely coined, there may be an increment, growing out +of the capitalization of the money-services, in the value of the coin. +The coin may be worth more than the uncoined bullion. This need not be +true. If the amount of money work to be done is not increasing, it will +not be true, unless the value of the bullion declines, and need not be +true then. But an agio on coined over uncoined metal is quite possible, +and has frequently occurred. Such an agio has limits, however. In the +first place, the bullion may be used as a substitute for coin, so +lessening the amount of work there is for coin to do, and lessening the +source of the agio. Bullion would tend to rise in value from being thus +employed, and coined money would lose in value from a reduction in the +services it performed. Further, _anything_ which has more than ordinary +saleability may be used as a substitute, in one or another capacity. +Again, the agio, if it appeared in a country where men are accustomed to +thinking about money, might well arouse distrust, lessen the scope of +the coin still further, and so cut into its own source. But such agios +have appeared, and while a pure case, where the sole source of the agio +is the values created in the money-functioning, is hard to find, I think +it is not to be questioned that cases where this is part of the +explanation have arisen. I should be disposed to find part of the +explanation of the rise of the rupee in India after the closing of the +mints in 1893 in this factor. There seems to be evidence, however, that +Laughlin is right, in part, in ascribing the rise to an expectation of +the adoption of the gold standard.[493] + +Modern money, in general, however, rests on a system of free, even +where not strictly gratuitous, coinage. Coined metal thus rarely gets, +save to a limited extent or temporarily, an agio over uncoined bullion. +Uncoined bullion is acceptable in a host of places where coin would +otherwise be used, particularly in reserves for credit instruments. +Bullion is even superior in international trade as a medium of exchange. +Credit paper (particularly bills of exchange), is superior to both in +international exchange, as a medium of exchange, because of various +reasons of economy. Such paper is even used in reserves in many places, +particularly by the Austro-Hungarian Bank. + +The fact of free coinage means, substantially, that the state has made +the money form a free good. How much value is thereby destroyed we may +best see if we ask precisely how much the money form could mean _at the +limit_. Initially, the money form means simply the certification of +weight and fineness by a trusted authority. It saves, therefore, the +delay and expense of testing the weight and fineness by assay, etc. It +saves the trouble and delay of subdivision of a formless metal. It +averts many difficulties. For small retail transactions, indeed for +retail transactions in general, the conveniences of coined over uncoined +metal are very great. Small transactions do not justify the trouble and +expense of assaying and weighing and subdividing gold! In a country, +therefore, where the bulk of the money work is in effecting small +transactions, we might expect a considerable agio for coined over +uncoined metal. This would be especially true if that country had few +facilities for credit substitutes for the coin, particularly for small +transactions. In a country like the United States, however, where checks +are often drawn for amounts less than a dollar, and where the bulk of +the gold, or standard money, is to be found, not in circulation but in +reserves, one need not anticipate that the medium of exchange function +would give a big agio to gold coin, even if free coinage ceased. So long +as coinage means merely a certification of weight and fineness, this +conclusion will hold. For purposes of large transactions, the item of +weighing and assaying would not be serious. Indeed, American banks are +accustomed to weigh even gold coin, in quantity. It goes by weight, +rather than by tale, and if light-weight, it counts for less than its +nominal value. The writer knows a bank which has a considerable store of +light-weight gold coin that has been in its vaults for over twenty +years. Such coin may be counted at par in reports by the bank to the +Government.[494] It might be paid out through the window to customers, +who would not weigh it, in case of a "run" on the bank. But it cannot be +used in dealings with other banks without loss. + +Does the legal tender aspect of coin count for more? Under a smoothly +working system of free coinage, where moreover, all forms of money are +kept at a parity by ready redemption, we have seen that the legal tender +feature makes no difference. Would it make a difference where coinage is +restricted? If we assume that the use of checks for small payments, and +the use of bullion in reserves, in a given case, prevents the existence +of an agio growing out of the other functions of money, I think it clear +that the legal tender feature alone will not create one. But suppose +that there is an agio from other causes, will not the legal tender +aspect of money tend to increase it? Will not men demand coin, which +bears an agio, rather than bullion, when they have the right to demand +either? And will not the agio then, in a way, grow out of itself, a +bigger agio appearing, because an agio has already appeared? It does not +seem to me that this need follow. If there be an agio, then creditors +will demand either coin, or bullion _on a different basis from coin_. +But so long as they get the benefit of the agio, either in the form of +coin, or of a larger amount of bullion, particular circumstances, rather +than a general rule, will determine which they will demand. The banker +might well prefer bullion. The international banker would prefer +bullion. The man who wishes money for retail transactions will take +coin. Men will use the legal tender quality of money as a means of +getting the benefit of what agio there is (though contract right, where +the contract calls for coin, would accomplish all that a legal tender +law would accomplish), but whether they take 23.22 grains of coined +gold, or 25.5 grains of gold bullion, will depend on which they prefer +in the circumstances. I do not see that the legal tender feature adds +anything to the case of restricted coinage that it does not add to the +case of free coinage.[495] In either case, there will be temporary +emergencies, when panics arise, when legal tender money gets an agio +over any possible substitute. Solvency may depend on it. This might +arise under free coinage, if the panic were acute, and if settlements +had to be made immediately. But as long as there is time for men to +work things out, I should not expect the legal tender feature, _per se_, +to add to the agio of coined metal even under restricted coinage. + +In general, the possibility of an agio for coined metal, under +restricted coinage, rests on the extent to which coin has a unique +function. In so far as substitution is possible, there is no room for an +agio. For many purposes, bullion may be substituted. To the extent that +credit is developed, and is flexible, various other substitutes are +possible. To the extent that barter can be used, still other substitutes +are possible. + +Among an ignorant people, little accustomed to developing new +expedients, having an economic life that is not flexible, having an +economy based on petty economic units, having little development of +credit, accustomed to the use of money in most transactions, money might +well be, in many connections, highly important if not indispensable. In +England, before the War, where no bank-notes under five pounds were in +circulation, and where small checks were little used, an agio on coin +might appear if coin got so scarce as to be inadequate for retail trade, +but for bank reserves bullion would have served virtually as well as +coin, and with the stock of coin she had at the time England could have +gone on for a long time indeed with no more agio than just enough to +prevent the melting down of the coin. In the United States, where checks +can be used for very small transactions, and where a high percentage +(very conservatively estimated by Kinley at from 50 to 60%) of retail +business is done with checks, the agio on coins of a dollar or over +growing out of retail trade might be expected to be very slight. On the +other hand, the legal requirements for reserves in specified types[496] +of money might, in time, lead to some agio. I do not think that the +reserve function in England would ever do so. If we could combine our +use of checks in retail trade with England's absence of legal reserve +requirements, I should think that the agio would have little chance +indeed of growing great! If to this could be added Canada's extensive +use of small elastic bank-notes, the chance would be still less. If +bank-notes of one dollar could be issued, the agio would be less still. + +It is in the case of coins of very small denomination that the agio +might appear most readily. Such coins, if limited in amount, and if +given the usual restricted legal tender,[497] do not need redemption to +circulate at face value, even when made of baser metals. It is quite +thinkable that such coins should, even when redeemable, circulate at an +agio over the redemption money. In small retail transactions the need +for money to do business is most imperative. Even here, however, there +is large flexibility. The present writer, during the period of money +stringency in the Panic of 1907, made much larger use of checks in very +small payments than was his usual practice, and the same was true of +various of his acquaintances. + +I think that the quantity theorist, with his doctrine of an unlimited +agio through the restriction of coinage proportionate to the +restriction, is best understood if we say that he has taken an +exaggerated estimate of the imperativeness of the need for formed money +in the smallest retail transactions as typical of the whole +situation.[498] I have elsewhere shown, however, that, in so far as +Kinley's figures for 1909 give us a clue,[499] the total retail trade of +the United States is less than one-eleventh of the total of all +transactions calling for the use of money and checks. Of that total +retail trade, the part in which money is actually used is, on Kinley's +high estimate, between 40 and 50%,[500] and the part in which money is +imperative is much lower still. Small retail transactions do not give +the type for the pecuniary transactions in the United States! They more +nearly do so in India, and the possibility of agio is, doubtless, +greater there. For our larger transactions, there is an almost +indefinite possibility of substitutes for coined money, if profits can +be made by making the substitutions. Beating the agio would be a source +of profits. + +I repeat what was said in the chapter on "Dodo-Bones" differentiating +this doctrine of the agio from the quantity theory doctrine: (1) This +doctrine presupposes value for the money article from some non-monetary +source. It relates only to a differential portion of the value of money. +(2) This doctrine denies the law of proportionality even for this +differential portion. (3) This doctrine is concerned, not with the +general level of prices, but with the absolute value of money measured +in the ratio of coin to bullion. + +Under the system of free and gratuitous coinage, no agio of coined over +uncoined bullion is possible. Where small brassage charges are made, as +in France (or as in England, where the interest lost during the period +of coinage is charged to the man who exchanges bullion for coin at the +Bank of England) there may be an agio of this amount, though it often +happens that this agio disappears, particularly in England. So perfectly +is bullion a substitute for coin in England, that the Bank of England +will often forego its privilege of taking the slight toll in interest, +and will credit men depositing bullion with as much as if they had +deposited coin. From what has gone before, as to the possibility of an +agio, I conclude that the United States, England, Canada, and possibly +France, would be unable to make large brassage charges. If the brassage +charge were much larger than the charges made by reputable and +well-known jewelers for assaying and weighing, etc., there would be a +large substitution of bars for coins, and the mints would have little to +do. However, it needs no arguing that with free coinage, and either very +low or no brassage charges, the value of bullion and of coin will, +quality for quality and weight for weight, be virtually identical, +within a narrow range of variation. + +What, then, shall we say of the way in which the forces drawing gold +from the arts into money manifest themselves? + +How describe the equilibrium between the value of gold as money and the +value of gold in the arts? How construct intersecting curves, presenting +a marginal equilibrium? The problem is baffling, and I frankly confess +that what I shall have to say does not satisfy me. I hope that some +critic may solve the problem better. I can point out the difficulties of +the situation, and can indicate reasons why the sort of solution which +the economist's training in marginal analysis leads him to desire are +not easily found. But I fear that I shall fail to satisfy the demand +for an application of curves to the problem! + +The first difficulty is that we are barred from the use of our +yardstick. Money is the measure of all things in economic theory--except +money and gold bullion! Of course there are economic values other than +those of gold which do not actually come into the market, but even there +we can commonly, by the accountant's methods, make use of the money +measure. In very high degree, our conventional curves of all sorts run +in money terms, and assume a fixed value of money. Clearly the money +curve of diminishing value for gold would tell us nothing. The value of +gold might sink as its quantity increased, but then the value of the +money-unit would sink _pari passu_, and so the curve, with ordinates +expressed in numbers of dollars per ounce, would not sink. The +value-curve of gold, expressed in money, is a straight line, parallel to +the X axis. Possible substitutes in the form of abstract units of +value,[501] or of composite units of goods, of an assumed fixed value, +will have to be used if anything is used, but they are less satisfactory +in the application, and leave the analysis a good deal less realistic. + +If this were all, the problem would be easy! But there is a second +difficulty. We find the factors requiring gold as money, if summed up in +a curve, presenting themselves as a call for the temporary rental of the +gold. The money functions are performed, in general, not by keeping +gold, and getting an endless series of uses from it, as in the arts, but +by passing it on, sooner or later. Even in the case of the reserve +function, the bearer of options function, and the store of value +functions, it is not expected to hold the gold indefinitely--always +there is the anticipation of some time when it will be passed on again. +A curve for gold in the monetary employments, therefore, would be a +curve showing the diminishing values of rents, or particular services +rather than a curve for capital values. The curve for gold in the arts, +however, would be a curve showing the diminishing _capital values_ of +units of gold, as the supply in the arts is increased. The two curves do +not run in common terms. But another and more fundamental difficulty. In +the case of wheat, we may construct our curve free from complications, +in idea, at least. On the base line, we lay out quantities of wheat. For +each quantity of wheat, we erect an ordinate, a sum of money, or a +number of abstract units of value, as the case may be. Connecting these +ordinates, we have a curve, showing how the value (or the money-price) +of wheat descends as the quantity of wheat increases. Given the shape of +the curve, and given the number of bushels of wheat, the marginal value +of the wheat is given. In idea, at least, it does not matter, for the +shape of the curve, whether the amount of the wheat is great or small, +whether the marginal value of the wheat is low or high. If there are ten +thousand bushels only in the market, wheat will be worth $5 per bushel. +With 100,000 bushels, it is worth 40c. The fact that there are 100,000 +bushels does not lessen the magnitudes on the higher portions of the +curve. The nature of the services which wheat performs is not affected +by its value. This is _not true of gold_, either in the arts or as +money. In the arts, I have already shown that one function of gold is as +a means of conspicuously displaying wealth. Gold is like diamonds in +this. _Because gold is a valuable_, it gets an additional valuable +service. This additional valuable service enhances its value. The thing +is checked, however, before an endless circle is created, by the fact +that as gold rises in value a smaller amount of gold will display a +given amount of wealth. The value-curve for gold in the arts, +therefore, is not a simple thing like the curve for wheat. It turns upon +itself, in ways that I see no graphic device for presenting. This is +even truer for money. Men wish to have, when they seek money, a quantum +of _value_ in highly saleable form.[502] The curve for the value of the +services of money presupposes a fixed capital value of money. It is the +capital value of money which does the money work. Given a value of +money, and given the values of goods, we may see how much money is +required to effect a given exchange or perform some other money service. +Then, knowing how much value will be created by each exchange, or other +money service, we may arrange the services in a series, a scale of +descending importance, and get a curve. This curve is, in fact, the +curve which presents itself in the money market. There we find a curve, +running in terms of money itself, so much money for the use of money for +such a length of time. But this is a curve of demand for money funds, +rather than for gold as such. The "supply" that corresponds to this +"demand" is, not gold, but all manner of credit instruments, chiefly +bank-deposits, expressed in terms of gold. Such a curve is clearly not +to be put into equilibrium with the value-curve for gold in the arts, +(1) because it assumes a fixed value for money (2) because it is +concerned with temporary rentals, and not capital values, and (3) +because the demand it expresses is not for the use of gold alone. + +We may get some aid in reducing these complexities to familiar terms if +we employ the device of assuming an equilibrium between gold in money +and gold in the arts, without trying to explain in quantitative terms +how that equilibrium is arrived at, and then see what causes will lead +that equilibrium to shift. In getting the laws of _change_, we may get +closer to the causes of the phenomenon itself. The effort to reduce the +thing to precise mathematical form requires a degree of simplification +which seems to me likely to rob an answer of much significance. + +Assuming that the equilibrium is reached, we may see what factors would +tend to cause gold to go into the money-use, and what factors would tend +to draw gold into the arts use. We may also see how these changes from +one side or the other would modify the value of gold. + +Assume that a manufacturing jeweler has extra demand for his products. +His products, of course, are composites of gold, labor, and other raw +materials, etc., but part of the extra value that comes to his products +attaches itself to the gold that is in them. He now has an incentive, +which was lacking before, to melt down full weight gold coin in his +possession, or to buy gold bars which might otherwise have been coined. +To buy the gold bars, however, probably means that he must have +accommodation at the bank. He borrows from the bank the amount he needs, +giving a short-time note, since he expects to make up his gold and +market it in a fairly short time. The paper of manufacturers of gold +will commonly stand well in the "money market," and this is especially +true of those in whose hands the gold is not worked up into such +specialized forms that the value of the bullion is a minor matter. (I +find it necessary to refer frequently to the money market, though a full +analysis of money-market phenomena cannot come till after our discussion +of credit.) If he must borrow to get the gold, _then the money-rates +will come into comparison with the profits he expects to make from +working up the gold_. This will usually be true even if he melts down +gold coin already in his possession. He might deposit that gold, and so +reduce his expenses at the bank, either buying back his own discounted +paper, or getting interest on daily checking account. If he has to +borrow to get the gold, he may get it either by drawing gold from the +bank directly, or by giving a check on the bank to a bullion dealer, +which may ultimately lead to a diminution in the bank's supply of gold. +However he gets the gold, there is bound to be some reaction, (1) on the +bank's supply of gold, (2) on the supply of loanable funds in the money +market, and hence (3) on the money-rates themselves. If he borrows from +the money market, he affects the money-rates directly (even though +probably, in a given case, not noticeably); if he melts down coin, +instead of depositing it (or paying it out to others who may ultimately +deposit it) there tends also to be less gold in the bank's vaults; if he +buys gold with his own funds in the bullion market, the supply of +current bullion for which the banks also compete is reduced. In any of +these cases, the banks have less gold than would otherwise be the case. +The relation between gold reserves and the supply of money-funds has +been partly discussed already. We have seen that there is no +proportional relation, as Fisher, and other quantity theorists contend. +Loanable funds, on a given gold reserve, are highly elastic. But the +elasticity calls for higher money-rates, and higher money-rates tend to +reduce the volume of trading, and check the demand. Borrowings from the +money market by workers in gold, therefore, are much more significant +than borrowings by other manufacturers or merchants, because the latter +are content with credit devices, for the most part, while the workers in +gold withdraw gold itself from the money market. It is, moreover, harder +for the money market to resist extra demand from the jewelers than from +many other interests. The assets of the jewelers, especially from those +who do not work the gold up in highly specialized forms, are exceedingly +liquid. Their paper, therefore, is exceptionally good in the discount +market. Usually, too, the larger jewelry houses have specially good +general credit and high reputation. There is, then, less disposition for +the market to look askance at an unusual supply of their paper than +would be the case with many other sorts of paper. They tend to get about +as low rates as anyone else in the market. A money market under +centralized control seeking to protect its gold, might tend to raise +discount rates on jewelers' paper, but a competitive money market is +very unlikely to do so. + +An increase in the value of gold in the arts would, thus, reflect itself +pretty quickly in the money market, first in the form of added value for +the services of money, and then, secondly, in an increase in the capital +value of money. Indeed, an increase in the value of a single rental is +an increase in the capital value also, since the value of the single +rental is one portion of the capital value. Not only does it mean a +higher capital value for gold, but it consequently tends to mean a +higher "price." It does mean a higher "price" for present money as +compared with future money. It tends, also, to mean a higher "price" of +money in terms of other goods. Meeting higher money-rates, all borrowers +tend to borrow less, and to buy less, to offer less money for goods. It +need not follow, however, that the rising value of gold reduces prices. +The rise in the value of gold in the arts may well be a manifestation of +a general rise of values. General prosperity, rather than causes +affecting the value of gold in the arts alone, may have occasioned the +increasing demand for gold in the arts. This would mean rising values +for goods at large. It might well be, therefore, that the rise in the +values of goods would offset the rise in the value of money, and that +prices of goods would rise at the same time that gold is being withdrawn +from the money market to the arts. + +Business in general, as well as the jewelers, may be making increased +demands on the money market. This would tend still further to raise the +money-rates. It would also, however, tend to increase the supply of +money-funds. Commercial and industrial paper, in a time of buoyancy and +expansion, is particularly acceptable to the banks, and they are likely +to expand their loans despite the failure of gold reserves to keep pace. +They simply get along with smaller reserves. Higher money-rates in such +a case tend to reduce the volume of business, but need not actually +reduce it, if there are bigger profits than before anticipated in +business transactions. Not absolute money-rates, but money-rates in +relation to anticipated profits from the use of money, are significant. +There is large room here for flexibility, elasticity, etc. There is much +slack to be taken up by the money-rates, much slack in the fluid +substitutes for money in various functions, and much slack to be taken +up by the volume of trade. But all this will best appear after our +discussion of the money market. + +I have said enough to indicate the character of the factors immediately +determining the equilibrium between gold in the arts and gold in the +money employments. In the preceding discussion, also, I have discussed +the more fundamental factors governing the value of gold in both +employments. The problem of translating the fundamental theory of value +into money market terms, and of translating the phenomena of the money +market into terms of fundamental values is not easy. Most of our value +theory in the past has been concerned with individual psychology, Crusoe +economics, trading in small markets with a few buyers, barter +transactions, etc. It has been abstract and unrealistic. The practical +students of the money market, who are immersed in the facts of modern +money, have got little help from it, and have often been scornful of it. +I hope to be able to contribute something to bringing the two methods +of approach to common terms. They are correlative aspects of the same +problem. Each gives highly important clues to the understanding of the +other. Neither can be understood without some understanding of the +other. A theory of value which cannot be applied in the money market, +the stock exchange, and the great field of modern business generally, +has small _raison d'être_. + +In the next chapter I shall take up the problems of credit, and the +money market. + + + + +CHAPTER XXIII + +CREDIT + + +Analysis and description are much more important than definition. +Definition at the beginning of a study is frequently a fetter, rather +than an aid to thought. This is especially true in a field where +phenomena overlap and interlace, and where the "pure principle," +"essence" or "_Wesen_" of the thing defined never presents itself, but +is only to be reached by violent abstraction. To pick out one +element--as "futurity"[503]--as marking off credit from other things +would be an illustration of this. Or to take the notion of _promise_, or +contract obligation, in connection with futurity, is likewise to limit +the field unduly, on the one hand, and to include things which do not +belong there on the other. Thus, a contract whereby A is to build a +house for B by the end of a year, receiving at that time, or in +instalments as the work proceeds, a sum of money, is not a credit +transaction. We have, however, promise, futurity, and a future payment +of money all called for in the contract. On the other hand, if A sends B +a telegraphic order for money, which B receives three minutes after the +money is entrusted by A to the telegraph company, we have a credit +transaction, with no element of futurity in it. Certainly there is less +of futurity there than in the case where a laborer, working all day, is +paid only at night for work done in the morning. Futurity enters into +the values of all goods which are not destined for immediate +consumption--capital values of long-time goods are discounted present +worths of _future_ values. Contracts, promises, and beliefs in promises +run through the whole range of economic life,--the domestic servant, +paid weekly, illustrates all three. Yet only a special class of these +economic activities are commonly counted as credit transactions. Credit +is really a part of the system of economic value relations not easily +marked off in economic nature from the rest. Its clearest _differentiæ_ +are juridical rather than economic. It will be the purpose of the +present chapter, in part, to blur, rather than to make precise, the line +between credit and non-credit in economic phenomena, and to assimilate +the laws of credit to the general laws of value. + +This will involve, however, a careful analysis and precisioning of +certain phenomena commonly counted as credit phenomena. Buying and +selling on the one hand; borrowing and lending on the other: the +distinction seems clear. It is in law. But what is it in economic +nature? When a merchant discounts his own note at the bank, it is +borrowing. When he discounts the note of another, his debtor, it is +selling. If he writes before his endorsement of the note, "without +recourse," (unusual at a bank, but common enough with real estate +mortgage-notes) he has made a perfect sale, and is entirely out of the +transaction. Is it, however, in economic nature a different transaction +from the original one in which he got the note from a borrower? Legally +bonds are credit instruments, and stocks are not. Stocks represent +_ownership_. But practically, as an economic matter, both represent the +alienation of control, on faith, to a small group of men, and +practically, too, the difference between preferred stocks and bonds is +often very slight. Whatever the legal rights of a bondholder, under the +terms of his contract, the legal fact itself often is, under the growing +practice of receiverships, that he cannot exercise his right to +foreclose without such difficulty that it doesn't pay to do it. Very +frequently indeed the junior bondholder will come out of a +reorganization as simply a preferred stockholder--which is what he +practically was all the time. He couldn't vote as a bondholder, but his +voting rights as a stockholder commonly mean little! As a bondholder, if +he held enough bonds, he might even have more influence on the affairs +of the corporation than as a stockholder. The market is moved by other +forces than the legal distinctions in corporate contracts! And market +facts are not necessarily correctly told by the accountant's categories +either. I shall trouble myself little, in what follows, with the +juridical and accountancy problems of credit, save in so far as these +bear directly on the more pertinent economic aspects of the matter. I am +interested in the question of credit as a part of the problem of value +and prices--and particularly from the standpoint of the problem of the +value of money. + +What difference is made in values and prices by lending and borrowing? +What kinds of lending and borrowing are there? What shall we say of +bank-notes, of bank-deposits, of bills of exchange? What difference is +made by the money market? Behind the legal forms and the technical +methods, what are the psychological forces at work? How are these +psychological forces modified by the technical forms and methods? What +are the economic differences between long and short time loans? How +shall we draw the distinction between the "money-rates" and the long +time interest rate on "capital?" Why can some things serve as collateral +in the money market when others cannot? What sorts of credit are +appropriate to commerce, to manufacturing, to agriculture? Is credit +capital? Is an increase in credit an increase in values? The last two of +these questions imply that we have a definition of credit. Perhaps the +answers to some of the other questions may have given us such a +definition. But analysis and description will precede definition. + +The etymology of "credit" has sometimes been taken as the clue to the +meaning of the word for economics, and the idea of confidence, or +belief, has been made the heart of the matter. A man has good credit +when others have confidence in his integrity, etc. Men lend to others +when they can trust them to repay. Doubtless something of this sort was +responsible for the original choice of the word. But when loans are made +on good mortgage security, or on collateral security, the personality of +the borrower may count for little or nothing. Confidence there is, but +not confidence in the intentions of the borrower. The confidence is in +the "goodness" (_i. e._, the value and marketability) of the collateral. +The same questions are raised by the lender here which he would raise if +he were going to buy the thing, instead of lending with it as security. +None the less, I think that in the etymology of the word we have an +important clue. We must generalize the notion, however, beyond the +limits of confidence in personal intentions. It involves confidence in +the general economic situation, in the future of business, in the +permanence of values, in the certainty of future incomes, etc. Thus +viewed, the element of confidence, though important in highest degree, +is not peculiar to the phenomena which we call credit phenomena in +economics. It appears wherever there are values which depend on future +events. One does not need much confidence in buying potatoes or apples +or meat--though in the case of meat quite a lot of confidence may be +involved--and misplaced! But whenever the future is involved, whenever +capital values of any kind are involved--lands, stocks, bonds, houses, +horses, manufacturing equipment, etc.--the element of belief, +confidence, hopeful attitude toward the future, is quite as much present +as in the case of a loan. Nor is the element of personal confidence +less present, often, in these things than in the case of a loan. Very +often the value of a horse may depend in considerable degree on the +integrity of the man who offers it for sale; the value of a piece of +land may be much enhanced if a trustworthy owner makes certain +statements as to the yields he has got from it; the values of stocks +(really credit instruments, from the angle of economic analysis) may +depend very much on the personality of the organizers and managers of a +corporation. Personal prestiges may count for much more in these cases +than in the case of a collateral loan. + +Further, in connection with the element of belief, or confidence. +Borrowing is expensive, and men do not borrow for amusement. That +borrowing and lending may increase, it is not enough that lenders have +confidence in the ability of borrowers to repay. Borrowers must also +have confidence in the future of their businesses, in their ability to +make enough out of the loan to pay the expense involved, and have a +surplus left over. I abstract here from consumption loans. They play a +very minor rôle.[504] The analysis in an earlier chapter, based on +Kinley's figures, showing that retail trade is less than one-eleventh of +the total pecuniary transactions in 1909, and that the percentage of +credit instruments used in retail trade is much lower than in other +transactions, will justify us, when quantitative questions are involved, +in abstracting from consumption loans. Since such loans will be chiefly +employed in retail buying, and since we know that most retail buying +does not result from loans for consumption purposes, we may conclude +that modern credit is overwhelmingly of a different sort. Most of it +arises from business activities of one kind or another, and rests on +expectation of profit and loss.[505] Such loans are not made when +borrowers, as well as lenders, have not confidence in the transactions +they mean to put through. + +So far the thing has run in terms of individual calculation of profit +and loss. But even the most sagacious business men do not play a lone +hand. No one is uninfluenced by the expectations and feelings of others. +In general, business confidence is in large degree a matter of social +psychology, resting on suggestion, contagion, etc., as well as on cool +calculation of profit and loss. Even where men are able in considerable +degree to free themselves from the prevailing optimism or pessimism, +they must take it into account. The man who extends his business when +nobody is in the mood to buy, when no one will make contracts with him, +runs a very fair chance of bankruptcy, even though there be, in the +technical facts of industry, no reason for the prevailing pessimism. A +man with large resources, which are not fully employed, seeing that the +prevailing "bad business" is "largely psychological" may, indeed, take +advantage of the fact, get his labor and raw materials cheaply, and +produce some staple in advance of his market. If he can afford to hold +his surplus, he may make large profits by so doing. But usually business +men will not, in such a situation, have the surplus resources to enable +them to put through such an undertaking, and hence, even though they may +recognize that the rest of the business world is irrational, they must, +perforce, conform to its irrationality, and their sober estimate of the +prospects of a given undertaking may be just as much adverse as if they +shared the feeling of gloom which all about them feel. They meet it +from the banker from whom they wish to borrow. Even if able to borrow, +they meet it from the dealers to whom they are accustomed to sell their +products. The prevailing gloom is as much a fact with which they must +reckon as is the price of their raw materials, or the technical +qualities of those raw materials. + +Further, business confidence is not a matter in which each man counts +one! There are centers of prestige, men and institutions whose attitude +toward the future counts heavily indeed in determining the attitudes of +others. These prestiges may arise from various causes. Recognized wisdom +and probity may give a man great prestige in economic matters. There are +financial writers and students of the market, not necessarily men of +great wealth, whose opinions are exceedingly influential in making +business confidence. The wisdom without the probity is not enough. Some +men, known to be sagacious students of the market, have been known to +succeed in their plans by telling the truth, with the result that +everybody else did the wrong thing! They made business confidence, but +not the sort that was complimentary to them. Other men have prestige, +influence in making business confidence, by virtue of possession of +large wealth. They are, first, in position to lend largely. Their +decisions count directly for more than the decisions of thousands of +other men. The very fact that they have confidence in the future, apart +from anything else, means a tremendous increase in _effective_ business +confidence--which we are here concerned with. The optimism of a man who +can neither buy nor sell nor borrow nor lend, because he himself has no +economic resources, and no prestige, is like the desire of a penniless +beggar for an economic good--its effect on the market is not great! But +further, the fact that a rich man is lending makes possible activities +which would not otherwise be possible, and so justifies confidence on +the part of those who wish to deal with those to whom he lends. Such a +man may, on the other hand, borrow. His borrowing, for business +activity, justifies confidence on the part of those who would deal with +him. Quite apart, therefore, from any influence on the opinions of +others growing out of respect for his judgment, or less rational +reaction to him, he can do much to make or unmake business confidence. +But commonly, also, such a man is a center of prestige, as well as a +controller of economic power by virtue of his wealth. Men look to him +for their cue. If _he_ has confidence enough in the future to risk his +great wealth, surely smaller men with smaller interests need not be +afraid. Vitally important centres for the making and controlling of +business confidence are the banks. Having intimate knowledge of the +affairs of many business men, of business men in many different lines, +they are in a position to judge wisely of business prospects. Having +great power to make or refuse loans, they can encourage or chill the +enthusiasm which business men may independently develop. The whispered +word of a banker may well count for more than the half-page +advertisement of a promoter. But the banker is not all powerful. His +influence is much greater, often, in restraining than in evoking +business confidence. Bankers may during long periods be quite unable to +increase their loans, though they tempt borrowing by easy rates. + +Business confidence is a fact of social psychology. It is an organic +phenomenon, with radiant points of control. It is a matter of +inter-mental activity, rather than a thing in which each man makes an +independent choice. + +But this is to say nothing of credit phenomena that is not true of all +value phenomena. All economic values are social values. The values of +wheat or sugar or bicycles are social values. There are centers of power +and prestige, growing out of the distribution of wealth, or various +other social factors, which have a dominating influence on economic +values, as a rule. Credit phenomena are merely part and parcel of the +general system of economic motivation and control. + +In _Social Value_ (pp. 102-103) I have denied the doctrine of Meinong +and Tarde that explicit belief, existential judgments, are essential to +the existence of values, taking value in the generic sense, which +includes æsthetic value, religious and patriotic value, legal, moral, +and other values. I have pointed out that we do, at times, value ideal +objects, the creatures of our imaginations. The dead sweetheart, or the +Beatrice that never was (or that never was what she was imagined to be) +may have tremendous value. Not merely things hoped for, but things +hopelessly gone, as "The Lost Cause" to the Southerner, may be objects +of value so high that other things, known to be real, may sink into +insignificance beside them. Even in these cases, however, there must be +a "reality-_feeling_" an unconscious presumption or assumption that the +object valued is real. Indeed, belief, as distinguished from mere +ideation, is an emotional "tang," an essentially emotional, rather than +intellectual, fact. If it be present, the ideation and explicit judgment +may be dispensed with. + +It is, however, characteristic of economic values, particularly of the +values of instrumental goods and of the goods with which business men +make profits, that the tendency to raise the question of reality, to +require explicit judgment, is strong. The successful business man is +necessarily the man who does this, who does not too highly value the +creatures of his imagination, when he imagines a vain thing. One need +not, perhaps, seriously raise the question as to the reality of the loaf +of bread he buys. Explicit judgment there would be superfluous. But +very serious questionings come in whenever lands or houses or +securities or bills of exchange come in. One needs to know what the +facts are, and to make judgments based upon them. Hence, for all values +of capital goods and income-bearers, for the values which pass in +wholesale and speculative trading in general, the matter of _belief_ is +vitally important. Here, again, then, we have nothing in the +psychological principles underlying credit phenomena to mark them off +from the general field of value phenomena. + +The general laws of value, then, apply in the case of credit phenomena. +We find nothing unique in essence in them. The juridical relations, +also, in so far as they have economic significance, shade into one +another. To buy a bond from a bondholder is purchase and sale. To pay a +borrower money for his personal note is lending. But from the standpoint +of the theory of value and prices this distinction may be ignored. We +may extend the idea of buying, selling, and price to cover all contracts +where values are balanced against values, and expressed in terms of each +other. Future money has its price in present money, just as much as +present wheat has its price in present money. Really it is not future +money against present money. It is a case of _rights_, which involve the +payment of money in the future, sold for money, and priced in money. In +general, it is _rights_, rather than _things_, which pass in economic +exchange. Physical delivery does not constitute selling. Delivering a +load of wheat to a railroad does not constitute sale of the wheat to the +railroad; selling a farm does not involve any physical moving of the +farm. Rights, _in personam_ or _in rem_, are objects of economic value, +and the exchange of these rights makes up the bulk, if not the whole, of +economic exchange. (Exchange may be limited to the transfers of juristic +rights, without value being so limited. I have discussed the relations +of value and exchange in the chapter on "Value," above.) Property rights +are commonly conceived of as the proper objects of buying and sale. +Contracts involving the future services of free men stand legally on a +different footing from contracts regarding physical goods. But economic +analysis is not greatly concerned with these distinctions, except in so +far as they affect the values of the things exchanged, and so the terms +of the exchanges. I do not believe that the legal distinctions can be +made to run on all fours with any significant economic distinctions, and +shall not undertake to make them do so. In the phenomena we have simply +cases of buying and selling (in a generalized sense of those terms) of +_rights_, at _prices_ (by a very slight extension of the term, price, to +which the market is well accustomed). The terms of these exchanges, the +prices, are governed by values, social economic values, in no wise +different from the values which govern the prices in exchanges which we +do not class as credit transactions. I say that credit phenomena are +exchanges of rights. This is true of all exchanges. We do not exchange +rights for money. We exchange rights to other things for rights to +money. The mere physical transfer, even of money, does not give rights +to the money. I may merely be giving you the money for safe keeping, or +for use for my purposes. While the law makes the rights to money that +has left the hands of its owner less lasting, as against innocent third +parties, than in the case of other objects, and while the right to money +is always, or almost always, met by returning other money of equal +amount, even in the case of money it is a right, and not a mere physical +transfer, that is significant. + +Our problem regarding credit is, then, much simplified. We have simply +to pick out certain economic exchanges to which the name of credit +transactions has been applied,--a various and heterogeneous set of +exchanges, in many ways--and study them, to find their peculiarities. +These peculiarities will not make them exceptions to the general laws of +value. They will make them merely special cases. To find essential +principles marking off credit transactions, at large, from non-credit +transactions is an exceedingly difficult thing. There are more +differences among credit transactions themselves, than there are between +the genus, credit transactions, and the class of things not called by +that name. + +Thus, monthly payments of rent, of wages, of college professors' +salaries, are not commonly called credit transactions. The monthly +payment of grocery bills, or of telephone bills, involves credit. Where +is a real difference to be found? On the other hand, between book credit +between grocer and patron on the one hand, and a bank-note or deposit +credit on the other, the difference is large, in many practically +important ways. Between a call loan and a ten year agricultural +mortgage-note, the differences are even greater. + +One may be disposed to find the differences between credit transactions +and non-credit transactions in the fact that the former stipulate a +definite sum of money, due at definite times. This would partly +differentiate a bond, say, from a stock. The bond not merely calls for +stipulated yearly payments, but also calls for a definite payment at the +end. This would, however, exclude British Consols from the list of +credit instruments! British Consols differ from safe preferred stocks in +legal, rather than in economic, ways. Legally they are alike in that no +terminal payment is called for. Practically they are alike in that +annual regular sums may be expected. It may at least be said of credit +transactions that stipulated money payments, either at a different time +or a different _place_, are called for. This would include the +telegraphic transfers of funds, and would exclude the case where A, a +farmer, does a day's work for B, a neighbor, for the promise of a day's +work in return at a later season. The latter transaction involves many +of the elements that definitions of credit have included, but I think +that we may at least limit our conception of credit transactions to +transactions within a money economy, where money, as a measure of +values, functions in the calculations. Shall we, however, limit credit +transactions to cases where a stipulated _amount_ of money is named in +the contract, for a stipulated time? + +Shall we exclude contracts where the payment of money is made contingent +on anything? By contingency here I mean legal contingency. This test +would exclude the highest grade preferred stock. It would include the +shakiest bonds that contained, in the terms of the contract, no +contingency. But where, then, would one place such an instrument as the +Seaboard Airline Adjustment 5% Bonds, which may default in a given year +half of the interest, if it is not earned,[506] and which yet call for +the payment of the principal at a stipulated time? + +What shall we say of "borrowing and carrying" transactions on the stock +exchange? Is not the loan of stocks a real credit transaction? +Ordinarily, when stocks are put up as collateral, one thinks of the +money as being lent, and the stock merely as a pledge. But in the case +of borrowing stocks by a bear to deliver next day, the transaction is +definitely thought of as a loan of stock. It is sometimes paid for, the +bear paying the bull a premium, instead of receiving interest on the +money he has turned over to the bull as a "pledge." The more usual +thing, is, of course, for the bull to pay the bear interest. But in a +contract like this, there are many contingencies. As the stock rises in +value, the bear must lend more money to the bull; if the stock falls, +the bull must return part of the money to the bear. Both times and +amounts are here contingent, even though in the end the amounts lent and +repaid balance. Call loans, of course, do not call for payment at a +stipulated time, and the same is true of bank-deposits and bank-notes, +and of many other forms of credit. Interest on deposits in mutual +savings banks is contingent, legally, as to amount. Are insurance +policies credit instruments? What of endowment policies? + +It is easy to draw legal distinctions in all these cases, but to show +that definite and uniform economic consequences flow from these legal +distinctions is quite impossible. Rather, it is easily possible to show +that uniform or certain economic consequences do not, in general, flow +from them. + +I shall refrain from the effort to give a general, fundamental +definition of credit. I shall rather discuss certain of the more +important types of what have been called credit, with a view to seeing +what bearing they have on the problems with which this book is +concerned; the value of money, and prices. The general class of +transactions to which the name, credit transactions, has been applied +may be roughly designated as transactions in which the consideration on +one side, at least, is the assumption of a debt, running in terms of +money (though not necessarily to be paid in actual money), payable +either at a future time or at another place. Objections can be found to +this definition. It does not meet the fundamental test of a definition +that, for the purpose in hand, it should seize upon the essential and +unique characteristic of the things marked off. I am not sure that it +meets the tests of inclusiveness and exclusiveness even for those +transactions which we call credit transactions. Thus, if A and B go to +the bank together, and A there buys B's horse, standing in front of the +bank, giving B in return a check, which B immediately cashes in the same +room where the check is drawn, the idea of different time or different +place is not realized in any but a technical sense. A, in drawing the +check is, of course, assuming a debt. The check, if repudiated by the +bank, becomes a note, which A must pay. A, moreover, is paying B, not +with money, but with the transfer of a claim on the bank, and the fact +that his check, if unpaid, becomes a note is not the main fact about the +check. Understanding our definition of credit to cover this case also, +however, and attaching no fundamental importance to the definition save +as a means of marking off a class of more or less related phenomena +which we mean to discuss, the definition will serve. + +Thus defined, we have in credit a concept susceptible to quantitative +treatment. Debts, in terms of money, can be summed up, and we may have +the concept of the "volume of credit" as the sum of such debts at a +given time, or through a given period of time, or as an average through +a period of time. We may distinguish credit transactions from credit, +defining credit as the volume of debts, and credit transactions as +transactions in which the debts are passed in exchange. This would be to +broaden the notion of credit transactions beyond the usual conception, +since it would include transactions in which A sells ("without +recourse") B's note to C. It would also include cases where bonds are +sold. It would exclude cases where stocks are sold, since they are not +legally debts. Some would prefer to limit the notion of credit +transaction to transactions in which there remains some contingent +responsibility on the part of the one who uses the credit instrument, +but this would be to deny the name, credit transaction, to cases where +bank-notes or government paper are used in payments, as well as to deny +it to the case where bonds are sold. It is not important, for my +purposes, to draw a sharp line about the concept, credit transaction, +however. And about the concept credit itself I have drawn a line resting +on a legal, rather than an economic, distinction. + +Within the field of credit, thus defined, we may single out for especial +consideration certain forms of demand or short time credit, particularly +bills of exchange, bank-notes and bank-deposits, and merchants' +book-credit. We shall also have something to say regarding long-time +credit, including bonds, and mortgage-notes that have no general market. + +All these debts in terms of money, to which, in the aggregate, we have +given the name, volume of credit, have grown out of _exchanges_. +Exchange is here used in a wide sense, and is not confined to the case +where goods or services are bought and sold. It is an exchange, if a man +gives his note to a banker in return for a deposit credit. But, on the +assumption that exchanges are made only when gains are to be realized, +it follows that all debts, and so all credit, have been created in view +of anticipated gains (or to avert anticipated losses). In a society +where everything is in equilibrium, a "static state," where there are no +"transitions" to be effected, where there is no occasion for +speculation, and where exchanges of lands, etc., are negligible, the +volume of all exchanges, including those where debts are passed in +exchange, would be small. The occasion for the creation of the debts +which make up the volume of credit would not be nearly so numerous as +under dynamic conditions. The _volume_ of credit, in other words, is +largely a function of dynamic conditions, even though credit would exist +in a static condition of economic life. The bulk of credit, as the bulk +of exchanging, grows out of dynamic conditions, transitional changes, +and the like. + +This will be clearer when we raise the question as to _why_ debts are +created, as to what function debts perform in economic life. Why should +a man borrow? Let us suppose that a farmer has 600 acres of land. He +wishes to sell 100 acres, and use the proceeds in buying equipment for +his farm. But he finds it difficult to sell the 100 acres. There is no +ready market. He can sell it immediately only at a great sacrifice. By +waiting, and looking industriously for a customer, or by engaging a real +estate dealer to do so, he could finally find a buyer, but the thing is +slow and uncertain, and he wishes to get the equipment at once. He +borrows, therefore, giving his farm as security, or a part of the farm +as security. He exchanges a claim on the future income of the farm for +present money, and with this he can buy the equipment he needs. The net +result has been that the credit transaction has transformed his +unmarketable quantum of value into a marketable form of value. He has +been able, by an indirect step, to do what he could not do directly--to +trade a part of the farm (which in its economic essence is a prospect of +future income) for the equipment. In this illustration, _credit has +functioned as a means of increasing the marketability or saleability of +non-pecuniary forms of wealth_. Credit is primarily a device for +effecting exchanges that could not otherwise be effected, or for +effecting exchanges more easily than they could otherwise be effected. +This means that credit transactions are a part of the productive +process, and that they increase values. It is the function of credit to +universalize the characteristic of money, high saleability. It is the +function of credit to "coin," so to speak, rights to goods on shelves, +lands, etc., etc., into liquid rights, bearing the dollar mark, which +are much more highly saleable than the rights in their original form +were, and which often become as saleable as money itself, functioning +perfectly as money. + +Credit thus tends to universalize that characteristic which Menger[507] +considers the unique characteristic of money. By means of credit +transactions, a man borrows up to 50% of the value of the farm, makes +his farm in effect, 50% saleable or fluid. The man who owns livestock +may not be able, on a given day, to market them without loss, but he can +use their value in the market, up, say, to 75%, by a loan. The man who +owns a hundred shares of United States Steel may not be able, at a given +time, to market them to his satisfaction--though in the case of articles +and stocks dealt in the speculative markets saleability is very high +indeed, and in the case of United States Steel, in particular, the +"spread" between "buying price" and "selling price" is very narrow--but +he can borrow, with the stock as security, up to 80% of its value. On a +bond of the United States government, he may borrow up to 100%.[508] The +process of creating credit is a process of transforming rights from +unsaleable to saleable form. Often this means the subdivision of rights, +preferential rights to a _portion_ of the value of a piece of wealth +being more saleable, because of greater certainty, than the total right +to the whole. Another reason why partial rights may be more saleable is +that the value represented by each partial right is smaller. It is +easier to market things worth a thousand dollars than things worth fifty +thousand, as a rule. In any case, a chief economic function of credit +is,--_the_ chief function for our purposes--to make fluid and saleable +articles of wealth other than money; to universalize the quality of +saleability. + +This justifies us in our contention made before that _all_ corporate +securities, whether stocks or bonds,[509] are, in economic nature, +alike. Driven to a legal concept for a definition of credit, we were +obliged to exclude stocks from our rough definition. But corporate +organization does precisely what the various other transactions that we +have called credit transactions do. Lands and buildings and machinery, +or the roadbed and rolling stock of a railroad, are highly specialized, +often unfit for use in any form other than that in which they now +appear. As concrete instruments of production, they would be highly +unsaleable. In their totality, as a going concern, they are highly +unsaleable, because in the aggregate so very valuable. Grouped together, +however, but still subdivided, the objects of many thousands of partial +rights, represented by stocks and bonds, they become saleable in high +degree. + +As objects other than money gain in saleability, they tend to gain in +value, also. This is not necessarily true, always. If wealth is already +in the best place, at the proper time, and in the proper hands, no point +is involved in further exchanges. Additional saleability--or an increase +in the qualities that make for saleability--could make no difference. +But when objects could be employed to greater advantage if in different +hands, if, in other words, there is occasion for exchange, then whatever +adds to the saleability of a good adds to its value. What would +otherwise have gone into the trouble and expense of marketing now is +saved. In general, items of wealth tend to gain in value as they gain in +saleability--though not in any definite proportion. + +Further, as objects of value other than money gain in saleability, money +tends to lose its _differential advantage_ in this respect, and so +tends to lose that part of its value which comes from the money-uses. If +all things, including gold, were equally saleable, there would be no +_raison d'être_ for money, and gold would have only the value that comes +from its commodity functions. In so far as credit-arrangements give to +partial rights to wealth the capacity to serve as a medium of exchange +or for other money purposes--and this is true to a high degree of +bank-credit--this tends to cut under the sources of value of money. +Credit thus, from two angles, tends to raise prices; it raises the +values of goods; and it tends to lower the value of money. The limits on +this, however, are reached when gold ceases entirely to function as +money, and when all items of value are perfectly saleable. Then credit +has done its perfect work for prices, and can do no more. No incentive +remains for further borrowing, if all items of value that need to be +exchanged are perfectly saleable. + +These theses will meet objection, particularly from those who are +accustomed to quantity theory reasoning, and who look upon the volume of +credit as something independent of the volume of trade. On the logic of +the quantity theory there is no reason why prices might not mount +indefinitely, if only credit could increase indefinitely. The causes +controlling the volume of credit are, on this view, quite independent of +the volume of trade. I have given this line of thought sufficient +criticism, perhaps, in Part II, but shall find occasion to recur to it +at a later point in this chapter. However, writers not bound by quantity +theory ideas, may still find reason to question these theses, and it is +necessary that I should take account of various complications, and make +what may well be called substantial qualifications and modifications, +before the theses are acceptable. + +First, objection will be offered to the doctrine that all credit is +merely rights to wealth, that credit rests on wealth. It will be urged +that many loans are made without collateral, or mortgage security, that +the "personal credit" of the borrower is the only security, and the only +basis of the loan. This objection is not serious. There are, doubtless, +loans which are disguised benevolences, where the lender gets nothing +good in return for his loan. I abstract from such cases. Quantitatively +they are not important, and qualitatively they are not really commercial +transactions. In general, when a good merchant borrows at the bank on +his personal note, the bank knows very well what goods he has in stock, +what prospects he has for marketing them, what other debts he has, what +his "net worth" is. And the bank knows that it has legal claims, even +though not preferred claims, on his wealth. When a young business man +borrows capital from a neighbor, giving no security because he has no +marketable wealth which would serve as security, he is, none the less, +exchanging a valuable right for the loan. He is giving the lender a +right to a preferential share in his future income. The lender has +considered the young man's abilities as sources of income, in +conjunction with the capital lent. Incidentally, the lender retains +rights, preferential rights as against the young man himself, in the +quantum of value he has turned over to him. If a young man borrows the +resources with which he buys a farm, the lender takes a mortgage on the +farm itself. Transactions of this sort frequently have in them the +element of benevolence, and the considerations are not always strictly +commercial. In the case of a young man of unusual ability, however, who +insures his life for the benefit of the lender, such transactions may be +perfectly good commercial transactions, value balancing value in the +exchange. The thing traded is commonly present money (or its equivalent) +for rights to future money income. + +Public loans present no exception to our rule. They represent the +transfer of present wealth for the future income which the government, +by virtue of its public domain, or, more commonly, its taxing power, may +expect to receive. With a strong government, this future income may be a +very substantial part of the total income of the people. Public loans +may often be for commercial purposes, as when municipalities borrow to +build or extend municipal enterprises. In cases of this sort, the market +frequently will consider the prospects of commercial success of the +enterprises in fixing the value of the municipal bonds. Where the +proceeds of the loan are for non-commercial purposes, as war, the +question of the future income of the government will still, ordinarily, +be a dominant factor in determining the value of the securities. Often, +however, there is the direct action of patriotic fervor, etc., enhancing +the values of government securities. We have seen this in the case of +government money. It is no part of our theory to maintain that men's +calculations are always rational, or that the whole of the value of a +long-time income-bearer rests on the anticipated income. But this is no +peculiarity of credit phenomena. The same thing is true of lands, for +example. Capital values often get independent in part of their +"presuppositions," as we have seen in the chapter, _supra_, on "Economic +Value." War security issues often represent the effort of the +government--as at the present time--to bring into the present every +possible bit of future values, as a means of increasing their power in a +desperate struggle. The high prices of goods in such a situation +represent the concentration of future values into the present, an +increase in the motivating power which stimulates the people to unwonted +exertions. In war time, moreover, many _ideal_ values,--those whose fate +is dependent on the outcome of the war--enter into and increase the +values of those goods which are needed for carrying on the war. This +leads to larger sacrifices of future income than would ordinarily be +tolerated. It is not so much a case of present goods rising because of +extra credit, as of extra credit because present goods are more +valuable. + +A second objection would be raised that in many cases, the values +pledged by the borrower could not exist if the lender did not make the +loan. This would be particularly the case with credit granted for the +starting of a new or novel enterprise, which as yet exists only in idea. +The established merchant, with goods on his shelves, or with a bill of +lading for goods which he has sold, has a very tangible, concrete basis +for a loan, whose value is independent of the decision of any given +banker. If my doctrine is to be taken as holding that all credit rests +on concrete physical goods, very many exceptions indeed could be found. +But this is not my doctrine. It is that credit rests on valuable +_rights_. These rights may be rights to existing concrete goods; they +may be rights to future incomes. In any case, it is the values, rather +than the physical quantities, that are significant. Witness cotton +before and after the outbreak of the World War. Ultimately, in +general,[510] economic values come from the "primary values" or "first +order" values of consumption goods and services. These values are +reflected back, by the imputation processes, to the various "factors of +production" which have made the existence of the goods and services +possible, in accordance with well-known laws which need not be here +elaborated. But the category of "factors of production" is far from +exhausted when we have named land, labor, and produced instruments of +production! Some writers have rejected the notion of "factors of +production" largely or altogether, and prefer such a term as "agents of +acquisition."[511] I certainly have no intention to give to the term, +factor of production, any ethical connotation. Even though a factor of +production be, like land or labor, a _sine qua non_ of production, it +does not follow that the owner of that factor gets his proper, or +ethically just share, under the laws of economic imputation. Many of the +"factors of production," in the sense of factor which derives a value +from the economic laws of imputation, may well be parasitic from the +angle of ultimate social welfare. The only test is as to whether, under +existing social arrangements, a portion of the income _of a given +establishment_ would cease to exist if that factor should disappear, or +be reduced. From the angle of this test, monopoly power, trade-marks, +established trade connections, the big idea of an entrepreneur, a +dynamic personality, capacity for winning other men's confidence and +good will, and sometimes that brutal selfishness which makes other men +shrink from conflict, or the reputation of being a dangerous and +vindictive man, may be equally "factors of production" with land, labor, +and produced instruments of production. In Part IV of this book, "The +Reconciliation of Statics and Dynamics," we have discussed the +"intangible capital items" of this class, and have indicated that many +of them perform really important and necessary social functions. Others +are doubtless pernicious. Production involves leadership, organization, +the making and maintaining of "interstitial connections," as well as the +technology of muscle and machine. But credit is based on values, rather +than on concrete goods as such, and if these "intangibles" have value, +they may have credits based upon them.[512] + +That some of these values exist only by virtue of the fact that credit +is granted is no marked peculiarity. The granting of credit is an +exchange of the rights of the creditor for rights to the future income +of the borrower. If the exchange were not made, in certain cases, the +borrower would have no future income to which he could give rights. The +entrepreneur with a big idea cannot actualize that big idea unless he +can bring it into conjunction with land, labor, capital, and a market +for the products. The exchange of rights to the value of the products +for the banker's deposit-currency, or the private lender's money is +merely one of many necessary exchanges required to bring about the +combination which will create the products. If there were no possibility +of marketing the products, he would be equally helpless, and his idea be +equally valueless. The general range of values, under our present system +of division of labor, private property, private enterprise, etc., depend +on the possibility of exchange. Men produce for the market, rather than +for their own consumption, or for the consumption of a communist +society. Without exchange, many values would persist, but most values +would at least be diminished. Exchange is part of the productive +process. The only peculiarity in the case under discussion is that the +man getting credit for the exploitation of a big new idea commonly has a +very limited market--is dependent on the decision of one bank or lender, +or at most of one out of a few possibilities. The narrower the market, +the more dependent are the values of things that must be exchanged upon +the decisions of a few men. Wheat is free, virtually, from individual +caprices, though even there a big operator may organize a pool and +temporarily affect the value very greatly. But the immediate power of a +few men on values is increasingly great as we get closer to those things +which are unique, which are capable of only specialized employment, and +which call for the coöperation of elaborate and expensive systems. And, +of course, the influence of individual caprice, or individual decisions, +on all values grows greater as wealth and power are concentrated. +Economic social value is an institutional value, specially weighted and +controlled by individuals, classes and institutions.[513] + +Joseph Schumpeter, in his _Theorie der wirtschaftlichen Entwicklung_, +has made much of the rôle of the banker in economic evolution. He sees +in the banker a creator of "_Kaufkraft_," by means of which an +entrepreneur, a dynamic man who has a new idea which he wishes to +actualize, is able to wrest from the unwilling "static economic +subjects" their land, labor and instrumental goods for the purpose of +putting his new plan through. This new _Kaufkraft_ is the true _Kapital_ +which the new enterprise requires. Capital, thus defined, is not an +accumulation of goods, is not embodied in goods. It is an _agent_, a +_power_, which the banker creates. It makes dynamic change possible. +Schumpeter is particularly anxious, in clearing the way for his new +theory of interest, to get rid of all the notions of saving, +accumulations of stocks of goods, etc., which have commonly been made +prominent in the discussion of capital and interest. We need not here +discuss his theory of interest.[514] He maintains that the new dynamic +credit, credit granted by a banker for a really new enterprise, as yet +not concretely in existence, represents something new in the world, +anomolous from the angle of static values, and static credit. Indeed, he +regards credit as unessential for the static analysis, and banishes it +from the "_Wesen_" of his static state. But this new credit is different +from such credit as there may be in the static state, because, he holds, +the new credit does not rest on goods, and has no _Deckung_. Schumpeter +himself calls these doctrines "heresies." They become less dangerous, +however, when we learn that by "saving" Schumpeter means mere trenching +upon accustomed expenditure, so that the entrepreneur who saves part of +unusual profits is really not saving at all, and when one discovers that +his contention that there need be no accumulation of goods prior to the +starting of a new enterprise means merely that there need be no special +accumulation of goods _ad hoc_. Of course if saving means trenching upon +accustomed expenditure, it is banished by hypothesis from the static +state, but there may still be plenty of capital (in the ordinary sense +of accumulated produced means of production) for Schumpeter's +entrepreneur to get hold of by means of his new _Kapital_. His +contentions that the new credit does not rest on goods, that it has no +_Deckung_, and that we have a new thing in the world since in dynamic +credit we have a case of temporal discrepancy between the making of +obligations and the ability to pay them, calls for further analysis. + +It is true that there is a time during which the new credit has no basis +in concrete goods. Very speedily, however, the new credit is exchanged +for concrete goods, and the enterprise is started. Further, the banker +commonly insists on a margin at the start. Further, the claims of the +borrower on the banker are themselves, prior to their expenditure for +the things needed in the enterprise, assets to which the banker may look +as a basis for his confidence in the goodness of the entrepreneur's +promise to pay him. There is never a moment when the new credit does not +rest on _values_. The loan by the banker to the borrower is, +essentially, like the case of the purchase of any bearer of future +incomes, say a machine, or a factory. The machine is, after all, in +economic nature, merely a "promise" of future goods and future values, +as an Austrian economist should be quick to recognize, and machines are +almost as frequently poor performers as borrowers--indeed, most +commonly, the borrower's inability to repay comes from the failure in +the value of the goods which his physical equipment produces. The +_raison d'être_ of the new credit is the new values which have come into +existence: the new plan of the entrepreneur, _validated by the banker_, +attains a value equal to the present worth of the extra products which +it promises. I repeat that it is values which are significant as the +basis of loans, that values are not all embodied in physical goods, and +that value is essentially a psychological thing. + +The banker's validation of the plan may be an essential factor in its +value. _Belief_ is often an essential factor in values. The new value, +and the new credit, have a large element of belief in them. The value of +the new plan rests proximately in the belief of the banker, manifested +by his granting of credit. But the value of the _bank-credit_ rests +ultimately in the _prestige_ of the banker, which is a fact of social +psychology, resting in a massing of belief on the part of the public in +him, in the validity of his bank-notes and deposit-currency, coupled +with support from legal and other institutions. But this is to +anticipate the discussion of the nature of bank-credit. The point +involved is sufficiently illustrated by the case where a man who is not +a banker lends his money to an entrepreneur of a new undertaking. Here +again the enterprise is impossible without the loan. Here the loan is +made on the basis of an anticipated income. Here again the anticipated +income is made possible only by the loan; one of the values that enters +into the exchange exists only because the exchange is possible. None the +less, the credit rests on value. It is a right to an anticipated income. +The man who has made the loan has his security in the value which he has +lent, plus the present worth of the extra income which the new idea is +expected to create. + +Now a great practical difference is made in the course of economic life +by the decisions of lenders to lend to men who plan new things, instead +of to men who plan old things. It makes an enormous difference whether +or not new plans appeal to the imaginations of those who control the +economic resources of society. It makes a great difference whether +static values (the capital values of incomes to be created in familiar +ways) or dynamic values (capital values of incomes to be created in +novel ways) win out in the competition for loans from those who have +loans to make. But _as values_, the two are of the same psychological +stuff and substance: futurity and belief are essential elements in both +of them. + +Stable belief, and strong belief, are easier to evoke in the case of the +established and the familiar. New ways of creating wealth must promise +larger returns, and make more dramatic appeals to the imagination, than +old ways. Schumpeter indicates that it is the essential function of the +banker to give preference to the new ways, that the mass of men are +"static" in their attitude, and that, for some reason which he does not +clearly indicate, the banker is not. This has not been our American +experience, on the whole. The contrast which Schumpeter makes between +the timid, static masses, and the few highly important dynamic +entrepreneurs, holds very much less true in America than in Continental +Europe. There it is doubtless true that new industrial enterprises have +had their main encouragement from bankers. Here, such enterprises have +appealed largely to the mass of men, to the investing and speculative +public. Our commercial banks have lent largely upon stock exchange +collateral, which means that, indirectly, bank-loans have gone to +finance industry. The extent of this is enormous, as will later appear. +However, the banks, as banks, have not been large _buyers_ of stocks. +They have guarded themselves by requiring "margins" from those to whom +they have lent on such collateral. Seasoned bonds have been bought in +great volume by our commercial banks, but few stocks. Even the +underwriters and investment bankers have been primarily intermediaries, +expecting to pass on to private buyers the securities they hold +temporarily. My point here is, merely, that there is nothing in the +distinction between static and dynamic credit, when by that is meant the +distinction between credit for new enterprises and credit for old +enterprises, to mark off a peculiar or essential province for +bank-credit. The need for bank-credit does arise out of dynamic +conditions, primarily, but it is not the need for credit to _start_ +dynamic changes, even though bank-credit may do, and does do, that. The +chief reason for bank-credit is to enable economic society to readjust +itself quickly and readily to dynamic changes, by putting through +without friction the necessary exchanges that such readjustment +requires, and by holding in liquid form a fund of rights which can meet +the emergencies and unexpected occurrences which dynamic conditions +involve. To this we now turn. + +Bank-credit is the debt of responsible institutions, payable on demand +in money. It may take the form of notes, or of the right to draw checks. +Long evolution has begot a system of legal relationships, and of banking +technique which makes these promises easily performed. The same process +of development has led to social reactions toward banks and bankers +which give them enormous prestige. Legal regulation, in the case of many +banks, requiring adequate capital, and, in this country, requiring +minimum cash reserves, have added to that prestige. The promise of the +bank is commonly so liquid and saleable that the banks are not called +upon to fulfill it by the actual payment of money--the promise alone is +an object of value which is perfectly saleable, which runs in terms of +money, and which functions as a perfect substitute for money in almost +every use except for very small retail transactions. Even there, it is +very much used. + +Among the features of banking technique to which we must give especial +attention are the following: (1) the banker has substantial resources of +his own, his "capital," which constitutes the "margin" of protection +which he offers to those who give him valuable things in return for his +promises to pay money on demand; (2) the banker exchanges his promises +to pay on demand, as far as possible, for those things which have a high +degree of "liquidity," _i. e._, for those things which he can quickly +dispose of for cash, or for the promises of other bankers which are the +equivalent of cash. Farm mortgages are not good assets for a banker to +hold in large amount. They are long-term obligations, with a very +limited market, and they will not help him in emergencies to meet his +obligations to pay on demand. Agricultural loans, and other mortgage +loans are made in considerable volume by our State banks and trust +companies. All classes of commercial banks make many non-liquid loans, +as we shall later see. But all of them get as high a proportion of +liquid loans as they can. Bills of exchange, running ten, thirty, sixty +or ninety days, growing out of commercial transactions which +automatically terminate themselves in the payment of cash or the +promises of other bankers, constitute admirable assets. In return for +these, the banker may give his promises freely. This is especially true +where there is, in the banking practice, a wide "rediscount market," in +which he can sell these bills before maturity if he wishes to get even +more liquid assets. Promissory notes, for short periods, thirty, sixty, +or ninety days, growing again out of commercial transactions, which, +like those for which the bills of exchange were drawn, automatically +bring in cash or the promises of other banks, are in many respects like +the bills of exchange, even though the rediscount market for such notes +has not been so highly developed as the market for bills of exchange in +Europe. Whether such notes are as available for rediscount as bills of +exchange is a question of technical banking which we need not here +discuss in detail, though I venture the opinion that bills of exchange +are superior decidedly for this purpose, especially "documentary" bills. +The element of personal credit is commonly larger in the promissory +note, and that limits the market. Banking organization, and particularly +our new Federal Reserve System, may greatly reduce the disadvantages of +the promissory note from this angle, but it seems not unlikely that the +bill of exchange may be a factor of increasing importance in our +internal banking arrangements. The general test, however, of what is +available for a banker's assets depends on varying conditions, and is +not to be answered by a simple formula. A bank in a rural region which +loads up heavily with the safest local bonds is little better off than +with farm mortgages. For neither is there a quick market in an +emergency. A city bank, near the stock exchange, may very safely buy in +large amounts highly saleable as a profitable substitute for part of its +cash reserve. Even country banks may, and do, safely own such bonds. +Short loans on stock and bond security, constitute the most important +single type of bank-loan in the United States, as we shall later see. +(3) The third feature of banking technique to which attention must be +given is the reserve policy. The banker must keep some actual money on +hand (how much we have in part considered in Part II, and shall again +discuss). + +I shall give attention to these points in what follows. The first point +needs little discussion. Large "capital" for a bank gives prestige and +security. Some capital is a _sine qua non_ for a bank which expects its +notes or deposit currency to have general acceptability. + +It will be well to consider further the circumstances determining the +form which a bank's assets shall take. Though commercial banks own +enormous quantities of high grade bonds, it is rare for commercial banks +in America to buy stocks of corporations.[515] They will often lend to +owners of such stocks with the stocks as collateral, up to a high +percentage of the value of the stocks, but they will rarely trade their +demand obligations for the stocks directly. In general, a bank wishes +to have its assets in the form of obligations of other people, expressed +in terms of dollars, and having a definite term to run (or callable on +demand). + +One reason for this is a bookkeeping reason. "Par value" of stocks has +little meaning any more. Market-prices of stocks, even the best stocks, +are not absolutely fixed. They fluctuate, even though within narrow +limits. This fact presents complications to the bookkeeper! Of course, +the bank's buildings and fixtures, listed among its assets, fluctuate +also, in value, and in the price that could be obtained on a given day, +but the bookkeeper can abstract from that, since the bank has no +intention of selling its buildings and fixtures. The notes and bills +held in the bank's portfolios also in fact fluctuate in value, and in +the price at which they might be sold on a given day, but they are +expressed in terms of dollars, and the bookkeeper commonly has no need +to look beyond the figures written on them. At irregular intervals, a +small percentage of them may be marked off the books as "bad," but +usually the minor fluctuations are abstracted from. The bank does not +like to have assets whose published prices fluctuate. But this is, I +suppose, not the main objection which banks have to stocks as assets +since it does not prevent their buying bonds. I abstract from the legal +restrictions that prevent many banks from buying stocks. The fundamental +reason is to be found elsewhere. The point is to be found here: the +transaction whereby property rights in roadbed, rolling stock, etc., +were collected into property rights in a going, organic whole increased +the saleability of all these rights; the further subdivision of these +rights into many thousands of equal parts enormously increased the +saleability of these rights, especially when coupled with listing in an +organized market; the further transaction, by which a preferential claim +upon these subdivisions of rights is embodied in a collateral note +still further increases the saleability of the value of these rights. +The whole of the value embodied in a share of stock has not the +certainty and saleability which a banker wishes for his assets. It might +not be possible to market the stock on a given day without loss. But a +collateral note, embodying 80% of that value, with provision for +additional collateral in case the margin is reduced, is highly liquid +and the banker has no doubt that, with watchfulness, he can always +realize the full face value of such a note. It becomes saleable enough +for his purposes. The transaction by which this note is exchanged for +the banker's demand obligation gives the drawer of the collateral note a +perfectly saleable form of value with an almost universal market, which +he can convert without loss into practically anything that money can +buy. We have here a series, a scale, saleability of rights growing +steadily greater, through a series of transformations and exchanges, +till at last the virtually perfect saleability is reached. Again we are +reminded of Menger's analysis[516] of the methods of primitive barter, +whereby the man who possesses a good of low saleability, through +successive exchanges, gradually gets goods of higher and higher +saleability, until he finally reaches his goal. Bank-credit, this most +highly saleable of all forms of rights except the rights to actual money +in hand, and in general not inferior to money, cannot usually be had by +direct offer to the bank of crude property rights. These must be refined +and distilled, till a central core of highly saleable value emerges, and +then they may enter the bank's assets in return for bank-credit. The +best bonds likewise offer such a central core of highly saleable value. + +A further point is to be noticed about this scale of saleabilities. At +each stage of the exchanges of less saleable for more saleable rights, +the holder of the less saleable rights must make concessions to the +holder of the more saleable rights. And the degree of his concession is, +in general, correlated with the lack of saleability of what he offers. +Commonly this takes the form of giving up a right which has a higher +yield for one which has a lower yield. Or, viewed more fundamentally, +from the angle of the capitalization theory, income-bearers of low +saleability are capitalized at a higher discount rate than +income-bearers of higher saleability, with the same yield. Farm lands +may be capitalized on a 10% basis. (There will be great differences +between regions in this, depending in considerable measure, often, on +the activity of farm sales. I would refer here to the facts mentioned in +my chapter on "The Quantity Theory and International Gold Movements," +contrasting Cass Co., Iowa, with Yazoo Co., Mississippi. Of course, the +risks of agriculture count heavily, also, and the prestige of owning +land as compared with other forms of property.) The farmer's mortgage +note may bear 7%. A merchant who holds that note may use it as +collateral, with a margin, backing his own note, and get accommodation +for three months at 6%. The bank may rediscount the note of the +merchant, giving it its own endorsement, on a 4-1/2% basis. The coal +mine owned by a small company may yield 12%; sold to a large iron +company, which combines mining and smelting and manufacturing, that mine +may be represented by 7% stock; a collateral loan, for sixty days, based +on 80% of the value of the stock may be had for 4%; the demand liability +of the bank given in exchange for the collateral note will either yield +nothing at all, or else yield a low per cent, one, one and a half, or +2%, on large checking accounts. If the collateral note be a call note, +the rate will be lower, in general, than on a time note. I here refer to +what was said in the chapter on the functions of money with reference to +the relation of short loans, especially call loans, to the "bearer of +options" function of money. Part of the yields of these loans is in the +bearing of options. This function grows out of the uncertainties of a +dynamic market. It would disappear if uncertainties, "friction," and +dangers disappeared. + +The importance of liquidity and saleability in the assets of a banker +needs little discussion. It has been reiterated by virtually every +writer on the subject. Its connection with the need for meeting demand +obligations is obvious. The point that I would here emphasize is, +however, that this, too, grows out of dynamic changes, uncertainties, +etc. An economic life in "normal equilibrium," in static balance, with +all things going smoothly, in anticipated ways, could dispense in large +measure, or wholly, with such liquidity. Obligations which matured at +the time that the holders of the obligations had maturing obligations, +would serve their purpose perfectly. Again I would emphasize the fact +that the theory of money and bank-credit is essentially a dynamic +theory, and that the notion of "normal equilibrium" which underlies the +quantity theory has no bearing whatever on these fundamental matters. + +The market where fluid bank-credit is exchanged for less fluid rights +has been given the name, "the money market." The prices fixed in this +market are "money-rates," figured as percentages on the amounts of +bank-credit exchanged for the less fluid rights. It is, of course, +strictly speaking, not a money market. Money, as the term has been used +in this book, has been taken to mean gold coin, subsidiary coin, +government paper, and for the United States, bank-notes. In a country +where much bank-credit is elastic bank-notes, it is better to +distinguish money from bank-notes. The term, money, is not one easily +defined in a logical manner. A good logical definition should seize on +some essential characteristic of the object defined, should include all +the objects of that class, and should exclude all others. We can meet +the tests of inclusiveness and exclusiveness in a definition of money, +but we can hardly meet the first test. The differences between gold +money, for example, and gold bullion are less than the differences +between gold money and government paper. The differences between +bank-notes and bank-deposits are less than the differences between +bank-notes and government paper, or bank-notes and gold. The term, +money, covers a group of more or less miscellaneous things, concerning +all of which few general laws are possible. Gold, or other standard +money, in particular, may obey different laws from other forms of money. +I have been careful, in the foregoing, to avoid the danger of letting +the argument rest on any ambiguity in the meaning of the term, however, +and for the present shall not attempt further definition. For the +present, we shall use the term, "money market," in its familiar sense, +as meaning that market in which bank-credit is exchanged for less fluid +rights. An organized money market commonly appears only in larger +cities. In smaller places, relationships between banks and customers are +much more personal, and indeed, even in larger cities, regular business +houses have particularly intimate relations with special banks. A fluid, +impersonal market, to which men may repair without reference to anything +but the marketability of the collateral they have to offer, is a +distinctively metropolitan affair. Only large dealers commonly have +relations with more than one or two banks. Larger houses in the big +cities often do sell their "commercial paper" through brokers, and some +of the big New York mercantile houses have had their paper scattered a +good deal throughout the country. The lack of protection which houses +which sought such credit faced during the Panic of 1907 tended to check +the practice in some measure, but it has revived, and even +increased.[517] In the matter of a wide market for commercial paper, +however, an impersonal market, with great fluidity, we are well behind +not only England, but also Continental Europe. The London acceptance +house has especially contributed to an impersonal market. The American +money market is _par excellence_ a New York market, and the primary type +of paper discounted in the American money market is stock exchange +paper, and foreign bills of exchange. For commercial paper, however, +there are innumerable more personal, more restricted, markets, and +commercial paper constitutes a very considerable part of banking assets, +though much less than is often supposed. But this we shall discuss in +the next chapter. + + + + +CHAPTER XXIV + +CREDIT--BANK ASSETS AND BANK RESERVES + + +In traditional discussions of banking, the impression is given that +commercial paper is the normal and dominant type of banking assets.[518] +To one accustomed to this view, the figures of the Comptroller of the +Currency for banking investments in the United States for 22,491 banks +of all kinds (State, national, private, and savings banks, and trust +companies) in 1909,[519] will occasion dismay: + + (000,000 omitted) + Loans on real estate $ 2,505 + Loans on other collateral security 3,975 + Other loans and discounts 4,821 + Overdrafts 69 + United States bonds 792 + State, county and municipal bonds 1,091 + Railroad bonds and stocks 1,560 + Bonds of other public service corporations 466 + Other stocks, bonds, etc 703 + Due from other banks and bankers 2,562 + Real estate, furniture, etc 544 + Checks and other cash items 437 + Cash on hand 1,452 + Other resources 111 + -------- + Total Resources $21,095 + +These figures, however, call for further analysis. They include figures +from institutions which should not be counted with commercial banks. The +percentage of real estate loans, especially, is too high to represent +the workings of commercial banks, a very high percentage of real estate +loans being held by stock and mutual savings banks. The other items, +however, are not much changed by the inclusion of savings banks and +private banks. It will be well to draw some conclusions from these +aggregate figures for all classes of institutions, before taking up a +more detailed analysis of State and national banks, and trust companies. + +Where, among these items, does one find "commercial paper"? In the +reports of the metropolitan papers, giving daily variations in interest +rates, it is usual to find "commercial paper" listed as a separate +category, coördinate with "sixty day paper," "ninety day paper," etc. +Recent periodical discussion has gone elaborately into the question as +to what should be called "commercial paper," from the standpoint of the +policy of the Federal Reserve Banks. I think it safe to say that no two +markets, at present, in the United States will use the term in precisely +the same way, and that all would restrict the term to a small portion of +the "other loans and discounts" listed above. The most general +definition of "commercial paper" would be paper bought through +note-brokers. Despite the decided increase in loans and discounts which +our war prosperity has involved, there has been very frequent complaint +of the scarcity of "commercial paper." I shall use the term, "commercial +paper" in a much more liberal sense than the American money market does, +and shall mean by it all loans of a really liquid character, made by +banks to merchants and others to pay for the purchase of goods in +anticipation of a resale within the term of the loan which will enable +the loan to be repaid at maturity. From this should be excluded, +however, loans made to speculators. With this liberal, and not very +precise, definition of commercial paper, we raise again the question as +to where it may be found in the items above given. + +Virtually all of it, I think, must be found in the item, "other loans +and discounts"--an item which, in all, is slightly less than 23% of +total banking assets.[520] But not all of this "other loans and +discounts" is commercial paper. Very much indeed represents loans of a +non-liquid character, regularly renewed, which manufacturers and others +have put, not into moveable goods, but into fixed forms of +capital-goods, as machinery, and even buildings. One case in New York, +which the writer is informed by a business man well acquainted with both +banking and business in many sections of the country is typical of many +cases, is as follows: a New York bank is at present lending to a small +manufacturer of automobile supplies about $30,000. Of this, about +$10,000 is liquid, periodically covered by "bills receivable," and if +the bills receivable should fail, in the period in question, to cover +the $10,000, the bank would insist on a reduction of the loan. The +remaining $20,000, however, is not liquid. It was spent for non-moveable +equipment; the bank expects to renew the notes for this loan +periodically, and is well aware that it could not force collection +without bringing the business to a close--or else forcing the factory to +get accommodation elsewhere. The $10,000 that is liquid is by no means +all spent for goods, but is spent, in part, for wages. _None_ of the +$10,000 is spent for goods which are to be resold without being +transformed by manufacture. None of the $30,000, therefore, is, in the +strict sense, "commercial paper." It is manufacturer's paper. Part of it +is virtually as liquid as commercial paper; two-thirds of it is not +liquid. + +A very large part indeed of bank-loans are of this character. A large +part of the loans made to farmers are in no sense liquid: when the loan +is made, for, say, six months,[521] it is perfectly understood by both +bank and borrower that a renewal will be asked for and granted. It is +impossible to say what fraction of this $4,821,000,000 of "other loans +and discounts" is really liquid commercial paper, or liquid paper of any +kind, in the sense that it can be automatically paid off at maturity. I +venture the statement with entire confidence, however, that the +proportion of liquid paper is not one-half of the amount. I should +question if more than one-fourth of it is truly liquid, in the sense in +which that term is commonly used: meaning that the loan is made to put +through a transaction which will be completed during the term of the +loan, and permit the loan automatically to be paid off. I do not mean by +this merely that the banks could not reduce this item by one-fourth +suddenly. Even in a market made up wholly of highly liquid paper, an +arbitrary refusal to renew one-fourth of the loans, with the effort to +reduce loans and discounts by one-fourth, would occasion great +embarrassment and even disaster. The test of liquidity here applied +relates to the items separately, on the assumption that other things are +not radically changed. Even in this sense, however, viewing each loan +transaction separately, it may well be questioned if the banks in the +United States could find among their "other loans and discounts" items +exceeding a fourth of the total (in value) which they could refuse to +renew, at least in large part, without disappointing reasonable +expectations, and embarrassing good business men.[522] + +Of this paper, not truly liquid, no doubt a good deal is advanced to +wholesale and retail merchants, and is, in this sense, commercial paper. +The terms, "liquid paper" and "commercial paper" by no means run on all +fours! As will later appear, the bulk of liquid banking assets are not +commercial paper at all. And only that part of a bank's loans to a +merchant may be called "liquid" which can be paid off by the merchant +without disappointing his reasonable expectations,--causing him to seek +other banking connections. + +There is, however, another item in which we may find some commercial +paper, and this is the item, "loans on other collateral security." This +has commonly been supposed to be virtually all stock exchange loans. +Thus, Conant[523] cites the growth in this item in New York as evidence +of the growth of loans on stocks and bonds. For New York, loans on +stocks and bonds do make up the great bulk of this item. Even in New +York, however, there are other factors in it, absolutely, even though +not relatively, important, and in the country outside, the other +elements are not at all negligible, even though for the outside country +the part secured by stocks and bonds is the major part, and even though +the growth of this item in our total banking assets is, in general, +fairly indicative of the growth of loans secured by stocks and bonds. +Figures for the other items are not available for State banks, trust +companies or savings and private banks. They are not till very recently +available for national banks. In 1915,[524] however, the Comptroller +separates the item, "loans on other collateral security," for national +banks, into two parts, (1) loans "secured by stocks and bonds" +($1,750,597,273), and (2) loans "secured by other personal securities, +including merchandise, warehouse receipts, etc." ($882,749,812). Is +there any commercial paper in this last, not inconsiderable, item? + +Let us locate the item, in the effort to find out. The percentage runs +highest in Chicago, where this class of collateral loan exceeds the +loans on stocks and bonds. The inference is strongly suggested, +therefore, that much of it, there, at least, represents advances to +live-stock, grain and produce traders and speculators on the Board of +Trade, at the stock yards, etc. The inference is strengthened by the +fact that St. Louis, where there is a good deal of grain and commodity +speculation, shows more than twice as much of this kind of paper as does +Boston, where this kind of speculation is unimportant--despite the fact +that Boston's aggregate collateral loans of all kinds greatly exceed +such loans in St. Louis. In New York, where there is a great deal of +coffee and cotton speculation, and some other commodity speculation, the +amount of this paper, though relatively small, is absolutely greater +than in any other city. No doubt, in New York, which is the country's +centre for foreign commerce, a fair amount of the paper secured by +"other personal securities, including merchandise, warehouse receipts, +etc.," is really commercial paper, representing advances to importers +and exporters--though the difficulties of giving this kind of security +where goods are in transit would prevent most of our foreign trade being +financed in this manner. The total of this kind of paper in New +York--all these figures are for national banks alone--was only 113 +millions on June 23, 1915.[525] It may be doubted if very much of this +paper, in the great cities, represents goods in transit. With the +caution that the view here expressed is based on inference, and not on +actual knowledge of what the large city banks are doing, the writer +concludes that probably the bulk of this paper, in large cities, +represents loans to speculators rather than to merchants. It is liquid, +but it is not commercial paper. + +What of such paper in the country districts? Nearly +one-half--$436,000,000 out of $882,000,000--of these national bank-loans +on "other personal security, including merchandise, warehouse receipts, +etc.," are in the country, outside the Reserve and Central Reserve +Cities. Much of it is in the South. Much of it in the grain and +live-stock producing regions. What do such loans mean?[526] Much of it +is loans to farmers and planters. In the South, much of it is on crop +liens. The loans on cotton warehouse receipts, at least in the country +parts of the South, are not as great as is commonly supposed. In the +North and West, there are a great mass of farmers' chattel mortgage +loans, including loans on horses, grain in cribs, hogs, sheep, cattle, +mules, etc. The use of this type of paper for financing the breeding and +feeding of live-stock, particularly hogs, cattle and sheep, is very +extensive. Virtually all loans to farmers and feeders for these purposes +are secured by such chattel mortgages. It seems improbable that a great +deal of this paper could represent ordinary commerce. Neither +wholesalers nor retailers can easily handle merchandise on which chattel +mortgages have been given. The usual method of granting credit to them +is to advance loans on one and two name paper, unsecured. Not many +loans to retailers and wholesalers will fall in the category under +discussion. + +To what extent are the loans of this type to farmers liquid? Well, the +crop lien loans in the South have a natural term, and, though commonly +longer loans than bankers have in mind when speaking of liquid paper, +are liquid in the sense that they are automatically paid off at +maturity. Loans on work-animals need not have a natural term. Loans on +animals being fed for the market have such a natural term, and are truly +liquid. Loans, however, on breeding animals are not thus liquid, such +loans are commonly regularly renewed at maturity, and the banks do not +count on them in emergencies. It is the opinion of Dr. J. E. Pope that +fully two-thirds of the aggregate loans on live-stock chattel mortgage +security are to breeders rather than to feeders, and hence are not +liquid. Of course, none of these loans are commercial paper. + +I conclude, therefore, that the thesis with which we started that the +overwhelming bulk of commercial paper is to be found in the item, "other +loans and discounts" is correct. I see no reason to suppose that an +analysis of the loans of State banks and trust companies would show a +different conclusion. We lack the figures for breaking up the collateral +loans of State banks and trust companies into the two classes, "secured +by stocks and bonds" and "secured by other personal securities, +including warehouse receipts, merchandise, etc." We have merely the +gross figures for collateral loans. As the State banks are in large +degree country banks, it is probable that the percentage of commodity +collateral as compared with stock exchange collateral for State banks +would be larger than for national banks. However, the total of +collateral loans for State banks is relatively small--559 millions, for +1909, as against "other loans and discounts" for State banks in that +year of 1,112 millions, and as against a total of collateral loans of +all banks reporting in that year of 3,975 millions. On the other hand, +the collateral loans of the trust companies are very large: 1,222 +millions for 1909, as against "other loans and discounts" for the trust +companies in the same year of 460 millions. As the trust companies are +chiefly city institutions, and as the concentration of trust company +loans and capital in New York City is relatively very great, it would +seem pretty clear that taking both State banks and trust companies into +account would substantially lessen the percentage of loans "secured by +other personal security, including merchandise, warehouse receipts, +etc.," to total collateral loans. As the amount of commercial paper in +this class of loans for national banks is probably small, it may be +expected to be still smaller in the aggregate of collateral loans. + +The following figures, for State and national banks, and trust +companies, only, will, in the light of the foregoing, give us basis for +some further conclusions regarding the character of banking assets in +the United States. As before, the year 1909 is chosen: + + (000,000 omitted)[527] + + _State _National _Trust _Aggre- + _Resources_ Banks_ Banks_ Companies_ gate_ + + Real estate loans 414 57 377 848 + Collateral loans 559 1,939 1,222 3,720 + All other loans 1,112 2,966 460 4,538 + U. S. bonds 5 740 3 748 + State, county and municipal + bonds 65 156 155 376 + Railway stocks and bonds 75 351 362 788 + Bonds of other public service + corporations 50 148 168 366 + Other bonds, stocks, etc 95 208 769 1,072 + Total of items here listed 2,375 6,565 3,516 12,456 + ----- ----- ----- ------ + Total Resources 3,338 9,368 4,068 16,774 + +This table makes clear that the figures for real estate loans given in +the table for all banks, a few pages preceding, were much too high. It +leaves the relations among the other items, however, not greatly +changed. "All other loans" increase from slightly less than 23% of total +assets to 27%. If we concede that one-half of the "all other loans" +represents liquid "commercial paper"--a very liberal estimate, as we +have previously concluded--we get about 13-1/2% of the assets of these +institutions in the form of "commercial paper," an increase over the +11-1/2% to be assigned on the basis of the other table. The figure is +the roughest sort of approximation. I attach little importance to the +exact percentage, and the argument which follows is not dependent on any +exact figure here. The proportion of collateral loans to total resources +is changed also, and even more: collateral loans are 18% of total bank +resources when all kinds of banks are included, and are over 22% of +total bank resources when only State and national banks and trust +companies are counted. If the foregoing is correct within very wide +limits of error as to the amount of commercial paper, collateral loans +very substantially exceed commercial paper. If all the "all other loans" +should be counted as commercial paper, collateral loans are still not +far behind them--22% as against 27-1/2%. + +What is the significance of this? We have seen that for national banks, +the great bulk (over 66%) of the collateral loans were secured by stocks +and bonds in June, 1915. We saw reasons for supposing that a higher +percentage of stock exchange collateral would be found when State banks +and trust companies are included. Suppose we assume that 75% of the +collateral loans of all three classes of institutions here in question +are based on stock exchange collateral.[528] This would mean 16-1/2% of +the total resources of these institutions in stock exchange loans--still +well above the 13-1/2% we have assigned to "commercial paper." In any +case, it is at least justifiable to contend that loans on stock exchange +collateral are as great in volume as commercial loans. I think that they +very substantially exceed them. But further, we have another large +percentage of bank resources invested in stock exchange securities +outright--chiefly in bonds. The aggregate for those investments in the +institutions under consideration is 3,250 millions. This is something +over 19% of the total assets of these institutions. Combining this with +the loans on stock exchange collateral, we get nearly 36% of bank and +trust company assets invested, directly or indirectly, in stock exchange +securities, as against an assumed 13-1/2% in commercial paper. Conceding +that all the "all other loans" are commercial loans, the stock exchange +assets still exceed them in the ratio of 36 to 27-1/2. + +In our second table, we have listed items which aggregate only 12,456 +millions of the total resources for these institutions of 16,774 +millions. The items listed, however, represent virtually all the credit +extended by banks to industry, commerce, agriculture, the stock market, +other speculation, and the State. The excluded items of main importance +are: Due from other banks and bankers, 2,302 millions; checks and other +cash items, 432 millions; and cash on hand, 1,411 millions--the three +items aggregating 4,146 millions, which virtually closes the gap. These +three items are of immense importance as making for liquidity in +banking assets, and as making possible extensions of credit to the +business world, but it is not proper to count them when an estimate of +the extent of bank-credits is in question. Our second table contains, +for the three classes of institutions, all the items properly counted +there, except overdrafts (small in amount) and one other big item which +does not get into bank statements at all, namely, _overcertifications_ +and "_morning loans_." Of this last item, more later. We may, then, +recalculate our percentages on the basis of the credit extended by the +three classes of institutions, instead of on the basis of total +resources. On this basis, the percentages are: + + Real estate loans, 7.4%; + + Collateral loans, 30%, of which we assign to stock exchange + collateral, 22-1/2%, and to other collateral, 7-1/2%; + + All other loans, 36.4%, of which we assign to "Commercial + paper" 18.2%; + + Total stocks and bonds, 26%. + +Adding the percentages for stock exchange collateral loans and for +stocks and bonds owned, we get 48-1/2% of all extensions of bank-credit +for these three classes of institutions in the form of credits extended +to the security market. If everything else except the real estate loans +should be counted as "commercial loans" the stock exchange credit would +still exceed the commercial credit. If my estimate of 18.2% of +bank-credit based on commercial paper is high enough,[529] the banks and +trust companies have extended over two and a half times as much credit, +at a given time, to the security market as they have to commerce. This +on the face of the record. But there is, as above indicated, a further +item which does not get into the record, namely, overcertifications and +"morning loans." Every day in the great speculative centres, and very +especially in Wall Street, enormous advances are made to brokers, which +are canceled during the day, but which, during their short life, are a +real addition to bank-credit. To attempt to estimate this with any +accuracy is hopeless, but the total on any ordinary day is enormous, and +most of it is extended in connection with stock market transactions. + +A final comparison,[530] which will conclude this perhaps too wearisome +analysis of these figures, will consider the loans alone, neglecting the +securities owned: + + Of total loans: + + Real estate loans, 9.3%; + + Collateral loans, 40.8%, of which we assign to stock exchange + collateral, 30.6%, and to other collateral, 10.2%; + + All other loans, 49.6%, of which we assign to "Commercial + paper," 24.8%. + +The development of bank loans on stock exchange collateral is a +remarkable feature of the three or four decades preceding 1909. The +following figures, of national bank loans in New York City,[531] +illustrate the tendency: + + (000,000 omitted) + + _Loans on _Advances on + _Date_ Commercial Paper_[532] Securities_ + + 1886 146 107 + 1890 151 145 + 1892 160 183 + 1894 168 192 + 1896 151 162 + 1898 181 260 + 1900 185 384 + 1902 210 396 + 1903 239 391 + 1904 268 538 + +The tendency is not peculiar to America, however. The following table +gives a classification of the loans and discounts of all the great +European banks[533] in selected years from 1875 to 1903: + + (Figures in francs, 000,000 omitted) + + _Note _Commercial _Advances on + _Date_ Circulation_ Loans_ Securities_ + 1875 9,699 4,027 828 + 1880 10,482 3,384 1,112 + 1885 11,662 4,050 1,231 + 1890 13,194 5,192 1,549 + 1895 15,896 5,328 3,669 + 1899 14,992 8,352 4,037 + 1900 15,906 8,514 4,171 + 1902 16,215 6,939 4,178 + 1903 16,539 6,147 4,129 + +We conclude, therefore, that the great bulk of banking credit in the +United States, even of "commercial banks," is not commercial credit. +Much of it, in the smaller places, especially, represents in fact, +whatever the form, long time advances to agriculture and industry. Most +of it, in the great cities, and to a large extent in even the smaller +places, represents advances to the permanent financing of corporate +industry. Excluding real estate loans, more than half of bank-credit +represents either ownership of bonds (with some stocks) or else advances +on stocks and bonds. Another important part of bank-credit, which I +shall not even attempt to measure, is employed in financing commodity +speculation. + +It is worth while to compare our figures concerning bank loans with +Kinley's figures, which we have previously considered, for deposits made +on March 16 of 1909, the year we have chosen for the bank loans figures. +It is important to remember that "deposits," as used by Kinley in this +investigation, does not mean what the term means in a bank balance +sheet. Kinley's figures relate to the actual items deposited on the day +in question, and not to the net balance after deposits and withdrawals +have been compared when the bank has closed for the day. A large deposit +in the balance sheet sense might show no "deposits" in Kinley's sense, +in a given day; while enormous "deposits" in Kinley's sense might be so +offset by incoming checks that virtually nothing is left on the balance +sheet at the end of the day, for a given depositor. Kinley's figures +thus give us a means of getting at the degree of _activity_ of different +classes of deposits in the balance sheet sense, and so, indirectly, of +different classes of _loans_. + +Loans and deposits (in the balance sheet sense) are, as we know, closely +correlated. This is true for banks in the aggregate, and for banks +individually at a moment of time. It is not generally true of a given +individual deposit account at a moment of time, but through a period of +time, for business deposits, it tends to be true that the items +deposited offset the amounts borrowed.[534] If the items deposited are +numerous, if the depositor has an "active" deposit account, receiving a +large flow of banking funds, as compared with his net deposit balances, +we may infer that his loans are also active, that he pays off loans +frequently, that his paper, in the assets of the bank, is "liquid." + +I need not give the details of Kinley's figures again, as they have been +elaborately analyzed in connection with the estimate of the "volume of +trade."[535] The figures show that retail and wholesale deposits between +them make up about 25% of the total deposits. This would serve to show +that "commercial paper," which we have allowed to be about 24.8 of total +loans, is slightly more active (and hence "liquid") than the average of +loans.[536] It will also suggest, however, that our figure for +"commercial paper," truly liquid, is too high, since we should expect +this kind of paper to be more active than the average--unless, indeed, +stock exchange collateral loans are so exceedingly active as to make a +tremendously high average. I refrain from trying to get a definite +answer on this point, since there are many indeterminate elements: among +others, uncertainty as to the extent to which wholesale deposits and +retail deposits _include_ all commercial deposits, and uncertainty as +to the extent to which they _exclude_ manufacturer's deposits. The great +bulk of Kinley's deposits, however, fall into the "all other" class, and +the great bulk of the "all other deposits" are located in the great +financial and speculative centres, particularly New York. We have +concluded that they represent chiefly (a) transactions in securities; +(b) other speculation; (c) loan and other financial transactions, +particularly the shifting of call loans on stock exchange collateral. It +is, then, the deposits of those connected with the great financial and +speculative markets, particularly the stock market, whose deposits are +most active, and whose loans are most liquid. Stock market collateral +loans thus constitute the most perfectly satisfactory sort of bank loan, +from the standpoint of liquidity. Though such loans do not make up the +bulk of bank loans (we have concluded that they constitute 30.6% of the +loans of State and national banks and trust companies in 1909), they do +account for the bulk of banking activity, and supply the greatest part +of the liquidity of total bank loans. + +When we consider further the item of securities (chiefly bonds) in +banking assets, we find another highly important source of liquidity. +The sales of bonds in the great banking centres are enormous. The +figures of bond sales on the exchanges do not begin to tell the story. +One big bank in New York in 1911 sold more than half as many bonds as +were sold in that year on the floor of the Stock Exchange.[537] It has +been frequently stated that ten bonds, of those listed on the Exchange +are sold over the counter for one on the floor. This is truer of Boston +than New York. The "outside market" for unlisted bonds is a very +important matter. Dealings among banks in these items and in foreign +exchange are exceedingly important. This is especially true of the +business of the great private bankers, as Morgan, Kuhn-Loeb and others. +Much of this does not appear in Kinley's figures, since neither the +deposits of the great private banks in other banks, nor the deposits +made in the private banks themselves (so far as New York City is +concerned) figure in his totals.[538] Had they been included, the +percentage of the "all other deposits" would have grown, and we should +have had still more impressive evidence of the fact that modern banking +in the United States is largely bound up with the security market, and +that modern bank-credit gets its liquidity chiefly from that source. + +The story is even more impressively told by the figures for bank +clearings, which include the transactions between banks, and the +transactions of the private bankers. In New York, in 1909, total +clearings for the year were 104 billions, as against 62 billions for the +whole country outside New York.[539] That bank clearings are closely +correlated with stock exchange transactions, has been demonstrated fully +by N. J. Silberling, who has shown the following correlations: New York +Stock Exchange share sales with New York clearings, r = .718; total +clearings for the country with New York share sales, r = .607; total +clearings for the country with railway gross receipts (as representative +of ordinary trade), r = .356.[540] The active deposits and the liquid +loans are chiefly connected with activities in finance and speculation. + +Now two important practical conclusions are suggested by this analysis. +The first is that the complaint of many farmers, merchants, politicians, +and even scientific writers that too much money and bank-credit are at +the disposal of Wall Street and other speculators rests on a +misunderstanding of causal relations. Wall Street does not, by using a +large amount of bank-credit, take just that much away from ordinary +business. Rather, it increases the amount available for ordinary +business! Wall Street, and the other financial and speculative centres, +supply the _liquidity_ for bank assets, and so make possible loans on +non-liquid paper. Banks do not need to have all their assets liquid. If +they did, American banks would have long since gone under! The foregoing +discussion of loans to farmers, and manufacturers and even merchants +should have made that clear. But banks do need a substantial margin of +liquidity, to protect the rest. They get it from stock exchange +collateral loans, and from ownership of listed and easily marketable +bonds, primarily. They get part of it from true commercial paper. Thus, +the director of a country bank in Iowa told the writer that banks in his +section--where banks owned in large measure by farmers, and dealing +largely with farmers, are very numerous and important--make a regular +practice of buying, through brokers, a considerable amount of notes of +outside merchants. They do this to protect themselves. Their other +loans, to farmers, while good, are slow. If pressed themselves, they +cannot press their depositors. These notes bought through note-brokers, +however, are impersonal. They can refuse to renew them. They can sell +them again. They thus buttress the rest of their assets. They can thus +lend more, rather than less, to local customers. They can safely get +along with much smaller cash reserves. Similarly with the practice of +country banks of sending a large part of their cash to Wall Street banks +to be lent on call, for which the country banks get, say, 2% from the +Wall Street banks. Their country customers would pay 6% or more for +that money in some cases, but the banks dare not tie up more of their +assets in non-liquid local paper. They lend more, rather than less, at +home, because they send part away. Wall Street is not "draining our +commerce of its life blood"![541] Wall Street is rather preventing that +life blood from coagulating! + +A second important practical conclusion relates to the provision in the +Federal Reserve Act which forbids Federal Reserve Banks to rediscount +stock exchange paper. This provision was intended to keep funds from +being diverted from commerce to stock speculation, and doubtless met the +approval of many very good students of the subject. If the foregoing be +true, however, that provision is a mistake. It is a mistake, first, +because it will lessen, rather than increase, the power of the Reserve +Banks to provide relief to commerce through aiding in making bank assets +liquid _via_ the stock market. It will limit the liquid assets of the +Federal Reserve Banks in too great a degree to gold. It is a mistake, in +the second place, because it prevents the Reserve Banks, particularly in +New York and Boston, from making satisfactory profits--which is one +important purpose of a bank! Even more important, however, is the third +objection: it prevents, in large degree, the Federal Reserve Banks from +being effective weapons against the "Money Trust." How far we have a +"Money Trust" need not be here argued. The Pujo Committee, relying in +considerable degree on admissions of prominent financiers that +"concentration had gone far enough," and on the inability of Mr. Baker +to find more than one issue of securities of over $10,000,000 within ten +years, without the coöperation or participation of one of the members of +a small group, concluded that we have a "Money Trust" in the sense that +there is "an established and well-defined identity and community of +interests between a few leaders of finance ... which has resulted in a +vast and growing concentration of control of money and credit in the +hands of a comparatively few men."[542] How far this conclusion is +justified is, of course, a matter that would require elaborate +discussion. There seems to be evidence that there is, since the death of +the elder Morgan, a decided loosening of ties. One feels the need, +moreover, of discounting very considerably many of the conclusions of +the Pujo Committee. The present writer feels that the case has been +made, however, that there has been, and probably continues, a much +greater concentration of such control than is desirable. Whether or not +there is at present such a "Money Trust," it seems pretty clear that +temporary, if not permanent, alignments, may give effective monopoly +control when the issue of very big blocks of securities is involved. For +present purposes, however, it is enough to note that _if_ there is, or +should come to be, a "Money Trust," it is a trust concerned with +_financing industry, through handling security issues_, and not a trust +_in the granting of ordinary commercial credit._[543] If, therefore, the +Federal Reserve Banks are to compete with it, and break its monopoly, +they must do it by entering the market with funds for the financing of +corporate industry. Power to rediscount commercial paper seems a feeble +and hardly relevant weapon against a combination concerned with +purchasing securities, and making collateral loans! No doubt, this power +is worth something. If an independent investment banker wishes to +compete with a "Money Trust" in financing a new enterprise, he can go to +his commercial banker, and offer collateral security for a loan; if the +commercial banker wishes to aid him, but is short of lending power, he +may, if he has plenty of commercial paper available for rediscount, +rediscount it with the Federal Reserve Bank, and so get the additional +funds. But a New York bank, or trust company, with the bulk of its +assets in stock exchange investments, may well not have enough +commercial paper eligible for rediscount, and the Federal Reserve Bank +could help very much more effectively if it could take collateral loans +directly. A fourth, and even more important objection to the restriction +on stock exchange collateral loans for Federal Reserve Banks relates to +the power of these banks to aid in a crisis. Crises first hit the stock +market. Financial panics are most acute there. The need for immediate +and drastic relief is greatest there. If stock exchange loans lose their +liquidity, what of the rest of bank loans? Power to lend on stock +exchange collateral, in the hands of the Federal Reserve Banks, may well +prove, in crises, an essential, if we wish to make our system definitely +"panic proof."[544] + +And now for a vital theoretical conclusion from this lengthy analysis of +bank loans. For the quantity theory, and the "equation of exchange," all +exchanges stand on a par. If one exchange takes place, that lessens the +money and credit available for another exchange. The more exchanges +there are, the less money and credit there are per exchange, and the +lower prices must be, as a consequence. Nothing could be more false. +Exchanges are not on a par.[545] Some classes of exchanges increase, +rather than decrease the funds available for handling others. The +activity of the speculative markets, making loans fluid, enormously +increases the lending power of the banks for all purposes. Exchanges of +securities, especially, instead of lowering prices, make it easier for +prices to rise.[546] The years of extraordinary stock sales have always +been "bull" years. There have been big "bear" days,[547] but never big +bear years, in the record of New York Stock Exchange share sales. The +selling and reselling of speculative goods of securities, and of notes +and bills are especially important as making it easier for banks to +expand loans. To list all manner of items, as Professor Fisher +does,[548] "real estate, commodities, stocks, bonds, mortgages, private +notes, time bills of exchange, rented real estate, rented commodities, +hired workers," and count them all as "actual sales," all part of the +"goods"[549] which make up the "volume of trade," is to put the theory +utterly beyond the pale. Seasonal calls on an inelastic money supply for +actual cash to move crops and pay agricultural wages may make a real +difference in the value of money; scarcity of money of the right +denominations for retail trade may give an agio to such money,[550] but +the money and credit used by speculators, bill brokers, dealers in +foreign exchange, investment bankers, etc., increases, rather than +decreases, the funds available for ordinary industry and commerce. + +I have made clear the distinction between the direct and indirect +financing of industry by banks. Great banks in Continental Europe often +_buy_ the stocks of new corporations, hold them permanently, put bank +officers on the boards of directors, and supervise closely the +operations of the companies. In America, while officers of +commercial[551] banks often are members of boards of directors of the +companies which borrow heavily from the banks, the practice is to make +short-time loans to such companies (in form, if not in fact), and to +lend on their securities, rather than to buy them. Our banks own +securities in enormous amount, but they are chiefly seasoned bonds, +rather than stocks of new or even well-proved, enterprises. + +It is commonly supposed, too, that collateral loans are chiefly or +almost wholly made to speculators, who buy securities in the expectation +of holding them only till investors take them off their hands, and that +investors buy them, not with bank-credit derived from loans, but with +money or bank-credit which they accumulate by saving out of current +income. It is particularly true of the higher grade securities, which +savings banks and insurance companies can buy, that this is the case. +The bank-credit thus serves for temporary, rather than for permanent +financing, to the extent that this is true. I think, however, that the +extent to which bank-credit serves for permanently financing industry is +underrated. A good many investors have learned that the short-time +money-rates are, on the long time average, lower than the yield on +long-time securities.[552] They have learned, too, that high-yield +securities--securities high in yield as compared with the long-time +average of money-rates--can be obtained which can safely be carried on +margins of thirty, forty and fifty points, without danger that even such +catastrophes as the slump in security prices at the outbreak of the War +will wipe the margins out. The old distinction between investors and +speculators, the former those who buy for the yield, and the latter +those who buy for an anticipated rise in capital value, no longer +corresponds to the distinction between those who buy outright and those +who buy on a margin. The investor, buying a 6 or 7% preferred stock, +carrying it on a forty point margin, with money from his bank or broker +at 4 or 5%, is making 6 or 7% on his own forty dollars, and is making +the difference between 6 or 7% and 4 or 5% on the sixty dollars lent him +by his banker or broker. He substantially increases his yield thereby, +and his risks, if he chooses his stocks carefully, and scatters them +among a number of issues, are not great. For the banker or broker, such +a loan is perfectly satisfactory. The margin of security is wider than +that demanded on more speculative securities. Such a borrower will +receive consideration when more speculative loans are being called, or +not renewed. The investor of this type is, in effect, engaging in a form +of banking business. He is lending to the corporation funds which he has +borrowed from others; he has put up his own capital for the same purpose +that the bank uses its capital--to supply a margin of safety to those +who have taken his short-term promises to pay. Like the bank, too, he +converts rights to payments at a later date into rights to payment at an +earlier date. He is one of the links in the chain whereby the wealth of +low saleability employed in industry becomes distilled and refined till +it enters the money market. His profits come in the difference in the +yield as between more saleable and less saleable forms of rights. + +The extent of this practice cannot be stated, so far as any data to +which the present writer has access are concerned. The writer has met +the practice in a good many cases. One brokerage house, with whose +operations the writer has considerable acquaintance, makes a practice of +advising its more conservative customers to do this. A good many +brokerage houses sell investment securities on the "instalment plan," +which often means, in practice, that the initial margin put up by the +investor is his only payment, and that the security is gradually paid +for by letting the yield increase the margin. During the extremely easy +money of the present War period, occasional reference has been made in +the financial papers to the practice of buying even the highest grade +bonds on this basis--the yield of the bonds being very substantially +higher than the money-rates, giving a comfortable profit to those who +hold the bonds on a margin. + +That the practice is not wider spread is due primarily, probably, to the +temperamental qualities required. The investor, proper, is commonly a +very conservative person, who has an unreasoning distrust of +speculation, and to whom the word, "margin," necessarily suggests +speculation. That buying a stock on a margin is the same sort of thing +as buying the equity in a mortgaged farm, does not occur to him. On the +other hand, the man who knows the market well enough to be willing to +deal on margins, frequently is not content with the slow process of +accumulation which comes from annual yields, and prefers to take larger +chances in speculation on capital values. But there is an intermediate +class, who buy investment securities, with narrow range of fluctuation +in capital values, for the sake of the yield, and who buy them on +margins, margins ample to enable them to sleep at night, and to neglect +the daily market reports. I think that there are indications that this +class is growing larger, and more important. Doubtless much more +important than individual "bankers" of this sort, however, is the +enormous number of houses dealing in securities, "wholesalers" and +"retailers," who find profit on their "wares" even while on their +"shelves," through the differential between the yield and the charge +made by commercial banks on collateral loans. A very large percentage of +collateral loans is made to institutions of this type. As this practice +becomes more important, the result must be to widen the money market, to +increase the proportion of banking capital that goes permanently into +financing industry, and to reduce the difference in yield between +short-time paper and long-time securities--in other words, to bring the +"money-rates" closer and closer to the long-time interest rates. + +This would have seemed very strange and weird to Adam Smith. It means, +in effect, that the bulk of our banking credit is, directly or +indirectly, financing our industry rather than our commerce. Adam Smith +thought that a bank could safely lend to its customers only so much as +they would otherwise keep by them in the form of money. Perhaps this +notion, as growing out of some speculations regarding the general theory +of money, should not be taken as the statement of Smith's practical +attitude on the matter, but that practical attitude, as clearly +expressed in the paragraph[553] following, is that a bank can afford to +lend only for mercantile operations that are carried through in a very +moderate time, that the bank can afford to supply only the minor part of +the circulating capital, and no part of the fixed capital, of a +merchant, or manufacturer, no part of his forge and smelting house, etc. +Such loans lack the liquidity which the bank must insist upon. Only +those persons who have withdrawn from active business, and are content +with the income upon their capital, can afford to lend for such +purposes. The theory is sound, on the basis of the facts as Smith knew +them. But modern corporate organization and modern stock markets have +changed all that. Anything that is highly saleable can come into the +money market, and the modern corporation organization of business, +coupled with organized stock exchanges and a large and active body of +speculators, has made the forge and the smelting house as saleable as +the finished product. + +This is not to accept Schumpeter's doctrine,[554] so far as the United +States are concerned, that it is primarily the bankers, the +manufacturers of bank-credit, who make the decisions that turn industry +from old to new lines. They do not, on the whole. In Continental Europe, +particularly Germany, they do to a much greater extent. Criticism has +been made of our American commercial bankers, as contrasted with German +bankers, that the former are parasites, who insist on sure things, and +refuse to take chances with other business men in the development of +industry. To the present writer, our banking system seems to be rather a +more developed system than that of Germany, in that the "division of +labor" has gone further with us, and risk-bearing and the manufacturing +of bank-credit have been more sharply differentiated. We have bankers +enough who are "risk-bearers." But they are, on the whole, "private +bankers," "investment bankers," and the like, who do not manufacture a +great deal of deposit credit, but rather borrow heavily from the +commercial banks, which are the great manufacturers of bank-credit. +Under our system, the decisions which divert industry from old to new +lines are more democratically made, by speculators and investors under +the leadership of private bankers, and sometimes without that +leadership. These constitute the important intermediary which transforms +stock exchange securities into the basis of bank-loans. The commercial +banker buys, in general, not the stocks, but the note of the private +banker, broker, speculator, or investor, with the stocks as collateral. +If investment bankers, speculators and investors decide to support old +ways of doing things, the banks lend on the securities of the old kinds +of businesses; if investment bankers, speculators and investors turn to +new things, the commercial banks follow suit. Commercial banks can and +do discourage certain types of enterprises by refusing loans with their +securities as collateral, or by requiring very heavy margins with such +loans, but even these may be developed, and are with us on a large scale +developed, on banking credit, advanced by the speculators and private +bankers who borrowed it from the commercial banks with other securities +as collateral. The commercial banks of the United States may to a very +considerable degree check dynamic tendencies, but in general, they do +not lead and direct them. Bank-credit, directed by others than +commercial bankers, does, however, enormously facilitate both the +starting of new enterprises and social readjustment to them. + +How far can the total wealth of the country, agricultural as well as +industrial, be brought into the circle of the money market? The full +answer to the question would go far beyond the limits of this book. If +agriculture can be brought under the control of large corporations, +there is little reason for supposing that it, too, might not come in. +There are some peculiarities of agriculture, special dangers of drought +and flood, dangers of over-production and low prices, wide seasonal +fluctuations in conditions, which make it hard to standardize in any +case. But mining and even the manufacturing of such things as primary +steel products have wide variations in prosperity too. So long, however, +as agriculture remains a matter of families on a homestead--and for +social and political reasons, we may hope that this will always be the +case--it is difficult to bring it in. Bonds of agricultural associations +or of agricultural banks have had limited sale on the bourses of Europe. +The present writer, for example, found it impossible to find in four +great libraries in New York and Boston any quotation of the bonds of the +_Bayerische Landwirtschaftsbank_. Apparently, in general, such +securities have not high saleability. While this remains true, +agriculture may expect to remain under a handicap of higher interest +rates than industry and commerce. + +If, however, all forms of wealth could be made equally saleable, we +should find interest rates rising for those loans and securities which +now have the highest saleability. They would lose the peculiarity which +now enables them to perform a service as bearer of options. Money-rates +and long-time rates of interest would tend to come together. Long-time +rates on formerly unsaleable loans would fall, and rates on highly +saleable loans would rise. The present low rates in the "money market" +grow out of _differential_ advantages. + +We turn now to the third important aspect of the technique of banking, +namely, the matter of cash reserves. First I would point out that this +is merely a part of the more general problem of liquid assets. The +difference between cash and liquid paper is a matter of degree. There is +large possibility of substitution of the one for the other, as it +becomes more profitable to use one or the other. When money-rates are +low, it may well be worth while to carry large reserves; when +money-rates are higher, the gains to be made by substituting paper for +cash in the bank's assets are much greater. I have pointed out the use +which great European banks, notably the Austro-Hungarian Bank, make of +foreign bills of exchange as "reserve," selling bills when money is +"easy," and the yield on bills is small, buying bills when money is +"tight," and the yield on bills is large.[555] The great Joint Stock +Banks of England, the chief sources of bank-credit in the great banking +country of the world, also make use chiefly of deposits with the Bank of +England as their "reserves." Some cash they keep, but it is "till +money," rather than reserve. They carry, also, "secondary reserves" in +highly liquid paper, stock exchange loans and commercial bills. The +differences are differences in degree. The Bank of England does keep a +large reserve in cash (including notes of the Issue Department and gold +bullion) but it denies that it has any definite ratio in mind,[556] and +it protects its reserves, when they are low, not by ceasing to loan, but +by raising its discount-rate. The whole thing is highly flexible. + +This is, in general, true throughout the world,[557] where banking is +highly developed. A country which has expanding business, based on +rising values of goods and rising capital values of anticipated incomes, +which in turn grow out of increasing business confidence, etc., and out +of the development of new enterprises which make readjustment necessary, +expands its bank-credit to meet the situation. Expanding bank-credits in +time grow so large that bankers feel larger cash reserves to be +desirable. Their reserves may be also, in some measure, drawn upon by +the growing retail trade and wage-payments, which call for more money +in circulation. They meet the situation by raising money-rates. This +tends to prevent the exportation of gold, and tends to encourage the +importation of gold, which finds its way into bank reserves. Banks may +even borrow directly from banks in other countries, to get the gold they +need, or to prevent the exportation of the gold they have. The higher +money-rates, also, tend to check marginal borrowing--the borrowing by +those who see only very small profits to be made by the use of the +bank-credit they borrow. If the rising values of goods, however, and the +profits to be made by effecting exchanges, speculative and other, are +large, the volume of bank-credit will, none the less, grow. If the tide +of rising business confidence is strong, the banks will be disposed to +accept securities and rights as collateral which they would distrust at +other times. A very big difference indeed may appear between bank +reserves in active times and bank reserves in dull times. The banks need +less reserves in proportion to deposits in active times, because the +very activity itself increases the liquidity, the saleability, of their +paper assets, and so makes actual cash less necessary. Even in this +country, the practice of counting deposits in other banks as reserve is +well developed. This is not only true of country banks, or banks outside +the reserve cities. It has been, in considerable degree, the practice of +the big trust companies in New York City. It is the practice of private +bankers connected with the stock exchanges, and the practice of brokers, +who are, for many purposes, bankers, especially those who allow their +customers to check on their accounts. Such houses may carry no cash at +all. One, with whose workings the writer is somewhat familiar, makes the +rule--"We pay by check and receive only checks." None the less, this +house allows its customers to check upon it, and checks drawn on it +perform all the functions of checks drawn on banks which keep a cash +reserve. Of course, our new Federal Reserve system is built, in part, on +the principle of collecting reserves in central reservoirs, and our +banks will doubtless increase the practice of counting deposits with +other banks as reserve.[558] They will feel the need for less reserves, +also, with a wider rediscount market. + +_Within a given country_, I think that we may safely generalize the +doctrine that the causal relation between reserves and deposits is +exactly the reverse of that asserted by the quantity theory, within very +wide limits indeed. That is to say, increasing reserves are a _result_, +and not a _cause_, of increasing loans and deposits. We shall further +hold that the relation between them instead of being definite, is highly +flexible. This is not to assert that reserves may not increase without a +prior increase in loans and deposits. That has happened in the United +States during the present War. It does mean, however, that increasing +loans and deposits will pull gold into a country, and that increasing +reserves do not force increasing deposits and loans.[559] If a country's +business is growing, if that business is soundly based, so that +expectations are being met, obligations being paid out of the income +which arrives, on schedule time, to meet anticipations, there need be no +effective check to the amount of gold that will come into the country to +serve as reserves, within limits that are rarely reached. It is +miscalculation, maladjustment of costs and prices in particular +enterprises, failure of "interstitial adjustments," especially failure +of particular crucial links in the business chain, as the businesses +engaged in producing iron and steel, to respond to the needs of other +expanding businesses, that check movements of expansion in business, not +inadequacies of bank reserves.[560] As long as only wise plans are made, +as long as they meet no mishaps, as long as the carrying out of the new +plans does not itself so change the facts on which the calculations of +business men have been based as to cut under anticipated profits, so +long may business, within a given country, expand without danger from +inadequate reserves. Of course, if the whole world is simultaneously +expanding, the competition for gold in the international money markets +may be so severe that all may be hampered. + +That reserves will increase, as expanding credit, due to increasing +business or rising prices, requires increased reserves, can hardly be +disputed, I think, if we look at a country of small size, or (what is +the same thing from the angle of economic analysis, so far as the +present problem is concerned) if we take a particular part of a country. +Seasonal movements of cash for reserves in this country have been +obviously determined by the movements of credit, rather than the +reverse. Expanding business at crop moving seasons, requiring advances +of credit by country banks, and an unusual drain on the cash resources +of the country banks, has regularly meant that the country banks draw +cash from the New York banks. When the need for such cash in the country +banks passes, when they can no longer employ it to advantage at home, +they send it back to New York. New York, to meet the emergency caused by +the withdrawal of cash, draws to a considerable extent on Europe for +gold. It is not as easy for New York to get gold quickly from Europe as +it is for France to get gold in an emergency from England. More time is +required. Inelasticity, too, in the forms of currency most needed for +small transactions, has made very real difficulties for us. But that, +within the country, the sections whose business and credit were +expanding take cash reserves from those sections where credit is less +urgently demanded, needs no debating. This is seasonal. But the same +thing is true in the long run. As business and bank-credit have +expanded, year by year, in Oklahoma, Oklahoma's cash reserves have +grown. Bank-credit in a country cannot go on indefinitely mounting, if +bankers are making unsound loans, if the values on which the loans rest +are based on vain imaginings, if anticipated profits are not realized. +But if a country have rich resources and intelligent entrepreneurs, with +sagacious bankers who can discriminate between sound and unsound +business, it may, within very wide limits indeed, expand its bank-credit +without check from inadequate reserves, as its business expands, and as +prices, particularly prices of lands and securities, rise.[561] + +If the country in question be a very large country, however,--large in +the sense that its business and volume of bank-credit are very large, +and particularly in the sense that bankers' assets are of such character +that a large volume of reserves is desirable--restraints on the process +of expansion may come. Reserves will come in, but the resistance in +stiffer money-rates will be felt. Bankers in other countries will +compete with the bankers in the country in question for reserves. Rising +money-rates will put an end to many marginal exchanges. They will lessen +the saleability of many rights which might otherwise be available as +banking collateral. The extension of bank-credit will feel a drag. There +is large flexibility here. But, in a long run period of many years, the +volume of gold in the world will impose a maximum limit upon the +possibility of expansion of bank-credit in the world as a whole. This +limit is doubtless never reached. Within the limit, the variations in +the volume of the world's credit are primarily determined by the other +concrete factors we have been discussing. Proportionality between the +world's gold and the world's volume of credit does not at all obtain. +Under certain conditions, much higher proportions of reserves to +bank-credit will be found in a given country than at other times, and +the same will be true in the world at large. + +I would refer again to the discussion by J. M. Keynes, quoted in Part +II.[562] Reserves have absorbed enormous quantities of gold, easily +obtained as a consequence of abundant gold production, in the past +fifteen years. Proportions of gold reserves to bank-credit have grown. +In the preceding period, when gold production went on less rapidly than +business development, percentages of reserves were lower. Most bankers +feel better with large reserves. When they can get gold, they prefer +gold to other substitutes. When they cannot easily get gold, they use +other substitutes, of the various kinds of paper, particularly, which +have been described. Gold differs from other things, in bankers' assets, +in degree, rather than in kind. Instead, therefore, of the law of the +proportionality of reserves to volume of bank-credit, I venture the +generalization[563] that, as gold production increases rapidly, the +tendency is for the proportion of gold reserves to volume of bank-credit +to rise; with diminished gold production, the tendency is for the +proportion of reserves to fall, assuming that the factors other than +volume of gold production which make for expansion of business maintain +themselves. + +Increasing volume of gold tends to increase the volume of trade. But +there are other causes for the increase or decrease of trade as well. +These causes, working in harmony with rapidly expanding volume of gold, +lead to a very rapid growth of trade.[564] Working in the face of a drag +from less rapidly growing gold supply, they strain the possibilities of +bank-credit expansion. Various substitutes for gold in bank reserves are +employed. Substitutes in the form of other forms of credit are employed. +Barter is resorted to increasingly. Methods of employing other things +than gold in the retail trade of a country are resorted to. +"Gold-exchange" standards are devised. Countries "wait their turns " to +come on the gold standard. Coöperation, not only within countries, but +among countries, seeks to economize the scanty stock of the precious +metal. Very large slack is thus revealed. But the expansion of business +is checked, the volume of business confidence is reduced, the values of +future incomes in enterprises is lowered, production is checked, and +prices are reduced, (a) because the value of money rises; and (b) +because the values of goods and income-bearers is reduced. The exchange +side of production is hampered. Substitutes for gold, through increased +activities of bankers and other agents of exchange, are costly. Greater +tolls on values are taken by those who handle the mechanism of exchange. +It does make a difference whether or not the world's gold is abundant! +But the difference is not made solely, or even mainly, in the +price-level.[565] + +The reserve function of money is essentially a _dynamic_ function. The +reserve function is merely a phase of the bearer of options +function.[566] It is the practice of quantity theorists to speak of +"normal" ratios between reserves and deposits (or reserves and demand +liabilities), and to speak of the "static" laws governing this relation. +This in true of Kemmerer, of Fisher, of A. P. Andrew, and, in general, +of contemporary quantity theorists. Kemmerer very explicitly puts it as +a matter of static theory, "If we divide the money of the country into +two parts; one, that used directly in daily cash transactions, and the +other, that kept in banks as reserves, it may be said that, _under +perfectly static conditions_ [italics mine], the proportion of the total +represented by each of these parts would be constant. Each banker would +find from experience what proportion of reserve to liabilities it was +advisable for him to maintain, and would order his business, as far as +possible, so that his reserve would neither exceed nor fall below that +most desirable proportion."[567] Kemmerer quotes the following passage +from A. P. Andrew: "In the long run, _as apart from cyclic +oscillations_, the quantity of bank-credit is governed by the quantity +of money."[568] Fisher's view we have considered at length in Part II. +It is essentially the same. He is working with the statics of the +problem of money and credit. These different writers differ greatly in +the extent to which they would insist on the validity of their static +tendency in real life. Professor Fisher, as we have seen, is exceedingly +uncompromising, holding tenaciously to his principle as subject only to +slight modification during transition periods. Professor Kemmerer, in +the chapter from which the quotation just given is taken, gives an +important realistic analysis of dynamic conditions and makes liberal +concessions to the view that the ratio is no constant in real life.[569] +Professor Taussig, whose view was summarized at length in chapter IX, +finds, in real life, so many exceptions to the doctrine of +proportionality of reserves and deposits that he virtually abandons that +doctrine. What I wish to insist on here, however, is that there are no +static laws _possible_ in this connection. The reserve function is a +dynamic function. The theory of reserves must rest in an analysis of +friction, of transitions, of dynamic uncertainty and dynamic change. It +is a part of the general theory of liquidity of bank assets, of +saleability of rights, and the like. If one can find a "normal" amount +of dynamic change, a "normal" amount of uncertainty, a norm for the +coming of technical inventions, a normal prospect of war, a normal rate +of gold production, a normal rate of growth for population, a normal +amount of Jew-baiting in Russia, with a norm for migration, and if one +can hold these norms, and a multitude of similar norms, in fixed +relation to one another, one might have justification for speaking of a +"normal ratio" of bank reserves to bank demand liabilities! + +Apart from dynamic changes, from frictional elements which create +uncertainties, in general, apart from uncertainty and irregularity and +lack of "normality," there would be no occasion for bank reserves at +all! To the extent that static conditions are realized, bank cash +reserves may be, and _are_, dispensed with. It is well known that +England gets along with surprisingly little gold. The total stock in the +country has been smaller than the gold reserve of the Banque de France, +and much of the gold in England was in use among the people, since small +paper money (before the War) was not in use in England. The gold reserve +of the Bank of England has been usually only a fraction of that of the +Banque de France. Some years since, the distribution of gold as between +England and the United States, was, roughly, England six hundred million +dollars, the United States, one billion, six hundred million. A larger +proportion of gold was in reserves in the United States than in England. +Yet England was doing the banking business of the world, while we had +trouble in doing our own! The Bank of England carries virtually the only +reserve in the country. The Joint Stock Banks, with demand liabilities +vastly in excess of the demand liabilities of the Bank of England, carry +only "till money" in cash or Bank of England notes, and for the rest, +carry as their "reserve" their deposit credits with the Bank. A great +deal of criticism, from Bagehot down (to go no further back) has been +directed at the "inadequacy" of English banking reserves, and many dire +predictions have been made as to the dangers that impended unless the +reserves were increased. We shall probably hear less of this after the +War! The Bank of England still stands! It has never failed to pay out +gold over its counters, even though it has, with the aid of the +government, doubtless restricted and controlled foreign shipments of +gold. But it has met the unprecedented emergency better than any other +bank in Europe, and to-day (Sept. 1916) is in exceedingly good shape. +Sterling exchange at New York seems "pegged" at the "lower gold point," +and apprehensions regarding the stability of the English financial +system seem definitely allayed. It is aside from our present purpose to +discuss war time conditions. I am rather interested in analyzing the +features of the English money market which have made it possible, in the +period preceding the War, for English bankers to get on with so little +gold. As will appear, it is because English business and financial +affairs have been more nearly "static," have come nearer to realizing +the assumptions of static economic theory, than is true of any other +country on earth. + +The very fact, for one thing, that England is the great _international_ +banker has meant a scattering of risks. Acute panics do not come in all +countries on the same date. Bad business in one country may be offset by +good business in another; drains of gold to one country may be met with +gold flowing in from others. The same considerations which tend to +stabilize the railroad business, as compared with, say, cotton-growing, +apply to the international banker as compared with the banks of a single +country or section. But further, the London market has developed +coöperating agencies for smoothing out friction and eliminating +uncertainties to a degree unknown anywhere else. An anonymous writer in +_The Americas_ for April, 1916,[570] has given an exceedingly +interesting account of this organization of the London market,--the +product of the development of generations. Let us enumerate some of the +points: There is nowhere in the world so much expert judgment in the +grading and evaluating of hundreds of commodities from all parts of the +world. There is, coupled with this, a worldwide reputation for the +experts of absolute integrity, so that producers in remote countries +regularly ship ("consign") to London cargoes without definite +arrangements, knowing that there are in London organized facilities by +which the commodities are warehoused, expertly and fairly judged, and +either sold at once or else made the basis of a collateral loan against +which they can draw immediately. The institutions which make this +possible are (a) the system of warehousing, with its certificates or +warrants which give absolute title to the goods, and which are easily +negotiable; (b) the organized arrangements in connection with the +warehouses by which commodities are received and either graded as they +are, or separated and mixed with others to form standard blends readily +marketable--this with rigid integrity and expertness which the whole +world trusts; (c) a speculative community which has unlimited banking +credit, ready to buy at a concession in price virtually any +commodity--honey in the comb, sealing wax, pianos, farm machinery, what +not; (d) the organized markets or periodical auctions which speculation +and final purchase together support; (e) the banks, which, relying on +the standardization of the commodities and the readiness of the +speculative community, can without hesitation lend the money on which +the distant shipper is relying to conduct his business. + +What comes to London is fluid. Everything comes to London! The +multiplicity of items dealt in gives stability to that business which +deals with all--the banking business. The London Stock Exchange is no +provincial affair, easily demoralized by an adverse rate decision! +Securities of every country on earth are listed there, and speculated +in. It must be a world catastrophe which really demoralizes the London +stock market! + +It will doubtless seem strange to many to say that New York cannot +displace London as the centre of world finance, that the dollar cannot +displace the pound sterling in financing international trade, because +New Yorkers do not speculate enough! They do speculate enormously, but +not in many things. A restricted list of stock exchange +securities--almost wholly American; cotton--in which New York is the +world centre; coffee, in which New York has the largest volume of +speculative futures, though yielding precedence, ordinarily, to Havre, +Hamburg and Santos[571] in spot transactions. There is extensive sugar +speculation at the New York Coffee Exchange, which has, indeed, recently +changed its name to indicate the fact. There is a produce exchange in +New York, but it is a very small affair as compared with the Chicago +Board of Trade, and its operations and scope are infinitesimal when +compared with the produce speculation in London. Of course, there is a +vast deal of _unorganized_ speculation in many things in New York, as in +business everywhere, particularly in America. But, while the pecuniary +magnitudes of organized speculation in New York are very great, the +range of items dealt in is restricted. New York banks cannot possibly +get such a variety of collateral, based on standardized and readily +marketable goods and securities, as can London. New York, consequently, +cannot finance international trade, save as an auxiliary to London--and +New York banks must have vastly more gold in their vaults than London +bankers need! As goods and securities become _more_ marketable, +gold--whose services are needed because of its _superior_ +marketability--becomes _less_ necessary. + +The whole story of London's organization would be a long one. London +financial institutions have a degree of expertness, growing out of +specialization, in large part, which makes all manner of paper fluid in +the London money market which would lack fluidity in New York. The +Acceptance Houses are a sort of international Bradstreet and Dun. They +know intimately the standing and business of houses all over the world. +They do not give out their information, but they do put their stamp on +the paper of business houses, thus standardizing it, lending, not money, +but "pure credit," while the other banks, relieved of the necessity of +investigating the paper, can buy it as a miller might buy No. 1 wheat. +There is the extraordinary extension of insurance, so that virtually any +kind of risk may be shifted to those well able to bear it. All this +makes for liquidity, for "static" conditions in the money market, and +dispenses with the need for gold. + +As we approach static conditions, we need less and less gold reserve +behind bank demand liabilities. _The static law of bank reserves is that +none are needed!_ I think we have here the real reason why writers who +have sought to give us the law for a "normal" ratio have given us such +vague phrases as "shown by experience to be necessary," and the like. +When irregularity of income and outgo in a bank's business, non-liquid +assets, business cycles, uncertainties, legislative changes affecting +business, crop failures, changes in demand, new inventions, wars, are +abstracted from, no reason can be given why a banker should keep any +reserve at all! But these things are dynamic things. And it is +characteristic of irregularities that they are irregular. To get a +"normal" ratio out of them is not easy. + +On the static assumptions, an "ideal credit economy" is perfectly +possible. If everything that needs to be marketed is perfectly +marketable, if the stream of business flows regularly and without +friction in the same channels, if all contingencies are foreseen and +dated in advance, a bank needs no cash reserve. All payments can be made +by bank-credit. Banks bookkeeping becomes merely a refinement of barter, +with _money_ remaining as a measure of values, a unit for reckoning, but +not being used as a medium of exchange, or as a bearer of options, or in +reserves. The measure of values function is the great static function of +money. + +To the extent that static assumptions are not realized, we need money in +bank reserves. This extent is a thing that varies from time to time, and +from place to place. It is not the same for a given place from time to +time, nor is it the same at all places at a given time. It is not the +same for the whole world from time to time. + +Since friction, preventing the free marketing of goods and securities +and services, exists, since there are dynamic changes which require +readjustments through exchanges, we need the work of the banker and he +needs cash. But there are other things than money which make for the +"statification" of the market. The speculator does it. And the other +agencies of the sort represented in the London market do it. They are +substitutes for gold. Gold has no monopoly. The services performed by +gold can be performed in many other ways, and by many other agencies. +There is enormous flexibility in the matter. + + + + +PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS + + + + +CHAPTER XXV + +THE RECONCILIATION OF STATICS AND DYNAMICS + + +In the foregoing discussion of the value of money it has appeared that +the value of money is not an isolated problem! Not only have we found it +necessary to consider it as part of the general theory of value, but it +has been advisable to bring it into relation with a large number of the +special theorems of economics, including the law of supply and demand, +cost of production, the capitalization theory, the doctrine of +appreciation and interest, the theory of international gold movements, +Gresham's Law, the theory of elastic bank-credit, and the general theory +of prosperity. The book has thus become a book on general economic +theory, viewed from the standpoint of the theory of money. It has been +as contributing to the problem of the value of money that these other +doctrines have been discussed, but I trust that they, too, have gained +something of clarification from being considered in this relation, and +that the emphasis on the rôle of money in general economic theory has +helped in bringing the various elements in our current theory into a +closer-knit interdependence. + +The present chapter seeks to carry the conclusions so far reached toward +a further unification of economic doctrine, by finding for certain +contrasts, like that between statics and dynamics, a higher synthesis, +so that it may be possible for students of dynamics and students of +statics to speak a common language, to use common measures, to find that +their phenomena are not, after all, of essentially different nature, and +to come to agreement as to the relative importance of "static" and +"dynamic" tendencies. It will appear that the theory of money and +exchange plays an important rôle in effecting that higher synthesis, and +is itself clarified by it. + +The "theory of goods vs. the theory of prosperity," "statics vs. +dynamics," "normal vs. transitional tendencies," "long run vs. short +run" laws, "market vs. normal price," "abstract theory vs. concrete +description," "historical or evolutionary study vs. cross-section +analysis," "temporal vs. logical priority," "causation as a temporal +sequence vs. causation as timeless logical relationships"--these, and +similar contrasts have appeared frequently in the history of social +thought, and have been especially refined and elaborated in the history +of economics. We have even compounding of the notions into more +complicated distinctions, as by Seligman,[572] in his two statements of +the law of costs: in the short run, normal price tends to be the maximum +cost of production; in the long run, normal price tends to be minimum +cost of production. Seligman has illustrated his notion by an adaptation +of the familiar figure of the sea-level and the waves: for short-run +purposes, we may contrast the surface waves, the market prices, with the +sea-level, the normal price; for longer run purposes we may see the +level of the sea itself changing, under the influence of the tide, and +may have a dynamic normal, which is still to be distinguished from the +fluctuations due to the play of winds on the surface. + +We have further an increasing recognition of the up and down play of +forces accelerating and retarding the processes of industry and trade. +For earlier writers, panics and crises were anomalies; since Mill's +_Principles of Economics_, to go back no further, we have had increasing +recognition of such occurrences as more or less periodic and +inevitable, bound up in the very nature of economic life itself, and of +late there has been a fairly general acceptance of the notion of the +business cycle, of an alternating rhythm of prosperity and depression. +The explanation of this alternation has been attempted by numerous +theories, one of which, that of Joseph Schumpeter,[573] rests the whole +case definitely in the distinction between static and dynamic +tendencies, and in the conflict between the opposing sets of forces +which statics and dynamics undertake to describe. + +We are told by the orthodox economist that war is wasteful, destroying +laborers and goods, and lessening the wealth and productive power of +society. We are told that it diverts labor from productive employments, +that it turns huge masses of capital and labor to the production of +goods which men cannot enjoy, that it burdens the people with taxes, +etc. Static theory can see nothing but evil in war, from the standpoint +of minimizing human sacrifices, and maximizing human enjoyments. None +the less we see many war periods--notably that of our Spanish-American +War, and the present World War, so far as the United States are +concerned--periods of marked prosperity, growing out of the new +expenditures which war itself involves. Mules and other farm products +rose in price with the Spanish-American War, as the Federal Government +bought them for the army; various factories concerned particularly with +war munitions increased their activity, the gains of factory owners and +farmers led them to increase their purchases, wages rose, and rose in +part because part of the labor force was in the army. The Civil War did +spell demoralization and economic ruin for the South, but for the North +it gave a great dynamic impetus to trade, transportation and +industry--an impetus, strangely enough, that was so great that the new +industries and enterprises which had grown up were able to absorb with +little shock the million men set free from the Northern armies when the +great struggle was over.[574] + +For static theory, scarcity is an evil. A general overproduction is +impossible. For the practical business man, confronted with the +momentous problem of marketing his output, overproduction is a vital +reality, and there are few times indeed when much more could not be +produced if only a satisfactory market could be found for it. Static +theory would see the whole explanation of this in maladjustment, too +much of some things being produced, too little of others. This simple +statement does explain much of the phenomenon, but it is far from +telling the whole story, and even if it were a complete explanation, it +would by no means dispose of the reality of overproduction as a constant +menace, even when not a dire reality, facing almost every business man. +Static theory at best tells what a completed adjustment would be; it +does not touch the problem of how adjustment is brought about, and +maladjustment overcome. Yet just that problem is the vital concern of +the business man. + +For static theory, high or low prices are matters of no concern. And +abundance or scarcity of money and credit make no real difference in the +economic process. Abundant money and credit exhaust themselves in +raising prices, and the rest of economic life goes on unchanged. This +doctrine of the quantity theory is, as I have undertaken to show in Part +II, bad even as a matter of static theory. But it is only as a matter of +static theory that it is even thinkable. + +The economic theory of the 19th Century, following the lead of Adam +Smith and Ricardo, has been accustomed to dismiss as utter folly the +notions of the Mercantilists as to the balance of trade, and the +importance of an inflow of gold, and has conclusively proved that +protective tariffs tend to divert the labor, capital and land of a +country from those lines of production they are best adapted to to lines +for which they are less well suited. Critics have pointed out, as in the +"infant industries" argument, that we cannot treat the labor capacity +and technical knowledge of a country as constants, that the temporary +encouragement of one line of industry by a tariff may so modify the data +of the situation that the country may in time become better adapted to +the protected industry than to other lines. And I think that we may well +go further, and make substantial concessions to the doctrines of the +Mercantilists as they themselves stated them, seeing in a favorable +balance of trade, and in expanding exports and diminishing imports +sources of impetus which are not subsequently neutralized by the static +process of equilibration. I do not conclude from this that protective +tariffs are commendable, any more than I conclude that war is +commendable. Both may give dynamic impetus, and lead to economic +development. Both may lead to political corruption, to iniquities in the +distribution of wealth, to waste and suffering of various kinds, in +which honest and patriotic men suffer, and cunning and unworthy men +gain. The point here is simply that static theory does not tell the +whole story regarding either tariffs or wars. It may well be true--I +think it is true--that static theory offers the more important +principles for judging the results of wars and tariffs.[575] It is the +central problem which I have set myself at the outset of this discussion +to find a way to bring static and dynamic considerations _under a common +measure_, to reduce them to homogeneity so that comparisons may be +instituted, and so that the student of statics and the student of +dynamics need not talk merely at cross-purposes. But we do not achieve +this result by ignoring considerations in either sphere. + +Bastiat, with a fine show of logic, has sought to rule out of court the +doctrines that extravagance and tariffs, etc., are sources of prosperity +by his emphasis on the "Unseen," as opposed to the "Seen." The +prosperity growing out of the extravagant expenditures of one brother is +open to all eyes. The consequences of the savings of the frugal brother +men do not see so easily, and do not attribute to his frugality. +Doubtless Bastiat is right in his main theses. But one point needs +emphasis: that which is "Seen" stirs the imagination of men. And +imagination energizes human activity. The motivation of economic life is +a psychological matter. + +And so at a host of points the contrast may be drawn, in one or another +form. The pure, abstract, static theory gives one conclusion; the other +approach suggests one different.[576] + +How is it possible to give proper weight to considerations drawn from +such divergent spheres of thought? Indeed, how shall we weigh the +dynamic considerations at all? Static theory presents itself in +quasi-mathematical form. At times, it parades itself in equations, and +it readily enough, without arousing a feeling of incongruity, expresses +itself in mathematical curves, with ordinates and abscissæ. One static +tendency finds itself in marginal equilibrium with another, and the +margin is expressed in quantitative units, commonly sums of money. +Static doctrine does, indeed, lay claim to precision and exactness, and +static tendencies may be weighed against one another. But how shall one +undertake to give quantitative measure to such a thing as the +educational influence of a tariff on silk manufacture? How measure the +dynamic impetus of a new chain of banks on the industry and trade of the +region affected? How gauge the importance of a new advertising scheme, +or a new invention? Dynamic considerations are commonly presented in +vaguer, looser form than static theories. Usually we have merely a +statement of a qualitative tendency, without effort to make the +importance of the tendency quantitative. Indeed, I think it safe to say +that one chief difference between statics and dynamics is that those +tendencies which can be most easily formulated have been recognized by +statics, while those which are less understood, and less precisely +formulated, are left to dynamics! A big part of the difference is +methodological, rather than inherent in the nature of the phenomena +themselves. + +I think that it needs little argument to show that all the contrasts +listed at the beginning of this chapter do not run on all fours. +Compare, let us say, the contrast between "statics and dynamics" with +that between "historical and cross-section" study. Concrete, realistic +history is not dynamic theory. A realistic description of society viewed +at a given short period of time is not static theory. Both statics and +dynamics are _abstract_. _Laws_ are not the same thing as description +and narration. The assertions of both statics and dynamics are commonly +made on the assumption, "_cæteris paribus_." A new bank will stimulate +business in a western town if bank-robberies do not come into fashion! A +tariff on wool will tend to educate the farmers in sheep-raising if the +habit of relying on governmental assistance does not develop, and make +them more, rather than less, inert,--or sharpen their political rather +than their economic acumen. Concrete history need not always verify +dynamic laws![577] It is, above all, important to insist that the +distinction between statics and dynamics is not the same as the +distinction between theory and description, or between the abstract and +the concrete. Evolutionary study may result either in concrete history, +or generalized laws; cross-section study may be either concrete +description or abstract formulæ concerning forces in equilibrium. And +there may be varying degrees of abstractness in both cases. + +The contrast between long-run and short-run tendencies is not +necessarily the same as that between statics and dynamics. This former +distinction does recognize one factor which is sometimes classed as +"dynamic," namely, "friction."--"Friction," by the way, is a blanket +term which covers a multitude of sins of imperfect analysis and lazy +thinking! It is far from a simple, unitary thing. Sometimes it seems to +mean the action of the whole social order, other than the economic +values!--But dynamic, as used by the two writers who have used the term +most precisely, J. B. Clark[578] and J. Schumpeter,[579] is reserved for +those factors in economic life which make for constructive _change_. +Neither writer would call mere habit and inertia, which make +readjustments slow, or the necessities of physical nature, which retard +readjustment, by the name, "dynamic." It may be noted, in passing, that +both writers limit the term quite strictly to changes _in_ economic life +growing _out of_[580] economic causes. Schumpeter narrows the dynamic +factors to one, namely, _enterprise_, while Clark gives five general +classes of dynamic factors, all of which are primarily economic in +character. Neither extends his study to cover forces which are not +primarily economic in character, but which none the less lead to +economic changes. + +Again, the "theory of prosperity" is not identical with "economic +dynamics," though the two in large measure overlap. For one thing, while +some writers, as Schumpeter, find the business cycle to be a necessary +consequence of dynamic changes, and would maintain that no business +cycle, no up and down of tempo in production, no panics or crises, are +necessary if changed methods of industry, etc., did not come in, not all +writers would so explain the business cycle. Some writers would find the +explanation in the inherent instability of a money and credit economy, +some in the inherent weakness of a capitalistic system, quite apart from +necessary dynamic change. Irving Fisher makes no use of changed methods +of production in his explanation of business cycles, though he does +mention invention as one possible cause of a disturbance in normal +equilibrium.[581] But further, dynamics is largely concerned with +problems, like invention, changes in the economic habits of a people, +methods of organizing industry, etc., which, while they may well bear on +the problems of prosperity and depression, yet have interest for their +own sake, and would be studied if there were no business cycles. +Further, the notion of statics, the other term in the static-dynamic +contrast, is not identical with the "theory of wealth," or "theory of +goods," or "theory of the wealth of nations" which such a writer as +Veblen[582] would put in contrast with his "theory of prosperity." There +is a normative, or practical, and polemical coloring in the body of +doctrine growing out of Adam Smith, which Veblen would term, the "theory +of the wealth of nations," which is lacking in the more colorless +"statics" of to-day. + +I do not find any of the contrasts thus far discussed quite +satisfactory. I have been using the terms, statics and dynamics, as +general terms to cover all these contrasts. I shall try to formulate a +general contrast which includes most of the ideas passed in review, from +a somewhat different angle, and then try to show that the contrast, +while useful, is not absolute, and that it is possible to measure +considerations drawn from one viewpoint in terms of considerations drawn +from the other. + +Let us take as our starting point the notion of a cross-section picture +of society. I have set forth this notion in ch. 13 of my _Social Value_, +and have elaborated it in the discussion of von Mises' theory in the +chapter on "Marginal Utility" in this book. A cross-section picture may +be made more or less concrete and descriptive, or abstract and +analytical. If one looks at the picture of society in cross-section as +given by Giddings in his _Principles of Sociology_ (Bk. II, chapters on +"The Social Population," "The Social Mind," "The Social Composition," +and "The Social Constitution"), one finds a picture in which +organization and system are made clear, but in which vivid description +of concrete social facts is the primary concern. The account given is +largely qualitative rather than quantitative. It is a picture of flesh +and blood, as well as an account of functioning. It is, perhaps, not +easy to realize that Giddings is doing the same general sort of thing +that the pure economic theorist is doing, with his picture of a static +equilibrium of economic values. But what economic theory is concerned +with is, after all, to be found in Giddings' scheme. The pure theorist +takes for granted the physiographic environment, whose influence +Giddings takes into account. The theorist abstracts from biological and +racial factors. He assumes a social population, a social order, a +political system. He has not taken into his purview the social mind as a +whole, in his static theory. Rather, he has been concerned with only one +part of the social mind, namely, the economic values. Economic values, +and the objects of economic value, have been the data of the static +theorist. Given scales of economic value, such that for one quantity of +goods of a given kind, a given value per unit will obtain, given all of +these value-scales, and given the quantities of goods and services whose +values are in question, and static theory will furnish an equilibrium +picture, in which the price relations of different kinds of goods are +made clear, and their values are measured. The value-scales, and the +absolute magnitudes of value at different points on the scale, are +assumed, are data. Further, in order that the notions may be made +mathematically precise, a unit of value is needed, and this is commonly +the value of the money-unit, which is assumed to be constant. The +picture then becomes systematic. There is a system of values, expressed +in prices, which is stable, so long as the data do not change. It is +mechanically conceived, and illustrated by various mechanical symbols, +as balls in a bowl, or connecting reservoirs, or, best of all, by +intersecting curves. It is an abstraction from the living, pulsing, +organic whole of the social mind--the inter-mental life of men in +society. It squeezes much of the life out of the phenomena it +describes. It makes them exact, only by making them mechanical. It thus +becomes exact by becoming, in considerable degree, superficial and +abstract.[583] This is not to condemn static theory. Static theory has +proved its usefulness by solving too many problems for such a statement +of its limitations to involve a condemnation. But the statement of its +limitations will aid us in seeing its relation to that vaguer body of +doctrine which we call dynamics, or the theory of prosperity, etc. + +Now this means that static theory is not _value_ theory. It assumes a +theory of value. It assumes the value-scales as data. It assumes the +value of money as a datum. Static theories of supply and demand, cost of +production, capitalization, etc., assume the value of money, as has been +shown in Part I, and static theory, resting in the notion of +accomplished transition, normal equilibrium, abstracting from the +difficulties of readjustment, abstracting from friction, etc., misses +the whole point as to the functions of money, as shown in Part II. +Static theory proceeds by assuming a change in one of the elements of +its situation, say one of the value-scales, and then tells what the new +equilibrium will be after readjustment takes place, assuming that other +value-scales remain constant, and that quantities of the objects of +value do not change. Or, it assumes a change in the quantity of one of +the objects of value, and then predicts the new equilibrium. The new +equilibrium will often involve changed values and prices all around, and +will often involve altered quantities of other objects of value. But the +initial change comes from an alteration _from outside_ the system in one +or more of the data of the system.[584] + +Now dynamics, theory of prosperity, etc., are concerned with the causes +of changes in the data with which statics works, in large measure. Among +the problems with which statics has not adequately dealt, and in large +measure cannot deal, are (1) the nature of value itself, and the laws +governing changes in the value-scales; (2) the problems of readjustment, +including the problems of money, credit and exchange; (3) the psychology +of invention, of enterprise, and the like. (4) The reactions of economic +values and economic organization on the non-economic phases of social +life. (5) The reaction of the non-economic factors, as law, morals, art, +religion, etc., on economic life. (6) The problem of prosperity and +depression. I say that statics has not dealt adequately with these +problems. Statics in its present narrow form cannot deal with them. But +in considerable degree, I am convinced, statics can be made to deal more +adequately with them, if its scope be broadened, and its limitations be +made less rigid. Schematically, at least, the central ideas of statics +can be applied to a large part of these problems. I may add that my list +of six classes of problems with which statics has not adequately dealt +is not meant as a system of categories. The list is incomplete, and the +classes are not mutually exclusive. Rather, they overlap in large +measure. In a large way, it might be said that statics is concerned with +the laws of the equilibration of values, and that dynamics, theory of +prosperity, etc., are concerned with the nature and causes of variations +in the values themselves. The contrast may be put, in general, as the +contrast between the _theory of value_, and the _theory of price_, +statics being price-theory, and dynamics being value-theory. But this is +a thesis which calls for much elaboration and qualification before its +significance is made clear, to say nothing of its justification being +established. + + * * * * * + +We may approach the problem of bringing the two terms of the contrast +together from either of two angles: (1) we may show that dynamic factors +tend, in large degree, to submit themselves to measurement in terms of +money-prices, which obey the laws of static marginal equilibrium. (2) We +may show that all static prices presuppose values whose explanation is +in terms of the same phenomena with which dynamics, the theory of +prosperity, etc., have busied themselves, namely, considerations drawn +from the study of social psychology, including the psychology of +suggestion, imitation, mob-mind, the functional organization of minds +into a social mind, social beliefs, social values of other than economic +nature, and social institutions. (1) The evidence on the first point is +already in considerable measure worked out, particularly by Veblen, in +his _Theory of Business Enterprise_, and in his other writings on the +nature of capital, etc. Something more in this direction I have done in +my _Social Value_, and other writers have elaborated the notion. (2) The +case for the second contention has been made in detail in my _Social +Value_, and in what follows I shall rely chiefly on the discussion +presented there, and in the chapter on "Value" in this book. + +I take up first the thesis that dynamic factors may come under the +static measure. Veblen has made much of the contention that modern +"capital" is not, as Smith thought, and as orthodox economists in +general have contended, a matter of physical accumulations of goods. The +volume of business capital is a pecuniary concept, and may wax and wane +with little variation in the physical stocks. "Under modern conditions +the magnitude of the business capital and its mutations from day to day +are in great measure a question of folk psychology rather than of +material fact." (_Theory of Business Enterprise_, p. 149.) And in large +measure Veblen's work is given to showing how factors of legal and +social psychological nature get a money-measure. The actual capital of a +business enterprise does not rest chiefly on the physical equipment, +stocks of raw materials, etc., etc., which it possesses. To be added is +"good will," and this includes (p. 139) established customary business +relations, reputation for fair dealing, franchises, privileges, +trade-marks, brands, patent rights, copyrights, exclusive use of +processes guarded by law or secrecy, exclusive control of particular +sources of materials, etc. Veblen contrasts things of this nature +sharply with the concrete equipment, saying that the former are +serviceable only to the owners, while the latter are serviceable to the +community at large as well. The physical, tangible, and ethically +commendable character of the physical equipment is everywhere stressed, +while the pathological, anomolous, and sinister character of the less +tangible and more recent "capital items" is always set before us--all +the more effectively because Veblen maintains a satirical attitude of +moral indifference, and presents the case with Olympian aloofness. I am +not here concerned with the social welfare aspect of the matter, though +I shall later speak of that. My present purpose is to make clear two +points in Veblen's doctrine: (1) that he does bring these intangible +things, which are the variables involved in his theory of prosperity, +under the price measure; and (2) that he considers these prices as +anomalies from the standpoint of the general laws governing the values +and prices of concrete goods. To this last point I shall later take +sharp exception. For the present, I wish to develop further the extent +to which such factors may be brought under the general static measure. + +The feature of static theory which Veblen chiefly employs in giving a +money-measure to his "intangible capital" is the capitalization +theory.[585] The capital magnitude of the items of good will previously +mentioned is a capitalization of the _income_ which they are expected to +bring in. And it may be said that a large part of Veblen's doctrine of +the causes of the ups and downs of business rests on the complaint that +this capitalization process is not rationally carried through--that +incomes are overestimated, and that business men are tenacious of +capital magnitudes once built up, and refuse to mark them down properly +when the facts in the situation have changed. His theory of prosperity +thus rests on non-rational enthusiasm on the one hand, and a certain +kind of "friction" on the other hand, and apparently the difficulties in +the situation as he sees it would largely disappear if these two +elements could be rationalized, and the static theory work more +perfectly. The elements involved in the capitalization theory, as shown +in the chapter on that topic, are three: the anticipated income, the +prevailing rate of discount, and the capital value, the last named being +the child of the first two. The capital magnitude is a shadow, where the +income is the substance. Veblen seems to find the trouble arising in +that the capital magnitude takes on a substantial character, and refuses +to play the passive rôle of shadow. It is interesting, in passing, to +compare this theory of Veblen's with the theory of crises developed by +Irving Fisher, from the standpoint of a body of doctrine which is purely +static, and which Veblen has criticised as "taxonomic" in a high degree. +For Fisher[586] the trouble arises from friction in connection with +another element in the capitalization problem, namely, the interest +rate. Business men think that "a dollar's a dollar," and refuse +to let the interest rate be marked up in accordance with the +doctrine of "appreciation and interest." This, likewise, leads to +overcapitalization, leaves the passive shadow too big. I must confess +that it seems to me that one theory is about as "taxonomic" as the +other--that both rest on pointing out divergences from a static, +"taxonomic" norm. In general, Veblen's work in this field consists in +assimilating the "intangible" capital to the class of land, and other +long time concrete income-bearers, but that is after all classification, +systematization, "taxonomy." In saying all this, I am as far as possible +from questioning the value of Veblen's work. Rather I rate it as of +extreme significance. "Taxonomy" does not appear to me so dreadful a +word as it does to Veblen. I should rather say that some taxonomy is +good and some is bad, depending on whether or not it leads to fruitful +generalizations, and deeper insights. + +It is, as I have said, chiefly the capitalization theory which Veblen +applies to these newly important intangible "capital-items." The +phenomena of the stock-market, where such things are most actively +bought and sold, and where they appear as differential portions of the +capital values of securities, doubtless first called attention to +them--though the item of "good will" as a business asset, for which a +money-price is paid when businesses change hands, is doubtless older and +wider than modern corporation finance. The capitalization theory applies +to them most readily and obviously, as compared with other elements in +the static theory of prices. + +But as we become better used to the large rôle which these phenomena +play,--not that the phenomena are new, but that their present importance +is new, and hence our serious study of them is new--we are increasingly +able to see that other elements of static theory also apply. _Static +theory applies increasingly as understanding increases!_ The vaguely +discerned, the novel, the imperfectly analyzed, can be stated only in +qualitative terms. As things are better understood, the mind seeks +system, taxonomy, quantitative measurement. Business men to-day are well +accustomed to applying _cost_ concepts to many of these intangible +magnitudes. Advertising, for example, is being worked out with +increasing exactness, and business men are increasingly applying +accounting processes to the determination of the question of _how much_ +advertising "pays." Well-known brands are capital items. Well-known +brands have cost money! Business men contemplating the marketing problem +may well balance the cost of creating a new brand against the cost of +buying an old one, and may balance the cost of creating a new brand +against the profit to be made from allowing an old one to deteriorate, +through cheapening its process of manufacture. Trade-connections are +capital items. They are also items which have been created by patient +thought and labor and expense. Franchises, since the days when the +public awoke to their value, have cost money to the corporations that +possess them, and figure in corporate bookkeeping often. Even in the old +days, they often had a cost, which commonly stayed _out_ of the +corporations' books, at least in that form,--bribes, entertainments to +legislators and members of councils, and so on. In Part II of this +book,[587] I have discussed "selling costs" as contrasted with costs of +production in the narrow sense, and have pointed out how high a +proportion of total costs these selling costs are. I have also indicated +how many of these costs tend to be "capitalized." These selling costs +are static measures of the elements of "friction" which interfere with +the smooth working of static laws! An extension of statics, however, +can in considerable degree take account of them. It is, of course, far +from true that cost doctrine will explain all of these intangible +capital magnitudes. But this is likewise true of the prices of many +tangible items. Cost doctrine does not hold universal sway even in the +confines of the strictest static theory. + +I have said that dynamic factors tend to come under the rules of static +taxonomy to the extent that they become more accurately understood. The +understanding here referred to is not merely on the part of the +scientific theorist! The subject-matter of economic science is itself +psychological. It includes the psychology of the business man, as well +as the psychology of purchasers and laborers, and the general field of +social-mental life that bears on economic processes. It includes the +theories of the business men, as well as their aspirations and +"motives." It includes their methods of computation, and the accuracy or +inaccuracy of their prognostications. It has been pointed out recently +that at the current price of copper (22c. per pound in Jan. 1916) the +prices of copper stocks are very much lower than they were when copper +reached the same price some years ago. Calumet and Hecla stands some two +or three hundred points lower than it did then, and the same percentage +difference is manifest in the case of many other stocks. But the +explanation which the broker and market writer offer is that people have +awakened to the fact that mining stocks are stocks with wasting assets, +that the incomes from copper stocks cannot, therefore, be capitalized on +so high a basis as similar incomes from other securities; that people +to-day realize this fact as they did not some years ago; that the +earlier capital-prices of copper stocks were vastly exaggerated on the +basis of a careful estimate of probable total future income, etc. Japan, +little used to the great prosperity growing out of sudden great +increases of special kinds of business, found herself in such an orgy +of war stock speculation that it was necessary to close the stock +exchange in 1915. The United States, better familiar with the phenomena +of boom and depression, seasoned by many experiences of similar nature, +have found that on the whole,--at least in the opinion of many competent +judges in January of 1916,--war stock speculation has been kept in +reasonable bounds, thanks in large part to the conservatism and caution +of bankers and brokers, and that the general economic situation is in +fairly stable equilibrium, with most of the probable sources of disaster +foreseen and "discounted." To "discount" is to make "static"![588] +Whatever the business man can reduce to bookkeeping terms, and whatever +he can measure by money in the market, the economist should be able to +bring within the "orderly sequences of economic law." + +In _Social Value_, I have pointed out how wide is the scope of the money +measure. Waves of public opinion, of waning or waxing hope and belief, +of patriotic fervor, of religious exaltation, of political movements of +one or another kind--all these find some sort of money measure in the +market. In the gold market in the early '60's in New York, the "bulls" +sang "Dixie," and the bears sang "John Brown's Body"! It was patriotic +to be a bear, and unpatriotic to be a bull. These considerations +affected the prices very appreciably, at times, especially at the +beginning of the speculation in Greenbacks. Waning and waxing belief in +the triumph of the Northern armies manifested itself very strikingly in +the prices in the gold market, as W. C. Mitchell has conclusively +proved, with a wealth of detailed evidence, in his _History of the +Greenbacks_. But in less systematic markets, in less organized and +regular ways, many things besides are given a money measure: "Against +what, indeed, shall wealth be measured? Where are the markets which +measure its fluctuations? + +"But such markets exist, always have existed. Are there not streets +where woman's virtue is sold? Are there not commonwealths where there is +a ruling price for votes? Do not the comparative rewards of occupations +indicate what inducements will overcome the love of independence, of +safety, of good repute? We see men sacrificing health, or leisure, or +family life, or offspring, or friends, or liberty, or honor, or truth, +for gain. The volume of such spiritual goods Mammon can lure into the +market measures the power of money.... When gold cannot shake the +nobleman's pride of caste, the statesman's patriotism, the soldier's +honor, the wife's fidelity, the official's sense of duty, or the +artist's devotion to his ideal, wealth is cheap. But when maidens yield +themselves to senile moneybags, youths swarm about the unattractive +heiress, judges take bribes, experts sell their opinions to the highest +bidder, and genius champions the cause it does not believe in, wealth is +rated high." (Ross, _Foundations of Sociology_, pp. 171-172.) Ross is +here interested chiefly in the problem of measuring the varying +significance of wealth, symbolized by money, in terms of other and +non-economic, goods. But it is equally true that money measures these +goods. The range of the money measure is very wide. Nor is it confined +to the exchanging process. Gabriel Tarde[589] has pointed out that money +may function as a measure of non-material goods through gifts, public +subscriptions, etc. + +It is surely no extravagant claim to make that the methods of static +economics may be extended at least as far as the money measure goes! We +shall later see reason for believing that fruitful results may come from +an even wider extension of the static notion, at least as a schematic +device. + +In reducing static and dynamic considerations to common terms, we have +now gone far. We have shown that a wide range indeed of the phenomena +deemed dynamic, and largely ignored by current static theory, left to +the discussion of such innovating students of the "theory of prosperity" +as Veblen, are really in the actual practice of the business world +treated in the same way as are the "static" phenomena of the values of +physical goods and concrete services. And we have further shown how wide +indeed is the scope of the static yardstick, the dollar. But this is +only a part of the story. We have generalized statics. Can we similarly +generalize dynamics? Or has our generalization of statics merely +narrowed the field of dynamic considerations? + +To this I reply that we may view the whole field likewise from the angle +of what we have called dynamics, or theory of prosperity, or similar +name. These terms are not satisfactory, in my view, and I have already +used terms that appear to me better. My exposition on this point will be +briefer than in the generalization of statics, since I may refer to what +I have said elsewhere. In stating Veblen's contrast between "business +capital" and "the wealth of nations," I quoted him as follows: "Under +modern conditions the magnitude of the business capital and its +mutations from day to day are in great measure a question of folk +psychology rather than of material fact." The capital, or the wealth in +general, of older and simpler days was a material matter, concrete goods +and services, in his view. The newer items of capital are anomalies, +presenting something strange and novel, and sinister. I should maintain +that, whether sinister or no, they are in principle at least not _novel_ +or _anomalous_. _All economic values are matters of folk-psychology!_ +All economic values are social values. All are to be explained on the +same general principles that explain the values of the most complicated +stock-market phenomena--except of course, that the application of the +principles involves less complication in the case of such values as that +of a loaf of bread. But value is always a matter of psychological +significance, and never a matter of mere material fact. And these +psychological significances are not explained by such simple individual +phenomena as labor-pain, or marginal utility, but always by reference to +the total social-mental system, including its laws, its mores, its +institutions, its centres of power and prestige, its modes and fashions, +etc. If Veblen has in mind the contrast between goods whose values rest +in labor-pain or marginal utility, on the one hand, and values which +rest in a folk-psychology on the other hand, the contrast is a false +one. The first class does not exist. I shall not elaborate this point. I +have developed it at length in _Social Value_, and in the chapter on +"Economic Value" in this book. I should make the contrast, then, which +seems to me to gather up the central significance of most of the +contrasts we have been discussing, as follows: on the one hand, we may +view the matter mechanically and abstractly, in terms of the +equilibration of values conceived of like physical forces, expressed in +prices; on the other hand, we may view the economic situation more +fundamentally and realistically, seeing the interplay of men's minds, +viewing economic values as parts of a social mind, a functional unity of +many minds. We may treat society as a mechanism, or we may treat it as a +living, pulsing, psychological organization. In short terms, our +contrast may be between the theory of value, and the theory of price. +And here we are back to our thesis set forth on p. 559 of this chapter. + +The theory of value, as thus marked out, is still an abstraction from +the totality of our cross-section picture of social, or even of +economic, life. The essence of society is indeed psychological. But men +have bodies, and live in a material world, and have an elaborate +technology. Many of the factors which students of dynamics are concerned +with grow out of biological and technological relationships, and are +connected with physiographic influences. Can we bring all these into our +scheme? Giddings and Spencer would answer affirmatively. For Giddings +(_Principles of Sociology_, ed. 1905, p. 363): "All social energy is +transmuted physical energy." Giddings guards himself (pp. 365-366) +against a thoroughgoing monism, which would leave no distinction between +mind and matter, but in general he would hold to the scientific goal of +reducing the physical and psychical phenomena in society to a +parallelism, so that concomitant percentage variation could be +predicated of them, and so that considerations in one sphere could be +expressed by considerations in the other. In the hands of Giddings and +Spencer, such notions are handled with caution and discrimination, and +command respectful consideration. One feels, however, that the starting +point is a monistic metaphysics, and that the philosophical doctrine +does not justify itself in its scientific application. In the hands of +such a writer as Winiarski, however (_Rev. Philosophique_, vol. XLV, pp. +351-386; vol. XLIX, pp. 113-134; summarized by Ross, _Foundations of +Sociology_, pp. 156-157), who makes all mental states mere forms of +physical energy, and applies to mental processes the laws of mechanics, +the doctrine becomes merely bad poetry! From the standpoint of +the needs of social science, and from the standpoint of our present +knowledge of social facts--to say nothing of general philosophical +considerations--it seems clearly best to me to assume the common-sense +doctrine of dualism as a premise: mind and matter are two different +things; mind acts on matter, and matter acts on mind. We are then at +this position, when it comes to bringing technological and physiographic +factors into our scheme: on the one hand, the values control +technological applications, and control the course of industry. New +technological devices will be employed when the present worth of their +anticipated products is great enough to overcome the values that compete +with them. Land will be employed on that crop which gives the largest +rent, etc. Men's physical activities, and their employment of their +physical resources, are _motivated_ by values. That is the _function_ of +values. On the other hand, physiographic and technological factors +modify the lives and characters of men and peoples. _Values_ are in part +controlled by physiographic and technological conditions of life. But +these technological and physiographic factors, in order to influence +economic _conduct_, must first influence the value system. This they do, +(1) by affecting the quantities of _objects_ of value, and so modifying +the marginal relations among the value-scales and the marginal values; +(2) by affecting the lives of the people directly, and so modifying the +value-scales themselves. Similarly I see no way of bringing the vitally +important factor of heredity into our scheme in a direct manner, _in +propriore persona_, but only mediately, as it (1) affects the character +of the society, and so changes its value-system or its technological +activity and volume of products, or (2) as heredity becomes a matter of +concern to the society, and so an object of value, with its own place in +the value-system. + +There remains, therefore, in the field of technological, biological, and +physiographic features affecting economic life a considerable residuum +of economic problems for which, so far as I can see, no extension of the +static method can be devised. I propose no scheme of static price +analysis for balancing the effects of poor land and good heredity on the +character of a society.[590] The problem must be approached by other +methods specially suited to it, which we need not here discuss. But, +given the values that rule in that society, we may be sure that our +static picture of that value system will sum up much of the influence of +the bad land and the good heredity, mingled with the other factors which +have determined that set of values. + +Once a factor has been introduced into the value system, once it has +modified the value-scales, we may treat it by the methods of static +price theory. The analysis of the factors controlling the value-scales +is the problem of value theory. And here is, indeed, the central problem +of the "theory of prosperity." What are the causes controlling the +_mutations_ of values? What factors cause values to rise, intensifying +economic activity, stimulating trade, spreading prosperity? What brings +about the crash in economic values (and consequently in prices), in +panics and crises? Why the low values of the period of depression, +giving slight stimulus to industry and trade, leaving economic life +lethargic, inert? Increasingly it is recognized that the problems are +problems of values and prices. It is no part of my plan to give answers +in specific terms to these questions. That were the task of a large +book! And very much of it has already been done. It is my purpose here, +simply, to show that price theory, as developed on the basis of static +notions, may be extended, and has in considerable measure been extended, +to cover these problems, and that for the same reason that price theory +is unable to give really fundamental answers to them, often, it is +likewise unable to give fundamental answers to the value problem +anywhere--that the phenomena of value are of the same stuff and +substance as the phenomena treated by "dynamics" and "the theory of +prosperity," and that static theory has been busied chiefly with a +limited portion of the field only because the problems were easier +there. Much has been made, especially in such a book as W. C. Mitchell's +_Business Cycles_, of technological factors, and of factors in the +psychology of the business man and of the laborer in the ups and downs +of business, and particularly of certain elements of scarcity or +overabundance of productive resources at critical parts of the economic +system, which raise values and prices unduly at certain points, +compelling radical readjustments of values and prices elsewhere. +Virtually all of these considerations will fit into the scheme here +outlined. They work _through_ modifications of the system of values and +prices. H. L. Moore's recent _Economic Cycles_ lays heavy emphasis on +physiographic factors, particularly variations in rainfall. But these, +too, act on the economic situation through affecting the quantities of +objects of value, and so through modification of the marginal values of +goods. The psychological theory of economic value by no means excludes +any amount of influence one can find in physiographic or technological +factors. + +One of the most important factors in the minds of many writers who would +treat business cycles, and a factor to which virtually all writers give +attention, is the waxing and waning of business confidence, and of the +volume of credit. I have given an extended analysis of the psychology of +confidence, and of the psychological nature of credit, in my chapters on +that topic. It is enough to say here that we have in credit phenomena +things which are of the very stuff of economic values in general. +Beliefs and hopes are factors in economic values, and values wax and +wane with them. There is little indeed in the psychological and +institutional aspects of the theory of prosperity which an adequate +theory of value would not contain. + +The theory of _prices_, as an abstract formula of description, is of +primary interest to the scientist, who has nothing to do with the +manipulation of concrete values, and who has no interests at stake in +the behavior of particular values at a particular time. His purposes are +ultimately practical, no doubt, but the practical ends he has in view +are, after all, only to lay down general rules of public policy, of a +high degree of generality, and he consequently may abstract from a great +deal of the concrete causal process. The theory of _value_, in its +concrete fulness, is the special interest of the active business man, +and especially of the business man who wishes, not merely to _adapt +himself_ to changes in values, but also in part, to _control_ and +_manipulate_ those values. _He_ must study every factor which does, in +fact, bring about changes in the value system. We do not find the +market-letter of a brokerage house, or the calculations of a captain of +industry, or trust promoter, troubling themselves about marginal +utilities or labor-pains! Notions of supply and demand, and the +relations of the prevailing interest rate to the capital values of +securities, they do employ. Notions of money-costs of production they +make use of. But they also give very close attention to questions of +governmental policy, to court decisions, to movements in the field of +labor organization, to money-market phenomena, and particularly to gold +movements and the state of the exchanges, to political campaigns, to the +strength of the prohibition movement, to changing fashions and modes, +and, above all, to the general _tone_, the _consensus_, so far as it is +ascertainable, as to whether business is good or bad, whether men are +buoyant or depressed, to the ups and downs of business confidence. They +pay marked attention to the opinions expressed by certain men, great +bankers or industrial leaders, not merely because they think these men +good judges, but also, and in part primarily, because these men are +centres of power, "radiant points of social control," whose opinions +make the opinions of others, and whose statements that times are good +tend to make them good, and that times are bad tend to make them bad. +For static theory, nothing is more contemptible than the view which +"demagogues" often express in Congress that great men in Wall Street +make and unmake prosperity, bring about and check panics. For static +theory, the only way that big men can lower prices is by selling, and +the only way they can raise prices is by buying.[591] Their power to +raise and lower prices is thus limited by the amount of their wealth +which they are willing to employ in this way. As it is not likely to be +profitable to be a bull when the general condition of the "fundamentals" +calls for falling prices, and as bear operations, contrary to the +fundamentals, are likewise usually costly, the inference would be that +the big men will not, even if they could, alter the course of the +market. Their wealth is, after all, not so tremendous, as compared with +the aggregate wealth of the rest of the community. But the market takes +the big men more seriously! When they are selling heavily, other men are +often _afraid_ to buy, such is their prestige. When they give out +opinions, these opinions _become_ the opinions of a host of others, +almost automatically. When Morgan stepped into the breach in the Panic +of 1907 with $25,000,000, it was quite as much the fact that _Morgan_ +had acted, as it was the millions themselves, which relieved the +situation. Indeed, it was in no small degree the prestige of Morgan +which relieved the _disorganization_, which restored the discipline, and +made it possible for the elements in the market to work in harmony and +coöperation again. Society is a functional unity, and the "tone of +business," the ups and downs of prosperity, depend in large measure +indeed on the degree to which the lines of communication between the +different parts are kept open, on the question of whether each part does +its expected task at the right time and in the right way, on the +all-together-functioning, the _integration_, of the elements. These are +phases of the matter from which static theory abstracts. They are +organic problems, not mechanistic problems. Of course, mechanisms get +out of order too. But tightening a bolt is a very different thing from +restoring confidence and discipline to a market! + +Those who wish to control values have their own technology. There +is a technology of industry, a mechanical technology, running in +terms of pistons and levers and soil-fertility-equivalents, and +butter-fat-content, and ton-miles, which is governed by the values. +But there is also a technology of _controlling_ values which involves +advertising, making sentiment, keeping up social discipline, effecting +the equilibration of values by exchange, keeping "interstitial" +adjustments smooth, which involves a different kind of activity, +thought, and ability, and which employs different instrumentalities. Its +problems are problems of human nature and social relationships, its laws +are psychological laws, particularly the laws of suggestion, imitation, +and the like, its tools are the newspaper, the sign-board, the whispered +word, the cigar and the dinner with wine, sound logic, money and credit +instruments, the prestiges of men and institutions. For men whose work +lies in controlling and making values, rather than in making passive +technical adjustments to existing values, the theory of value, as I have +defined it, is of supreme importance. + +This, I may say for the critic who may consider the social value theory +a highly speculative and theoretical notion, does not mean that the +active business man or the advertising writer, has formulated the social +value theory in terms of a social mind, conceived of, in the light of +modern functional psychology, as a functional unity of individual minds! +The advertising writer is a student of modern psychology, and reads +books on the psychology of advertising, which discuss the psychology of +suggestion, and the like. But long before such books were written for +him, he studied the phenomena involved in his own way. It is not his +business to construct a theoretical economics! It is his business to +make a market for his wares. He is interested in the scientific theories +of modern social psychology only in so far as they help him in that +task. He has no occasion to construct a vast conspectus, which shall +summarize the whole economic situation, in its social setting. But my +point is, simply, that the kind of phenomena which he does study are +indicated and stressed and brought into a system in the theory of social +value which I have tried to elaborate. As his purposes are different +from those of the economist, his method of approach, and his range of +investigation, will necessarily be different. + +The notion of dynamics has been in a way connected with the idea of +evolution, of historical process in time, while the notion of statics +has been essentially connected with the notion of a cross-section, a +stage, an equilibrium of contemporary forces. How, then, bring the two +together? Of course, we may conceive the evolutionary process itself as +a series of stages, and the mind does tend almost inevitably to do that. +The fact is, of course, a perpetual flow, with unceasing change. The +mind grasps such a notion with difficulty, if at all. Logic is +mechanical and mathematical, and mathematics and mechanics are +static.[592] But further, we may in large measure bring the historical +considerations into a cross-section picture, when it is a value system +that is involved. _Past_ facts exert their influence through _present_ +values; and _future_ facts, which may be expected to modify future +values, come into the present equilibrium as discounted _present_ +worths. + +When we view the situation realistically, moreover,--which means, when +we view it as a living organic, psychological process,--our +cross-section does not need to be narrowed to a moment of time. We may +see the values not yet in stable equilibrium, but in process of +equilibration, with marginal values and prices fluctuating, tending +toward a static goal, but hindered by various cross-currents, of +"friction," of uncertainty, of momentary values which rest on beliefs +regarding the process of transition itself--as when a "bull" on the +war-stocks turns bear temporarily, because he thinks that prices may +fall before recovering themselves, and going higher. We may see +obstacles in the way of readjustment whose importance is itself subject +to static measure--labor temporarily out of work, and labor-time lost, +at so much per day; uncertainties which give rise to speculation, which +calls for the employment of extra banking credit, at such and such per +cent; capital-instruments which have to be "scrapped," representing the +loss of so many dollars. We may see the process of building up new +trade connections, at such and such a cost, to replace others which +formerly functioned, but which no longer serve, which were once worth so +much, and which now are valueless. Watching the realistic process of +transition, through a period of time, we may still apply our static +yardstick to many of its features. + +Above all, do we get in this connection a realization of the fact that +the "immaterial capital" of which Veblen speaks is true social +wealth.[593] Whatever is necessary for the carrying on of economic life, +whatever, if destroyed, must be replaced, before the economic process +can go on, and will be replaced by the expenditure of labor and thought +and money, is capital. The sales-force is as truly a part of the +labor-force of a corporation as are the mechanics. The trade connections +which the sales-force has built up is as truly a part of the capital of +the business as the machines which the mechanics have made. The static +theory which abstracts from this easily leads to dangerous conclusions. +Removing a tariff may well, _after the transition is completed_, give a +greater productive efficiency to a country. But what of the cost of +transition? May not the values destroyed, and to be recreated, in the +form of trade connections, social organization, accomplished +adjustments, and the like, be greater than the new values to be gained +by better adaptation of industry to the physical resources or the +capacities of the labor supply, of the country? In large measure, this +question, in a given case, is susceptible to a quantitative answer. The +statesman who reckons only the gains which the final static adjustment +will bring, and neglects the costs of reaching it, costs not alone in +"scrapped" machines, but also, in "scrapped" social organization, has +missed a substantial part of his problem. + +The theory of prosperity, and the theory of value, are largely concerned +with just this system of social control, by means of which value scales +are altered, and by means of which altered values are brought into a new +equilibrium. It is a complicated fabric of psychological relationships, +partly institutionalized, partly non-institutional. The institutions--as +banks, big corporations, speculative exchanges, and the like, are the +nuclei, about which centre much that is temporary, shifting, and +flexible. Given time, the whole system is highly flexible--it is +organic, and not mechanical. + +The serious injury of this system in a country may well be a greater +disaster than the destruction of physical items. Let unscrupulous +men--or misguided men--bring about a legal repudiation of debts, and the +disaster may be greater than the destruction of a city by an earthquake. +That creditors have been robbed is a minor matter, but that credit has +been shaken, so that men will fear to lend again or to sell except for +cash, may well mean industrial paralysis. + +Considerations like these enable us, in substantial degree, to reduce +"transitional" considerations to common terms with "normal" +considerations. We can apply the static measure to the "transitional +considerations," and we find the values which come into equilibrium in +the "normal" period to be generically like those whose variations +interest us in the period of transition. Indeed, the "normal +equilibrium," if it were ever reached, would also contain these +intangible capital items, though many of them would be much reduced, +since the work that they have to do would be largely gone, if the normal +equilibrium were persistent. + +It does not follow from the foregoing that many of the elements in +"modern business capital" are not, as Veblen's analysis suggests, +sinister and anti-social. To say that their values are true social +economic values, generically the same as the values of wheat or corn or +whiskey or opium or Sanatogen or milk or tickets to burlesque shows, or +silver sacramental sets, or Ford automobiles, is not necessarily to give +them a good moral character! Some of these intangible capital goods are +thoroughly anti-social, and should be destroyed. This is particularly +true of monopoly power, and of popular brands whose value rests in +popular delusion. But even here, caution is needed. Is it socially wise +to destroy a wine cellar, containing an hundred thousand dollars worth +of fine wines, even assuming that Demon Rum is as black as he is +painted, and that Veuve Cliquot is his favorite daughter? Will not the +economic values which have been destroyed in this moral fervor be +recreated? And will not this tend to divert labor and capital from the +creation of a corresponding amount of more wholesome economic goods? +Might it not be wiser from the standpoint of the temperance movement +itself, to sell the wine cellar--at private sale, of course!--and use +the proceeds in the campaign fund of the prohibition party? Of course, +there is more still to the story. The destruction of the wine cellar may +be done so dramatically, and may be so well advertised, that it will +arrest public attention, and tend to create new social values, of a +moral and legal sort, which will prevent the recreating of that wine, by +changing the direction of demand, and by lessening the sources of +supply. Similarly with trade connections, and other intangible capital +items. If destroying one means merely that labor and capital will be +employed in making others no better, the social gain is very doubtful. +And some sort of system of control of interstitial adjustment, of +overcoming friction, etc., there must be. + +I wish to contrast the view I have been here presenting with that +developed by Schumpeter, in his _Theorie der Wirtschaftlichen +Entwicklung_. In Schumpeter's view, the division between statics and +dynamics is much more than methodological. The phenomena of statics and +dynamics are different phenomena. Statics is concerned with the +influence of individual utility-scales, or utility-scales and psychic +cost-scales, hedonistic phenomena. Dynamics is concerned with the +influence of "_energisch_" (as distinguished from "_hedonisch_") +factors. (_Loc. cit._, 128.) Most men are moved by hedonic +considerations. Their economic activity tends toward the equilibrium +described in static theory. Seeking to maximize satisfactions, and to +minimize pains, they tend to get into the "best-possible" situation +("best-possible" under the "given conditions") and stay there. The +"energetic" type of men, moved by motives like love of activity for its +own sake, love of creative activity, love of distinction, love of +victory over others, love of the game, etc., undertake activities which +tend to alter the "given conditions" themselves, to alter the structure +and technique of economic society, to introduce new ways of doing +things, and so to break the static equilibrium. This last type of men is +small in number, but tremendously important. Schumpeter's theory of +value rests solely in an analysis of the hedonic factors mentioned, +conceived of as individual psychological magnitudes. I have discussed +his theory of value in the chapter on "Marginal Utility" in this book, +and would refer to that discussion here. He makes virtually no use of +the value concept there developed in explaining the causation of dynamic +change, but instead, as I have pointed out in that chapter, invents new +concepts, which do the work of the value concept, which he calls +"_Kaufkraft_," "_Kapital_," and "_Kredit_," which do not rest on +marginal utility, but rather on the activities of certain centres of +economic power, particularly of banks.[594] His picture of economic +evolution is that of a conflict between these static and dynamic forces, +between "utility-curves" and the psychological factors of the +"energetic" type, the former represented in a set of static +price-ratios, the latter in a set of dynamic "powers," conceived of, not +as sums of money (even though expressed in money-terms), but as +"abstract power," which grows, not merely out of the individual +psychologies of the entrepreneurs, but also, and primarily, out of the +social influence centered in the banker. This power which the banker +to-day supplies was in earlier periods supplied by the political power +of the despot, and is distinctly a matter of social organization, and +social control, an over-individual, social phenomenon, analogous to the +"social value" which I have sought to put behind all prices, whether +"static" or "dynamic." The dynamic man needs "power," either political +or financial, to "force" the "static" men out of their accustomed ways +of activity. They fear and resist him. He must coerce them. The contrast +is thus sharply made between abstract price-ratios, resting on +individual feeling-scales, and quantitative "powers," measured in money, +resting on a social basis. Between the factors underlying static prices, +and those underlying dynamic prices there is, thus, nothing in common. +Statics and dynamics are concerned with fundamentally different +phenomena.[595] + +If my criticisms of the utility theory of value are sound, and if what +has gone before in this chapter holds good, we must restate Schumpeter's +contrast.[596] The static tendencies do not rest on any peculiarities of +the psychological "stuff" from which static values are derived. They +rest rather in the universal tendencies of all values, whatever the +psychological factors behind them, to come to an equilibrium. The reason +that values, whether they be the values of new and novel things, or the +values of old and familiar things, tend to come to an equilibrium is +that gains come from equilibrating them. When some values are too low, +and some are too high, the opportunities for speculative gain are +evident. Arbitraging transactions, as between different places, +time-speculation, transferring labor and capital from one enterprise to +another, increasing the supplies of some goods and reducing the supplies +of other, changing land from wheat to corn, etc., etc.,--all these +things are sources of gain, and they will be done, whatever the origin +of the values involved. The new, dynamic enterprise, before it becomes +actualized in concrete machinery, factory building, etc., and long +before its income is actualized in money-receipts from the goods it is +destined to produce, becomes an _object of value_. The value is a +_future_ value. But it comes into the present as a discounted present +worth. As such it functions like any other value, tending to attract in +its own direction the land, labor and capital necessary for its +realization. It does not differ in its functioning from the present +worths of future goods of familiar sorts.[597] It tends, after a process +of reëquilibration--which Schumpeter, with his theory of crises, has +done much to elucidate--to come into equilibrium with the older, +"static" values, becomes itself a static value. Indeed, from its +inception, it comes under the static, money measure. It enters at once +into the scheme of static values and prices, even though it causes +readjustment there. + +The preëxisting static values are themselves to be explained, not as +growing out of individual feeling-scales, but as growing out of a +complex social psychology, in which some men and groups of men have +vastly greater social "power" than others. The preëxisting static values +are of the same stuff as the dynamic values. But this has already been +made clear. + + * * * * * + +The possibility of presenting an equilibrium picture of social forces, +to the extent that those social forces submit themselves to the money +measure, the possibility of applying the methods of static price-theory +wherever pecuniary concepts may be carried, does not exhaust the +possibilities of the static notion, at least as a schematic device. +There are many social values, particularly in the legal and moral +sphere, which do not readily come under the money measure, and where +such measurements as may be made in money terms seem obviously +inadequate. Of these values, as of all values, however, the law of +equilibration holds. _All_ tend to come into adjustment of a sort that +will allow the maximum of values to be realized. Something of the +exactness of the static method has recently appeared in a decision by a +famous jurist, confronted with the fact of the conflict of two legal +principles. Most judges would go on the legal theory that there can be +no conflict in the laws of a single sovereign. Of course, we have +courses in "Conflicts of Laws" in our law schools, but the subjects +treated in such courses relate to conflicts, say, between the laws of +New York and the laws of New Jersey. When a judge is presented with a +case of conflict between two laws of New York, he will commonly feel it +to be his duty to "remove" the conflict, by making distinctions, till +the conflict is whittled away. Not a little bad law has thus originated! +The law is "absolute." It knows no exceptions. It does not obey the law +of diminishing significance. Of course, "_de minimis non curat lex_," +but that means, not that there is a delicate margin, where the law +ceases to apply, but merely that the law disregards trifles too +insignificant to attract its attention at all. They are, in mathematical +phrase, "infinitesimals of the second order," discontinuous with the +interests of magnitude great enough to attract the attention of the law. +There is little room in such a legal theory for notions of the sort +discussed in this chapter to find place! But a different theory of the +law is implied, and partly expressed, in a recent decision by Mr. +Justice Holmes: "All rights tend to declare themselves absolute to their +logical extreme. Yet all in fact are limited by the neighborhood of +principles of policy which are other than those on which the particular +right is founded, and which become strong enough to hold their own when +a certain point is reached. The limits set to property by other public +interests present themselves as a branch of what is called the police +power of the State. The boundary at which the conflicting interests +balance cannot be determined by any general formula in advance, but +points along the line, or helping to establish it, are fixed by +decisions that this or that concrete case falls on the nearer or farther +side.... It constantly is necessary to reconcile and adjust different +constitutional principles, each of which would be entitled to possession +of the disputed ground but for the presence of the others." (Hudson +County Water Co. vs. McCarter, 209 U. S., 349, 1908.) Here we have a +scheme very like that of static economic theory! "The boundary at which +the conflicting interests balance"--the _margin_ where the curves of +diminishing value of the two legal principles intersect! A plurality of +legal values, in marginal equilibrium! Lacking a tool of thought so +convenient as money has proved for the economist, the jurist finds +trouble in making his margins precise. He is dealing with quantities for +which he has found no common measure. There is no "standard or common +measure" of legal values. Hence, most lawyers content themselves with +qualitative reasoning, seeking to avoid the necessity of quantitative +weighing and comparison of the factors in their problem by making +distinctions of _kind_. Mr. Justice Holmes recognizes the necessity and +the existence of legal _quantities_, and of making quantitative +distinctions, _i. e._, distinctions of _degree_. He sees a generic +essence common to the whole body of laws, such that marginal equilibria +are possible and actual. + +So far we have a static system of laws. But the same writer, in a later +decision, has said: "And yet again the extent to which legislation may +modify and restrict the uses of property consistently with the +constitution is not a question for pure abstract theory alone. Tradition +and the habits of a community count for more than logic." (Laurel Hill +Cemetery _vs._ San Francisco, 216 U. S. 358, 1910.) As these traditions +and habits of a community may change, so may the legal values change, +and new equilibria need to be reached in a process of readjustment. + +But further, in this view, and in the view of the best students of +jurisprudence in general, the legal values are not an insulated, +self-contained system. In the sentence last quoted, Justice Holmes sees +their root in a total social situation. And it is easy to show that +economic values, in particular, are part of that social situation out of +which legal values derive their power. Legal values enter into economic +values. Economic values enter into legal values. And between legal +values and economic values are marginal equilibria. There is a vast +social system of values, legal, economic, moral, religious, etc., in +constant dynamic change, but tending also to static equilibrium. Changes +at any part of the system compel readjustments throughout. The process +of equilibration is often slow, but slow or rapid, smooth or violent, it +is in constant process. For the further elaboration of notions like +these, I refer again to my _Social Value_. Here, as in the narrower +economic sphere, we have men and institutions whose chief activity is +concerned with the manipulation and control of these values, with +effecting the readjustments, and bringing about the reëquilibrations. +They have their appropriate tools and technology. Money and credit are +merely part of a much wider system concerned with social control and +social adjustment! + + * * * * * + +To summarize: The problem of this chapter has been to harmonize statics +and dynamics, the "theory of wealth" and the "theory of prosperity," +"normal" and "transitional," and similar notions, commonly held to +belong to different spheres, and to be incapable of reduction to common +terms. A number of such contrasts have been passed in review, and +numerous illustrations of the various types of contrast have been given. +It is the contention of the present chapter that the most fundamental of +these contrasts, and the one which gathers up the meaning of most of +them, is that between the theory of value, and the theory of price. The +theory of value is dynamic, is concerned with the phenomena of +prosperity and depression, is realistic enough to deal with transitions +and readjustments; the theory of price is static, and rests in the +notion of accomplished equilibrium, abstracting from the problems of +friction and transition. The reconciliation comes from two angles: on +the one hand we have generalized price theory, showing that in large +measure the phenomena with which value theory, theory of prosperity, +dynamics, deal come under the money measure, are made "static" by +"discounting," and by the application of accounting principles; that +this tends to be more and more true as knowledge grows more accurate; +that "statics" means especially quantitative, as opposed to merely +qualitative, thinking. We have shown further that the static schema is +applicable even where the money measure is inapplicable, and even beyond +the economic sphere, as illustrated by a recent decision of Justice +Holmes. The other angle of approach was to universalize value theory, +dynamics, theory of prosperity, by showing that all prices, whether +"static" or "dynamic" have the same fundamental sort of explanation, +that value is always a matter of social psychology, and never a matter +of mere individual psychical magnitudes, or of "material fact." This is +not to deny that physical facts have their bearing in the scheme: (a) +they are among the objects of value, even though not the only objects, +and (b) material facts, technological, physiographic, and biological, +are the basis on which human nature rests, out of which it has +developed, even though human culture including social values has +increasingly emancipated itself from immediate dependence on them, and +has acquired a partially independent movement of its own. The effort was +not made to reduce mind and matter to common terms, but the case was +rested in an irreducible dualism, and the causal influence of +non-mental factors on the value-scales themselves cannot be measured by +the static scheme. The static scheme, assuming the value-scales, gives a +precise answer as to the influence of the quantities of physical objects +on the marginal values. The significant fact about the values with which +dynamics, theory of prosperity, etc., deal is that they are the values +of immaterial social relationships and institutions, in large part, +which are concerned with the problems of social adjustment and control, +with affecting equilibria in the economic sphere, with overcoming the +friction and effecting the transitions from which static theory +abstracts. This is a phase of production quite as important as the +physical activities of laborers or machines. It has its own technology, +appropriate to its problems. In particular, money and credit are part of +its tools. Since its problems are to control men's minds, it uses +psychological forces. Where the mechanic uses a storage battery, charged +with electricity, to move material things, the technologist of economic +readjustment employs a dollar, charged with social value, which is power +over the action of men. It is as a bearer of value, in form adapted to +the problem, that is in highly saleable form, that the dollar functions. +It is the psychological significance of the dollar, and not its physical +qualities _per se_, that enables it to do its work. The physical weight +in gold, which itself is an object of social value, is commonly the +immediate basis of the value of the dollar to-day, but money may get its +primary value from other sources than valuable bullion. Given this +primary value, the dollar may get an enhancement in that value from the +services which it performs in the social technology of adjustment. + + * * * * * + + + + +INDEX + + +A + + Aborn, W. H., 252, n. + + Absolute _vs._ relative conceptions of value. + See VALUE, ABSOLUTE _vs._ RELATIVE. + + Abstinence, 67ff., 484-85. + See COST OF PRODUCTION, INTEREST. + + Abstraction, legitimate and illegitimate, 189-90, 553-54. + + Acceptance house, 497, 542. + + Acquisition _vs._ production, 482. + + Adams, Brooks, 219. + + Adams, T. S., 13. + + "Adaptation," 573, n. + + Advertising, 257-58, 367, 565. + + Agger, E. E., 140, n. + + Agio, 148-50, 390, 442-50. + See PREMIUM. + + Agricultural credit, 262, 318-19, 430, 492, 504-05, 528-29. + + "All other deposits," see "DEPOSITS" in KINLEY'S FIGURES. + + _Americas, The_, 540. + + Analytical _vs._ historical theories, 397-400. + See also HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS, STATICS, + DYNAMICS, ETC. + + Andrew, A. P., 170, n., 179, n., 537. + + Animism, social explanation of, 16-17. + + Ansiaux, M., 4, n. + + "Appreciation and interest," 76ff., 333, n. + See INTEREST. + + Aquinas, Thomas, 30. + + Arbitrage, 268, 585. + + Aristotle, 118, n. + + Ashley, W. J., 181, n. + + Assets of banks, 285, 489-97, Ch. XXIV; + bonds in, 250, 488, 498, 506, 508, 523; + stocks in, 491-93, 498, 506, 523; + stock exchange items chief factor in, Ch. XXIV, especially 523ff. + See Loans, "COMMERCIAL PAPER," COLLATERAL LOANS, RESERVES, ETC. + + Atwood, A. W., 173, n. + + Auspitz and Lieben, 91, n. + + Austrian School, 56, 70, 94, 300, 486, 562, n. + + Austria, paper money in, 140, 434, n.; + foreign exchange policy of, 181-82, 434, n., 444, 530; + money rates and interest rates in, 429. + + Averages, meaning of, 178, 292, 312-13, 315. + See CAUSATION. + Weighted. See WEIGHTING. + + +B + + Babson and May, 501, n. + + Backwardation, 146. + + Bagehot, W., 18, 37, 540, n., 580. + + Baker, G. F., 518, 519, n. + + Balances, required by banks, 173, 377. + + Balance of trade, 320, 551. + + Baldwin, J. M., 18, 37. + + Balkan Crisis, hoarding of bank-notes in Austria in, 140, n. + + Banks. See ENGLAND, BANK OF, STATE BANKS, PRIVATE BANKS, ETC. + As book-keepers for business, 365; + correspondent relations of, 355, n.; + bank capital, 489, 491, 524; + bank-credit, Ch. IX, 261, 484ff., 489-97, Ch. XXIV; + elasticity of, 129, 183, 216, 281-88, 299, 320; + relation of, to trade, 260ff., 281. + See Trade. Functions of, 484-89, 492-95. + See CREDIT, FUNCTIONS OF. + Technique of, 489-97, Ch. XXIV; + bank-drafts, 355-58, 367; + on New York and other centers, 356-58; + bank-notes, 129, 139, n., 289, 322-23, 447, 448, 472, 473, 487, 495, + 496, 511, 530, 539; + as "capital," 261, 484-88; + elasticity of, 129, 298, 448. + + Banking School, 283ff., 395. + See CURRENCY SCHOOL. + + Banker as centre of power, 32, 466, 484ff., 577, 583. + + Banker's psychology, 141, 304. + + Barbour, David, 154, 218, n. + + Barnett, G. E., 347, n. + + Barter, 99, 100, 130, 133, Ch. XI, 220, 226, 265, 369, 394, 404-07, + 419-21, 493, 536; + highly important in modern life, Ch. XI, 394; + made easier by money as a measure of values, 201, 394, 421; + intellectual difficulties of, 418-20; + physical difficulties of, 423. + + Bastiat, F., 552. + + Bears. See BULLS AND BEARS. + + "Bearer of options" function of money, 148, 201, 314, n., 418, 424-32, + 436, 442, 451, 495, 536, 543; + distinguished from store of value, 425; + dynamic function of money _par excellence_, 426, 495, 536; + reserve function a special case of, 426, n., 536ff. + + Belgium, National Bank of, 182. + + Belief, as element in values, 40, 136, 462-68, 486ff., 574-75; + relation of, to credit, 262, n., 462-68, 486ff., 581. + See CREDIT. + + Bendixen, F., 435, n. + + Bergson, H., 579, n. + + Bilgram, H., 3, n. + + Bills of exchange, 167, 181-82, 201, 254-55, 288-90, 369, 444, 490-91, + 530; + speculation in, 254-55, 514, 515, n.; + as reserves, 181-82, 444, 530. + See also FOREIGN BILLS, AND GOLD MOVEMENTS, INTERNATIONAL. + + Bimetallism, 219, n., 221; + not logically related to quantity theory, 219, n. + + Biological factors in social life, 571-73, 590. + + Böhm-Bawerk, E. von, 9, n., 44, 48, 51, 70, 78, n., 91, 94, 96, n., + 113, n., 146, n., 301, n., 303, n., 437, 563, n. + + Bonds, as bearers of options, 147-48, 425, 428; + listed, sold "over the counter," 250, 514; + bonds sold on Stock Exchange, not "cleared," 370; + held by banks. + See ASSETS OF BANKS. + "One house bond," 147. + + Book-credit See CREDIT. + + "Borrowing and carrying," See STOCKS. + + Bosanquet, B., 18, n. + + Boston, 289, n., 354, 368, 429 n., 503. + + Brassage, 450. + + Brokers, 168, 199, 235, 287, n., 367-68, 371, 372, 374-79, 409, + 496-97, 429, n., 521, n., 531, 575. + + Brown, H. G., 301, n. + + Business, speculation in, 252ff. + + "Business capital" vs. capital-goods, 482, 484ff., 560-61, 569, + 580-82. + See also "GOOD WILL," STATICS, DYNAMICS, FRICTION, ETC. + + Business confidence, 40-41, 97, 118, 185, 210-11, 214, 463-68, 530-31, + 536, 574-75, 577. + + Business cycle, 187-89, 254, 548-49, 555, 573-75. + + "Business distrust," 426, 427, n. + + Business man _vs._ economist, as value theorist, 573-78. + + Bulls and bears, 145, 371-73, 406, 471-72, 522, 576, 579. + + "Buying price" _vs._ "selling price," 402-04, 406-07, 476. + + +C + + Cairnes, J. E., 47, 50, 55, n., 57-59, 62, 64, 67-69, 220, n., 428, n. + + Call loans, 73, n., 375-78, 382, 425, 428ff.; + as "bearers of options," 425, 428ff. + + Call rates, why low, 428ff. + See MONEY RATES, INTEREST. + + Canada, 216, 284, n., 448, 450. + + Cannon, J. G., 347, n. + + Capital, Ch. IV, 98-99, 220, 222-23, 408, 410, 425, 429, 461, 484ff., + 526, 551, n, 560-62, 564-66, 569-70, 580-82; + circulating _vs._ fixed, 526. + + Capital goods. See GOODS, INSTRUMENTAL. + + Capitalist, 264. + + Capitalization theory, Ch. IV, 260, 297, 300ff., 316, 318, 389, + 416, n., 436-42, 459-60, 494, 562-64, 575; + assumes "banker's psychology," 305-06; + assumes fixed absolute value of money, 76ff., 313-14, 389, 438; + limitations of, 305-06,316-17, 481, n., 562, n.; + applied to value of money, Ch. IV, 111, 424, 436-42, 456; + conflicts with quantity theory, 300ff., 310-11, 389. + See also INTEREST, CAPITAL, RENT. + + Capital value, Ch. IV, 149, 224, 318-19, 402, 424, 436ff., 452, 459. + + Carey, H. C., 106. + + Carlile, W. W., 37, n., 397, 400, 407, 411, n. + + Carver, T. N., 4, n., 419, n., 453, n., 573, n. + + Causation, 142-43, 190, 204, 224, 279, 292, 312, 315, 336, 403, + 433, n., 437, 438, 454, 548; + exhibited by _change_, 190, 454-55. + + Causal theory of value, 14ff., 90ff., 96, 114, n., 163, 165-66, + 176-77, 186, 192, 204, 296, Ch. XV, 310, 336, 400-01, + 433, n, 437-38. + + Cause, a definition as, 143, 400-01. + + Checks, 167, 168, 184, 281, 339ff., 354ff., 364-81, 499; + "accommodation checks," 243; + certified, 200, 322, 349, 370, 376; + cashier's, 349; + collection of, 354ff.; + proportions of checks and money in payments, 174, 338, 447, 449, + 463. + + Checking accounts, 173-74. + See DEPOSITS. + + Chen-Huang-Chang, 407, n. + + Chicago, 246, 259, 289, n., 354, 379-80, 503, 542; + chief centre for check collections, 354; + Board of Trade, 252-52, 268, 327, 379-80, 503, 542; + Board of Trade clearing house, 369, 379-80. + + Circular reasoning in value theory, 15, 88, 89, 92, 100-01, 105, 112, + 113, 115, 117, 132, 135, 143, 279, 438, 452. + + Clark, J. B., 12-13, 48, 96, n., 264, n., 439, n., 440, n., 554-55. + + Clark's Law, 439. + + Clark, J. M., 3, n., 11, n., 14, n., 98, n., 413, n. + + Classical School, 69. + See COST OF PRODUCTION, CAIRNES, SENIOR, RICARDO, JAS. MILL, + J. S. MILL, LABOR THEORY OF VALUE, ETC. + + Clearing houses in speculative exchanges. + See STOCK EXCHANGE. + + Clearing houses, bank. + See CLEARINGS. + New York Clearing House, 346, 354; + New York Clearing House banks, 179, 344. + + Clearings, 200, 237-41, 345-46, 378, 392; + as index of "ordinary trade," 240-41, 516; + as index of speculation, 237ff., 378, 392, 516; + in New York City, 237-41, 339, 341-42, 345-47, 357-59, 360, 516; + of New York City trust companies, 345-47; + outside New York City, 239-41, 339, 340, 342, 348-53, 357-59, + 516, n.; + ratio of, to "deposits," 341-42, 348-59, 516, n.; + ratio of, to "total transactions," 348-51, 353, 359, n. + + Clow, F. R., 135, n., 144, n. + + Coin, 139, n., 167, 443-50; + coinage, 443-50; + statistics of, 412, n. + + Collateral loans, 461, 462, 463, 493, 494, 497, 502-06, 513, 523-26; + percentages of, on stocks and bonds, and on "other collateral + security," 502-09; + on "other collateral security" analyzed, 502ff. + + Collection of out of town checks, 354-55. + See CHECKS. + + Commerce. See TRADE. + + Commercial banks, 357, 488, 490, 498-99, 519-20, 523-29; + financing commerce no longer the chief function of, Ch. XXIV, + esp. 523ff. + + Commercial cities, outgrow manufacturing cities, 259. + + "Commercial paper," 431, 457, 490, 496-97, 498-520. + + _Commercial and Financial Chronicle_, 272. + + Commodity theory (Metallist theory, Bullionist theory), 81, 85, 129, + 135, 144, 151-53, 330, 390, 391, 435, n.; + hypothetical case illustrating, 151-53, 327-28, 390, 421; + contrasted with quantity theory, 151-53. + + Competitive display, relation of, to value, 410-11, 438-42, 452. + + Conant, C. A., 73, n., 182, n., 323, n., 347, n., 412, n., 418, n., + 428, n., 502, 510, n., 511, n., 535, n. + + Conant, L. Jr., 252, n. + + Concatenation of values and prices. + See VALUES, PRICES. + + Consols, 470. + + Contango, 145. + + Cooley, C. H., 3, 4, n., 19, 21, n., 30, 37, 484, n. + + Corporations. See STOCKS, BONDS, STOCK EXCHANGE. + Consolidations of, 198-258, 366-67; + lead to duplications of "deposits," 366-67; + corporation finance, 198-99, 201, n. 3, 432, 460-61, 476-77; + corporation securities as credit instruments, 460-61, 476-77, + 492-93, 527. + + Correlation, coefficient of, 237, 237, n. + + Cost of production, Ch. III, 193, 221, n., 257ff., 295, 300, 306-07, + 309, n., 389, 562, n., 565-66; + inapplicable to value of money, Ch. III, 389, 451; + relation of, to supply and demand, 50, Ch. III; + not related to quantity theory, 46ff.; + conflicts with quantity theory, 300, 306-07, 310-11, 389; + assumes fixed absolute value of money, Ch. III, 313-14, 389, 451; + "real costs," 44-45, 64ff., 96, 117, n. See LABOR THEORY OF VALUE. + Money costs, Ch. III, 90, 95; + Austrian cost theory, 56, Ch. III, 90, 95, 116, n. + See also SELLING COSTS. + + Cotton speculation. See NEW YORK COTTON EXCHANGE, AND SPECULATION. + + Credit, 42, 98-99, 130, 143-44, 166ff., Ch. IX, Ch. XIII, + Ch. XIV, 318, Ch. XVIII, 392-393, 395, 427, 441, 447, + Ch. XXIII, Ch. XXIV, 581; + not based on money, 326-27; + based on values, 326-27, 478-86, 485-86, 528-29; + part of general system of values, 40-41, 460, 462-68, 480, 486ff., + 574-75; + definition of, 459-60, 472-74, 489; + distinguished from credit transaction, 473; + juridical aspects of, 395, 460-61, 468-73; relation of, to belief. + See BELIEF. + Functions of, 263-66, 391-92, 395, 407, 441, 475-78, 484ff., 511-12, + 523-29; + relation of, to money, Ch. IX, Ch. XVIII, 393, 395. See also + RESERVES. + Relation of, to trade, Ch. XIII, Ch. XIV, 391-92, 393; + volume of, a function of dynamic change, 474; + elastic. See BANK CREDIT. + As "capital," 261, 461, 484ff.; + in "equation of exchange," 166ff.; + book-credit, 167ff., 226, 369; time-credit, 168. + See LOANS, INTEREST. + See also BANK-CREDIT, DEPOSITS, LOANS, COLLATERAL LOANS, CALL LOANS, + ASSETS OF BANKS, BELIEF, BUSINESS CONFIDENCE, etc. + + _Crédit Lyonnais_, 530, n. + + Credit theory of paper money. See PAPER MONEY and GREENBACKS. + + Crises, 213, 254, 520, 548-49, 555. + See PANICS, BUSINESS CYCLES, BUSINESS CONFIDENCE, THEORY OF + PROSPERITY. + + Cross-section analysis. See HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS. + + Curb, 250. + + Currency School, 283ff., 395; + "currency theory of deposits," 283. + + Curves applied to money, 451-53. + See MARGINAL ANALYSIS. + + Custom, 36, 109, 135, 136, 183-84, 205ff., 391, 405, 562, n., 589. + See HABIT. + + +D + + Davenport, H. J., 12, n., 14, n., 21, n., 25, 65, n., 67, 78, n., 80, + 91, n., 94, 103, n., 113-15, n., 218, n., 314, 418, n., + 419, n., 426, n., 429, n., 434, 447, n., 482, n. + + Davidson, T., 18, n. + + Dean, Rodney, 354, n. + + Debtor Class, 139. + + Debts, 433, n. ff., 472-75, 489; + repudiation of, 581. + + DeCoppet and Doremus, 249, 370. + + Definition, a, as cause for the circulation of money, 143, 400-01. + + DeLaunay, L., 412, n., 415, n. + + Demand. See SUPPLY AND DEMAND. + Increase of, 53; + nominal increase of, 54; + elasticity of, 55, 224-27, 411-13; + for money, in what sense used, 62; + elasticity of, 224-27; + demand curves, 51; + applied to gold, 451ff.; + social value explanation of, 42, Ch. II, 93; + distinguished from utility curves, 49, 52, 70, 80, 113, n., + 115, n., 116. + + "Demand Notes," 322, 448, n. + + Deposits, 129, 143, Ch. IX, 186, 296, 344, 345-47, 453, 472, 487; + by one bank in another, 358, n., 349, 355, n., 357, 365, n., + 367, n., 500, n., 508, 515, n., 530-32; + relations of, to "money in circulation," Ch. IX, 185, 294; + relation of, to reserves, Ch. IX, 286-87, 298-99; + activity of, 345-47, 512-16; + in Europe 262. + SEE GIRO-SYSTEM. + Deposits as "bearers of options," 425; + relation of, to loans, 285ff., 512; + relation of, to trade and prices, Ch. XIII, Ch. XIV, 287; + of private banks, 344; + deposits distinguished from "deposits," 339, n., 343-44, 512; + relation of, to "deposits," 512ff. + + "Deposits" in Kinley's studies of payments, 230, 232-36, 242-43, + 338ff., 392, 512-16; + retail "deposits," 232, 243, 269, 338, 367, n., 368, 392, 513; + wholesale "deposits," 232, 243, 338, 392, 513; + "all other deposits," 232, 235-37, 243, 338, 514; + relation of, to trade, 230, 243-45, 248, 339-40. + See OVERCOUNTING AND UNDERCOUNTING. + New York City, 233, 234, 242, 246, 340ff.; + country, 246; + in Pittsburg, 245-46; + check "deposits," volume of, 339, 360-62, 392. + + _Deutsche Bank_, 530, n. + + Dewey, John, 17, n., 22, 579, n. + + Dibblee, G. B., 259-60. + + Differential principle, and theory of rent, 430-41; + applied to money, 439-41, 529. + + Director of the Mint, statistics of gold consumption, 413, n. + + Discount. See TIME-DISCOUNT and CAPITALIZATION THEORY; + rate of, see INTEREST; + rate of, _vs._ money rates, see INTEREST; + on Greenbacks, see GREENBACKS, PREMIUM, AGIO. + + "Discounting," 298, 597. + + Distribution of wealth, 15, 31, 33, 37, 38, 97, 102-03, 246, 247, n., + 413-16, 465-67. + See also INTEREST, CAPITAL, CAPITALIZATION THEORY, RENT, IMPUTATION + THEORY. + + Division of labor in banking, America and Germany contrasted, 527; + extent of in England, 530, 540-41, 542. + + Dodo-Bones, 82, CL VII, 155, 280, 304, 321, 325. + + "Dollar exchange," 541. + + "Domestic trade" _vs._ foreign trade, appendix to Ch. XIII. + See TRADE. + + Double counting in estimating volume of trade. See OVERCOUNTING. + + Dualism, most useful metaphysics for social sciences, 571-72. + + _Dun's Review_, 272, n., 273, n. + + Dynamics, 42, 106, 178, n., Ch. X, 254, 262-66, 392-93, 395-96, 426, + 474, 484-89, 495, 527-28, Ch. XXV; + dynamics and statics, reconciliation of, 42, 395-96, Ch. XXV; + "dynamic credit," 484-89. + See TRANSITION PERIODS, PROSPERITY, THEORY OF, STATICS, "NORMAL," + FRICTION, FLUIDITY, LIQUIDITY, SALEABILITY, EQUILIBRIUM, + BUSINESS CAPITAL, INTANGIBLE CAPITAL, etc. + + +E + + Elasticity. See DEMAND, ELASTICITY OF, AND BANK-CREDIT, ELASTICITY OF. + + Ellwood, C. A., 4, n., 21, n. + + Emery, H. C, 146, n., 371, n., 576, n. + + England, 142, 184, 447-48, 450, 530, 534, 536-43. + See LONDON, and LIVERPOOL. + Bank of England, 183, 319, 323, 350, 538ff.; + "Bank Restriction" in, 323, n. + + English School, 96. + See CLASSICAL SCHOOL. + + Entrepreneur, 67, 485ff., 539, 583-85. + + "Epi-phenomenon," money as, 266. + + "Equation of Exchange," Ch. VIII, 186, 188, 191, 204, 283, + Ch. XV, 326, 363, 520-22, 527, n., 528, n.; + as equation of "values," 159; + mathematical analysis of, 158-66; + factors in, highly abstract, 162-63, 176-77; + "equation of exchange" _vs._ causal theory, 163, 165-66, 186, + 189, n. + See CAUSAL THEORY OF VALUE. + Statistics of, Ch. XIX. + See QUANTITY THEORY, DEPOSITS, VELOCITY, TRADE, VOLUME OF, + PRICE-LEVEL, etc. + + Equation of supply and demand, 51. + See SUPPLY AND DEMAND. + + Equilibrium, 91ff., 105, 115, n., 116, 117, 119, 156, 187, 190, 222, + 225, 254, 262-66, 293, 298-99, 328, 333, n., 392-93, 401, + 451-57, 557, 570-73, 583, 586-89. + + European Banking, 262, 497, 511, 523, 527, 530. + See ENGLAND, GERMANY, FRANCE, AUSTRIA-HUNGARY, BELGIUM, etc. + + Exchange, 9-11, 133, 224ff., 398ff., 468-69, 520-23; + creates _values_, + not _utilities_, 111, n., 145, 423-24, 424, n.; + in static state, 262-66, 401-02; + relation of, to value, 9-11, 401ff., 468-69. + See TRADE, GOLD MOVEMENTS, INTERNATIONAL, ETC. + + Exchangeability. See SALEABILITY. + + +F + + Fashion. See SUGGESTION. + + Federal Government, 147, 322, 332, 368, 432, 476, 549; + Federal war tax as index of grain speculation, 251. + + Federal Reserve System, 299, 490, 499, 518-20; + should rediscount stock collateral loans, 518-20; + "money trust" and, 518-20. + + Fetter, F. A., 7, n., 48, 78, n., 301, n., 303, n., 437, 440, n., + 562, n. + + Fiat theory, 136, 142. + See also LEGAL THEORY, _Staatliche Theorie_. + + Fichte, J. G., 22, 137. + + Fisher, I., 47, 56, 81, 91, n., 99, 117, n., 124, 128, 130, 143, 152, + 154ff., 172ff., 186ff., 196, 200, n., 203ff., 209ff., 216ff., + 222, 226-29, 231, 240, 247, 248, n., 254, 256, 261, 262, 274, + 281ff., 291ff., 301, n., 302-04, 306, 308, 311, 312, 324, + 326, 331, 333, n., 335ff., 348-49, 351-52, 360ff., 371, 376, + 381-83, 400, 437, 455, 522, 537, 555, 559, 563. + + Fite, W., 21, n. + + Fluidity, 143, 403, 456, 476, 542, 563, n. + See also LIQUIDITY, SALEABILITY, STATIC THEORY, ETC. + + Flux, W. A., 49. + + Foreign bills of exchange, in reserves, 181-82. + See BILLS OF EXCHANGE AND GOLD MOVEMENTS, INTERNATIONAL. + + Foreign trade, 261, 265, 503; + ratio of, to "domestic trade," appendix to Ch. XIII. + See TRADE, BILLS OF EXCHANGE, GOLD MOVEMENTS, INTERNATIONAL. + + France, 136, 139, n., 450, 530, n., 533; + _Banque de_, 136, 183, 425, 538-39. + + Friction, 11, 94, 262-66, 392, 426, 543-44, 554-55, 563. + See also STATICS, DYNAMICS, SALEABILITY. + + Functions of money, 76, 81, 83, 93-94, 110-11, 144-48, 151-53, 201, + 263-66, 313-14, 327-28, 390-91, 394, 399, Ch. XXII, 536ff., + 543; + in relation to value of money, 144ff., 390-91, 309-400, Ch. XXII. + + Functions of value. See VALUE, FUNCTIONS OF. + + "Futures," 243, 251. + See STOCKS, "BORROWING AND CARRYING" OF. + + Future values, 40, 107, 459-60, 480, 486, 585. + See CREDIT, PART OF GENERAL SYSTEM OF VALUES. + + Futurity, not peculiar to credit, 459-60, 475. + + +G + + George, Henry, 78, n., 301, n. + + Germany, 136, 139, n., 145-46, 167, 425, 433, n., 435, n., 527, + 530, n.; + giro-system in, 150, 167, 289; + great use of domestic bills of exchange in, 288-89; + limited division of labor in banking in, 527; + Reichsbank, 182, 183. + + Giddings, F. H., 87, n., 556-57, 571, 573, n. + + Giro-system. See GERMANY. + + Gold, 84, 143, Ch. XXI, 422, 432, 436, 441-43, 443-44, n., 530, + 535-56, 538-39, 567, 591; + in arts, 84, 135, 151-53, 224, 314, 330, 390, 400, Ch. XXI, 451-57; + as money, 84, 135, 141, 146, 224, 304, 322-23, 390, 408-16, 441-43, + 445, 451-57, 495-96, 530, 535-56, 538-39; + value of, 84, Ch. XXI, esp. 408-16, 451-57; + in reserves, 147, 180-81, 324-28. + + Gold mining camps, high prices in, 220, n. + + Gold movements, international, 60-61, 129, 142, 181-82, 183, 261, + 280, 292, Ch. XVI, 434, n., 531, 533-34. + + Gold production and prices, Ch. XVIII, 535-36; + new world discoveries, 219ff.; + Californian and Australian discoveries, 220-21, 221, n. + + Goods, consumers', 34ff., 82, 96, 481; + ranks or orders of. See RANKS. + Instrumental, 38, 81, 297, 482, 484, 500, 569, 579. + + "Goods side" of "equation of exchange," no, 159. + + "Good will," 260, 482-83, 561, 564. + See BUSINESS CAPITAL, INTANGIBLE CAPITAL, SELLING COSTS, ETC. + + Grain speculation. See SPECULATION, COMMODITY. + + Greenbacks, 141, 146, 147, 194, 304, 322-23, 332-33, 422, 432, 435, + 436, 567-68. + + Gresham's Law, 129, 140, n., Ch. XVII; + conflicts with quantity theory, Ch. XVII; + quantity theory version of, 321-22. + + +H + + Habit, 104, 109, 138, 225, 554-55, 589. + See also CUSTOM. + + Hadley, A. T., 157. + + Haig, R. M., 552, n. + + Hamburg, coffee speculation in, 252; + Giro-Bank, 150. + + Haney, L. H., 3, n. + + Harvey, "Coin," 327. + + Havre, coffee speculation in, 252. + + "Hedging," 243, 253, 264. + + Hegel, G. W. F., 18, n. + + Helfferich, Karl, 14, 82, n., 110, n., 134, 418, n., 419, n. + + Heredity, 571-73. + + Hermann, F. B. W. von, 438, n. + + History, economic interpretation of, 33. + + Historical vs. cross-section viewpoints, 101ff., 119-20, 135-39, + 397-400, 548, 553-54, 578-81. + See also STATICS, DYNAMICS. + + Hoarding, 140, n., 174, 207, 208, 211, 333, n. + + Hobson, J. A., 73, n., 308, n. + + Hollander, J. H., 154, 250, n. + + Holmes, Justice O. W., 24, 587-90. + + Holt, Byron W., 222, 249, 370. + + Hubbard, Guy C., 260, n. + + Hughes Commission, 252, n. + + Hume, David, 21, 47. + + +I + + Ideal credit economy, 543. + + Ideal values, 467, 480. + + Imitation. See SUGGESTION. + + Imputation theory, 28, 38-40, 99, 300, 389, 424, 481; + conflicts with quantity theory, 300, 303-04, 310-11, 389. + + Income, money. See MONEY INCOME. + + Income, net, of the United States, appendix to Ch. XIII. + + Index numbers, of check circulation, 361-62, 383; + of net income of the United States, 278; + of prices, 278, 381-82, 383, 436; + of railway gross receipts, 278; + of trade, 227-29, 255-56, 278, 363, 381, 383. + See STATISTICS. + + India, 140, 143, 149, 181, 443, 444, n., 449; + a liability, rather than an asset, to quantity theory, 444, n. + + Individual interest and social advantage, 397-99. + + Individual values, 19, 43-45. + See also VALUE, SUBJECTIVE, PERSONAL, SUBJECTIVE EXCHANGE. + + Individualistic theories, 14-16, 20, 21, 22ff. + + Individuality, a social product, 16-19. + + Industry, rather than commerce, chiefly financed by modern banks, + Ch. XXIV, esp. 523-29. + See ASSETS OF BANKS, BANK CREDIT, FUNCTIONS OF. + + Inertia. See HABIT, CUSTOM. + + Institutional values, 29-30, 413, 484. + + Institutions, 19, 27, 484, 487, 562, n., 570. + + Insurance policies as credit instruments, 472. + + Intangible "capital" _vs._ capital goods, 482-83, Ch. XXV. + See also GOOD WILL, BUSINESS CAPITAL, ETC. + + Interest, 146, 219, 223-24, 225, 301ff., 333, n., 416, n., 428-32, + 437, 471, 472; + "appreciation and," 76-78; + productivity theory of, 224, 302-03, 437; + "use" theory of, 437, 438, n.; + "pure rate" of, 75, 76, 77, 428-29; + _vs._ "money rates," Ch. IV, 224, 428-32, 461, 521, n., 523-24, + 526, 529. + See also MONEY RATES, CALL RATES, CAPITALIZATION, TIME DISCOUNT. + + International banker, 409, 446, 539ff. + See GOLD MOVEMENTS, INTERNATIONAL. + + International trade. See FOREIGN TRADE. + + Investment, 270, 523ff., 528; + _vs._ speculation, 521, n., 523-26; + banker, 489, 519, 523, n., 527-28. + + "Invisible items" in foreign trade, 268, 270, 320. + + +J + + James, William, 579, n. + + Jenks, J. W., 260, n. + + Jevons, W. S., 25, 48, 91, n., 107, 522, n. + + Jewelers, 409, 454-57; + paper of, in the money market, 454-57. + + Johnson, A. S., 4, n., 13, 105, 115, n., 265, n., 403, n., 440, n., + 563, n. + + Johnson, J. F., 73, n., 333, n., 418, n. + + Joint Stock Banks, 184, 530, 539. + See LONDON, ENGLAND. + + Jurisprudence, 23-24, 588. + See LAW, LEGAL VALUES. + + Juristic thinking, 24-25, 29, 433, n., 586-88; + contrasted with economic thinking, 433, n. + + +K + + Kant, I., 22, 137. + + Kemmerer, E. W., 48, 129, 135, 140, 141, 156, 157, 167, 170, 175, n., + 220, n., 226, 240, n., 254, 256, 274, 312, n., 321, 334-37, + 359, n., 361, n., 363-65, 381-83, 400, 426, n., 443, n., + 444, n., 522, n., 537, 538, n. + + Keynes, J. M., 180, 181, 182, n., 184, 207, 443, n., 535. + + King, W. I., 242, 243, 246, n., 247, n., 248, n., 269, 271-72, 275, n. + + Kinley, D., 13, 48, 78, n., 80, 110-11, 174, 208, n., 230, 233-36, + 237, n., 242-45, 249, 254, 256, 269, 321, 337-45, 349, + 350-52, 360, 365, n., 368, 376, 383, n., 419, n., 447, 449, + 463, 498, n., 512-15. + + Kirkbride and Sterret, 347, n. + + "Kiting," 368. + + Knapp, G. F., 49, 150, 418, n., 433-5, n. + + Knies, Carl, 12, 133, 323, n., 418, n., 419, n. + + Kuhn, Loeb & Co., 343-44, 515, 515, n. + + +L + + Labor theory of value, 12, 44-45, 64ff., 139, 570. + See VALUE, COST OF PRODUCTION, ADAM SMITH, RICARDO, MARX, CAIRNES. + + Land speculation, 254, 264, 317. + See SPECULATION. + + Laughlin, J. L., 48, 135, 141, 144, 146, 177, 219, n., 281, 282, n., + 283, n., 284, 312, n., 319, n., 327, n., 418, n., 419, n., + 443, n., 444, n., 459. + + Law, theories of, 23ff., 586-89; + statics and dynamics of, 586-88. + + LeBon, G., 37. + + Legal tender, 147, 418, 422, 432-36, 442, 445-47, 448, n. + See FUNCTIONS OF MONEY. + + Legal theory of money, 134, 136, 405, 433n., ff. + See _Staatliche Theorie_. + + Legal thinking. See JURISTIC THINKING. + + Legal values, 23-29, 40, 138-39, 413, 414, 435, n., 562, n., 586-89. + + Lewes, G. H., 87, n. + + Liabilities of banks, 285; + relation of, to loans, 286. + See DEPOSITS, BANK-NOTES, ETC. + + Liquid paper, 455, 489-91, 499ff., 513-18. + + Liquidity, 455, 475, 489, 495, 499ff., 508, 513-18, 526-27, 529-44. + See SALEABILITY, STATICS, FRICTION. + + Liverpool, 252, 259. + + Loans, on call. See CALL LOANS. + On cotton, 481, 504, 508, n.; + on grain, 380, 503, 508, n.; + to stock market, 375ff., 379, n., 430, 488, 502-03, 507-12, + 518-20, 523-28; + to wholesalers and retailers, 504-05; + consumption, 463; + war, see WAR LOANS. + Collateral, see COLLATERAL LOANS. + Activity of, 512-14; + relation of, to deposits, 285ff.; + relation of to "deposits," 375-81, 512-14; + relation of, to trade, 287, 287, n.; + relation of, to international gold movements, 318-19; + short loans as bearers of options, 425, 428-32. + See also ASSETS OF BANKS, "COMMERCIAL PAPER," "MORNING LOANS," + "OVERCERTIFICATIONS." + + Locke, John, 47. + + London, 145, 251, 259, 259, n., 497, 522, n., 539ff.; + stock exchange, 451; + money market, illustrates assumptions of static theory, 539ff. + + +M + + "Manipulation," of values and prices, 575ff., 589. + + Manufacturers' "paper," 454, 457, 500, 513, n. + + "Margins," 372, 488, 489, 493, 521, n., 523-26, 528; + "margin operator" as "banker," 524-26. + + Marginal analysis, 24, 51, 440, Ch. XXV; + applied to law, 586-89; + applied to money, 152-53, 199, 208, 225, 227, 451-57, 534. + + Marginal utility, 13, 14-15, 30, 34-35, 38, 40, 42, 44, 46, 49, + Ch. V, 137, 440, n., 562, n., 570, 583-86; + applied to value of money, Ch. V, 137; + essentially static theory, 106ff.; + Schumpeter's version of, 44, 90ff., 113, n., ff., 583-86; + limitations of, 92ff.; + "relative marginal utility," 113-114, n., 115, n., 440, n.; + quantity theory and, 46. + + "Market letter," 222, 575. + + Marshall, A., 48, 105, 265, n. + + Marx, Karl, 12. + + Mathematical economics, 91, n., 117, 139, 142, Ch. VIII, 310, 438, + 553. + + McCulloch, J. R., 66. + + Mead, G. H., 4, n. + + Meade, E. S., 198, n., 202, n., 477, n. + + Measure of values, 133, 150-53, 201, 265, n., 325, 327-28, 391, 417, + 418-23, 436, 451, 543, 567-69, 538; + must have value, 133, 326; + relation of, to commodity theory, 151-53; + applied to non-economic values, 567-69. + See also FUNCTIONS OF MONEY. + + Medium of exchange, 133, 201, 327-28, 391, 404, 418, 420-24, 425-26, + 433, n., 434, n., 436, 442, 543; + must have value, 133. + See FUNCTIONS OF MONEY. + + Meinong, A., 467. + + Menger, Karl, 14, 48, 82, n., 88, 96, n., 110, 397, 398, 400, 401, n., + 402-04, 406, 407, n., 418, 476, 493. + + Mercantilism, 225, 551. + + Merriam, L. S., 13, 419, n. + + Metallist theory. See COMMODITY THEORY. + + Middlemen, effect of eliminating, on price level, 306-07. + + Mill, James, 66. + + Mill, J. S., 46, 47, 50-52, 55, n., 58, 59, 61, 67, 69, 94, 129, 132, + 161, n., 172, 192, 193, n., 265, 285, n., 319, n., 333, n., + 548. + + Minneapolis, bills of exchange in, 289, n. + + Mises, L. von, 14, 48, 49, 80, 83, 88, 100, 109-11, 120, n., 182, n., + 418, n., 429, n., 434, n., 556. + + Mitchell, W. C., 91, n., 179, n., 188, 213, n., 265, n., 286, n., + 323, n., 329, n., 332-34, 363, 412, n., 430, n., 448, n., + 449, n., 522, n., 533, 536, 568, 574. + + Mode. See SUGGESTION. + + Money, abstracted from by static theory, 99, 265-66, 392; + definitions of, 167, 169, 325-26, 495-96; + functions of, see FUNCTIONS OF MONEY; + must have value from non-pecuniary source, Ch. VII, 326, 390-91, + 417, 440, 449, 591; + origin of, 394, Ch. XXI; + money not unique, 82-83, 85, 137, 145, 147, 148, 325, 329-30, 389, + 406-07, 417, 425, 437-50, 477-78, 535, 542, 544; + peculiarities of, 3, 57-58, 64, 69, 71, 74ff., 78-79, 81-83, 85, + 88, 91, 101, 124, Ch. VII, 132, n., 134, 144-45, 153, 392-93, + Ch. XXI, Ch. XXII, 406, 437ff.; + tool or instrumental good, Ch. IV, 82-83, 224, Ch. XXII, 591; + theory of, developed in isolation, 46ff.; + theory of, must be dynamic, 262-66, 393. + See also STATICS, DYNAMICS. + Value of, _vs._ "reciprocal of price-level," 8, 56-57, 77, 100, + 123, 128-29, 155-56, 312-13, 382, 388-89, 433, n., 449. + See VALUE, ABSOLUTE _vs._ RELATIVE. + Relation of, to credit. See CREDIT, RESERVES, RATIO, FIXED, M:M´. + Relation of, to trade, Ch. XIII, Ch. XIV. + See TRADE. + See ANALYTICAL TABLE OF CONTENTS. + + "Money in circulation," Ch. VIII, 173, 175, n., 179, 185. + + Money economy, 90, 220, 225, 265, n., 397, 399, Ch. XXI, + Ch. XXII, 555. + + "Money-funds," distinguished from money, 63, 427, 453, 495-96. + + Money income, distinguished from real income, 89; + distinguished from quantity of money, 90, 307-310. + + Money market, 32, 62, 221, 222, 319, 406, 427, 430, 453-58, 461, + 495-97, 516-20, 522, n., 524, 529-44, 575-76. + + "Money Post," on New York Stock Exchange, 372, 375, 430-31. + + Money rates, Ch. V, 145, 149, 183, 223, 224-26, 316, 319-20, 378, + 406, 428-32, 453-57, 461, 495, 523-24, 526, 529-30, 534; + _vs._ interest rates. See INTEREST. + Relation of, to bank reserves, 378; + to clearings, 378; + to international gold movements, 316, 318-20; + to dividend and interest payments, 522, n.; + to plans for corporate consolidations, 198; + to jewelers' profits, 454; + to trade, 223, 224, 226; + to volume of speculation, 378, 522, n. + + "Money Trust," 518-20. + + Monism, unsatisfactory metaphysics for social sciences, 571-72. + + Moore, H. L., 237, n., 238, n., 574. + + Morality, theories of, 22-23. + + Moral values, 22-29, 40, 137-38, 480, 562, n., 567-69, 582, 589. + + Morgan, J. P., 140, 519, n., 577; + J. P. Morgan & Co., 343-44, 375, 515, n. + + "Morning loans," 376, 377, 509, 510. + See "OVERCERTIFICATIONS." + + +N + + National banks, 234, 338, 342, n., 343, 345, 347, 355, n., 359, 375, + 498-99, 502-03. + + National City Bank, 375, 521, n., 540, n. + + Negative values, as "real costs," 71, n. + + New York City, 233-35, 259, 259, n., 340ff., 383, 392, 430-31, + 439, n., 502, 503, 506, 511, 514-16, 520, 541-42; + as "clearing house" for country, 236, 353ff.; + contrasted with London, 541-42; + "deposits" in, 233, 340ff., 392, 515; + "all other deposits" in, 235-37; + Cotton Exchange, 252, 503, 541; + Coffee Exchange, 252, 268, 503, 541; + Stock Exchange. See STOCK EXCHANGE. + Money market. See MONEY MARKET. + Clearings. See CLEARINGS. + + Newcomb, Simon, 156. + + Nicholson, J. S., 81-82, 124, 129-32, 134, 151, 167, 325-29. + + "Nominalism" in monetary theory, 433, n., ff. + See _Staatliche Theorie_. + + "Normal tendency," 176, 218, 254, 262-66, 293, 298-99, 315, 392-93, + 395, 536ff.; + "normal _vs._ transitional." + See "TRANSITION PERIODS," STATICS, DYNAMICS. + + Norton, J. P., 179, n., 287, n. + + Note-brokers, 496-97, 499. + + +O + + "Odd lot" dealings in securities, 249, 370. + + "One house bonds," 147. + + Origin of money, 394, Ch. XXI. + + Ornament, and origin of money, 408ff. + + Orthodox economist, 258, 549, 560. + + "Other collateral security," analyzed, 502ff. + + "Other loans and discounts," analyzed, 500ff. + + "Overcertification," 200, 376, 509, 510. + See "MORNING LOANS." + + Overcounting in estimates of volume of trade, 168, n., 200, n., + 230, 243-45, 247, n., 255, 339-40, 364-81. + See UNDERCOUNTING. + + Overproduction, 258, 550. + + "Over the counter" dealings in securities, 249, 370. + + +P + + Panics, 174, 273, 435, 446, 448, 520, 548-49, 555. + See CRISES, BUSINESS CYCLES. + + Paper money, 143, 150, 151, 418, 421, 473, 495, 496, 538; + inconvertible, 57, 84, 108, 132, 134, 136, 140, n., 141, 321-23, + 391; + credit theory of, 141, 146. + See GREENBACKS, AUSTRIA. + + Parasitic occupations, 482; + gold mining as, 262, n.; + American banking as, 527. + + Patten, S. N., 558, n. + + Paulsen, F., 22. + + Payments, 177-78, 338, 367, n.; + proportions of money and checks in, 174, 338, 383, 447, 449, 463; + wage, 174, 531; + relation of, to volume of trade. + See OVERCOUNTING, UNDERCOUNTING, BARTER. + + Pay rolls, money for, 174, 349. + + Pearson, Karl, 237, n. + + Perry, R. B., 3, n., 16, n., 21, n., 25, n., 97, n., 117, n., 118, n., + 119, n. + + Persons, W. M., 241, n., 276, n. + + Phillips, C. A., 174, n. + + Phillips, Osmund, 272, n., 353, n., 354, n. + + Physiographic factors in social life, 571-73, 574, 590. + + Pierson, N. G., 221, n. + + Pittsburg, "deposits" in, 245-46. + + "Platform" of quantity theorists, 155. + + Poker chips, 132. + + Pope, J. E., 316, 317, 319, n., 502, n., 504, n., 505. + + Populists, and quantity theory, 141. + + Positive doctrine, in Parts I and II, summarized, Ch. XX. + + "Power in exchange," 9-10, 388. + + Pragmatism in economic theory, 41-42, 93, 96-97, 98-99, 553, 571-72. + + Pratt, S. S., 248, n., 251, n., 252, n., 369, 370, 374, 476, n. + + Premium, 146, 194, 322, 332, 390, 442-50, 471. + See AGIO. + Gold, _vs._ general price level as index of value of money, 194. + + Prestige as economic power, 33, 37, 41, 405, 409, 411, 438-42, 463, + 465-66, 487, 489, 570; + prestige values. + See VALUES. + + Price, Theodore, 222. + + Price, 7ff., 388, 440, n.; + and value, 8ff., 298. + See VALUE. + "Buying price" _vs._ "selling price," 402-04, 406-07, 476; + "just price," 24. + + Price level, 56, 86, 87, Ch. VI, Ch. VIII, 188-89, Ch. XV, 315-17, + 328, 381-82, 388-89, 416, 416, n., 456, 520-23; + relation of, to particular prices, 156, 183, 295, 311-12, 315-17, + 388-89; + _weighted_ average, tied to T, 163ff., 363, 381-82; + supposed "passiveness" of, 126, 186, 187, 192, 290, Ch. XV, 389; + "reciprocal of," _vs._ value of money. + See MONEY, VALUE OF. + + Price-theory _vs._ value-theory, 49, 78, 389, 558-59, 570-77, 589-90. + See SUPPLY AND DEMAND, COST OF PRODUCTION, CAPITALIZATION THEORY, + IMPUTATION THEORY. + + Prices, concatenations of, 112-13, 300, 310, 313-14; + customary, 144; + fluid, 143; + world prices, and gold production, Ch. XVIII. + + Private banks, 338, 343-45, 348, 355, n., 357, 488, 498-99, 514-16, + 527-28, 531; + deposits in, in New York City, 344, 515; + "deposits" in, in New York City, 343-45, 515-16. + + Produce exchanges, 200, 251ff., 406, 541. + See SPECULATION, COMMODITY, CHICAGO BOARD OF TRADE, LONDON MONEY + MARKET, NEW YORK COTTON EXCHANGE, ETC. + + Production, confused with trade. See TRADE. + Relation of, to trade, 257ff., 269, 393; + exchange as. + See EXCHANGE. + Factors of, 268, 481-82; index of, 278; + money as instrument of. + See MONEY. + + "Productive," meaning of, 257, 591. + + Prosperity, theory of, 262, 395, 548, 555, 556, 569, 573ff. + See STATICS, DYNAMICS. + + Protective tariffs, 550-52, 553, 580-81. + + Pujo Committee, 344, 373, n., 375, 491, n., 515, n., 518-19. + + "Purchasing power," 9-10, 88, 98-99, 484; + of money, 86, 88, 155-56, 388, 583-86. + + +Q + + Qualitative _vs._ quantitative thinking, 191-92, 195, 324, 433, n., + 553, 586-88, 590. + See JURISTIC _vs._ ECONOMIC THINKING. + + Quantity theory, 42, 79, 81, 99, 110, Pt. II, esp. Ch. XV, 435, n., + 444, n., 448-49, 478, 520-23, 537ff., 550, 558, n.; + modicum of truth in, 195, 330, 448-49; + as basis of prediction, 334-35; + doctrine of, that quantity of money is of no importance, 219, + 219, n., Ch. XIII, _passim_, 265, 391-92; + conflicts with other theories, see SUPPLY AND DEMAND, COST OF + PRODUCTION, CAPITALIZATION THEORY, IMPUTATION THEORY, + GRESHAM'S LAW. + "Long run" _vs._ "short run" versions of, 170-71, 188-89, 192ff., + 262, 393; + not a functional theory, 262-66, 400-401; + not logically related to bimetallism, 219, n.; + applied to international trade, 61, 129, 183, 280-81, 292, + Ch. XVI; + not related to general theory of value, 46ff., 305; + psychological assumptions of, 143-44, 305, 444; + relation to medium of exchange function, 152, 266; + contrasted with commodity theory, Ch. VII, esp. 151-53; + types of, Ch. VII, Ch. VIII, 172, 177, n., 182-85, 192-94, + 210, n., 216-17, 218, n., 219, n., 220, Ch. XVIII, 521, n., + 522, n., 537, 538, n. + See RICARDO, MILL, J. S., TAUSSIG, NICHOLSON, FISHER, WALKER, + F. A., JOHNSON, J. F., JEVONS, BARBOUR, ANDREW, + DAVENPORT (p. 218, n.), KEMMERER. + + +R + + Railway gross receipts, 240-41, 278, 516; + relation of, to clearings, 240-41. + + "Ranks" or "orders" of goods, 34, 38, 96, 481, 562, n. + See IMPUTATION THEORY, AUSTRIAN SCHOOL, CAPITALIZATION THEORY. + + Ratio of exchange, 6ff., 25, 92, 388, 584; + abstract, as value, 25, 92. + See VALUE, ABSOLUTE _vs._ RELATIVE, PRICE, "PURCHASING POWER." + + Ratio, fixed, M:M´, Ch. IX, 187, 206, 281, 288, 290, 294, 328-29, + 529-44. + See RESERVES, DEPOSITS, "MONEY IN CIRCULATION." + + Real estate trade. See TRADE. + + Rediscounting, 490, 494, 518-20. + + _Reichsbank._ See GERMANY. + + Religious values, 414. + + Rent, 316, 439-41; + as cost, 70; + of money, as "money rates," Ch. IV, 145, 149, 424, 438-42, 451-57; + capitalization of. See CAPITALIZATION. + + Reserve cities, 233, 343, n., 357, 359, n. + + Reserve function of money, Ch. XVIII, 418, 421, 424, 436, 536-44; + special case of "bearer of options" function, 426, n., 536ff. + See FUNCTIONS OF MONEY. + + Reserves, Ch. IX, Ch. XVIII, 393, 395, 447, 451, 491, 517, 529-44; + bills of exchange as, 181-82, 444; + legal reserve requirements, 175, n., 184, 447, 448, 449; + ratio of, to deposits, 175, n., 179, 286-87, 298, 324ff., 529-44; + ratio of, to "money in circulation," 175, n.; + relation of, to money rates, 378; + "secondary reserves," 530. + + Resumption of specie payments, 146, 323. + + Retail "deposits," see "DEPOSITS." + + Retail trade. See TRADE. + + Ricardo, David, 47, 50, 51, 64, 65, 66, 106, 131, 550. + + Ridgeway, W., 407, n. + + Ripley, W. Z., 275. + + Risk, 67, 527, 542-43. + See DYNAMICS, "BEARER OF OPTIONS." + + Ross, E. A., 37, 568, 571. + + Royce, J., 18, n. + + Rupee. See INDIA. + + Rural banks, 232-35, 491, 517-18; + "all other deposits" in, 233-35; + loans by, in Wall Street, 517-18; + small volume of transactions of, 235, 342, n. + + +S + + Saleability, 10, 94, 99, 401-07, 430, 440-41, 453, 475-78, 489, + 493ff., 524-25, 526-27, 529, 540ff., 591. + + Santos, coffee speculation in, 252. + + Savings banks, 342, n., 409, 472, 498-99, 523. + + Savigny, F. C., von, 24, 398. + + Schumpeter, J., 44, 49, n., 80, 83, 90-100, 111, 113, n., ff., + 264, n., 265, 401, 429, n., 484-85, 488, 526, 549, 554-55, + 558, n., 583-86. + + Scott, DR, 78, n. + + Scott, W. A., 13, 48, 81, 132, 141, 144, 327, n., 418, n., 419, n., + 422, n., 431, n., 498, n., 501, n. + + Seager, H. R., 301, n., 303. + + Sea Board Air Line Adjustment 5's, 471. + + Seasonal changes, 187, 192, 533. + + Seignorage, 131. + + Self, the, 19. + + Seligman, E. R. A., 73, n., 301, n., 418, n., 548. + + Selling costs, 257ff., 393, 565. + + "Selling price" _vs._ "buying price." See "BUYING PRICE." + + Senior, N. W., 14, n., 67. + + Sex, social transformation of, 35-36; + rôle of, in origin of money, 409-13. + + Shakspere, 25. + + Share sales. See STOCK EXCHANGE, CLEARINGS. + + Shaw, A. W., 259, n. + + Silver, 139, n., 150, 151, 152, 219, 221, n., 327, 397, 412, 414, + 415, 421, 434; + certificates, 432. + + Simmel, G., 101, 418, n. + + Single tax, 318-19, 552, n. + + Smith, Adam, 12, 50, 64, 65, 222, 526-27, 550, 556. + + Smith, B. F., 366, n. + + Smith, Munroe, 24. + + Social control, Ch. I, 395, 409, 435. n., 482, 584; + technology of, 577ff., 589, 591; + "radiant points of," 37, 576. + + Social psychology, 17, 36-37, 143-44, 560, 569-70, 577-78, 586. + + Social value theory, Ch. I, 87, n., 98-99, 137ff., 158, 279, 310-11, + Ch. XX, 402, n., 408-16, 433, n., 435, n., 438-42, 464-67, + 469, 480, 560, 569-82, 586-89; + pragmatic character of, 40-42; + applied to law, 24, 586-89; + applied to morals, 22-24, 589. + + Social advantage, relation of, to individual interest, 397-99. + + Social "consciousness," 16; + social expectation, 409; + social forces, 26; + "social marginal utility," 12; + social mind, 7, 12, 34, 87, n., 557, 560, 570, 578; + social objectivity, theories of, 20ff.; + social organism, 16, 577; + social "oversoul," 16; + "social use-value," 12; + social _vs._ individual values, 43-45. + + "Socially necessary labor-time," 12, 15. + + Society and individual, 16-26, 118. + + Soetbeer, A., 413, n. + + Sombart, W., 220. + + South Atlantic States, "deposits" in, 233, 246. + + Spahr, C. B., 274. + + Specie, 182. + + Speculation, 60, n., 85, 143, Ch. XIII, 221, 225, 231, 233-41, 248ff., + 267, 298, 363-64, 382, 392, 503, 514-28, 540ff., 566-67, 579, + 585; + by manufacturers, wholesalers, and retailers, 243-44, 252-54; + commodity, 251ff., 379-80, 406, 503, 540-42; + influence of, on bank clearings, 237-41; + land, 254; + in London, 540ff.; + "odd lot," 249, 370. + + Speculators, 31, 249, 263, 322, 488, 499, 523-27, 529, 544; + _vs._ investors. See INVESTMENT. + + Spencer, Herbert, 571. + + "Spot" transactions, 251. + + Sprague, O. M. W., 174, n., 200, 354, n., 378, 502, n. + + _Staatliche Theorie_, 433, n., ff. + + Stabilizing the value of money, 152, 194. + + Standard, of deferred payments, 326, 391, 418, 436; + of value, 133, 201, 390, 418-23. + See MEASURE OF VALUES. + Money, 135, 325-26, 421, 445; + "primary" and "secondary," 422; + tabular, 152, 436. + + State banks, 234, 322, 338, 342, n., 343, 345, 347, 498-99, 505-09; + collateral loans in, 505-06, 507. + + Static theory, 11, 42, 93, 106ff., 176, n., 177, n., Ch. X, 219, n., + 223, 254, 262-66, 292-93, 395-96, 403, 426, 433, n., 474, + 481, n., 485, 487, 488, 536-44, Ch. XXV; + abstracts from money, 99, 265-66, 392; + relation of, to speculation, 263ff., 392, 474; + dynamics and, reconciliation of, Ch. XXV. + See also, SALEABILITY, LIQUIDITY, FLUIDITY, "NORMAL TENDENCY," + EQUILIBRIUM, "WEALTH OF NATIONS, THEORY OF," DYNAMICS, + TRANSITION PERIOD, PROSPERITY, THEORY OF, GOOD WILL, + "BUSINESS CAPITAL," FRICTION, HISTORICAL _vs._ CROSS-SECTION + VIEWPOINTS. + + Statistics, 237, n., 272, n., Ch. XIX; + of banking assets, 498, 503-04, 506, 509-11; + of bank-drafts on New York and other centres, 357; + of "equation of exchange," 191, 213, Ch. XIX; + of foreign and domestic trade, appendix to Ch. XIII; + of gold consumption, 412, n.; + of money in banks, _vs._ money in circulation, 179; + of money-rates, 430-31; + of net income of the United States, 246, 247, n., 278; + of prices, 278; + of quantity theory, 285, n., Ch. XIX; + ratio, loans to deposits, 286-87, n.; + reserves, 178-79, 286-87, n.; + of speculation, 248ff.; + of trade, 227ff., Ch. XIII, 363-81; + "ordinary trade," 240-47; + of velocity, 339, 361-63. + See WEIGHTING IN STATISTICS. + + Stevens, W. S., 199, n. + + St. Louis, 246, 252, 289, n., 503; Merchants' Exchange, 253. + + Stock exchange, 31, 145, 254, 282, n., 369ff., 406, 458, 491, 520, + 521-23, 527, 541, 564; + New York Stock Exchange, 242, 248ff., 268, 344, 430-31, 514, 521-23, + 541; + clearing house in, 199-200, 369-75; + share sales on, volume of, 248ff., 521, n., 522, n., 541; + share sales on, correlated with bank clearings, 237ff., 516; + bond sales on, 249, 370; + "odd lot" dealings on, 249, 370, 374; + security dealings outside, 250-51, 514; + compared with other exchanges, 250, 541. + + Stocks and bonds, essential identity of, 460-61, 476-77; + "borrowing" of, 145-46, 371-74, 471-72; value of. + See VALUE. + + "Stop loss" orders, 249, 373, n. + + Store of value, 314, n., 408, 418, 424, 426, 451. + Sec FUNCTIONS OF MONEY. + + Substitutes for money. See MONEY, NOT UNIQUE. + + Suess, Eduard, 413, n. + + Suggestion, 18, 36-37, 97, 118, 405, 410, 411, 464-66, 560, 570, + 577-78. + + Supply and demand, Ch. II, 80, 295, 299-300, 311, n., 389, 453; + applicable to general price level, 299-300, 389; + assumes fixed absolute value of money, 52ff., 313-14, 389; + conflicts with quantity theory, 299-300, 310-11, 389; + not related to quantity theory, 46-47, 59-61, 295; + inapplicable to money, Ch. II, 389; + applied to money, 59-62, 325, 453, n.; + in "money market," 62-63, 224, 453; + relation of, to cost of production, 50, 69-70; + relation of, to marginal utility, Ch. II, Ch. V, esp. 94-95, + and 114, n. + + +T + + Tabular standard, 152, 436, 451. + + Tarde, G., 18, 37, 466, 568. + + Tariff. See PROTECTIVE TARIFF. + + Taussig, F. W., 48, 49, 107, 123, n., 129, 151, n., 155, 182-85, 192, + 216, 254, 276, n., 379, 532, n., 537. + + "Taxonomy" in economic theory, 563-64, 565, 566. + + Taylor, Jas. H., 252, n. + + Taylor, W. G. L., 13. + + Technology, 571-74, 576, 590-91; + "technology of social control." See SOCIAL CONTROL. + + Temporal _regressus_. See HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS. + + Thompson, Burton, on barter in New York City real estate dealings, + 198, n. + + Ticker, 248-49, 373, n. + + "Till money," 183, 530, 539. + + Time credit. See CREDIT, FUTURITY, BOOK-CREDIT, BILLS OF EXCHANGE. + + Time discount, Ch. IV, 92, 93, 224. + See INTEREST, CAPITALIZATION. + + Time, influence of, of money-rates, 428-32. + + Timeless-logical _vs._ causal-temporal, relationships, 403, 548. + See CAUSATION, STATICS. + + Token money, 325, 326. + + Touzet, A., 412, n. + + Trade, various meanings of, 267ff.; + "domestic" _vs._ foreign, appendix to Ch. XIII; + "ordinary," volume of, 241-47, 369. + + Trade, volume of, 59-61, 117, Ch. VI, 144, 149, 159ff., 194, 215, + Ch. XIII, 332, n., 339-40, 363-81, 521-23; + an abstract number, distinguished from concrete goods, 161; + a pecuniary magnitude, 16-64, 271, 277-78; + confusions of, with production, or with stock, 225ff., 281, + 296, n., 306-07, 363, n., 521, n.; + governed by dynamic causes, 262-66, 392, 474; + quantity theory doctrine of causes governing, 217-18, 218, n., + 240, 255, 256, 257, 294, 522, n.; + real estate trade in, 198, 254, 264, 317; + relation of, to money and credit, Ch. XII, Ch. XIV, 391-92, + 532-36; + relation of, to price level, 160-66, 363, 381-82, 536; + retail trade in, 173, 184, 232, 242-44, 369, n., 444-45, 447, + 448-49, 463, 489, 531; + speculation chief factor in, Ch. XIII. + See SPECULATION. + Wholesale trade in, 232, 243, 244-46, 253-54, 369, n., 381. + See also BARTER, TRANSACTIONS, PAYMENTS, OVERCOUNTING, + UNDERCOUNTING. + + "Transactions, total," relation of, to bank clearings, 348-51, 353, + 359, n., 360; + relation of, to "deposits," 349-51, 353. + + "Transition periods," Ch. X, 196, 218, 262-66, 293, 298-99, 392-93, + 537ff., 548, 578-81, 589. + See "NORMAL TENDENCY," STATICS, DYNAMICS. + + Trosien, 319, n. + + Trust companies, 338, 342, n., 343, 345-48, 498-99, 505-09, 516, n.; + New York City, "deposits" in, 345-48; + clearings of, 345-47; + deposits of, 345, 516, n.; + collateral loans of, 505-07; + reserves of, 346-47, 531 + + Turgot, 78, n., 301, n. + + +U + + Undercounting in estimates of volume of trade, 168, n., 200, n., + 231, n., 364-65, 369-81. + See OVERCOUNTING, BARTER. + + Underwriters, 32, 488, 523, n. + + Urban, W. M., 29, n. + + "Use theory." See INTEREST. + + Utility. See MARGINAL UTILITY. + + +V + + Vacuum, monetary, 323. + + Value, Part I, 388-89 and _passim_; + absolute _vs._ relative, 7ff., 56-57, 77-78, 81, 86ff., 109-110, + 123, 156, 158-59, 303, 312, 328, 388-89, 402, n., 440, n., + 449; + abstract units of, 451; + exchange and, 9-11, 401ff., 483-84; + wealth and, 5, 41, 388; + as generic, 26, 288, 467; + _differentiæ_ of species of, 26ff.; + as quality, 5, 41, 97-98, 388; + as quantity, 5, 41, 97, 98, 388; + control over, 575ff.; + causal theory of. See CAUSAL THEORY. + Definition of, 5-7, 388; + derived, becomes independent, 40, 137ff., 391, 480, 481, n., + 562, n., 563, n. + See also IMPUTATION THEORY, CAPITALIZATION THEORY, RANKS OR ORDERS + OF GOODS. + Formal and logical aspects of, 5ff., 41, 86, 98, 388-89, 401-02, n.; + functions of, 10, 27, 43, 57, 87, n., 388, 440, 487, 552, 562, n., + 572, 585-86; + "human nature," 30, n.; + "inner objective," 13, 88, 110, 402, n.; + institutional. See INSTITUTIONAL VALUES. + "Intrinsic," 24; + "intrinsic causes of," 14, n.; + objective, 85, 87, 100; + of consumers' goods, 34ff., 300; + of diamonds, 438-42; + of gold. See GOLD. + Of instrumental goods, 38ff., 297, 300ff., 304, 467; + of money. See MONEY and ANALYTICAL TABLE OF CONTENTS. + Of stocks and bonds, 30-31, 32, 36-41, 300ff., 462; + "participation," 29, 30, n.; + "personal," 19, 86, 88, 89; + "prestige," 410-11, 438-42, 452-53; + "public economic," 13, 86, 88, 89; + "something physical," 135; + subjective, 85, 86, 88, 99, 100, 401-02, n.; + subjective, in exchange, 88, 89, 91, 99, 100, 101, 112-119, + 137, n. + See MONEY, VALUE OF, SOCIAL VALUE, PRICE, RATIO OF EXCHANGE, + "PURCHASING POWER," "POWER IN EXCHANGE," MARGINAL UTILITY, + COST OF PRODUCTION, SUPPLY AND DEMAND, ETC. + + Value theory _vs._ price theory. See PRICE THEORY. + + Values, concatenation of, 313-14; + simultaneous rise or fall of, 8. + + Van Antwerp, W. C., 372, n., 374, n. + + Van Hise, C. R., 208, n. + + Variables and constants, 97, 119, 143-44, 204-05, 256-57. + + Veblen, T. B., 37, n., 411, 439, 477, n., 556, 560-64, 569, 570, 580, + 582, 585. + + Velocity of circulation, 85, Ch. VI, 117, 131, 143, 194, Ch. XII, 290, + 292, 298, 309, 310, 333, n., 339, 361-63, 394; + "coin transfer" _vs._ "person-turnover" concepts of, 203-04, 308; + as causal entity, 204, 209, 213-13, 214; + quantity theory analysis of causes governing, 143, 203, 205ff., 309; + most highly flexible factor in "equation of exchange," 205; + varies with trade, 209ff., 306-08, 394; + varies with prices, 308-10, 394; + varies with value of money, 215; + meaningless abstract number, 204. + + +W + + Wagner, A., 25, n. + + Walker, Amasa, 401, n. + + Walker, F. A., 46, 62, 169, 170, n., 219, 220, n., 237, 414, n., + 419, n., 521, n. + + Wall Street. See NEW YORK CITY, STOCK EXCHANGE, NEW YORK CITY CLEARING + HOUSE, SPECULATION, MONEY MARKET, "MONEY TRUST," ETC. + + Walras, L., 91, n. + + Walsh, C. M., 188, n. + + Wants, social nature of, 35ff.; + competitive. See COMPETITIVE DISPLAY. + + War, 108, 140, n., 194, 427, 549-51; + World War, 136, 139, n., 142, 416, 427, 481, 521, 539, 550, n.; + American securities returned during, 521, n. + + War loans, 463, n., 464, n., 480-81. + + Wealth, 440; + definitions of, 5, n.; + relation of, to value, 5; + distribution of. See DISTRIBUTION OF WEALTH. + + "Wealth of nations," theory of, 262, 395, 556, 569. + + Weighting, in statistics, 163ff., 229, 229, n., 272, n., 341, 361, + 383. + + Weston, N. A., 339, 341, 342, n., 360. + + Wheat as money, 407. + + Whitaker, A. C., 65, 154, 319, n. + + White, Horace, 209, 211, 345, n., 401, n. + + Wholesale "deposits." See "DEPOSITS." + Trade. See TRADE, VOLUME OF. + + Wicksell, Knut, 128. + + Wicksteed, P. A., 91, n., 115, n., 116, 117, 214. + + Wieser, F. von, 14, 48, 49, 70, 80, 83-90, 99, 100, 101, 102, 106, + 109, 111, 308, n. + + Williams, A., 152. + + Williams, Clark, 347. + + Willoughby, W. W., 18, n. + + Wilson, E. B., 164, 165. + + Withers, Hartley, 221, 222, 540, n. + + Wittner, Max, 289, n. + + Wolfe, O. Howard, 349, 353, n., 359, n. + + Wolff, S., 289, n. + + +X + + _xy = c_, 149. + + +Y + + Yule, G. U., 237, n. + + +Printed in the United States of America + + * * * * * + + + + +FOOTNOTES + + +[1] _Social Value_, Houghton Mifflin, Boston, 1911. + +[2] Cooley, C. H., "Valuation as a Social Process," _Psych. Bull._, Dec. +15, 1912; "The Institutional Character of Pecuniary Valuation," +_American Journal of Sociology_, Jan. 1913; "The Sphere of Pecuniary +Valuation," _Ibid._, Sept. 1913; "The Progress of Pecuniary Valuation," +_Quart. Jour. of Econ._, Nov. 1915. Clark, J. M., "The Concept of +Value," and "A Rejoinder," _Quart. Jour. of Econ._, Aug. 1915. Anderson, +B. M., Jr., "The Concept of Value Further Considered," _Ibid._; +"Schumpeter's Dynamic Economics," _Pol. Sci. Quart._, Dec. 1915. Perry, +R. B., "Economic Value and Moral Value," _Quart. Jour. of Econ._, May, +1916. Bilgram, Hugo, "The Equivalent Concept of Value," _Ibid._, Nov. +1915. Haney, L. H., "The Social Point of View in Economics," _Ibid._, +Nov. 1913 and Feb. 1914. Johnson, A. S., in _American Economic Review_, +June, 1912, pp. 320 _et seq._ Carver, T. N., in _Jour. of Pol. Econ._, +June, 1912. Mead, G. H., in _Psych. Bull._, Dec. 1911. Ellwood, C. A., +in _American Jour. of Sociology_, 1913. Ansiaux, M., in _Archives +Sociologiques, Bulletin de l'Institut de Sociologie Solvay_, May 25, +1912, pp. 949-55. + +Professor Cooley's articles, which I have listed first in this note, +have in certain important particulars shifted the emphasis and changed +the method of approach. He is more interested in the general +sociological aspects of the value problem than in the technical economic +aspects. In considering economic value, he is more interested in its +general social functions than in its function as a tool of thought for +the economic theorist. He has, therefore, been less bound by schemata +than I have in the discussion. This different method of approach, +coupled with a singular charm in exposition which characterizes +everything Professor Cooley writes, makes it seem probable to me that +readers who may find the doctrine as I set it forth unconvincing, will +be convinced by Professor Cooley's exposition. I hope, too, that +Professor Cooley's articles, which have been scattered among three +periodicals, may soon appear together under one cover. + +[3] Including many whose formal definitions are quite different, and who +would repudiate the contentions here advanced! _Cf._ my article, "The +Concept of Value Further Considered," _Quarterly Journal of Economics_, +Aug. 1915, and _Social Value_, chs. 2 and 11. + +[4] Definitions of wealth differ, and there are few if any definitions +of wealth broad enough to make it true that only items of wealth have +value. All wealth has value, but not all value is embodied in wealth. +Thus, stocks and bonds, and "good will" have value. Few writers would +classify them as wealth. The distinction between wealth and property is +employed by many writers to meet the difficulty here presented, and it +is held that these intangibles have only the value of the wealth to +which they give title. In a logical schema, on the assumption of a +fluid, static equilibrium, this may serve. It is true in fact, however, +that many of these intangibles have value apart from the wealth to which +they give title. But these are complications which I reserve for a later +part of this chapter, for the chapter on "Statics and Dynamics," and (in +the case of irredeemable paper money) for the chapter on "Dodo Bones." + +[5] The notion of ratio of exchange as a ratio between values is +strictly accurate only under static assumptions. Goods, in actual life, +are not always exchanged strictly in accordance with their values. _Cf._ +my article, "The Concept of Value Further Considered," _Q. J. E._, Aug. +1915, pp. 698-702. In cases where prices, or exchange relations, are not +in accord with values, the term "ratio of exchange" is inapplicable, +since there are no quantities to be terms of the ratio--except the pure +abstract numbers of the commodities, each measured in its own unit, +exchanged. + +[6] In chapter 17 of _Social Value_, I have followed the German usage in +broadening the term, price, to cover all exchange relations. This has +led to misunderstanding on the part of some readers, and it has seemed +best to me to return to what appears to be the more familiar usage. It +is purely a question of convenience. Practically, ratios of exchange +which are not money-prices rarely come in for discussion, outside the +preliminary chapter on definition! Professor Fetter, in his article on +the "Definition of Price," in the _American Economic Review_, Dec. 1912, +proposes to broaden the term price in the manner which I am here +abandoning, and his count of economists would seem to leave usage about +equally divided between the broader and narrower uses of the term. It +does not seem to me to be a point worth arguing about, however, and +since I am practically convinced that cause of misunderstanding will be +removed by using price to mean "money-price," I shall so use the term in +this book, using ratio of exchange, or exchange relation, to express the +broader concept. + +[7] E. g., Böhm-Bawerk, _Grundzüge der Theorie des wirtschaftlichen +Güterwerts_, Conrad's _Jahrbücher_, 1886, p. 478, n.; Carver, "Concept +of an Economic Quantity," _Quarterly Journal of Economics_, 1907. + +[8] This distinction is elaborated _infra_, in the chapter on the +"Origin of Money." + +[9] It is a matter of high importance that the value notion should be +extended beyond exchange, if the economist is to be able to apply his +theory to such highly important economic problems as socialism. _Cf._ +Schäffle, _Quintessence of Socialism_, and Clark, J. M., _Quart. Jour. +of Econ._, Aug. 1915, p. 710. + +[10] As shown, _infra_, in the chapters on "Supply and Demand," "Cost of +Production," "Capitalization Theory," etc. + +[11] _Vide Social Value_, p. 176, n. _Cf._ Davenport, _Value and +Distribution_, chapter on "Ricardo." + +[12] Knies, _Das Geld_, vol. I of _Geld und Credit_, Berlin, 1873, pp. +113-125, esp. 124. + +[13] Chapter on "Value" in the _Philosophy of Wealth_, and ch. 24 of the +_Distribution of Wealth_. + +[14] _Social Value_, ch. 7. + +[15] T. S. Adams, "Index Numbers and the Standard of Value," _Jour. of +Pol. Econ._, vol. x, 1901-02, pp. 11 and 18-19; Kinley, "Money", p. 62; +W. G. L. Taylor, "Values, Relative and Positive," _Annals of the Amer. +Acad._, vol. ix; Merriam, L. S., "The Theory of Final Utility in its +Relation to Money and the Standard of Deferred Payments," _Annals of the +American Acad._, vol. iii. and "Money as a Measure of Value," _Ibid._, +vol. iv; Scott, W. A., "Money and Banking", 1903 ed., ch. III. Professor +Scott, in a letter to the writer, expresses the opinion that a value +concept which makes the value of a good a quantity, socially valid, +regardless of the particular holder of the coin or commodity in +question, and regardless of the particular exchange ratio into which the +value quantity enters as a term, "is absolutely essential to the working +out of economic problems." Johnson, A. S., "Davenport's Economics and +the Present Problems of Theory," _Quarterly Journal of Economics_, May, +1914, and _American Econ. Rev._, June, 1912, p. 320. + +[16] Cf. also Wieser's _Natural Value_, p. 53, n. Senior's "intrinsic +causes of value" comes to the same thing. + +[17] Cf. _Quarterly Journal of Economics_, Aug. 1915, pp. 681-82, esp. +681, n. + +[18] Among the leading figures in economics to whom this doctrine is +unacceptable, I would mention especially Professor H. J. Davenport, +_Value and Distribution_ and _The Economics of Enterprise_. A writer who +seeks to minimize the importance of the issue between the relative and +the absolute conceptions of value is Professor J. M. Clark, in +_Quarterly Journal of Economics_, Aug. 1915. Professor Clark seems to +agree with much of what has been said here, and the present writer would +agree with Professor Clark, as indicated above, that for many purposes +we do not need to look behind prices--entering a _caveat_ that this is +true only so long as we can assume a fixed absolute value of money. + +[19] The psychology of this statement, which involves hedonism, needs +improvement, but the issue need not be discussed here. _Cf. Social +Value_, ch. 10. + +[20] As Professor R. B. Perry, _Quart. Jour. of Econ._, May, 1916. + +[21] In this I am following a line of thought developed by Professor +John Dewey in a lecture delivered before the Harvard Philosophical Club +in 1913-14. + +[22] For the elaboration of these ideas, cf. Hegel, _Philosophy of +History_, _passim_; Willoughby, _The Nature of the State_, _passim;_ +Davidson, T., _History of Education_, New York, 1900, _passim_; +Bosanquet, B., _Philosophical Theory of the State_; Royce, J., _The +World and the Individual_. + +[23] Tarde, _Laws of Imitation_; Baldwin, _Social and Ethical +Interpretations_. + +[24] _Human Nature and the Social Order._ + +[25] _Cf._ Ellwood, C. H., _Some Prolegomena to Social Psychology_, +Chicago, 1901, and Cooley, C. H., _Social Organization_, New York, 1909. +See also _Social Value_, ch. 9. + +[26] _Cf. Social Value_, ch. 8. H. J. Davenport is the best modern +representative of this extreme individualism in economics. Individualism +is nearly dead in modern political, ethical, and sociological theory. +Revivals of it appear, however, in W. Fite, _Individualism_, and in a +recent article by R. B. Perry, "Economic Value and Moral Value," _Quart. +Journal of Economics_, May, 1916. (I have discussed Professor Fite's +views in the _Pol. Sci. Quart._ of June, 1912.) Professor Perry would +there appear to reduce ethical value to a purely individual phenomenon. +But he really brings in a "categorical imperative," not derived from the +values of the individual, by the "back door." "Now our general moral law +prescribes that an agent shall take account of all the interests which +his conduct affects, or shall judge his conduct by its consequences all +round." (_Loc. cit._, p. 481.) Just how this "general moral law" is to +be derived from individual values, is not made clear. That the wants of +every man should count equally with the wants of the agent is a +principle which one would expect from Kant or Fichte, but hardly one +which individualism can expect to maintain. + +[27] I use "volition" here in that wide sense which makes it cover both +the motor and the affective phases of mind. Munroe Smith would emphasize +the motor aspect, where Savigny stresses feeling and sentiment. + +[28] "Jurisprudence," a lecture delivered before the faculty of Columbia +University, Feb. 1908, New York, The Columbia University Press, 1909, p. +14. + +[29] I ran across this in Wagner's _Grundlegung_. Wagner had found it in +Raul. It is from _Troilus and Cressida_, Act II, Scene II. + +[30] Davenport, _Value and Distribution_, pp. 184, n., and 330-31, n.; +Jevons, _Theory of Political Economy_, pp. 14, 78-84, esp. 83. _Cf. +Social Value_, ch. 4. This seems to be the position of Professor R. B. +Perry, also, though he is not so extreme as Davenport. _Loc. cit._ + +[31] This term carries no connotation of teleology, as here used. I am +merely trying to state what the different kinds of value _do_, as a +matter of fact. + +[32] The _extent_ to which the values of consumption goods and services +are reflected in other economic values will receive attention below, in +the present chapter. + +[33] _Cf. Social Value_, p. 125, and Urban, _Valuation, passim_. Urban's +idea of "participation values" is better expressed by Cooley's phrase, +"human nature values," while Cooley's excellent phrase, "institutional +values" characterizes the more complex values in which classes and +institutions are specially _weighted_. _Cf._ Cooley's articles referred +to above, and _Social Value_, chs. 11-15, inclusive. + +[34] "The Institutional Character of Pecuniary Valuation," _American +Journal of Sociology_, Jan. 1913, p. 546. + +[35] This, unfortunately, is not high praise, as the Federal Judiciary +in general sets a lamentably low standard in these matters. + +[36] Neither "desire" nor "satisfaction" is really accurate here, but I +do not wish to digress for a discussion of the psychology of value in +the individual mind. The present argument can be developed without it. +The matter is discussed in detail in ch. 10 of _Social Value_. + +[37] Ross, E. A., _Social Psychology, passim_. + +[38] _Cf._ Veblen, T. B., _Theory of the Leisure Class_, and Carlile, W. +W., _Evolution of Modern Money_. + +[39] _Social Value_, chs. 3-7, esp. ch. 5. + +[40] But land does often have value which it is impossible to explain on +the basis of any income which may reasonably be expected from it, even +in the remote future. + +[41] P. 174. + +[42] _Cf._ the discussion of Wieser, Schumpeter and von Mises in the +chapter on "Marginal Utility," _infra_. + +[43] Flux, W. A., _Economic Principles_, London, 1904, pp. 4, 27, 29; +Taussig, F. W., _Principles of Economics_, New York, 1911, vol. I, pp. +141-143. _Cf._ my _Social Value_, ch. 5. + +[44] _Cf._ the present writer's _Social Value_, chs. 3-6, inclusive. + +[45] I am here abstracting from an important factor, namely, that not +all prices are affected equally by changes in the value of money. Some +prices are fixed by law and custom, and some incomes are tied by long +time contracts. Thus, it will happen, in many cases, that supply and +demand for a given good will be unequally affected by a change in the +value of money. This means that certain values are _tied_ to the value +of money, rising and falling with it, so that the amount of _power_ +which some elements in the economic situation are able to exert through +supply-price-offer and demand-price-offer are at the mercy of changes in +the value of money. But this is an element which is incalculable, on the +basis of the supply and demand concepts, and must be abstracted from if +we are to make any definite assertions as to the effect of increase or +decrease of demand in the active sense on supply in the passive sense, +or vice versa. Unless we make this abstraction, and unless we assume a +fixed value of money, we might find increase of demand in the active +sense (nominal) leading sometimes to an increase, and sometimes to a +decrease of supply in the passive sense, or rather, being accompanied by +either increase or decrease of supply in the passive sense. No law would +be possible. In practice, both of these abstractions are more or less +consciously assumed. + +[46] I think that it is a feeling that Mill has left out the +psychological factors in supply and demand which led Cairnes to the +effort to give definiteness to other and vaguer notions on the subject. + +[47] _Cf. Social Value_, ch. 2; "The Concept of Value Further +Considered," _Quart. Jour. of Economics_, Aug. 1915. For the doctrine +that supply and demand, and other elements of current price theory, +assume a fixed absolute value of money, see _Social Value_, p. 166, n., +and ch. 17. + +[48] _Leading Principles_, ch. on "Supply and Demand." + +[49] _Cf. Social Value_, pp. 29-30, and 64-71. + +[50] _Cf._ the discussion, _infra_, of "T" in the "equation of +exchange." + +[51] Cotton is chosen for this illustration because it has actually +happened, more than once, that a large crop has sold for a smaller +aggregate price than a smaller one. Thus, not to take an extreme +illustration, the crop of 1910-11 was 11,568,334 bales. That of 1911-12 +was 15,553,073 bales. The average price of spot cotton at New York from +Oct. 1910 to June, 1911, inclusive, was almost 15c. per lb.; the average +price of spot cotton in New York during the same months in 1911-12 was +not quite 10 cents per lb. On this basis, the eleven million odd bales +of 1910-11 sold for substantially more than the fifteen million odd +bales of 1911-12. + +[52] Nor is there anything in the hypothesis to reduce the number of +times any good needs to be exchanged against money. Rather there would +be an increase of exchanging, as speculation took place to bring about +the needed readjustments. For the present, I abstract from this. _Cf. +infra_, the chapter on "Volume of Money and Volume of Trade." + +[53] I shall recur to this point in the chapter on "The Quantity Theory +and International Gold Movements." + +[54] _Quart. Jour. of Economics_, 1894-95, p. 372. + +[55] _Cf._ Davenport, _Value and Distribution_, and Whitaker, _Labor +Theory of Value_. + +[56] _Cf. Social Value_, pp. 29-30; 64-71. + +[57] I incline to the view that the explanation of costs by foregone +positive values needs supplementing by a recognition of the rôle of +_negative social values_, and that thus interpreted, "real costs" have a +minor part to play. But I have not thought the matter through +satisfactorily, and shall find no occasion to use the doctrine in the +present volume. + +[58] This doctrine as applied to rates on call loans appears in +Seligman's _Principles of Economics_, 1912 ed., p. 395. The +peculiarities of call loans have also been discussed by C. A. Conant, +_Principles of Money and Banking_, I, p. 171. Conant there refers to a +discussion by Joseph F. Johnson, in _Pol. Sci. Quarterly_, Sept. 1900, +p. 500. There are some very interesting distinctions between the "hire +price" and the "purchase price" of money developed by J. A. Hobson, in +his _Gold, Prices and Wages_, pp. 153 _et. seq._ + +[59] One "pure rate" of interest, for loans of all periods over, say, +three years, is doubtless, a myth, or better, a methodological device +for simplifying thinking in connection with the theory of interest, and +the capitalization theory. It is not necessary for our purposes, +however, to give detailed analysis to the notion. We shall discuss the +capitalization theory as we find it, assuming that, as a matter of fact, +the difference between loans of 20 years and loans of 35 years, or in +perpetuity, of equal quality in other respects, may be abstracted from, +with safety. + +[60] The price-level is a _weighted_ average. These elements dominate +it. _Cf._ our discussion, in the chapter on the "Volume of Money and the +Volume of Trade," _infra_, of the elements entering into trade. We shall +make use of the capitalization theory at various points in our +discussion of general prices. _Cf._ the chapter on "The Passiveness of +Prices," where it is shown that the capitalization theory and the +quantity theory are irreconcilable. + +[61] There is an extensive body of controversial literature connected +with the capitalization theory, which it is unnecessary, for present +purposes, to consider. One interesting line of doctrine is that +developed by DR Scott (_Jour. of Pol. Econ._, Mar. 1910) and H. J. +Davenport (_Yale Review_, Aug. 1910), in which ordinary formulations are +criticised as assuming a "social rate" of interest, and in which the +effort is made to work the thing out on the basis of extreme +individualization, each man having a rate of discount of his own. I have +accepted the doctrine in the general form in which it has been developed +by Böhm-Bawerk (in criticism of Turgot and Henry George in his _Capital +and Interest_), by Fetter, in his _Principles of Economics_, and by +Fisher in his _Rate of Interest_, abstracting from points on which these +writers disagree. My criticism of their doctrines, were it necessary +here to develop it, would rest on the ground that their treatment of the +general interest problem is too individualistic, and I should side with +them as against Scott and Davenport. But these matters are aside from +our present problem. + +In our chapter on "Marginal Utility" we shall meet the capitalization +theory again, as applied to the value of money by David Kinley. We shall +also take it up in the chapters on "Dodo Bones," and "The Functions of +Money." + +[62] _Social Value_, chs. 3-7. The point is discussed _infra_ in the +present chapter. + +[63] Fisher, I, _Purchasing Power of Money_, p. 32. + +[64] Edition of 1903. + +[65] _Cf._ the chapter on "Dodo Bones," _infra_. + +[66] _Cf._ Menger's art. "Geld," Conrad's _Handwörterbuch_, 328, 3rd +ed., vol iv, p. 566. + +[67] _Cf._ Helfferich, _Das Geld_, ed. 1903, p. 480. + +[68] Discussed more fully _infra_, chapter on "Dodo Bones." + +[69] I make virtually no reference to the "spoken" part, which is +chiefly concerned with index numbers. + +[70] Chapter on "Dodo Bones." + +[71] Chapter on "Barter." + +[72] In its psychological explanation, this bears somewhat the same +relation to the social value concept of the present writer that the +social mind concept of Giddings and Lewes bears to the social mind +concept of the present writer. _Cf._ _Social Value_, ch. 9. Wieser's +concept excludes individual peculiarities. It is an abstraction from +individual values, a distillation of their common essence. The social +value concept of the present writer is a focal point in which are +summarized all the individual values, whether alike or divergent, and +not merely the individual marginal utilities of the goods in question +(Wieser's only factors) but also the individual emotions which affect +the distribution of wealth. Wieser's concept is based on a study of +individual marginal utilities considered as atomic elements; that of the +present writer looks on the social mind as an organic whole, in which +individual mental processes are phases, and does not try to synthesize a +social value out of elements, but rather, to analyze it into elements. +In the function in economic theory for which they are destined, however, +the two concepts have much in common. Both seek to be the fundamental +economic quantity. Both seek to be causal forces, lying behind prices, +even though expressed in prices; both oppose the conception of value as +merely relative. + +[73] _Social Value_, chs. 5, 6, 7, and 13. _Infra_ in the present +chapter. + +[74] See especially the chapter on "The Passiveness of Prices." + +[75] _Cf._ the writer's "Schumpeter's Dynamic Economics," _Political +Science Quarterly_, Dec. 1915. Schumpeter's theory, as there presented, +is based on the brief discussion in his _Theorie der wirtschaftlichen +Entwicklung_ (Leipzig, 1912), pp. 61 et seq., 105, 166-667, 116, 464, +and on Schumpeter's verbal expositions of the theory during his American +trip. Since that account was published, Professor W. C. Mitchell has +given an account of Schumpeter's doctrine, based on the fuller +discussion in Schumpeter's _Wesen und Hauptinhalt der theoretischen +Nationalökonomie_, which is in accord with the account here given. +(Mitchell, in _Papers and Proceedings_, Supplement to March, 1916, +_American Econ. Rev._, p. 150.) Mitchell attributes the essential +elements of Schumpeter's theory to Walras. The first exposition in +English of the conception, so far as the present writer is aware, is in +Irving Fisher's _Mathematical Investigations in the Theory of Value and +Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. Professor +Fisher, in his preface, accords priority to Jevons, Auspitz and Lieben, +and to Walras. The conception is not to be found in Jevons, though many +of the ideas involved in it are. The first non-mathematical exposition +of the doctrine, so far as I know, is by Schumpeter. As will be made +clear in a footnote at the end of the present chapter, neither Wicksteed +nor Davenport has really forced the problem through, to the full +equilibrium picture, and neither has escaped the Austrian circle. I do +not concur with Professor Mitchell's interpretation of Wicksteed on this +point. It may well be that mathematical method, with a system of +simultaneous equations, was necessary for the development of the idea. +If so, it illustrates both the strength and the weakness of mathematical +economic theory: it clarifies thinking, but it gets no causal theory! At +all events, no causal theory emerges in this case. + +[76] _Positive Theory of Capital_, Bk. IV, and _Grundzüge der Theorie +des wirtschaftlichen Güterwerts_, in Conrad's _Jahrbücher_, 1886. The +writer who would adhere to Schumpeter's doctrine must give up all notion +that any individual occupies a critical "marginal" position. All men are +equally marginal in Schumpeter's scheme. + +[77] _Positive Theory of Capital_, p. 156. + +[78] Schumpeter's scheme gives no money-prices. No form of this scheme +gives any quantitative values. Nothing but ratios can come from it. + +[79] _Supra_, chs. on "Value" and "Supply and Demand." + +[80] See, _infra_, the chapters on "Volume of Money and Volume of +Trade," and "The Functions of Money." + +[81] _Infra_, chs. on "Origin of Money," "Functions of Money," and +"Credit." + +[82] _Supra_, ch. on "Supply and Demand." + +[83] See note at the end of this chapter. + +[84] _Supra_, chapter on "Cost of Production." + +[85] That this is wholly alien to Böhm-Bawerk's thought is sufficiently +indicated by Böhm-Bawerk's vigorous criticism of Professor J. B. Clark, +in "The Ultimate Standard of Value," _Annals of the American Academy_, +vol. v, pp. 149-209. It may be noticed that Schumpeter makes use of +Menger's and Böhm-Bawerk's general doctrine of imputation of the value +of goods of the first order to goods of higher orders, without seeing +that his equilibrium picture gives no basis for such a procedure. + +[86] _Cf._ comments on Professor R. B. Perry's view, in the long note at +the end of this chapter. + +[87] _Cf._ Böhm-Bawerk, _Grundzüge_, etc. (_loc. cit._), pp. 5, 478, n.; +_Social Value_, chs. 2 and 11; J. M. Clark and B. M. Anderson, Jr., in +_Quarterly Journal of Economics_, 1915--"The Concept of Value." I may +add that this equilibrium scheme is, in my judgment, equally useless as +the basis of a hedonistic theory of _welfare_, since it is _absolute_ +amounts of utility that are significant there. + +[88] _Theorie der wirtschaftlichen Entwicklung_, pp. 83-84. + +[89] _Loc. cit._, ch. 3, part ii. + +[90] _Ibid._, p. 199. + +[91] For the assimilation of credit phenomena to the general phenomena +of value, by means of the social value doctrine, see _infra_ our section +on "Credit." The social value doctrine is still further generalized in +the chapter on "The Reconciliation of Statics and Dynamics." + +[92] _Ibid._ p. 169. + +[93] _Vide Mathematical Investigations_, _loc. cit._, p. 62, where +Fisher assumes _one_ price to be unity, "to determine a standard of +value." _Purchasing Power of Money_, pp. 174-175. + +[94] _Loc. cit._, pp. 72 _et seq._ + +[95] Pp. 132-136. + +[96] See _Social Value_, chs. vi and vii. + +[97] Bk. ii, ch. vi. + +[98] "_Cf._ Davenport, _Value and Distribution_, 560. 'For, in truth, +not merely the distribution of the landed and other instrumental, +income-commanding wealth in society, but also the distribution of +general purchasing power ... are, at any moment in society, to be +explained only by appeal to a _long and complex history_ [italics mine], +a distribution resting, no doubt, in part upon technological value +productivity, past or present, but in part also tracing back to bad +institutions of property rights and inheritance, to bad taxation, to +class privileges, to stock-exchange manipulation ... and, as well, to +every sort of vested right in iniquity.... _But there being no apparent +method of bringing this class of facts within the orderly sequences of +economic law, we shall--perhaps--do well to dismiss them from our +discussion_....' [Italics are mine.] It may be questioned if the +'orderly sequence' is worth very much if it ignore facts so decisive as +these! It is precisely this sort of abstractionism which has vitiated so +much of value theory. Most economists slur over the omissions; Professor +Davenport, seeing clearly and speaking frankly, makes the extent of the +abstraction clear. We venture to suggest that the reason he can find no +place for facts like these within the orderly sequence of his economic +theory is that he lacks an adequate sociological theory at the basis of +his economic theory. A historical _regressus_ will not, of course, fit +in in any logical manner with a synthetic theory which tries to +construct an existing situation out of existing elements. Our plan of a +_logical_ analysis of existing psychic forces makes it possible to treat +these facts which have come to us from the past, not as facts of +different nature from the 'utilities' with which the value theorists +have dealt, but rather as fluid psychic forces, of the same nature, and +in the same system, as those 'utilities.'" + +[99] Of course, we do not mean to question the immense light which +history throws upon the nature of existing social forces. + +[100] _Theory of Political Economy_, 4th ed., p. 34. + +[101] Art. "Geld," in _Handwörterbuch der Staatswissenschaften_. + +[102] _Cf._ Helfferich, _Das Geld_, Leipzig, 1903, for the same +terminology, pp. 485-486. + +[103] Exchange creates _values_. It does not necessarily create +_utilities_. Wheat going from a famine-stricken part of India to a place +where it will sell for higher prices does not gain in utility thereby. + +[104] A possible exception to this general statement might be made for +Professor H. J. Davenport, who would insist that his version of the +utility theory is based on "relative marginal utility," rather than on +marginal utility in Böhm-Bawerk's fashion. No critic has been more +merciless than he in the criticism of the Austrian confusions of +demand-curves with utility-curves, etc. But it is not clear to me that +Professor Davenport has freed himself from the general doctrine that he +criticises. I am not sure that he would accept Schumpeter's version of +the Austrian theory as correct. It may be possible to _read_ +Schumpeter's doctrine _into_ chapter 7 of Davenport's admirable +_Economics of Enterprise_, but it is not clear that one could read it +_in_ the chapter! That individual price-offer depends on the marginal +utilities of alternative goods, in comparison with the marginal utility +of the good in question, Davenport does emphasize. But the complication +that not merely the utilities of alternative goods, but also their +_prices_, have to be taken into account, and that this involves circular +reasoning when an effort is made to give a summary of the whole system +of prices by means of individual utility calculations, he does not, so +far as I can see, grapple with. He summarizes the thing on p. 104: "The +steps, then, are from (1) utility to (2) marginal utility, thence to (3) +the comparison of marginal utilities, and finally to (4) price-offer." +He takes no account here of the complication that the third step is in +large degree a comparison, not of marginal utilities proper, but rather, +of "subjective values in exchange." Yet just in this lies a vital +difficulty of utility theory, in so far as it attempts to explain +causation. Moreover, Professor Davenport is seeking to explain the +_causal_ relation of utility to _demand_, the old Austrian problem. The +explanation of demand is, indeed, the problem with which all theories of +value must come to terms, if they are to be of any use. As we have seen, +Schumpeter's schema has no bearing whatever on the explanation of +demand, or on _causation_ of any sort. Schumpeter's scheme leaves money +out, and demand-curves run in money terms. Davenport's scheme assumes +money--and "purchasing power." (_Loc. cit._, 91.) We have seen in the +chapter on "Supply and Demand" that the notion of demand and supply +involves money and a fixed absolute value of money. Professor Davenport +is thus doubly assuming value, the thing to be explained! Laws of +"relative marginal utility" developed on the assumption of money, and in +abstraction from changes in the value of money, are not likely to be of +service when the problem of the value of money itself is taken up. On +pp. 95-96, Davenport comes closest to Schumpeter's doctrine, saying that +"the total situation is directive of each individual in it," and that +there are "mutual reactions," such that particular facts are both +effects and causes, illustrated by the last person who jumps on a +crowded raft--does he sink the others, or do they sink him? This +recognizes the complexity of the problem, but it is not clear that it +even purports to do more than that. What is called for is a _definition_ +of the essential elements in that "total situation," with precise +statement as to what is assumed constant and what is allowed to vary, +and an analysis of the "mutual reactions," with a starting point and a +_terminus ad quem_,--an equilibrium in which "mutual reactions" cease to +trouble with their endless circle! Schumpeter's schema, though meeting +criticism on other scores, does meet this logical test, but Davenport's +does not appear to do so. + +It is interesting to note that Professor Alvin S. Johnson, in his review +of the _Economics of Enterprise_, concludes that Professor Davenport, +instead of meaning by "relative marginal utility" anything of the sort +that Schumpeter has in mind in his equilibrium picture of all utilities +to all individuals, really has an absolute value in mind. (_Quarterly +Journal of Economics_, May, 1914, pp. 433-436.) There is much in +Professor Davenport's book to justify this interpretation. + +Professor Davenport's application of "utility" to the problem of the +value of money will be found on pp. 267-275 of the _Economics of +Enterprise_. The general discussion of money and credit in the +_Economics of Enterprise_ has been exceedingly illuminating to me, and +my indebtedness to it will appear in the present book. + +Much of what has been said of Davenport's "relative utility" theory may +also be said of Wicksteed's. (_Common Sense of Political Economy_, +London, 1910.) This is in many ways a remarkable book, characterized by +excellencies of many different sorts. But it fails to present the +utility theory in such a way as to avoid circular reasoning. Wicksteed +sees the confusion of utility-curves with demand-curves, and protests +vigorously and at length against it. (_E. g._, pp. 147-150.) He starts +out by assuming money and a set of market prices. His earlier chapters +are given to showing how the individual adjusts himself to the market, +bringing his "marginal utilities" of various goods into harmony with the +market prices. He recognizes that he has made these assumptions (pp. +130-131), and that he cannot use the results thus achieved as an +explanation of the market prices. They are "our goal, not our starting +point." But by pp. 161-162 he finds himself with the "suspicion" that +nothing special or peculiar is to be found in the laws of "market or +current prices--a phenomenon which it is obviously impossible to regard +as ultimate, which demands explanation, and which we have not yet +explained.... Much remains to be done, but we can already see that the +preferences of each individual help to determine the terms or conditions +under which the choice of other members of the community must be +exercised. If you take the individuals of the community two and two it +is clear that the marginal preferences of each determine the limits +within which direct exchanges with the other can be entertained, and we +must already have at least a presentiment that the collective scale is +the register of the final and precise 'resultant' of all these mutually +determining conditions and forces." + +This seems to forecast Schumpeter's doctrine, but in the development +which follows, we do not find it. The heart of his analysis of the +causation of prices is in ch. vi, on "Markets." The "summary" which +precedes that chapter again suggests Schumpeter's analysis--the notion +of an all-embracing equilibrium. But when we get into the detailed +analyses of the chapter we find nothing more than an exceedingly good +account of the process by which supply and demand of particular goods, +considered separately, become equated, through two-sided competition, +and under conditions of monopoly. Instead of "relative marginal +utilities," we see customers coming into the market with various +money-prices in mind, and sellers trying out various money-prices--not +marginal utilities, nor yet two or more marginal utilities in comparison +with one another, but rather, money-prices, which, in the minds of the +buyers may be supposed to represent "subjective values in exchange," +based on both marginal utilities _and_ objective prices of other things +that enter into the budget, and which, in the minds of sellers, +represent estimates of the prices which buyers may be induced to pay. +Wicksteed does not transcend the circle. Finally, despite his caution to +avoid the more glaring forms of the circle, and the confounding of +demand-curves with utility-curves, and of utility with value, he does +lapse into it in its completest form in expounding the Austrian doctrine +of cost of production. "The only sense, then, in which cost of +production can affect the value of one thing is the sense in which it is +itself the value of another thing. Thus what has been variously termed +utility, ophelemity, or desiredness, is the sole and ultimate +determinant of all exchange values." (P. 391.) Here is the illicit leap +from marginal demand price to marginal utility which all utility +theorists make, sooner or later! It is true that costs in one place are +reflections of _demand_ elsewhere. But it is not true that costs in one +place have any definite quantitative relation to _utilities_ in another +place! + +When Wicksteed comes to discuss the value of money, he makes slight use +of the notion of abstract ratios among relative utilities, and employs a +concept which he has nowhere vindicated or explained: the _value_ of +money, as distinct from the reciprocal of the price-level, treating the +value of money as something which can be directly influenced by sinister +rumors affecting the credit of the Government, and which can be an +independent cause affecting velocity of circulation, and the amount of +trade done by means of money. _Loc. cit._, p. 623. See _infra_, our +chapter on "Velocity of Circulation." + +The only writers I know at first hand who have really thought the thing +through, and avoided the circle in form, are Schumpeter and Irving +Fisher. (_Mathematical Investigations in the Theory of Value and +Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. See +bibliographical note, _supra_, in this chapter.) I have given an +exposition of Schumpeter, rather than Fisher, because the former has put +the doctrine in non-mathematical form. In the text I have indicated the +limitations of their doctrine. Fisher definitely avows the impossibility +of applying the doctrine to the problem of the value of money. +_Purchasing Power of Money_, p. 174. Schumpeter doesn't apply it to +money, and when he tries to work out a utility doctrine of money, he +lapses into the Austrian circle in a very obvious form. In later +writings, Fisher also seems to forget the limitations imposed on utility +theory in his earlier essay. In his _Elementary Principles_, ed. 1912, +Fisher lists (pp. 408-409) a great multitude of factors that might +affect the price of pig iron, and then says: "Back of these causes lie +other causes, multiplying endlessly as we proceed backward. But if we +trace back all these causes to their utmost limits, they will all +resolve themselves into changes in the marginal desirability or +undesirability of satisfactions and of efforts, respectively, at +different points of time, and in the marginal rate of impatience as +between any one year and the next." Here these marginal psychic +magnitudes, which in the earlier essay appeared merely as surface +phenomena, resultants of a total situation, proportional to prices, +causes of nothing, merely symptoms of a completed equilibrium, are +erected into atomic _veræ causæ_, the ultimate ultimates! + +It is interesting to contrast this with a yet more recent statement by a +philosopher who has undertaken a defence of the utility theory of +economic value, Professor R. B. Perry, in the _Quarterly Journal of +Economics_, for May, 1916. Considering the contentions of the present +writer that many general social causes, in addition to the individual +utilities concerned with consumption, are needed to explain changes in +the values of goods, such as changes in fashion, mode, in general +business confidence, in moral attitude toward different sorts of +consumption, in the distribution of wealth, in taxes and other laws, +Professor Perry says: "If the Austrian School has neglected this, then +it needs to be corrected. But the essential contention of that school +remains, so far as I can see, unaltered; _in that these changes work +through individuals_ and have their _point of application_ in a more or +less rational _comparison of needs_ made by the _individual buyer or +seller_. Whatever affects these _individual schedules_ on a sufficiently +large scale will affect prices. But to ignore the individual channels +through which these forces pass, is elliptical." (Pp. 469-470. Italics +mine.) Now I call attention to several points in the foregoing. First, I +would contrast it with the doctrine quoted from Professor Fisher's +_Elementary Principles_. Where Fisher puts the utilities far back in the +realm of ultimate causation, making them the source from which spring +all the proximate social causes which might affect the price of pig iron +(such as "a trade war," "a change in fashion," a "change in incomes," +"decreasing foresight," etc., _loc. cit._, p. 409), Professor Perry +would make individual utility schedules the final focal point, toward +which converge, and through which pass, all the causal forces, however +richly explained by antecedent social factors, which affect prices. The +utility theory of value means all things to all men! + +But a second point with reference to Professor Perry's doctrine. It is +perfectly true that _all_ social activities are the work of +_individuals_. Society is nothing apart from the individuals who make it +up. To think of society and the individual as separate and antithetical +is a fallacy which I have criticised in detail in Part III of _Social +Value_. The social value theory does not mean that there are social +forces which do not run through individual channels. This is not to +accept the notion that individuals are really, in their psychical +nature, isolated monads, however. There is a functional unity of +individual minds, and no individual can be understood in abstraction +from society. But this view is as old as Aristotle. I have not contended +that prices can change apart from the mental activities of individual +men, working upon one another. So far there _may_ be no issue with +Professor Perry. + +But there is a big issue when he contends that all the causation is +focussed in _individual utility schedules_, and in a more or less +rational comparison of needs made by the _individual buyer and seller_. +This is _demonstrably erroneous_. Let us assume, for example, that +utility schedules of every individual New Yorker remain unchanged, but +that, through a change in the law (the work of individual men, under the +influence of their own individual emotions and ideas, of, say, ethical +character), incomes in New York City are _equalized_. Hold rigidly to +the assumption that there are no changes in utility schedules. Will +there not be, none the less, a radical readjustment of prices? Will not +the prices of Riverside palaces and steam yachts sink and the prices of +things which the poor esteem rise? The utility-curves of the erstwhile +rich, assumed to remain unchanged, no longer count for so much as before +in the market. The rich cannot go so far down their curves in the +consumption process as before. The poor, or those who had been poorest, +now count for more in the market. They can lower their margins. In other +words, the forces affecting the distribution of wealth, in so far as +they are legal and moral in character, at least, may affect the +price-situation, _without_ altering _utility schedules_. Some social +factors, as changes in mode and fashion, will work _through_ the utility +schedules, but others will not. One big _variable_ affecting prices +which need not, in idea, at least, affect utility schedules at all, and +whose main influence is anyhow not directed through them, is the volume +of business confidence. This factor we shall analyze in our discussion +of credit, _infra_. Professor Perry thus escapes only part of the +criticism which we have made (_Social Value_, pp. 45 and 56) of the +Austrian theory: (1) that it abstracts the individual from his vital +contacts with other individuals, and (2) that, within the individual +mind thus abstracted, the Austrians make a further abstraction, taking +as relevant only the interests concerned with _consumption of economic +goods_, summed up in the utility schedules. The second criticism applies +to Professor Perry as well. Men's total interests are not summed up in +utility schedules, and do not affect prices exclusively _via_ utility +schedules. + +It may be noticed, also, with reference to Professor Perry's discussion +that he has misconstrued the Austrian theory in conceiving it as an +analysis of an historical _process_, with a beginning and an end, +instead of a static picture, in which preëxisting individual factors +come into equilibrium. (_Loc. cit._, 475.) He seeks thus to avoid the +Austrian circle, but as we have shown in the discussion of von Mises in +the text, this way is not open to the Austrians. + +Able and penetrating though Professor Perry's discussion is, on the +psychological side, it fails, I think, to take adequate account of the +complexities with which the economist and sociologist must deal. + +In general, I find no version of the utility theory of value which is +defensible, and, above all, no effort to apply it to the value of money +which has met with success. + +[105] _Vide_ Taussig, _Principles_, I, 432. + +[106] "Der Bankzins als Regulator der Waarenpreise," Conrad's +_Jahrbücher_, 1897. + +[107] _Loc. cit._, ch. 8. + +[108] _Cf._ ch. on "Economic Value." + +[109] Nicholson, J. S., _Money and Monetary Problems_, pp. 64-66; 71-73. + +[110] _Works_, McCulloch ed. 1852, p. 213. + +[111] _Cf._ the criticism of Nicholson by W. A. Scott, _Money and +Banking_, 1903 ed., ch. 4. + +[112] _Cf._ Mill, _Principles_, Bk. III, ch. xiii, par. 1. "Nothing more +is needful to make a person accept anything as money, and even at any +arbitrary value, than the persuasion that it will be taken from him on +the same terms by others." It is not quite fair to identify Mill's +doctrine with the circle stated above, however, since Mill couples it +with a reference to convention, resting on the influence of +government--a mention, without analysis, of some of the factors to be +discussed shortly. + +[113] _Cf._ Knies, _Das Geld_, I, p. 140. + +[114] _Cf. Social Value_, ch. 2. _Infra_, our chapter on "The Functions +of Money." + +[115] _Das Geld_, Leipzig, 1903, p. 477. + +[116] Laughlin, rejoinder to Clow, "The Quantity Theory and its +Critics," in _Jour. of Pol. Econ._, 1902. + +[117] _Principles of Money_, _passim_. + +[118] _Cf. Social Value_, pp. 132-136, and _supra_, ch. on "Marginal +Utility and Value of Money." + +[119] Strictly speaking, there is no marginal utility, but only a +"subjective value in exchange," for money of the sort here discussed. +See _supra_, the chapter on "Marginal Utility." + +[120] The psychological reactions of the people in times of stress and +uncertainty toward different kinds of money cannot be predicted with any +certainty, and there seems to be absolutely no definite or universal law +governing the matter. The present writer collected a lot of newspaper +clippings at the outbreak of the present World War. From these it +appears that in both Paris and Berlin there was a very great distrust of +bank-notes, and an insistence by retailers, restaurants, landladies, +etc., on _coin_. But _silver_, which was not standard money, seems to +have been accepted without question. When hoarding is referred to in +these clippings, it is invariably gold that is mentioned. A similar +hoarding of gold took place during the Balkan crisis at the time of the +outbreak of the war between the Balkan Allies and Turkey. Professor E. +E. Agger informs me, however, that he has found some evidence that +bank-notes as well as gold were hoarded in Austria, at this time. + +Sometimes we have a suspension of Gresham's law, and an acceptance of +all kinds of money at varying ratios. The following clipping from the +_Boston Herald_ of March 17, 1914, illustrates this: "Douglas, Ariz., +March 16.--Four kinds of money are now circulating in the Mexican +territory controlled by the Constitutionalists. These are United States +currency, the first issues of the Constitutionalist government and of +Sonora state, and 'Villa money,' or that issued by Chihuahua at the +instance of the rebel military commander. United States takes +precedence. Merchants in Sonora, in order to protect themselves and at +the same time observe the laws requiring acceptance of the rebel +currency issues, have established a sliding scale of prices. This was +discovered when five merchants were arrested at Cananea by +Constitutionalist secret service men, who found that for American money +they could buy goods for less than half the amount exacted when payment +was offered in Mexican currency. The uncertainty of the rebel campaign +against Torreon is reflected in the money market. To-day +Constitutionalist sold for 22 and 28 cents American on the peso. Mexican +federal currency commanded from 30 to 32 cents." In the experience of +travellers who have discussed the matter with the writer, there was +little of this flexibility of relation between paper money and coin in +Berlin, or Paris at the outbreak of the present War. Where paper was +refused, it was absolutely refused, and where it was accepted, it seems +to have been accepted without discount. No doubt, a fuller investigation +would reveal all manner of variation in the behavior of different people +in different centres, and at the same centres, at the outbreak of the +War. + +[121] _Money and Banking_, 1903 ed., pp. 58-60; 101-104. + +[122] _Principles of Money_, p. 530. + +[123] Written in December, 1914. + +[124] _Cf._ Clow, F. R., "The Quantity Theory and its Critics," _Jour. +of Pol. Econ._, 1902, p. 602. + +[125] _Cf._ Emery, _Speculation_, pp. 90-91. + +[126] _Cf._ Böhm-Bawerk's criticisms of the "use" theory of interest. +(_Capital and Interest_, _passim_.) Both use theories and productivity +theories are probably suggested, in part, by peculiarities which money +possesses in pre-eminent degree. See _infra_, the chapter on the +"Functions of Money." + +[127] A more precise analysis of all these points will be given in the +chapter on "The Functions of Money." + +[128] _Cf._ Professor Taussig's account of expansions and contractions +of the silver currency in his _Silver Situation_, _passim_. + +[129] For bibliography, see _Am. Econ. Rev._, Dec., 1914, pp. 838-839. + +[130] New York, 1911. All references to this book in the present volume +are to the 1913 edition, which contains some new matter. + +[131] _Standard of Value_, London, 1912, p. 48, n. + +[132] _Papers and Proceedings_, Supplement to March, 1913, number of +_American Econ. Review_, p. 131. + +[133] _American Econ. Rev._, Supplement to March, 1916, number, p. 138. + +[134] _Loc. cit._, pp. 31-32. + +[135] _Loc. cit._, pp. 175ff. + +[136] "The Passiveness of Prices," _infra_. + +[137] Particularly in view of the elaborate statistics, to be considered +below, with which it is sought to make the equation realistic. + +[138] _Loc. cit._, p. 16ff. + +[139] _Loc. cit._ p. 25. + +[140] _Ibid._, p. 26. + +[141] _Ibid._, p. 27. + +[142] Where it is not meaningless, as at various points in the theory of +mechanics, the product is always of a different denomination from either +factor. + +[143] _Vide_ our ch. on "Supply and Demand," _supra_, for a discussion +of Mill's doctrine as to the "demand" for money. + +[144] What is here said of Fisher's equation of exchange applies, for +the most part, to all versions of it. + +[145] _Loc. cit._, p. 298. _Cf._ our chapter, _infra_, on "Statistical +Demonstrations of the Quantity Theory." + +[146] _Purchasing Power of Money_, p. 290. + +[147] The amplified equation is MV + M´V´ = PT, which takes account of +bank-credit. This is explained, _infra_. + +[148] _Loc. cit._, p. 487. I recur to this point in discussing the +statistics of the "equation of exchange" in ch. 19. + +[149] _Infra_, ch. on "Quantity Theory and World Prices." + +[150] _Loc. cit._, p. 48. + +[151] _Loc. cit._, p. 370. The same position is taken by Kemmerer, +_Money and Credit Instruments_, pp. 68 _et seq._ Mill denies the +validity of these distinctions. See _Principles_, Bk. III, ch. 12, Par. +8. + +[152] The above was written before the discussion in the _Annalist_ +(Feb. 7, Feb. 21, March 6, March 13, March 20, 1916) in which the +present writer urged that Professor Fisher had greatly exaggerated the +volume of trade in the United States by taking banking transactions as +representative of trade. In reply (see especially the number for Feb. +21, pp. 245 _et seq._) Professor Fisher maintains that the overcounting +to which I call attention is offset by undercounting, and considers +offsetting book-credits, which actually dispense with the use of money +and checks, an important element in the undercounting. I am unable to +reconcile this position with the reasons given for excluding +book-credits from the "equation of exchange." A detailed discussion of +the points at issue appears in later chapters, particularly in the +chapter on "Statistical Demonstrations of the Quantity Theory." + +[153] _Quarterly Journal of Economics_, vols. 8 and 9; _Political +Economy_, pp. 169-175; _Money_, chs. 3-8. + +[154] In our analysis of bank-loans, _infra_, we shall find reason to +hold that Walker, though false to the logic of the quantity theory, +comes nearer to a tenable doctrine than do Kemmerer, Fisher, Andrew, and +most other quantity theorists. + +[155] _Principles_, Bk. III, chs. 11 and 12. + +[156] _Purchasing Power of Money._ + +[157] _Loc. cit._, pp. 50-51. + +[158] _Loc. cit._, p. 280. + +[159] A. W. Atwood, "Hoarded Gold," _Saturday Evening Post_, Dec. 12, +1914, p. 26. + +[160] _Cf._ Kinley, D., _The Use of Credit Instruments_, Senate Document +399, 1910, pp. 192-194. + +[161] _Ibid._, pp. 102-103. In the same volume, on p. 200, the figures +are given _incorrectly_, as 70% checks and 30% cash. C. A. Phillips, +_Readings in Money and Banking_, 1916, p. 151, repeats this erroneous +statement. + +[162] _Cf._ Sprague, _Crises under the National Banking System_, Nat. +Monetary Commission Report, pp. 71-75; 200, 202. + +[163] _Cf._ also p. 280 of Fisher's _Purchasing Power of Money_. + +[164] Kemmerer (_Money and Credit Instruments_, p. 80) maintains that, +"under perfectly static conditions," money in circulation and money in +bank reserves will keep a fixed relation to one another. He offers no +argument to support this view. Of course, "under perfectly static +conditions," everything keeps in fixed relation to everything else. The +volume of credit will keep a fixed relation to the number of laborers +and to the supply of clocks. But this would hardly establish causal +connections! Fisher multiplies "fixed relations" of various kinds, +without, so far as very diligent search can tell, offering any argument +to support them. Thus, we have on p. 105 the statement, "We have seen +that normally the quantities of other currency are proportional to the +quantity of primary money, which we are supposing to be gold." Where +this thesis has been demonstrated, he does not indicate. In view of the +fact that gold has been the one really flexible element in our money +supply, the thesis is hardly credible. On pp. 146-147, facing this +difficulty, Fisher says: "Since, however, almost all the money can be +used as bank reserves, even national bank-notes being so used by state +banks and trust companies, the proportionate relations between money in +circulation, money in reserves, and bank-deposits will hold +approximately true as the normal condition of affairs. The legal +requirements as to reserves strengthen the tendency." Here is a very +substantial growth in the doctrine, with only one new argument, namely, +that concerning legal reserve requirements--which gives minimal ratios, +not _fixed_ ratios. In what way the fact that most kinds of money can +serve as legal reserves gives reason for the doctrine of fixed +proportions is not made clear. For Professor Fisher, however, it seems +quite enough, for on p. 162, in the heart of his causal theory, he +boldly announces: "There must be some relation between the amount of +money in circulation, the amount of reserves, and the amount of +deposits. Normally _we have seen_ that the three remain in given ratios +to each other." (Italics mine.) It is doubtless somewhat dangerous to +make a confident negative statement concerning a book which has no +index. But careful reading of all that has preceded this statement +reveals no references to this topic except those quoted above. "We have +seen" is not a legitimate premise when so important an issue is +involved. In our discussion of reserves in the section on credit, as +well as in the discussion of the volume of trade, it will appear that no +"normal" or "static" relations of this kind are possible. + +[165] "The price-level outside of New York City, for instance, affects +the price-level in New York City only _via_ changes in the money in New +York City. Within New York City it is the money which influences the +price-level, and not the price-level which influences the money. The +price-level is effect and not cause." (_Loc. cit._, p. 172.) + +[166] _Loc. cit._, p. 50. + +[167] W. C. Mitchell, _Business Cycles_, p. 306. + +[168] _Ibid._, p. 325. + +[169] J. P. Norton, _Statistical Studies in the New York Money Market_, +p. 71, and chart opposite p. 72. + +[170] _Ibid._, chart facing p. 72. + +[171] _Cf._ Mitchell, _loc. cit._, chart, p. 298, and text, p. 295. As +the ratio of _reserves_ to _money in circulation_ was greater in 1911 +than in 1894, and as the ratio of _deposits to reserves_ was also +higher, we have a still wider variation in the ratio of money in +_circulation to deposits_--M:M´. + +[172] See the striking figures collected by A. P. Andrew for 1907. +_Quart. Jour. of Econ._, Feb. 1908, p. 297. + +[173] _Infra_, our discussions of the relations of volume of money and +credit to volume of trade, and our discussion of credit in the +constructive part of the book. The theory of money and credit must be a +dynamic theory. + +[174] Senate Document, No. 405, 1910. For the Bank of England, see p. +25; for the Crédit Lyonnais, pp. 224-226; for the Deutsche Bank, pp. +374-375. + +[175] _Statist_, 1912, p. 577. + +[176] "The Prospects of Money," British _Economic Journal_, Dec. 1914. + +[177] _Cf._ Ashley, W. J., _Gold and Prices_, N. Y., 1912, pp. 21 _et +seq._ + +[178] _Cf._ von Mises, "The Foreign Exchange Policy of the +Austro-Hungarian Bank," British _Econ. Jour._, 1909, vol. 19. _Cf._ +Keynes, _Indian Currency and Finance_. + +[179] Conant, _Principles of Money and Banking_, vol. II, p. 50. In +1899, the reserve of the Bank of Belgium consisted of 107 millions +(francs) in specie, and 108 millions in foreign bills. + +[180] _Principles of Economics_, vol. I, pp. 432 _et seq._ + +[181] In the chapter on "Quantity Theory and International Gold +Movements," _infra_. + +[182] The Joint Stock Banks in England keep "till money" in cash, even +though their "reserves" are chiefly deposits at the Bank of England. + +[183] Fisher, _loc. cit. passim_. _Vide_ especially ch. 8. + +[184] _Purchasing Power of Money_. + +[185] _Business Cycles_, pp. 580, 595-596. + +[186] _Cf._ C. M. Walsh, _The Measurement of General Exchange Value_, +pp. 480-481. + +[187] On pp. 314-315, and elsewhere, Fisher indicates that _all_ the +causes affecting prices operate _through_ the factors in the equation of +exchange. _Cf._ p. 74. This would require a concrete equation of +exchange throughout. + +[188] Chapter on "Passiveness of Prices." + +[189] _Loc. cit._, p. 169. + +[190] _Cf._ his _Silver Situation_. 1878 to 1891 do not give time enough +for quantity of money to dominate volume of credit, in his exposition! + +[191] Mill, _Principles_, Bk. III, ch. 12, par. 1. + +[192] Fisher, _loc. cit._, p. 62. + +[193] "A Compensated Dollar," _Quart. Jour. of Econ._, Feb. 1913. + +[194] The chapter on "Dodo-Bones," _supra_, and the chapter on "The +Quantity Theory and World Prices," _infra_. + +[195] _Loc. cit._, p. 156. + +[196] _Ibid._, p. 160. + +[197] Or organs for pianos, etc. A common practice--less common in the +North than formerly--is the payment of bills at country stores in +produce. There is not a little barter at secondhand stores in New York +City. + +[198] Mr. Burton Thompson, of No. 7 Wall St., who knows the real estate +situation there intimately, states that while dealers do not like to +"swap" real estate, and do little of it when business is good, they are +forced to do it extensively when business is sluggish, "as has been the +case for the past four or five years." + +[199] _Cf._ E. S. Meade, _Corporation Finance_, p. 376, and _passim_. + +[200] The same thing often happens when a bond issue is paid +off--bond-holders may take their pay in new bonds. "Conversions" of +bonds into stocks, or of preferred into common stock, are also barter +transactions. $220,000,000 of the $420,000,000 which Mr. Carnegie and +his associates received from the Steel Trust for their plants, etc., was +paid, not with money and checks, but with bonds. _Vide_ Stevens, +_Industrial Combinations and Trusts_, p. 101. + +[201] The foregoing had been written before the discussion in the +_Annalist_ of Feb. and March, 1916 (pp. 183-184, 245-272, 313-317, 344, +377), in which Professor Fisher and the present writer joined issue with +reference to Professor Fisher's estimate, 387 billions, for the volume +of trade in the United States in 1909. The present writer contended that +the banking transactions which Professor Fisher took as representative +of trade greatly overcounted trade, since they included loans and +repayments, taxes, several checks in one transaction, gifts, etc., etc. +Professor Fisher contended that the overcounting was offset by +undercounting, and instanced particularly the clearing-house +arrangements in the speculative exchanges, where checks are in part +dispensed with, and the offsetting in "running accounts" through +book-credit. This indicates a substantial change in Professor Fisher's +view as compared with that set forth in the _Purchasing Power of Money_, +where he maintains, as shown above, that barter is virtually +non-existent, that money and checks are "for all practical purposes and +all normal cases," "necessities of modern trade," (p. 160), and that +book-credit merely postpones, and does not dispense with, the use of +money and checks (p. 370). + +The extent of the offsetting by barter, clearing-houses in the +exchanges, and book-credit, though very great, is quite small as +compared with Professor Fisher's 387 billions, and does not nearly +offset the overcounting. The writer has obtained some fairly definite +data on this point, which will be presented in the chapter on +"Statistical Demonstrations of the Quantity Theory," in discussing the +volume of trade. + +[202] _Miscellaneous Articles on German Banking_, Report of National +Monetary Commission, p. 175. _Cf. infra_, pp. 288-290. + +[203] _Cf._ our chapter on "The Functions of Money," _infra_. + +[204] One familiar feature of corporation finance makes barter much +preferable to money transactions, in one connection, which involves very +many corporations indeed, at their inception. Stock, in order to be +marketable, must be "full-paid and non-assessable." If the corporation +sells its stock to the first stockholders, this means that money must be +paid for it to the full par value, dollar for dollar. This is usually +not easy. An especial difficulty would then present itself that the +promotor would have trouble in getting any pay for his work. (Meade, +_Corporation Finance_, _passim_; Sullivan, _American Corporations_, +_passim_.) If, however, the stocks are paid for in _goods and services_, +the courts are much less exacting in looking to see if full value has +been received. Barring obvious fraud, the courts will usually count the +stock full paid and non-assessable even though the value of the goods +and services received is not very great. The first sale of the stocks of +a new corporation, therefore (if it is important enough to wish to have +a public market for its stocks), is a _barter_ transaction, as a rule. + +[205] _Purchasing Power of Money_, p. 152. + +[206] _Ibid._, pp. 352 _et seq._ + +[207] _Infra_, ch. on "Passiveness of Prices." _Weighted_ averages of +"person-turnovers" will not save the situation here, if incomes stop +entirely, since the persons involved then drop out altogether. Moreover, +_weighted_ averages would clearly depend on _incomes_, and hence on +_prices_, and hence could not depend on _habits_ exclusively, or +_causally explain_ prices. + +[208] _Loc. cit._, pp. 152-153. + +[209] _Ibid._, p. 154. Italics mine. + +[210] _Supra_, ch. on "Volume of Money and Volume of Credit." _Infra_, +ch. on "Bank Assets and Bank Reserves." + +[211] _Cf._ Kinley, _Money_, pp. 145 and 205-206, for the discussion of +various moveable margins of this sort. + +[212] Van Hise, _Concentration and Control_, p. 16. The tendency to +accumulate hoards when money is plentiful is notoriously strong in +countries like India. + +[213] _Loc. cit._, pp. 167-168. + +[214] _Ibid._, p. 164. + +[215] _Cf._ Davenport's analysis of the causes governing volume of +trade, _Economics of Enterprise_, p. 272. + +[216] _Loc. cit._, p. 110. + +[217] Perhaps not quite correct, since he does recognize differences in +degree as between different places, though, perhaps properly, from the +standpoint of his normal theory, saying nothing about differences in +degree as between different times in the same place. + +[218] _Cf._ also p. 315, _loc. cit._, where this is placed as one of +three main causes of the historical rise in prices. + +[219] That the overwhelming bulk of trade is in the cities will appear +in our chapter, _infra_, on "Volume of Money and Volume of Trades." + +[220] On the average, in the United States, the banks have less money +than the people have. _Vide_ Mitchell, _Business Cycles_, pp. 295 and +298. + +[221] Based on arbitrary assumptions as to variability. _Cf._ his p. +477. _Cf._ our chapter, _infra_, on "Statistics of the Quantity Theory." + +[222] Other passages might be cited to show that Fisher thinks that T +and the V's are fundamentally governed by different causes. For example, +he says "an increased trade in the Southern States, where the velocity +of circulation of money is presumably slow, would tend to lower the +average velocity in the United States, simply by giving more weight to +the velocity in the slower portions of the country." _Loc. cit._, p. +166. + +[223] _Cf._, _infra_, our chapter on "Statistical Demonstrations of the +Quantity Theory." + +[224] _Common Sense of Political Economy_, p. 623. + +[225] _Principles_, I, 432. + +[226] _Loc. cit._, pp. 432, 438-439. + +[227] _Ibid._, p. 439. _Cf._ our chapter, _supra_, on "Volume of Money +and Volume of Credit," where Taussig's view as to the relation of money +and bank-credit is analyzed. + +[228] _Loc. cit._ + +[229] Virtually the same expression is to be found in Barbour, David, +_The Standard of Value_, London, 1912, p. 43. Barbour denies vigorously +that more money can increase business, since it cannot increase the +number of laborers, or of machines, or the amount of food, etc. The +doctrine that volume of trade is fixed by (1) volume of products, and +(2) degree of specialization of production, and hence is independent of +volume of money, appears in Davenport, _Econ. of Enterprise_, 271-273. + +[230] In this view, Fisher typifies the general position of the quantity +theory, and, indeed, in part even of those who do not agree with the +quantity theory, but who, with the quantity theorists, view the problems +of money and banking as matters of static theory. High or low prices, +once the transition is made, exhaust the effects of increasing or +decreasing the money supply. During the period of transition, certain +readjustments in relations between creditors and debtors arise, which +lead to either temporary prosperity or temporary distress, but after the +transition, it is a matter of indifference whether or not money is +abundant. Though the view is, logically, an essential part of quantity +theory reasoning, we find much of it vigorously maintained by Laughlin, +_Principles of Money_, ch. on "Amount of Money Needed by a Country." +Laughlin and Fisher would seem to be at one in maintaining that the +quantity of money in a country is a matter of indifference, and from the +views of both would follow a condemnation of the idea that any long run +consequences for volume of trade, efficiency of production, etc., could +follow from increasing or decreasing the volume of money. + +It may be just as well here to indicate the conviction of the present +writer that the relation between the quantity theory and the bimetallic +movement is historical rather than logical. Indeed, in laying the stress +they did on the importance of an inadequate stock of money in accounting +for the depression of the latter part of the 19th Century, the +bimetallists were out of harmony with the quantity theory. + +[231] P. 50. + +[232] Pp. 358-372, vol. I. + +[233] _Loc. cit._, p. 160. _Cf._ our chapter on "Barter." + +[234] The fact that prices are often high in gold mining regions, as +compared with prices in the general world markets, has been taken by +many writers as proof of the quantity theory. _Cf._ Kemmerer, _Money and +Credit Instruments_, pp. 50-51, 58; Cairnes, J. E., _Essays in Political +Economy_, particularly the discussion of the Australian episode. It +seems to me that this is particularly inconclusive. High prices +characterize remote mining regions of all kinds, whether gold, silver, +copper, diamonds, tin or what not be the quest. Prices are not lower in +the tin and copper region in the northern part of the Seward Peninsula +in Alaska than they are in the gold region about Nome in the southern +part of that peninsula. They are high in both places, not because of the +abundance of gold or of money, but because of the great value of goods, +which have to be brought with great trouble and expense from the United +States. They are higher in the region of the Saw Tooth Mountains, in the +centre of this peninsula, where hydro-electric power for the use of the +gold miners about Nome, and for the copper and tin mines further north, +is being developed, than they are at Nome itself, on the coast, where +the gold is being mined. They were high in Australia because the +discovery of gold led everybody to abandon everything but gold mining, +and to bring in virtually everything from a distance. Wooden beams were +imported to Australia from Sweden! (Pierson, N. G., _Principles of +Economics_, I, p. 389.) One would expect prices in gold money to be +higher in a silver or copper mining region, which is prospering, than in +a gold mining region, equally remote, where a great deal of gold is +being mined, but at a cost too great to make the region prosperous. + +[235] _Loc. cit._, p. 51. + +[236] _Meaning of Money_, p. 18. + +[237] Price's address before Western Econ. Asso'n, Nov. 26, 1915; Holt's +letter; Dec. 2. + +[238] _Loc. cit._, p. 172. + +[239] See our discussion of "money rates" and "interest rates," _supra_, +in the chapter on "Capitalization," and _infra_, in the chapters on "The +Functions of Money," and on "Credit." + +[240] _Infra_, chapter on "Functions of Money," and _supra_, chapters on +"Capitalization" and "Dodo-Bones." + +[241] _Cf._ our chapters on "Supply and Demand," and "The Origin of +Money." + +[242] New York City can always use idle funds, "at a price." + +[243] Kemmerer, as well as Fisher, allows physical production and +consumption to dominate his "index" of trade variation. _Loc. cit._, pp. +130-131; Fisher, _loc. cit._, p. 479. _Cf._ our discussion of their +statistics, _infra_. + +[244] This confusion of volume of trade and volume of production is a +companion of the confusion discussed on p. 307, _infra_, of quantity of +money with volume of money-_income_. The two confusions, found in +virtually all expositions of the quantity theory, give it most of its +plausibility. + +[245] _Loc. cit._, ch. 12, and appendix to ch. 12. + +[246] _Supra_, ch. on "Equation of Exchange." + +[247] In a letter to the writer, Professor Fisher states that the +figures for the physical receipts at the cities, which dominate his +index for T, have not been available for recent years, and that since +they were discontinued, he has relied chiefly on the indirect +calculation of T _via_ the other factors in the equation. These figures +were discontinued in 1912. In the _American Economic Review_ for June, +1916 (p. 457, n.) Professor Fisher states that the indirect calculation +of T has always had more weight in his figures than the direct +calculation. This would serve in some degree to lessen the errors of his +index of variation. The extent to which he has allowed his T as directly +calculated on the basis of the index to be modified by the indirect +calculation, is indicated on p. 302 of the _Purchasing Power of Money_, +as follows: "The alterations in T, as shown in Figure 16, though still +greater than the preceding, are nevertheless so small and uniform as to +preserve an almost perfect parallelism between the original and the +altered curve. The differences rarely exceed 10%." Even an indirect +calculation of T, however, would not avoid the criticisms here urged, +since the other factors, MV, M´V´, and P are all, as we shall see in the +chapter on "Statistical Demonstrations of the Quantity Theory," +calculated by methods which give very excessive weight to trade outside +New York City and to non-speculative transactions. + +[248] _Loc. cit._, p. 485. + +[249] _The Use of Credit Instruments in Payments_, Senate Document No. +399, 61st Congress, 2nd Session. + +[250] This brief account will be amplified for critical discussion in +the statistical chapter below. Fisher in fact calculated MV and M´V´ +separately. The account above given is strictly accurate only for that +part of T, 353 billions, which is carried on by means of checks. The +calculation of MV, however, is also based on Kinley's figures. My +account here is adequate for the question at issue, which is, not as to +the absolute magnitude of trade, but rather, as to the _proportions_ of +speculation and other elements in trade. + +[251] The substance of the argument here presented first appeared in +articles in the _Annalist_, to which I am indebted for permission to use +it here. See the numbers of Feb. 7, March 6, and March 20, 1916. +Professor Fisher's replies, directed wholly against the charge of double +counting, appeared in the _Annalist_ of Feb. 21 and March 13, 1916. +Professor Fisher does not question my contention that speculation makes +up the overwhelming bulk of trade, in these replies. He rather seeks to +meet the charge of overcounting by holding that bank-transactions do not +fully count speculation! This he thinks particularly true of stock +exchange transactions. _Cf._ his article of Feb. 21, 1916. + +[252] The Census Bureau figures have been subject to a good deal of +criticism, and I therefore refrain from trying to draw precise +conclusions from them. + +[253] The figures showing the number of banks reporting from each State, +together with the number of reports rejected, will be found on pp. 47-49 +of his monograph. The figures above are combinations of figures from his +various tables. These tables are so carefully indexed in Dean Kinley's +monograph that detailed page references are unnecessary here. + +[254] _Cf._ our discussion of this topic in the statistical chapter, +_infra_. + +[255] _Loc. cit._, pp. 153-154. + +[256] _Discussions in Economics and Statistics_, I, 204. Quoted by +Kinley, _loc. cit._, 152. + +[257] The coefficient of correlation has been developed by the +biologists, chiefly Karl Pearson, but has been applied to problems in +many fields, especially economics, sociology, psychology, and education. +A good source is Yule's _Introduction to the Theory of Statistics_. +Professor H. L. Moore has made extensive use of the method in his _Laws +of Wages_, and his _Economic Cycles_. + +Connected with the coefficient of correlation, usually, is a figure for +"probable error," which depends, primarily, on the square root of the +number of observations. When the probable error is low, and the +coefficient of correlation high (as .8), it is commonly supposed that a +very high degree of causal connection is established. I shall not go +into detail in discussion of the method. My personal judgment is that it +is overrated, that "spurious" correlations, leading to quite erroneous +conclusions, have frequently resulted from it, and that the labor +involved in calculating coefficients of correlation is frequently too +great for the results obtained. I should never be disposed to accept +conclusions based on a "correlation coefficient" unless there were other +converging evidence to support it. In effect we have, in the coefficient +of correlation, nothing more than a refinement of the method of +comparing two curves on a graph. The curves tell the story, in a general +way, whereas the coefficient of correlation sums up all the comcomitant +variations (and disagreements) in one figure. The eye does not readily +compare the degree of relation between two curves with the degree of +relation between two others. When it is desired to know which, of +several relationships, is closest, the graphic method, or the method of +comparing series of figures, burdens the attention. The coefficient of +correlation condenses the information to such a degree as to make +comparison easy. It is, then, merely a refinement of familiar +statistical methods. Used wisely, guided by sound theory, it aids in +presenting facts. It enables us to state quantitatively things we +already know qualitatively. But there is no magic in it! As I have +mentioned both Mr. Silberling and Professor Moore in this connection, it +is proper to say that both of them are fully alive to the dangers and +limitations of the method, and that Professor Moore emphasises strongly +the need for sound _a priori_ testing of hypotheses before submitting +them to the test of correlation. One danger, that of getting a high +correlation merely because both of the variables compared are _growing +rapidly_, has been avoided by Mr. Silberling by the use of successive +_percentage_ deviations, instead of absolute figures. For reasons +explained by Mr. Silberling in a footnote, he uses, instead of the +"probable error," a statement of the number of observations. Thus, +"r = .78 (46)" means that the coefficient of correlation is .78, and +that there are 46 observations for each of the two variables compared. + +[258] They get into clearings, however, _two_ days after. + +[259] Professor Kemmerer, also. See his index of variation of trade, +_op. cit._, pp. 130-131. + +[260] It is unfortunate that weekly figures from railways do not exist +in such number, or for roads of sufficient importance, to justify +correlations of the weekly figures with clearings. + +[261] Professor W. M. Persons informs me that Mr. Silberling's results +are in accord with calculations which he has made. _Vide_ his article in +the _Am. Econ. Rev._ of Dec. 1916. + +[262] _The Wealth and Income of the People of the United States_, New +York, 1915. + +[263] See our chapter, "Statistical Demonstrations of the Quantity +Theory." + +[264] _Loc. cit._, pp. 78-79. + +[265] _Jour. of Polit. Econ._, vol. v, p. 165. + +[266] Even this is too high, for 1909, on the basis of our estimate for +net income in 1909, in the Appendix to this chapter. + +[267] The extent of speculation in wholesale trade is discussed in this +chapter, _infra_. "Double counting" is discussed in the chapter on +"Statistical Demonstrations of the Quantity Theory." + +[268] _The Use of Credit Instruments_, p. 151. + +[269] The figures for rent and wages are from W. I. King, _op. cit._ The +other figures are from the _Statistical Abstract of the United States_, +unless otherwise stated. King's estimates are for 1910. The other +figures are for 1909. Compare this list with my discussion in the +_Annalist_, March 6, 1916, p. 317, where I made computations purposely +much too large. In that computation I clearly greatly exaggerated +salaries and professional incomes, and rent as well as retail and +wholesale trade. My figure there included the rent of houses as well as +the rent of land. King's figure is only for land rent. However, in view +of the fact that a high percentage of real estate is used by the owner, +with the result that no rent-payments are required, I think King's +figure high enough for the whole item. + +[270] Professor Fisher has estimated total real estate exchanges in the +country at less than 1% of the total 387 billions (_op. cit._, p. 226), +and a colleague of the Harvard Business School has given me an estimate +of $1,300,000,000 for total advertising in the United States. Neither of +these items is properly counted part of the "static" trade that would +occur were things in "normal equilibrium." If, however, we counted them, +we should add only 1%, say, of the total. When it is seen how +insignificant, in comparison with the 387 billions indicated by +deposits, the figures for total manufactures, total farm products, and +total wages, are, there really is little need to argue the case. It is +impossible to find, in the "ordinary trade" we have not mentioned, items +whose total will equal the least of these three. Moreover, we have +allowed for a multitude of these items in permitting the figure for +retail trade to be as high as it is, and have left large leeway in +making no deduction for the speculation in wholesale trade, and in +counting farm products in full. Interest and dividends I have not +counted. They are not "trade." When we have counted stock sales, we have +already counted the exchanges in which dividends were sold. The man who +buys the stocks has already bought the dividends. To count the dividends +in addition would be a case of that double counting of capital and +income against which Professor Fisher has warned us in his _Nature of +Capital and Income_. Rents and wages represent payment for current +services, and are properly items of trade. Interest and dividends are +one-sided money payments, completing transactions for which money has +already passed, and in which a man is merely getting a delivery of +something he has already bought. In general, loans and repayments are +not properly counted as part of ordinary, or physical trade. If, +however, we counted total corporate dividends and interest we should get +only $4,781,000,000 (King's estimate, _loc. cit._, p. 262). This is a +little over 1%. What else is there? In his article of March 13, 1916, in +the _Annalist_, Professor Fisher failed to meet my suggestion that a +bill of particulars was called for! + +[271] See the table of shares and approximate values in Pratt's _Work of +Wall Street_, 1912 ed., p. 187. This table covers the years, 1890-1911. + +[272] Boston _Transcript_, "Tape Record of Sales Incomplete," May 6, +1916, Pt. I, p. 12. The _Transcript_ quotes as authority the New York +_Commercial_. Following the extraordinary market of Sept. 25, 1916, when +the ticker recorded 2,317,000 shares sold on the New York Stock +Exchange, the newspapers estimated that missed sales, odd lots, and +unrecorded sales on stop loss orders, would bring the total above +3,000,000 shares. There was an unusual number of stop orders caught that +day. There will be very few other sales of 100 shares missed by the +ticker, except in times of extraordinary pressure. See _Boston Herald_, +Sept. 26, 1916, p. 1. + +[273] Hollander, J. H., _Bank Loans and Stock Exchange Speculation_, +Senate Document 589, 61st Congress, 2nd Session, p. 23. + +[274] Pratt, _Work of Wall Street_, 1912 ed., p. 264. + +[275] _Annalist_, Dec. 27, 1915, p. 719--"Selling Phantom Grain." + +[276] My information regarding the Coffee Exchange in New York comes +from the Treasurer of the Exchange, Mr. Jas. H. Taylor, through the +courtesy of Mr. W. H. Aborn, of Aborn and Cushman, New York. + +[277] Report of the Hughes Commission, in appendix to Pratt's _Work of +Wall Street_, Rev. ed., p. 417. This report gives information regarding +all the organized exchanges in New York. + +[278] L. Conant, Jr., "The United States Cotton Futures Act," _American +Economic Review_, March, 1915, p. 1. + +[279] Hughes Commission, _loc. cit._, p. 418. + +[280] Taussig, _Principles of Economics_, I, p. 405; Kinley, _Report of +the Comptroller_ for 1896, p. 89. + +[281] This is probably more extensive in London than in the United +States. + +[282] _Loc. cit._, p. 47. + +[283] _Loc. cit._, pp. 130-131. The very title, "_growth_ of business," +suggests the fallacy to which we refer in the text, namely, that we have +a steady upward movement, with little variation. This is largely true of +production and consumption. It is in no sense true of "trade," as +distinguished from production. + +[284] Kemmerer relied on the investigation of 1896, whereas Fisher used +more the figures of 1909. Kemmerer does not, in general, assign an +absolute magnitude for "trade," but for 1890 he gives a figure. _Loc. +cit._, p. 136. _d._ + +[285] _Loc. cit._, p. 136, _d._ + +[286] A recent discussion of these problems is to be found in Shaw, A. +W., _Some Problems in Market Distribution_, Harvard Univ. Press, 1915. + +[287] _Op. cit._, pp. 51-52. + +[288] London, Paris, and New York all do a great deal of manufacturing, +particularly of finer things, whose value is high, and which require a +high proportion of labor, as compared with machinery. _Cf._ our +discussion of the London "Money Market," _infra_, in Part III. + +[289] _Ibid._, p. 47. + +[290] _Cf._ Jenks, _The Trust Problem_, Rev. ed., p. 29. The doctrine +that these costs are net social loss is challenged by the present writer +in an article, "Competition _vs._ Monopoly," in the New York +_Independent_, of Oct., 1912. + +[291] "Royal" has been estimated at $5,000,000; "Spearmint" at +$100,000,000. Mr. Guy C. Hubbard, of the _Dry Goods Economist_, New +York, has given the writer some exceedingly interesting data regarding +the value, as bankable collateral, of various trade-marks and firm +names. + +[292] _Cf._ our discussion of "The Reconciliation of Statics and +Dynamics," _infra._ + +[293] Significant in this connection, is the contention of recent +students of American agriculture, that the great need is better +organization and credit, facilities for _marketing_. + +[294] _Loc. cit._, p. 89. Though Fisher does not conclude that banking +is bad, he does conclude that gold mining is a parasitic and socially +injurious industry, like the making of burglars' "jimmies." See his +_Elementary Principles of Economics_, N. Y., 1912, pp. 499-500. + +[295] Fisher does admit that the _character_ of the banking system, and +of the money system, will affect the volume of trade. "There have been +times in the history of the world when money was in so uncertain a state +that people hesitated to make many contracts because of the lack of +knowledge of what would be required of them when the contract should be +fulfilled. In the same way, when people cannot depend on the good faith +or stability of banks, they will hesitate to use deposits and checks" +(78). But there is nowhere an admission that the _amount_ of bank-credit +has any influence on the volume of trade, and there are repeated +assertions, as already instanced in the text, that the volume of trade +is quite independent of the volume of money and bank-credit. + +[296] Part IV of this book gives a detailed analysis to the problems +involved in these contrasts. + +[297] This thesis was set forth by the present writer at the 1915 +meeting of the American Economic Association. See _Papers and +Proceedings_, Supplement to March, 1916, _Amer. Econ. Rev._, pp. +168-169. + +[298] _Cf._ J. B. Clark, _Distribution of Wealth_, _passim_, and J. +Schumpeter, _Theorie der wirtschaftlichen Entwicklung_, pp. 1-101. See +also the present writer's "Schumpeter's Dynamic Economics," _Pol. Sci. +Quart._, Dec, 1915, and A. S. Johnson, in _Quart. Jour. of Econ._, May, +1914. + +[299] _Principles_, Bk. III, ch. xviii, par. 1. + +[300] _Theorie der wirtschaftlichen Entwicklung_, p. 77. Since the +foregoing was written, Professor W. C. Mitchell has presented an +admirable historical paper on "The Rôle of Money in Economic Theory," in +which he has multiplied instances, in the history of the science, of +this contempt for money, or abstraction from money, in economic theory. +He finds that Marshall, and some other later writers, have given much +fuller recognition to the rôle of money, which he conceives of primarily +as an institution which has rationalized economic behavior, by forcing +upon the individual bookkeeping habits of thought. This still leaves it +legitimate to abstract from money, however, for "pure theory." Highly +important as is the "measure of values" function, it does not explain +the main work which money, as money, actually _does_ in economic life, +nor need it be a source of value for money. _Cf._, _infra_, our chapter +on "The Functions of Money." Professor Mitchell's paper will be found in +"Papers and Proceedings," Supplement to the March, 1916, number of the +_Am. Econ. Rev._ + +[301] The materials in this appendix are taken from an article published +in the _Annalist_ of Jan. 8, 1917, pp. 39, 53-54, and the New York +_Times_ Annual Financial Review of Dec. 31, 1916, and are reprinted by +the courtesy of the New York Times Company. + +[302] _Vide Annalist_, Feb. 7, 1916, pp. 183-184, and Feb. 21, 1916, p. +246. + +[303] _Wealth and Income of the People of the United States_, p. 129. + +[304] The justification of this procedure is argued more fully in my +article in the _Annalist_ of Feb. 7, 1916, above referred to. + +[305] The figures for railway gross receipts are taken from the +_Commercial and Financial Chronicle_, rather than from Government +reports, in order to get figures for calendar rather than fiscal years, +and in order to get the latest possible figures. As the absolute figures +are not strictly comparable throughout, the method employed has been to +calculate _percentage_ gains or losses for the _same roads_ for +successive years. This would lead to a cumulative error, if large new +roads had been built during the period, and had retained their +independence. In point of fact, however, the curves for the absolute +figures and for the percentage changes run pretty closely parallel down +to 1909, at which time a large number of small roads, not previously +counted, are brought into the figures. As the number of roads reported +varies, the percentage changes on the same roads give us the more +accurate measure of year by year variation. It is, at the date of +writing (December, 1916), the only possible method for 1916, since the +_Chronicle_ figures which come to the end of November are based on only +37 roads, with a mileage of 84,452 out of over 240,000 miles usually +reported. For these roads, a gain of 19.63%, for the first eleven months +of 1916 over the same months in 1915, is reported, and our figures for +1916 rest on the assumption that the gain for the whole year over 1915 +is 17.27%. (The greatest gains are for the earlier months, as the end of +1915 was a period of great activity.) Much fuller figures supplied me by +Mr. Osmund Phillips, of the _New York Times_, for the first _ten_ months +of 1915 and 1916 serve to justify this estimate for the gain of 1916 +over 1915. For the _Chronicle_ data, see vol. 102, p. 930, vol. 103, p. +2112, and _passim_. + +The index of prices chosen is Dun's. (See especially _Dun's Review_ of +May 11, 1907, Jan. 9, 1915, and later months, and the discussion of +Dun's index number in the _Bulletin of the United States Bureau of Labor +Statistics_, Whole Number 173, July, 1915, pp. 148 _et seq._) Dun's +index number is chosen partly because it is complete for 1916, and +partly because it is weighted in accordance with the consumption of +different classes of goods, and so particularly suited to this inquiry. +I venture to express strong preference for rationally weighted index +numbers, and for the use of different index numbers for different +purposes. (_Vide_ the discussion of index numbers in ch. 19.) Our price +index for each year is an average of the twelve monthly figures given by +Dun from 1894 to 1916. For the years 1890-94, our price index is an +average of the figures for January and July. This average is lower, in +most years, than the average for the whole year, and may well be lower +than the average for these years, but no attempt has been made to +rectify this possible source of error. The index is recalculated from +Dun's figures (where it is not a percentage, but a sum of prices), and +made a true percentage index, with a base in 1910. + +The figures for exports and imports are for _calendar_ years. They were +obtained, for the years 1890-1909, from _Statistics of the United +States, 1867-1909_ (National Monetary Commission Report), and, for the +years since 1909 from the _Commercial and Financial Chronicle_. For +1916, November and December are estimated. + +[306] Their indicia of variation for "trade," though failing to meet the +problems for which they were designed, as shown in chs. 13 and 19, are +good indicia of variation for physical production and consumption. + +[307] That this should have been seriously denied during the recent +Presidential campaign, on the basis of the estimate that foreign trade +is minute as compared with domestic trade, gives special point to the +present discussion. + +[308] King's figures, for which he estimates a margin of error of 25% +are used for these years. (_Loc. cit._, p. 129.) The export and import +figures used are for fiscal years. + +[309] Probably the apparent moderate increase in imports is due wholly +to higher prices. The actual physical volume has possibly been reduced, +as compared with the period before the War. + +[310] I am indebted to several colleagues for advice and criticism in +connection with these tables, particularly Professors Taussig and W. M. +Persons. Mr. N. J. Silberling has been particularly helpful, aiding in +the choice of the statistical sources, suggesting methods of handling +and interpreting them, and making virtually all the computations in the +tables. + +[311] Retail prices of exports and imports are obtained by adding 50% to +the wholesale figures reported, on the assumption that wholesale prices +are two-thirds of retail prices. The percentages in the final column are +obtained by dividing the figures for foreign trade by the figures for +domestic trade. The percentage would reach 100 when foreign trade +becomes equal to domestic trade. + +[312] The figures in column 4 are obtained for any year, say 1905, by +taking the index in column 3 for 1905, the index in column 3 for 1910, +and the absolute figure in column 4 for 1910, and solving by the "rule +of three." + +[313] The notion of interdependence need not involve circular reasoning, +if the facts really justify it. The whole cosmos is, doubtless, +interdependent. Often certain systems within the cosmos manifest enough +_in_dependence of the rest of the universe to justify us, for some +purposes, in thinking only of _inter_relations within the systems. The +important thing is to make the circle in theory as big as the circle in +fact. _Cf. Social Value_, p. 152, n. + +[314] In chapter XVI. + +[315] _Cf._ our chapter, _infra_, on "The Quantity Theory and +International Gold Movements." + +[316] Italics mine. + +[317] _Loc. cit._, p. 165. + +[318] The resemblance of the view here maintained to that of Professor +Laughlin is at many points close. I am indebted to his _Principles of +Money_ for many suggestions. + +[319] _Loc. cit._, p. 165, n. The doctrine is reiterated on p. 168. + +[320] This is strikingly true in the stock market--the place where more +trade takes place than in any other market. See the figures in the +preceding chapter with reference to stock transactions, and the chapter +on "Bank Assets and Bank Reserves." + +[321] For a history of this debate, with bibliography, see Laughlin's +_Principles of Money_, ch. 7, on the "History and Literature of the +Quantity Theory," esp. pp. 260 and 263-264. Laughlin shows the +connection of the currency principle and the quantity theory. + +[322] It may be that in the brief discussion of elastic bank-notes on p. +173 (_loc. cit._), Fisher means to given an explanation of the theory of +elasticity from a quantity theory standpoint. The statement there is +that money not only tends to flow away from _places_ where prices are +high, but also from _times_ when money is high. "If the price-level is +high in January as compared with the rest of the year, bank-notes will +not tend to be issued in large quantities then. On the contrary, people +will seek to avoid paying money at high prices and wait till prices are +lower. When that time comes they may need more currency; bank-notes and +deposits may then expand to meet the excessive demand for loans which +may ensue. Thus currency expands when prices are low and contracts when +prices are high, and such expansions and contractions tend to lower the +high prices and to raise the low prices, thus working toward mutual +equality." + +If this be the quantity theory account of elasticity--and it would seem +to be about the only thing the quantity theory could say--it is about as +far from giving an account of the real facts as any theory could be! +Something of this sort is suggested, perhaps, by the behavior of +Canadian bank-notes, which do expand in the fall, when prices of wheat +are lowest, and contract in January, when wheat prices are higher. This +grows, however, out of the peculiarities of an agricultural country, and +does not at all illustrate the general doctrine maintained. First, wheat +prices in the fall are low because wheat is most abundant then. Wheat +prices in January, under the influence of speculation, commonly differ +from wheat prices in the fall by an amount about equal to the elevator +charges, rattage, insurance, interest, and other carrying charges +involved. Second, wheat prices are only one element in the general +price-level. Low wheat does not prove that the level is necessarily low. +A good wheat crop may mean increases in general prices, and often does. +Third, and more important, the real reason for an expansion in Canadian +notes at such a time is that the wheat _has to be moved_. The farmers do +not want to carry it; the speculators are ready to carry it; and it must +be sold. Expanding _trade_, at the season, is the cause of expanding +bank-notes. The influence of the _price_ of wheat is exactly the reverse +of that which Fisher assigns. If the price of wheat is low in the +crop-moving season, _less_ notes will be issued than if the price is +high. In other words, the greater the increase in PT, not P or T alone, +the greater will be the expansion of bank-notes. Decrease either P or T, +and less notes will be issued. + +In general, the phenomenon of elastic bank-credit is the phenomenon of +an expanding bank-note or deposit issue accompanied by rising prices and +volume of trade, and a decrease when trade and prices decrease. This is +all commonplace, but I feel it best to refer to familiar sources to show +how old and well recognized my statement of the case is. The following +is from Mill's _Principles of Economics_, Bk. III, ch. 24, par. 1: "Not +only has this fixed idea of the currency as the prime agent in the +fluctuations of price made them shut their eyes to the multitude of +circumstances which, by influencing the expectations of supply, are the +true causes of almost all speculations and of almost all fluctuations of +price; but in order to bring about the chronological agreement required +by their theory, between the variations of bank issues and those of +prices, they have played such fantastic tricks with facts and dates as +would be thought incredible, if an eminent practical authority had not +taken the trouble of meeting them, on the ground of mere history, with +an elaborate exposure. I refer, as all conversant with the subject must +be aware, to Mr. Tooke's _History of Prices_. The result of Mr. Tooke's +investigations was thus stated by himself, in his examination before the +Commons Committee on the Bank Charter question in 1832; and the +evidences of it stand recorded in his book: 'In point of fact, and +historically, as far as my researches have gone, in every signal +instance of a rise or fall of prices, the rise or fall has preceded, and +therefore could not be the effect of, an enlargement or contraction of +the bank circulation.'" + +I see nothing in Fisher's discussion of credit to differentiate it from +the position of the old Currency School. And the reason is a very simple +one: Fisher has followed the quantity theory to its logical conclusions! + +[323] See our chapter on the "Volume of Money and the Volume of Credit." + +[324] How close the relation between loans and deposits is may be seen +from Professor Mitchell's chart, _Business Cycles_, p. 344. The same +chart exhibits the variations in the reserve percentage, which is very +much greater. The New York Clearing House banks, which we have seen +(_supra_, "Volume of Money and Volume of Credit") have a spread of from +24.89% to 37.59% in the yearly average of percentage of reserves to +deposits--a spread of over 50%--show a variation in yearly average for +the percentage of loans to deposits of only 24.3%--the range being from +83% to 104%. _Ibid._, pp. 325 and 331. For a partially different series +of years, see the chart of J. P. Norton, _Statistical Studies in the New +York Money Market_, facing p. 104. + +[325] Neither deposits nor loans vary _proportionately_ with trade. Very +active trade may merely increase the activity of loans and deposits, +causing both to be shifted more rapidly--larger outgo, larger income, +loans more frequently contracted and paid off, larger amounts +"deposited" on a given day, but balances, both of loans and deposits, at +the end of the day not increased proportionately with the activity. This +is strikingly illustrated in the business of the stockbroker. + +[326] _Supra_, p. 47. + +[327] Italics mine. + +[328] "Miscellaneous Articles on German Banking," in _Report of Nat. +Mon. Commission_, p. 175. Art. by Max Wittner and Siegfried Wolff. + +[329] The figures are not easily compared, as the figures for +giro-_transfers_ do not indicate the volume of giro-_accounts_, which is +doubtless much smaller. I know no estimates for the turnover either of +notes or of bills of exchange. To determine what _proportion_ of +business is done by each would, thus, not be easy. The volume of bills +of exchange for the year is three times as great, for 1907, as the +figures for note issue. The giro-system, as is well known, is relatively +unimportant as compared with notes. But I do not undertake to assign +figures showing proportions of business done. + +[330] Inland bills of exchanges in connection with the grain trade are +still very important, especially at Chicago and Minneapolis. The writer +has met frequent reference to cotton bills at St. Louis. Wool bills are +frequent in Boston. + +[331] _Vide_ my criticism of his statistical fallacy in this connection, +in the _Annalist_ of Feb. 7, 1916. He rules out foreign trade from his +"equation of exchange" by the device of assuming that imports and +exports cancel one another. This, however, to the extent that it is +true, makes the bill of exchange more, rather than less, important as a +substitute for money and deposits. Fisher, _loc. cit._, pp. 306, and +374-375. See appendix to chapter XIII of the present book. + +[332] _Vide_ ch. 16 for a more precise statement of this part of +quantity theory doctrine. + +[333] _Purchasing Power of Money_, pp. 169-170. + +[334] _Ibid._, p. 170. + +[335] _Ibid._, p. 171. + +[336] _Ibid._, p. 172. + +[337] _Ibid._, p. 172. Italics mine. + +[338] _Ibid._, pp. 174-181. + +[339] I call attention, in passing, to Fisher's confusion, in this +sentence, of "commodities" with "trade." This occurs frequently in his +argument. _Cf._ pp. 225-226, _supra_. + +[340] The Capitalization theory is briefly outlined by Böhm-Bawerk, in +the critical and historical volume of his _Kapital und Kapitalzins_ +(English title of the volume, _Capital and Interest_), in his criticisms +of the theories of Henry George and Turgot. It has subsequently been +elaborated, and much improved, by Fetter, in his _Principles of +Economics_, and, more recently, has been restated, with mathematical +formulæ, by Fisher, in his _Rate of Interest_. A good brief statement +will be found in Seligman, _Principles of Economics_, ch. on "The +Capitalization of Value." Extensive use has been made of it by Veblen. +More recently, it has been elaborated in the controversy over the theory +of interest participated in by Seager, Fisher, Brown and Fetter, in the +_American Economic Review_, 1912-13-14, and the _Quarterly Journal of +Economics_, 1913. + +[341] Italics mine. + +[342] The criticisms I should make of the present formulations of the +time-preference theory of interest, as presented by Böhm-Bawerk, Fetter +and Fisher, rest on the individualistic method of approach, and are at +many points analogous to the criticisms I have made of the utility +theory of value. These criticisms need not affect the points at issue +here. On the particular point involved, I agree with Fisher that the +productivity theory gives a wrong answer. + +[343] _E. g._, Fisher, _Purchasing Power of Money_, p. 179. + +[344] This confusion is a companion of the confusion between volume of +_goods in existence_, or volume of _production_, and volume of goods +_exchanged_. The errors growing out of this confusion have been dealt +with in ch. 13, especially pp. 225-226. Virtually all quantity theorists +make both these mistakes. + +[345] The fundamental causation is psychological, and calls for a theory +of _value_, as distinguished from exchange-relations. + +[346] _Supra_, chapter on "Velocity of Circulation." + +[347] This distinction is clearly made and developed by von Wieser, in +the two articles referred to in our chapter on "Marginal Utility." It is +used by him in criticisms of the quantity theory. "Der Geldwert und +seine geschichtlichen Veränderungen," _Zeitsch. für Volkswirtschaft, +Sozialpolitik und Verwaltung_, XIII, 1904; discussions in _Schriften des +Vereins für Sozialpolitik_, 1009, no. 132. A similar distinction runs +through J. A. Hobson's _Gold, Prices and Wages_, London, 1913. The +present writer had worked out the line of argument here presented before +reading either of these discussions. + +[348] I have chosen maid-servants, to avoid complications of costs of +production in the reasoning that might come if other labor, engaged in +producing goods for the market, were selected. To tighten the argument a +tittle further, I assume that the masters receive their monthly incomes +on the first day of the month; that they pay the maids on the same day; +that the rest of the expenditures, both of masters and maids, are strung +out through the rest of the month. + +[349] _Op. cit._, p. 27. + +[350] A possible alternative interpretation of Professor Fisher's +conception is suggested in two or three sentences in the passage of the +_Purchasing Power of Money_ I have been discussing. On p. 175 he makes a +distinction between individual prices _relatively to each other_ and the +price-level. But the distinction which he _discusses_ in the passage as +a whole is between the price-level and individual prices _not_ +considered in relation to each other. Comparison, moreover, with his +original enunciation of the notion (Papers and Discussions, 23d Annual +Meeting of the American Economic Association, pp. 36-37), would serve to +justify the interpretation I give, as nothing at all is said there about +super-ratios between individual prices. But the internal evidence is +even more convincing. Demand and supply, and cost of production, find +their problem, not in the relation between the money price of aspirin +and the money price of caviar, but in the money-price of aspirin or the +money-price of caviar considered separately. Professor Fisher thus +conceives supply and demand in his _Elementary Principles_ (p. 260). +This interpretation is especially necessary, since Professor Fisher is +joining issue with writers who surely use demand and supply and cost of +production as means of explaining money-prices, and not super-ratios +between them. Further, the price-level is _not_, on Professor Fisher's +own scheme, a factor in determining the relations of the prices of sugar +and of wheat _inter se_. With a given price-level, wheat might be worth +a dollar and sugar nine cents, and the ratio of their money equivalents +would be 100:9; with a price-level twice as high, wheat would be worth +two dollars, and sugar eighteen cents, but the ratio between their money +equivalents would be still 100:9. The whole discussion is quite +meaningless unless the contrast be between concrete money-prices of +particular goods, and their average. On either interpretation, moreover, +my criticism of the exalting of the average into an entity would stand. + +[351] _Purchasing Power of Money_, pp. 175-179. + +[352] I am glad to find myself in agreement with Professors Laughlin and +Kemmerer in holding that this notion of Professor Fisher's is untenable. +"The distinction Professor Fisher draws between the prices of individual +commodities and the general price-level appears to me, as to Professor +Laughlin, to be untenable. It is, moreover, contradictory to his general +philosophy of money. His index numbers recognize no general price-level +distinct from individual prices.... Professor Fisher's illustration of +the ocean would be more apposite if he called it a lake whose level was +continually changing, and if he considered each particular wave as +extending to the bottom." Kemmerer, _Papers and Discussions_, 23d Annual +Meeting of the American Economic Association, p. 53. At the same time, I +agree with Professor Fisher that there must be something more +fundamental than the particular prices to make the scheme work. This +something I find in the absolute value of money. + +[353] _Loc. cit._, p. 14. + +[354] _Cf. Social Value_, chs. 2 and 11, and "The Concept of Value +Further Considered," _Quart. Jour. of Econ._, Aug., 1915. See also, +_supra_, the chs. on "Value," "Supply and Demand," "Cost of Production," +and "Capitalization." + +[355] This tendency may be more than offset by the increasing +significance of money as a "bearer of options" or "store of value" in +periods of panic and depression. See, _infra_, the chapter on "The +Functions of Money," and Davenport, _Economics of Enterprise_, pp. +301-03. + +[356] "Agricultural Credit in the United States," _Quart. Jour. of +Econ._, Aug., 1914, p. 708, n. + +[357] Iowa farm lands are exceedingly active, 18% of the farms being +sold annually. The Mississippi lands are much less active. I am indebted +to Dr. Pope for information regarding Iowa on this point. + +[358] The Single Taxer could at least retort that this need not protect +landlords in countries, like England, which lend surplus capital abroad. + +[359] _Cf._ Trosien, _Der landwirtschaftliche Kredit und seine +durchgreifende Verbesserung_, p. 29, cited by J. E. Pope, _loc. cit._, +p. 705, n. + +[360] This was seen by Mill, (_Principles_, Bk. III, ch. viii, par. 4), +and has been especially emphasized by Laughlin, _Principles of Money_, +ch. 10. _Cf._ A. C. Whitaker's discussion in the _Quart. Jour. of +Econ._, Feb. 1904. + +[361] _Supra_, p. 124, and ch. on "Dodo-Bones." + +[362] Comptroller of the Currency estimates the State bank-notes in 1861 +at 202 millions; in 1862, at 183 millions. _Report of the Comptroller of +the Currency_, 1915, vol. II, p. 37. + +[363] W. C. Mitchell, _History of the Greenbacks_, ch. on "The +Circulating Medium," and _passim_. + +[364] See Conant, _Modern Banks of Issue_, New York, 1896, p. 114. An +interesting analysis of the course of the gold premium and of prices +during the period of the Bank Restriction in England, and of the +controversies relating thereto, will be found in Knies, _Der Credit_ +(vol. II of _Geld und Credit_), pp. 247 _et seq._ The same period is +studied in detail by Thos. Tooke in his _History of Prices_. + +[365] _Money and Monetary Problems_, p. 105, and preceding. + +[366] Nicholson, _loc. cit._, 84ff. + +[367] _Ibid._, 76ff. + +[368] _Cf._ Laughlin, J. L., _Principles of Money_, and Scott, W. A., +_Money and Banking_. + +[369] _Cf._ _infra_, our discussion of credit. It is not maintained that +credit needs to be based on _physical_ goods, but it is maintained that +credit is based on _values_, which are generally not the value of a sum +of gold. + +[370] I have elaborated this notion in a hypothetical case in the +chapter on "Dodo-Bones," to which I would now refer. See also the +analysis of an "ideal credit economy" in the discussion of reserves in +the section on Credit, in Part III. + +[371] _Infra_, the discussion of reserves in Part III. + +[372] _Cf._ the chapter on "The Origin of Money," _infra_. + +[373] See especially _History of the Greenbacks_, pp. 188ff.; 207-208; +275-279. + +[374] Various efforts have been made by adherents of the quantity theory +to meet the facts developed by Mitchell with reference to the +Greenbacks. Thus, it has been suggested that the coming to par of the +Greenbacks shortly before the resumption of specie payments was an +accidental coincidence, due to the fact that the volume of trade in the +United States just happened to grow to the right amount to bring the +Greenbacks to par at that time. No statistical evidence has been offered +for this thesis, I believe. It is, indeed, the only logical thing which +a quantity theorist could say on the matter, except one alternative, (F. +R. Clow, _J. P. E._, vol. II, p. 597) namely, that if the Greenbacks +should exist in such quantity that, under the quantity theory, their +value ought to fall below the discounted future value of the gold in +which they were to be redeemed, speculators would take them out of +circulation, holding them for the interest, and so reduce their quantity +that the value would rise to that discounted future value. The first +thesis, that based on putative changes in the volume of trade, though +highly improbable in fact, is logically possible. The second thesis, +however (_Purchasing Power of Money_, p. 261) meets serious +difficulties. What motive would a speculator have for taking the +Greenbacks out of circulation, and hoarding them? The answer is, he gets +thereby the "interest," as the Greenbacks approach the date for +redemption in gold. If this were the only way in which he could get this +gain, the answer would be good. But there is another way in which he can +get it, and something more besides, namely, by _lending out_ his +Greenbacks. In that case, since the creditor gets the full benefit of an +appreciating standard of deferred payments, he would get all the +"interest" which he could get by hoarding, and, in addition, he would +get contract interest on his loan. Of course, if the principle of +"appreciation and interest" worked out with perfect smoothness, he would +find his contract interest reduced as the other rose, and one might even +expect, if the Greenbacks were very redundant, that contract interest +would disappear. There is no evidence that this did happen, however! And +so long as any contract interest existed, we have a thoroughly valid +reason why a holder of Greenbacks would lend them rather than hoard +them. + +Another effort to harmonize the facts with the theory consists in the +contention that _anticipated_ future increases in the Greenbacks would +work in the same way as actual increases. But this is to shift the whole +basis of the quantity theory, which rests in the notion of a mechanical +and--in the mass--unconscious equilibration of quantity of money and +number of exchanges. The quantity of money is not increased until it is +increased! _Cf._ Mill, _Principles_, Bk. III, ch. 12, par. 2, and Jos. +F. Johnson, _Money and Currency_, Rev. ed., p. 235. + +Professor Fisher has another way to meet the facts of the Greenback +régime, and that is by holding that they prove his case! I do not think +that anyone, however, who examines the figures he offers on p. 260 +(_loc. cit._) will be impressed by the degree of concomitance between +money and prices which they exhibit, especially after Mitchell's careful +analysis of changes in detail. + +At another point, Professor Fisher maintains (p. 263) that the rapid +changes in gold premium which came with news from the military +operations (_e. g._, the 4% drop in Greenbacks after Chickamauga), were +due to alterations in velocity of circulation and in volume of trade! As +the gold market usually got the news by wire, before the newspapers got +it, however, this thesis is not very convincing. + +[375] Kemmerer, E. W., _Money and Credit Instruments in their Relation +to General Prices_, New York, 1907; Fisher, _Purchasing Power of Money_, +New York, 1911; subsequent yearly continuations of "The Equation of +Exchange" in the _American Economic Review_. The references here, as +throughout, are to the 1913 edition of Professor Fisher's book. + +[376] _History of Prices._ + +[377] To this type would belong Professor Fisher's figures with +reference to the years, 1860-66 on p. 260 of his _Purchasing Power of +Money_. + +[378] This relates particularly to Fisher's figures. + +[379] _Loc. cit._, p. 298. + +[380] _Ibid._, p. 297. + +[381] _Cf._ our chapter, _supra_, on the "Equation of Exchange." + +[382] These are the "finally adjusted" figures. _Loc. cit._, 304. + +[383] _Ibid._, p. 277. Fisher's estimate for V, as corresponding more +closely to Kinley's figures for the proportions of money and checks in +trade, is to be preferred to Kemmerer's. _Cf._ our comments on this +point, _infra_, in this chapter. Even the figures for M´ are not +correct, since they do not include deposits growing out of "morning +loans," cancelled during the day. _Infra_, ch. 24. + +[384] _Report of the Comptroller_, 1896; _The Use of Credit Instruments +in Payments in the United States_, National Monetary Commission Report, +Washington, 1910. + +[385] I am indebted to the _Annalist_ for permission to use here +materials first published in the _Annalist_ in articles by the present +writer: "Home vs. Foreign Trade," Feb. 6, 1916; "Tests of Home Trade +Volume--a Rejoinder," March 6, 1916; "Home Trade Volume," March 20, +1916, p. 377. To these articles Professor Fisher replied: "A +Multi-Billion Dollar Nation," _Annalist_ Feb. 21, 1916; and "Over and +Under Counting," _Ibid._, March 13, 1916. + +[386] Except checks deposited by one bank in another. Kinley's figures +exclude these in 1909, but not in 1896. + +[387] The methods and data employed by Professor Fisher are described at +length in his _Purchasing Power of Money_, ch. XII, and Appendix to ch. +XII. + +[388] M´ is the _average_ of bank deposits, as shown by the balance +sheets, for all banks in the country for the year. Throughout, the +reader must distinguish this from the "deposits" of Kinley's +figures--amounts "deposited" on March 16. + +[389] It is easier, sometimes, to make an assumption regarding a set of +facts than to find out what they are! In this case, some work was +involved. Old newspapers had to be hunted up for various cities, and +letters had to be written, to find out, for various cities, (a) +clearings for March 17, 1909, and (b) the number of banking days in the +year 1909. This work was done by Mr. N. J. Silberling, who got figures +from 12 cities which had 69% of all clearings outside New York. These +cities are: Chicago, Philadelphia, Boston, St. Louis, Pittsburg, San +Francisco, Baltimore, New Orleans, Atlanta, Providence, St. Paul, and +Seattle. The daily average of clearings for these cities in 1909 was +$136,222,436; the actual clearings for March 17, 1909, was $132,961,273. +The ratio of average daily clearings to actual clearings on March 17 was +1.0245:1. The increase needed in the figure for deposits outside New +York, then, was only 2.45%. Mr. Silberling, wishing to be conservative +in view of the 31% of outside clearings not investigated, allows outside +clearings to be 3% below normal. On this basis, following Professor +Fisher's method of computation, he multiplies the deposits assigned by +Professor Fisher to New York by 1.28, and the deposits assigned to the +country outside by 1.03, getting total deposits for the day of 1.11 +billions, as against Professor Fisher's figure of 1.20 billions, and a +total for the year of 333 billions, as against a total obtained by +Professor Fisher of 364 billions. + +[390] To this 786 millions is added all that comes from the erroneous +assumption regarding outside clearings, when figures for the whole year +are obtained. Country deposits, for the year, are thus still further +exaggerated by 31 billions! + +[391] _The Use of Credit Instruments_, etc., p. 152. There is abundant +evidence in Dean Kinley's figures that only a decidedly minor part of +the amount (373 millions) of checks allowed by Professor Weston for the +non-reporting banks could have been outside the larger cities. The +amount deposited in a day in a country bank is so small that a great +multitude of these banks would be required to show as much as a single +New York City institution. Thus, ninety banks (27 national banks, 58 +State banks, 3 private banks, 1 stock savings bank, 1 trust company) in +Arkansas, report only $728,148 in checks, an average of $8,090 per bank. +If all the 13,000 non-reporting banks were country banks, and if this +ratio held, we should have 105 millions more for the day (instead of +Professor Weston's 373 millions), or 31 billions more for the year. This +average is based chiefly on State and national banks. The average is too +high for the private banks (whose daily average as reported is $4,010), +and for the mutual savings banks (whose daily average is $1,254). It is +well above the daily average of the stock savings banks, which are, in +many States, practically commercial banks ($6,405). In the non-reporting +banks there are comparatively few national banks, and about 5,000 +private banks and savings banks, of these the great majority being +private banks. We cannot make up the 373 millions in the country +districts. Nor can we make up the 373 millions by taking in all the +reserve and central reserve cities, exclusive of New York. Chicago, in +the returns, shows 42.6 millions in checks; St. Louis, 14 millions; +Boston, 48.8 millions; Philadelphia, 28.6 millions; the other reserve +cities show 40.2 millions--a total of 174 millions. If we doubled the +returns for these cities, we should still be 200 millions short of the +373 millions added by Professor Weston to the total! Neither in the +country districts, nor in the major cities outside New York can we find +enough to make up that addition. Very much of the amount added for +non-reporting banks must be found in New York City itself. + +[392] Dean Kinley's questionnaire asked the banks reporting their +deposits for the day to exclude deposits made by other banks. These +deposits were not excluded in the 1896 investigation. + +[393] House Committee on "Money Trust." Feb. 28, 1913. Pp. 57, 78, 145. + +[394] _Cf._ _supra_, and _infra_ our discussion of the volume of trade, +and _infra_, our discussion of credit, particularly the analysis of +bank-loans. + +[395] _Vide_ the opinion expressed by an official of a New York trust +company, quoted below, on p. 346. + +[396] _Cf._ Horace White, _Money and Banking_, 5th ed., p. 364. + +[397] Kirkbride and Sterret, _The Modern Trust Co._, New York, 1905, pp. +59-60; Cannon, _Clearing Houses_, _Nat. Mon. Com. Report_, p. 178; +Conant, _Principles of Money and Banking_, II, p. 244. + +[398] Inquiry was also made of Professor George E. Barnett, who had +cited the figures given by the New York Supt. of Banks at p. 133 of his +_State Banks and Trust Companies_. Professor Barnett writes, in part, as +follows: "I made no independent inquiry at the time, and accepted the +statement of the superintendent of banks without critical examination of +its basis. From what you say, it appears highly probable that he was +mistaken in his conclusions. The only question in which I was interested +was whether the reserves of the trust companies could be reasonably +lower than those of the national banks. I did not care so much about the +exact ratio of clearings and only quoted that incidentally." For the +purposes which both Professor Barnett and Mr. Williams had in view, the +exact ratio was unimportant. The higher figures which I have given above +would support the thesis in which both were interested, namely, that +trust company accounts are less active than bank accounts, and so lower +reserves may be safely held by trust companies than by national banks. + +[399] Fisher, _loc. cit._, p. 444. + +[400] P. 443. Other discussions of this investigation are in the +_Journal of the American Bankers' Association_, Jan. 1914, p. 487; +_Ibid._, Feb. 1915, p. 555; _National Banker_, March, 1915. + +[401] None of the cities covered in the figures given in the _Annalist_ +were in New York State. Kinley's figures show that the percentage of +checks received in deposits of March 16, 1909, in banks outside New York +State was 91%. _Loc. cit._, p. 180. + +[402] Multiplying the 408 millions of checks deposited outside New York +on March 16, 1909 by 303, the assumed number of banking days, gives +123.6 billions. Probably, therefore, 124 billions is too small a figure. +But we should be slow in modifying a figure based on 17 months' +observations because of the figures from one day's observations. + +[403] I have greater confidence in this conclusion, since seeing a +letter from Mr. Howard Wolfe, who made the investigation of outside +clearings and "total transactions" for the American Bankers' +Association, to Mr. Osmund Phillips, Editor of the _Annalist_. Mr. Wolfe +writes: "I do not believe that the experience of the New York banks +would differ from that of other institutions which now supply [these +figures]." + +[404] My information on this point comes from Professor O. M. W. +Sprague. It is corroborated by an official of the Bankers Trust Company +in New York. + +[405] _Vide_ Rodney Dean, of the Fifth Avenue Bank, New York, "The +Problem of Collecting Transit Items," _Journal of the American Bankers' +Association_, Jan. 1914, p. 537. Boston inaugurated the system in +1890-1900; Kansas City five years later. Since the above was written, I +have learned that New York, in recent months, has introduced the new +system. This does not affect our argument regarding the figures for +1909. + +[406] Since the foregoing was written, my attention has been called by +Mr. Osmund Phillips, Financial Editor of the New York _Times_, and +Editor of the _Annalist_, to indirect ways in which items on out of town +banks sent to New York for collection will affect New York clearings. +Country correspondent banks to which New York banks send these items for +collection, may remit for them in four ways: (1) by sending cash; (2) by +sending items on out-of-town banks, which the New York bank will send on +to some other correspondent for collection; (3) by draft on the New York +bank which has sent the items to be collected; (4) by draft on some +other New York bank. In the last case, New York clearings are affected. +The first case is not, quantitatively, important. The second and third +cases would seem to be the normal types, assuming correspondent +relations between New York banks and country banks to be _reciprocal_, +since the New York bank would be disposed, as far as possible, to turn +over its collection business to its own depositors among the country +banks. Mr. Phillips says, however, that the fourth case is important. To +the extent that this is true, our conclusion that out of town collection +items do not affect New York clearings must be modified, and it becomes +a matter of importance whether these items are large or small. My +information, as stated above, is that Chicago exceeds New York City in +this. + +If, however, the Kansas City and Boston arrangements held in New York, +these collection items would be represented _twice_ in New York +clearings. The fact that the items do not themselves get into the +clearings remains. + +Direct information regarding New York clearings is very desirable. Our +indirect approach must be considered inconclusive until more detailed +figures for New York City are at hand. We need figures covering all +types of banks in New York, for a period of, say, a year (to allow for +seasonal changes), in which deposits made by one bank in another are +separated from other deposits. National banks alone would exaggerate the +item of deposits by one bank in another, especially as they are the +depositories of the great private banks. + +[407] Or, in some cases, taking the place of cash dealings between banks +and a local clearing house. On the face of it, it is incredible that +_balances_ between cities, or _within_ cities, after the country +clearing houses have done their work, should be so great as to account +for a very great part of New York clearings. These balances between +cities other than New York, and balances within country clearing houses, +must be a minor fraction of _country_ clearings, and country clearings +are little more than half of New York clearings. Ordinary commerce, as +shown in chapter XIII, cannot give rise to great sums in the aggregate, +to say nothing of giving rise to great _balances_. + +[408] The whole thing is summed up on p. 25 of the Comptroller's +_Report_ for 1892. + +[409] _Cf._ Kemmerer, _Money and Credit Instruments_, p. 117. + +[410] _Annalist_, July 6, 1914, p. 8. The editor of the _Annalist_ gives +me the following information: data for twenty banks, six in New York and +fourteen in Chicago, Philadelphia, Boston, and St. Louis, for the week, +Aug. 28-Sept. 2, 1916, show that clearings are 71% of "total +transactions" in New York, and about 40% in the other cities. These +figures are all for national banks, except for one bank in St. Louis. + +[411] There is one further generalization developed in connection with +Mr. Wolfe's investigation of the ratio of clearings to "total +transactions" which seems to have relevance here, though I am not sure +how it should be interpreted. The average ratio, as stated, is about +40%. This varies, however, for different cities. "The rule seems to be +that the larger the proportion of bank deposits to individual deposits, +the smaller will be the figure representing this ratio. In Cincinnati, +for example, it is 31.4% while in Los Angeles it is 59.7%." (_Jour. of +American Bankers' Ass'n_, Jan. 1914, p. 487.) How safely based this +generalization is cannot be told from the context, as no further facts +are offered. Nor is its bearing on the question at issue, as to whether +or not New York clearings bear a higher ratio to New York deposits than +country clearings do to country deposits, entirely clear. It would seem +to indicate that deposits made by outside bankers in the banks of +reserve cities make smaller contributions to clearings than individual +deposits do, and this would fit in with the fact that checks on outside +banks, deposited for collection by one bank in another, do not get into +clearings. What further explanation or significance it has I leave to +the reader. It is possible that there are a number of important relevant +facts missing regarding New York clearings, and that the conclusions +here reached may require later revision. + +[412] _Loc. cit._, p. 304. + +[413] But not as a correct estimate of M´V´ for the equation of +exchange! We do not know what part of these checks were used in "trade." +_Cf._ our discussion of the estimate of T, _infra_. + +[414] Kemmerer does not do this, but takes total clearings for the +country as his index of variation. _Loc. cit._, 118-120. His figures for +"check circulation" are, thus, more variable than Fisher's. In this, +Kemmerer's results are much to be preferred. + +[415] I have taken the figures for clearings from Professor Fisher's +table, _loc. cit._, p. 448. + +[416] _Loc. cit._, p. 304. _Cf._ our chapter on "Velocity of +Circulation," _supra_. + +[417] _Loc. cit._, pp. 477-478. + +[418] There is, of course, the further point, to be emphasized in the +discussion of T, _infra_, that MV (and hence V), assuming the +calculation otherwise correct, is too large, to the extent that it +includes tax payments, loans and repayments, dealings between agent and +principal, etc. But this criticism does not so clearly apply to MV as it +does to M´V´. + +[419] _Business Cycles_, p. 308. + +[420] That volume of trade and volume of physical goods are virtually +interchangeable in Fisher's thought is strikingly illustrated on p. 195 +of the _Purchasing Power of Money_: "A doubling in the quantities of all +commodities _sold_, or (_what is almost the same thing_) a doubling of +the quantities _consumed_." Italics are mine. + +[421] This is strictly true only of the part of T which comes from the +figure for M´V´, 353 billions. In calculating MV, Professor Fisher +introduces more complexities, into which we shall not enter, as the +absolute amount is small--only 34 billions!--and the possible error from +this source not great enough to affect a calculation where 20 billions +one way or the other is within the "margin of error." + +[422] _Vide_ _Annalist_, Feb. 17, Feb. 21, March 6, March 13, and March +20, 1916, for a discussion of this point by Professor Fisher and the +present writer. + +[423] _Op. cit._, pp. 112-113. It is interesting to note that Kemmerer's +argument takes the form of proving, not that bank transactions do not +overcount trade, but merely that they do not _undercount_ trade. With +this contention I am in hearty agreement! The overcounting is worse in +Kemmerer's figures for 1896 than for Fisher's in 1909, since the 1896 +figures included deposits made by one bank in another, while the 1909 +figures do not. _Cf._ Kemmerer, p. 105, and Kinley, in _Report of the +Comptroller_ for 1896 and in the 1909 monograph, _passim._ + +[424] _Vide_ the present writer's discussion in the _Annalist_, March 6, +1916, p. 313. + +[425] I am informed by Mr. B. F. Smith, Treasurer of the Cambridge Trust +Company, that the practice of having separate dividend accounts is a +very widespread one, especially with the larger corporations. + +[426] _Statistics of Railways_, 1909, p. 71. + +[427] Professor Fisher, in his _Annalist_ article of Feb. 21, 1916, +quotes Dean Kinley (_The Use of Credit Instruments_, p. 151), as holding +that duplications have largely been eliminated from his 1909 figures. +Professor Fisher overlooks the fact that Dean Kinley is here referring, +not to money value of trade, but merely to volume of checks. Dean Kinley +merely indicates that by eliminating deposits made by one bank in +another, he has avoided having the same check counted in deposits made +in two or more banks on the same day. Even this is not wholly avoided. +(_Ibid._, pp. 158-159.) It was extensive in the 1896 figures. Dean +Kinley thinks, properly enough, that he has a sufficiently close +approximation to the volume of checks, for the reporting banks, but what +the checks were drawn for he does not undertake to say. His problem was +_payments_, not _trade_. From the angle of volume of trade, he finds +duplications even in the retail deposits (_Jour. of Polit. Econ._, vol. +5, p. 165). + +[428] _Annalist_, March 13, 1916, p. 344. + +[429] Chapter on "Volume of Money and Volume of Trade," pp. 241-248. We +really did not "find" nearly that much. The figures assigned to retail +and wholesale trade rest on figures for retail and wholesale bank +"deposits," and are, especially the wholesale figures, much too large. + +[430] _Annalist_, Feb. 21 and March 13, 1916. + +[431] _Loc. cit._, p. 180. + +[432] _Ibid._, pp. 166-167; 187; 273. + +[433] Pratt, _loc. cit._, p. 166. + +[434] _Ibid._, p. 187. + +[435] Emery, _Speculation on the Stock and Produce Exchanges_, pp. 89; +74-95. A Boston broker expresses the opinion that the magnitude of +artificial borrowing to make the clearance sheet misleading is not +great, so far as Boston is concerned. I have got no estimates for New +York. + +[436] The banks, of course, are not borrowing stocks. + +[437] Van Antwerp, _The Stock Exchange from Within_, New York, 1913, p. +290 + +[438] It recently happened that Alaska Gold was being "loaned flat" on +the Boston Stock Exchange, which was a prelude for a six point advance +in the next two or three days, as the bears were driven to cover. + +[439] One factor complicates this. Are all the hundred share sales +recorded? In our chapter on "Volume of Money and Volume of Trade," we +called attention to a statement to the effect that brokers get together +before the market opens, and compare "stop loss" orders, matching these +with other orders, with the understanding that they automatically go +into effect if the "market" reaches the prices indicated. The statement +indicated that this substantially increases sales beyond the recorded +totals, as such sales do not get on the ticker. I think, however, that +this cannot throw our reckoning out greatly. The great majority of sales +are not on "stop loss" orders. None of the sales of "floor traders," who +average a third of the total trading (_Pujo Committee Report_, Feb. 28, +1913, p. 45), would be on "stop loss" orders. The bulk of the rest is +not. Moreover, not all stop loss orders, by any means, would be executed +in this manner. It is not easy to see how, under the rules and practices +of the Exchange, many other sales could go unrecorded, except on days of +greatest stress. On September 25, 1916, when over 2,300,000 shares were +sold, the daily paper spoke of sales missed by the ticker, which was +swamped with sales to be recorded, as an item of some magnitude. But the +Ticker is wonderfully efficient. It sometimes gets behind the market by +several minutes, but it rarely misses anything, under ordinary +conditions. + +[440] _Ibid._, p. 166. + +[441] This explains the estimates of Wall Street men that the Clearing +House reduces checks by two-thirds. For _their purposes_, the saving is +almost that much, of the items offered for clearings. _Cf._ Van Antwerp, +_The Stock Exchange from Within_, pp. 121-122. + +[442] _Ibid._, p. 273. There is one billion difference between Pratt's +estimate and mine. I incline to the view that mine is correct, the more +as he puts his figure, 14 billions, as a safe lower limit. But a billion +one way or the other is trifling! + +[443] An official of the Bankers Trust Company has secured for me from a +broker at the "Money Post" an estimate of 20 to 25 millions as an +average, with 50 millions as a maximum, for 1915. The Pujo Committee, in +its report in 1913, p. 34, gives a similar estimate. + +[444] P. 34. + +[445] _Annalist_, Aug. 14, 1916. + +[446] N. J. Silberling, "The Mystery of Clearings," _Annalist_, Aug. 14, +1916, p. 223. + +[447] There is one further piece of evidence which has been obtained +through the courtesy of a New York brokerage house. At the request of +the gentleman who has supplied the figures, I have altered them by a +constant percentage, to prevent possible identification, but the +proportions among them hold as they were given. The figures show the +business of the house for the month of March, 1916. The figures show: + + Market value of stocks and bonds bought, 1,644,630 + Total deposits made during month, 1,475,502 + Average borrowed from banks, 952,000 + +For this house, then, for this month, the deposits were less than the +value of securities sold, by 11.5%. The month, however, was unusual. It +was a month of reduced activity, following large activity. This is +strikingly shown by the figure for the _average_ bank loans for the +month--over two-thirds of the _total_ deposits for the month. The house +had a large bull _clientèle_, which was holding its stocks, and not +selling on a bear market. The turnover was very slow, as Wall Street +goes. It was a time of extraordinarily easy money when banks called few +if any loans. The broker, in explanation of his figures, says: "The most +of our checks were to other brokers. Checks to banks about equaled +checks to customers. Your assumption that we did not pay off many loans +in March is, I think, right." The same broker states in another letter +that he thinks that, in general, the bulk of checks to and from brokers +are in dealings with banks. In this month, then, with this factor +reduced to a minimum, we still have deposits undercounting sales by only +11.5%. The figures do not prove my thesis that brokers' deposits greatly +overcount their sales, but they at least show that they do not greatly +undercount them. In view of the peculiarities of the month chosen, with +transactions between banks and brokers cut to the minimum, they are +quite consistent with the contention that normally the brokers' deposits +will much exceed their sales. + +[448] Kemmerer's main figures are merely _indicia_ of variation, rather +than absolute magnitudes, for trade. On p. 136, _d._ (_loc. cit._), +however, he indicates that his figures for "total monetary and check +circulation" is also a figure for "total business transactions"--and +counts 89% of it as wholesale trade. + +[449] _Cf._ the discussion of the relation of P and T in the chapter on +"The Equation of Exchange." + +[450] _Op. cit._, p. 136. + +[451] _Ibid._, pp. 70-71. + +[452] _Loc. cit._, p. 487. + +[453] Kemmerer does not accept Kinley's estimate of 75% for checks as +compared with money in payments as a "sure minimum" for 1896, but rather +counts it as a "fair maximum." (_Loc. cit._, p. 106.) Using this as a +basis, he gets a monetary circulation for 1896 of 47.7 billions, and a +"velocity of money" (since the monetary stock in circulation in 1896 was +a little over 1 billion) of 47. (_Loc. cit._, p. 114.) Kinley's fuller +investigation in 1909 has made it clear that his 1896 conclusions +understated, rather than overstated, the proportion of checks to money. +His "sure minimum" was needlessly low. He concludes in 1909 that 80 to +85% for checks is safe. (_Op. cit._, p. 201.) _Cf._ Fisher's comments, +_loc. cit._, pp. 430; 460 _et seq._ Fisher's V is about half as great as +Kemmerer's, and varies to some extent. I think Fisher, since his results +are closer to Kinley's later figures, has made much the better estimate +here. + +[454] Since I have already compressed the contents of a book of 200 +pages into Chapter I of the present book, it seems undesirable to +attempt here a further compression of that chapter. These theses, +therefore, do not give the substance of the social value theory. + +[455] Menger, "Geld," _Handwörterbuch der Staatswissenschaften_; +Carlile, _Evolution of Modern Money_. + +[456] We should make a slight and unimportant qualification as to +Kemmerer. _Cf._ our chapter on "Dodo-Bones," _supra_. + +[457] It seems necessary to point out this essential lack of correlation +between value and exchangeability, since Mr. Horace White, in his _Money +and Banking_ (5th ed., p. 135), identifies value and exchangeability: +"Value is an ideal thing in the same sense that weight is. The former +means exchangeability; the latter means force of gravity. A dollar is a +definite amount of exchangeability." _Cf._ also Amasa Walker's +contention that "exchangeable value" is tautology, equivalent to +"exchangeable exchangeability!" _Science of Wealth_, 5th ed., p. 9. +_Cf._ my article "The Concept of Value Further Considered," _Quart. +Jour. of Econ._, Aug. 1915, pp. 696 _et seq._ + +[458] This is stated by Schumpeter, so far as land is concerned. _Vide +Quarterly Journal of Economics_, Aug. 1915, p. 704. It is due Menger to +point out that he does not make the distinction between value and +exchangeability which I have just made. His theory rests in an analysis +of the saleability or exchangeability of goods. But Menger's conception +of value is essentially different from my own. He commonly means by +"_Wert_" merely subjective value, or marginal utility. He objects to the +notion that one good measures the value of another, or that goods, when +exchanged, are equivalent in value, on the ground that there must be a +surplus in value (subjective value) for each exchanger, or exchange +would not take place. He has, as a primary concept, no absolute social +value. "_Tauschwert_" is for him a relative value, though he is finally +driven to constructing what is virtually an absolute value notion, by +distinguishing "_äusserer Tauschwert_" from "_innerer Tauschwert_" in +the case of money, the latter being concerned exclusively with the +causes affecting prices _from the side_ of money, ignoring changes +in prices due to causes affecting goods. (_Cf._ art. "Geld," in +_Handwörterbuch der Staatswissenschaften_, 3d ed., pp. 592-593. He does +not make this distinction in developing the theory of saleability of +goods, however. _Cf._ the chapter, _supra_, on "Marginal Utility and the +Value of Money." It is absolute social value which I am here +distinguishing from exchangeability. It is equally true, however, that +subjective value and exchangeability have no necessary correlation.) + +[459] _Cf._ A. S. Johnson, "Davenport's Competitive Economics," _Quart. +Jour. of Econ._, May, 1914, p. 431. + +[460] The man who wishes to "break" a twenty dollar bill may well have +to go through Menger's process, getting two tens from one man, breaking +one of these into two fives with another, and so on. Or he may have to +buy something which he does not want to get "change." + +[461] Ridgeway, _Origin of Metallic Currency_, p. 327; Carlile, +_Evolution of Modern Money_, p. 233. Grain is said to have been used in +ancient China as money,--not as a standard of value, but as a medium of +exchange. Chen Huan Chang, _Economic Principles of Confucius and his +School_, vol. II, p. 437. + +[462] Written in 1914. + +[463] The Hindu law of inheritance is a factor here. The Hindu woman may +retain, after the death of her husband, father or brother, the ornaments +he has given her during his lifetime. But all of the rest of the family +property must go to male heirs, even remote male heirs coming in before +the closest female relatives. + +[464] _Cf._ Carlile, _Monetary Economics_, introductory chapter. The +whole question may hinge on terminology, so far as Carlile is concerned. +It is not clear what he means by "value of gold." + +[465] _Cf._ Conant, _Principles of Money and Banking_, I, ch. 7, esp. p. +102. + +[466] I do not believe that we have sufficient agreement among the best +students of the statistics of the precious metals to justify any +statistical conclusions regarding the laws governing the industrial +consumption of gold and silver. Even the facts as to the proportions of +annual production of gold in recent years going to money and to the arts +are in dispute. Thus, DeLaunay (_The World's Gold_, New York, 1908, p. +176), divides the annual output as follows: Exportation to the East, and +loss, 16%; coinage, 44%; industry, 40%. The industrial employments are +divided as follows: jewelry, 24% (of total annual gold production); +watch cases, 10%; gold leaf, 2.25%; watch chains, 1.75%; plate, 0.75%; +various uses, as pens, dentistry, chemical works, etc., 1.25%. +DeLaunay's competence as an authority is attested by various writers, +among them W. C. Mitchell (_Business Cycles_, p. 281). Mitchell, +comparing DeLaunay's estimates with divergent estimates of other +authorities, concludes that there is not sufficient evidence to justify +definite conclusions. I do not think that anyone who has read the +criticisms which Touzet has brought together (_Emplois Industriels des +Métaux Précieux_, Paris, 1911, pp. 49-52) of the methods employed in the +investigations by the Director of the United States Mint in 1879, 1881, +1884, 1886, and 1900, will have large confidence in the exactness of the +results reached in those investigations. (See annual reports of the +Director of the Mint for the years in question.) Touzet's careful and +elaborate study employs the figures of these investigations as the best +available, but with substantial misgivings. There are many indeterminate +elements in the problem, as shown by both Touzet and DeLaunay, among +them, the extent to which coin is melted down for industrial purposes. + +The Director of the Mint would assign a much higher proportion of the +annual output to coinage than would DeLaunay. + +Earlier studies, by Soetbeer and Suess, seem quite out of harmony with +these conclusions. (Suess, Eduard, _The Future of Silver_, Washington, +Government Printing Office, 1893, pp. 51-53.) Suess thinks that +virtually as much gold was going into the arts uses as was being +produced, in 1892, and quotes Soetbeer (_Litteraturnachweis_, p. 285) as +admitting that such a contention may not be demonstrable, but at the +same time holding that it cannot be disproved. + +In the face of what seems to be a really indeterminate statistical +problem, I content myself with the theoretical conclusions in the text. +Because I cannot find adequate grounds for confidence in the main source +from which he has drawn his statistics, I refrain from a criticism of +the theory and method underlying Professor J. M. Clark's ingenious +effort to derive statistical laws for the elasticity of the arts demand +for gold. (_American Economic Review_, Sept. 1913.) + +[467] _Cf._ our chapter on "Economic Value," _supra_, and "Social +Value," _passim_. + +[468] F. A. Walker, _International Bimet_. + +[469] See DeLaunay, _The World's Gold_, New York, 1908, p. 176. +DeLaunay's figures indicate that the use of gold for gold leaf and plate +is quantitatively a minor factor in the industrial consumption of gold. +Jewelry and watch cases are the most important items. + +[470] Capital prices of lands and securities might well be lower, if +interest rates are markedly higher, and if land rents and "quasi-rents" +suffer from higher wages and higher interest. + +[471] _Cf._ chapter on "Dodo-Bones," _supra_. + +[472] Among the writers who have treated this topic, I would mention +especially Menger, "Geld," in _Handwörterbuch der Staatswissenschaften_; +Laughlin, _Principles of Money_; Scott, W. A., _Money and Banking_; +Knies, _Das Geld_; Walker, F. A., _Money and Political Economy_; Conant, +_Principles of Money and Banking_; Seligman, _Principles of Economics_; +Johnson, J. F., _Money and Currency_; von Mises, L., _Theorie des Geldes +und der Umlaufsmittel_; Helfferich, K., _Das Geld_; Simmel, _Philosophie +des Geldes_; Davenport, H. J., _Economics of Enterprise_. The difference +between the standard of value (common measure of values) function, and +the medium of exchange function is particularly well illustrated by +Scott, _loc. cit._, ch. 1. The legal functions of money are especially +treated by Knapp, _Staatliche Theorie des Geldes_. + +[473] For discussions of the idea of measuring values, and the +dependence of this on the conception of value as an absolute quantity, a +common or generic quality of wealth, see Knies, _Das Geld_, I, 113ff.; +Kinley, _Money_, 61-62; Merriam, L. S., "Money as a Measure of Value," +_Annals of the American Academy_, vol. IV; Carver, "The Concept of an +Economic Quantity," _Quart. Jour. of Econ._, 1907; Laughlin, _Principles +of Money_, 1903, pp. 14-16; Davenport, _Value and Distribution_, p. 181, +n.; Anderson, _Social Value_, chs. 2 and 11, and "The Concept of Value +Further Considered," _Quart. Journal of Econ._, 1915; Helfferich, _Das +Geld_, 1903 ed., pp. 470-478; Scott, _Money and Banking_, ch. 1. + +[474] See Scott, _Money and Banking_, ch. 3. + +[475] A further reason for preferring "common measure of values" is that +expression carries dearly the connotation of absolute values. "Relative +values" cannot be "measured," _Social Value_, pp. 26-27. + +[476] Current text-books, following the Austrian doctrine, define +production as the creation of "utilities." This is incorrect. Production +is the creation of _values_. _Cf. Social Value_, pp. 119 and 189. + +[477] This is the view of H. J. Davenport (_Economics of Enterprise_, +pp. 301-302). + +[478] Kemmerer has shown this to be true of bank reserves. As we shall +see, the reserve function is merely a special case of the "bearer of +options" function. For Kemmerer's discussion of business distrust, see +_Money and Credit Instruments_, pp. 124-126, and 144. + +[479] "In New York, for instance, loans by banks 'on call' are subject +to repayment within an hour or two after notice is given that repayment +is desired." Conant, _Principles of Money and Banking_, vol. II, p. 56. +In general, the banks are content if the loan is repaid by 3 o'clock on +the day it is called. + +[480] _E. g._, Cairnes, J. E., _Leading Principles of Political +Economy_. + +[481] _One_ "pure rate" is a myth, but the notion has some significance, +as setting off a body of causes distinct from the money-market factors +under consideration. _Cf. supra_, the ch. on "The Capitalization +Theory." + +[482] See von Mises, "The Foreign Exchange Policy of the +Austro-Hungarian Bank," British _Economic Journal_, 1909, pp. 208-209. +An able Boston broker, in Feb. 1917, calls attention to the growing +difficulty of placing long-time bonds, without very high yield, in view +of the scarcity of real capital, despite the exceedingly low +"money-rates." I venture to predict an increasing "spread" between +"money-rates" and the yield on long-time investments, the longer the War +lasts. The view of Davenport and Schumpeter (_Annalist_, Feb. 28, 1916, +and _Theorie der wirtschaftlichen Entwicklung_), which would deny the +validity of the distinction between money-rates and interest rates, and +would make the money-market phenomena the primary cause of all interest +phenomena, seems to me indefensible, alike in theory and in fact. + +[483] _Cf._ the analysis of bank-loans in the United States, _infra_. + +[484] Mitchell, _Business Cycles_, p. 146. + +[485] _Journal of Political Economy_, XVI, May, 1908, pp. 273-298. + +[486] Leipzig, 1905. This book has had wide influence on German thinking +on money. It is typical of the tendency in German thought to make the +State the centre of everything. Recognizing the historical fact that +money has originated in a commodity, it holds that the commodity basis +is a phenomenon of historical significance only, that modern money is a +creature of the State. The money-unit is not definable as a quantity of +metal, of given fineness, but rather is a "nominal" thing, present +monetary standards being defined by legal proclamation in terms of past +standards. The necessity for this reference to past standards grows out +of the existence of past _debts_. The State must preserve the continuity +of juristic relations, between debtors and creditors as elsewhere. Knapp +holds that the _Zahlungsmittel_ (legal means of quittance, legal tender) +function is the primary function of money, and that it is not a concept +subordinate to _Tauschmittel_ (medium of exchange). It is not necessary +for our purposes to take account of Knapp's theory in detail. He really +has little to say about the value of money. Indeed, he confesses, in a +later discussion, that his theory is not concerned with that subject! +(_Schriften des Vereins für Sozialpolitik_, No. 132, 1909, pp. 559-563.) +The amount of economic analysis in the book is not great. It is a +striking illustration of the fact that legal thinking is largely +concerned with _qualitative distinctions_, rather than with quantitative +causal conceptions. (_Cf._ my discussion in the chapter on "The +Reconciliation of Statics and Dynamics," _infra_, of the "statics" of +the law.) Knapp's book has a forbidding appearance, because of the large +number of new terms, based on Greek roots, which he has coined. The +German language is inadequate to express his ideas! The Germans +themselves have complained much of this. Careful reading of the book +discloses, however, that the new terms are admirably adapted to express +the distinctions he draws. I think, too, that English readers of the +book, who remember enough of their Greek to recognize an occasional +Greek root as vaguely familiar, will find less difficulty in giving +fixed meanings to his new terms than would be the case with new German +compounds. One who takes the trouble to master Knapp's vocabulary will +find the effort worth while. Knapp has a high order of dialectical +acumen. But the main part of the book has little direct bearing on the +problem of the value of money, whether one understand by "value of +money" the absolute social value of money, or the reciprocal of the +price-level. The main points to be drawn from his discussion are (1) the +fact that past debts may tend to sustain the value of an otherwise +worthless money; and (2) that the State's willingness to accept money +for taxes, etc., may also contribute to its value. Knapp lays heaviest +stress on this last point. He seems to concede, however, that the rôle +of the State here is not different from that of any other big factor in +the market, and that the State's power in this particular is a function +of the magnitude of its fiscal operations. Both of these doctrines fit +readily into my social value theory. Knapp's discussion of methods of +regulating the international exchanges by methods other than gold +shipments is interesting, and might well be studied by those who are +concerned with the exchange situation in the present war. His thesis +that the value of silver depended on the course of the exchanges between +gold and silver countries, instead of the course of the exchanges +depending on the values of gold and silver, seems to me an absurd +exaggeration of a minor qualification into a main theory. His doctrine +that international relations alone make the purely legal money, without +commodity basis, unsatisfactory, I do not accept. I have discussed this +general topic in my chapter on "Dodo-Bones," however, and may content +myself with now referring to that chapter. It is not true, as a matter +of fact, moreover, that the money-unit is no longer defined as a +quantity of metal. Our own American practice is sufficient evidence on +this point. Knapp has sought to generalize his own interpretation of the +history of Austrian paper into universal laws of money! That his +interpretations meet authoritative dissent in Austria is sufficiently +evidenced by von Mises' discussion, in his _Theorie des Geldes_ (ch. on +"Das Geld und der Staat"), and in his English article on "The Foreign +Exchange Policy of the Austro-Hungarian Bank," British _Economic +Journal_, 1909. The notion that the legal tender function is prior to +the medium of exchange function I regard as quite indefensible. It is +doubtless true, in certain cases, that a government may debase its +money, defining the new debased money in terms of the old, and that +people who have debts to pay may, for a time, accept the debased money +as a medium of exchange. But the limit of this is reached when the old +debts have been paid. Unless other factors (not necessarily redemption), +then come in to sustain the value, the value will sink, to a level +commensurate with the debasement. The value would generally sink to a +considerable degree, in any case, if only the legal factors worked to +sustain it. I have gone over this in the chapter on "Dodo-Bones," +_supra_. It was only by being a valuable object, and commonly only by +being a medium of exchange, that the money could have become a means of +legal quittance in the first place. Men would not have made contracts in +terms of it, otherwise. And men would cease making contracts in it as +soon as it (or other things tied to it in value) ceased to be an +acceptable medium of exchange. + +Knapp finds a good many phenomena in the history of money for which the +quantity theory, and the metallist theory, can give no explanation. He +has an exceedingly poor opinion of both theories, and makes many telling +points against both. In so far as his doctrine asserts that the +phenomena of money are matters of social organization, psychological in +nature, I find myself in harmony with it. My dissent comes when he seeks +to erect the abstractions of the jurist into a complete social +philosophy! Law is only a part of the system of social control, and +economic values, while influenced by legal values, are far from being +explained when legal factors only are taken into account. Legal factors +often play a more direct part in connection with the value of money than +in connection with other values, but they do not dominate the value of +money. + +Recent German literature on money (_e. g._, Fr. Bendixsen, _Geld und +Kapital_, Leipzig, 1912) has been a good deal influenced by Knapp, and +there is a fair chance that American students may have to read his book +if they wish to understand the next decade of German monetary history. +It will be well for Germany if this is not the case! + +[487] _Economics of Enterprise_, p. 257. + +[488] _Cf._ Böhm-Bawerk's _Capital and Interest_, _passim_, particularly +his discussion of Hermann, for an exposition and criticism of the "use" +theory of interest. + +[489] _Cf._ Clark, J. B., _The Distribution of Wealth_, pp. 210-245. + +[490] This is not necessarily true among Asiatics, or on the East Side +in New York City. + +[491] The adherent of the Ricardian analysis who would deny this may +fight it out with Clark, Fetter, and A. S. Johnson! + +[492] A friendly critic--with a radically different theoretical point of +view--feels that I am here playing fast and loose with the word, +"value," meaning sometimes "total utility," sometimes "marginal +utility," sometimes "relative marginal utility," and sometimes "price." +I _never_ mean any of these things by "value," when used without +qualification, in this book. I mean always _social economic value_, +conceived of as _absolute_. + +[493] I have been unable to satisfy myself that anyone has made a +sufficiently thorough study of the course of the gold premium on the +Rupee, the agio of the Rupee over its bullion content, or the course of +prices in India, during the period from 1893 to 1898, to justify +confident statements as to the comparative strength of different +elements in the explanation of that history. Kemmerer states (_Money and +Credit Instruments_, p. 38) that he can find no evidence at all to +support Laughlin's view of the matter. (See Laughlin, _Principles of +Money_, pp. 524 et seq.) J. M. Keynes, however, in his _Indian Currency +and Finance_, p. 5, says: "The Committee of 1892 did not commit +themselves; but the system which their recommendations established was +_generally supposed_ [Italics mine.] to be transitional and a first step +toward the _introduction of gold_ [italics mine.]." In the arrangements +of 1893, moreover, a ratio between English gold and the Rupee was +established, of 16d. to the Rupee, even though provisions for holding +the Rupee to this ratio were left till the establishment of the "gold +exchange standard," several years later. Keynes, on p. 3, discusses the +arguments of the silver party against the introduction of gold, which is +further evidence that the action of the Committee was understood as +looking toward a gold standard. There is _some_ evidence at least for +Laughlin's view. That his view offers a complete explanation, I think +unlikely. + +Kemmerer's admirable _Modern Currency Reforms_ (Macmillan, 1916), is at +hand while the proof sheets are being revised. It is interesting to note +that he finds the statistical evidence regarding Indian prices, trade, +etc., far too scanty to justify positive conclusions as to the causes +governing the course of the rupee. He prefers, rather, to rest the case +for the quantity theory on _a priori_ reasoning and statistics for the +United States. _Loc. cit._, pp. 70-71. In the chapter on "Dodo-Bones," I +have suggested that India might come nearer than other countries to +actualizing the assumptions of the quantity theory. On Kemmerer's +showing, however, it appears to be a liability, rather than an asset! + +[494] This is a national bank. In the same community, the writer asked +the president of a State bank about his gold reserve, and was told that +light-weight gold coin could not be used, since the State bank examiner +made a practice of _weighing_ the gold of State banks. + +[495] Legal tender can add to value of money only when it confers an +option on the _debtor_. In the case discussed, it is the _creditor_ who +has the option. But options are not necessarily valuable. + +[496] As Davenport has pointed out, money is really moneys--there is a +hierarchy. _Cf. Economics of Enterprise_, pp. 256-259. + +[497] The restricted legal tender of small coins, where the coins are +limited in amount to the needs of retail trade, is virtually an +unrestricted legal tender, in practice, and amounts, in fact, to +redemption. The coins are capable of being used where large coins, of +standard metal, would otherwise be used, or where checks, redeemable in +standard coin, would be used. Legal tender is vastly more effective with +reference to a small part of the money system than it would be with the +whole of the money supply. The same is true of the privilege of using a +particular form of money in paying taxes. _Cf._ W. C. Mitchell's +discussion of the "Demand Notes," _History of Greenbacks_, _passim_. + +[498] _Cf._ Mitchell's account, (_Ibid._, pp. 166-173), of the premium +on minor currency, during the Civil War. Pennies were used in rolls of +25 as a substitute for silver quarters, which had left the country under +Gresham's Law. The premium was due primarily to the need for small +change, rather than to bullion content, though the latter was a factor +even for coins made of baser metals, in 1864. + +[499] _Cf._ my article in the _Annalist_, Feb. 7, 1916, "The Ratio of +Foreign to Domestic Trade," and the chapter, _supra_, on "The Quantity +of Money and the Volume of Trade." + +[500] Kinley's figures show a much lower percentage of money than this. +He is anxious not to overestimate the extent to which checks are used, +however, and so gives the figures of 50 to 60% of checks as a safe lower +limit. + +[501] _Cf. Social Value_, 183-184. + +[502] _Cf._ Carver's contention that "the demand for money is a demand +for value." "Concept of an Economic Quantity," _Quart. Jour. of Econ._, +1907. + +[503] _Cf._ Laughlin's _Principles of Money_, p. 73. + +[504] The main modern type of loan for non-business purposes is the +public loan for war purposes, or to meet fiscal deficits. In the case of +war loans, the emergencies are often so great that the rate of interest +makes little difference. + +[505] No longer true of Europe, probably, since the huge war debts have +been incurred. + +[506] The interest so defaulted is cumulative, like a preferred +dividend, for years after 1909. Wall Street speaks of this issue as a +"half-bond." + +[507] _Supra_, chapter on "Origin of Money." + +[508] "It is needless to say that Government bonds always rank as the +very highest class of collateral, and the banks require no margin on +such security." Pratt, _Work of Wall Street_, 1912 ed., p. 287. This, it +need not be said, is not always true! + +[509] Veblen has elaborated the doctrine that stocks and bonds are much +the same. _Cf._ the discussion in Meade's _Corporation Finance_ of the +relation of junior bonds and preferred stocks in reorganizations. + +[510] I do not accept the imputation theory, or the capitalization +theory, without qualification, except as static first approximations. +Values of "factors of production" may easily become, and do become, in +large part independent of their "presuppositions," _Cf._ the chapter on +"Dodo-Bones", _supra_, and the chapter on "Economic Value." + +[511] This would seem to be Davenport's view. See his article in the +_Quarterly Journal of Economics_, Nov. 1910. + +[512] To a high degree, "good will," trade-marks, etc., are bankable +assets. + +[513] _Social Value_, 1911, _passim_, especially ch. XIII. Cooley, C. +H., "Institutional Character of Pecuniary Valuation," _Am. Jour. of +Sociology_, Jan. 1913. + +[514] _Cf._ my article, "Schumpeter's Dynamic Economics," _Political +Science Quarterly_, Dec. 1915, and the chapter on "Marginal Utility," +_supra_. That the new bank-credit, without the painful _preliminary_ +"abstinence" which the classical economics has stressed, is enough to +provide capital for a new enterprise is, as Schumpeter insists, true. +Schumpeter has made an important contribution in his emphasis on this +too much neglected point. But it should be noted that this does not +dispense with curtailing of consumption, and "abstinence." It merely +shifts the necessity for curtailing consumption to some one else. The +new plan of the dynamic entrepreneur, by means of bank credit, draws +labor and capital away from the existing static enterprises. That +curtails their output. That leaves less goods of the old kinds for +people to consume. That means higher prices for consumption goods, in +the interval between the starting of the new enterprise and the time +when its finished products are added to the "real income" of the +community. Extensions of bank credit, there, shift the burden of +"abstinence" to the consumer, and to the static producer. "Saving" is +still the source of capital, but it is involuntary saving. + +[515] In 1912, the First National Bank of New York owned 43 millions of +bonds, but no stocks. Report of Pujo Committee, Feb. 28, 1913, p. 66. +The National City Bank had 33 millions in bonds, but no stocks. _Ibid._, +p. 72. State banks own few stocks; trust companies own a good many. + +[516] _Cf._ the chapter on "The Origin of Money," _supra_. + +[517] In March, 1916, one of the largest banking houses in Boston +informed the writer that over one-fourth of its notes and discounts +(including all forms of loans) had been bought through note-brokers. + +[518] _Cf._, _e. g._, pp. 135ff. of Scott's excellent _Money and +Banking_, Rev. ed., New York, 1910. + +[519] The year 1909 is chosen, in order that comparison may be more +readily made with the figures of Dean Kinley's investigations based on +reported deposits made on March 16 of that year. The figures quoted are +taken from p. 39 of the Report of the Comptroller for 1913. + +[520] Even excluding the item "due from other banks and bankers," as +representing duplications, the item "other loans and discounts" remains +approximately only one-fourth of total banking assets. + +[521] Almost all agricultural processes require more than six months +from their inception to the marketing of the product. + +[522] This view would seem to correspond with the view of Babson and May +(_Commercial Paper_, 1912), and of W. A. Scott ("Investment vs. +Commercial Banking," _Proceedings of Investment Bankers' Association of +America_, 1913, pp. 81-84). Both of these discussions appear in Moulton, +_Money and Banking_, Pt. II, pp. 70 and 75-77. Dr. J. E. Pope considers +the view correct. On the other hand, Professor O. M. W. Sprague thinks +the "other loans and discounts" of large city banks are more liquid than +my statement would indicate. + +[523] _Principles of Money and Banking_, II, p. 52. + +[524] _Report of the Comptroller of the Currency_, vol. II, pp. 145 _et +seq._ + +[525] Total collateral loans in New York City on that date were +$719,327,596. This is for national banks alone. _Report of Comptroller_, +1915, II, 144. There is every reason to suppose that if trust companies +and private banks were included, the _proportion_ of stock exchange +collateral loans would be very much higher. + +[526] I am very fortunate in having the views of Dr. J. E. Pope on this +question. I know no one whose knowledge of agricultural credit, whether +of American or of European conditions, is so thorough and extensive. + +[527] This table is constructed on the basis of data in the _Report of +the Comptroller_ for 1913, pp. 774-78. + +[528] A single observation does not justify very confident conclusions, +and figures for subsequent years may alter this. There is reason for +supposing that commodity collateral was unusually large in proportion in +the Comptroller's figures for national banks in June, 1915, (1) because +the banks had been trying to reduce stock collateral loans, following +the collapse of the outbreak of the War, (2) because they were aiding +cotton owners to tide over a period of stress, and (3) because of great +grain speculation. Later: 1916 figures show this. Comptroller's +_Report_, I, p. 30. Stock loans increase from 66% to 71.2%, of +collateral loans. + +[529] The preceding argument would indicate that it is much too high. + +[530] The figures for 1909 are fairly typical of the proportions of +these items in the assets of the three classes of institutions for the +ten years from 1904 to 1914. Since 1900, there has been some increase in +the percentages of real estate loans and "all other loans," at the +expense of the percentage of securities owned, and collateral loans, as +these years have been years of reduced activity on the Stock Exchange. +The changes are not important enough, however, to modify any conclusions +which we shall base on the figures here given. All classes of loans have +grown, and investments in securities have grown, but real estate loans +and "all other loans," particularly the latter, have grown somewhat more +rapidly. + +[531] These figures are taken from Conant, _Principles of Money and +Banking_, vol. II, p. 52. + +[532] The term "commercial paper," as here used by Conant (whose source +is the _Comptroller's Report_ for 1904 and preceding years), doubtless +includes a good many items which we have decided not to count as +commercial paper. The item, "advances on securities," also includes some +items other than stock exchange loans, but not a high percentage in New +York City. In 1913 the figures for all reporting banks in New York City +were: collateral loans, 1,070; "other loans," 658. _Report of +Comptroller_, 1913, p. 779. + +[533] Taken by Conant (_Ibid._, p. 51) from the _Économiste Européen_ +(April 29, 1904), XXV, p. 546. + +[534] For the depositor who borrows from several banks, but deposits +only in one,--as a stockbroker--the items deposited will, of course, +substantially exceed the amounts borrowed at the bank where the deposits +are made. But this will not affect our argument for _classes_ of +depositors from _representative_ banks in the community as a whole. + +[535] _Supra_, chapters on "Volume of Money and Volume of Trade," and +"Statistical Demonstrations of the Quantity Theory." + +[536] The relevance of comparing wholesale and retail figures with +figures for "commercial paper" may well be questioned, since our +conception of commercial liquid loans would include manufacturers' paper +which represents raw materials, work in process, and bills receivable. +However, we have found reason to conclude that Kinley's wholesale +deposits include a large percentage of manufacturers' deposits. +(_Supra_, p. 245.) The comparison here is in any case rough. We do not +need precise figures for the argument. + +[537] Pratt, _Work of Wall Street_, 1912 ed., p. 264. + +[538] Returns from private banks in Kinley's investigation of 1909 are +virtually negligible, so far as absolute amounts are concerned, for the +whole country. For New York City, they are absolutely negligible. The +"all other deposits" reported by private banks in New York City for +March 16, 1909, are one thousand, nine hundred and eighty-four dollars, +in all! The grand total, "all other deposits" for all classes of banks +reporting in New York, is over a hundred and ninety-eight millions. The +great private banks are, thus, clearly not represented. They are not +represented in any form, since Kinley's figures exclude deposits made by +such banks in other banks. How important they would be, if included, one +cannot be sure, since they keep their affairs pretty secret. Some +information, however, is available. Thus, the Pujo Committee reports +(_Report_, Feb. 28, 1913, p. 145) that on Nov. 1, 1912, there was +$114,000,000 on deposit with J. P. Morgan and Company, exclusive of +$49,000,000 on deposit with their Philadelphia branch of Drexel and Co. +It is understood to be the practice of J. P. Morgan and Co. to keep no +cash on hand, and to deposit with other banks all their cash and checks. +On this date, they had on deposit with other banks $12,094,000, "which +presumably included all their own funds." It may be assumed, therefore, +that the remaining 102 millions was loaned out. There can be no doubt at +all, I suppose, that practically all they had lent out was on stock and +bond collateral. They are known to be one of the biggest lenders at the +"money post" on the Stock Exchange. They are not supposed to do much +business with ordinary merchants in the usual discount and deposit way. + +I have found no figures for Kuhn-Loeb & Co., for total deposits made +with them, nor for their deposits in other banks. The Pujo Committee +(_Ibid._, p. 73) states that for the six years preceding 1913 this firm +held, on the average, deposits from interstate corporations amounting to +over 17 millions. For J. P. Morgan & Co., this class of deposits +amounted to about half of total deposits. (_Ibid._, p. 57.) There is, of +course, no assurance that this proportion holds with Kuhn-Loeb's +deposits. + +These figures are very great, however. For the week ending April 3, +1915, for example, only three banks (the National City Bank, the +National Bank of Commerce, and the Chase National Bank), and only two +trust companies (the Bankers Trust Company and the Guarantee Trust +Company), held deposits exceeding those credited to J. P. Morgan and +Co., and only one of these, the National City Bank, very markedly +exceeded the Morgan deposits. The majority of the New York Clearing +House banks had less than the deposits of interstate corporations with +Kuhn-Loeb. + +As all the big private bankers deal chiefly in stock exchange loans and +securities, and foreign exchange, and as this kind of business has been +shown to be exceedingly active and to call for large checks and +clearings, we may assume that Kinley's figures would be greatly +increased if they were included. + +The trust company reports for New York in Kinley's figures are also very +incomplete. New York trust companies report less than twice as much as +Boston trust companies, and an absurdly small amount as compared with +banks. _Cf._, _supra_, the chapter on "Statistical Demonstrations of the +Quantity Theory." + +[539] It has been supposed by many writers that New York clearings +exaggerate New York transactions as compared with the extent to which +outside clearings represent transactions. Such evidence as we have would +show that this is not true to a sufficient degree to modify the present +argument. Clearings are less than deposits in both New York and the +country outside, _Supra_, chapter on "Statistical Demonstrations of +Quantity Theory." + +[540] "The Mystery of Clearings," _Annalist_, Aug. 14, 1916, p. 198. +_Supra_, chapter on "Volume of Money and Volume of Trade." + +[541] See any Congressional debate on "the Money Trust." + +[542] _Pujo Committee Report_, Feb. 28, 1913, p. 130. _Cf._ also p. 138 +(statements of Messrs. Baker, Reynolds, Schiff, and Perkins), and p. 160 +for Statements regarding the testimony of Messrs. Morgan and Baker. + +[543] I know no responsible writer who has charged that there is a +monopoly, or a tendency toward monopoly, in this matter. + +[544] I am not naïve enough to suppose that this suggestion can be much +more than an illustration of the bearing of my theory! I should even +agree that the political difficulties are so great that we would do well +to try out our system in times of stress before seriously raising the +question of giving the Federal Reserve Banks the power to rediscount +loans on stock exchange collateral. + +[545] Walker's version of the quantity theory, excluding credit +transactions, escapes much of this criticism. _Supra_, chapter on +"Equation of Exchange." + +[546] It is nothing for Wall Street to "turn over" many times two +billion dollars worth of securities. In a big bull year, this will be +accomplished twelve or more times without effort--prices rising merrily, +so long as no new supply of stocks and bonds comes in to make trouble. +(See our estimate of New York security transactions, _supra_, chapter on +"Volume of Money and Volume of Trade.") But let there be a liquidation +by investors of anything like two billions, sold once, and the market +feels a tremendous drag. It seems universally agreed that foreign +selling of securities during the present War has been a great factor in +checking advances in security prices in New York. The actual amount of +liquidating by foreign investors, however, has been trifling as compared +with the volume of sales since the War began. The best estimate of +foreign liquidation is probably that of the National City Bank, which +has taken careful account of previous estimates, and which has unrivaled +sources of "inside information." The estimate of this institution is +that from a billion and a half to a billion six hundred million dollars +worth of foreign held securities have been liquidated in America since +the beginning of the War. (This does not include foreign loans placed +here.) This estimate is given in October of 1916. (Monthly circular of +the National City Bank on "Economic Conditions, etc.," Oct., 1916, p. +3.) It is safe to say that no amount of "churning" of securities already +in the market could have anything like the depressing effect on security +prices that an unusual amount of liquidation by investors has. It is not +increase in number of _exchanges_ that depresses prices. It is increase +in the floating _supply_. Activity in the floating supply makes it +easier, rather than harder, for speculators to get banking +accommodations which enable them to "hold" and "carry" securities, and +activity in sales therefore positively tends to _increase_ rather than +to decrease, security prices. The broadening of the range of securities +dealt in, moreover, instead of depressing the prices of those already +active, helps to sustain them. Thus, brokers and bankers welcomed the +recent revival of activity in the rails, following the bull market in +war stocks. It gave a broader basis for loans. Banks would lend more +liberally, and on narrower margins, if railroad stocks could be mixed +with the brokers' war stock collateral. + +Here again we see the significance of the distinction between long-time +interest rates, connected with the volume of real capital, and the +"money-rates." + +Again, periodic payments of interest and dividends, temporarily locking +up considerable sums of bank deposits which have to be built up in +anticipation of such payments, have a very much more serious effect on +the money market than do payments many times greater in connection with +stock sales. The tension in the London money market growing out of +periodic accumulations and disbursements of the British Government is +well known. The summer of 1916 witnessed a temporary tightening in Wall +Street (in what was, generally, the period of easiest money the Street +has ever known), from a similar cause--a bunching of dividend and +interest payments, with some other large financial transactions. Money +rates in New York regularly show the influence of such payments, +temporarily. Money rates also show the influence of active speculation, +as a rule, as shown by Mr. Silberling's investigations ("The Mystery of +Clearings," _Annalist_, Aug. 14, 1916), but it takes a very much greater +volume of stock sales than of dividend and interest payments to produce +a given effect on money rates. + +[547] As May 9, 1901, when 3,336,695 shares were sold. Compare +Mitchell's stock barometer, 1890-1911, _Business Cycles_, p. 175, with +records of share sales for those years. + +[548] _Purchasing Power of Money_, 1913 ed., p. 186. The same criticism +applies to Kemmerer, and Jevons. _Cf._ Kemmerer, _Money and Credit +Instruments_, pp. 70-71. It is applicable to most quantity theorists. + +[549] _Ibid._, p. 185. It will be noted that at this point, Fisher +lapses from the doctrine that volume of trade is determined by "physical +capacities and technique." _Ibid._, p. 155. + +[550] _Cf._ our discussion, _supra_, in the chapter on the "Functions of +Money," of money in retail trade. + +[551] Our great private banks, bond houses, and investment bankers, +etc., of course do buy stocks of new enterprises on a huge scale. Many +of our big commercial banks have taken part in underwriting operations. + +[552] See pp. 428-432, _supra_. + +[553] _Wealth of Nations_, Bk. II, ch. 2, ed. Cannan, I, pp. 187 and +290-291. + +[554] _Theorie der wirtschaftlichen Entwicklung_, chs. 2 and 3. + +[555] _Supra_, chapter on "Volume of Money and Volume of Credit." + +[556] _Interviews on the Banking and Currency Systems of England, +Scotland, etc._, Senate Document No. 405, 1910 (National Monetary +Commission Report), p. 25. + +[557] This is clearly the opinion of European bankers, as indicated in +their statements to interviewers for the Monetary Commission. See, _e. +g._, statements by the _Deutsche Bank_, _Ibid._, pp. 374-375, and the +_Crédit Lyonnais_, _Ibid._, pp. 224-226. + +[558] The item, "Due from other banks and bankers" in our table of total +bank resources for 1909, is 2,563 millions--about 12% of the whole and +slightly more than the amount we assigned to "commercial paper." It is a +highly important factor making for liquidity. For State, and National +banks and trust companies it is almost as great--2,302 millions. The +first figure does not include many great private banks. + +[559] _Vide_ Professor Taussig's history of the years, 1878-1890, in his +_Silver Situation_. + +[560] _Cf._ Mitchell's _Business Cycles_, pp. 495-496; and _passim_. + +[561] _Cf._ the chapter, _supra_, on "The Quantity Theory and +International Gold Movements." + +[562] "The Prospects of Money," British _Economic Journal_, Dec. 1914. + +[563] _Cf._ Conant's discussion, _Principles of Money and Banking_, I, +ch. 7. + +[564] This would seem to be Mitchell's view. _Cf. Business Cycles_, p. +494. + +[565] _Cf._ chapter XIII. + +[566] _Cf._ the chapter on "The Functions of Money," _supra_. + +[567] _Money and Credit Instruments_, p. 80. + +[568] _Ibid._, p. 82. Italics mine. + +[569] Kemmerer, in general, is less concerned, apparently, with +defending a causal quantity theory than with defending the "equation of +exchange." To the extent that this is true, I have little quarrel with +his doctrines. To "prove" the "equation of exchange," however, is, +first, a work of supererogation, and, second, in no sense a proof of the +quantity theory. _Vide_ the chapters, _supra_, on the equation of +exchange and on statistics of the quantity theory. + +[570] Published by the National City Bank of New York. _Vide_ also +Bagehot. _Lombard Street_, introductory chapter, and Withers, _The +Meaning of Money_. + +[571] This information is supplied me by an official of the New York +Coffee Exchange, through the courtesy of Mr. W. H. Aborn, of Aborn and +Cushman, Coffee Brokers, 77 Front St., New York. + +[572] _Principles of Economics_, _passim_. + +[573] _Theorie der wirtschaftlichen Entwicklung._ + +[574] The writer has ventured some tentative predictions as to +conditions following the present War in the New York _Times_ Sunday +magazine of Dec. 10, 1916, pp. 10-11. + +[575] There are important dynamic and "frictional" considerations +opposed to protective tariffs, as well as static considerations. Very +many of the "intangibles" later to be discussed depend on free trade. A +high percentage of England's "capital" would be destroyed by protective +tariffs and trade restrictions, and to a less degree this is true of all +countries. _Vide_ N. Y. _Times_ Sunday magazine, Dec. 10, 1916, pp. +10-11. + +[576] A case in point is the discussion of the effects of increment +taxes on the building trade, participated in by Professor R. M. Haig and +the present writer in the _Quarterly Journal of Economics_, Aug. 1914, +and Aug. 1915. The doctrines criticised in my article were static +theories, and my criticisms made the static assumptions. Professor Haig, +accepting the validity of my criticisms on the assumptions laid down, +for the most part, seeks to recast the argument on a dynamic basis, +emphasizing dynamic and "frictional" considerations from which my +argument had abstracted. I think that what difference of opinion remains +between us would probably be removed if the distinction between static +and dynamic were clearly drawn and rigidly adhered to. + +[577] _Cf._ my review-article, "Schumpeter's Dynamic Economics," _Pol. +Sci. Quart._, Dec. 1915, p. 645. + +[578] _Distribution of Wealth_; _Essentials of Economic Theory_. + +[579] _Theorie der wirtschaftlichen Entwicklung_. + +[580] _Cf._ my _Social Value_, pp. 139-140, n. + +[581] _Purchasing Power of Money_, ch. 4. + +[582] _Theory of Business Enterprise._ + +[583] _Vide_ my discussion of Professor Patten's _Reconstruction of +Economic Theory_ in the _Political Science Quarterly_ of March, 1913, +and the _American Economic Review_, Supplement to the March number, +1913, pp. 90-93. + +[584] _Cf._ Schumpeter, _loc. cit._, pp. 1-101, and _passim_. That the +quantity theory is essentially "static" will appear strikingly if the +statements in the text be compared with Fisher's discussion in chs. 5-7 +of _The Purchasing Power of Money_. + +[585] It is only as a matter of highly abstract statics that the +capitalization theory (as presented in earlier chapters) can be +maintained with any strictness. In fact, capital values are not always +passive shadows, yielding freely to changes in anticipated income, and +to changes in the rate of discount. Very often capital values become +themselves substantial, become divorced from their presuppositions, can +no longer be explained by any imputation process. This is particularly +likely to be the case with lands in inactive markets. The income-bearer +is as much an object of value as is the income; is often _immediately_, +for its own sake, an object of value. The long-run tendency to +assimilate this value to a capitalization of prospective incomes may be +exceedingly slow in working out, if it ever works out. Indeed, a high +capital value may sometimes be a means of increasing the income, since +in the minds both of lessor and lessee the usual percentage return on +capital will be a factor in determining what is a "proper" rental. If a +capital value, no longer justified by prospective income, has behind it +the sanction of actual cost-outlay, there may easily be a reflex from it +on the size of the income itself. Such a capital value, unjustified by +prospective income, but still believed in by the market, may function +just as effectively as any other capital value. Book-values, not marked +down to correspond with changed income-prospects, even when they cannot +command purchasers, may still serve as a basis for _loans_--Veblen's +theory of crises rests, as we shall see, in part on this fact. + +Considerations of this sort strengthen still further the case against +the marginal utility theory of value. To pass,--as Fetter and the +Austrians in general seek to do--from marginal individual consumption +values to market prices of consumption goods, then to prices of +production goods, or to magnitudes of distributive shares, then, simply, +by the capitalization theory, to capital values, with the notion that +the original marginal utilities supply the psychological explanation at +every stage of the process, the remoter values being merely built up of +the original marginal utilities, is quite invalid. At every stage there +is a hitch: the marginal utilities do not explain the prices or values +of the consumption goods, as has already been elaborately pointed out; +and the relation between the values of consumption goods and the capital +values is very much looser and less direct than the static theory +requires. Institutional, legal, and moral forces come in, not alone at +the first step, in giving social weight to the wants of special classes +and individuals, but also at the second, giving prestige to certain +enterprises, and so higher values to their securities, giving banking +support here and refusing it there, giving popular and patriotic support +here, and not there, giving direct action of law, custom and tradition +on certain _prices_ (whence, indirectly on values), and leaving prices +free to change readily in other cases. (_Cf._ my discussion in _Quart. +Jour, of Economics_, Aug. 1915, pp. 699-701.) The static theory of +capitalization describes an ideal logical relation, while capital values +are, in fact, built up by a psychological process which is logical only +in part. In large degree, especially when the market lacks perfect +fluidity, capital values are _immediate_, and not merely _derived_, +values. In this, I think, I am in accord with the view briefly stated by +A. S. Johnson in his recent review of Böhm-Bawerk (_Am. Econ. Rev._, +March, 1914, pp. 115-116). + +[586] _Loc. cit._, ch. IV. _Vide_ Veblen's discussion of Fisher in the +_Pol. Sci. Quart._ of 1908, and his discussion of Clark in the _Quart. +Jour. of Econ._, Feb. 1908. + +[587] Chapter on "Volume of Money and Volume of Trade." + +[588] On Oct. 9 of 1916, I still venture the opinion that the stock +market has shown wonderful conservatism in the face of extraordinary +temptations. From Oct. 1915, to Aug. 1916, the "bears" dominated the +market, and prices fell pretty steadily. The "bull" movement of Sept. +1916, seems to have reached its crest without passing the level of a +year ago. The market may "run away," but it has not yet done so. + +[589] _Psychologie Économique_, vol. I, pp. 77-78. + +[590] Nor do I see any method for bringing into our equilibrium picture +the control which the environment retains over values by its power to +_eliminate_ those groups whose choices vary too widely from the norms of +"survival-necessities." Vide Giddings, _Principles of Sociology_, ed. +1905, p. 20; Carver, _Essays in Social Justice_, _passim_. I think that +the range of choices compatible with survival is very wide. Moreover, +"adaptation" is not a simple matter of adjustment to the physiographic +environment. It includes adjustment to the _social values_, both of the +group in question and of other groups. + +[591] _Cf._ H. C. Emery's discussion of "manipulation" in his +_Speculation in the Stock and Produce Exchanges_, pp. 171ff. + +[592] _Cf._ Dewey, _Essays in Logical Theory_; Bergson, _Time and Free +Will_, _passim_, and _Creative Evolution_; James, _Problems of +Philosophy_. + +[593] _Cf._ Bagehot's discussion in _Lombard Street_ of the features of +English organization which prevented supremacy in the Eastern trade from +passing to Greece and Italy with the opening of the Suez Canal. +(Introductory chapter.) See also the discussion of the English money +market in ch. XXIV, _supra_. + +[594] _Cf._ my article on "Schumpeter's Dynamic Economics" in _Political +Science Quarterly_, Dec. 1915, and ch. XXIII, _supra_. + +[595] In my article on Schumpeter's theory above mentioned, I have +pointed out that his contrast between statics and dynamics is not by any +means a fixed one, and that in particular he shifts back and forth +between a hypothetical static state, primarily a methodological device, +which assumes perfect fluidity and mobility of the objects of exchange, +on the one hand, and a realistic static state, immobile, held in the +bonds of custom and tradition, illustrated by India and China, on the +other hand. The version of the distinction between statics and dynamics +here discussed is only one of several which he gives. It is, however, +the one which at present I wish to contrast with my own view. With many +of Schumpeter's doctrines I am in hearty accord, and I have learned much +from his book. I think that his book affords abundant evidence of the +usefulness of the static-dynamic contrast. + +[596] Schumpeter's contrast between statics and dynamics is in most +essentials closely parallel to Veblen's contrast between the theory of +wealth and the theory of prosperity, and his main conclusions resemble +Veblen's, despite Schumpeter's optimism and Veblen's pessimism, and +despite temperamental and methodological differences. Most of my +criticisms of Veblen apply also to Schumpeter. + +[597] _Cf._ our discussion, _supra_, of the relation of credit to +futurity. + + * * * * * + + + + +TRANSCRIBER'S NOTES + + +1. Passages in italics are surrounded by _underscores_. + +2. Footnotes have been moved from the middle of a paragraph to the end +of the e-text. + +3. The original text includes Greek sigma character. For this e-text +version it has been replaced with its transliteration [Greek: S]. + +4. Fractions are indicated as in the example below: + 6-1/4 indicates whole number 6 with fractional part of one-fourth. + +5. The following misprints have been corrected: + "thing" corrected to "think" (page 124) + "theorrists" corrected to "theorists" (page 155) + "$75,00,000.00" corrected to "$75,000,000.00" (page 208) + "theory theory" corrected to "theory" (page 330) + "practive" corrected to "practice" (page 428) + "this held" corrected to "thus held" (page 442) + "in in" corrected to "in" (page 476) + "clasess" corrected to "classes" (page 509) + "legarthic" corrected to "lethargic" (page 573) + "enchancement" corrected to "enhancement" (page 591) + "74-71" corrected to "64-71" (ftn. 55) + "equilibbrium" corrected to "equilibrium" (ftn. 86) + "Instrnmeuts" corrected to "Instruments" (ftn. 163) + "reguularly" corrected to "regularly" (ftn. 545) + Missing text added in footnotes 412, 468, 595. + +6. Some of the page references in the index have been corrected. + +7. 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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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Thus, we do not necessarily +keep eBooks in compliance with any particular paper edition. + + +Most people start at our Web site which has the main PG search facility: + + http://www.gutenberg.org + +This Web site includes information about Project Gutenberg-tm, +including how to make donations to the Project Gutenberg Literary +Archive Foundation, how to help produce our new eBooks, and how to +subscribe to our email newsletter to hear about new eBooks. + + +</pre> + +</body> +</html> diff --git a/34823-h/images/p006.png b/34823-h/images/p006.png Binary files differnew file mode 100644 index 0000000..37880b4 --- /dev/null +++ b/34823-h/images/p006.png diff --git a/34823.txt b/34823.txt new file mode 100644 index 0000000..77c7a1b --- /dev/null +++ b/34823.txt @@ -0,0 +1,22225 @@ +Project Gutenberg's The Value of Money, by Benjamin M. Anderson, Jr. + +This eBook is for the use of anyone anywhere at no cost and with +almost no restrictions whatsoever. You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: The Value of Money + +Author: Benjamin M. Anderson, Jr. + +Release Date: January 2, 2011 [EBook #34823] + +Language: English + +Character set encoding: ASCII + +*** START OF THIS PROJECT GUTENBERG EBOOK THE VALUE OF MONEY *** + + + + +Produced by Curtis Weyant and the Online Distributed +Proofreading Team at http://www.pgdp.net (This book was +produced from scanned images of public domain material +from the Google Print project.) + + + + + + + + + + HARVARD COLLEGE + LIBRARY + + FROM THE + + QUARTERLY JOURNAL + OF ECONOMICS + + + + THE MACMILLAN COMPANY + NEW YORK . BOSTON . CHICAGO . DALLAS + ATLANTA . SAN FRANCISCO + + MACMILLAN & CO., LIMITED + LONDON . BOMBAY . CALCUTTA + MELBOURNE + + THE MACMILLAN CO. OF CANADA, LTD. + TORONTO + + + + + THE + VALUE OF MONEY + + BY + + B. M. ANDERSON, JR., PH. D. + ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY + AUTHOR OF "SOCIAL VALUE" + + + New York + THE MACMILLAN COMPANY + 1917 + + _All rights reserved_ + + + + COPYRIGHT, 1917 + BY THE MACMILLAN COMPANY + Set up and electrotyped. Published May, 1917. + + + + To + + B. M. A., III + AND + J. C. A. + + WHO OFTEN INTERRUPTED THE WORK + BUT NONE THE LESS INSPIRED IT + + + + +PREFACE + + +The following pages have as their central problem the value of money. +But the value of money cannot be studied successfully as an isolated +problem, and in order to reach conclusions upon this topic, it has been +necessary to consider virtually the whole range of economic theory; the +general theory of value; the role of money in economic theory and the +functions of money in economic life; the theory of the values of stocks +and bonds, of "good will," established trade connections, trade-marks, +and other "intangibles"; the theory of credit; the causes governing the +volume of trade, and particularly the place of speculation in the volume +of trade; the relation of "static" economic theory to "dynamic" economic +theory. + +"Dynamic economics" is concerned with change and readjustment in +economic life. A distinctive doctrine of the present book is that the +great bulk of exchanging grows out of dynamic change, and that +speculation, in particular, constitutes by far the major part of all +trade. From this it follows that the main work of money and credit, as +instruments of exchange, is done in the process of dynamic readjustment, +and, consequently, that the theory of money and credit _must be a +dynamic theory_. It follows, further, that a theory like the "quantity +theory of money," which rests in the notions of "static equilibrium" and +"normal adjustment," abstracting from the "transitional process of +readjustment," touches the real problems of money and credit not at all. + +This thesis has seemed to require statistical verification, and the +effort has been made to measure the elements in trade, to assign +proportions for retail trade and for wholesale trade, to obtain +_indicia_ of the extent and variation of speculation in securities, +grain, and other things on the organized exchanges, and to indicate +something of the extent of less organized speculation running through +the whole of business. The ratio of foreign to domestic trade has been +studied, for the years, 1890-1916. + +The effort has also been made to determine the magnitudes of banking +transactions, and the relation of banking transactions to the volume of +trade. The conclusion has been reached that the overwhelming bulk of +banking transactions occur in connection with speculation. The effort +has been made to interpret bank clearings, both in New York and in the +country outside, with a view to determining quantitatively the major +factors that give rise to them. + +In general, the inductive study would show that modern business and +banking centre about the stock market to a much greater degree than most +students have recognized. The analysis of banking assets would go to +show that the main function of modern bank credit is in the direct or +indirect financing of corporate and unincorporated _industry_. +"Commercial paper" is no longer the chief banking asset. + +It is not concluded from this, however, that commerce in the ordinary +sense is being robbed by modern tendencies of its proper banking +accommodation, or that the banks are engaged in dangerous practices. On +the contrary it is maintained that the ability of the banks to aid +ordinary commerce is increased by the intimate connection of the banks +with the stock market. The thesis is advanced--though with a recognition +of the political difficulties involved--that the Federal Reserve Banks +should not be forbidden to rediscount loans on stock exchange +collateral, if they are to perform their best services for the country. + +The quantity theory of money is examined in detail, in various +formulations, and the conclusion is reached that the quantity theory is +utterly invalid. + +The theory of value set forth in Chapter I, and presupposed in the +positive argument of the book, is that first set forth in an earlier +book by the present writer, _Social Value_, published in 1911. That book +grew out of earlier studies in the theory of money, in the course of +which the writer reached the conclusion that the problem of money could +not be solved until an adequate general theory of value should be +developed. The present book thus represents investigations which run +through a good many years, and to which the major part of the past six +years has been given. On the basis of this general theory of value, and +a dynamic theory of money and exchange, our positive conclusions +regarding the value of money are reached. On the same basis, a +psychological theory of credit is developed, in which the laws of credit +are assimilated to the general laws of value. + +In a final section, the constructive theory of the book is made the +basis for a "reconciliation" of "statics" and "dynamics" in economic +theory--an effort to bring together the abstract theory of price +(_i. e._, "statics") which has hitherto chiefly busied economists, and +the more realistic studies of economic change (_i. e._ "dynamics") to +which a smaller number of economists have given their attention. These +two bodies of doctrine have hitherto had little connection, and the +science of economics has suffered as a consequence. + +This book was not written with the college student primarily in mind. +None the less, I incline to the view that the book, with the exception +of the chapter on "Marginal Utility," is suitable for use as a text with +juniors and seniors in money and banking, if supplemented by some +general descriptive and historical book on the subject, and that the +whole book may very well be used with such students in advanced courses +in economic theory. I think that bankers, brokers, and other business +men who are interested in the general problems of money, trade, +speculation and credit, will find the book of use. Naturally, however, +it is my hope that the special student of money and banking, and the +special student of economic theory will find the book of interest. The +book may interest also certain students of philosophy and sociology, who +are concerned with the applications of philosophy and social philosophy +to concrete problems. + +My obligations to others, running through a good many years, are very +great. With Professor E. E. Agger, I talked over very many of the +problems here discussed, in the course of two years of close association +at Columbia University, and gained very much from his suggestions and +criticisms. Professor E. R. A. Seligman has read portions of the +manuscript, and given valuable advice. Professor H. J. Davenport has +given the first draft an exceedingly careful reading, and his criticisms +have been especially helpful. Professor Jesse E. Pope supervised my +investigations in the quantity theory of money in 1904-5, in his seminar +at the University of Missouri, and gave me invaluable guidance in the +general theory of money and credit then. More recently, his intimate +first hand knowledge of European and American conditions, both in +agricultural credit and in general banking, has been of great service to +me. Mr. N. J. Silberling, of the Department of Economics at Harvard +University, has been helpful in various ways, particularly by making +certain statistical investigations, to which reference will be made in +the text, at my request. Various bankers, brokers, and others closely in +touch with the subjects here discussed have been more than generous in +supplying needed information. Among these may be especially mentioned +Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the +_Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H. +Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston, +various gentlemen in the offices of Charles Head & Co., and Pearmain and +Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr. +W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate +Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee +Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade, +DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of +the Bankers Trust Company, New York. My greatest obligations are to two +colleagues at Harvard University. Professor F. W. Taussig has given the +manuscript very careful consideration, from the standpoint of style as +well as of doctrine, and has discussed many problems with me in detail. +Professor O. M. W. Sprague has placed freely at my service his rich +store of practical knowledge of virtually every phase of modern money +and banking, and has read critically every page of the manuscript. None +of these gentlemen, of course, is to be held responsible for my +mistakes. I also make grateful acknowledgment of the aid and sympathy of +my wife. + +In the course of the discussion, frequent criticisms are directed +against the doctrines of Professors E. W. Kemmerer and Irving Fisher, +particularly the latter, as the chief representatives of the present day +formulation of the quantity theory. Both their theories and their +statistics are fundamentally criticised. I find myself in radical +dissent on all the main theses of Professor Fisher's _Purchasing Power +of Money_, and at very many points of detail. To a less degree, I find +myself unable to concur with Professor Kemmerer. But I should be sorry +if the reader should feel that I fail to recognize the distinguished +services which both of these writers have performed for the scientific +study of money and banking, or should feel that dissent precludes +admiration. I acknowledge my own indebtedness to both, not alone for the +gain which comes from having an opposing view clearly defined and ably +presented, but also for much information and many new ideas. My general +doctrinal obligations in the theory of money and credit are far too +numerous to mention in a preface. My greatest debt in general economic +theory is to Professor J. B. Clark. + + B. M. ANDERSON, JR. + + HARVARD UNIVERSITY, March 31, 1917. + + + + +ANALYTICAL TABLE OF CONTENTS + + +_PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE_ + + +CHAPTER I + +ECONOMIC VALUE + PAGE + Problem of value of money special case of general theory of + value; present chapter concerned with general theory 1 + + Formal and logical aspects of value: value as quality; value + as quantity; value and wealth 5-6 + + Absolute _vs._ relative conceptions of value: value of money + _vs._ "reciprocal of price-level"; value prior to exchange; + value and exchangeability; do prices correctly express + values? 6-12 + + Doctrine so far in accord with main current of economic + opinion 12-14 + + Causal theory of value new: marginal utility, labor theory, + etc., rejected 14-16 + + Social explanation required: "individual" a social product, + both in history of individual and in history of race 16-19 + + And above individual impersonal psychic forces, law, public + opinion, morality, economic values 19-20 + + Three types of theory have dealt with these: theory of + extra-human objective forces; extreme individualism; + social value theory 20-21 + + Illustrated in jurisprudence, ethics, and economic theory 21-26 + + Law, morals, and economic values generically alike, but have + _differentiae_ 26-28 + + But not differentiated on basis of states of consciousness + of individual immediately moved by them, because many + minds in organic interplay involved 28-33 + + Economic social value (a) of consumers' goods and services: + "utility" and scarcity; "marginal utility"; social + explanation of marginal utility; marginal utilities the + conscious _focus_ of economic values of consumers' goods; + but only minor part of these values; individuals, classes + and institutions heavily weighted by legal, moral, and + other social values, in power over economic values of + consumers' goods 33-38 + + Economic social value (b) of labor, land, stocks, bonds, + "good will," etc.; based only in part on values of + consumers' goods; partially independent, directly + influenced by contagion, and centers of power and + prestige 38-41 + + Pragmatic character of theory 41-43 + + Relation of social values to individual values 43-45 + + +CHAPTER II + +SUPPLY AND DEMAND, AND THE VALUE OF MONEY + + _Hiatus_ between general theory of value and theory of value + of money 46-47 + + Partly because former has been developed by different writers + from those who have developed latter 47-49 + + But chiefly because supply and demand, cost of production, + etc., _assume_ fixed value of money, and are theories of + _price_, rather than _value_ 49 + + Supply and demand useful but superficial formula, common + property of many value theories 49-50 + + Crude and unanalyzed in Smith and Ricardo; first made precise + by J. S. Mill, who gives essentials of modern doctrine 49-51 + + Boehm-Bawerk's pseudo-psychology spoils Mill's clean-cut + doctrine 51-52 + + Supply and demand assumes fixed _value_ of money-unit, and + hence inapplicable to money itself 52-56 + + But supply and demand does _not_ assume fixed _price-level_ 56-57 + + Cairnes _vs._ Mill 57-58 + + Mill's unsuccessful effort to apply supply and demand to + money 59-62 + + Walker's attempt 62 + + Supply and demand in the "money market" 62-63 + + +Chapter III + +COST OF PRODUCTION AND THE VALUE OF MONEY + + Types of cost theory: modern cost doctrine is "money costs" + doctrine, and inapplicable to value of money 64 + + Labor cost: Smith; Ricardo; Ricardo's confession of failure; + "real costs" in Senior and Cairnes; Mill's "money-outlay" + cost doctrine, and Cairnes' criticism; but "money-cost" + has survived 64-67 + + Because "real cost" doctrine does not square with facts 67-69 + + "Money-cost" of producing money-metal 69-70 + + Austrian cost doctrine runs still in money terms, assuming + value, money, and fixed value of money 70-71 + + "Negative social values" as "real costs" note, 71 + + +CHAPTER IV + +THE CAPITALIZATION THEORY AND THE VALUE OF MONEY + + Money as "capital good," and "money-rates" as rentals 72-73 + + Capitalization theory; formula; capital value passive + resultant of annual income and rate of discount 73-74 + + But in case of money, rental and rate of discount not + independent variables 74-76 + + And in case of money, capital value not passive shadow, + but active cause of income 76 + + Capitalization theory assumes money, and fixed value of + money 76-77 + + Assumed fixed value of money absolute, and not relative 77-78 + + Capitalization theory, in current formulation, inapplicable + to value of money 78-79 + + +CHAPTER V + +MARGINAL UTILITY AND THE VALUE OF MONEY + + Marginal utility theory usually thinly disguised version of + supply and demand, and hence inapplicable to money 80 + + View that money is unique in having no utility _per se_ 81-83 + + Marginal utility and "commodity theory" of money-value 81-82 + + Quantity theorists and marginal utility of money 81-82 + + Money an instrumental good, and marginal utility no less + applicable here than elsewhere; marginal utility invalid + as general theory of value, hence invalid when applied to + money 82-120 + + Wieser's theory of value of money 83-88 + + A circle in reasoning 88-90 + + Schumpeter's similar circle 100 + + But Schumpeter's general utility theory, though inapplicable + to value of money, in form avoids a causal circle 90-98 + + Schumpeter's _conspectus_; different from Boehm-Bawerk and + most utility theorists 90-92, 113-120 + + Defects and limitations of Schumpeter's general theory 90-98 + + Schumpeter's substitutes for social value concept 98-99 + + Von Mises sees circle of Wieser and Schumpeter 100 + + Seeks to avoid it by construing utility theory as historical, + instead of static, theory 101 + + But this departs from fundamentals of utility theory; other + difficulties 101-110 + + Kinley's doctrine 110-111 + + General criticism of utility theory 111-115 + + Davenport, Wicksteed, Fisher, Perry 113-120 + + +_PART II. THE QUANTITY THEORY_ + + +CHAPTER VI + +THE QUANTITY THEORY OF PRICES. INTRODUCTION + + Preliminary statement of quantity theory, and of critical + theses to be developed in following chapters. Virtually + every contention and every assumption of quantity theory + to be challenged 123-129 + + +CHAPTER VII + +DODO-BONES + + Quantity theory doctrine that valueless objects can serve as + money; Nicholson's assumption: money made of dodo-bones 130-131 + + Fisher's view also 130 + + And Ricardo's 131-132 + + Will dodo-bones circulate? Dodo-bones and poker chips; + circular reasoning 132 + + Both medium of exchange and standard of value must be + valuable 133 + + Is inconvertible paper an exception? 133-134 + + Doctrine that money gives legal claim to things in general 134 + + Kemmerer's assumptions; money made of commodity, once + valuable, now used only as money 135 + + Commodity theory requires present commodity value 135 + + Historical _vs._ cross-section view: possibility that such + money would circulate 135-136 + + Value not tied up with marginal utility or commodities: + social value theory; derived values often become + independent of original presuppositions, in economic + as well as legal and moral spheres 136-139 + + But this no basis for quantity theory: social psychology, + not mechanics 139 + + "Banker's psychology" _vs._ psychology of blind habit: + India, Austria, United States; monetary phenomena of war + times; "credit theory" of Greenbacks 139-142 + + Question-begging definitions 142-143 + + Assumptions of quantity theory: blind habit and fluid prices 143-144 + + Extreme commodity theory denies that money-use adds to value + of money; usually not true; analysis of money-functions 144-150 + + Hypothetical case in which whole value of money comes from + commodity value 150-152 + + Money must have value apart from monetary employments, but, + in general, gains additional value from employment as + money 152-153 + + +CHAPTER VIII + +THE "EQUATION OF EXCHANGE" + + Fisher leading, most consistent, most uncompromising + quantity theorist: wide acceptance of his views 154 + + Taussig _vs._ Fisher 155 + + Fisher and dodo-bone doctrine: logical part of quantity + theory; Fisher's value concept 155-156 + + "Equation of exchange": analysis of Fisher's version, + typical of all 156-171 + + In what sense equality between two sides of equation? + Meaning of "T" 158-161 + + No "goods side" to equation; both sides sums of money; + equal because identical; equation meaningless 161-162 + + All factors in equation highly abstract 162-163 + + "P" and "T" cannot both be given independent definitions: + P defined as _weighted_ average, with T in denominator; + and must be changed from year to year, as elements in T + change, even though no prices change 164-166 + + This makes circular theory: _problem_ defined in terms of + _explanation_ 165-166 + + Causal theory associated with equation of exchange 166 + + Equation amplified to include credit; not acceptable to + Nicholson or Walker, and caricature of conditions in + Germany and France 166-170 + + Book-credit, bills of exchange, etc., excluded 167-170 + + Why a one-year period? 170-171 + + +CHAPTER IX + +THE VOLUME OF MONEY AND THE VOLUME OF CREDIT + + Mill thought credit acts on prices like money, and that + this reduces quantity theory tendency to indeterminate + degree; Fisher holds volume of money _in circulation_ + governs volume of credit, so that quantity theory stands 172 + + Fisher's arguments for fixed ratio, _money_ to + bank-deposits 172-173 + + Argument a _non-sequitur_, even if contentions true 173-177 + + Contentions untrue: no fixed ratio between _reserves_ and + deposits, or reserves and demand liabilities, either in + America or Europe 177-182 + + Taussig's views; virtually surrender of quantity theory in + modern conditions 182-185 + + Bulk of quantity theorists in between Fisher and Taussig, + but nearer to Fisher's view than to Taussig's 185 + + +CHAPTER X + +"NORMAL" VS. "TRANSITIONAL" TENDENCIES + + Quantity theory qualified by distinction between "normal" and + "transitional" effects of change in quantity of money, etc. 186 + + Meaning of distinction, and extent of qualification hard + to determine: is "normal period" real period in time? + How long is "transitional period"? Is it realistic, or + hypothetical? Is equation of exchange realistic? + Concrete _vs._ hypothetical price-levels 186-189 + + Legitimate and illegitimate abstraction 189-190 + + Causation and temporal order 190-191 + + Fisher admits very slight qualification of "normal theory" 192 + + Mill's quantity theory "short run" theory; Taussig's "long + run" theory; radically different logic in the two 192-193 + + Fisher's theory sometimes "long run" and sometimes "short + run" 194-195 + + +CHAPTER XI + +BARTER + + Quantity theory spoiled if resort to barter possible and + important 196 + + Extent of barter and other flexible substitutes for money and + bank-credit; simple barter; different methods of corporate + consolidations; flexibility, with state of money-market; + clearing-house arrangements in speculative exchanges; + offsetting book-credits 197-200 + + Barter made easier under money economy, by measure of + value function of money 201 + + Bills of exchange; foreign trade 201 + + +CHAPTER XII + +VELOCITY OF CIRCULATION + + Velocity conceived by quantity theory as causal entity, + independent of quantity of money and prices; necessary + assumption for law of proportionality 203 + + "Coin-transfer" _vs._ "person-turnover" concepts 203-204 + + Velocity really non-essential by-product, meaningless + average 204-205 + + Doctrine that velocity independent of money; habit and + convenience; hoarding; hoarding by banks 205-209 + + Velocity and volume of trade; vary together 209-214 + + Value of money causally governs velocity 214-215 + + +CHAPTER XIII. + +THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION + + Quantity theory doctrine that volume of trade, and volume + of money (and credit), are independent; trade governed + by physical and technical conditions, not money 216-219 + + View that quantity of money vitally affects production and + trade 219 + + Walker, Sombart, Withers, Price, Holt 219-222 + + Increase of money increases trade, even on static theory: + increase of money increase of capital; lowered margin + in exchanges; money-rates and interest; money tool of + exchange; elasticity of demand for money-service; in + Arizona and New York City 222-225 + + _Trade_ distinguished from _production_ and from _stock_ 225-226 + + Trade chiefly speculation; Fisher's $387,000,000,000 of + trade in U. S. in 1909 analyzed; index of variation in + trade; figure based on Kinley's returns from 12,000 + banks; double-counting 227-230 + + Figure largely represents speculation; statistics of total + wealth of U. S.; small role of wholesale and retail + deposits; "all other deposits" bunched in speculative + centers, especially New York; trifling "deposits" in + country banks; evidence of bank-clearings: clearings + and stock speculation; clearings and ordinary business 230-241 + + Measurement of "ordinary trade" 241-248 + + Volume of stock speculation 248-251 + + Commodity speculation 251-252 + + Unorganized speculation 252-254 + + Bill and note speculation 255 + + Fisher's and Kemmerer's indicia of trade variation wholly + misleading 255-257 + + Production waits on trade; selling costs _vs._ "cost of + production"; "good will"; are banks useless? 257-262 + + "Normal _vs._ transitional": statics _vs._ dynamics; money + and credit make static assumptions possible; very little + trade in "normal equilibrium" or static state; volume + of trade depends on transitions and dynamic changes; + functional theory of money and credit must be dynamic + theory; abstraction from money by static theory; no + static theory of money and credit possible; quantity + theory misses whole point of money-functions 262-266 + + +APPENDIX TO CHAPTER XIII + +THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES + + Ambiguity of "domestic trade": figures comparable with + export and import figures cannot include turnovers; net + income of United States, minus imports on retail basis, + counted as domestic trade; exports on retail basis + counted as foreign trade; net income for 1910; index of + variation for other years; cautions and qualifications; + ratio of foreign to domestic trade, 1890-1916 267-278 + + +CHAPTER XIV + +THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT + + Interdependence of trade, and money (and credit); + increasing trade causes increase of money and credit 279-281 + + Quantity theory doctrine: Fisher _vs._ Laughlin 281-282 + + Quantity theory has no explanation of elastic bank credit: + "Currency Theory" of deposits 282-285 + + Loans and deposits 285-288 + + Bills of exchange 288-290 + + Summary of quantity theory doctrine 290-291 + + +CHAPTER XV + +THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES" + + Heart of quantity theory: price-level cannot change without + prior change in money, deposits, trade, or velocities: + independently rising price-level, unable to alter trade + or velocities, would drive money away, and so be unable to + sustain itself; individual prices can rise independently, + but other prices must fall to compensate 292-295 + + Criticism: argument impressive only because it assumes an + _uncaused_ rise in general price-level; when causes + assigned, prices can independently rise, compelling + modification in other factors in "equation of exchange"; + "transitional" and "normal" effects: instances 295-299 + + Quantity theory conflicts with supply and demand: supply + and demand holds good: particular prices and price-level 299-300 + + Generalization of conflict to include cost of production, + capitalization theory, imputation theory 300 + + Capitalization theory _vs._ quantity theory; different + psychological assumptions of the two theories 300-306 + + Cost of production _vs._ quantity theory; money-_income_ + _vs._ quantity of money 306-308 + + Quantity theory false, granting all its assumptions 308-310 + + Doctrine that price-level independent of particular prices, + and presupposed by them, false; absolute value of money, + not price-level, presupposed; price-level may change + with value of money constant, through changes in absolute + values of goods 310-314 + + +CHAPTER XVI + +THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS + + Quantity theory holds that gold movements depend on + price-_levels_; but price-level mere average, cause + of nothing 315-316 + + Some prices, rising, tend to repel gold, but most prices + have no such effect 316-317 + + Some prices, rising, bring in gold 317-319 + + Gold movements and money-rates 319-320 + + +CHAPTER XVII + +THE QUANTITY THEORY _vs._ GRESHAM'S LAW 321-323 + + +CHAPTER XVIII + +THE QUANTITY THEORY AND "WORLD PRICES" + + Types of quantity theory: world's volume of _gold vs._ + quantity of _money_ in given country; standard _vs._ + token money; abandonment of dodo-bone theory and + "equation of exchange" 324-326 + + Credit does not rest on money: measure of values _vs._ + reserves; loans and wealth; value of money _vs._ + price-level 326-328 + + Loose relation of reserves and credit in world as whole; + no proportionality of quantity of gold to value of gold; + no quantity theory needed to assert that value of gold + related to its quantity 328-330 + + +CHAPTER XIX + +STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY +OF A BURIED CITY + + Criticism of quantity theory statistics yields constructive + conclusions; Mitchell and Greenbacks; Kemmerer's and + Fisher's statistics of "equation of exchange"; Kemmerer's + criticism of earlier statistics 331-335 + + Kemmerer's and Fisher's figures all wrong except for volume + of money and deposits, and prices in base year; if correct, + would not prove quantity theory 335-337 + + Fisher's statistics, resting on Kemmerer's, chiefly studied: + their relation to Kinley's "deposits" figures 337-338 + + M'V' calculated: errors in calculation; New York very + incomplete in Kinley's figures; private banks and trust + companies; clearings and "deposits," in New York and + outside; "total transactions" and clearings; Fisher + exaggerates country checks by at least 116 billions, for + 1909; major part of all "check deposits" in New York City 348-353 + + New York as "clearing house" for United States: extent of, + and influence of on New York clearings, much overestimated; + bulk of New York clearings and New York "deposits" grow + out of New York business 353-361 + + Index of variation for M'V' wrongly weighted; V' wrongly + calculated for all years; which upsets calculation of V 361-363 + + Volume of trade: greatly exaggerated by bank transactions, + which include vast deal of duplications in checks, loans + and repayments, etc. 363-368 + + Fisher's reply; _under_counting offsets _over_counting 368-369 + + Main items of undercounting in clearing houses of speculative + exchanges; measurement of, in New York Stock Exchange, and + Chicago Board of Trade; swamped by call loan transactions, + which exceed security sales 369-381 + + Price-indexes of Kemmerer and Fisher, dominated by wholesale + prices, have no relevance to their "equations of exchange" 381-383 + + In general, their figures bury speculation and New York City 383 + + +PART III. THE VALUE OF MONEY + + +CHAPTER XX + +RECAPITULATION OF POSITIVE DOCTRINE + + Recapitulation of constructive theses of Parts I and II, + and program of Parts III and IV 387-396 + + +CHAPTER XXI + +THE ORIGIN OF MONEY, AND THE VALUE OF GOLD + + Problem stated 397-401 + + Value _vs. saleability_: degrees of saleability; theory + of saleability; "buying price" _vs._ "selling price"; + indirect exchange in barter economy; development of + commodity of superior saleability into money 401-406 + + Money never unique 406-407 + + Origin of gold money: ornament; store of value; social + prestige of prodigality and of ornament; love of + approbation, sex-impulse, and competitive display; + elastic value-curve of gold; industrial employments + of gold 407-413 + + Distribution of wealth and power, and value of gold 413-416 + + +CHAPTER XXII + +THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY + + Classification 417-418 + + Measure of values (standard of value) distinguished + from medium of exchange; former does not add value + to money metal, latter does 418-424 + + Reserve function 424 + + Money as "bearer of options"; distinguished from store of + value; the _dynamic_ function of money _par excellence_; + explanation of low rates on call loans, and short loans, + and low yield of high grade bonds, which share "bearer of + options" function; "pure rate" of interest _vs._ "money + rates": Austria; the New York money market 424-432 + + Legal tender; the _Staatliche Theorie_ 432-436 + + Standard of deferred payments; which functions add to + value of money metal? 436 + + Relation of money rates to capital value of money 436-442 + + Agio when coinage is restricted: India _vs._ Western World 442-450 + + Equilibrium of gold in arts and gold as money: difficulties + of marginal analysis; the money-market phenomena 450-458 + + +CHAPTER XXIII + +CREDIT + + Analysis rather than definition: "futurity" not essence + of credit; credit part of general value system; stocks + as credit instruments; juridical and accounting phases 459-462 + + Confidence; involved in general value phenomena as well + as credit; social psychology of confidence; contagions; + influence of centers of prestige; nothing unique in + credit; selling _vs._ borrowing 462-469 + + Definition of credit; credit _vs._ credit transaction; + credit and exchange; bulk of credit grows out of + dynamic conditions 469-474 + + Functions of credit; increasing saleability of + non-pecuniary wealth; corporate organization; + limits of credit expansion 475-478 + + Consideration of objections: that personal loans do not + rest on wealth; public loans; that value behind loan + would not exist if loan were not made 478-484 + + Schumpeter's "heresies"; his view of the function of the + banker: "dynamic credit"; America _vs._ Continental + Europe 484-488 + + Peculiarities and functions of bank credit; technique of + banking: capital; assets; reserves; "liquidity"; money + market 488-496 + + +CHAPTER XXIV + +CREDIT--BANK ASSETS AND BANK RESERVES + + Traditional view that liquid commercial loans normal and + dominant type of bank asset disproved; cannot exceed + 11-1/2 per cent of assets of American banks; analysis of + bank assets: "other loans and discounts"; stock collateral + loans; loans on "other collateral security"; + stocks and bonds held by banks; classes of banks; various + combinations; excluding real estate loans, more + than half of credit extended by State and national + banks and trust companies is to stock market; rapid + development of stock collateral loans: New York; + Europe 498-512 + + Activity of different types of loans: banking assets get + liquidity chiefly from stock market, and from produce + speculators 512-516 + + Credit extended to Wall Street not at expense of ordinary + commerce; country banks and Wall Street 516-518 + + Federal Reserve Banks should rediscount stock collateral + loans; "Money Trust" a trust in financing corporations, + not ordinary commerce; panics and Federal Reserve System 520 + + Quantity theory, putting all exchanges on a par, grotesque: + volume of trade and prices in the stock market 520-523 + + Direct and indirect financing of corporations by banks; + "margin dealer" as "banker" 523-526 + + Adam Smith's view of banker's functions, and of safe bank + loans 526 + + Correct on basis of facts of his day, but corporate + organization and organized stock market have made + smelting house as liquid as consumers' goods 527 + + Division of labor in banking: America _vs._ Germany 527-528 + + Agriculture in money market 528-529 + + Reserve problem: special case of problem of liquid assets; + many flexible substitutes for cash 529-532 + + Causal relation runs from deposits to reserves; gold + production and reserve-ratio 532-535 + + No static law or "normal ratio" possible; reserve function + entirely dynamic function; reserve not needed in "static + state"; illustrated by London money market; "ideal + credit economy" 536-544 + + +_PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS_ + + +CHAPTER XXV + +THE RECONCILIATION OF STATICS AND DYNAMICS + + Theory of money as focus of general economic theory, + exhibiting interdependence of doctrines; basis of + further unification of statics and dynamics in higher + synthesis 547-548 + + Statics _vs._ dynamics, normal _vs._ transitional, and + related contrasts; illustrations; divergent lines of + doctrine: tariffs, wars, overproduction, extravagance, + etc. 548-552 + + Statics quantitative; dynamics qualitative 552-553 + + Statics and dynamics both abstract 553-554 + + Dynamics and "friction" 554-555 + + "Theory of prosperity" and dynamics 555-556 + + Statics and cross-section analysis; statics as + price-theory; dynamics as value-theory 556-560 + + Generalization of statics: price-theory applied to + dynamic phenomena: capitalization; costs; "taxonomy;" + "discounting" dynamic changes; money the static + measuring-rod: wide scope of money-measure; + measurement of non-economic values 560-569 + + Generalization of dynamics: all values, whether of wheat + or "good will," have social psychological explanation; + technological and biological factors, and the static + equilibrium; business cycles 569-575 + + Business man _vs._ economic theorist, and value-theory; + manipulation of values and prices 575-578 + + Statics and time 578-580 + + Immaterial capital 580-582 + + Statics and dynamics have not different subject-matter 583-586 + + Equilibrium of all social values: statics and dynamics + of the law: social forces and social control 586-589 + + Summary of Part IV 589-591 + + + + +PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE + + + + +THE VALUE OF MONEY + + + + +CHAPTER I + +ECONOMIC VALUE + + +The problem of the value of money is a special case of the general +problem of economic value. The present chapter is concerned with the +general theory of value, while the rest of the book will consider the +numerous peculiarities and complications which make money a special +case. The main proof of the theory here presented is to be found in a +previous book[1] by the present writer. A number of periodical articles +by several writers which have since appeared, in criticism or in further +development of the theory, have at various points led to shifting +emphasis and clearer understanding on the author's part, and the present +exposition, without seeking explicitly to meet many of these criticisms, +or to embody the new developments, will none the less be different +because of them. To one writer in particular, Professor C. H. Cooley, +the theory is indebted for restatement, amplification, and important +additions.[2] On the whole, however, the theory presented in this +chapter is substantially the theory presented in the earlier book. The +theory is set forth in the present chapter with sufficient fullness to +make the present volume independent of the earlier book. + +Value has long been recognized as the fundamental economic concept. +There have been many and divergent definitions of value, and many +different theories as to its origin. It is the belief of the present +writer--not shared by all his critics!--that the definition of value +which follows, and the conception of the function of value in economic +theory involved in it, conform to the actual use of the term in the main +body of economic literature. The theory of the _causes_ of value here +advanced is new, but the definition of value, and the conception of the +relation of value to wealth, to price, to exchange, and to other +economic ideas, seem to the present writer to conform to what is +implied, and often expressed, in the general usage of economists.[3] + +It is important to separate sharply two questions: one, the theory of +the causes of value, and the other, the definition of value, or the +question of the formal and logical aspects of the value concept. The two +questions cannot be wholly divorced, but clarity is promoted by +considering them separately. We shall take up the formal and logical +aspects of the matter first. + +Value is the common quality of wealth. Wealth in most of its aspects is +highly heterogeneous: hay and milk, iron and corn-land, cows and calico, +human services and gold watches, dollars and doughnuts, pig-pens and +pearls--all these things, diverse though they be in their physical +attributes, have one quality in common: Economic Value.[4] By virtue of +this common or generic quality, it is possible to add wealth together to +get a sum, to compare items of wealth with one another, to see which is +greater, to get ratios of exchange between items of wealth, to speak of +one item of wealth, say a crop of wheat, as being a percentage of +another, say the land which produced it, etc. This common quality, +value, is also a _quantity_. It belongs to that class of qualities which +can be greater or less, can mount or descend a scale, without ceasing to +be the same quality,--like heat or weight or length. Such qualities are +_quantities_. There is nothing novel in the statement that a quality is +also a quantity. It is implied in every day speech. We say that a man is +tall, or heavy, or that the room is hot--qualitative statements; or we +may say exactly how tall, or how heavy, or how hot--quantitative +statements. The distinction between qualitative analysis and +quantitative analysis in chemistry implies the same idea. Thus we may +speak of a piece of wealth as having a definite quantity of value, or +say that the value of the piece of wealth is a definite quantity. We may +then work out mathematical relations among the different quantities of +value, sums, ratios, percentages, etc. + +Ratios of Exchange are ratios between two quantities of value, the +values of the units of the two kinds of wealth exchanged.[5] A good many +economists, particularly in their chapters on definition, have defined +value as a ratio of exchange. This is inaccurate. The ratio of exchange +presupposes _two_ values, which are the terms of the ratio. The ratio is +not between milk and wheat in all their attributes. It is between milk +and wheat with respect to one particular attribute. Compare them on the +basis of weight, or cubic contents, and you would get ratios quite +different from the ratio which actually is the ratio of exchange. The +ratio is between their values. + + [Illustration: + Ratio of Exchange + Milk ------------------------- Wheat + \ / + \ / + \ Value Value / + \ / + \ / + \ / + \ / + Social Mind + ] + +In the diagram above, something of what is to follow is anticipated, +since the cause of value is indicated. Wheat is shown to be exerting +an influence on milk, and milk exerts an influence on wheat. The +comparative strength of these two influences determines the ratio of +exchange between them. But these two influences are not ultimate. The +ratio of exchange is a relation, a _reciprocal_ relation. It works both +ways. But behind this relativity, this scheme of relations between +values, there lie two values which are absolute. These values rest in +the pull exerted on wheat and on milk by the human factor which is +fundamental, which in our diagram we have called the "social mind." +Values lie behind ratios of exchange, and causally determine them. The +important thing for present purposes is merely to note that value is +prior to exchange relations, that it is an absolute quantity, and not, +as many economists have put it, purely relative. The ratio of exchange +is relative, but there must be absolutes behind relations. + +A _price_ is merely one particular kind of ratio of exchange, namely, a +ratio of exchange in which one of the terms is the value of the money +unit.[6] In modern life, prices are the chief form of ratio of exchange, +but it is important for some purposes to remember that they are not the +only form. + +Values may simultaneously rise and fall. There may be an increase or +decrease in the sum total of values. Ratios of exchange cannot all rise +or fall. A rise in the ratio of the value of wheat to the value of milk +means a fall in the ratio of the value of milk to the value of wheat. +Both may have fallen in absolute value, but both cannot simultaneously +rise or fall with reference to one another. This is the truism regarding +ratios of exchange which many economists have inaccurately applied to +value itself in the doctrine that there cannot be a simultaneous rise or +fall of values. There can be a simultaneous rise or fall of values, but +not a simultaneous rise or fall of ratios of exchange. + +There can be a general rise or fall of prices. Goods in general, other +than money, may rise in value, while money remains constant in value. +This would mean a rise in prices. Or, money may fall in value while +goods in general are stationary in value. This would also mean a rise in +prices. In either case, more money would be given for other goods, and +the ratio between the value of the money unit and the value of other +goods would have altered adversely to money. There are writers to whom +the term, value of money, means merely the average of prices (or the +reciprocal of the average of prices). For them, a rise in the average of +prices is, _ipso facto_, a fall in the value of money. This view will +receive repeated attention in later chapters. The view maintained in the +present book is that the value of money is a quality of money, that +quality which money shares with other forms of wealth, which lies +behind, and causally explains, the exchange relations into which money +enters. Every price implies _two_ values, the value of the money-unit +and the value of the unit of the good in question. + +Value is prior to _exchange_. Value is not to be defined as "power in +exchange." Certain writers[7] who see the need of a quantitative value, +which can be attributed to goods as a quality, still cling to the notion +that value is relative, that two goods must exist before one value can +exist, and that value is "power in exchange," or "purchasing power." The +power is conceived of as something more than the fact of exchange, and +as a cause of the exchange relations, but is, none the less, defined in +terms of exchange. This position, however, does not really advance the +analysis. It is a verbal solution of difficulties merely. To say that +goods command a price because they have power in exchange is like saying +that opium puts men to sleep because it has a dormitive power. +Physicians now recognize that this is no solution of difficulties, that +it is merely a repetition of the problem in other words. If we wish to +explain exchange, we must seek the explanation in something anterior to +exchange. If value is to be distinguished from ratio of exchange at all, +it cannot be defined as "power in exchange." + +To seek to confine value to exchange relations, moreover, makes it +impossible to speak of the value of such things as the Capitol at +Washington City, or the value of an entailed estate, or of values as +existing _between_ exchanges. Nor can we make the price which a good +would command at a given moment the test of its value, except in the +case of the highly organized, fluid market. Land, at forced sale, +notoriously often brings prices which do not correctly express its +value. Moreover, even for wheat in the grain pit, the exchange test is +valid only on the assumption that a comparatively small amount is to be +sold. If very much is put on the market, the situation is changed, and +the value falls. In other words, if "bulls" cease to be "bulls," and +shift to the other side of the market, the very elements which were +sustaining the value of the wheat have been weakened, and of course its +value falls. "Power in exchange" is a function of two factors, (1) value +and (2) saleability. A copper cent has high saleability, with little +value, while land has high value with little saleability.[8] Some things +have value with no saleability at all. In a socialistic community, where +all lands, houses, tools, machines, etc., are owned by the state, and +where such "prices" as exist are authoritatively prescribed, value and +exchange would have no necessary connection. Values would remain, +however, guiding the economic activity of the socialistic community, +directing labor now here, now there, determining the employment of lands +now in this sort of production, now in that. Exchange is only one of the +manifestations of value. More fundamental, and more general, including +"power in exchange," but not exhausted by it, is the power which objects +of value have over the economic activities of men. This is the +fundamental function of values. The entailed estate, which cannot be +sold, still has power over the actions of men. The care which is taken +of it, the amount of insurance which an insurance company will write on +it, etc., are manifestations and measures of its value. The same may be +said of the Capitol at Washington.[9] + +In the fluid market, prices correctly express values. Assuming that the +money-unit is fixed in value, variations in prices in the fluid market +correctly indicate variations in values. The great bulk of our economic +theory, the laws of supply and demand, cost of production, the +capitalization theory, etc., do assume the fluid market, and a fixed +value of the dollar.[10] Our economic theory is static theory, in +general, and abstracts from the time factor and from "friction." In +fact, values change first, and then, more or less rapidly, and more or +less completely, prices respond. In the active wholesale and speculative +markets, where the overwhelming bulk of exchanging takes place, the +prices respond quickly. Static theory is thus adequate for the +explanation of these prices, for most practical purposes, so long as the +changes in prices are due to changing values of goods, rather than to +changing value of the money-unit. Moreover, the distinction between +value and price is, in a fluid market, where the value of money is +changing slowly, often not important. In the assumption of money, and of +a fixed value of money, the absolute value concept is already assumed. +No harm is done, however, if the economist does not explicitly refer to +this, but goes on merely talking about money-prices. Very many economic +problems indeed may be solved that way. This is why the inadequate +character of the conceptions of value as "ratio of exchange" or +"purchasing power" has not prevented these notions from being +serviceable tools in the hands of many writers. But there are many +problems for which these conceptions are not adequate, because the +implicit assumption of a fixed value of money cannot be made. Among +these problems is the problem of the value of money itself, which +constitutes the subject of this book. For that problem, an absolute +value concept is vital. + +If, in our diagram above, we substitute for "social mind" the more +general expression, "human factor," we should find that our value +concept is the common property of many writers. We should find it +fitting in with the absolute value notion of Adam Smith and of +Ricardo.[11] The "human factor" which _explains_ the absolute value is, +for them, labor. We should find it fitting in with the "socially +necessary labor time" of Marx: the value of a bushel of wheat is the +amount of labor time which, on the _average_, is required to produce a +bushel of wheat. It is an absolute value. It is a causal coefficient +with the absolute value, similarly explained, of the bushel of corn, in +explaining the wheat-price of corn. Our concept will fit in exactly with +the "social use-value" of Carl Knies, according to whom the economic +value of a good in society is an _average_ of its varying use-values to +different individuals in the market. This average is an absolute +quantity. The absolute values of units of two goods, thus explained, +causally fix the exchange ratio between the goods. Knies' value-theory, +it may be noticed, is explicitly modeled on that of Marx, to whom he +refers, the difference being that Knies takes an average of individual +use-values, while Marx takes an average of individual labor-times, as +the causal explanation.[12] Our value concept will fit perfectly with +Professor J. B. Clark's "social marginal utility" theory of value. +Indeed, the present writer gratefully acknowledges that the concept is +Professor Clark's rather than his own, and that all that is necessary +for its explanation has been set forth by Professor Clark.[13] +Professor Clark's _causal_ theory of value, his explanation of this +absolute quantity of value as a _sum_ of individual marginal utilities, +we have elsewhere[14] criticised as involving circular reasoning, like +all marginal utility theories, in so far as they offer causal +explanations. But his statement of the logical character of value, of +the relation of value to wealth, of value to price, of value to +exchange, of the functions of the value concept in economic theory, and +of the functions of value in economic life,--Clark's doctrines on these +points we have accepted bodily, and in so far as the present writer has +added anything to them it has been by way of elaboration and defence. + +The concept of value here developed is explicitly adopted by T. S. +Adams, David Kinley, W. A. Scott, W. G. L. Taylor, L. S. Merriam, and A. +S. Johnson, among American writers, to name no others. All of these +writers would concur in the formal and logical considerations[15] as to +the nature of value here presented, whatever differences might appear +among them as to the causal explanation of value. + +The value concept here presented performs the same logical functions as +the "inner objective value" of Karl Menger, Ludwig von Mises, and Karl +Helfferich, discussed in our chapter on "Marginal Utility," below, and +is, in its formal and logical aspects, to be identified with that +notion. It is essentially like Wieser's "public economic value," +discussed in the same chapter.[16] That there should remain critics[17] +who consider the present writer a daring innovator, who is thrusting a +personal idiosyncracy in terminology upon economic theory, is striking +evidence that men often talk about books which they have not read! The +reader who accepts, provisionally, the doctrine so far presented, as a +tool of thought which will aid us in the further progress of the +argument, may do so with the full assurance that he is accepting a tried +and tested concept, which has seemed necessary to very many indeed of +the great masters of the science.[18] + +So far, the writer feels himself in accord with the main current of +economic thought. When we come to a causal explanation of the value +quantity, however, earlier theories appear unsatisfactory. The labor +theory of value has long since broken down, and has been generally +abandoned. The reasons for this will appear in the chapter on "Cost of +Production." The effort to explain value by marginal utility, by the +satisfactions which individuals derive from the last increment consumed +of a commodity, has likewise broken down, as will appear in the chapter +on "Marginal Utility." In general, it may be said that the effort to +pick out feeling magnitudes,[19] either of pleasure or pain, in the +minds of individuals, and combine them into a social quantity, leads to +circular reasoning. Thus, the utility theory: It is not alone the +intensity of a man's marginal desire for a good which determines his +influence on the market. If he has no money, he may desire a thing ever +so intensely without giving it value. If he is rich, a slight desire +counts for a great deal. In other words, utility, backed by _value_, +gives a commodity value. But this is to explain value by value, which is +circular. So with the theory of average labor _time_. How shall we +average labor time? The problem is easy if we confine ourselves, say, to +wheat. If one bushel of wheat is produced with ten hours' labor, a +second with eight hours' labor and a third with six hours' labor, the +average is eight hours, and we may fix the value of the bushel of wheat +according. But suppose we wish to compare the labor engaged in making +_hats_ with the labor engaged in raising wheat. How can such labor be +compared? Hats are, in their physical aspects, incommensurable with +wheat. The one quality which they have in common, relevant to the +present interest, is _value_. Given the value of the wheat and the value +of the hats, you may compare and average out the labor engaged in +producing them. But if value must be employed as a means of averaging +labor, it is clear that average labor can be no explanation of value. +This is not the only flaw in the labor-time theory, but it illustrates a +vice which it has in common with all those theories which start with +individual elements, and seek to combine them into a social quantity. +The whole method of approach is wrong. It makes two abstractions, +neither of which is legitimate: first, it abstracts the individual from +his vital and organic connections with his fellows, and then, second, it +takes from the individual, thus abstracted, only a small part, that part +immediately concerned with the consumption or production of wealth. In +this process of abstraction, very much of the explanation of value is +left out. The _whole_ man, in his _social_ relations, must be taken into +account before we can get an adequate theory of value. We turn, then, to +a brief discussion of society and the individual, and to a discussion of +those individual activities and social relations which are most +significant in the explanation of economic value. + + * * * * * + +All mental processes are in the minds of individual men. There is no +social "oversoul" which transcends individual minds, and there is no +social "consciousness" which stands outside of and above the +consciousnesses of individuals. So much by way of emphatic concurrence +with those critics of the social value theory[20] who persist in +foisting upon the theory the notion that there is a social oversoul, or +that the "social organism" is some so far unclassified biological +specimen. To say that economic value is a social value, the product of +many minds in organic interplay, is not to say that economic value is +independent of processes in the minds of individual men, or that it +results from any mysterious behavior of a social oversoul. + +The human animal is born with certain innate instincts and capacities. +Human animals of different races and different strains are in highly +important points different in their instincts and capacities. But the +human animal is not born with a _human mind_. Nor could the human +animal, apart from association with his fellows, ever develop a human +mind. "The human mind is what happens to the human animal in a social +situation."[21] Of course, without the care of adults, the infant would, +in general, promptly perish. But, more fundamental for our purposes, is +the fact that all the important stimuli which play upon the child during +his first two years, when the human mind is being developed, are social +stimuli. So true is this, that the child's commerce with physical things +runs in social terms. The child interprets the physical objects about +him _personally_, attributes life and human attributes to them, holds +conversation with them, praises and blames them, makes companions of +them. This _animism_ of the child, so puzzling to an old-fashioned +psychology, is readily explained by social psychology. It is a social +interpretation of the universe. It follows naturally from the principle +of apperception: the interpretation of the unknown in terms of the +known; the extension of accumulated experience to the interpretation of +new experiences. The first experiences of the human animal are social +experiences. + +In the history of human society, a similar generalization is possible. +The human _individual_ is found, not in primitive life, but late in the +scale of social evolution. Individuality is a social product. The savage +is not a free, self-conscious person, who can set himself off against +the group, and feel himself an isolated centre of power. His life is +wrapped up in the group life. In the great barbarian states like Ancient +Egypt or China, the life of the individual was so controlled by social +tradition, and innovation was so ruthlessly crushed out that +individuality had little scope. Greece and Judea gave larger scope to +individual variation, but the individual still felt himself bound up +with his group, and was stoned, given hemlock, or crucified if he +challenged the existing social order too seriously. The break-up of the +Greek city states, as independent sovereignties, and their subjection to +the universal sway of Rome, made it possible for the cultured Greek to +set himself up in opposition to the State; the coming of Christianity, +substituting personal relations with deity, for the communal worship +which had preceded it, gave the individual a vital interest apart from +the life of the group about him, so that he could still further feel +independent of his immediate social environment. The development by the +Roman lawyers of the _Jus Gentium_, the law which is common to all +nations as distinguished from the particular law of a given group, +emphasized the doctrine of the Christian religion and of the Stoic +philosophy of a humanity which transcends the limits of a given +state,[22]--a notion which tended to free the individual from dependence +on his immediate associates. But note that in all this we have merely a +widening and multiplying of social relationships, and that the +individual gains freedom from one set of social relationships only by +coming into others. The Christian gains freedom from his immediate +surroundings because he feels himself in communion with "angels and +archangels and all the glorious company of Heaven." Francis Bacon could +survive his degradation in the England of his day because he could leave +his "name and memory ... to foreign nations and to the next age." + +Bagehot, in his _Physics and Politics_, Tarde, and Baldwin, to name no +others,[23] have shown how tremendously responsive human beings are to +suggestion, how wide is the sway of imitation in human life, how +fashion, mode, custom, etc., make and mold the individual. Cooley,[24] +with an improved psychology, has amplified the analysis, tracing the +development of the individual mind in interaction with the minds of +those about him, making still clearer the sweep and pervasiveness of +social factors in framing the very self of the individual. In what +follows, I assume the results of these investigations. They constitute +the starting point from which we set out on the quest of a theory of +economic value. + +So much for the individual. He is a social product. But what of society? +Objective, external, constraining and impelling forces, which are not +physical, which are seemingly not the products of the will of other +individuals with whom the individual holds converse, meet the individual +on every hand. There is the Moral Law, sacred and majestic, which stands +above him, demanding the sacrifice of many of his impulses and desires. +There is the Law, external to him and to his fellows, in seeming, +failure to obey which may ruin his life. There is Public Opinion, which +presents itself to him as an opaque, impersonal force, before which he +must bow, and which he feels quite powerless to change. There are +Economic Values ruling in the market place, directing industry in its +changing from one sort of production to another, bringing prosperity to +one individual and bankruptcy to another, not with the caprice of an +individual will, but with the remorseless impersonality of wind and +tide. He who conforms to them, who anticipates their mutations, gains +great wealth--but no business man dare set his personal values against +them. There are great Institutions, Church and State and Courts and +Professions and giant Corporations and Political Parties, and +multitudinous other less formal or smaller institutions, which go on in +continuous life, though the men who act within them pass and change. +Their Life seems an independent life, and the individual who tries to +change their course finds that his efforts mean little indeed, as a +rule. There is a realm of Social Objectivity, a realm of organization, +activity, purpose and power, not physical in character, not mechanical +in nature, which is set in opposition to individual will, purpose, +power, and activity. How is the individual related to this objective +social world? + +Three main types of theory have sought to answer this question. On the +one hand, there is a type of theory, doubtless the oldest type, a type +which arises easily in a period when social changes are slow, which sees +in the objective social world something really separate and distinct +from individual life, having a non-human origin, and deriving its power +from something other than the human will. On the other hand, there is an +extreme individualism, which emphasizes individual separateness, which +posits as a _datum_ the individuality which we have seen to be a social +product, and thinks of the objective social realm as a mere mechanical, +mathematical summing up of individual factors, or as a something which +individuals have consciously made, by contract or agreement, or what +not. Finally, there is a type of theory, to which the present writer +would adhere, which finds a false antithesis in the contrast thus +sharply made between society and individual, which holds that the +individual is not, in his psychological activity, so much set off from +the activities of his fellows as the contrast would indicate, but rather +shares in the give and take of a larger mental life. This larger mental +life is completely accounted for when all the individuals are completely +accounted for, but it cannot be accounted for by considering the +individuals _separately_. No individual is completely, or primarily, +accounted for until his _relations_ to the rest of the group are +analyzed. Thinkers who start out with the individuals separately +conceived, and then seek to combine them in some arithmetical way, +abstract from those organic social relations which constitute the very +heart of the phenomenon we are seeking to explain. The parts are in the +whole, but the whole is not the _sum_ of the parts. The relationships +are not arithmetical, additive, mechanical, but are vital and organic. +Men's minds _function_ together, in an organic unity.[25] + +The first two of these types of theory (perhaps because individuals are +_physically_ sharply marked off from one another, and go on in +_biological_ functioning in obvious separateness) have falsely +accentuated the self-dependence and separateness of individual _minds_. +The second type of theory, which has sought to work out the whole thing +on the basis of this false conception of the individual, has largely +failed to see the objective social realities, or has, with +methodological rigor, denied their existence. This second type of +thinking has especially characterized a good deal of economic theory, +which rests on the philosophy and psychology of David Hume.[26] We will +set our doctrine in clearer light if we contrast three parallel types of +theory which have appeared with reference to the nature of morality, of +law, and of economic value. For each of these phenomena, we have +theories which represent all three of the types of social thinking to +which we have referred. + +In the theory of morals, we have, at one extreme, doctrines like those +of Kant and Fichte, according to whom morality is a matter of +obligation, independent of the human will, independent of consequences, +inherent in the nature of things. Man's mind can find out what the moral +law is, but man's mind has nothing to do with the making of the moral +law. The same notion is involved in the ideas of "natural rights," +"justice though the heavens fall," and the like. The conception is +strikingly brought out in the question about which old theologians +sometimes debated: is Right right because God enjoins it, or does God +enjoin Right because it is Right? Whether or not Right is supreme over +God, these old theologians never questioned that Right is supreme over +all human wishes and desires, and in no sense an outcome of them. At the +other extreme, we have the moral doctrine of the Sophists, for whom each +man's _will_ was right for him--a doctrine which reappears in every +individualistic and anarchistic age. For this doctrine, there are no +valid social standards of right and wrong. There is nothing binding on +the moral agent but his own will. In between, is the moral doctrine of +such thinkers as Friedrich Paulsen, or John Dewey, who represent the +reigning type of moral theory to-day. For them, morality is a purely +human matter. It grows out of the needs and interests of men. What is +good at one time and place is not necessarily good at another time and +place. There are no immutable moral principles, valid throughout the +ages. None the less, morality is not a private matter, about which men +may do as they please. Morality is the product of an organic society, +the product of the interplay of many minds. To a given individual, the +moral law is, indeed, an external constraining and impelling force. It +is the will of the rest of the group. It may be his own will too, but if +it is not, it overrides his personal preference, He, on the other hand, +is part of the group which constrains and guides every other individual. +There are, in fact, many sets of moral values: on the one hand, the +social moral values _par excellence_, which the group will _enforce_ in +various ways; and then, for each individual, his own moral values, which +may correspond qualitatively more or less with the group values, or may +antagonize them. But the Moral Law is the will of the group. It is no +simple composite of the moral values of individuals. It has its organic +interrelations with all phases of social life. Economic changes modify +it, legal changes modify it, religious values modify it, all phases of +social life are expressed in it. + +In legal theory, we find these three types of doctrine also. The first +type is clearly indicated in the general attitude of American and +English courts, especially toward the common law, though it influences +their interpretation of all law. The law is something which the mind of +man may find out, but may not make. If a new situation arises, the court +"finds" the law--in theory the principle "discovered" by the court was +in the common law at the beginning. Of course, we know that the judge +invents the rule he makes, to fit a novel case, but the judge himself +will not admit it. The theory of the law and the theory of morality have +developed in close connection, and the notion of "natural right" is a +juristic as well as a moral idea. At the other extreme, we have from +certain recent students of law the doctrine that "The Law" is a myth, +that there is nothing but the particular opinion of a particular judge +at a particular time. Individualism cannot go so far in legal theory as +to give every individual in society a chance to put his oar in, and have +a separate law for himself! The social and institutional character of +law is too obvious to permit that. But individualism has gone so far in +legal theory as to deny all objectivity to law except in a given +decision in a particular case. In between these two extreme views, +appear the views of writers like Savigny, or Professor Munroe Smith, for +whom the law is a changing product of social psychology, volitional[27] +rather than intellectual in character, objective enough to the +individual who violates it, or the judge who seeks to pervert it, but +none the less not outside the minds and interests of men. In Professor +Munroe Smith's phrase, law is "that part of the social order which by +virtue of the social will may be supported by physical force."[28] I +venture to describe this type of legal theory as the "social value" +theory of the law. In the chapter on "The Reconciliation of Statics and +Dynamics," _infra_, I have cited certain opinions of Mr. Justice Holmes +which apply it, and even bring into it the notions of the marginal +analysis. + +There are, similarly, three types of economic theory. At the one extreme +we have theories of "intrinsic" value, which would place economic value +outside the wills of men. The mediaeval discussions of "just price" often +illustrate this notion. It creeps not infrequently into judicial +opinions,--to which such notions are essentially congenial! The working +economist of our own day has found little use for it, but in periods +when economic change was slow it suggested itself not unnaturally to +men, as an explanation of the seeming impersonality of market phenomena, +and as a practical idea for combatting extortion and injustice. +Something of the idea is involved in a sentence of Shakspere's:[29] + + "But value dwells not in particular will; + It holds his estimate and dignity + As well wherein 'tis precious of itself + As in the prizer." + +At the opposite extreme would be those economists, as Professor +Davenport and Jevons, who find no value for a good except in the minds +of individual men, so that there may be as many different values as +there are different men. That something social and objective exists in +the market place can hardly be denied, but when pressed for an account +of it, these writers reduce it to a bare, abstract, mathematical +ratio.[30] Each individual mind is shut up within its own limits, +inscrutable to other minds, and there can be no psychological phenomena +which include activities in many minds, for this view. In between these +two extremes, is the social value theory of the present writer. Economic +value is not intrinsic in goods, independent of the minds of men. But it +is a fact which is in large degree independent of the mind of any given +man. To a given individual in the market, the economic value of a good +is a fact as external, as objective, as opaque and stubborn, as is the +weight of the object, or the law against murder. There are individual +values, marginal utilities, of goods which may differ in magnitude and +in quality from man to man, but there is, over and above these, +influenced by them in part, influencing them much more than they +influence it, a social value for each commodity, a product of a complex +social psychology, which includes the individual values, but includes +very much more as well. Our theory puts law, moral values, and economic +values in the same general class, _species_ of the _genus_, social +value, alike in their psychological "stuff" and character, to be +explained by the same general principles, even though differentiated in +their functions, and in the extent to which they depend on various +factors in the social situation. They are parts of a social system of +motivation and control. They are the _social forces_, which govern, in a +social scheme, the actions of men. + +It may be well to suggest rough _differentiae_ which mark off these +values from one another. Legal values are social values which will be +enforced, if need be, by the organized _physical_ force of the group, +through the government. Moral values are social values which the group +enforces by approbation and disapprobation, by cold shoulders and +ostracism or by honor and praise. Economic values are values which the +group enforces under a system of free enterprise, by means of profits +and losses, by riches or bankruptcy. The group may, under a communistic +or socialistic system, rely in whole or in part upon the machinery of +the law; in which case economic values appear not in their own form as +immediately guiding production, but as "presuppositions" of some of the +legal values. + +The differentiation of these types of social value may also run in +terms of their _functions_,[31] though it is not so easy to mark them +off here, since their functions overlap. The function of economic values +is to guide and control the economic activities of men, to send labor +from one industry to another, to cause one sort of thing to be produced +or another, to supply the motive force which _impels_ industry. Legal +and moral values also directly affect industry, often working to check +the results which the economic values alone would lead to--as when the +law forbids the production and sale of liquor, or checks child labor, +etc. The law, on the other hand, does not, primarily, in its influence +on industry, seek _positively_ to determine its direction. The law +forbids the production of liquor, but does not decree the production of +bread. The law may seek to affect industry positively, by protective +tariffs, for example, which aim at the building up of certain +industries, but its effects are here indirect, reached through +modifications in the economic values. Economic values, on the other +hand, do not primarily aim at the regulation of the conduct of men +outside the market place, or the shop or the farm, etc. Economic values +are not primarily concerned with making men be good husbands or good +neighbors, or brave soldiers. Economic values may be used, in part, for +these purposes, as when a father-in-law uses his wealth as a lever to +make his son-in-law behave--or, indeed, as a bait to get a son-in-law! +It is hard to find a phase of social life which is not touched by all +types of social values, but it is possible, roughly, to mark off those +phases of social life which are subject to primary regulation by one or +the other sort of social value. + +The differentiation is easier when we look at the social _institutions_ +which have to do primarily with the one or the other sort of value. +Courts and legislatures are easily marked off from stock exchanges and +banking houses. There is not so clearly an institutional nucleus for +moral values, since the church has lost its control over the moral +situation. + +When we view the matter from the standpoint of the _objects_ of value, +_differentiae_ also appear. The main type of object of moral value is +modes of conduct; the "type object" of economic value is physical things +which men eat, wear, drink, etc., even though _quantitatively_ the major +part of the sum total of economic values attach to other things, +instrumental goods, lands, labor, and social relations, like franchise +rights, good will, which in the main reflect the values of consumers' +goods;[32] objects of legal value are in large degree the same as +objects of moral value, namely, modes of conduct, but moral values +attach to a wider group of objects, and legal values attach to certain +forms of conduct which are morally indifferent. + +It is not so easy to make the differentiation when we view the thing +from the standpoint of the consciousness of men who are at the centre of +the situation, to whose consciousness the social values are presented. +We may put at the very forefront of the economic value of oranges the +gustatory feelings or desires of those who consume them; at the +forefront of the moral value of a heroic rescue by a fireman the thrill +that runs through the onlookers. Qualitatively, these psychological +states are different, as those who have experienced both will know. But +it is difficult indeed to put the difference into words. When it comes +to a legal value, say the legal value of a given contract right which a +man seeks to enforce in court, it is not easy to find any particular +emotion or state of consciousness which is peculiar or appropriate to +it. The value is so highly institutionalized and impersonal, that it +seems to the court and lawyers and even the litigants to be merely a +question of fact to be intellectually analyzed. Its roots are deep in +human emotions, but not in the emotions, primarily, of those who are +handling the transaction. Perhaps the jurist has states of consciousness +we know not of. There may be a distinctively legal emotion. It seems to +crop out at times when one questions, in conversation with a judge or +lawyer, the infallibility of the courts. But the law does not derive its +power therefrom! Rather, the law derives its power from the general +consent and acquiescence and support of the mass of men, who turn over +to experts the details of administering it, and who support The Law in +general, rather than the rule of the _corpus delicti_, with their +emotional sanction. + +I think that we have here a clue to a vital point for our theory. We +need not expect to find the major part of the explanation of any of +these social values in the conscious emotions of those who are moved by +them. In the case of the orange or the heroic act, we are, indeed, close +to pretty simple human feelings and desires. In general, in the case of +moral values, the individual emotion and the social value are +_qualitatively_ comparable, since moral values rarely take on a highly +institutional character. They are more free from class or institutional +control than other social values. This need not be true. Thus, the +plantation negro need not feel any personal shame in the moral +delinquency which he none the less hides from the "white folks" whose +values he must more or less conform to. But, on the whole, moral values +are much more "participation values,"[33] shared by the whole group in +common, than are economic values or legal values. When we pass beyond +the simple case of a consumption good, and get into the realm of the +more institutional economic values, we lose all guidance from the clue +of satisfactions in consumption. Just what emotion, for example, is +appropriate in the presence of the four and a half per cent convertible +bond of the Chesapeake and Ohio Railway Co.? If it be answered that +ultimately that bond represents satisfactions in consumption, since the +owner of it may spend the income for consumers' goods, or since the +railroad in question carries coal which goes to Italy to be used in a +cruiser which will sink an Austrian warship, thereby giving consumers' +satisfactions to individuals in Italy, so that the value of the bond is +ultimately reducible to specific satisfactions of given individuals, we +may still hold that those satisfactions do not constitute the value of +the bond, as such. Moreover, the same is true of the legal values. +Ultimately, very specific human emotions are affected by the rule of the +_corpus delicti_, or the rule governing pleas in _estoppel_. Both in +legal and in economic values we have an elaborate and complex system of +social psychological character, which can by no means be reduced to +elementary desires or feelings of individuals, even though when the +whole story is told, no part of the system will be found outside the +minds of individual men. The point has been well put by Professor C. H. +Cooley: "It would be as reasonable to attempt to explain the theology of +St. Thomas Aquinas, or the _Institutes_ of Calvin, by the immediate +working of religious instinct as to explain the market values of the +present time by the immediate working of natural wants."[34] I think +that any attempt to differentiate the various kinds of social value on +the basis of the type of emotion in the minds of those who have most +immediately to do with them, or to explain them primarily by those +emotions, is foredoomed. The law does not get its power from the emotion +of the judge who gives a decision, nor does the value of a rare painting +rest chiefly in the intensity of desire of the few rich connoisseurs who +compete for it. Back of the judge, giving _validity_ to his decision, +stands the will of the group; back of the rich connoisseurs stand the +legal and other social values concerned with the distribution of wealth, +by virtue of which they are able to make their wants felt in the market. +Both judge and connoisseur are focal points, through which stream the +social forces affecting the values in question. Both are important. But +the emotions and ideas of neither exhaust the psychological causation +involved in the values. + +This is very much more apparent when we consider the values that arise +in the great speculative markets, say in the wheat pit, or the stock +exchange. Those who buy and sell are primarily interpreters, students, +of impersonal, social forces, seeking to adjust themselves to them, to +forecast them, in such a way as to derive profit from them. Their +choices and decisions are also factors. Indeed, it is possible to view +the matter in such a way as to make their decisions the whole story. In +the same way, it is possible to make the mind of the judge the final +explanation of the legal value. But the speculators themselves are under +no such illusion. They know very well that if they run counter to the +facts they will lose money. And the judge knows very well that the range +of arbitrary choice which he can exercise without impeachment, or at +least without reversal by a higher court, is very limited. Nor is even +a Supreme Court of the United States free to do its arbitrary will. Just +because it is so conspicuous, and because its doings are so important, +it has manifested more respect for judicial tradition, and more +responsiveness to the tides of public sentiment, than any other court in +the Federal Judiciary.[35] + +The head of a great banking house makes a decision regarding an +underwriting operation. On his decision depends the question of whether +or not the securities are issued. On the issue of the new securities +depends, in part, the values of the existing securities of the +corporation in question, and the nature of the future employment of +thousands of men and great quantities of land and capital. Tremendous +power is concentrated in the hands of this banker. But it is not _his_ +power! He cannot exercise it in an arbitrary or capricious way. He +approaches his problem in much the same spirit that the judge approaches +a disputed question of law. He analyzes the factors involved. He +considers the condition of the money-market, the question of the +probable ease or difficulty of marketing the new securities to +investors, the prospects of the business of the corporation in question, +the probable future demand for its products, the stability of that +demand, the personnel of the management of the corporation, the attitude +of the government toward it, the nature of its other outstanding +securities, with special reference to the proportion of bonds to stocks, +and the amount of "fixed charges" against its earnings. He may also take +into account other enterprises of similar character which he has +connections with, and the question of whether or not building up the +corporation in question may injure other corporations to which he has +responsibilities. He looks far into the future, seeking to conserve his +prestige, and unwilling to assume responsibility for an issue which +investors will later lose faith in. Proximately, his decision is +tremendously important, and his thoughts and feelings are of immense +significance, but ultimately, _they_ are determined by all manner of +social considerations, and _always_, _the degree to which they count_ in +determining values depends on his weight in the economic situation, +which rests (1) on his _prestige_, _i. e._, the massing of beliefs and +hopes of many men, (2) on his _wealth_, which rests in the legal and +moral values governing distribution, and (3) on his institutional +relationships, which again are psychological facts, partly legal in +character. He is as much a social instrument as is the judge. Both may +abuse their power. Both do at times abuse their power. But the +significant point is that the power both have is social power, and is in +no sense proportional to the intensity of their own emotions. It arises +from the emotional power in the minds of many men. + +It would be easy to elaborate the points in which morals, laws, and +economic values are alike, and to show in detail that the theory of +economic value is merely a special case of the general theory of social +value. For our present purposes, however, it is enough to have +illustrated the general doctrine, and to have set up the economic values +as true social forces. It may be noticed that the effort to +differentiate the different kinds of value is not altogether successful. +They are not in watertight compartments in social life. It is a +commonplace among students of ethics that moral values grow, in greater +or less degree, out of economic factors. Indeed, the "economic +interpretation of history" has as its central theme the doctrine that +morality, law, and ideal values in general are governed by the economic +situation. This is a one-sided view. Moral and legal values are +influenced and modified by economic forces. Legal and moral values do, +in part, derive their power from economic values. But on the other hand, +economic values likewise derive part of their power from legal and moral +values. The "social mind" is an organic whole, in which no factors exist +"pure," and in which there is constant give and take. The effort to +explain moral values by a single principle, as sympathy, legal values by +another simple principle, as fear, and economic values by a different +simple principle, as utility, is foredoomed. It has been given up by the +students of law and morals, and should be abandoned by the students of +economics. + +Let us consider more narrowly the main factors affecting and explaining +economic social values. Let us take, first, the simplest case, that of +goods and services which minister directly to human wants, goods and +services "of the first order." Goods of this sort would be oranges, +bread, clothing, jewels. Services of this sort would be the services of +the barber, the valet, the physician, the preacher, the teacher, the +actor. I abstract, in discussing these values, from the complications +that grow out of the friction in retail trade, and the existence of many +customary prices, and prices fixed by other than economic values, in the +case of teachers, or preachers. I shall concentrate attention upon such +things as oranges, bread, clothing, and jewels. The _focus_ of the +values of these things, and an essential condition of their existence, +is their utility, that is to say, their power to satisfy human wants. +Utility as used in economics does not mean usefulness in any moral +sense. From the standpoint of the economist, whiskey and opium are as +useful as bread, if they satisfy wants equally intense. And the +economist is not concerned with the general utility of things considered +in their totality. Air is more useful than jewels, but a carat of air is +not as useful as a one-carat diamond. Air exists in such abundance that +it does not need to be economized. Scarcity with reference to the +extent of the wants involved is also essential to economic value. A +combination of the ideas of utility and scarcity gives us the simple +notion for which the formidable name of "marginal utility" has been +devised. The marginal utility of a good to a man is the power the last, +or "marginal," unit of the good which the man consumes has to give him +satisfaction, or, viewed from the standpoint of the man, is the +intensity of his desire[36] for, or of his satisfaction in, the final +unit consumed. So far, our account of the value of the orange will seem +perfectly acceptable to those accustomed to traditional discussions of +the problem in the text-books. The difference is that many text-books +stop at this point, leaving the impression that with the definition of +marginal utility the whole value problem has been solved. For the social +value theory, the conception of marginal utility is barely a starting +point. Indeed, it is not even a starting point. We shall have to look +both in front of it and _behind it_. Recognizing that marginal utilities +to individuals are essential to economic values of consumption goods, we +shall have to point out other things which are also essential, and we +shall have to explain the factors determining these marginal utilities +themselves. + +The last point may be considered first. Men's desires are socially +determined. Even the simplest, most instinctive, wants of human nature +are, in their concrete manifestations, the product of social culture in +overwhelming degree. Consider sex and hunger. We do not enjoy our food +when our neighbors pick their teeth with their forks. This would not +trouble a chimpanzee, whose _instinctive_ equipment in the matter of +hunger is vastly more like that of a man than is the _actual_ hunger +impulse of a highly civilized man like that of a savage. Civilized men +will often starve rather than eat human flesh. Even when moral scruples +are overcome, actual physical revulsion may prevent it. Men of different +times and places wish food of special sorts, served in special ways. +They wish to eat in the company of their fellows, but only of those +fellows who can know and obey the ritual that is appropriate to the time +and place. This is true of humble folk as of those who "dress for +dinner." The ritual differs for the two sorts of people. But there is a +spirit, a type of conversation, a code of etiquette, which prevails at +the mealtime of virtually all men, and too serious digressions therefrom +will take away the appetites of all. About the mealtime and the festal +board have gathered a great host of traditions, ideals, and social +activities, till they have become in verity an institution, and not the +least important, by any means, of social institutions. Out of the simple +instinct of sex, we have evolved many of the most precious things of our +civilization, and between the sex impulse of the animal and the sex +impulse of the gentleman who is seeking to marry the one woman in all +the world, there is a difference so great that comparison between the +two is difficult. + +Here we have wants which grow out of the most elementary things in human +nature, wants which are intense and universal, but which vary, in their +concrete manifestations, enormously from age to age and from place to +place. When we come to the wants which change more quickly, the fact +that social factors dominate needs no arguing. Fashion, mode, custom, +obviously account for the concrete wants that exist in clothing, +ornamentation, amusement, housing, etc. If we wish to know what women +will be wanting to wear six months hence, we do not go to women +individually and ask them. We could not find out that way. They would +not know. We go rather to the theatre, and study the stage and the +boxes, to the famous designers of women's dress, to the metropolitan +centres of various sorts, to the "radiant points of social control"[37] +from which emanate the suggestions which pass in imitative waves through +the women of the country in the next few months. The laws of imitation +have been elaborately developed by Bagehot, Tarde, Baldwin, Ross, LeBon, +Cooley, and others, and I content myself here with referring to their +writings. The wants of women--and men--are socially given, grow out of a +give and take, a social process. And in this social process, it is not +true that each man counts one! Rather, a few lead, and many follow. +There are centres of prestige which count overwhelmingly. + +Certain wants are competitive.[38] Where social status depends on having +as good a house as one's neighbors, and where social leadership depends +on having a better house than one's neighbors, there is no limit to +men's desires for better houses. With each improvement which one +introduces, each feels the desire to improve, however contented he might +have been had the other not made the improvement. To this we shall recur +in our discussion of the origin of money, in explaining the value of +gold. + +So much for the human wants which stand as the focus of economic values +in the case of articles of immediate consumption. + +But, given these wants, and given their marginal intensities, we are +only at the beginning of our explanation of the economic values of the +consumption goods. It is again not a case of each want counting one, to +the extent of its intensity. There are again, by virtue of the legal and +moral values governing the distribution of wealth, _centres_ of power. +The wants of some men count for nothing, however intense they may be. +The pauper, the prisoner, the beggar--popular proverb about "beggars and +horses" understands them, however much the "marginal utilitarian" may +forget that their wants count for nothing.[39] The slightest whim, on +the other hand, of the man who has inherited millions may count heavily +in giving values to goods. For the explanation of the values of +consumption goods, then, we need both the socially determined marginal +utilities of individuals, and the socially determined _weight_ which +these individuals have in our economic system. This _weight_ would +involve a very elaborate explanation. Many factors affect it. We call +attention here, however, especially to the fact that it rests in large +part on the legal and moral values and institutions concerned with the +distribution of wealth. Changes in the distribution of wealth are as +important as changes in the wants themselves in giving the explanation +of changes in values. The economic social values of consumption goods +include not merely the values of those goods _to_ the individuals who +consume them, but also the values _of_ the individuals themselves in the +social scheme of things. + +What of the values of instrumental goods, of goods of "higher orders," +of labor, of stocks and bonds, of lands, of franchise rights and good +will? + +It is the one great contribution of the Austrian economists to have +shown that the causation in value runs, primarily, from consumption +goods to the goods of higher "orders" which are concerned with their +production, and that these values of instrumental goods, etc., are +derived and secondary values. The value of wheat is based on the value +of bread, the value of land on the value of wheat. The value of the +stock of United States Steel rests in part on the value of iron lands, +which rests on the value of ore, which rests on the value of pig iron, +which rests on the value of steel rails, which rests on the value of the +service of transporting building materials, which rests on the value of +a building, which rests on the value of the services which a dentist +performs in an office in the building. This is the main line of +causation. This is the first approximation which gives us a clue, +without which we should find problems insoluble. But is it not clear +that this cannot be the whole story? At every step complications enter. +The whole thing cannot be got out of the value of the dentist's +services, and the other consumers' goods and services, which are +indirectly aided by the property to which title is given by ownership of +U.S. Steel stock; nor is the value of the stock to be fully explained by +the value of the property to which it gives title. + +At every step, we meet the complication that men must estimate and +calculate, for one thing. And rarely indeed can men see all the steps, +the end from the beginning. Take first a very simple case, wheat land. +The value of the wheat land of to-day rests on the value of wheat, but +it is the wheat of to-morrow and for many years to come; the wheat of +to-morrow rests for its value on the value of the bread of the day after +to-morrow. Sometimes the differential between goods at two consecutive +steps in the productive process is pretty constant. Wheat and flour vary +pretty closely together. The differential is not strictly fixed even +there. But bread and wheat land have a much looser connection in their +variations. If land could produce no wheat or corn or other good that +would satisfy human wants, and if it could not itself satisfy human +wants, it would ordinarily have no value.[40] But the connection +between the value of the bread and the value of the land is loose and +uncertain, while the connection between the value of the land and the +intensity of the wants actually satisfied by the bread produced from it, +is absolutely _nil_. Whether the bread saves a starving man or feeds the +pet pigeons of a millionaire, is a matter of indifference so far as the +value of the land (or of the bread) is concerned. + +We take the values of consumption goods, and break them up, attributing +part to the labor that immediately produced them, part to the raw +materials that entered into them, part to the machine that fashioned +them, and so on. We then break up the value attributed to the raw +material, attributing part to the labor that worked in producing it +immediately, part to the machine that fashioned it, part to the rawer +material of which it was made. And so with the values of the machines. +Ultimately we get back to the values of labor, or of land, or of +securities giving title to complexes of lands, machines, etc.--values +which we do not further break up. But at every step, we find additional +factors. We find these derived values becoming independent, substantial, +standing in their own right. Moral and legal values affect them +directly, as in the case of patriotic support of government securities, +moral antagonism to the securities of the Distillers' Securities +Corporation, or the influence of court decisions, legislation and +elections on security values. Such values rest, in large degree, on the +massing of _beliefs_ and hopes, not concerned with specific +satisfactions of wants, but with the existence of _future_ economic +values. These beliefs and hopes again have their social explanation. It +is not a case where each man counts one. There are centres of prestige +and power, bankers and financial magnates, whose opinions and decisions +count heavily, and waves of optimism and pessimism, which affect the +whole group. We shall discuss these matters more fully in connection +with the analysis of credit, at a later point of our study. For the +present, it is enough to point out that the whole thing cannot be +explained on the basis of the values of consumers' goods, and that the +values of consumers' goods are only in small part explained by the +intensities of the wants they serve. + +In summary: Economic value is the common quality of wealth, by virtue of +which it is possible to compare divers kinds of wealth, and treat wealth +quantitatively, getting ratios of exchange, sums of wealth, etc. Value +is a quantity, _i. e._, a quality which has degrees of intensity. Ratios +of exchange are ratios between values. Price is a particular sort of +ratio of exchange, namely, a ratio in which one of the terms is the +value of the money-unit. Prices correctly express values on the +assumption of the fluid market, and on the assumption that the value of +the money-unit does not vary. + +The value quality is psychological in character. It rests in human +minds. But not in the minds of individuals thought of separately. +It is a complex of many individual mental activities, highly +institutionalized, and including legal and moral values, hopes and +beliefs and expectations, as well as the immediate intensities of men's +wants for consumption goods. + +The ultimate test of scientific theory must be practice. If a theory +aids in manipulating facts, if it leads to the discovery of ways of +doing things which are better than old ways, if it solves problems which +have hitherto remained unsolved, or carries the solution of problems +farther than has hitherto been the case, it is a good theory. It need +not be the best possible theory. It need not be a final theory. The +chief claim for the present theory of value is that it not only unlocks +all the doors that earlier theories have unlocked, but also others which +have resisted the old keys. The man who goes into the modern stock +market armed with marginal utility and the quantity theory is like the +man who would fight Hindenburg with bows and arrows. Bows and arrows are +effective in the hands of expert archers, and the great figures in the +history of economics have done wonderful things with marginal utility, +"real costs," and the quantity theory. But the social value theory is +offered as a better weapon. + +The writer believes that the problem of the value of money has not been +solved by the older theories of value. He believes that the social value +theory will solve it. He proposes on the basis of the social value +theory to make clearer the nature of credit phenomena, and to assimilate +the laws of credit to the general laws of value. He proposes with the +social value theory to bring together in a higher synthesis two +divergent types of economic theory, the "static" and the "dynamic." He +thinks that a rigorous and consistent application of the absolute +concept of value will clarify confusions at various points in the +general body of price theory, as the laws of supply and demand, etc. + +He offers the social value theory as the only way of giving a +_psychological_ explanation to the demand-curve, and a marginal _value_ +explanation of marginal demand-_price_. Demand-curves are social value +curves, on the assumption of the fixed social value of the dollar. The +utility theory, as will appear in the chapter on "Marginal Utility," has +failed to give psychological magnitudes corresponding to _any_ point on +the demand-curve. In general, he offers the social value notion as the +justification for the assumption of a quantitative value which, as we +shall see, underlies the whole of our current price analysis. + +The theory here outlined has been, as stated, developed and defended +more fully in a previous book. For the rest, the author would have it +judged by its usefulness or failure as a tool of thought in the +investigations which follow. + + NOTE. It has seemed best not to break the main course of the + argument of this chapter for the elaboration of one point on + which there has appeared to some critics to be vagueness in the + exposition of the social value theory in my earlier volume, + namely, the relation of social values to the individual values + of those who are moved by the social values. Social values have + as their function the guidance and control of the activities of + men. But men are also moved by their own individual feelings, + interests, and desires. + + What is the relation between these two sets of factors? In what + has gone before, it has been made clear that social values + present themselves to the individual as opaque, objective + facts, largely beyond his control, to which he must adjust + himself. They represent the minds of other men, acting in + corporate and organic ways, putting pressure on him, or + offering him lures. Now the individual reckons with these + social values in the same way that he reckons with any other of + the facts affecting the economy of his life. He must adjust + himself to them in the same way that he must, if he is a + blacksmith, adjust himself to the technical qualities of the + iron he is manipulating. This does not mean that he is passive + before them, any more than he is passive before the iron. He + rather seeks to carry out his personal purposes and desires by + actively adapting himself to objective facts, whatever they be. + This means that different individuals will react in different + ways to the same social value. The fear of the law will keep + one man from burning dead leaves in the street where it will + not keep another man from murder. A given degree of social + pressure will make one man crease his trousers, while another + man will not even know that the pressure to crease one's + trousers exists! There are great individual variations in + responsiveness and sensitiveness to social pressure. In part, + these variations are due to inborn qualities. In larger part, + they are due to social education, and to social status. Thus, + the fact that one man will work all day in a ditch in response + to the lure of a dollar and a half, while another will not + work in the ditch for a hundred dollars a day, may rest in + slight degree on the greater inborn sensitiveness of the latter + to the physical pain of labor, but rests primarily on the fact + that the latter doesn't need the money, and has a social + standard, growing out of his class-associations and education, + which would make him ashamed to be seen in the ditch. Indeed, + we may think of the social standard in question as a social + value acting _on_ him, rather than _in_ him. He fears ridicule. + The same degree of social power, luring men toward the ditch, + exists in the dollar in each case, but the response is very + different in the two cases. + + Later formulations of the utility theory and the labor cost + theory, as represented by the theory of Schumpeter, which we + shall discuss in the chapter on "Marginal Utility," give us, in + a scheme of purely static equilibrium, a picture of the + adjustment of the individual values to the social values. As we + shall see, they give us no account whatever of the social + values. They do not explain causation at all. But they do show + that there is a tendency for the individual marginal utilities + of consumption to become proportional to the social values of + the goods consumed by each individual; and for the individual + marginal disutilities in production to become proportional to + the social values of the rewards that come to producers. The + scheme is highly unrealistic. It has been emphatically + repudiated by Boehm-Bawerk, so far as the disutility equilibrium + is concerned. ("Ultimate Standard of Value," _Annals of the + American Academy_, Vol. V, pp. 149-209.) But it is worth + something, not as explaining social values or market prices, + but rather, as showing how individuals _conform_ to social + values and market prices. _Cf. Social Value_, pp. 43-44, n. 2, + and 148. + + The theory that individual marginal utilities and disutilities + are proportional to market values is unrealistic enough, in the + light of the analysis of individual utilities which we have + given, even for the utilities. It is quite impossible to make + anything of importance of it from the side of individual + disutilities. The length of the working day is not fixed for + each worker by a comparison of his own labor pain with the + satisfactions he expects from his wages. It is fixed by + conditions largely external to him, and the whole group works + the same number of hours, with the machine. The law may limit + the working day. Trades-union effort may do it. Opportunities + for alternative employment may do it, for the labor force of a + factory as a whole. But the theory, which really must rest in + the notion that each individual has many options, and that the + working period is flexible, cannot mean much. The prosperity of + the laborer does more to limit the working day than does his + suffering! + + The reactions of individuals as consumers or producers on the + social values modify the social values. But, as we have shown, + the primary explanation of the social values is not to be found + in the individual utilities and disutilities of those who react + to them. Utilities and labor pains are parts, but minor parts, + in the explanation of social values. + + + + +CHAPTER II + +SUPPLY AND DEMAND, AND THE VALUE OF MONEY + + +The theory of the value of money is a special case of the general theory +of economic value. To the layman, this would seem to go without saying. +To the student of the literature of the subject, however, who has +noticed the wide divergence between the method of approach to the +general problem of value and the method of approach to the problem of +the value of money, in most treatises which include both these topics, +the proposition will sound unusual if not heretical. Most text-books in +English to-day will offer the marginal utility theory as the general +theory of value. The same books commonly present the quantity theory of +the value of money. Whether or not the two theories are consistent may +wait for later discussion, but that the quantity theory of money is a +_deduction from_ the utility theory of value, and a _special case_ of +the utility theory of value, will not, I believe, be contended by +anyone. Certainly in its origin, the quantity theory is much the older +theory. The same is true for those writers who seek to explain value in +general on the basis of cost of production, and who at the same time +offer the quantity theory to explain the value of money. The two +theories may or may not be consistent, but in any case, they are +logically and historically independent, neither being a deduction from +the other. Older writers (as Walker and Mill), whose treatment of the +general theory of value runs in terms of "supply and demand," have +stated that the quantity theory is merely a special case of the law of +supply and demand, and the statement is occasionally met in present-day +writings, though one of the most recent and best known of the +expositions of the quantity theory, Professor Fisher's _Purchasing Power +of Money_, very explicitly repudiates this doctrine.[41] But it may be +easily shown, and will be shown later, that the quantity theory, and the +present-day formulation of the law of supply and demand, are in no way +logically dependent upon each other. This lack of connection between two +bodies of doctrine which should be in a most intimate and essential way +related to each other, may well throw suspicion on the current +treatments of both topics. In any case the lack of connection raises a +problem, and calls for explanation. + +Part of the explanation may be sought in the fact that the writers who +have developed the general theory of value have not been, in general, +the writers who have most elaborated the theory of the value of money. +The theory of money has been for a long time a more or less isolated +discipline. In Ricardo, we have an elaboration of the labor theory of +value, and we also have the quantity theory of money. But it is not +clear that Ricardo added anything to the quantity theory. He found it, +in much the form in which he used it, in the writings of predecessors, +among them Locke and Hume. Ricardo makes large use of the quantity +theory as a premise, but apparently feels the theory to be so +self-evident that it needs little exposition or defence at his hands. +John Stuart Mill is a clear exception to the general statement. Cairnes, +likewise, did treat both topics in considerable detail, but while his +interest in the general theory of value was that of the theorist, his +treatment of money was primarily in the spirit of the publicist, and his +interest was less in the justification of the theory--which he again +seems to feel needs little defence--as in its application. A similar +statement may be made with reference to Jevons. He worked out his +general theory of value for its own sake; his utterances on the theory +of the value of money must be sought scattered through his practical +writings on money. Alfred Marshall's _Principles_ (Vol. I) says almost +nothing about the theory of money; his opinions on that subject are to +be found in some _ex cathedra_ replies to questions from a Parliamentary +Commission. The most important discussions in England of the value of +money are to be found in the long polemic between the Currency and the +Banking Schools, by writers who would not be listed among the makers of +the general theory of value. In the United States to-day, with the +exceptions of Professors Fisher and Taussig, the writers who have been +interested in the general field of economic theory have done +comparatively little with the value of money (_e. g._, Professors Clark +and Fetter), and the writers who have been most interested in the value +of money have usually not written largely on the general theory of value +(_e. g._, Professors Laughlin, Scott, Kinley). Professor Kemmerer might +well be included as an illustration of this last statement. His primary +interest is in money, rather than general theory, even though he does +precede his theory of the value of money with an exposition of the +utility theory of value. In German, a similar situation obtains. +Boehm-Bawerk has touched the theory of money scarcely at all. Menger has +written an important article on "Geld" in the _Handwoerterbuch der +Staatswissenschaften_, but the important thing about this article is the +theory of the origin of money, and the reader will find little on the +problem of the value of money. Wieser has recently taken up the value of +money (in articles published in 1904 and 1909), but no trace of his +views has as yet manifested itself in the English literature on money, +and the writer may here express the opinion that Wieser's contributions +to the theory of money are not likely to be very influential, or to add +to his reputation.[42] Austrian writers on the value of money, as Wieser +and von Mises, have recognized more clearly than anyone in America or +England, the essential dependence of the theory of the value of money on +the general theory of value. The German writer on money who has +attracted most attention recently, however, G. F. Knapp, troubles +himself about the general theory of value not at all. + +But the main explanation of the hiatus between the two bodies of +literature and doctrine is to be sought in something more fundamental. +Neither utility nor costs nor supply and demand furnishes an adequate +basis from which the quantity theory, or any other theory of the value +of money can be deduced. The cost theory, and the supply and demand +theory, in their present-day formulation, are really not theories of +value at all, but are theories of _prices_, theories which presuppose +_value_, and _money_, and a _fixed value of money_. And the utility +theory, as usually presented, is either a theory of barter relations, or +else (more commonly) speedily settles down into the grooves of supply +and demand, leaping by means of a confusion of utility curves and +demand-curves (or sometimes by a deliberate identification of them, _e. +g._, Flux and Taussig[43]) to the treatment of market prices. I shall +take up these points in order. + +A historical summary of the development of the notions of supply and +demand will aid the exposition. It may be noticed, first of all, that +supply and demand is really a very superficial formula even though an +exceedingly useful one. By virtue of its superficial character, it +antagonizes few other theories, and it has been the common property of +almost all schools of value theory. Cost theories and utility theories, +labor theories, or social value theories, all find use for it, in one +form or another. It is really quite neutral and colorless, so far as the +ultimate questions of value-causation are concerned. The more +fundamental causal factors offered by one theory or another are commonly +supposed to operate _through_ supply or demand, in price-determination. +Adam Smith seems to see this more clearly than does Ricardo. Ricardo, +indeed, sometimes thought of demand and supply as forces antithetical to +the forces of labor-costs which he was considering. In ch. xxx of his +_Principles of Political Economy and Taxation_ (ed. McCulloch, pp. +232ff.) he holds that his natural value ultimately rules, except (p. +234) in the case of monopolized articles. Supply and demand govern the +prices of monopolized articles and of all articles in the short run. I +do not find in Ricardo any clear statement to the effect that cost of +production operates _through_ influence on supply. Neither Adam Smith +nor Ricardo felt the need of very much precision in the definition of +supply and demand. Smith does, indeed, distinguish "effectual" from +"absolute" demand, in a well-known passage (ed. Cannan, I, p. 58), +defining effectual demand as the demand of the effectual demanders, +_i. e._, these who are willing to pay the "natural price" of the +commodity. The term "supply" he does not use in this passage, but speaks +of the "quantity which is actually brought to market," and gives as the +law of market price that it is determined by the "proportion" between +this quantity and the effectual demand. That much is wanting in this +analysis will be sufficiently clear when the views of J. S. Mill and +Cairnes are considered. Ricardo offers even less than Smith in the way +of definition. The reader may compare the pages in _Ricardo's Works_ +cited above, and the discussion of the demand for labor on p. 241 in the +same volume. + +In J.S. Mill, a clean-cut notion first appears. The doctrine that price +is determined by a ratio between effectual demand (_i. e._, the wish to +possess combined with the power to purchase) and supply (_i. e._, the +quantity available in the market), is sharply criticised. How have a +ratio between two things not of the same denomination? "What ratio can +there be between a quantity and a desire, or even a desire combined with +a power?" To make supply and demand comparable, demand must be defined +as "quantity demanded," and then the difficulty arises that the quantity +demanded will vary with the price, which seems to present a case of +circular reasoning if demand is to be a determinant of price. The +solution which Mill develops for this difficulty really gives us our +modern conception, virtually complete except that Mill does not present +it in the useful diagrammatic form and does not whisper the magic word, +"margin." There is a demand-schedule, which, plotted, would give a +demand-curve. At such and such prices, such and such quantities are +demanded, or will be purchased. There is a supply schedule, presenting a +supply situation of similar character (though not so clearly indicated). +The price reached is that price which _equalizes_ amount demanded and +amount supplied. A higher price will lead to competition among sellers, +forcing down the price, a lower price will lead to competition among +buyers, forcing up the price. The notion of a _ratio_ between supply and +demand is replaced by the notion of an _equation_ between them. The +present writer wishes to remark, in this connection, that Boehm-Bawerk's +elaborate analysis, with his "marginal pairs," etc., has not advanced +one step beyond this conception of Mill's, that it is really less +satisfactory than Mill's analysis, because of the impedimenta of +pseudo-psychology it has to carry, and because of its confusion of +utility schedules with demand schedules.[44] In our present-day +expositions, as presented in the diagrams, we are accustomed to say that +price is fixed when marginal supply-price and marginal demand-price are +equal, putting the stress on the ordinate, rather than on the abscissa, +on the identity of the dollars paid or received, rather than on the +identity of the goods given or received. But this is merely another way +of stating the same equilibrium which Mill perceived--when marginal +demand and supply prices are equal, amount supplied and amount demanded +will be equal, and conversely. + +One point is to be added, making explicit what is implicit in the modern +theory of supply and demand. Supply and demand doctrine assumes _money_, +and a _fixed value_ of money. That there should be a given schedule of +money-prices for varying quantities of a good, is possible only if there +be a given value of the money-unit. + +That the modern doctrine of supply and demand necessarily involves the +assumptions of value, of money, and of a fixed value of money, may be +proved by the following considerations: + +Supply-situation, represented by the supply-curve, and demand-situation, +represented by the demand-curve, are conceived of as antithetical and +independent causal forces, whose equilibrium determines both "supply and +demand" (in the sense of quantities supplied and demanded) and price. +Mill's doctrine that supply and demand determine price gets out of the +circle that demand (amount demanded) is itself dependent on price, only +by making both demand in this sense and price _results_, rather than +causes, and by putting the causation back into the more complex factors +which I call "supply-situation" and "demand-situation." The two +independent causes, then, are summed up in the supply-curve and the +demand-curve. But, first, these curves are expressed in money. And +second, a change in the value of money would affect _both_ of them +proportionately. But a theory which is concerned with supply and demand +as independent and antithetical must abstract from factors which give +them a _common_ movement, without modifying their _relation_ to each +other. A change in the value of money would lead the supply-curve to +move to the right, and the demand-curve to move to the left, the change +in each being proportionate, and the amount supplied, and amount +demanded, would remain unchanged. Changes in the value of money must, +therefore, be abstracted from. + +Again, we must precise the notion of an _increase_ in demand, or of +supply. Increase in demand may mean mere increase in amount demanded, +consequent upon a lower price, consequent, _i. e._, upon a lowering of +the supply schedule. In this sense, increase in demand is a passive +fact, a result rather than a cause. On the other hand, if the increase +in demand is an increase in the amount demanded at the _same_ price, if +it means a change in the demand-situation, represented by the moving to +the right of the demand-curve, we have a causal factor in increase in +demand, a factor which raises the price and compels new supply to come +into the market. We may distinguish these two meanings as increase in +demand in the active and in the passive senses. _Mutatis mutandis_, we +may speak of increase of supply in the active and passive senses. These +distinctions have been made before, but it has not been clearly seen +that these distinctions, and the connected doctrines, involve the +assumption of a fixed value of money. But consider: it is the current +doctrine that increase in demand in the active sense, the demanding of +a greater amount at the same price, the moving of the demand-curve to +the right, not only raises the price, but also tends to _increase the +supply_. But this is true only if the _cause_ of the increase in demand +is not a cause which simultaneously works on supply, neutralizing that +tendency. If the increase in amount demanded at a given price be due to +a lowered value of money, then the same lowered value of money will +reduce the supply available at that price _pro tanto_, and the new +equilibrium, _caeteris paribus_, will be at a higher price, to be sure, +but with the same amount supplied and demanded. "Demand" is a term which +carries the connotation of motivating power in economic theory. Through +demand run the forces which regulate production and supply. The function +of increased demand is to induce increased supply. But the value +concept, and the assumption of a fixed value of money, are needed to +preserve this part of the doctrine. Without them we have no way of +distinguishing a _real_ increase in demand in the active sense, which +does modify the adjustments in production, and alter the proportions of +different supplies, from a _nominal_ increase in demand in the active +sense, which merely raises a money-price, without affecting supply.[45] + +Another approach will lead to the same conclusion. Demand and +supply-curves are not to be understood merely in terms of brute, +physical quantities. They are rather curves expressing economic +_significances_, manifesting _psychological_ forces which lie behind +them. No considerations of mere physical quantity will explain why one +demand-curve should be "elastic" and another inelastic,--each curve has +its own peculiarities, which are not mechanical in their nature. +Demand-curves express the diminishing economic significance of goods as +their quantity is increased. How economic significance is to be +interpreted need not be argued here. I have elsewhere undertaken to show +that the utility theory of value does not explain the economic +significance which demand-curves express--that demand-curves are not +utility curves. My own theory is that demand-curves are to be explained +only in terms of a social psychology, that demand-curves are +social-value curves. But my argument at this point does not rest on the +particular type of causal theory of value one chooses. It is enough that +the demand-curve be recognized as expressing economic significance, and +diminishing economic significance.[46] But for the demand-curve to +express variation in economic significance of a good, there is need for +a unit in which to express that variation. That unit is the economic +significance of the dollar, itself assumed to be invariable--as all +measures must be assumed to be invariable if measurement is to mean +anything. If the unit chosen vary in the course of a given +investigation, the curve tells you nothing at all. + +Another way of reaching the same conclusion is to say that an increase +in demand in the active sense will lead to an increase in supply only if +there be no corresponding increase in demand for the alternative +employments of the sources of that supply, that, _e. g._, an increased +demand for wheat will lead to increased production of wheat only if +there be not a corresponding increase in the demands for corn and other +crops which can be raised on land and with labor and capital that would +otherwise produce wheat. This is only another phase of the argument that +went before, that an increase in demand due to a falling value of money +would lead to a corresponding shift in the supply-curve. It is not quite +the same argument, however, because that was an argument concerned with +short run tendencies, resting on the assumption that the holders of +supply would immediately react to a change in the value of money, +whereas the argument just presented rests on the longer adjustments, +based on the law of costs, as worked out by the Austrians. This point +will be made clearer in the next chapter. + +Yet another, and perhaps simpler, approach to the same conclusion is by +pointing out that an individual, deciding to buy, must take account of +the prices of other things in his budget--that individual +demand-schedules would be different if market prices of other +things--which depend on the value of money--were different. + +The doctrine that supply and demand (and cost of production, the +capitalization theory, and other elements in the current price-analysis) +presuppose a fixed value of money, must be sharply distinguished from +the doctrine of Professor Fisher (_Purchasing Power of Money_, ch. 8), +and others, that a fixed _general price level_ is assumed by supply and +demand, etc. I should deny that a fixed general price level is assumed. +The point rests in the distinction between value as _absolute_ and value +as _relative_. For my theory, it is perfectly possible for the general +price level to rise, with the value of money constant, because of a rise +in the values of _goods_. In a later chapter, on "The Passiveness of +Prices," I shall examine the doctrine of Professor Fisher more closely, +and set these two views in clearer contrast. For the present, it is +enough to point out one vital difference between a rise in prices due to +a fall in the value of money and a rise in prices due to a rise in the +values of goods, with the absolute value of money unchanged: in the +latter case, there is an increase in the psychological stimulus to +industry, an increase in economic power in motivation, which energizes +and increases production. In the latter case, especially when the fall +in the value of money is rapid, and the rise in prices is clearly due to +that cause (as in the case of Confederate paper, or the French +_Assignats_), we find a reverse effect on industry. Intermediate cases, +where money is falling in value, but where goods are also rising, give +us intermediate results. + +In what follows, I shall from time to time refer to this distinction. In +my own exposition, I shall always use "value of money" in the absolute +sense, as distinguished from the mere "reciprocal of the price +level,"--a practice which I have sought to justify in the chapter on +"Value," and in other places there referred to.[47] + +The modern theory of supply and demand, then, assumes money, and a fixed +value of money. It is, therefore, obviously unfitted as an instrument to +solve the problem of the value of money. If supply and demand concepts +are to be applied to this problem, they must be of a different sort. +This was pointed out by Cairnes[48] who criticised Mill's formulation, +and pointed out that Mill departed from it in three capital doctrines: +in the theory of the value of money, in the theory of wages, and in the +theory of international values. By the demand for money, Mill means, not +the amount of _money_ demanded, but the quantity of goods offered +against money--a very different conception. (Mill, _Principles_, Bk. +III, ch. viii, par. 2.) In what sense a quantity of goods can equal a +quantity of money, or in what sense there can be a ratio between goods +and money, (to recur to Mill's former problem as to the ratio between +things not of the same denomination) Mill does not make clear, nor is it +defensible to speak of either a ratio or an equation on the basis of +Mill's system, since Mill had no absolute value concept. Cairnes seeks +to reconstruct the notion of supply and demand, in such fashion as to +make it possible to apply it universally, and takes up the question of +the comparability of supply conceived as a quantity of goods, and +demand, conceived, not as a quantity of goods, but as desire combined +with the ability to pay. He concludes that in both supply and demand +there is a physical, as well as a mental, element. Demand he defines as +the desire for a commodity backed by general purchasing power; supply as +the desire for general purchasing power, backed by the offer of a +commodity. Thus he thinks he has made the two of the same denomination, +so that comparison may be instituted between them, and the ideas of +equation, ratio, and proportion made legitimate. By "general purchasing +power," Cairnes seems to mean money and the representatives of money. It +is not an abstract power, since it is the "physical" element in demand, +comparable with, and of the same denomination with, the physical element +in supply, a commodity. Cairnes' solution of Mill's difficulty seems to +me to be merely verbal, however. First, in what way is the desire for +general purchasing power in the mind of one man comparable with the +desire for a commodity in the mind of another man? I pass over the +supposed difficulty that knowledge of other men's emotions is +impossible,[49] and emphasize simply the point that price offer, either +by demander or supplier, is no test of the intensity of desire where +there are inequalities in the distribution of wealth. But second: in +what sense is general purchasing power, money and money-funds, of the +same denomination as a commodity? Cairnes emphasizes the physical +character of both. But surely they are not comparable on the basis of +any physical attributes--weight, bulk, etc. Certainly if we look at the +concept of demand here given, the physical aspect is simply +irrelevant--gold money goes by weight, but what of paper money and +credit instruments? And in what sense is even gold money physically of +the same denomination with, say, wheat, or hay or base-ball tickets? Not +physical quantities, but economic quantities, are relevant here; not +weight or bulk, but _value_. By means of a concept of value, as the +homogeneous quality of wealth, present in each piece of wealth in +definite, quantitative degree, could Cairnes bring about comparability +between the "physical" elements in supply and demand. But not otherwise. +Only significances, values, are relevant here. Supply and demand +presuppose value. + +It will be interesting to consider the effort to solve the problem of +the value of money by means of supply and demand on the lines employed +by Mill, where demand for money is defined as quantity of goods to be +exchanged, and supply of money as quantity of money times rapidity of +circulation, and where physical quantities are treated as the relevant +factor, no value concept of the sort here contended for being +presupposed. This is, essentially, Mill's method. There is, in this +conception, first the difficulty that "quantity of goods to be +exchanged" is not a true quantity at all, but is a mere collection of +things of different denominations, dozens of eggs, pounds of butter, +gallons of milk, etc., incapable of being funded into a quantity.[50] +There is, second, the difficulty that increasing the amount of any one +of the items in this heterogeneous composite need not increase the +"demand" for money, in the sense that it increases the "pull" on money, +or tends to increase the supply of money. Yet, under the general +doctrine of supply and demand, an increase in demand should be a +stimulus to increase in supply. Indeed, it is easy to construct a case +where an increase in the quantity of one of the items in this composite, +the others remaining unchanged, would actually tend to _repel_ money, to +reduce the _supply_ of money. Suppose that one item in America's stock +of goods, say cotton, is much increased in quantity, and suppose that +cotton has a highly inelastic demand-curve, so that the increased +quantity sells for less money than the original quantity.[51] Suppose, +too, that cotton is our chief article of export, and that the bulk of +our cotton is exported. Would not the "balance of trade" tend to turn +against us, so that gold would tend to leave the country, and the supply +of money be reduced? There is nothing in the situation assumed to raise +the prices of other goods,[52] so that they could exert a counteracting +"pull" on money. Europeans, to be sure, having less to pay for cotton, +could demand more of other things, and Americans paying less for cotton +could demand more of other things. But, on the other hand, American +producers of cotton, receiving less for their cotton--receiving +precisely as much less as the others had more--could then demand less of +other things, exactly as much less as the others are able to demand +more. The original tendency for gold to leave the country, and the +tendency for gold to leave the money-form and be used in the arts, would +remain unneutralized. An "increase of demand for money," in Mill's +sense, would in this case present the remarkable phenomenon of driving +money away. Physical quantities are irrelevant. Psychological +significances are what count. + +It is interesting to note, in this connection, that some striking +contradictions in quantity theory reasoning on any formulation, whether +connected with the notions of supply and demand or not, are involved in +this hypothesis. The illustration above gives a case where a lowered +price level leads money to flow away from your country. But, on the +quantity theory explanation of foreign exchange, it is _rising_ price +levels which drive gold away, and _falling_ price levels which attract +gold![53] + +Mill's effort to apply the notion of demand and supply to the value of +money is, then, (1) not an application of his formal doctrine of supply +and demand, and (2), is a failure, leads to results contradictory to the +general law of supply and demand, as soon as we take account of the +peculiarities of individual commodities, and cease to look at +commodities in one huge lump. Psychological forces, rather than +physical quantities, are what count. Whether or not the supply and +demand notion of Cairnes, reinterpreted by putting a quantitative value +concept into it, could serve as a means of approach to the value of +money, I shall not here argue. No one so far as I know has attempted to +do the thing that way, and my own theory is best developed by another +method. It is interesting to note, however, another somewhat different +effort to apply the supply and demand formula. General Walker does so, +including among the factors determining the demand for money, not only +the quantity of goods to be exchanged, but also the _prices_[54] +prevailing. Since by value of money Walker means merely the reciprocal +of the price-level, this is the clearest possible case of a vicious +circle. It would be a circle even if he were trying to explain the +absolute value of money, as distinguished from the reciprocal of the +price-level, since the former is one of the determinants of the latter. +Value of money and values of goods determine prices; prices and quantity +of goods determine demand for money; demand and supply of money +determine value of money,--a hopeless circle. + +I know no sense in which the terms, demand and supply of money, can have +relevance to the problem of the value of money. There is one sense in +which the terms can be used which fits in with the modern supply and +demand-curves, and that is the sense in which they are used in the money +market. Demand for money comes from borrowers; supply of money from +lenders. The price paid is a money-price, the curves express the short +time money-rates, the rental of money, in terms of money, for stated +periods of time. There is a relation, later to be investigated, between +the rental of money, the money-rate, and the value of money, but the two +are in no sense the same. It should be noted, too, that we are here +concerned with "money-funds" rather than with money in the strict +sense,--distinctions and relations in this connection properly belong at +another stage of our inquiry. Whenever the terms, demand and supply of +money, appear in the following pages, they will be used in the sense +developed in this paragraph. + +Demand and supply are superficial formulae. They cannot touch a problem +so fundamental as that of the value of money. + + + + +CHAPTER III + +COST OF PRODUCTION AND THE VALUE OF MONEY + + +When the cost theory was a labor theory, as with Ricardo, the +expression, cost of production of money, could have a definite meaning. +It meant the labor-cost of producing the money metal. Even in this form, +it is recognized that cost of production has a looser connection with +value in the case of money than in the case of most commodities, because +the supply of money metal is large and durable, and the annual +production affects it slowly. But cost of production theories, in the +form of labor theories, or labor-abstinence-risk theories, have little +standing in modern economic theory. Ricardo himself saw the break-down +of the pure labor theory; and Cairnes, Ultimus Romanorum, so limited and +modified the "real costs" doctrine as to leave little validity in it, +even on his own showing. The prevalent doctrine of cost of production +runs in terms of "money-costs"--and hence is of no use when the problem +of the value of money itself is to be solved. + +A brief historical sketch of the cost theory will be helpful. Costs are +sometimes conceived as a cause of value, and sometimes as a measure of +value. Often these two aspects are mixed, and writers shift from one +notion to the other. This is particularly true of the labor theory. In +Adam Smith the contention sometimes is that labor is unvarying in value, +hence an admirable measure of values, and an excellent standard of +long-time deferred payments. Smith compares wheat and silver from the +standpoint of the constancy of their relation to labor, and concludes +that wheat is the better standard in the long run, because it remains +more nearly fixed with reference to labor than does silver. Sometimes +Smith thinks of labor as a cause of value, and thinks of the labor that +enters into the production of a good as the significant thing. At other +times, the labor that goods will command or purchase is the significant +thing--and here one is not clear whether he thinks of labor as a cause +or as a measure. Whether labor is to be funded as labor-pain, or as +labor-time, Smith does not state. Sometimes labor seems to be considered +as homogeneous in its efficiency. At other times, he makes comparison +between different kinds of labor as to their efficiency, and compares +the efficiency of labor in different occupations. One can find nearly +anything one pleases in Adam Smith on these points. At times he speaks +of "labor and expense," rather than labor alone, as governing prices. + +Labor-cost to the laborer would take the form of labor-pain or +labor-time. To the employer, it would take the form of outlay in wages. +Adam Smith never makes any definite statement of point of view here, and +shifts back and forth from one to the other. He recognizes variations in +labor-pain, in danger, etc., in different kinds of labor when discussing +wages. + +Ricardo elaborated the labor theory of value, and tried to think it +through. He was too keen a logician to shift view-points with Smith's +facility, and he tried to make a completed system.[55] There is some +shifting from the theory of labor as a cause of value to labor as a +measure of value, as in the following passage: "If the state charges a +seigniorage for coinage, the coined piece of money will generally exceed +the value of the uncoined piece of metal by the whole seigniorage +charged, because it will require a greater quantity of labour, or, +which is the same thing, the value of the produce of a greater quantity +of labour, to procure it." (_Works_, McCulloch ed., 213.) In general, +however, Ricardo developed a causal theory of value, quantity of labor +being the basis of the absolute values of goods, their _relative_ values +depending on the relative amounts of labor involved in the production of +each. I shall not go into the matter fully, but shall call attention to +the rock on which the system split, as Ricardo himself admits. A greater +or less proportion of capital works with labor in producing different +things, and the value of product, in that case, varies not merely with +the labor, but also with the amount of capital, and the length of time +the capital is employed. How say, then, that labor alone governs value? +How reduce labor-cost and capital-cost to homogeneous terms? James Mill +tried to do it for him by making capital merely stored up or petrified +labor, which gives up its value again in production. But this doesn't +meet the difficulty, because there is a _surplus_ value, over and above +that explained by all the labor, including the labor which produced the +machine, and the labor which produced the raw materials which entered +into the machine, etc. The case of wine is a particularly obstinate +case. Wine increases in value merely with the passage of time, at a rate +which corresponds to the profit on capital. Ricardo finally, in +correspondence with McCulloch, definitely abandons the case, stating +that there are many exceptions to the proportionality between exchange +value and labor-cost. "I sometimes think that if I were to write the +chapter on value again which is in my book, I should acknowledge that +the relative value of commodities was regulated by two causes instead of +one, namely, by the relative quantity of labor necessary to produce the +commodities in question, and by the rate of profit for the time that the +capital remained dormant." (Davenport, _Value and Distribution_, p. +41.) But this is a "dualistic" rather than a "monistic" explanation--one +element is a money-expense, or at all events a pecuniary item, while the +other is a "real cost" item. The two are incommensurate and +incommensurable. + +Senior seeks to supply the unifying principle. "Abstinence" and labor +have pain as a common element, and so are commensurable. Costs, reduced +to labor and abstinence, become homogeneous again. Monism is restored. +Cairnes completes the doctrine by adding risk to the real cost elements: +a triune cost concept, sacrifice being the generic fact in the three +manifestations. + +With John Stuart Mill, in general, we have an entrepreneur view-point. +Money-expenses of production, entrepreneur outlay, plus wages of +management, or including wages of management, are the factors with which +Mill reckons. He is no longer concerned with psychological ultimates, or +real costs. Cairnes criticised Mill sharply for this. No distinction is +more fundamental he holds, than that between costs or sacrifice on the +one hand, and rewards on the other. Labor, abstinence and risk are +sacrifices; wages, interest, profits are rewards. None the less, in cost +doctrine, as in supply and demand doctrine, it is Mill's view which has +prevailed. Cost as conceived by Mill is a superficial, pecuniary notion. +It tells little as to ultimate causation. But it is virtually only as a +pecuniary doctrine, costs from the entrepreneur view-point, that the +cost doctrine is met in modern theory. + +Why is this? Well, first, the real-cost doctrine simply does not square +with the facts. The hardest labor does not produce the most valuable +goods. Value in fact does not vary either with labor-pain or labor-time. +In fact, whatever the explanation, it would seem to be truer that the +relation is an inverse relation. Nor does the abstinence that pinches +hardest produce the largest amount of capital. And while there is some +correlation between risks and profits, the correlation is at best low +and is not a correlation between psychological sacrifice and profits. +Even "marginal abstinence" for a Rothschild or a Rockefeller causes no +pain. It is absurd to seek to find a common element in the "abstinence" +of a rich man and the pain of a poor and aged laborer. I pass over the +supposed difficulty that abstinence is, in general, suffered by one set +of minds, and labor-pain by a different set of minds, and hence, since +men cannot compare their own emotions with the emotions of other men, +there is no comparability. This subjectivistic psychology would, of +course, make it equally impossible to fund labor-pains of different +laborers, or to get any common denominator at all.[56] It is enough to +point out that differences between rich and poor, between successful and +unsuccessful, between efficient and inefficient, (apart from acquired +differences which may be smoothed out by the "stored up +labor-of-training" principle) make labor-pain, and marginal labor-pain, +vary greatly from value, and make labor-pain, abstinence and risk quite +incommensurable, and quite without fixed relation to value. Cairnes saw +this in part, and developed his doctrine of non-competing groups to deal +with it. Labor-pain and value vary together only when we are comparing +goods produced by laborers within a competing group. Laborers in one +group do not compete with laborers in another group. There is perfect +competition in the capital market, however, and so capital costs +("abstinence") are perfectly correlated with value, to the extent that +capital enters. Cairnes seems to think that the whole difficulty with +his real cost doctrine comes from the failure of competition. In fact, +however, it comes also from the inequalities in wealth. And even in his +highly competitive capital market it is equally true that abstinence, or +even marginal abstinence (a term which Cairnes does not use) has no +constant relation to amount of capital accumulated, value produced, or +interest received. The cost theory breaks down at every point when it +runs in labor-abstinence-risk terms. So generally has this been +recognized, that the cost theory has generally given way to the utility +theory, and cost doctrine when it appears in modern economics is either +the very superficial money-outlay notion of Mill, or else the Austrian +cost doctrine, later to be discussed, which is still a pecuniary +concept. I have elsewhere undertaken to show (_Social Value_, chs. 3-7, +and the ch. on "Marginal Utility," _infra_) that these defects of the +"real-cost" theory, are just as much in evidence in the utility theory. +The failure of the real cost theory of value is by no means a +vindication of the utility theory. Both have the same vice--the effort +to combine into a homogeneous sum a lot of individual psychological +magnitudes measured in money, when the money-measure has a different +psychological significance for each individual, and so comparison and +addition are impossible. But in any case, the real cost doctrine of the +Classical School has failed, and so cannot serve as the basis of the +theory of the value of money. + +Obviously the money-outlay cost theory of Mill cannot explain the value +of money itself. The marginal cost of producing twenty-three and +twenty-two hundredths grains of gold will always be a dollar, however +the dollar may vary in value. Indeed, in general, the assumption of a +constant value of the money-unit is implied in the monetary cost +concept. Cost curves are _supply_-curves and the reasoning already given +as to the need for assuming constant value for money in the supply and +demand concept will apply here. Costs function in value-determination +only by checking supply. Rising costs tend to mean a lessened supply. +But if the cost-curve is rising _because_ of a fall in the value of +money, then the demand-curve will be rising also, and production will +not be checked. The general law as to the relation of cost to demand and +supply assumes a fixed value of the unit of cost, the dollar. + +To the Austrian economists we owe a rational theory of costs which gives +the money-outlay concept more than a merely empirical basis. First, they +see in costs not causes, but results. Value causation comes ultimately, +not from the side of supply, but from the side of demand. I shall not +now undertake a criticism of their explanation of demand. I have +elsewhere criticised their confusion of demand-curves and +utility-curves, and pointed out that marginal utility gives no +explanation of demand. I shall recur to the utility theory of value at a +later point. For the present, it is enough to point out that the +Austrian theory of costs is independent of their utility vagaries, and +rests best on the notion of supply and demand, as expressed in the +modern curves, with the assumption of a fixed value of the money-unit. +Costs consists of entrepreneur money outlay of various kinds, chiefly +wages, interest, and rent. Rent is, for the Austrians, as much a cost as +any other item of entrepreneur outlay. But these items of cost are not +ultimate data. They are rather reflections of the positive values of the +products. Value runs from finished product to agents of production, +labor, and instrumental goods, and land. Avoiding needless complications +from a discussion of interest as a factor in cost--a doctrine on which +the Austrians, say Wieser and Boehm-Bawerk, are not agreed,--it is enough +to point out that high wages or high rents, which limit production in +any given industry or establishment, are high _because_ the land and +labor in question have _alternative_ uses, because other industries, or +other competitors in the same industry, bid for them. Cost-curves, +then, are reflections of demand-curves. The cost-curve of wheat, _e. +g._, is what it is because of the demand-curve for corn, for cattle, and +for every other commodity that could be produced with the same labor and +land. Cost doctrine thus becomes part of the general doctrine of supply +and demand, and runs in pecuniary terms, assuming money, and a fixed +value of money, and hence is incapable of serving as a theory of the +value of money itself. + +That some vaguer form of cost doctrine, where the unit of cost is, not +money, but some composite commodity of things used in the production of +the standard money metal, or a unit of abstract value, might be worked +out, is doubtless true. Gold production, like other industry, is part of +the general economic scheme, and there is some sort of equilibrium +reached which draws labor and capital now away from, and now back to, +the gold mine. To bring this equilibrium into the general scheme of the +modern theory of costs, however, in terms precise enough to make a +satisfactory theory of the value of money, is a thing which has not so +far been done, and I do not have high hopes of its early accomplishment. +In any case, such a theory must rest upon a positive theory of value. +Cost doctrine is negative, and can never be fundamental.[57] + + + + +CHAPTER IV + +THE CAPITALIZATION THEORY AND THE VALUE OF MONEY + + +Money is capital. A dollar is a capital-good. Money is, moreover, a +durable form of capital, which gives forth its services bit by bit, and +indeed, in a community where the state bears the burden of wear and +tear, never ceases to give forth those services. In any case, from the +standpoint of a given individual, so long as there is a limit of +tolerance prescribed for legal tender, it is a matter of accident if he +ever incurs a loss from the wastage of the capital instrument, money, +through wear and tear. Moreover, the fact that money is "fungible," and +that its use is to be found in a process which commonly returns to the +owner, not the same coin, but a different coin, we may, in general, +abstract from the wear and tear of the dollar, and look upon the dollar +as a capital instrument which promises its owner, if he chooses to use +it as capital, a perpetual annuity. The nature of this money service +will be more fully described later. For the present it is sufficient to +say that exchange is a productive process, that exchange creates values, +in as true a sense as manufacturing does, and that money facilitates +exchange in as true a sense as coal facilitates manufacturing. There is, +at any given time, a demand-curve for this money service, manifesting +itself in the money market, a demand for the short time use of money as +a tool of exchange, and the "prices" which come out of the interaction +of demand and supply in the money market are the short time "money +rates" including the "call rates." These are properly to be conceived, +not as pure interest on abstract capital, but as rents[58] which are to +be attributed to money as a concrete tool. + +Now, in general, when such rents appear, they may be capitalized. And +the price of the instrument of production that bears these rents, will +be the sum of the rents, discounted at the prevailing rate of interest, +with considerations of risk, etc., allowed for. The reasoning of the +capitalization theory is really quite simple. Take, for example, a piece +of urban site land, which is expected to bring a perpetual annuity of +one hundred dollars. The whole economic significance of the land is +contained in its services, present and prospective. The possession of +land under certain circumstances brings other services, as social +prestige, than the services which can be alienated to a lessee. But in +this case I am abstracting from considerations of that sort, and also +from the factor of risk. The whole value of the piece of land under +consideration comes from the value of the one hundred dollars a year. +But these annual incomes are not all equally valuable, even though all +expressed as one hundred dollars. The first one hundred dollars is due +one year hence, the tenth ten years hence, the thousandth, a thousand +years hence. The principle of perspective comes in--I abstain from any +detailed discussion of the theory of interest, simply stating that in a +general way I agree with the contention that _time_ constitutes the +essence of the phenomenon, or rather, the tendency to discount the +future. The capital price of the land is the sum of an infinite +convergent series of the "present worths" of the incomes. The formula +is as follows: capital price of land = $100/1.05 + $100/(1.05)^2 + +$100/(1.05)^3 ... + $100/(1.05)^n when the rate of interest is 5%. The +limit of this series, assuming the series to be infinite, is $2000, and +a simple formula for calculating it under the assumptions, is to divide +$100, the annual income, by .05, the rate of interest. Given the annual +income, given the prevailing rate of interest, the capital price is +determined. The relation may be illustrated, roughly, by the figure of a +candle, a disk, and the shadow of the disk on the wall. The disk +represents the annual income, the shadow on the wall the capital value, +and the distance between the flame and the disk the rate of interest. +Increase the distance between the flame and the disk, the rate of +interest, and the shadow becomes smaller; shorten the distance, and the +shadow is increased. Similarly, enlarge the disk, and the shadow is +enlarged. The capital value varies directly with the annual income, and +inversely with the rate of discount. Now my purpose here does not +involve a detailed examination of the validity or limitations of the +capitalization theory. For the present, the only question is, has this +theory any application at all to the problem of the value of money? It +offers itself as a general theory of the values of durable bearers of +income. Money is a durable bearer of income. + +The capitalization theory, however, is of no use for the purpose in +hand. Money does not obey the general law in the relation which the +magnitude of the income bears to the rate of interest. In general, the +income and the rate of discount are independent variables. Their +influence, operating in opposite directions, fixes the capital value, +increasing income increasing the capital value, increasing discount rate +reducing it. In the case of money, however, the two factors are not +independent. The short time money rate is not, to be sure, identical +with the long time rate of interest, which is the rate of discount for +the purpose in hand. But the two tend to vary together in the long run +average in fact, and they are related in the _expectation_ of those who +are concerned in the capitalization process. + +In our chapter on the "Functions of Money," in Part III, it will be +shown that normally there tends to be a difference between the money +rates and the long time interest rates, the long time rates tending to +be higher than the rates on short loans, the rate on very short loans +being lower than the rate on somewhat longer short time loans, and the +call loan rate being lowest of all. The explanation of this must be +deferred till we have analyzed the functions of money. But the important +thing, for present purposes, is that the money rates, though lower than +the "pure rate" of interest, tend to vary, in long time averages, with +that "pure rate,"[59] and that, consequently, the income from renting +money, and the discount rate to be applied in capitalizing that income, +are not independent magnitudes, but tend to vary together. They thus +tend to neutralize one another. If money rates go up, and if they are +expected to stay up long enough to justify (on the ordinary +capitalization theory) a rise in the capital value of money, we have a +counteracting influence in the long time interest rate, which also +rises, and tends to pull down the capital value of money. To recur to +our illustration of the candle and the disk, as the disk increases in +diameter, the distance between the candle and the disk grows greater, +and so the _shadow_ tends to remain the same. + +There is a further difficulty, to which attention will be called more +fully in later chapters, particularly the chapter on "Dodo Bones," and +the chapter on the "Functions of Money." In other cases, in general, the +capital value is, as the capitalization theory requires it to be, a true +shadow, a passive function of the income and the discount, of the disk +and the distance between the candle and the disk. In the case of money, +however, the income is causally dependent, in part, upon the capital +value. Money can function as money only by virtue of having value. The +shadow becomes substance in the case of money. It is the _value of +money_ which makes possible the _money work_. The capitalization theory, +thus, if applicable at all, must be radically modified before being +applied. We shall subsequently, in the chapters above referred to, take +account of this fundamental complication. For the present, we can state +it merely as a problem: how can we construe the interaction of the +income value of money and the capital value of money in such a way as to +avoid a circular theory? + +But further, the capitalization theory, as heretofore formulated, like +the doctrines of supply and demand and cost of production, assumes +_money_, and a _fixed absolute value_ of money. This assumption must be +made if we are to be able to predict, on the basis of the capitalization +theory, that a given annual income, at a given rate of discount, will +give a specified capital value. This may be shown by the following +considerations: If men anticipate that the value of the income, which is +a fixed sum of dollars, is to grow less in the future, then the present +worth of the bearer of that income will shrink to an extent greater than +the "pure rate" of interest would call for. The principle of +"appreciation and interest" comes in. The nominal interest, in times of +falling value of money, tends to exceed the pure rate by an amount which +compensates for the loss in value of future income as the dollar falls +in value. We have here, however, a principle different from the +principle of time discount. It is not the influence of time, which makes +a _given_ value appear smaller as it is further removed in time, but it +is an anticipated lessening in the value of the income itself, that +counts. In terms of our candle and disk illustration, it is a factor +affecting the size of the disk, rather than a factor affecting the +distance between the disk and the candle. For the purposes of +calculation, the two elements in the nominal rate of interest may be +lumped together, and the nominal rate, rather than the pure rate, may be +taken as the rate of discount for capitalization purposes. But for +theoretical purposes, the two must be kept distinct. The capitalization +theory rests on the assumption of a fixed value of the money unit. + +That the fixed value of the money unit assumed is an absolute value, and +not a mere "reciprocal of the price level," may be proved by some +further considerations regarding relations among these same factors. +Assume a fall in the rate of interest. Then, on the capitalization +theory, prices of lands, stocks and bonds, houses, horses, and all items +of wealth which give forth their services through an appreciable period +of time, will rise, and with them the average of prices, or the general +price level, will rise.[60] If one hold the _relative_ conception of +value, according to which the value of money necessarily falls when +prices rise, because the two are merely obverse phases of the same +thing, then this rise in the price level is, _ipso facto_, a fall in the +value of money. But we have seen that a fall in the value of money +means, on the "principle of appreciation and interest," a rise in the +interest rate! Hence, we would have proved that a fall in the interest +rate causes a rise in the interest rate--which is absurd. If, however, +we recognize that prices can rise without a fall in the value of money, +if, _i. e._, we use the absolute conception of value, this difficulty +disappears. The capitalization theory and the theory of appreciation and +interest can be reconciled only on the basis of the absolute conception +of value. + +The capitalization theory, then, in its present formulation, assumes +money, and a fixed absolute value of money. It is, therefore, +inapplicable to the problem of the value of money itself. + +In general, none of the polished tools of the economic +analysis,--neither cost of production, the capitalization theory,[61] +nor the law of supply and demand,--is applicable to the problem of the +value of money. The reason is that they get their edge from money +itself. The razor does not easily cut the hone. It is to this fact, I +think, that we owe the widespread and long continued vogue of a theory +so crude and mechanical as the quantity theory. In the next chapter we +shall show that the utility theory of value--which we shall not +recognize as a polished tool!--has also failed to give us help in +explaining the value of money. + + + + +CHAPTER V + +MARGINAL UTILITY AND THE VALUE OF MONEY + + +A good many writers have attempted to apply the marginal utility theory +to the value of money. Among these, I may particularly mention Friedrich +Wieser, Ludwig von Mises, Joseph Schumpeter, and, in America, David +Kinley, and H. J. Davenport. + +The marginal utility theory is ordinarily merely a thinly disguised +version of supply and demand doctrine. As usually presented in the +text-books, we have an analysis of the phenomenon of diminishing utility +of a given commodity to a given individual, illustrated by a diagram, in +which the ordinates represent diminishing psychological intensities. +Often a money measure is given to these diminishing intensities, and the +curve is presented as the demand schedule of a given individual. Then, +with little further analysis, a leap is made to the market, and it is +assumed that the market demand-curve, of many individuals, differing in +wealth and character, is a utility-curve, and value in the market is +"explained" by means of marginal utility. I need not here repeat my +criticisms of this procedure.[62] It gives simply a confused statement +of the doctrine of supply and demand. The analysis of utility which +precedes the discussion of market demand is wholly irrelevant, and +merely mixes things up. That such a conception is of no use in solving +the problem of the value of money has been sufficiently indicated in the +chapter on supply and demand. + +Sometimes the contention is made that money is unique among goods in +having "no power to satisfy human wants except a power _to purchase_ +things which do have such power."[63] This contention, in Professor +Fisher's view, precludes the application of the marginal utility theory +to the problem of the value of money, and he makes no use of marginal +utility in his explanation. Indeed, in the passage from which this +quotation is taken, Professor Fisher says that the quantity theory of +money rests on just this peculiarity of money. Not all writers who +contend that money has no utility _per se_, however, have felt it +necessary to give up the marginal utility theory as a theory of money, +as we shall later see. + +On the other hand, writers of the "commodity school" (or "metallist +school"), writers who see the source of the value of money in the metal +of which it is made, can apply the utility theory readily to the value +of money, making the value of money depend on the marginal utility of +gold, or the standard metal, whatever it is. To the writers of this +school, it is incredible that anything which has no utility should +become money. Money must be either valuable itself, or else a +representative of some valuable thing. The value of money comes from the +value of the standard of value, and that value may, so far as the logic +of the situation is concerned, be as well explained by marginal utility +as the value of anything else. Typical of this view is Professor W. A. +Scott's discussion in his _Money and Banking_[64], though the emphasis +there is not on marginal utility as the explanation of the value of the +standard, but on the value (conceived of as an absolute quantity) of the +standard as essential to the existence of money, and the performance of +the money functions. Professor Scott attacks vigorously and effectively +Nicholson's exposition of the quantity theory,[65] where the assumption +is made that money consists of dodo-bones (the most useless thing +Nicholson could think of). Most quantity theorists would share +Nicholson's view that dodo-bones would serve as well as anything else +for money--or, to put the thing less fantastically, that the substance +of which money is made is irrelevant, that the only question is as to +the quantity, rather than the quality, of the money-units, and the +quantity of the money-units, not in pounds or bushels or yards, but in +abstract number merely. For writers who seek the whole explanation of +the value of money in its monetary application, and who see that money, +_qua_ money, cannot administer directly to human wants, the view that +Professor Fisher expresses, namely, that money has no utility, and is +unique among goods in this respect, seems on the surface, to have +justification. On the surface merely, however. Money is not unique among +goods in being wanted only for what it can be traded for. Wheat and corn +and stocks and bonds and everything else that is speculated in is +wanted, by the speculators, only as a means of getting a +profit[66]--they are remoter from the wants of the man who purchases +them than the money profit he anticipates. Ginsing, in America, has +value, though consumed only in China. And there are people, particularly +jewelers, who often want money as a raw material for consumption goods. +The difference is at most a difference of degree--and of slight degree +indeed in the case of such things as bonds, which count on the "goods" +side of the quantity theory price equation, but which really are in all +cases remoter than money itself from human wants. Money really stands, +for the purpose in hand, on the same level as any other instrumental +good.[67] It does not give forth services directly, as a rule. Neither +does a machine, or an acre of wheat land, or goods in a wholesaler's +warehouse. Exchange is a productive process, an essential part of the +present process of production. Money is a tool which enormously +facilitates this process. It has its peculiarities, no doubt. One of +them is--and money is not unique in this as will later appear--that it +must have _value_ from non-monetary sources[68] before it can perform +its own special functions, from some of which it draws an increased +value. But there seems to me to be nothing in the contention quoted from +Professor Fisher, to justify setting money sharply off from all other +things, or to justify the view that marginal utility is inapplicable to +the value of money, if it be applicable to the value of anything at all +that is not destined for immediate consumption. I do not believe that +the marginal utility theory is valid for any class of goods, not even +those for immediate consumption. Where marginal utility theory is,--as +in the conventional text-book expositions--merely another name for +supply and demand theory, it is, as already shown, not applicable to the +value of money, and it is useful in the surface explanation of +market-prices of goods. But where marginal utility theory really seeks +to get at value fundamentals, it is precisely as valid for money as for +goods of other sorts--invalid, in my judgment, in both places, and for +the same reasons in both. + +Among the writers who would apply the utility theory to money, while +still insisting that money, as such, has no utility, are Wieser, +Schumpeter--who accepts Wieser's theory in its main outlines--and von +Mises, who develops a notion very different from that of the other two. + +Wieser's doctrines are set forth in two expositions, separated by five +years, the second representing a considerable development in his +thought, though resting in part on the first. The first is an address +upon the occasion of his accession to the professorship at the +University of Vienna, in 1904, and is published in the _Zeitschrift fuer +Volkswirtschaft, Sozialpolitik und Verwaltung_, vol. 13 entitled, "Der +Geldwert und seine geschichtlichen Veraenderungen." The second is a +discussion, partly written and partly spoken, "Der Geldwert und seine +Veraenderungen" (written), and "Ueber die Messung der Veraenderungen des +Geldwertes" (spoken), in _Schriften des Vereins fuer Sozialpolitik, +Referate zur Tagung_, no. 132, 1909. For the purpose in hand, a brief +statement of one or two points would suffice to show the futility of +Wieser's effort to get an explanation of the value of money _via_ +marginal utility, but I think that readers may be interested in a fuller +account of Wieser's doctrine, just because it is Wieser's, and so shall +undertake to give a more systematic account of it. For brevity, in the +exposition which follows, I shall refer to the first article as "I," and +to the second as "II."[69] + +Wieser holds that it is possible to have money wholly apart from a +commodity basis (I, p. 45), citing the Austrian _Staatsnoten_ as a case +in point. The reason for giving them up is that they do not circulate in +foreign trade. Gold fulfills its international money-functions the more +easily because of its various employments, but, after it is thoroughly +historically introduced, as money, it could fulfill its money functions +even if all these employments be thought away (46). Wieser gives no +argument for this contention, and its validity will be examined +later.[70] There are, he says, two sources for the value of gold, the +money use and the arts use, interacting. Money is further removed from +wants, not only than consumption goods, but also than production goods, +which are but consumption goods in the seed. The latter are technically +destined for definite goods. But money may be used to procure whatever +good you please, in exchange. (The absoluteness of this distinction, +also, may be questioned. Pig iron is almost as unspecialized as money in +its relation to wants, since tools enter into the production of almost +every service that human wants require, from surgical operations, +through instrumental music, to wheat and horse-shoes. On the other hand, +money is not the only thing by means of which other things are +purchased. The extent of barter in modern life will wait for later +discussion.[71] I do not think that _any_ sharp distinction between +money and all other things is valid.) Wieser complains of the older +economics which treats money as a commodity. And he contends that as +money and commodities show a contrast in their essence (_Wesen_), they +should also manifest a contrast in the laws of their values, even though +the fundamental general theory of value applies to both (I, 47). He +finds in representatives of money (_Geldsurrogate_) and in velocity of +circulation of money, factors which are lacking in commodities. (Again a +question must be interjected by the writer. Are not corporation +securities essentially like _Geldsurrogate_ from this angle? And do not +goods vary greatly in the number of times they are exchanged? What of +the speculative markets, where more sales are made in an active market, +at times, than there are commodities or securities of the type dealt in +in existence?) The value of money is essentially bound up with the +money-service. Wieser indicates that he is not talking about the +subjective value of money, but its objective value, using the popular +meaning of the term, which, he says, is not strictly logical, but is +useful: the relation of money to all other goods which are exchanged, +the purchasing power of money. This depends on goods as well as on +money. In the second article, Wieser refines and elaborates his +conception of the objective value of money, seeking to get away from the +notion of relativity which is involved in the conception of purchasing +power, and to get an absolute conception, which shall be a causal factor +in the determination of general prices, rather than a mere reflection of +them. It is to be a coefficient with the objective values of goods in +determining prices. A change in general prices may be caused by a change +in the value of money, and may be caused by a change in the values of +goods (II, p. 511). In explaining this objective value concept (which, +in its formal and logical aspects, is in many ways similar to the +absolute social value concept maintained by the present writer, though, +in the present writer's judgment, inadequately accounted for by Wieser, +so far as a psychological causal theory is concerned) Wieser objects to +the term, "objective value" which he had used in the earlier article. He +prefers "volkswirtschaftlicher Wert." (This term is perhaps best +rendered "public economic value," for present purposes, to distinguish +it, on the one hand, from individual or personal value, and, on the +other, from the social economic value concept of the present writer. At +the same time, the connotation of a communistic or authoritive value +must not be read into the term. It is, in its formal and logical +aspects, really the most common of all the value notions, and may, best +of all perhaps, be translated simply "value," or "economic value," or +"absolute value." But for the present discussion, we shall call it +"public economic value.") This public economic value, in the case of +goods, is not a mere objective relation between a good and its +price-equivalent. It is a subjective (psychological) value, like +personal value. If one wishes to call it objective value, one is using +objective in the sense of the general subjective as distinguished from +the personal individual idiosyncracy (II, p. 502). The objective +exchange value of goods (here Wieser uses "objektiver Tauschwert" as the +equivalent of his "volkswirtschaftlicher Wert" above mentioned) is the +common subjective part of the individual valuations leaving out the +remainder of individual peculiarities ("der allgemein subjective Teil +der persoenlichen Wertschaetzungen mit Verschweigung des individual +eigenartig empfundenen Restes").[72] Wieser does not seem to me to think +out clearly the distinction between absolute and relative value in this +connection. He wishes to get something more fundamental than a mere +relation between goods and money; he wishes a psychological phenomenon. +He wishes to have a value of goods which can be set over against the +value of money, the two, in combination, determining prices. And yet, he +wishes somehow to get these out of the prices themselves. "We must seek +a concept of the public economic value of money which, to be sure, +proceeds from the general price-level (_Preisstand_), but which excludes +from its content everything that comes purely from the value of goods" +(II, 511). To the public economic value of money, however, Wieser gives +no independent definition. The definition runs in terms of the values of +the goods. "The value of money rises when the same inner values (_innere +Werte_) of commodities are expressed in lower prices; it falls, when +they are expressed in higher prices" (II, 511-12). "Inner value" of +goods is not defined, but I take it that Wieser uses it as meaning +essentially the same thing as the public economic value already +described--an absolute value. (_Cf._ the usage of Menger and von Mises, +_infra_, in this chapter, with respect to the terms, "inner" and "outer" +value.) The definition is not strictly circular, perhaps, but at least +it is pretty empty. Nothing appears to give the value of money, as +distinct from its purchasing power, an independent standing. The reason +for this will later appear. It should be noted, however, that the +definition is not in terms of prices or purchasing power. Prices might +remain unchanged, in Wieser's scheme, and yet the value of money sink, +if the inner values of goods should sink. + +The value of money, thus defined, is to be explained by marginal +utility. But money has no marginal utility of its own, it has no +subjective use-value, but only a subjective exchange value,--derived +from the use-value (marginal utility) of the commodity purchased with +the marginal dollar (II, 507-8). This subjective-exchange value of money +is the personal value of money, as distinguished from its public +economic value, and is the cause of the public economic value. The +personal value of money changes (1) with the volume of one's personal +income, (2) with the intensity of one's need for money, and (3) with +market prices. The personal value of money is directly influenced and +measured only in exchanges for consumption goods. Expenditures of other +kinds affect it only indirectly by leaving less for consumption +expenditures. The laborer always reckons with the personal value of +money, but not the business man, in his business calculations. As in the +case of goods, we pass from personal to public economic value (II, 509). +The personal value of money depends on the relation between an +individual's money income, and his real income, in terms of goods. The +public economic value of money depends on the money income of the +community as a whole, and its real income. (II, 516-18). Money income +grows faster than real income, through the extension of the money +economy. Money income is not, like real income, dependent on quantity. +The mere extension of the money economy increases the volume of money +income, lowers the personal value of money, lowers its public economic +value, and raises prices. Witness the effect on a rural community of +bringing it into the great market, where all costs are reckoned in money +and rising costs compel rising prices. Hence, there is a tendency for +the public economic value of money to sink, and this has been the +historical fact (I, II, 519-520.) + +Criticism of this theory is almost superfluous. There are elements in +Wieser's discussion, not here presented, which have very considerable +importance, and which will be presented in a later chapter when the +criticism of the quantity theory is taken up. Wieser deals some heavy +blows to the quantity theory. But his constructive doctrine presents the +clearest possible case of the Austrian circle. The value of money +depends, not on its subjective use-value, its own marginal utility--it +has none. The value of money depends on its subjective value in +exchange, the marginal utility of the goods which are exchanged for it. +But these depend on prices. And prices depend, in part, on the value of +money itself! This circle, present in every form of the Austrian theory +which seeks a causal explanation of value and prices by means of +marginal utility,[73] though often less obviously present, is here quite +glaring. The distinction between volume of money income and quantity of +money is, on the other hand, an important one, and will be emphasized +when the quantity theory is taken up.[74] One further point in Wieser's +doctrine calls for comment. It is strange indeed to find an Austrian +seeing in a rise in money costs a _cause_ of a general rise in prices. +The Austrian doctrine is rather that rising money costs are +_reflections_ of rising general prices. Wieser's doctrine that the +extension of the money economy to rural regions, compelling the farmer +to reckon all his costs in money and so to raise his prices, has been +adequately criticised by von Mises, who points out that Wieser sees only +half the phenomenon; that eggs and butter are, indeed, higher in price +in the rural region when it comes into contact with the city, but that +they are correspondingly lower in the city from the same cause. On the +other hand, the doctrine of costs is not the whole point in Wieser's +notion of the extension of the money economy as a cause of higher +prices, and we shall deal with the doctrine again, in a different +connection. + +By devitalizing the marginal utility theory, by stating it in such a way +that it makes no causal assertions, and in such a way that it leaves the +real value problem untouched, it is possible to free it from the circle +just pointed out. Schumpeter does so state it. + +Schumpeter's theory of value,[75] though he attributes it to +Boehm-Bawerk, seems to the present writer to be essentially different. +Boehm-Bawerk undertakes to explain the value (objective value in +exchange) of each good by its _own_ marginal utility to different +individuals, buyers and sellers of the good--indeed, by its marginal +utility to _four_ individuals, the two "marginal pairs."[76] He sees at +points that the prices of other goods are sometimes factors, making +marginal utility give way to "subjective value in exchange," as the +determinant of an individual's behavior toward a given good in the +market--as in his much discussed overcoat illustration.[77] But +Boehm-Bawerk never gets out of the circle which this reaction of the +market-prices on the individual subjective values involves. Schumpeter +seems to rise to a higher conspectus picture, which, in form, avoids the +circle. His picture is that of a vast equilibrium, in which, instead of +attributing the market value of each good to its own marginal utility, +you explain the exchange ratios[78] of every good to every other good, +all at once, by reference to a total situation: _given_ the number of +goods of each class, given the number of individuals in the market, +given the _distribution_ of each class of goods among the individuals, +given the utility-_curves_ (not marginal utilities) of each good to each +individual, an equilibrium will be reached, through trading, in which +ratios between marginal utilities of each kind of good to each +individual are inversely proportional to the abstract ratios (ratios of +exchange) between the same goods, each measured in its own unit. The +ratios are abstract ratios, between pure numbers, so far as the market +ratios are concerned; the ratios in the mind of each individual are +concrete ratios, between marginal utilities. The scheme, thus stated, +says nothing as to the _causal_ relation between marginal utility and +market ratios; it merely states certain _mathematical_ relations between +each individual system of marginal utilities on the one hand, and the +abstract market ratios on the other. By avoiding _assertions_ as to +causation, it avoids a causal circle. In such a situation, marginal +utilities and market ratios are, in reality, alike resultants, +_effects_, of the given quantities of goods, distribution of goods, +numbers of buyers and sellers, and individual utility-_curves_--not +_marginal_ utilities. To this picture, one may add--what Schumpeter does +not add--the curves showing time-preferences of each individual for each +sort of good, and (an element which Schumpeter does include) the curves +of _dis_-utility for the individuals who produce each kind of good. The +system, it may be noted, is as good a proof of _real cost_ doctrine as +it is of utility doctrine. + +Such a picture, I submit, avoids the circle which is presented in all +other formulations of the Austrian theory of value. I wish, however, to +indicate its limitations as a theory of value, and the impossibility of +any application of it to the problem of the value of money. (1) Its data +are inaccessible: nobody could possibly know all the utility-curves and +all the time-preference curves (and disutility of labor-curves, etc.) of +all goods to all individuals in, say, the United States. To explain +market ratios by utility-curves is a case of _ignotum per ignotius_, so +far as practical application is concerned. Moreover, the scheme is so +difficult to visualize that it is useless as a tool of thought--as one +will find who tries to think it through, without the aid of higher +mathematics, for ten goods, and ten persons, with unequal distribution +of wealth, and different utility curves, time-preference curves, and +disutility-curves for each kind of good to each individual. (2) The +scheme must assume smooth curves and infinitesimal increments in +consumption, which is a fiction so far as the individual psychology is +concerned. Without this assumption, the point-for-point correspondence +between individual and market ratios does not exist. It is only in +social-value curves, or in demand-curves in the big market (which are +social-value curves, expressed in money),[79] that you have, as a matter +of fact, the right to smooth out your curves. (3) The theory must assume +the frictionless static state, in which marginal adjustments are +perfectly accomplished, and equilibrium really reached. Without this +assumption, again the point-for-point inverse correspondence of market +ratios and individual ratios fails. But this makes it quite impossible +to apply the doctrine to any functional theory of the value of money, or +to bring money in any realistic way into the scheme. As will be shown +more fully in later chapters, money functions in bringing about just +the absence of friction which static theory assumes. That is what money +is _for_. The functional theory of money, therefore, cannot abstract +from friction and dynamic change.[80] It is, of course, possible, on +this scheme to pick out any one of the goods in the system, say the +1-1000th part of a horse, call it the "money-unit," and determine a set +of money-prices. These "money-prices" are already given in the scheme in +the ratios between the abstract numbers of this unit and the abstract +numbers of the units of all other goods. But this is meaningless, so far +as a theory of money is concerned. It abstracts entirely from the +_differences_ in _salability_[81] of goods, on which the theory of money +must rest. It gives us no clue to that part of the value of the +money-article which comes from its money-functions. + +(4) The theory has no bearing on the problems of supply and demand. +Demand-curves are curves, not of utility, but of money-prices. They are +concerned, not with a _system_ of ratios among goods in general, but +with the absolute money-prices of particular goods, one at a time. The +modern demand-curves and supply-curves, representing the demand and +supply doctrine first made precise by J. S. Mill,[82] are concerned with +the money-prices of particular goods, and the "equation of supply and +demand"--amount supplied and amount demanded--gives an equilibrium in +which only one price is determined. Austrian theory, in Boehm-Bawerk's +hands, and in the hands of practically all adherents of the Austrian +School, including Davenport,[83] has been offered as really bearing on +the explanation of demand, and as giving a psychological account and +explanation of the demand-curve. The scheme of Schumpeter has simply no +bearing at all on this vital point. The equilibrium picture in which +_all_ goods are involved supplies no data from which to construct any of +the magnitudes above or below the margin of the demand and supply-curves +of any given good. One reason why this is so will appear from the point +made with reference to "money-prices" in the preceding paragraph. For +Schumpeter's scheme, the significance of the article chosen as "money" +would be as much a problem as anything else, when the conditions are +laid down. It would vary in the process of reaching the equilibrium. Its +ratios with all other things would, thus, fluctuate until the +equilibrium was reached. But, as we have seen, in the chapter on "Supply +and Demand," curves of supply and demand must assume a fixed +significance of the money-unit. It may be further noticed, as marking +off Schumpeter's scheme from supply and demand analysis, that in +Schumpeter's scheme, the individual is the centre of interest, and his +reactions _toward all kinds of goods_ is emphasized; whereas in supply +and demand analysis, the _good_--one good--is the centre of interest, +and the price-offers streaming toward it from all kinds of individuals +is emphasized. The two bodies of doctrine are quite distinct. + +(5) The theory has no bearing on the explanation of entrepreneur +cost--money-outlay, "opportunity cost," alternative positive values, or +what not. It finds no place for the modern cost doctrine. It does not in +any way open the path to the Austrian theory of costs. Costs, for +Austrian theory, as, in general, for modern theory, are reflections of +_demand_ for the employment of the agents of production in alternative +uses. Thus, it costs a great deal to raise wheat in Illinois, because of +the rival demand for the land to produce corn. Labor costs are high in +ordinary manufacturing, because of the rival demand for labor in the +munitions factories, etc. As Schumpeter's theory can give no account of +the _demand_ for labor in the munitions factories, it follows that it +can give no account of the _cost_ of labor in the other factories. +Instead, indeed, of giving us the modern cost doctrine, we see +Schumpeter's scheme reviving the old _real cost_ doctrine, running in +terms of sacrifices in production.[84] + +(6) The foregoing paragraph gives emphasis to the point with which we +started, namely, that Schumpeter's theory is not a _causal_ theory, but +merely a theory which gives mathematical relations in a static picture. +For the general theory of the Austrians, this real cost doctrine is +anathema. Values are positive. The emphasis is put on positive wants, as +_causes_ which guide and motivate industry. The _clue_ to all values is +in the values of _consumption_ goods, which are in direct contact with +the utilities which are the source of value. From the values of +consumption goods, we _derive_ the values of production goods, labor, +etc., which are goods of "second, third and fourth _ranks_" and whose +values are merely reflected from the causal marginal utilities of the +consumption goods they are destined to create. None of this causation is +brought into Schumpeter's conspectus picture. On the contrary, with the +bringing in of disutility of production, we have the doctrine of the +earlier English School revived. The equilibrium picture is as good a +proof of the one theory as of the other. If we assume the utility-curves +constant, and allow the cost-curves to vary, then causation would be +initiated by the cost-curves.[85] + +(7) Such an equilibrium picture leaves untouched the vital question +which any theory must answer which means to be of practical use in +concrete situations: what are the real _variables_ in the situation, and +what factors are constant? What causes are _likely_ to produce changes +in market prices? The individual-utility curves, which in Austrian +theory are commonly treated as the only variables, except quantities of +goods,--in the strict static picture there are no variables at all!--are +really, when conceived of as individual, as growing out of the mental +processes of each individual separately, the most _constant_ factor in +the situation. For, on the principle of the inertia of large numbers, +each unit of which is moved by its own peculiar causes, changes in the +utility-curves of one man will be offset by opposite changes in the +utility-curves of another, and so the general system will remain much +where it was. Of course, if a rich man changes his curve, a poor man's +change will not offset it in the market, but this is to emphasize the +_distribution of wealth_ rather than the utility-curves. It is only when +you get changes of a sort that the individualistic psychology, and the +"pure economic" explanation factors, of the Austrians find no place for, +that you can predict a change in the general price-system. It is only +changes in fashion or mode, in general business confidence,[86] in moral +attitude toward this or the other sort of consumption or production, in +the distribution of wealth, changes in taxes and other laws--causes of a +general social character--that you can count on to produce important +changes in values. Of course, changes in the adequacies of supplies +would be taken account of on either interpretation. + +(8) The scheme under consideration gives no value concept which the +economist can make any particular use of. It gives only ratios between +marginal utilities in the mind of the same individual, and abstract +market ratios. It gives no _quantitative_ value, which can be attributed +to goods as a quality,[87] a homogeneous quality of wealth by means of +which diverse sorts of wealth may be compared, funded, etc. Such a +concept is, however, necessary for the economic analysis, and Schumpeter +is driven to creating substitutes for it of various sorts, notably +_Kaufkraft_ and _Kapital_. _Kaufkraft_, as Schumpeter uses the term, is +not derived from marginal utility, but is an abstraction from the idea +of money. It is not a quantity of money alone, nor even of money and +credit, but is a fund of "abstract power," which depends not alone on +the quantity of money and credit in which it is embodied, but also on +the prices of goods.[88] This _Kaufkraft_ is needed to give the causal +"steam," the "motivating power," which the social value concept +connotes, but which ratios in the market lack. Similarly, _Kapital_ is +conceived of as an agent, a dynamic force, distinguished from +accumulations of concrete productive instruments, by means of which the +entrepreneur gets control of land, labor and instrumental goods.[89] +Other functions of the quantitative value are shouldered on a +hard-worked and unusually defined concept, _Kredit_, which leads +Schumpeter into certain "heresies"[90] regarding credit, which are +mostly harmless in themselves, but which will arouse misunderstanding +and opposition. "_Praeter necessitatem entia non multiplicanda sunt_," +and the social value concept, which covers by inclusion the notion of +market ratio--market ratios being ratios between social values--and +which does all the work that Schumpeter attributes to _Kapital_ and +_Kaufkraft_, and most of the new work which he attributes to _Kredit_, +is to be preferred,[91] if only on grounds of intellectual economy. +"Capital" is then saved for more usual meanings, and economy in +terminology is also effected. Schumpeter also departs, as shown, from +the abstract market ratio notion in erecting a causal theory of value, +in which "marginal utility" is used as the equivalent of a quantitative +value, and is traced by the Austrian imputation process back to the +original factors of production. He even speaks of labor as having +"utility," whereas labor,[92] unless used in domestic service, has, not +utility, but only value. + +In the marginal utility scheme above outlined there is no place +for money, on the assumptions laid down. It is a scheme of barter +relations. The utilities which come into equilibrium are not +subjective-exchange-values, which, as Schumpeter, with Wieser, contends, +are the only subjective values money has, but are real subjective use +values--marginal utilities. The scheme, assuming as it does, perfect +exchangeability of all goods, with infinitesimal increments in +consumption, has no place for money. There really is no money service to +be performed. Schumpeter, indeed, speaks of money as a mere "Schleier," +which does not touch the essence of the phenomena, and such it is on his +assumptions. In a similar situation, Professor Irving Fisher gives up +the effort to find a psychological explanation of the value of +money,[93] and offers the quantity theory as a mechanical principle, +additional to the psychological barter scheme. Schumpeter, however, does +lip service still to the need for a psychological explanation. His +answer runs in Wieser's terms--indeed, he attributes it to Wieser. The +_Preis_ of money[94]--Schumpeter does not use Wieser's absolute value +concept, but lets his value of money run in purely relative terms--the +price of money in goods depends on the subjective value of money. This +subjective value of money rests on the experience of each individual in +making purchases--rests on the prices of consumption goods, determined +by the relation between real income and money income. The circle is as +clear as day. + +Ludwig von Mises sees this circle, and tries to avoid it. In von Mises +there seem to me to be very noteworthy clarity and power. His _Theorie +des Geldes und der Umlaufsmittel_ is an exceptionally excellent book. +Von Mises has a very wide knowledge of the literature of the theory of +money. He has a keen insight into the difficulties involved. He +recognizes fully that, so far, the utility school has failed to solve +the problem (119-120). His theory is as follows: Individual valuations +(93) constitute the basis of the objective exchange value of money. But +while for other goods, subjective use-value and subjective +exchange-value are different concepts, for money the two coincide, and +both rest on the objective value of money (94). This seems to be our old +circle in unmistakable form, but Mises thinks he has an escape, as will +later appear. No function of money is thinkable which does not rest on +its objective exchange value. The subjective value of money rests on the +subjective use-values of the goods for which it can be exchanged (95). +Money, at the beginning of its money-functioning, must have objective +exchange value from other causes than its money-function, but it can +remain valuable, even though these causes fall away, exclusively through +its function as general instrument of exchange (111). He gives no +argument in support of this contention, but refers with approval to +Wieser (_loc. cit._), and to Simmel (_Philosophie des Geldes_, 115ff.). +Hence, the important consequence that in the value of money of to-day a +historical component is contained. Herein is to be found a fundamental +contrast between the value of money and the values of other goods +(119-120.). The individual valuation of money rests on the objective +exchange value of money of _yesterday_. This individual value of money +is the explanation, on the money side, of the objective value of money +of to-day. Going back, step by step, you come ultimately to the +subjective use-value of the money-stuff in its non-monetary +employment--a temporal _regressus_. This opens the way to a theory of +the value of money based on marginal utility. This avoids the circle of +explaining the objective value of money of to-day by the subjective +exchange value of money of to-day, which in turn rests on the +contemporary objective value of money. + +I find this particularly interesting, since it employs a device which +had once suggested itself to me as a means of escape from the Austrian +circle, but which reflection led me to abandon. I have discussed the +whole matter in my _Social Value_, and therefore venture a quotation +from that book.[95] + +"How are we to get out of our circle:[96] The value of a good, A, +depends, in part, upon the value embodied in the goods, B, C, and D, +possessed by the persons for whom good A has 'utility,' and whose +'effective demand' is a _sine qua non_ of A's value? The most convenient +point of departure seems to be the simple situation which Wieser has +assumed in his _Natural Value._[97] Here the 'artificial' complications +due to private property and to the difference between rich and poor are +gone, and only 'marginal utility' is left as a regulator of values. But +what about value in a situation where there are differences in +'purchasing power'? How assimilate the one situation to the other? + +"A _temporal regressus_, back to the first piece of wealth, which, we +might assume, depended for its value solely upon the facts of utility +and scarcity, and the existence of which furnished the first 'purchasing +power' that upset the order of 'natural value,' might be interesting, +but certainly would not be convincing. In the first place, there is no +unbroken sequence of uninterrupted economic causation from that far away +hypothetical day to the present, in the course of which that original +quantity of value has exerted its influence. The present situation does +not differ from Wieser's situation simply in the fact that some, more +provident than others, have saved where others have consumed, have been +industrious where others have been idle, and so have accumulated a +surplus of value, which, used to back their desires, makes the wants of +the industrious and provident count for more than the wants of others. +And even if these were the only differences, it is to be noted that +private property has somehow crept in in the interval, for Wieser's was +a communistic society. And further, an emotion felt ten thousand years +ago could scarcely have any very direct or certain quantitative +connection with value in the market to-day. Even if there had been no +'disturbing factors' of a non-economic sort, the process of 'economic +causation' could not have carried a value so far. It is the living +emotion that counts! Values depend every moment upon the force of live +minds, and need to be constantly renewed. And there would have been, of +course, many 'non-economic' disturbances, wars and robberies, frauds and +benevolences, political and religious changes--a host of historical +occurrences affecting the weight of different elements in society in a +way that, by historical methods, it is impossible to treat +quantitatively.[98] + +"What is called for is, not a temporal _regressus_, which, starting with +an hypothesis, picks up abstractions by the way, and tries to synthesize +them into a concrete reality of to-day, but rather, a _logical analysis_ +of existing psychic forces, which shall abstract from the concrete +social situation the phases that are most significant. This method will +not give us the whole story either. Value will not be completely +explained by the phases we pick out. But then, we shall be aware of the +fact, and we shall know that the other phases are there, ready to be +picked out as they are needed for further refinement of the theory, as +new problems call for further refinement. And, indeed, we shall include +them in our theory, under a lump name, namely, the rest of the +'presuppositions' of value. + +"Our reason for choosing a logical analysis of existing psychic forces +instead of a temporal _regressus_--instead, even, of an accurate +historical study of the past--is a two-fold one: first, we wish to +cooerdinate the new factors we are to emphasize with factors already +recognized, and to emerge with a value concept which shall serve the +economists in the accustomed way--it is illogical to mix a logical +analysis with a temporal _regressus_. But, more fundamental than this +logical point, is this: the forces which have historically _begot_ a +social situation are not, necessarily, the forces which _sustain_ it. +The rule doubtless is that new institutions have to win their way +against an opposition which grows simply out of the fact that we are, +through mental inertia, wedded to what is old and familiar. We resist +the new _as_ the new. Even those who are most disposed to innovate are +still conservative, with reference to propaganda that they themselves +are not concerned with. The great mass of activities of all men, even +the most progressive, are rooted in habit, and resist change. When, +however, a new value has won its way, has become familiar and +established, the very forces which once opposed it now become its surest +support. Or, waiving this unreflecting inertia of society, as things +become actualized they are seen in new relations. What, prior to +experiment, we thought might harm us, we find beneficial after it has +been tried, and so support it--or the reverse may be true. The psychic +forces maintaining and controlling a social situation, therefore, are +not necessarily the ones which historically brought it into being."[99] + +Since the foregoing was written, I have found that another theorist, +Professor Alvin S. Johnson, had also given consideration to the same +idea, as a means of escape from the Austrian circle. Professor Johnson +refers to the notion briefly in his review of _Social Value_ (_Am. Econ. +Rev._, June, 1912, p. 322), holding that the doctrine is logically +tenable, though rejecting it on psychological grounds. "The value of a +thing newly created can be explained only with reference to values +antecedently existing." That there is a continuity in the value system, +as in the whole social-mental life of men, I should be the last to deny. +But it is not the antecedently existing values, _as_ antecedently +existing, that give value to the new piece of wealth. The antecedent +values function only as _persisting_, as _contemporary_ social forces. +We do not find the motivating power of existing values in the ashes of +burnt out desire! It seems to me very essential to distinguish the two +methods of approach to the problem. It is possible to state a historical +sequence--if you know it,--showing how values have historically come and +gone. But for an equilibrium picture, of the sort that our price theory +demands, where there is a mechanical balancing of contemporary factors +(as in Marshall's balls in the bowl illustration), such an account is of +no use. Existing social forces have their history. But, at a given +moment, they are what they are, and what they _were_ at a different time +adds no ounce of weight to the power they now exert. If a quantitative +account of value is called for--and price-theory is essentially +concerned with the measurement of values--we must bring measure and +measured into contemporary balance. The historical account is one +thing; the cross-section analysis is another. "Static theory" is a +mechanical abstraction from the organic cross-section picture, which, by +making it superficial, is able to make it exact. + +It seems to me that this distinction must be kept clear if progress in +the science is to be made. At every point, divergent conclusions are +reached if the two view-points are merged. The distinction between +statics and dynamics is, in a general way, the same as the distinction +here made between the historical and the cross-section view. It is no +answer to the Ricardian theory of land-rent for Carey to point out that +historically, in new countries, the uplands are cultivated first, and +the more fertile river-valleys later. Ricardo is talking about statics, +and Carey about dynamics. Carey does not answer Ricardo, because he is +talking about a different problem. The utility theorist especially has +no right to leave the static view-point. All the elementary laws on +which the utility theory is based are static laws. The law of satiety, +of diminishing utility, is a static law, and the utility theorists are +careful to point out that it holds only for an individual at a given +time. It rests on nerve fatigue. Give the nerve time to rest, and +utility does not sink. On the contrary, the dynamic law of wants is that +wants expand. As old wants are satisfied, new wants arise, so that, in +the course of time, _marginal_ utilities do not sink--the competition of +new wants forces up the margins of the old wants. Moreover, with time, +tastes change, habits are formed, and the same wants may grow more +intense--as in the case of olives or whiskey. All this has been seen by +the creators of the utility theory. Thus, Wieser: "The want as a whole +of course retains its strength so long as a man retains his health; +satisfaction does not weaken but rather stimulates it, by constantly +contributing to its development, and, particularly, by giving rise to a +desire for variety. It is otherwise with the separate sensations of the +want. These are narrowly limited both in point of time and in point of +matter. Anyone who has just taken a certain quantity of food of a +certain kind will not immediately have the same strength of desire for a +similar quantity. Within any single period of want every additional act +of satisfaction will be estimated less highly than a preceding one +obtained from a quantity of goods equal in kind and amount." (_Natural +Value_, p. 9.) A similar statement is in Taussig's _Principles_ (I, +124), "In such cases, however, the tastes of the purchasers may be said +to have changed in the interval. At any given stage of taste and +popularity, the principle of diminishing utility will apply." +Illustrations could be multiplied. + +It is true that _future_ marginal utilities come into the utility theory +scheme, but they come in, not as future utilities, but as "_present +worths_" of future utilities, or as "present anticipated feelings" in +Jevons' phrase[100] suffering a discount, usually, in the process. But I +am not aware of any writer among the founders of the utility school, who +has sought to bring past utilities into the scheme. The past is dead. +Its effects persist in the present only in present processes. A _memory_ +is a _present_ psychological fact. + +Consider further. Is it the prices of yesterday that determine the +subjective value of money to an individual, if the prices of yesterday +are different from the prices of to-day, _and the individual knows it_? +In so far as we have the clear, intelligent economic mind, seeking its +interests--and the marginal utility theory assumes this type of +mind--the tendency is to bring all the factors in the problem into the +present. If prices change slowly, so that the individual can count on +essentially the same situation to-day that he had yesterday, doubtless +he will not take the trouble to recast his value system. There is a +tremendous lot of trouble in bringing about, in the individual's mind, +the rational equilibration of values--trouble which the Austrian theory +commonly abstracts from, but which should be recognized in the analysis, +and accorded its own marginal significance in the scale. To throw the +emphasis on inertia, however, and to assume that men do not readjust +their margins to meet changed conditions, is to depart from the +fundamentals of the Austrian theory. If the price-situation is a rapidly +changing one, men do rapidly readjust their estimates of money. If money +is fluctuating rapidly in value--as, say, during a time when there is +depreciated paper money, whose future depends on military events, the +adjustments may be very rapid indeed. I quote the following from the +news columns of the _New York Times_, of April 4, 1914, p. 2: "Jaurez, +Mexico, Apr. 3.--After the hysterical outbursts last night that greeted +the news of the fall of Torreon, this city was preternaturally calm +to-day.... The silent gentleman with the dyed mustache who spins the +marble at the roulette wheel in the Jaurez Monte Carlo, conducted by +Villa's officers for the benefit of the rebel treasury, seemed the only +person who was not excited. When the crowd of players suddenly deserted +him on the sound of the bugle call of victory, he gave the marble +another whirl from sheer force of habit, but none returned.... In an +hour, however, play was faster and more furious than ever, for holders +of Constitutionalist money early realized that their currency had +suddenly increased in value, and that they were somewhat richer than +before." I do not question the fact, however, that men are slow in +making calculations, and that society is often unconscious of changed +conditions, and often readjusts less rapidly than occasion requires. +There is a vast deal of inertia, of blind habit, of custom, etc. But +emphasis on these factors is not marginal utility theory! Factors like +these are emphasized by a functional psychology, and by a social +psychology--not by an individualistic psychology which rests on the +assumption of rational calculation. It is not _past_ utilities that +explain present subjective values of money when these subjective values +are out of harmony with the present market facts, but rather _present_ +habits, present customs, present disinclination to readjust, etc. There +is a big difference, psychologically, between the mental processes +through which one arrived at one's present state of mind, and the +present state of mind itself. The original "commodity utility" of the +money metal, in the far away time before the money use affected its +value, is surely no longer a factor. Certainly not on the basis of an +individualistic psychology of the Austrian type. All the individuals who +experienced that original utility are long since dead! Not even memories +of the original utilities persist. + +When writing the passage in _Social Value_, quoted above, I did not +suppose that I was dealing with a notion that anyone else would ever +take seriously. My purpose in discussing it was chiefly to throw into +sharp relief the contrast between the historical and the cross-section +viewpoints, and to make clear that my own theory was based on analysis +of existing psychological forces. Since finding, however, that two +writers for whose views I have so much respect have independently +developed the same idea, and have taken it seriously, I have felt it +worth while to give it this extended consideration. + +Von Mises, like Wieser, needs an absolute value of money in his +thinking. He does not call the concept by that name, but, following +Menger[101] speaks of the "inner objective value of money" and the +"outer objective value of money." (Mises, p. 132.) The latter is the +purchasing power of money, a relative concept, exactly expressed in the +price-level. The inner objective value of money is designed to cover the +causes of changes in prices which originate on the money-side of the +price relation alone.[102] This inner objective value of money performs +the same logical function in the theory of money that the absolute +social value concept of the present writer does, even though the +psychological explanation lying behind it is very different. + +Von Mises considers the quantity theory at length, noting a number of +defects in it, chief of which is the fact that it has no psychological +theory of value behind it, that it does not account for the _existence_ +of the value of money, and at most gives a law for _changes_ in a value +whose existence is taken for granted. The details of this criticism, +however, need not be here presented. The quantity theory is to be +treated in detail at a later point of our study. + +The writer who has most definitely stated the relation of utility to the +functions of money, is David Kinley (_Money_, ch. viii). He would +explain the value of money, by (a) its utility as a commodity, and (b) +its utility in the money-employment, the employments reaching a marginal +equilibrium. The utility of the money metal in its commodity use calls +for no analysis. But what is meant by the utility of money as money? +Where the writers so far discussed have denied that money as money has +any utility, Dean Kinley finds a utility in the money-function itself: +money facilitates exchange, and exchange, by transferring goods from +those who do not need them to those who do need them, increases the +utility of those goods. Money, as money, thus produces utility.[103] The +utility of money is the extra utility which comes into being by virtue +of its use, as compared with what would exist in a state of barter. The +marginal utility of money is the utility of money in the marginal +exchange--the exchange which would be effected by means of barter if +money were any more difficult to procure. The marginal utility of money, +then, is not the whole of the marginal utility of the good for which it +is exchanged, but rather is the differential part of that utility which +is created by means of the use of money in exchange. The marginal +utility of money, thus, appears in separate services of money. Money is +a durable good, which gives forth its services bit by bit. The value of +money is based on these separate services, it is "the capitalized value +of the service rendered in the marginal exchange." + +This conception is, it seems to me, much truer to the spirit of the +general marginal utility theory than the theories of Wieser, Schumpeter, +or von Mises. If the utility theory at large were valid, the application +here would be valid. To Dean Kinley's conception of a marginal utility +of the money service, I offer simply the objections which I offer to the +utility theory at large--objections indicated in what has gone before, +and in my _Social Value_. The application of the capitalization theory +to the value of money I have already discussed in a previous chapter, +and shall again consider in the chapter on "The Functions of Money." + +I conclude that the marginal utility theory has not solved the problem +of the value of money. The reason, however, is simply that it has not +solved the general problem of value. The marginal utility theory, in so +far as it seeks to make marginal utility the _cause_ of value, is +circular. The effect of a given man's wants upon the value of the goods +he wants depends, not on the marginal intensity of those wants alone--a +penniless prisoner may desire a marble palace ever so intensely without +affecting its value--but also upon the value of the wealth possessed by +the individual who experiences the wants. But this is to explain value, +not by marginal utility alone, but by value as well--a circle. Or, if we +leave the standpoint of absolute values, and look at the matter in terms +of prices, the same situation presents itself. The price which an +individual is willing to pay for a good depends on his income,--which +commonly rests on prices--and on the prices he has to pay for other +goods which enter into his budget. His price-offer, expressive of the +marginal utility of a horse to him, is made with consideration of the +price of a buggy, of harness, of feed, of the wages of the servant who +cares for the horse, the price of a barn, and of the other things that +the possession of the horse involves. And not these alone: less +immediately, but still vitally, his whole budget enters. Higher prices +for theatre tickets or for food or for clothing will reduce his +price-offer for a horse. Further, his price-offer for the horse will be +tremendously influenced by his opinion as to the permanent market price +of horses. He will not be willing to pay a price for the horse which he +cannot expect to get back if he should decide later to sell the horse. +The direct influence of market price on individual demand-price is very +great indeed. Marginal utility (subjective use-value) very frequently +gives place to subjective value-in-exchange in the determination of an +individual's marginal demand-price--which means that the market controls +the individual instead of the individual controlling the market. With +sellers, it is _generally_ subjective-exchange-value, rather than +marginal utility, that determines supply-price-offer. The sellers, in so +far as they are producers, have little need for the great mass of their +stocks. They will sell them, rather than keep them, at almost any price. +The reason they ask high prices is simply that they think the market +will give them the high prices. The individual price-offers, in the +aggregate therefore, presuppose the whole market situation--presuppose a +general value and price system already fixed and determined. Each +individual price offer presupposes many other prices, though not, of +course, the whole market. Since, then, much of the market situation is +assumed in the determination of each particular price, by the Austrian +method, it is obviously circular reasoning to think that the +determination of each price separately by this method will supply data +for a summary of the market situation as a whole. In the one form in +which the utility theory avoids a circle,--that presented by Schumpeter, +and discussed in an earlier part of this chapter--it is not a causal +theory. Marginal utility is not a cause of market prices, but rather, +marginal utilities and market prices are alike resultants, effects, of +more fundamental factors. No writer[104] who has presented the utility +theory in this form has tried to apply it to the value of money, and +even if it could be so applied, it would not give a causal explanation +of the value of money in terms of marginal utility. In most of the +efforts to apply the utility theory to money, the circle becomes so +obvious that one marvels that able theorists should for a moment fail to +see it. + + + + + +PART II. THE QUANTITY THEORY + + + + +CHAPTER VI + +THE QUANTITY THEORY OF PRICES. INTRODUCTION + + +The quantity theory, in its usual formulations, is a theory, not of the +value of money, in the absolute sense of value, but of the general +price-level, the average price of goods exchanged for money. It is not a +psychological theory. It does not deal with psychological quantities, or +psychological forces. It is a mechanical theory, concerned simply with +quantities, and the relations between them. The essence of the quantity +theory comes out in the following brief statement: given a number of +units of money; given a number of units of goods to be exchanged; assume +these two numbers to be independent[105] of each other; assume all the +goods to be exchanged for all the money; then the average price will be +a simple function of the quantities of goods and of money respectively, +such that an increase in the amount of money will increase the average +price per unit of goods proportionately, if goods remain unchanged in +amount, or an increase in goods will lower the price per unit +proportionately, money being assumed to remain unchanged in amount. The +qualification is commonly added that if goods have to be exchanged more +than once, the effect is the same on prices as if there were an added +number of goods equal to the added number of exchanges, and that if +money is used more than once in exchanging a given number of goods, the +effect is the same as if there were proportionately more money. Both +quantity of goods and quantity of money are commonly defined as actual +quantity multiplied by "rapidity of circulation." Rapidity of +circulation, however, for both money and goods, is commonly thought of +as a constant, so that the original formula remains unaffected by the +qualification, so far as a prediction as to the effect of increase or +decrease of money or goods on prices is concerned. Involved in the +quantity theory, and explicitly stated by many writers, is the doctrine +that the substance of which money is made is irrelevant, that it is the +number, and not the quality or size of the money-units that counts. "In +short, the quantity theory asserts that (provided velocity of +circulation and volume of trade are unchanged) if we increase the +_number_ of dollars, whether by renaming coins, or by debasing coins, or +by increasing coinage, or by any other means, prices will be increased +in the same proportion. It is the number, and not the weight, that is +essential. This fact needs great emphasis. It is a fact which +differentiates money from all other goods and explains the peculiar +manner in which its purchasing power is related to other goods. Sugar, +for instance, has a specific desirability dependent on its quantity in +pounds. Money has no such quality. The value of sugar depends on its +_actual quantity_. If the quantity of sugar is changed from 1,000,000 +pounds to 1,000,000 hundredweight, it does not follow that a +hundredweight will have the value previously possessed by a pound. But +if money in circulation is changed from 1,000,000 units of one weight to +1,000,000 units of another weight, the value of each unit will remain +unchanged." (Irving Fisher, _Purchasing Power of Money_, pp. 31-32.) To +the same effect is Nicholson's exposition, in which the money is assumed +to consist of dodo-bones, the most useless substance that Nicholson +could think of. For the quantity theory, prices are determined by the +_numbers_ of goods and dollars that are to be exchanged for one another, +and not by the _values_ of the goods and dollars;--indeed, for the +quantity theory, "value" commonly has no meaning apart from the prices +which are supposed to be adequately explained by the mechanical +relations of numbers. + +In the critical study which follows, virtually every doctrine and every +assumption of this preliminary statement will be challenged. I shall +deny, first, that the quantity of goods to be exchanged and the quantity +of money to be exchanged for the goods, are independent quantities, +maintaining, rather, that an increase in either of them tends normally +to be accompanied by an increase in the other. Quantity of goods and +quantity of money _exchanged_ are not simple physical stocks, given +data. Rather, they are consequences of human choices and human +relationships, and vary from a large number of highly complex +psychological causes, many of which are common to both. I shall deny, +second, that "rapidity of circulation," either of goods or of money, is +a simple constant, independent of quantity of goods or of quantity of +money. I shall maintain, rather, that rapidity of circulation of money +is a phenomenon which calls for psychological explanation: that the +rapidity of money really means the _activities of men_; that these +activities are complex, and obey no simple law; that instead of being an +independent factor, constant, in the situation, the rapidity of +circulation of money is bound up with the quantity of money, the +quantity of goods to be exchanged, the rapidity of circulation of goods, +and the prices of the goods, and that the rapidity of circulation of +goods is likewise causally dependent on the factors named--or better, on +the causes which control them; that rapidity of circulation, whether of +money or of goods, is not a causal factor independent of prices, but +rather in part depends on prices. In the third place, I deny the +doctrine that the question as to _what_ the money-unit is made of is +irrelevant. On the contrary, I shall maintain that the _quality_ of +money, rather than its quantity, is the determining factor. I shall not +maintain that only money made of or redeemable in valuable bullion can +circulate, nor shall I maintain that the value of money depends wholly +on the value of its bullion content when money is made of valuable +metal. I recognize that value can come from other sources. But I shall +maintain that value from some source other than the monetary employment +is an essential precondition of the monetary employment, even though +recognizing that that monetary employment may, in a way later to be +analyzed, add to the original value of the money. The doctrine that only +physical quantities, or abstract numbers, of goods are relevant I shall +challenge especially, maintaining, on the contrary, that the +psychological significances, the values, of goods are the really +important thing, so that an increase in the number of one sort of goods +may have a very different effect on the average of prices from an +increase of the same number of units of some other good, and so that an +increase in the number of goods exchanged under one set of conditions +may have a very different effect on prices--or may be accompanied by a +very different movement in prices, for the question of causal relations +is a complicated one--from the change in prices that might accompany the +same increase in the amount exchanged of same goods under other +circumstances. Finally, the doctrine of the quantity theory that the +price-level is a passive result of the other factors named: quantities +of goods and money, and their respective velocities; that prices cannot +initiate a change in the situation, will also be challenged. I shall +undertake to show that the first change in the situation may appear in +prices themselves, and that the quantities of goods exchanged, and of +money, and their velocities, may then be altered to correspond with the +change in prices. + +I shall further maintain, as against the whole spirit of the quantity +theory, that it does not seize hold of essentials in the causes lying +behind prices. I shall contend that the factors with which it deals, +instead of being independent _foci_ to which converge the causes +governing the price-level, and through which causation flows in one +direction, are really not true "factors" at all, but rather are blanket +names for highly complex and heterogeneous groups of facts concerning +which few general statements are possible. Quantity of goods exchanged, +for example, may be in some of its parts caused by rising prices, in +others of its parts may be causing falling prices and is chiefly caused +by _fluctuating_ prices. The net change in prices in this case is not +the result of any one movement from "quantity of goods" as a whole. +Changes in the price-level are not one result, but rather, are the +mathematician's average of many changes, due to a host of causes, in +many individual prices. The quantity theory is an effort to simplify +phenomena highly complex. Of course, the simplification of complex +phenomena in thought is a laudable scientific goal, but when the +simplification goes so far as to group things only superficially +related, and to leave out the really vital elements, it is worthless. +Value theory, with all the value left out, is like Hamlet with no actor +for the title role. Simplification in the explanation of general prices +has gone as far as we can legitimately take it when we seek to summarize +all the factors involved in the _foci_ of, on the one hand, the value of +money, and, on the other hand, the values of the particular goods. The +general price-level is an average of many concrete prices. Each of these +individual prices has a concrete causal explanation. The _general_ +price-level has, not a few simple causes, but an infinite host of +causes. Indeed, the general price-level has no real existence. It is a +convenient mathematical concept, by means of which we may summarize the +multitude of concrete facts. It is useful as a device for measuring +changes in the value of money, on the assumption that changes in the +values of goods neutralize one another. This assumption is never +strictly true, and often is demonstrably false. The general price-level +is neither a cause nor a result. Particular prices, in general, are +results of two causes, namely, the value of money and the value of the +good in question, and particular prices may then become causes, changing +the quantity of money involved in a given set of exchanges. Neither +quantity of money, nor quantity of goods exchanged, nor rapidity of +circulation, nor general price-level is a simple, homogeneous quantity, +obeying definite laws. + +I shall also undertake to show that in many important cases the quantity +theory leads to conclusions regarding the price-level which contradict +other laws of prices, notably the capitalization theory, the cost of +production doctrine, and the law of supply and demand. I have previously +pointed out that these three doctrines are inapplicable to the problem +of the value of money itself. On the assumption of a value of money, +however,--using value in the absolute sense--they are applicable to the +problem of prices, and, since the price-level is merely an average of +particular prices, they should be applicable to the problem of the +price-level also. It will be shown, in the course of the criticism which +follows, first that the quantity theory contradicts each of these +doctrines, in certain situations, and second, that in these cases, the +conclusions based on the cost theory, the supply and demand theory, and +the capitalization theory are right, and the conclusions based on the +quantity theory are wrong. It has been maintained by certain writers, as +Knut Wicksell[106] and Irving Fisher,[107] that cost of production and +supply and demand are inapplicable to the problem of the general +price-level. I shall maintain the contrary, holding that while these +doctrines are inapplicable to the problem of the _value_ of money, they +_are_ applicable to the problem of general prices, on the assumption of +a fixed value of money. By the value of money I mean its absolute[108] +value, and not--what the quantity theorists commonly mean--its +"purchasing power," or the "reciprocal of the price-level." + +I shall undertake to show that no sound conclusion reached on the basis +of quantity theory reasoning is the peculiar property of the quantity +theory school; that every valid conclusion which may be based on the +quantity theory may also be deduced from the theory maintained in this +book, and, indeed, that most of them may be deduced from several other +theories of money, notably the commodity or bullionist theory. I shall +show a number of false and misleading doctrines which logically spring +from the quantity theory, and shall undertake to show that the quantity +theory fails to give an adequate basis for several important parts of +the theory of money, among them Gresham's Law, the theory of +international gold movements, and the theory of elastic bank-notes and +deposit-currency. + +So much for the theses to be maintained. The detailed proof of these +contentions will best be given in connection with a critical account of +various versions of quantity theory doctrine. Attention will be given in +this summary to the expositions of Nicholson, Mill, Taussig, and +Kemmerer, and very special attention to I. Fisher, though some other +writers will also be taken into account. + + + + +CHAPTER VII + +DODO-BONES + + +Must money have value from some source outside its money-functions? It +is a part of the quantity theory that this is unnecessary. I have cited, +in the preceding chapter, Irving Fisher and J. S. Nicholson to this +effect. Nicholson's statement is interesting and picturesque, exhibiting +the quantity theory in all the nakedness of its poverty, and I shall +present it at some length. "For simplicity," to isolate his phenomenon, +he assumes a hypothetical market, in which the following conditions +obtain: (1) No exchanges are to be made unless money (which he assumes +to consist of counters of a certain size made of dodo-bones) actually +passes from hand to hand. No credit or barter. (2) The money is to be +regarded as of no use whatever except to effect exchanges, so that it +will not be withheld for hoarding, _i. e._, will be actually in +circulation. (3) There are ten traders in the market, each with one kind +of commodity and no money, and one trader with all the money (one +hundred pieces), and no commodities. Further, let this moneyed man put +an equal estimation on all the commodities. Now let the market be opened +according to the rules laid down; then all the money will be offered +against all the goods, and, every article being assumed of equal value, +the price given for each article will be ten pieces, and the general +level of prices will be ten. It is perfectly clear that, under these +suppositions, if the amount of money had been one thousand pieces, the +price-level would have been one hundred per article, etc. Under these +very rigid assumptions, then, it is obvious that the value of money +varies exactly and inversely with the amount put into circulation.--The +rapidity of circulation he regards as cooerdinate, in fixing the +price-level, with the volume of money. To illustrate this, he assumes +again his hypothetical market, and "dodo-bones," assuming as before that +one merchant has all the money (one hundred pieces), and that ten have +commodities of equal value. Instead, however, of the merchant with the +money desiring all the commodities equally, he is made to desire only +the whole of that of trader one, who in turn desires the whole of number +two's stock; and so on to the ninth merchant, who wants the commodity of +number ten, _who wants the dodo-bones_. In this case, each article will +be exchanged only once, as formerly, but the money will change hands ten +times, and the price of each article will be one hundred instead of ten. +"We now see that, under these circumstances, with the same quantity of +money, and the same volume of transactions, the level of prices is ten +times as great as before, and the reason is that every piece of money is +used ten times instead of once." Whence he concludes: "The effect on +prices must be the same when, in effecting transactions, one piece of +money is used ten times as when ten pieces of money are used once."[109] + +Ricardo, too, expresses the dodo-bone theory very explicitly. "If the +state charges a seigniorage for coinage, the coined piece will generally +exceed the value of the uncoined piece of metal by the whole +seigniorage, because it will require a greater quantity of labour, or, +which is the same thing, the value of the produce of a greater quantity +of labour, to procure it. + +"While the state alone coins, there can be no limit to this charge of +seigniorage; for, by limiting the quantity of the coin, it can be raised +to any conceivable value. It is on this principle that paper money +circulates; the whole charge for paper money may be considered a +seigniorage. Though it has no intrinsic value, yet, by limiting its +quantity, its value is as great as an equal denomination of coin, or of +bullion in that coin."[110] + +Would the dodo-bones circulate? Nicholson chose the illustration to +throw into the sharpest relief the absence of any value from a +non-monetary employment. Nobody has any use for them as dodo-bones. What +economic force is there, then, to make them circulate? Nicholson says +nothing about an _agreement_ among the traders, _assigning_ a +significance[111] to the dodo-bones, so that they might function in the +same way that poker chips do--indeed, any such notion would vitiate his +illustration, for he proposes to explain an adjustment of prices by +natural economic laws. Why then, will any of the traders give up his +valuable commodities for the worthless dodo-bones? Will you say that he +will take them, not because he wants them himself, but because he knows +that others will take them from him? But why would the others want them? +Because they in turn can unload them on still others? But this seems a +plain case of the vicious circle. It is, in effect, saying that the +dodo-bones will circulate because they will circulate. A will take them +because B will take them; B will take them because C will take them, C +because ... N will take them; N takes them because A will take +them.[112] I do not deny that if the traders used the dodo-bones as +counters, agreeing that such dodo-bones should represent some other +commodity chosen as a standard of values, that the dodo-bones would +circulate. But, in that case, they would be, not primary, +self-sustaining money, but merely representative, or token money. And +just here let me lay down two general propositions[113] respecting the +two main functions of money: to serve as a standard, or common measure, +of values, the article chosen must, as such, be valuable. The thing +measured must be either a fraction or a multiple of the unit of +measurement. But this quantitative relation can exist only between +_homogeneous_ things. The standard, or measure, of values, then, must be +like the commodities whose values it is to measure, at least to the +extent of having _value_.[114] The second proposition is respecting the +medium of exchange. The medium of exchange must also have value, or else +be a representative of something which has value. There can be no +exchange, in the economic sense--I abstract from disguised benevolences, +accidents, and frauds--without a _quid pro quo_, without value balancing +value, at least roughly, in the process. Now when it is remembered that +the intervention of the medium of exchange, taking the place of barter, +really breaks up a single exchange under the barter system into two or +more independent exchanges, and that the medium of exchange is actually +received in exchange for valuable commodities, it follows clearly that +the medium of exchange must either have value itself, or else represent +that which has value. These two propositions seem almost too obvious to +require the statement, but they contradict the quantity theory, and they +are not, on the surface, reconcilable with certain facts in the history +of inconvertible paper money. It is necessary, therefore, to state +them, and to examine further some of the phenomena which seem to +contradict them. If they are true, Nicholson's dodo-bones will perform +neither of the primary functions of money. They have no value, +_per se_--they cannot, then, measure values; they are neither valuable +nor titles to valuable things--they are not _quid pro quo_ in exchange, +and will not circulate. + +I shall not pause long to discuss the doctrine that money needs no value +itself, because it is really a sort of title to, or claim on, or +representative of, goods in general. The notion, first, would not pass a +lawyer's scrutiny. There are no such indefinite legal rights. A system +of legally fixed prices, with a socialistic organization of society, +would be necessary to give it definiteness--and in such a situation +there would be no room for a quantity theory of prices! Economic goods, +as distinct from money, are not generally "fungible" to the extent that +would make them indifferent objects of legal rights. Besides, whether or +not the thing is logically thinkable, it is legally false. Legal factors +enter into the economic value of money, as will later be shown, but it +is economic, and not legal, value, which makes money circulate. +Helfferich has taken the trouble to give the notion of money as a mere +title to things in general a somewhat more fundamental analysis, and I +would refer the reader who is not satisfied by the foregoing on this +point to his discussion.[115] + +I wish to make very clear precisely how much I mean by the foregoing +argument that circular reasoning is involved in saying that A will take +the dodo-bones because B will take them. The same question arises for B, +and for the others. The real question is as to the cause for any general +practice of the sort. Why should A _suppose_ that B will take them? +What could bring about such a system of social relations that a general +expectation of this sort could arise? + +Kemmerer undertakes to give an answer in a hypothetical case by the +following ingenious assumption (_Money and Credit Instruments_, p. 11): +the money consists of an article which formerly had a high commodity +value, which has lately entirely disappeared, but the money continues to +circulate, through the influence of custom, and because of the demand +for a medium of exchange. + +In this illustration Kemmerer recognizes the historical fact that money +has originated from some commodity which had value because of its +significance as a commodity. Historically, a great many different +commodities have served, and gold and silver finally emerged victors for +reasons which need not just now concern us. These historical facts, +coupled with the idea that value is, essentially, "something +physical,"[116] or coupled with the notion that value arises only from +marginal utility, or from labor, have been accepted by the Commodity or +Metallist School as sufficient proof that standard money is only +possible when made of some valuable commodity. Professor Laughlin seems +to think of the whole thing as depending on the value of gold bullion, +and to recognize the money-employment as a factor in affecting the value +of money only in so far as it draws gold away from the arts, and so +raises its value there by lessening the supply.[117] If money originated +in a commodity, how is it possible for the commodity value to be +withdrawn, and for money still to retain its value? + +This brings us to a question I have raised before, namely, whether the +genetic, or historical account of a social situation, and the +cross-section analysis of the same situation, necessarily agree.[118] Is +it possible that when a commodity basis was necessary to start the +thing, and when even in the modern world gold bullion, interconvertible +with gold coin, remains the ultimate basis of the money-systems of all +great commercial peoples, that you could withdraw the commodity support +and keep money unchanged in value? Or could you even have any value left +at all? Now in answer, I propose to admit the possibility of so doing. +The forces which a cross-section analysis reveals are not necessarily +identical with those which a theory of origins sets forth. Once the +thing is set going, the forces of inertia favor it. A new theory, fixed +in the minds of the people, say the quantity theory itself, might give +them such confidence in their money that its value might be maintained. +A fiat of the government, making the money legal tender, supplemented by +the loyalty of the people, might keep up its value. I think there is +reason to believe that this is a source of no little importance of value +for the German paper money to-day, and, to a less extent, of the notes +of the _Banque de France_. All these possibilities I admit. Value is not +physical, but psychological. And the form of value with which we are +here concerned, economic value _par excellence_, is a phenomenon of +social, rather than individual psychology. Many and complex are the +psychical factors lying behind it. Belief, custom, law, patriotism, +particularly a network of legal relationships growing out of contracts +expressed in terms of the money in question, the policy of the state as +to receiving the money for public dues, the influence of a set of +customary or legally prescribed prices, which tie the value of money to +a certain extent to the values of goods--factors of this character can +add to the value of money, and can, conceivably, even sustain it when +the original source of value is gone. Social economic value does not +rest on marginal utility. In general, utility is essential, as one of +many conditions, before value can exist, even though the intensity of +the marginal want served by a good bears no definite relation to its +value. But in the case of the value of a money of the sort here +considered, marginal utility is in no sense a cause of the value. +Rather, the marginal utility[119] of such money to an individual is +wholly a reflection of its social value, and changes when that social +value changes. It is quite consistent with the general theory of +economic value which I have set forth in _Social Value_, for me to admit +possibilities of this kind. The value of money in such a case has become +divorced from its original presuppositions. The paper, originally +resting on a commodity basis, or the coins originally valued because +they could be transformed into non-monetary objects of value, have +become objects of value in themselves. Analogous phenomena are common +enough in the general field of values, and are less common in the field +of economic values proper than one might suppose. Thus, most moral +values tend to become independent of their presuppositions. Moral values +of modes of conduct have commonly arisen because those modes of conduct +were, or were supposed to be, advantageous in furthering other ends. +Morality, in its essence, is _teleogical_. Yet so far have the moral +ideals become ends in themselves that it is possible to have great +thinkers, like Kant and Fichte, setting them up as eternal and +unchangeable categorical imperatives, regardless of consequences. Thus +Fichte declares, "I would not tell a lie to save the universe from +destruction." Older still is the dictum, "_Fiat justitia, ruat coelum._" +Yet truth and justice, in the history of morals, and, in the view of +most moral thinkers to-day, are of value primarily because they tend to +preserve the universe from destruction, and would never have become +morally valuable had they had the other tendency! Legal values manifest +this tendency even more--one needs only to point to our vast body of +technical rules of procedure in criminal cases, which persist long after +their original function is gone, and after they have become highly +pernicious from the standpoint of the ends originally aimed at. In the +sphere of the individual psychology the phenomenon is very common. The +miser's love for money is a classical example. The housewife who so +exalts the cleanliness of her home that the home becomes an unhappy +place in which to live, is an often-described type. The man who retires +from business that he may enjoy the gains for the sake of which he +entered business often finds that the business has become a thing of +value in itself, and longs to be back in the harness, while many men, +long after economic activity is no longer necessary, continue the +struggle for its own sake. Activities arise to realize values. The value +of the activity is derived from the value aimed at. But consciousness is +economical, and memory is short. The activities become habits. The +habits gather about themselves new psychological reactions. The +interruption of habitual activities is distasteful. Life in all its +phases tends to go on of its own momentum. The activities tend to become +objects of value in themselves, whether or not their original _raison +d'etre_ persist. In both the social and the individual sphere, apart +from blind inertia and mechanical habit, active interests tend to +perpetuate the old activities, whose _raison d'etre_ is gone. The judge +who continues to apply the outgrown absurdities of adjective law may do +it from timidity or from being too lazy to think out the new problems +whose solution must precede readjustment to present social needs, but +the criminal lawyer who can free his guilty client by means of these +technicalities has an active interest in their perpetuation. The +individual who would readjust his conduct in the light of changed +interests finds that active opposition is met in the emotional +accompaniment of the old habits. The economic society may wish to be +free from a money whose original value is gone, but there is a powerful +debtor interest which approves of that money, and whose support tends to +maintain its value. + +All these possibilities I admit. My own theory of value, which finds the +roots of economic value ramifying through the total social psychological +situation, rather than in utility or labor-pain alone, involves +possibilities like these. But--and this is a point I wish especially to +stress--we are out of the field of mechanics, and in the field of social +psychology, when we undertake to explain the value of money that way. No +longer is there any mathematical necessity about the matter. There is no +such _a priori_ simplicity as the quantity theory deals with. Factors +like these might maintain the value of money for a time, and then wane. +These factors might vary in intensity from day to day, with changing +political or other events, leading the value of money to change from day +to day, quite irrespective of changes in its quantity.[120] In so far as +you have a people ignorant of the nature of money and of monetary +problems, a people in the bonds of custom, with slightly developed +commercial life, whose economic activities run in familiar grooves +unreflectively, you will most nearly approximate a situation like that +which Professor Kemmerer assumes. But that means that what might be true +in India, or to a less degree in Austria--countries to which the +quantity theorists are accustomed to refer--need not at all be true in +the United States. Here everybody was talking about the theory of money +in 1896--not necessarily very intelligently!--and here, moreover, such +phrases as "good as gold," and propositions like that which came from +Mr. J. P. Morgan in his testimony before the Pujo Committee that "gold +is money, and nothing else," would seem to indicate that a very great +part of our people might utterly distrust such a money as Professor +Kemmerer describes. The banker's tendency to look behind for the +security, to test things out, to seek to get to bed-rock in business +affairs, holds with a great many people. An overemphasis on this is +responsible for the doctrine of Scott[121] and Laughlin[122] that the +sole source of the value of inconvertible paper money is the prospect of +redemption, and that inconvertible paper money differs from gold in +value by an amount which exactly equals the discount at the prevailing +rate of interest, with allowance for risk, for the period during which +people expect the paper money to remain unredeemed. We have not the +banker's psychology to any such extent as that. Apart from the fact that +the money function adds to the value of money, under certain +circumstances,--a point to be elaborated shortly--other, non-rational +factors, contagions of depression and enthusiasm, patriotic support, +"gold market" manipulations, etc., entered to break the working of the +credit theory of paper money as applied to the American Greenbacks. I +may here express the opinion that the credit theory is the fundamental +principle in the explanation of the value of the Greenbacks, however. +But we have not the banker's psychology to any such extent as the +extreme forms of that theory would assume. "Uncle Sam's money is good +enough for me," is a phrase I have heard from the Populists,--who, by +the way, were pretty good quantity theorists! "The government is behind +it." There are plenty of men for whom that assurance would be enough. +Indeed, the general notion that in some way, not specified, perhaps not +yet known to anybody, the government will do what is necessary to +maintain the value of its money is a ground which might well influence +even the most sophisticated banker. I think such a general confidence in +the English government has clearly been a factor in the price of +Sterling exchange since the balance of trade turned so overwhelmingly +against England in the present War.[123] Our monetary history, I may +add, has been in considerable measure a struggle between these two +opposing psychological reactions on that point. The utter breakdown of +the _fiat_ theory came in Rhode Island, and in connection with the +Continental Currency, in the days before the Constitution was adopted. +On the other hand, I do not believe that those who put a banker inside +every one of us can prove that their principle has been a complete +explanation at any stage of our monetary history. But clearly +considerations like these take away all mathematical certainty from the +matter. + +The foregoing analysis makes clear, I trust, that the notion that the +money function alone can make an otherwise valueless money circulate is +untenable. There must be value from other sources as well. All that is +conceded is that there need not be a physical commodity as the basis of +the money. Value is not necessarily connected with a physical commodity. + +There is a disposition on the part of many quantity theorists to beg the +question at the outset, to assume money as circulating, without +realizing how much this assumption involves. The assumption involves the +further assumption that there are _causes_ for the circulation of money. +But the same causes which make money circulate will also be factors in +the determination of the _terms_ on which it circulates, _i. e._, the +prices. To seek then, by a new principle, the quantity theory, to +explain these prices without reference to these causes, is a remarkable +procedure. There is sometimes a disposition to do the thing quite simply +indeed: define money as the circulating medium, and, _by definition_, +you have it circulating! A rather striking case of this, which is either +tautology or circular reasoning, appears in Fisher's _Purchasing Power +of Money_ (p. 129): "Take the case, for instance, of paper money. So +long as it has the _distinctive characteristic of money,--general +acceptability at its legal value_,--and is limited in quantity, its +value will ordinarily be equal to that of its legal equivalent in gold." +(Italics mine.) + +It is not quite easy to construct, even ideally, a social psychology +which would perfectly fit the quantity theory. One would have to assume +that money circulates purely from habit, without any present _reason_ at +all. The assumption must be that the economic life runs in steady +grooves, so that quantity of goods exchanged will always be the same, or +at least, that it will always be the same proportion of the goods +produced--there must be no option of speculative holding out of the +market allowed the holder of exchangeable goods. The individuals must +have constant habits as to the _proportions_ of the money they receive +to be spent and to be held for emergencies. All the factors affecting +"velocity" of both money and goods must be constant--Professor Fisher +maintains very explicitly that velocities, both of money and of +bank-deposits are fixed by habit (_loc. cit._, p. 152),--and, in any +case, the assumption is necessary. A thoroughly mechanical situation +must be assumed, where there is the rule of blind habit. Given such a +mechanism, you pour in money at one end, and it grinds out prices at the +other end, automatically. But, strangely enough, in this social +situation where blind habit rules, prices are perfectly fluid! In India, +or in other countries where the assumptions of the quantity theorist +come most nearly to realization, so far as the general rule of habit is +concerned, one finds also many customary prices. In a country completely +under the rule of habit, the prices would, as a matter of +_psychological_ necessity, be also fixed. What might then be expected to +happen in such a country, if an economic experimenter should disturb +them in their habitual quantity of money? Which habits would give way, +those relating to prices, or those to velocities, or those relating to +quantities of goods exchanged?[124] I shall not trouble to solve this +problem, as it seems to me not the most useful way to approach the +problem of the value of money, but I submit it to the consideration of +advocates of the quantity theory. My present purpose is accomplished in +pointing out the psychological assumptions which the quantity theory +makes: a psychology of blind habit, in a situation where the price-level +is free from control by customary prices. + +Now at another point I wish to mediate between the quantity theorists +and their extreme opponents. Representatives of the Metallist of +Commodity School--like Professor Laughlin, and Professor Scott in his +earlier writings--seem to deny that the money-employment has any direct +effect in increasing the value of money. The money-employment affects +the value of money only indirectly, by withdrawing the money metal from +the arts, so raising the value of the money metal, and consequently +raising the value of the coined metal. The quantity theory, on the other +hand, would utterly divorce the value of money from causal dependence on +the stuff of which the money is made. Both these views seem to me +extreme. Unless money has value from some source other than the money +employment, it cannot be used as money at all. Nobody will want it. On +the other hand, the money use is a valuable use. Exchange is a +productive process. Money, as a tool of exchange, enables men to create +values. And you can measure the value of the money service very easily +at a given time if you look at the short time "money-rates," _i. e._, +rates of discount on prime short term paper. These are properly to be +considered, not interest on abstract capital, but the rent of a +particular capital-good, namely, money. The money is hired for a +specific service, namely, to enable a man to get a specific profit in a +commercial transaction. Money is not the only good which can be thus +employed, and which is paid for for this purpose. Ordinarily a man will +pay for money for this purpose. Sometimes, however, one needs the +temporary use of something else more than one needs money, and the +holder of money pays a premium for the privilege of temporarily holding +the other thing. I refer especially here to the practice of "borrowing +and carrying" on the stock exchange. The "bear" sells stock which he +does not possess, and must deliver the stock before he is ready to close +his transaction by buying to "cover." He goes to a "bull" who has more +stock than he can easily "carry," and who is glad to "lend" the stock in +return for a "loan" of its equivalent in money. Ordinarily the bull is +glad to pay a price for the money, as it is of service to him. +Sometimes, however, the situation is reversed, and the service which the +temporary loan of the stock performs for the hard-pressed bears is +greater than the service which the money performs for the bulls, and the +payment is reversed. When the bull pays a premium to the bear, for the +use of the money, the amount paid is called "carrying charge," "interest +charge for carrying," "contango," (London) or (in Germany) "_Report_." +This is the usual case. But sometimes the bear pays the bull a premium +for the use of the stock, and the charge is then called "premium for +use," "backwardation," (London) or "_Deport_" (Germany).[125] Money is, +thus, not the only thing which has a "use" in addition to the ordinary +"uses" which are the primary source of its value.[126] In the case of +other things, however, this kind of "use" is unusual. In the case of +money it is the primary use. The essence of this use is to be found in +the employment of a quantum of _value_ in highly saleable form in +facilitating commercial transactions. Commercial transactions, in this +sense, are not limited to ordinary buying and selling. I think it best +to defer further analysis of the money service to a later chapter, on +the functions of money, which will best be preceded by a consideration +of the origin of money. For the present, it is enough to note that money +has certain characteristics which enable it to facilitate exchanges, and +to pay debts, better than anything else, and that this fact makes an +addition to its value. It is possible, I think, to measure this addition +to value rather precisely in certain cases. Thus, in the case of the +American Greenbacks, we find them at a discount, say from the beginning +of 1877 on, as compared with the gold dollar in which they were to be +redeemed in Jan. 1879. I think it safe to contend that the country was +practically free from doubt as to their redemption after the early part +of 1877. The discount steadily diminished as the time of redemption +approached. Laughlin's theory is thus far beautifully vindicated. The +central fact governing the value of the Greenbacks during this period +was the prospect of redemption. But, and here I think we see the +influence of the money-use, the discount was not as great as would have +been called for by the prevailing rate of interest, as measured by the +yield on other obligations of the Federal Government, at this time. And +the discount completely disappeared some little time before the actual +redemption. I see no cause for the absence of a discount in the later +months of 1878 except the additional value which came from the money +use. This additional value is, ordinarily, not very great. And money is +not alone in possessing it. In extraordinary circumstances it may become +quite large. Thus, in 1873, in the midst of the panic, the gold premium +fell sharply. At this time the significance of the Greenbacks as a legal +tender, a means of final payment of obligations (_Zahlungs_- or +_Solutions-mittel_), as distinguished from medium of exchange +(_Tauschmittel_), attained an unusual significance. In ordinary times, +the marginal value of this function of money sinks to zero, but in +emergencies it may become very great. In ordinary times, during the +Greenback period, uncoined gold bullion, or gold coin used, not as +money, but simply by weight in exchanges, played an important role, +competing with the Greenbacks in various employments, particularly as +bank reserves, and as secondary bank reserves, and so reducing the +marginal value of the money-employment of the Greenbacks themselves. +Gold bullion is not the only thing which can thus serve, however. +To-day, and generally, securities with a wide market, capable of being +turned quickly into cash, without loss, or capable of serving as the +basis of collateral loans, up to a high percentage of their value, have +a much higher value, for a given yield, than have other securities, +equally safe, but less well-known and less easily saleable. The +"one-house bond" (_i. e._, the bond for which only one banking house +offers a ready market) must yield a great deal more to sell at a given +price than the bond of equal security which is listed on the exchanges, +and has a wide market. Part of this is in illustration of another +function of money, the "bearer of options" function, which enables the +holder to preserve his wealth, and at the same time keep options for +increasing its amount when bargains appear in the market. Foreign +exchange performs many of these functions of money in European +countries, particularly Austria-Hungary.[127] + +The notion that the whole value of gold coin rests on its bullion +content arises most easily in a situation where free coinage has long +been practiced, and where there are no legal obstacles to the melting +down of coin for other uses. Where free coinage is suspended, the +peculiar services which only money can perform--or rather, the services +which money has a differential advantage in performing--may easily lead +to an agio for coined over uncoined metal. The mere fact that coined +metal is of a definite fineness well known and attested is often of some +consequence, though the attestation of well-known jewelers may give this +advantage to metal bars as well, for large transactions. But for smaller +transactions, nothing can easily take the place of money. A high premium +on small coins, apart from redemption in standard money, may easily +arise from the money-use alone. And standard coin may well attain, in +greater or less degree, a premium. If it is scarce, as compared with the +amount of business to be done, this premium may well be greater than if +it is abundant. But that an indefinite premium is possible, or that this +premium varies exactly and inversely with the quantity, I see no reason +at all for supposing. If the premium be great enough, men, especially in +large transactions, will make use of the uncoined metal--just as they +did use gold in this country during the Greenback period. The advantages +of money are not absolute. Money is simply more convenient for many +purposes than other things. The possibility of a premium is limited by +the possibility of substitutes. It is further limited by the fact that a +high premium would awaken a distrust which would bring the premium to +destruction, by destroying trade, and so destroying the money-use on +which the premium is based. + +A detailed discussion of the Indian Rupee since 1893 lies outside the +scope of this chapter. I think it may be well, however, to recognize at +this point that the limitation in the quantity of the rupee, through +abrogation of free coinage, was a factor in the subsequent rise in its +value. It was not the only factor, by any means. But it was a factor. It +may be also recognized as a factor in the value of Austrian paper money. + +The doctrine just laid down, as to the influence of the money-use in +adding to the value of money, is in no sense the same as the quantity +theory. For one thing, it is easily demonstrated that the value-curve +for the uses of money is not described by the equation, _xy_ = _c_. This +curve expresses, in terms of value, the idea of proportionality which is +an essential part of the quantity theory. Put in terms of the money +market, we have a demand-curve for money, not for the long-time +possession of money, but for its temporary use--a rental, rather than a +capital value, is expressed in the price which this curve helps to +determine. This curve is highly elastic. When money-rates are low, +transactions will be undertaken which will not be undertaken when the +rate is a little higher. In the second place, the method of approach is +very different. It is not the whole volume of transactions which must +employ money, but only a flexible part. In the third place, the +money-use is here conceived of as a source, not of the whole value of +money, but only of a differential portion of that value. In the fourth +place, the argument runs in terms of the absolute value of money, and +not in terms of the level of prices. + +It is not the legal peculiarity of money, as legal tender, which is +necessarily responsible for this agio when it appears. In the first +place, not all money is legal tender. In the second place, we find the +same phenomenon in connection with "bank-money" at times--I would refer +especially to the premium on the _marc banko_ of the Hamburg Girobank. +(_Cf._ Knapp, _Staatliche Theorie des Geldes_, p. 136.) The legal tender +peculiarity may, however, in special circumstances be a source of a very +considerable temporary agio. + +It is possible, however, to frame a hypothetical case in which, barring +temporary emergencies, the money-use will add nothing to the value of +money, and in which the whole value of money will come from the value of +the commodity chosen as the standard of values. Assume that the standard +of value is defined as a dollar, which is further defined as 23.22 +grains of pure gold. Assume, however, that no gold is coined. Let the +circulating money be made of paper. Let this paper be redeemable, not in +gold, but in silver, at the market ratio, on the day of redemption, of +silver to gold. This will mean that varying quantities of silver will be +given by the redeeming agencies for paper, but always just that amount +required to procure 23.22 grains of gold. Let us assume, further, that +the government issues paper money freely on receipt of the same amount +of silver. Assume, further, that the government bears the charges which +the friction of such a system would entail, by opening numerous centres +of issue and redemption, by providing insurance against fluctuations in +the ratio of silver to gold for a reasonable time before issue and after +redemption, meeting transportation charges, brokerage fees, etc. In such +a case, the standard of value would not be used as money at all. It +would have no greater value than it would if it were not the standard of +value--abstracting from the fact that in the one case it might be used +in its uncoined form as a substitute for money more freely than in the +other. In any case, it would form no part of the quantity of money. Its +whole value would come from its commodity significance. The value of the +paper money, however, would be tied absolutely to the value of gold. As +gold rose in value, the paper money would rise in value, and vice versa. +The quantity of money would be absolutely irrelevant as affecting its +value. The quantity of silver would be likewise irrelevant. The +causation as between quantity of money and value of money would be +exactly the reverse of that asserted by the quantity theory. A high +value of money would mean lower prices. With lower prices, less money +would be needed to carry on the business of the country. Paper would +then be superabundant. But in that case, paper would rapidly be sent in +for redemption, and the quantity of money would be reduced.[128] The +value of money would control the quantity of money. The standard of +value, which was not the medium of exchange, would control the value of +money, and so the level of prices, in so far as the level of prices is +controlled from the money side. + +In this hypothetical illustration, we have the extreme case of what the +Commodity or Metallist School seems to assert. In this case, barring +temporary emergencies too acute to admit of increasing the money-supply +by the method described, their theory that the value of money comes +wholly from the commodity value of the standard, would offer a complete +explanation. I offer this illustration as the antithesis of the +dodo-bone illustration of Nicholson. That illustration sets forth the +extreme claims of the quantity theory, and purports to be a case in +which the quantity theory would work perfectly. The case illustrative of +the commodity theory clearly brings out the fact that that theory rests +on exclusive attention to the standard of value function of money. The +dodo-bone theory gives exclusive attention to, but very imperfect +analysis of, the medium of exchange function. But I submit that the +extreme case of the commodity theory, in the illustration I have given, +is a thinkable and consistent system. It would work--even though not +conveniently. Indeed, it resembles in essentials the plan actually +proposed by Aneurin Williams, and later by Professor Irving Fisher[129] +for stabilizing the value of money. Substitute a composite commodity for +gold, and gold for silver, in the illustration, and you have the +essentials of that plan. The dodo-bone hypothesis, however, as I have +been at elaborate pains to show in the foregoing, is unthinkable. It +would not work. It is, thus, possible to construct a system for which +the commodity theory would offer a complete explanation. It is not +possible to do this for the quantity theory. + +But the limiting case for the commodity theory is not the actual case. +Standard money is also commonly a medium of exchange. Standard money is +particularly desirable in bank and government reserves. Its employment +in these and other ways is a valuable employment, and adds directly to +its value both as money and in the arts. There is a marginal equilibrium +between its values in the two employments. The notion that the only way +in which the money employment adds to the value of money is an indirect +one, by withdrawing gold from the arts, so lessening its supply and +raising its value there, may be proved erroneous by this consideration: +what, in that case, would determine the margin between the two +employments? What force would there be to withdraw gold from the arts at +all? Why should more rather than less be withdrawn? There must be +ascending curves on both sides of the margin. Gold money in small amount +has a high significance per unit in the money employment. A greater +amount has a smaller significance per unit. The marginal amount of gold +put to work as money has a comparatively low significance in that +employment--a significance just great enough to secure it from the +competing employments in the arts. + + * * * * * + +We conclude, then, that money must have value to start with, from some +source other than the money function, and that there must always be some +source of value apart from the money function, if money is to circulate, +or to serve as money in other ways. But this is not to assert the +doctrine of the commodity school, that its value must arise from the +metal of which it is made, or in which it is expected to be redeemed. +Nor is it to deny that the money function may add to the original value. +On the contrary, the services which money performs are valuable +services, and add directly, under conditions which we shall analyze more +fully in a later chapter on the functions of money, to the value derived +from non-pecuniary sources. Value is not physical, but psychical. And +value is not bound up inseparably with labor-pain or marginal utility. + + + + +CHAPTER VIII + +THE "EQUATION OF EXCHANGE" + + +In Professor Irving Fisher's _Purchasing Power of Money_[130] we have +the most uncompromising and rigorous statement of the quantity theory to +be found in modern economic literature. We have, too, a book which +follows the logic of the quantity theory more consistently than any +other work with which I am acquainted. The book deals with the theory +more elaborately and with more detail than any other single volume, and +sums up most of what other writers have had to say in defence of the +quantity theory. Professor Fisher's book has, moreover, received such +enthusiastic recognition from reviewers and others as to justify one in +treating it as the "official" exposition of the quantity theory. Thus, +Sir David Barbour cites Professor Fisher as the authority on whom he +relies for such justification of the theory as may be needed,[131] while +Professor A. C. Whitaker declares that he adopts "without qualification +the whole body of general monetary theory" for which Professor Fisher +stands.[132] Professor J. H. Hollander has recently referred to +Professor Fisher's work on money and prices as a model of that +combination of theory and inductive verification which constitutes real +science.[133] The _American Economic Review_ presents as an annual +feature Professor Fisher's "Equation of Exchange." + +Not all, by any means, of those who would call themselves quantity +theorists would concur in Professor Fisher's version of the +doctrine--Professor Taussig, notably, introduces so many qualifications, +and admits so many exceptions, that his doctrine seems to the present +writer like Professor Fisher's chiefly in name. But there is no other +one book which could be chosen which would serve nearly as well for the +"platform" of present-day quantity theorists as _The Purchasing Power of +Money_. Partly for that reason, and partly because the book lends itself +well to critical analysis, I shall follow the outline of the book in my +further statement and criticism of the quantity theory, indicating +Professor Fisher's views, and indicating the points at which other +expositions of the quantity theory diverge from his, setting his views +in contrast with those of other writers. We shall find that this method +of discussion will furnish a convenient outline on which to present our +final criticisms of the quantity theory, and parts of the constructive +doctrine of the present book. + +First, Professor Fisher presents in the baldest possible form the +dodo-bone doctrine. The quality of money is irrelevant. The sole +question of importance is as to its quantity--the number of +money-units.[134] I shall not here discuss this point, as a previous +chapter has given it extended analysis, except to repeat that it is in +fact an essential part of the quantity theory. If the _quality_ of money +is a factor, a necessary factor, to consider, then obviously we have +something which will disturb the mechanical certainty of the quantity +theory. Professor Fisher is thoroughly consistent with the spirit of his +general doctrine on this point. + +Second, Professor Fisher has no absolute value in his scheme. By the +value of money he means merely its purchasing power, and by its +purchasing power he means nothing more than the fact that it does +purchase: the purchasing power of money is defined as the reciprocal of +the level of prices, "so that the study of the purchasing power of money +is identical with the study of price levels." (_Loc. cit._, p. 14.) In +this, again, Professor Fisher is absolutely true to the spirit and logic +of the quantity theory doctrine. The equilibration of numbers of goods, +and numbers of dollars, in a mechanical scheme, gives prices--an average +of prices, and nothing else. Any psychological values of goods or of +dollars would upset the mechanism, and mess things up. They are properly +left out, if one is to be happy with the quantity theory. Fisher, in +discussion of Kemmerer's _Money and Credit Instruments_, has criticised +the exposition of the utility theory of value with which Kemmerer +prefaces his exposition of the quantity theory, as "fifth wheel." I +agree thoroughly with Fisher's view in this, and would add that the only +reason that it has made Kemmerer little trouble in the development of +his quantity theory is that he has made virtually no use of it there! +The two bodies of doctrine, in Kemmerer's exposition, are kept, on the +whole, in separate chapters, well insulated. Coupled with this purely +relative conception of the value of money, however, there is, in +Fisher's scheme, an effort to get an absolute out of it: the general +price-level is declared to be independent of, and causally prior +to,[135] the particular prices of which it is an average. I mention this +remarkable doctrine here, reserving its discussion for a later +chapter.[136] + +A further feature of Professor Fisher's system, to which especial +attention must be given, is the large role played in it by the "equation +of exchange." This device has been used by other writers before him, +notably by Newcomb, Hadley, and Kemmerer, receiving at the hands of the +last named an elaborate analysis. But Fisher, basing his work on +Kemmerer's, has made even more extensive use of the "equation of +exchange," and has given it a form which calls for special +consideration.[137] The "equation of exchange," on the face of it, makes +an exceedingly simple and obvious statement. Properly interpreted, it is +a perfectly harmless--and, in the present writer's opinion, +useless--statement. It gives rise to complications, however, as to the +meaning of the algebraic terms employed, which we shall have to study +with care. The starting point is a single exchange: a person buys 10 +pounds of sugar at seven cents a pound. "This is an exchange transaction +in which 10 pounds of sugar have been regarded as equal to 70 cents, and +this fact may be expressed thus: 70 cents = 10 pounds of sugar +multiplied by 7 cents a pound. Every other sale and purchase may be +expressed similarly, and by adding them all together we get the equation +of exchange _for a certain period in a given community_."[138] The money +employed in these transactions usually serves several times, and hence +the money side of the equation is greater than the total amount of money +in circulation. In the preliminary statement of the equation of +exchange, foreign trade, and the use of anything but money in exchanges +are ignored, but later formulations of the equations are made to allow +for them. "The equation of exchange is simply the sum of the equations +involved in all individual exchanges in a year.... And in the grand +total of all exchanges for a year, the total money paid is equal in +value to the total value of the goods bought. The equation thus has a +money side and a goods side. The money side is the total money paid, +and may be considered as the product of the quantity of money multiplied +by its rapidity of circulation. The goods side is made up of the +products of quantities of goods exchanged multiplied by their respective +prices." + +Letting M represent quantity of money, and V its velocity or rapidity +of circulation, p, p', p'', etc., the average prices for the period of +different kinds of goods, and Q, Q', Q'', etc., the quantities of +different kinds of goods, we get the following equation: + + MV = pQ + p'Q' + p''Q'' + etc.[139] + +"The right-hand side of this equation is the sum of terms of the form +pQ--a price multiplied by the quantity bought."[140] The equation may +then be written, + +MV = [Greek: S] pQ (Sigma being the symbol of summation). + +The equation is further simplified[141] by rewriting the right-hand +side as PT, where P is the weighted _average_ of all the +p's, and T is the _sum_ of all the Q's. "P then represents in +one magnitude the level of prices, and T represents in one +magnitude the volume of trade." + +It may seem like captious triviality to raise questions and objections +thus early in the exposition of Professor Fisher's doctrine. And yet, +serious questions are to be raised. First, in what sense is there an +equality between the ten pounds of sugar and the seventy cents? Equality +exists only between _homogeneous_ things. In what sense are money and +sugar homogeneous? From my own standpoint, the answer is easy: money and +sugar are alike in that both are _valuable_, both possess the attribute +of economic social value, an absolute quality and quantity. The degree +in which each possesses this quality determines the exchange relation +between them. And the degree in which each other good possesses this +quality, taken in conjunction with the value of money, determines every +other particular price. Finally, an average of these particular prices, +each determined in this way, gives us the general price-level. The value +of the money, on the one hand, and the values of the goods on the other +hand, are both to be explained as complex social psychological forces. +But when this method of approach is used, when prices are conceived of +as the results of organic social psychological forces, there is no room +for, or occasion for, a further explanation in terms of the mechanical +equilibration of goods and money. Professor Fisher, as just shown, very +carefully excludes this and all other psychological approaches to his +problem of general prices, and has no place in his system for an +absolute value. In what sense, then, are the sugar and the money equal? +Professor Fisher says (p. 17), that the equation is an equation of +values. But what does he mean by values in this connection? Perhaps a +further question may show what he _must_ mean, if his equation is to be +intelligible. That question is regarding the meaning of T. + +T, in Professor Fisher's equation, is defined as the sum of all the Q's. +But how does one sum up _pounds_ of _sugar_, _loaves_ of _bread_, _tons_ +of _coal_, _yards_ of _cloth_, etc.? I find at only one place in +Professor Fisher's book an effort to answer that question, and there it +is not clear that he means to give a general answer. He needs units of Q +which shall be homogeneous when he undertakes to put concrete figures +into his equation for the purpose of comparing index numbers and +equations for successive years. "If we now add together these tons, +pounds, bushels, etc., and call this grand total so many 'units' of +commodity, we shall have a very arbitrary summation. It will make a +difference, for instance, whether we measure coal by tons or +hundred-weights. The system becomes less arbitrary if we use, as the +unit for measuring any goods, not the unit in which it is commonly sold, +but the amount which constitutes a 'dollar's worth' at some particular +year called the base year" (p. 196). If this be merely a device for the +purpose of handling index numbers, a convention to aid mensuration, we +need not, perhaps, challenge it. The unit chosen is, in that case, after +all a fixed physical quantity of goods, the amount bought with a dollar +in a given year, and remains fixed as the prices vary in subsequent +years. That it is more "philosophical" or less "arbitrary" than the more +common units is not clear, but, if it be an answer, designed merely for +the particular purpose, and not a general answer, it is aside from my +purpose to criticise it here. If, however, this is Professor Fisher's +_general_ answer to the question of the method of summing up T, if it is +to be employed in his equation when the question of _causation_, as +distinguished from _mensuration_, is involved, then it represents a +vicious circle. If T involves the price-level in its definition, then T +cannot be used as a causal factor to explain the price-level. I shall +not undertake to give an answer, where Professor Fisher himself fails to +give one, as to his meaning. I simply point out that he himself +recognizes that the summation of the Q's is arbitrary without a common +unit, and that the only common unit suggested in his book, if applied +generally, involves a vicious circle. + +What, then, is T? Perhaps another question will aid us in answering +this. What does it mean to _multiply_ ten pounds of sugar by seven +cents? What sort of product results? Is the answer seventy pounds of +sugar, or seventy cents, or some new two-dimensional hybrid? One +multiplies feet by feet to get _square_ feet, and square feet by feet to +get cubic feet. But in general, the multiplication of _concrete_ +quantities by _concrete_ quantities is meaningless.[142] One of the +generalizations of elementary arithmetic is that concrete quantities may +usually be multiplied, not by other concrete quantities, but rather by +_abstract_ quantities, pure numbers. Then the product has meaning: it is +a concrete quantity of the same denomination as the multiplicand. If the +Q's, then, are to be multiplied by their respective p's, the Q's must be +interpreted, not as bushels or pounds or yards of concrete goods, but +merely as abstract numbers. And T must be, not a sum of concrete goods, +but a sum of abstract numbers, and so itself an abstract number. Thus +interpreted, T is equally increased by adding a hundred papers of +pins,[143] a hundred diamonds, a hundred tons of copper, or a hundred +newspapers. This is not Professor Fisher's rendering of T, but it is the +only rendering which makes an intelligible equation. + +We return, then, to the question with which we set out: in what sense is +there an equality between the two sides of Professor Fisher's equation? +The answer is as follows: on one side of the equation we have M, a +quantity of money, multiplied by V, an abstract number; on the other +side of the equation, we have P, a quantity of money, multiplied by T, +an abstract number. The product, on each side, is a _sum of money_. +These sums are equal. They are equal because they are _identical_. The +equation asserts merely that what is _paid_ is equal to what is +_received_. This proposition may require algebraic formulation, but to +the present writer it does not seem to require any formulation at all. +The contrast between the "money side" and the "goods side" of the +equation is a false one. There is no goods side. Both sides of the +equation are money sides. I repeat that this is not Professor Fisher's +interpretation of his equation. But it seems the only interpretation +which is defensible. + +A further point must be made: Sigma pQ, where the Q's are interpreted as +abstract numbers, is a summary of concrete money payments, each of which +has a causal explanation, and each of which has effected a concrete +exchange. Mathematically, PT is equal to [Greek: S] pQ, just as 3 times +4 is equal to 2 times 6. But from the standpoint of the theory of +causation, a vast difference is made. Three children four feet high +equal in aggregate height two men six feet high. But the assertion of +equality between the three children and the two men represents a high +degree of abstraction, and need not be significant for any given +purpose. Similarly, the restatement of [Greek: S] pQ as PT. One might +restate [Greek: S] pQ as PT, defining P as the _sum_ (instead of the +average) of the p's, and T as the weighted average (instead of the sum) +of the Q's. Such a substitution would be equally legitimate, +mathematically, and the equation, MV = PT equally true. [Greek: S] pQ +might be factorized in an indefinite number of ways. But it is important +to note that in PT, as defined by Professor Fisher,[144] we are at three +removes from the concrete exchanges in which actual concrete causation +is focused: we have first taken, for each commodity, an average, for a +period, say a year, of the concrete prices paid for a unit of that +commodity, and multiplied that average by the abstract number of units +of that commodity sold in that year; we have then summed up all these +products into a giant aggregate, in which we have mingled hopelessly a +mass of concrete causes which actually affected the particular prices; +then, finally, we have factorized this giant composite into two numbers +which have no concrete reality, namely, an average of the averages of +the prices, and a sum of the abstract numbers of the sums of the goods +of each kind sold in a given year--a sum which exists only as a pure +number, and which, consequently, is unlikely to be a causal factor! It +may turn out that there is reason for all this, but if a _causal_ theory +is the object for which the equation of exchange is designed, a strong +presumption against its usefulness is raised. Both P and T are so highly +abstract that it is improbable that any significant statements can be +made of either of them. As concepts gain in generality and abstractness, +they lose in content; as they gain in "extension" they lose (as a rule) +in "intension." On the other side of the equation, we also look in vain +for a truly concrete factor. V, the average velocity of money for the +year, is highly abstract. It is a mathematical summary of a host of +complex activities of men. Professor Fisher thinks that V obeys fairly +simple laws, as we shall later see, but at least that point must be +demonstrated. Even M is not concrete. At a given moment, the money in +circulation is a concrete quantity, but the average for the year is +abstract, and cannot claim to be a direct causal factor, with one +uniform tendency. Of course Professor Fisher himself recognizes that his +central problem is, not to state and justify, mathematically, his +equation[145]--that is a work of supererogation, and the statistical +chapters devoted to it seem to me to be largely wasted labor. Professor +Fisher recognizes that his central problem is to establish _causal_ +relations among the factors in his equation of exchange. It is from the +standpoint of its adaptability as a tool in a theory of causation that I +have been considering it. It should be noted that "volume of trade," as +frequently used, means not numbers of goods sold, but the money-price of +all the goods exchanged, or PT. It is in this sense of "trade" that +bank-clearings are supposed to be an index of volume of trade. The +sundering of the p's and Q's really is a big assumption of many of the +points at issue. Indeed, it is absolutely impossible to sunder PT. It is +always the p aspect of the thing that is significant, Fisher himself +finally interprets T, statistically, as billions of _dollars_.[146] As a +matter of mathematical necessity, either P must be defined in terms of T +or T defined in terms of P. The V's and M and M' may be independently +defined, and arbitrary numbers may be assigned for them limited only by +the necessity that MV + M'V' be a fixed sum.[147] But P and T cannot, +with respect to each other, be thus independently defined. The highly +artificial character of T has been pointed out by Professor E. B. +Wilson, of the Massachusetts Institute of Technology, in his review of +Fisher's _Purchasing Power of Money_ in the _Bulletin of the American +Mathematical Society_, April, 1914, pp. 377-381. "Various consequences +are readily obtained from the equation of exchange, but the +determination of the equation itself is not so easy as it might look to +a careless thinker. The difficulties lie in the fact that P and T +individually are quite indeterminate. An average price-level P means +nothing till the rules for obtaining the average are specified, and +independent rules for evaluating P and T may not satisfy [the equation.] +For instance, suppose sugar is 5c. a pound, bacon 20c. a pound, coffee +35c. a pound. The average price is 20c. If a person buys 10 lbs. of +sugar, 3 lbs. of bacon, and 1 lb. of coffee, the total trading is in 14 +lbs. of goods. The total expenditure is $1.45; the product of the +average price by the total trade is $2.80; the equation is very far from +satisfied." Wilson thinks it necessary, to make the matter straight, to +define T, arbitrarily as (MV + M'V')/P in which case, the equation is +true, but so obviously a truism that no one would see any point in +stating it. T no longer has any independent standing. Fisher has, +however, an escape from this status for T, but only by reducing P to the +same position. He defines P as the _weighted_ average of the p's (27), +and fails, I think, to see how completely this ties it up with T. The +only method of weighting the p's that will leave the equation straight +is to weight the different prices by the number of units of each kind of +good sold, namely, T. Thus, in Wilson's illustration, we would define P +as [(5c.x10) + (20c.x3) + (35c.x1)]/14 P is then 10-5/14 c., while T is +14. PT is, then, equal to $1.45, which is the total expenditure, or MV + +M'V'. Be it noted, here, that P is defined in terms of T, _i. e._, P is +defined as a fraction, the denominator of which is T. No other +definition of P will serve, if T is to be defined independently. + +But notice the corollary. P must be differently defined each year, for +each new equation, as T changes in total magnitude, and as the elements +in T are changed. The equation cannot be kept straight otherwise. +Suppose that the prices remain unchanged in the next year, but that one +more pound of coffee, and two less pounds of sugar are sold. P, as +defined for the equation of the preceding year would no longer fit the +equation. P, as previously defined, would be unaltered, since none of +the prices in it had changed. P, defined as a weighted average with the +weights of the first year, would, then, still be 10-5/14 cents. The T in +the new equation is 13. The product of P and T is $1.34-9/14. But the +total expenditure, (MV + M'V') is $1.70. The equation is not fulfilled. +To fulfill the equation, it is necessary to get a new set of weights for +P, in terms of the new T of the new equation. From the standpoint of a +_causal_ theory, this is delightful. P is the _problem_. But you are +not allowed to _define_ the problem until you know what the +_explanation_ is! Then you define the problem as that which the +explanation will explain! + +Fisher, however, appears unaware of this. At all events, he does not +mention it. And he ignores it in filling out his equation statistically, +for he assigns one set of weights to the particular prices in his P +throughout.[148] + +The causal theory with which the equation of exchange is associated is +as follows: P is passive. A change in the equation cannot be initiated +by P. If P should change without a prior change in one of the other +factors, forces would be set in operation which would force it back to +its original magnitude. M and T are independent magnitudes. A change in +one does not occasion a change in the other. An increase or decrease in +M will not cause a change in V. Therefore, an increase in M must lead to +a proportionate increase in P, and a decrease in M to a proportionate +decrease in P, if the equation is to be kept straight. Changes in T have +opposite proportional effects on P. + +Before examining the validity of the causal theory, and the arguments by +which it is supported, it will be best to state the more complex formula +which Professor Fisher advances as expressing the facts of to-day. The +original formula ignored credit, and ignored the possibility of resort +to barter. It also failed to reckon with certain complications which +Fisher deals with as "transitional" rather than "normal." + +The formula which includes credit is as follows: + + MV + M'V' = PT + +Here, MV and PT have the same significance as before. M' is the average +amount of bank-deposits in the given region for the given period, and +V' is the velocity of circulation of those deposits. M, money, consists +of all the media of exchange in circulation which are _generally_ +acceptable, as distinguished from those which are acceptable under +particular conditions, as by endorsement. M excludes money in bank +reserves and government vaults. Money, specifically, includes gold and +silver coin, minor coins, government paper money, and bank-notes; M' +consists of deposits transferable by check. This version would not +satisfy such a writer as Nicholson,[149] who would limit money to gold +coin, and would include in M' not only deposits, but also bank-notes, +and other credit instruments. I may suggest here, what I shall later +emphasize, that Fisher's "money," though he doubtless is using the most +common definition of money, is really a pretty heterogeneous group of +things, concerning which it is possible to make few general statements +safely. In economic essence, _e. g._, bank-notes are much more like +deposits than like gold, and if one wishes to separate money and credit, +bank-notes belong with M' rather than with M. But we must take the +theory as we find it! Again, credit is by no means exhausted when +bank-deposits are named. Why should not book-credits, and bills of +exchange be included? Why not postal money-orders, why not deposits +subject to transfer by the giro-system? M' is defined[150] as "the total +deposits subject to transfer by check," and would, thus, exclude the +giro-system of Germany. It is surely a very provincial equation of +exchange, with which Fisher and Kemmerer seek to set forth the universal +laws of money! Fisher's reason for excluding book-credits is that +book-credits merely postpone, and do not dispense with, the use of money +and checks.[151] Book-credits, unlike deposits, have no _direct_ effect +on prices (_Ibid._, 82, n.; 370), but only an indirect effect, by +increasing the velocity of money. (_Ibid._, 81-82; 370-371.) +Book-credit, indeed "time-credit" in general thus has no direct effect +on prices, and is properly excluded from the equation of exchange. These +distinctions seem to me highly artificial. In the first place, the use +of checks, in part, merely postpones the use of money: money is moved +back and forth from one part of the country to another, and from one +bank to another, to the extent that checks fail to offset one another, +and in the case of book-credit, while there is less of this offsetting, +there is a good deal of it, especially between stockbrokers in different +cities, and in small towns and at country stores, and particularly in +the South, where the country storekeeper and "factor" are also dealers +in cotton, etc., and where they advance provisions during the year to +the small farmers, receiving their pay, in considerable degree, not in +money, but in cotton, which they credit on the books in terms of money +to the customer--a point which Fisher mentions in an appendix. (_Ibid._, +p. 371.) The difference on this point is a difference in degree +merely.[152] Further, Fisher makes the same point with reference to +deposits subject to check that he makes with reference to book-credits, +namely, that their use increases the velocity of money. To say that one +has a _direct_ effect on prices, and the other only an indirect effect +is absolutely arbitrary. If buying and selling are what count, if prices +are forced up by the offer of money or credit for goods, and forced down +as the amount of money and credit offered for goods is reduced, then one +exchange must count for as much as any other of like magnitude in fixing +prices. The same is true of transactions in which bills of exchange or +other credit devices serve as media of exchange. Of course these +considerations do not render the equation of exchange, as presented by +Fisher, untrue. The equation simply states that the money and +bank-deposits used in paying for goods in a given period are equal to +the amount paid for those goods in a given period. It makes no assertion +concerning payments for other goods, and makes no assertion as to the +amount of other transactions which are paid for in other ways. General +Walker, presented with the problem of credit phenomena, simplifies the +thing even more.[153] He rules out all exchanges which are effected by +credit devices, counting only those performed by coin, bank-notes and +government paper money, and insists that the general price-level is +determined in those exchanges in which money alone (as thus defined) is +employed. His equation--if he had considered it worth while to use +one--would then have been simply + + MV = PT + +where T would be merely the number of goods exchanged by means of money. +One could make a similar equation, equally true, by defining money as +gold coin, and reducing T correspondingly. Is there any reason for +limiting the equation at all?[154] Is there any reason for supposing +that any one set of exchanges is more significant for the determination +of the price-level than any other set of exchanges? Does not the logic +of the quantity theory require us to include all exchanges which run in +terms of money?--If one wishes a complete picture of the exchanges, some +such equation as this would be necessary: + + MV + M'V' + BV'' + EV''' + OV'''' = PT, + +where B represents book-credit, V'' the number of times a given average +amount of book-credit is used in the period, E bills of exchange, and +V''' their velocity of circulation, and O all other substitutes for +money, with V'''' as their velocity of circulation. Even then we have +not a complete picture, if direct barter or the equivalents of barter +can be shown to be important. + +For the present, I waive a discussion of the comparative importance of +these different methods of conducting exchanges. The situation varies +greatly with different countries. Fisher's and Kemmerer's equations are +at best plausible when presented as describing American conditions, are +much less plausible when applied to Canada and England, and are +caricatures when applied to Germany and France. + +So much for the statement of the equation of exchange, except that it is +important to add that the period of time chosen for the equation is one +year. Just why a year, rather than a month or two years or a decade +should be chosen, may await full discussion till later. I shall venture +here the opinion that the yearly period is not the period that should +have been chosen from the standpoint of Fisher's causal theory, and +that it probably was chosen, if for any conscious reason at all, because +of the fact that statistical data which Fisher wished to put into it are +commonly presented as annual averages. The question now is, however, as +to the use to be made of the equation in the development of a causal +theory. + + + + +CHAPTER IX + +THE VOLUME OF MONEY AND THE VOLUME OF CREDIT + + +John Stuart Mill, who first among the great figures in economics gives a +realistic analysis of modern credit phenomena, thought that credit acts +on prices in the same way that money itself does[155] and that this +reduces the significance of the quantity theory tendency greatly, and to +an indeterminate degree. The quantity theory is largely whittled away in +Mill's exposition of the influence of credit. In Fisher we have a much +more rigorous doctrine. The quantity of money still governs the +price-level, because M governs M'. The volume of bank-deposits depends +on the volume of money, and bears a pretty definitely fixed ratio to it. +Just how close the relation is, Professor Fisher does not say, but the +greater part of his argument, especially in ch. 8,[156] rests on the +assumption that the ratio is very constant and definite indeed. At all +events, the importance of the theory, as an explanation of concrete +price-levels, will vary with the closeness of this connection, and the +invariability of this ratio. It is not too much to say _that the book +falls with this proposition_, to wit, that M controls M', and that there +is a fixed ratio between them. We would expect, therefore, a very +careful and full demonstration of the proposition, a care and fullness +commensurate with its importance in the scheme. But the reader will +search in vain for any proof, and will find only two propositions which +purport to be proof. These are: (1) that bank reserves are kept in a +more or less definite ratio to bank deposits; (2) that individuals, +firms and corporations preserve more or less definite ratios between +their cash transactions and their check transactions, and between their +cash on hand and their deposit balances.[157] + +If these be granted, what follows: the money in bank-_reserves_ is no +part of M! M is the money in circulation, being exchanged against goods, +not the money lying in bank-vaults![158] The money in bank-vaults does +not figure in the equation of exchange. As to the second part of the +argument, if it be granted, it proves nothing. The money in the hands of +individual and corporate depositors is by no means all of M. It is not +necessarily the greatest part. The money in circulation is largely used +in small retail trade, by those who have no bank-accounts. A good many +of the smallest merchants in a city like New York have no bank-accounts, +since banks require larger balances there than they can maintain. +Enormous quantities of money are carried in this country by laborers, +particularly foreign laborers. "The Chief of the Department of Mines of +a Western State points out that when an Italian, Hungarian, Slav or Pole +is injured, a large sum of money, ranging from fifty dollars to five +hundred or one thousand, is almost always to be found on his person. A +prominent Italian banker says that the average Italian workman saves two +hundred dollars a year, and that there are enough Italian workmen in +this country, without considering other nationalities, to account for +three hundred million dollars of hoarded money."[159] I do not wish to +attach too great importance to these figures, taken from a popular +article in a popular periodical. It is proper to point out, too, that +these figures relate to hoarded money, rather than to M, the money in +circulation. But in part these figures represent, not money absolutely +out of circulation, but rather, money with a sluggish circulation. And +they are figures of the money in the hands of poor and ignorant elements +of the population. Outside that portion of the population--larger in +this country than in any other by far[160]--which keeps checking +accounts, are a large body of people, the masses of the big cities, the +bulk of rural laborers, especially negroes, the majority of tenant +farmers, a large proportion of small farm owners, especially nominal +owners, and not a few small merchants in the largest cities, who have no +checking accounts at all. A very high percentage of their buying and +selling is by means of money. Kinley's results[161] show that 70% of the +wages in the United States are paid in cash, and, of course, the +laborers who receive cash pay cash for what they buy. (Not necessarily +at the _time_ they buy!) Money for payrolls is one of the serious +problems in times of financial panics.[162] To fix the proportion +between money in the hands of bank depositors and non-depositors is not +necessary for my purposes--_a priori_ I should anticipate that there is +no fixed proportion. But it is enough to point out that money in the +hands of depositors is not the whole of Fisher's M. Of what relevance is +it, then, to point out, even if it were true, that an unascertainable +portion of M tends to keep a definite ratio to M', when the thing to be +proved is that the _whole_ of M tends to keep a definite ratio to M'? +Fisher's argument is a clear _non-sequitur_. If it proves anything, it +proves that a sum of money,[163] not part of M, and another sum of +money, an unknown fraction of M, each independently, for reasons +peculiar to each sum, tends to keep a constant ratio to M'. This gives +us _l'embarras des richesses_ from the standpoint of a theory of +causation! Two independent factors, bank-reserves and money in the hands +of depositors, each tending to hold bank-deposits in a fixed ratio, and +yet each moved by independent causes! By what happy coincidence will +these two tendencies work together? Or what is the causal relation +between them? And if, for some yet to be discovered reason, Professor +Fisher should prove to be right, and there should be a fixed ratio +between M as a whole and bank-deposits, would it not indeed be a miracle +if all three "fixed ratios" kept together? Bank-deposits, indissolubly +wedded to three independent variables[164] (independent, at least, so +far as anything Professor Fisher has said would show, and independent +in large degree, certainly, so far as any reason the present writer can +discover), must find their treble life extremely perplexing. May it not +be that Professor Fisher has pointed the way to the real fact, namely, +that bank-deposits are subjected to a multitude of influences, no one of +which is dominant, which prevent any fixed ratio between bank-deposits +and any other one thing? At a later point, I shall maintain that this +is, indeed, the case. + +Be it noted further, however, that even if we grant a fixed ratio, on +the basis of Fisher's argument, between M and M', Fisher has offered no +jot of proof that the causation runs from M to M'. He simply assumes +that point outright. "Any change in M, the quantity of money in +circulation, _requiring as it normally does a proportional change in +M'_, the volume of deposits subject to check." (_Ibid._, p. 52, Italics +mine.) For this, no argument at all is offered. A fixed ratio, so far as +causation is concerned, might mean any one of three things: (a) that M +controls M'; (b) that M' controls M; (c) that a common cause controls +both. Fisher does not at all consider these alternative possibilities. I +shall myself avoid a sweeping statement as to the causal relations among +the factors in the equation, because I do not think that any of the +factors is homogenous enough, as an aggregate, to be either cause or +effect of anything. But if a generalization concerning these magnitudes +were required, I should be disposed to assert that the third alternative +is the most defensible, and that to the extent that M and M' vary +together it is under the influence of a common cause, namely, PT! That +is to say, that the volume of bank-deposits and the volume of money tend +to increase or decrease in a given market--and Fisher's theory is a +theory of the market even of a single city[165]--_because of_ increases +or decreases in PT (considered as a unitary cause rather than as two +separate factors) in that market. But I shall not put my proposition in +quite that form, as I find the factors in the equation of exchange too +indefinite for satisfactory causal theory. + +So much for the validity of Fisher's argument, assuming the facts to be +as he states them. Are the statements correct? Do banks tend to keep +fixed ratios between deposits and reserves? Do individuals, firms, and +corporations tend to keep fixed ratios between their cash on hand and +their balances in bank? Regarding this last tendency, Professor Fisher +says in a footnote on p. 50, "This fact is apparently overlooked by +Laughlin." I think it has been generally overlooked. I have found no one +who has discovered it except Professor Fisher. Certainly no depositor +whom I have consulted can find it in his own practice--and I have put +the question to "individuals, firms, and corporations." The further +statement which Professor Fisher adduces in its support does not prove +it, namely, that cash is used for small payments, and checks for large +payments.[166] It would be necessary to go further and prove that large +and small payments bear a constant ratio to one another, and further, +that velocities of money and of bank-deposits employed in these ways +bear a constant relation. If Fisher has any concrete data, of a +statistical nature, to support the doctrine of a constant ratio between +bank-balance and cash on hand in the case of individual depositors, he +has failed to put them into his book. Nor is there any statistical +evidence offered in the case of banks. It should be noted here that +finding a general average for a whole country or community would not +prove Fisher's point. General averages give no concrete causal +relations. Fisher's argument, moreover, starts with individual banks and +individual deposit-accounts (pp. 46 and 50) and generalizes the +individual practice into a community practice. He would have to offer +data as to individual cases. + +While general averages could not _prove_ the contention of a constant +ratio between reserves and deposits for individual banks, general +averages can _disprove_ the contention. A constant general average would +be consistent with wide variation in individual practices, on the +principle of the "inertia of large numbers." But if the general average +is _inconstant_, it is impossible that the individual factors making it +up should be constant. This disproof is readily at hand, both for the +ratio of deposits to reserves in the United States, and for the ratio of +demand obligations to reserves among European banks (most of which do +not make large use of the check and deposit system). + +For the United States, from 1890 to 1911, taking yearly averages, we +have a variation in the ratio of reserves to deposits of over 73% of the +minimum ratio. The ratio was 26% in 1894, and 15% in 1906. "The +juxtaposition of these extreme variations shows how inaccurate is the +assumption that the deposit currency may be treated as a substantially +constant multiple of the quantity of money in banks."[167] For New York +City, the annual average percentage of reserves of Clearing House banks +to net deposits varies from 24.89% in 1907 to 37.59% in 1894.[168] The +extreme variations[169] in weekly averages are (for the sixteen years, +1885-1900) 20.6% in August, 1893 and 45.2% in February, 1894. These +figures are extreme, since the number of occurrences is small for them, +but there are numerous occurrences of deviations from the mean as wide +apart as 24% and 42%.[170] The yearly fluctuation in all these ratios is +very great. + +The ratio of money held by the banks and money held by the people also +shows wide variation, and considerable yearly fluctuation. There is a +further complication, for the United States, of varying proportions of +the total monetary stock held by the Federal Treasury. As between the +banks and the public, the banks held about a third in 1893 (average for +the year), and nearly half in 1911.[171] Whatever may be the relations +between money in the hands of the people, money in banks, and volume of +deposits, in "the static state," there is no statistical evidence +whatever to justify the notion of fixed relations among them in real +life.[172] We shall later show that there can be no static laws whatever +governing the relations of credit and reserves.[173] + +For European banks, the case is equally clear. European bankers deny +any intention of keeping any definite reserve ratio. This appeared very +clearly in the "Interviews" obtained for the Monetary Commission with +leading European bankers.[174] The Banque de France increased its gold +reserves, between 1899 and 1910, by 75%, but increased its discounts and +advances during the same period by only 5%.[175] J. M. Keynes[176] +points out that the reserves of the great banks of the world, and of +Treasuries which act as central banks, have absorbed an enormous part of +the gold produced in the fifteen years before the War, increasing their +holdings from about five hundred million pounds sterling in 1900 to one +billion pounds sterling at the outbreak of the War. "The object of these +accumulations has been only dimly conceived by the owners of them. They +have been piled up partly as the result of blind fashion, partly as the +almost _automatic consequence_, in an era of abundant gold supply, of +the particular currency arrangements which it has been orthodox to +introduce.... The ratios of gold to liabilities vary very extremely from +one country to another, without always being explicable by reference to +the varying circumstances of those countries.... The contingencies, +against which a gold reserve is held, are necessarily so vague that the +problem of assessing the proper ratio must be, within wide limits, +indeterminate. It is natural, therefore, that bankers, who must act one +way or the other, should often fall back on mere usage or accept _that +amount of gold as sufficient_ which, _if they are chiefly passive, the +tides of gold bring them_. [Italics mine.] At any rate, the management +of gold reserves is not yet a science in most countries. There is no +ideal virtue in the present level of these reserves. Countries have got +on in the past with much less, and under force of circumstances could do +so again." + +It will be noticed that Keynes, in the passage cited, is speaking of +_gold_ reserves, while Fisher's contention relates to all kinds of money +available for reserves, which in this country would include gold, silver +dollars, greenbacks, and, for many State banks, the notes of national +banks. He is also talking of the relation of reserves to demand +_liabilities_, which for most great European banks are primarily notes, +rather than of reserves to deposits. But as an exposition of the theory +of the ratio of reserves to deposits (the chief liability of American +banks), it is applicable to American conditions, and as a statement of +the facts, it of course gives a basis for testing Fisher's doctrine +generally. I do not think that Fisher's fixed ratio, as between reserves +and deposits, or even the ratio which more moderate quantity theorists +might seek to find between gold and demand liabilities, will find any +justification in the facts of banking history.[177] + +A factor which has developed on a grand scale in recent years has tended +still further to weaken any tendency that may be supposed to exist +toward a fixed ratio between money-reserves and demand-liabilities. I +refer to the gold exchange-standard, in India, the Philippines, and +elsewhere, and to the practice of the great banks of the continental +countries of Europe, particularly the Bank of Austria-Hungary, of +holding foreign gold bills, rather than gold exclusively, as reserve to +cover note issue. In the case of the Austro-Hungarian Bank, which has +carried this practice to the extreme, all possibility of a fixed ratio +between gold reserves and demand-liabilities has vanished. The ratio is +highly flexible. When bills are cheap, _i. e._, when the exchange is "in +favor" of Austria-Hungary, the Bank buys bills with gold; when bills +are high, when the exchanges have turned "against" Austria-Hungary, the +Bank sells bills for gold. Commonly, the holder of a note of the +Austro-Hungarian Bank does not ask for it to be redeemed in gold, but in +foreign exchange. The reason for this practice on the part of the Bank +is primarily economy. A large holding of gold would represent idle +capital--a heavy burden for the Bank of a debt-ridden and poorly +developed country. Foreign bills, however, serve equally well for +maintaining the value of the bank-notes, and at the same time bear +interest.[178] A similar practice has been employed by the Reichsbank, +by the National Bank of Belgium,[179] by virtually all the debtor +countries of Europe, and the great trading countries of Asia. + +Confidence in these conclusions is much increased by a study of the +views of Professor Taussig.[180] Professor Taussig is, in his initial +formulations of his doctrine, a quantity theorist. In a situation where +only money is used, credit being excluded, in effecting exchanges, he +would hold that the quantity theory correctly accounts for prices. He is +fond of the old formulation, as a first approximation, even in dealing +with the complex facts of modern banking. But he does not dodge the +complex facts, and his theory becomes, substantially, first, a general +formula, and second, an elaborate body of qualifications and exceptions, +the latter making up the major part of the theory. His doctrine +regarding the relation of money and credit is as follows: there is, in +the long run, a real _limitation_ on elastic credit instruments in the +quantity of _specie_. (This is very different from the assertion that +there is a _fixed_ ratio between _deposits_ and _money_ in circulation, +including paper, bank-notes, etc., in money. The present writer has no +quarrel with the doctrine that the gold supply of the _world_ imposes +_outside_ limitations on the _possible_ expansion of credit.) The +limitation, Taussig holds, comes in two ways: (1), in the connection +between prices in any one country, and prices in the world at large; +(2), in various links of connection between the volume of deposits (and +of notes elastic like deposits) and the quantity of specie. I shall +consider at a later point the relation between prices in different +countries.[181] I shall there maintain that the quantity theory, which +explains gold movements on the basis of price-_levels_ in different +countries, is inadequate; that not price-levels, but particular prices, +of goods most available for international trade, are of primary +importance, and that of these particular prices, one, namely the "price +of money," or the short time money-rate, is most significant of all. For +the present, I wish to analyze the linkages which Taussig finds between +elastic credit instruments and specie, and to see how far they would go, +not in proving Taussig's point (with which I have little quarrel) but in +proving Fisher's contentions. The points involved are: (a) _Direct +necessity_ constrains the bankers to keep _some_ cash on hand.[182] This +fixes a _minimum limit_ (Taussig's contention), but does not at all +suggest a "normal ratio" (Fisher's contention). (b) _Binding custom_, as +to the proper amount of reserve that banks should carry, particularly +important in connection with the Bank of England, but also in evidence +in the Banque de France and the Reichsbank. Here again, however, +minimal, rather than fixed, ratios are suggested. Limitations on the +_expansion_ of credit these customs may impose, but they by no means +determine a normal, or average amount of credit expansion--in England +least of all, since there is so large a flexible element in the deposits +of the Joint Stock Banks, whose reserves are largely secret. The +statement _supra_ quoted from Keynes, together with the testimony of +European bankers, may be considered in connection with this point, also, +as to the factors determining the reserve policies of the great European +banks. The extent to which custom really binds is doubtful. (c) _Direct +regulation by law_, peculiar to the United States. Here again, a +minimum, rather than a fixed ratio, is indicated. Some _limitation_ on +credit expansion by the banks is caused by this at times, but Fisher's +argument would require vastly more. (d) _The interaction in the use of +deposits, notes, and other constituents in the circulating medium._ The +point involved here is that different kinds of business call for +different kind of media. Small retail business is not done with hundred +dollar bills, nor are stocks and bonds bought with pennies. Limiting the +size of bank-notes to five pounds in England compels the use of a large +amount of gold for smaller transactions, and keeps a larger amount of +gold in use than would otherwise be the case. Expanding business draws +cash from the banks for circulation, trenching on reserves. That +Professor Taussig has a point here is not to be doubted, but how closely +it limits the expansion of credit will depend on the degree to which +different kinds of media of exchange really _are_ thus specialized. In a +country like the United States, where checks may be used for virtually +any transaction of over a dollar, and where small change for less than a +dollar will be increased by the Government to meet the demands of trade, +the point would not seem to involve a practically serious limitation. + +Finally, Professor Taussig recognizes a coefficient with the quantity of +specie in the _temper of the business community_. Whether or not +deposits are to expand, depends not only on reserves, but also on the +attitude of borrowers. + +Taussig concludes: "Thus there is only a rough and uncertain +correspondence of bank expansion with bank reserves; much play for ups +and downs which have no close relation to the amount of cash in bank +vaults, _and still less direct relation to the amount of money afloat in +the community at large_. Where bank media, whether in the form of +deposits or notes, are an important part of total purchasing power, the +connection between general prices and quantity of 'money' is irregular +and uncertain." (Italics mine.) + +This conclusion would be of little service in supporting Fisher's +rigorous contentions! Our constructive theory concerning the relations +of reserves and deposits, or reserves and demand liabilities, must wait +for later discussion, in the chapter on "Bank Assets and Bank Reserves" +in Part III. It will there be maintained that there are no "normal" or +"static" laws governing the percentage of reserves to demand +liabilities, or to deposits, that the reserve function of money is a +_dynamic_ function, and that its whole explanation must be found in +dynamic considerations. For the present, I am content to have analyzed +two widely divergent views, one the extreme view of Professor Fisher, +representing the quantity theory in its utmost rigor, and the other, the +view of Professor Taussig, who virtually surrenders the quantity theory +in complex modern conditions. + +In between these two writers, verging more toward Fisher than toward +Taussig, will be found, with great individual variation, the rest of the +quantity theorists. The quantity theory, as an instrument of prediction, +becomes important only to the extent that Fisher's view is maintained. + + + + +CHAPTER X + +"NORMAL" VS. "TRANSITIONAL" TENDENCIES + + +The Quantity Theory, as a causal theory, is, then, little altered by the +passage from a hypothetical, creditless economy to the actual world, +where a vast deal of credit is used,--particularly in Professor Fisher's +hands. Of the different kinds of credit, only deposits subject to check +are recognized as directly influencing prices, and deposits subject to +check are controlled by the volume of money. The causal theory[183] +remains, then, as follows: if M be increased, it will increase M' +proportionately; it will not change the V's; it cannot increase T; to +keep the equation straight, therefore, P must rise in proportion to the +rise in M. A decrease of M, reducing M' proportionately, leaving V's and +T unchanged, must proportionately reduce P. P is passive. A change in P +cannot sustain itself, unless it be due to a prior change in T, the V's, +M or M'. + +This theory is set forth with the qualification that these effects are +the "normal" effects of the changes in question. The proportion between +quantity of money and price-level is not strictly maintained during +"transition periods." I now approach the most difficult question which I +shall have to answer as to the meaning of Fisher's terms. The same +problem arises for all quantity theorists. Precisely what is the +distinction between "transition periods" and "normal periods"? What +limitations and qualifications does he admit to the rigorous statement +of his theory so far given? I may first express the opinion that the +line shifts greatly in his own mind, or at least shifts greatly in the +exposition. I do not find an explicit statement in which definitions are +given. The matter is chiefly discussed by Fisher in ch. 4,[184] which is +called "Disturbance of Equation and of Purchasing Power during +Transition Periods." There we find, as I have stated, no definitions, +but the initial statements would suggest the following: a transition +period is the period following a change in any one of the factors in the +equation during which a readjustment among all the others is taking +place; the normal period is the period preceding such a change, or +following the transition after such a change, and is characterized by +the fact that all the factors are at rest, in stable equilibrium. +Equilibria during transition periods are unstable. During the +transition, the relations among the factors vary: M and M' need not keep +their fixed ratio; P need not be wholly passive; M and P need not keep +the same proportion. But until M and M' get back into the normal ratio, +until P becomes proportional to M (in the proportion prior to the +initial disturbance), there is no rest; the equilibrium is unstable. How +long is a transition period? How realistic is the notion of a transition +period? Is the transition period a theoretical device, to aid in +isolating causes, or is it supposed to be a real period in time? Is the +normal period a real period in time, or is it merely a theoretical +hypothesis? It is not easy to answer these questions. Thus (p. 72) the +seasonal fluctuations are declared to be "normal and expected," and, at +the same time, one gets the impression that Fisher considers them +illustrations of his "transitions," in which the normal theory does not +strictly hold (pp. 72, 169). What is described chiefly in the chapter on +transition periods is the business cycle--a theory of the business +cycle, based primarily on the notion that the failure of interest to +rise as fast as prices rise causes the "boom," and that the draining of +bank reserves precipitates the crisis. I shall not discuss this theory, +as a theory of business cycles, further than to say that Wesley +Mitchell's study would indicate that the interest rate is a minor +factor, and that, while as a theoretical possibility, the drains on bank +reserves may check prosperity if something else doesn't do it first, +practically something else always does come in ahead, so far as his +studies have gone.[185] My interest here is primarily in seeing the +limitations Fisher imposes on his theory, and the qualifications he +admits. If the business cycle is the typical transition period, during +which his normal theory doesn't hold, when does the normal theory hold? +When are the "normal periods"? There is no concrete period during which +prices are neither rising nor falling, during which no important changes +are taking place among the factors.[186] At times, Fisher seems to +indicate that the normal period is imaginary (pp. 56, 159). Is, then, +the contrast between a realistic "transition period" and a hypothetical +"normal period" or are both hypothetical? Is the equation of exchange, +too, a mere hypothesis? It should be, if it is to set forth a merely +hypothetical theory. But no, Fisher insists on putting concrete data +into it, and, indeed, gives an elaborate statistical "proof" of the +equation. It, at least, is realistic. I confess that my certainty as to +Fisher's meaning grows less, as I study his book with greater care. If +the typical transition period be the business cycle, then the normal +period could come only once, say, in ten years--or whatever period, +regular, or irregular, one chooses to assign to the business cycle. The +concrete price-levels for the greater part of the time are then +surrendered to other causes. And the one-year cycle described in the +equation of exchange is quite irrelevant. The equation of exchange +should cover the whole business cycle, to fit in with the theory. +Indeed, a realistic equation of exchange would then have no meaning at +all, as the average price-level during the business cycle, played upon +by a host of causes other than the factors described in the quantity +theory, would not be the same as the average price-level which _would +have_ obtained had only the "normal" causes been in operation.[187] + +The distinction between "normal" and "transition" _periods_ suggests a +dangerous fallacy: namely, that during one period one sort of causation +is working, with the other in abeyance. In fact, whatever causes there +are are working all the time. The only legitimate thing is to abstract +from one set of causes, and see what the other set, if left to +themselves, will bring about. But this sort of abstraction has many +dangers, one of which is that the causes abstracted from are frequently +thought of as non-existent. The chemist, in his laboratory, can in +actual physical fact abstract impurities from his chemicals, and see +what they will do. He can even perform experiments in what is +practically a vacuum. But the economist has no right to _think in +vacuo_! All that he has a right to do is to assume the factors which he +does not wish to study _constant_. And even that he must not do if (1) +changes in the factors which he wishes to study do in fact lead to +changes in the factors abstracted from, or (2) if the factors which he +wishes to study can only change _because_ of prior or concomitant +changes in the factors from which he is abstracting. Is it, for example, +legitimate to assume an increase in M' apart from its usual +accompaniment, an increase in PT? + +The notion, too, that causation can be seen in a state of stable +equilibrium should be critically analyzed. Causation is only _revealed_ +by a _course of events_, when mechanical causation is involved. The +relation of cause and effect may be a contemporaneous relation in fact, +and it is possible, where conscious, psychological phenomena are +involved, to discern causal relations among the elements in a mental +state by direct introspection. It is the not uncommon practice, also, in +the theory of mechanics, or in theoretical economics, where the method +of investigation is deductive rather than inductive, to abstract from +the temporal sequence, and to construe causal relations as timeless, +logical relations. But even here, the cause of a _change_ in the general +situation precedes the change in time, and it is only by abstraction +that the time element is left out. If there is no question as to the +causal relations, this abstraction is legitimate, but if all that one +knows about the situation be that in a stable equilibrium certain +constant ratios obtain, then the question as to which term in the ratio +is cause and which is effect remains unanswered. In Fisher's situation, +then, assuming that it be true--which I shall deny--that the only stable +equilibrium is that which the normal theory requires, it still remains +true that the causal relations among the factors can only be revealed by +a study of the transitions, by seeing the temporal sequence of changes +in the factors of the equation. Even if it be granted that M, M' and P +tend to keep a constant relation to one another, the quantity theory +falls if, for instance, it can be shown that a change may first occur in +P, spread to M', and finally reach M last of all, leading to a new +normal equilibrium which is stable. I shall later show cases of this +sort.[188] + +The abstract formulation of Fisher's contrast will not, I believe, give +us an answer as to the extent to which he thinks his quantity theory +realistic. I find myself particularly in genuine uncertainty as to the +point mentioned above: would an actual equation of exchange for the +whole business cycle, made up of the averages of M, M', V, V', P and T +for the whole period, exhibit the "normal" relations among these +factors? Or would this "normal" relation only emerge concretely at some +moment of time in the course of the cycle when the abnormal causes +affecting the price-level happened to offset one another? Or is it true +that no actual figures which might be found, either for a moment of +time, or as averages for any given period, will exhibit the relations +required, and that only a hypothetical equation, based on the figures +for M, M', V, V', P and T that _would have been realized_ had there been +no "disturbing" causes, will show these "normal" relations? If, as +Fisher at times indicates--as in his reference to Boyle's Law (p. +296)--he is stating only an abstract tendency, which may be neutralized +by other tendencies in the situation, so far as concrete results are +concerned, then it is this last doctrine which we must take, and the +concrete equation of exchange has little if any relevance. If, moreover, +this last interpretation be given, then the whole of Fisher's elaborate +statistical "proof" is pointless. The only sort of statistical proof +which would be relevant would be of a much subtler sort, not a mere +filling out of the equation of exchange by means of annual figures, but +an effort to disentangle and measure the _importance_ of his tendency, +as compared with other tendencies. But we have the other tendencies +merely mentioned in qualitative terms, and we never find any definite +statement, of mathematical character, as to how important they are. + +It seems pretty clear, however, that on the whole, despite occasional +suggestions that his theory is abstract, Fisher means his theory to be +the overwhelmingly important point in the explanation of actual +price-levels. He is particularly insistent on the high degree of the +generality of his contention that P is passive. Thus: "So far as I can +discover, _except to a_ LIMITED _extent during transition periods, or +during a passing season_, (_e. g._, _the fall_) (capitals mine, italics +Fisher's), there is no truth whatever in the idea that the price-level +is an independent cause of changes in any of the other magnitudes, M, +M', V, V', or the Q's."[189] On p. 182 he enumerates in a series of +propositions his general normal theory, and adds, as the first sentence +of proposition 9: "Some of the foregoing propositions _are subject to_ +SLIGHT _modification during transition periods_." (Italics and capitals +mine.) And the general drift of the argument, particularly in chapter 8, +where the heart of Fisher's causal theory is presented, would indicate +that the concessions he is disposed to make are very slight, indeed. + +The question as to how long a _time_ is required, in Fisher's view, for +a transition to occur, and for his normal tendencies to dominate, is +nowhere made clear. The quantity theory, in the hands of some writers, +is a very long run theory, for others, it is a short run theory. Thus, +Taussig would make the "run" exceedingly long.[190] Mill makes it a +short run theory. "It is not, however, with ultimate or average, but +with immediate and temporary prices, that we are now concerned. These, +as we have seen, may deviate widely from the standard of cost of +production. Among other causes of fluctuation, one we have found to be, +the quantity of money in circulation. Other things being the same, an +increase of the money in circulation raises prices, a diminution lowers +them. If more money is thrown into circulation than the quantity which +can circulate at a value conformable to its cost of production, the +value of money, so long as the excess lasts, will remain below the +standard of cost of production, and general prices will be sustained +above the natural rate."[191] I pause to note that it is really strange +that a single name should describe theories so different, resting on +such essentially different logic. Long run or short run theories, all +are "quantity theories," whether "money" be defined as gold, or as all +manner of media of exchange, or as only those media of exchange which +pass from hand to hand without endorsement. Fisher would doubtless call +his theory a long run theory. From the standpoint of the notion that +"prices ... lag behind their full adjustment and have to be pushed up, +so to speak, by increased purchases,"[192] however, we get a short run +quantity theory doctrine. The logic of these two is very different. The +short run doctrine seeks to explain the actual process of price-making +in the market. Money is offered against goods, and the actual quantities +on each side determine the momentary price-level, concretely. Or, when +credit is considered, money and credit offered against goods, at a given +time, or in a given short period, determine the actual price-level +reached. This is the logic of the equation of exchange--actual money +paid is necessarily equal to actual money received. The long run +doctrine is fundamentally based on a different notion. Surrendering the +actual or average of price-levels to other causes, in part, it still +asserts that, given time enough, and barring new disturbing tendencies, +a price-level will ultimately be reached which will bear it out. I find +no recognition, on Fisher's part, of the fact that these two doctrines +are different, and, in fact, I find them blended and confused in the +course of his argument. He would doubtless maintain that his is a long +run doctrine. But how long is the "run"? Sometimes it seems to be, as +already shown, a whole business cycle. Sometimes a passing season, as +the fall. When he undertakes to apply his theory to a practical proposal +for regulating the value of money, he relies on the quantity theory +tendency to bring about adjustments so quickly that it is worth while to +make _monthly_ adjustments in anticipation of it.[193] When discussing +the changes in gold premium on the Greenbacks during the exciting times +of the Civil War, he relies so thoroughly on his theory that he will not +allow even the rapid change of four per cent in a single day following +Chickamauga to occur except in conformity with the quantity theory. This +last statement is so remarkable that I must quote Fisher himself: "It +would be a grave mistake to reason, because the losses at Chickamauga +caused greenbacks to fall 4% in a single day, that their value had no +relation to their volume. This fall indicated a slight acceleration in +the velocity of circulation, and a slight retardation in the volume of +trade" (263). It would be indeed remarkable if the changes in the gold +market, which got war news before the newspapers got it, and where +changes in gold premium occurred before the rest of the country could +possibly react to the war news, should be controlled by V and T! I had +not supposed that the most rigorous of short run quantity theorists +would make any such demands on his theory as that. Indeed, I had not +supposed that the quantity theory would feel called on to explain the +gold premium, as such, except in so far as the gold premium is an index +of general prices. + +Finding it impossible to limit Fisher to any single statement of the +quantitative importance of his normal theory as compared with the other +tendencies at work, but concluding that, on the whole, he considers it +of high importance, I shall now proceed to an analysis of the reasoning +by which he seeks to justify it as a _qualitative_ tendency. I shall +maintain that, however long or short the period required, however strong +or weak the tendency he defends, the reasoning by which he seeks to +justify it is unsound, and that even as a qualitative tendency, the +quantity theory is invalid. At a later part of the book, as in an +earlier part,[194] I shall undertake to find the modicum of truth which +the quantity theory contains, and shall show that no quantity theory is +needed to exhibit this modicum of truth. + + + + +CHAPTER XI + +BARTER + + +In the statement of the quantity theory, the proviso is commonly made +that all exchanges must be made by means of money, or of money and +bank-credit. Barter is excluded by hypothesis. If resort to barter were +possible, then people might avert the fall in prices due to scarcity of +money, or increase in trade, by dispensing with money in part of their +transactions, and the proportional decrease in prices which the quantity +theory calls for would be lacking. Is this assumption true? Is barter +banished from the modern world, or does it remain reasonably possible, +and, to a considerable degree, actual? + +Fisher maintains the thesis--the failure of which he admits would spoil +the quantity theory[195]--that barter is practically impossible, and +negligible in modern business life. "Practically, however, in the world +to-day, even such temporary resort to barter is trifling. The +convenience of exchange by money is so much greater than the convenience +of barter, that the price adjustment would be made almost at once. If +barter needs to be seriously considered as a relief from money +stringency, we shall be doing it full justice if we picture it as a +safety valve, working against a resistance so great as almost never to +come into operation, and then only for brief transition intervals. For +all practical purposes and all normal cases, we may assume that money +and checks are necessities for modern trade."[196] + +This contention seems to me untenable. I think it can easily be shown +that barter remains an important factor in modern business life, +especially if one extends the term barter, a little, to cover various +flexible substitutes for the use of money and checks in effecting +exchanges. Clearly from the standpoint of the present issue, such an +extension of the meaning of barter is legitimate, as any such +substitutes would equally spoil the proportionality in the supposed +relation between prices and money, or prices and trade. + +Where does one find barter? Well, not to be ignored would be the +advertisements which fill many columns of such a paper as the New York +_Telegram_ in the course of a week; "Wanted: to trade a well-trained +parrot for a violin"--a trade that might, or might not, be a wise one! +There is a good deal of such simple barter among the people. Then, +perhaps more important, is the regular practice of sewing machine, +piano, automobile, and other similar companies of taking part of the +payment for a new machine, piano,[197] or automobile in the similar +thing which the owner is discarding. The old machine, piano, etc., are +then repaired, repainted, and sold again. This is a very extensive +practice. Again, there are companies which combine the business of +wrecking old houses and building new ones, who regularly take the old +materials as part of their pay. This is a highly important feature of +the organized building trade in great cities, and is frequently done in +small towns. The building trade is no negligible matter. The +"horse-trade" still thrives in rural regions, and barter of various +kinds, of live stock, of grain and hay, of fresh and cured meat, and of +labor, is an important feature in rural life in many sections. Much of +agricultural rent in the South is still paid in kind, under the "share +system." Much labor, especially farm and domestic labor, is still paid +for partly in kind. Where payments for labor are made in orders on +company stores, we have again what is virtually barter, from the +standpoint of the point at issue. _Real estate_ transactions make large +use of barter. Farms are exchanged for one another, with some cash (or +more usually, a promissory note) "to boot." The writer has repeatedly +heard real estate men say to customers: "I can't sell it for you very +easily, but I can trade it off, and maybe you can sell what you trade it +for." This is perhaps more frequent in rural real estate transactions, +and in the smaller cities, than in large cities, but it is very +extensive in New York City.[198] + +Again, when corporations are to be combined, various plans are possible. +There may be a merger; there may be a holding corporation; there may be +a lease. If the money market is easy, one of the former methods will be +used,--most frequently, for legal reasons, the holding corporation, if +there are any valuable franchises involved. But mergers and holding +corporations commonly involve buying out the interests which are to be +absorbed, and call for the use of checks. If the money market is tight, +therefore, the promoter of the combination may frequently find the lease +the more advantageous form of consolidation.[199] The great advantage of +the lease is that, when the money market is tight, it involves no +_financial plan_, no underwriting, no outlay of "cash." This is, +therefore, an equivalent of barter, so far as the point at issue is +concerned. Even where a holding corporation is formed, however, there +may be considerable barter: the stockholders of the corporation which is +absorbed may receive payment for their stocks, in whole or in part, in +the securities of the holding company, rather than in checks. An era of +financial consolidation, such as we have been passing through, and +through which we have not by any means gone, though the movement toward +_monopoly_ has been in great degree checked, presents a great deal of +this sort of barter, or equivalents of barter.[200] A striking thing to +notice here, moreover, is the flexible margin between use of bank-credit +and barter, a margin depending primarily upon the condition of the money +market, and particularly upon the money-rates. + +Not yet has the most important element in modern barter been mentioned. +I refer to the "clearing-house" arrangements of the stock and produce +exchanges. Under these arrangements, brokers who have sold ten thousand +shares of Westinghouse El. and M. Common during the day, and bought +seven thousand shares, buying and selling being in smaller lots, with a +number of different houses, no longer are obliged to deliver ten +thousand shares, receiving therefor $700,000, and to receive seven +thousand shares, paying therefor $490,000. Instead, they deliver three +thousand shares only to the clearing house, and receive from the +clearing house only $210,000 when the transaction is, from the +standpoint of the particular broker involved, completed. This is a far +remove, in technical perfection, from primitive barter, but it is +barter, and it saves the using of a vast deal of bank-credit as between +brokers. How important it is, from the standpoint of the stock exchange, +may be judged from the following statement in Sprague's _Crises Under +the National Banking System_: "A much more fundamental change in the +organization in the New York money market came with the establishment of +the stock exchange clearing house in May, 1892. It led to a very +considerable reduction in the _clearing-house exchanges of the banks_ +and also, and more important, in the volume of certified checks. +[Italics mine.] Overcertification of checks ceased to be a factor of the +first magnitude in the banking methods of the city. Had not this +arrangement for stock-exchange dealings been set up, it is probable that +it would have been necessary to close the stock exchange in 1893 and in +1907, and it is also probable that the volume of business transacted in +the years after 1897 could not have been handled." (P. 152.) + +The same arrangements have been widely introduced in other stock +exchanges, and in the produce exchanges.[201] + +In general, with reference to barter, this point is significant. The +money economy has made barter _easier_ rather than harder. It has made +possible a host of refinements in barter, which make it at many points +more convenient and cheaper than check or money exchanges. It is common +to find our present methods of conducting foreign trade described as a +"system of refined barter," which indeed, from the standpoint of the +present issue, it is: bills of exchange are neither money nor +bank-credit! Where bills of exchange are used in internal trade +extensively--as in Germany, where they pass from hand to hand in several +transactions before being discounted at banks[202]--we have a highly +important substitute for money and deposits, which functions as +barter,--flexibility of substitutes for money and deposits is strikingly +evident. The feature of the money economy which has thus refined and +improved barter is the _standard of value_ (_common measure of value_) +function of money.[203] This standard of value function, be it noted, +makes no call on money itself, necessarily. The _medium of exchange_ and +"_bearer of options_" functions of money are the chief sources of such +additions to the value of money as come from the money-use. But the fact +that goods have money-prices, which can be compared with one another +easily, in objective terms, makes barter, and barter-equivalents, a +highly convenient and very important feature of the most developed +commercial system. And so we reject another essential assumption of the +quantity theory.[204] + + + + + +CHAPTER XII + +VELOCITY OF CIRCULATION + + +For the quantity theory, it is important to treat velocity of +circulation of money and of deposits, as self-contained entities, really +independent factors. This is true of Fisher's theory. It is particularly +necessary that V and V' should vary from causes unconnected with M and +M'. The V's are to be a sort of inflexible channel, through which M and +M' run in their influence on the passive P, which is to rise or fall +proportionately with them. If an increase of M or M' should lead to a +reduction in the V's, if people, having more money available, should be +less assiduous in using every bit of it in effecting exchanges, then P +would not rise in proportion to the increase in M. Complete +demonstration of Fisher's thesis, therefore, requires the proof of the +negative proposition that V does not change as a consequence of changes +in M or M'. This proof Fisher finds in the contention that the V's are +fixed by the habits and conveniences of individuals, whence they are not +influenced by such a cause as a change in the amount of money.[205] + +V is defined,[206] not as the number of times a given dollar is +exchanged in a given year (the "coin-transfer" notion), but as a social +average based on the average number of coins which pass through _each +man's_ hands, divided by the average amount held by him (the +"person-turnover" concept of velocity.) V' is similarly defined. Fisher +asserts that both concepts, if correctly employed, lead to the same +result. I would point out one important difference between them here: +if money is _short-circuited_, if, _i. e._, a part of the economic +community loses its incomes, or finds its incomes reduced, then the +"velocity of money," on the "coin-transfer" basis is reduced, provided +the "person-turnover" average remains the same, while on the +"person-turnover" basis the velocity will remain unchanged. It is +clearly the "coin-transfer" concept which is fundamental, from the +standpoint of the equation of exchange, and Fisher feels justified in +using the other method only because he considers it an equivalent of the +"coin-transfer" concept. I shall later show cases where the distinction +between the two concepts is all-important, particularly in the case +where T is reduced by the elimination of _middlemen_.[207] + +The conception of velocity of circulation as a real, unitary entity, a +_cause_, in the process of price-determination, is, I suppose, almost as +old as the quantity theory itself. It is an essential part of the +quantity theory. To me "velocity of circulation" seems to be a mere +name, denoting, not any simple cause or small set of causes, which can +exert a specific influence, but rather a meaningless abstract number, +which is the non-essential by-product of a highly heterogeneous lot of +_activities of men_, some of which work one way, and others of which +work in another way, in affecting prices. It is at best a passive +_resultant_ of conflicting and divergent tendencies, and has, to my +mind, no more _causal_ significance than the average of the abstract +numbers of yards gained by both sides, heights and weights of players, +kick-offs, and minutes taken out for injuries, would have on the result +of the Yale-Harvard game. The real causes of changes in prices lie +deeper! I should expect V and V' to be the most highly flexible factors +in the equation of exchange, and should expect to be able to keep the +equation straight, in a great variety of situations, by allowing the V's +to vary. + +Before undertaking detailed analysis of the causes governing V, I shall +discuss Fisher's specific argument, typical of the quantity theory, that +an increase of money cannot change the V's. "As a matter of fact, the +velocities of circulation of money and deposits depend, as we have seen, +on technical conditions, and bear no discoverable relation to the +quantity of money in circulation. Velocity of circulation is the average +rate of 'turnover,' and depends on countless individual rates of +turnover. These, as we have seen, depend on individual _habits_. Each +person regulates his turnover to suit his individual _convenience_.... +In the long run, and for a large number of people, the average rate of +turnover, or what amounts to the same thing, the average time money +remains in the same hands, will be closely determined. It will depend on +density of population, commercial _customs_, rapidity of transport, and +other technical conditions, but not on the quantity of money and +deposits nor on the price-level." (Italics mine.[208]) He proceeds to +assume that money is doubled with a _halving_ of the V's, instead of a +_doubling_ of P. Everybody now has on hand twice as much money _and +deposits_ as his convenience has taught him to keep on hand. He will +then try to get rid of this surplus, and he can only do it by buying +goods. But this will increase somebody else's surplus, and he will +likewise try to get rid of it. This will raise prices. "_Obviously_ this +tendency will continue until there if found another adjustment of +quantities to expenditures, and the _V's are the same as +originally_."[209] The foregoing argument rests in part, it will be +seen, on the assumption that a fixed ratio between M and M' obtains, +else the increase of _money_ in everybody's hands would not mean a +corresponding increase in their _deposits_. I have already criticised +this doctrine. For the contention that the V's will finally be _just the +same_ as before, I find no specific argument at all--"_obviously_" +presumably making that unnecessary. + +As the point immediately at issue is that V's will be _unchanged_ by the +increase in M (otherwise P would not increase _proportionately_--let us +see if considerations can be adduced which will make this a little less +"obvious." First, it will be noticed that Fisher, in the foregoing, in +one sentence speaks of the matter as resting on _habit_, and in the next +sentence, on _convenience_. He speaks, also, of business _custom_. Now +it is important to note that habit and custom, on the one hand, and +considerations of convenience on the other, do not necessarily coincide. +Many habits and customs are highly inconvenient. And it is not at all +likely that habit and custom should govern so highly complex a thing as +the ratio between cash on hand and the price-level. Rather, in so far as +custom and habit rule, one would expect them to relate to a simpler +matter, namely, the _amount of cash on hand_. If the amount of cash kept +on hand should remain controlled by habit, while the amount of money is +increased, then V, instead of remaining unchanged, would actually be +increased, unless the habits should be broken in on. I shall show in a +moment that considerations of convenience would probably lead to a +reduced V, in so far as individual turnover is concerned. But which +tendency will prevail? Well, that will depend on the degree to which +custom and habit rule as compared with considerations of +convenience--_i. e_., there would be no rule valid for all communities. +That convenience would lead to a larger amount of money on hand--and I +am following Fisher's temporary hypothesis that there has been no rise +in prices prior to the movement to restore the V's to their old +magnitudes--will appear from considerations like these. Few men have as +much on hand as they would like to have, including both their cash in +hand and their deposit balances. Most people have the tendency to hoard, +though it is usually held in check by necessity. If money on hand be +increased suddenly, without prices being increased, and without any +prospect of increased incomes in the future--and there is nothing in +Fisher's provisional hypothesis to call for increased incomes, as they +could, in fact, come only from an increase in prices--why might not +there be a considerable saving of money, with a corresponding reduction +in V? If it be objected that people, in saving their money, will in +considerable degree put it into the banks, and that the banks, with +larger reserves, will increase loans and deposits, I would urge, that it +is on the part of banks that this tendency to increase hoards in times +of abundant money is particularly marked, and for proof would point to +the figures quoted from Keynes[210] for the great banks and treasuries +of Europe in the last fifteen years. It is not necessary for my purpose +at this point to do more than show that there is reason to expect an +increase in money to _change_ the V's. Fisher's argument rests on the +contention that the V's will be neither increased or reduced--otherwise +an increase in money will not _proportionately_ raise prices. The appeal +to habit and custom in the matter is particularly unsatisfactory. Custom +and habit could not possibly regulate things so complex as velocities of +money and bank-deposits. + +Whatever be the ultimate effect of an increase in money, the immediate +effect is commonly to reduce the money-rates. Banks have less inducement +to pay interest on deposits, and charge lower rates for loans. Now +merchants, especially small merchants, are often embarrassed in making +change for customers. The man who has tried to make payment with a ten +dollar bill in a country store has not infrequently put the storekeeper +to much inconvenience. To offer a ten dollar bill, or even a five dollar +bill, to a storekeeper on Amsterdam Avenue in New York City may well +mean that the one clerk in the establishment, or the proprietor's wife +will run out with the bill to three or four neighboring stores before +finding change with which to break it. If money is more abundant, if +money-rates are easier, for a time, it may easily happen that many small +merchants will experience the superior convenience of having a more +adequate amount of change in the till, and will, even after the +money-rates have risen--if they do rise again to the old figure--find a +new reason for keeping more cash on hand. There is a marginal +equilibrium between the interest on the capital invested in cash in the +till, and the wages of the clerk,[211] whose active legs assist the +velocity of money. Not only banks and small dealers, however, find it +advantageous to increase their supply of ready funds, held idle for +special occasions. The United States Steel Corporation has kept as much +as $50,000,000.00 to $75,000,000.00 in idle cash or idle deposits, as a +means of being independent of banks in times of emergency.[212] The +motive for accumulating reserves and hoards, either of cash or deposit +accounts, is at all times strong. In times of financial ease, it may +easily find the difficulties which ordinarily repress it give way, and, +by being gratified, grow stronger. + +I conclude that there is positive reason for expecting an increase of +money to reduce the velocity of money. + +Horace White, in his _Money and Banking_, in the earlier editions, +speaks of the velocity of money, "_alias_ the state of trade." Is not +this the truth? Is not money circulating rapidly, when business is +active, and slowly when business is dull? Is not the velocity of +circulation a highly flexible and variable average, a _cause_ of +nothing, and an index of business activity? Or, better, perhaps, are not +the V's and T both governed, in large degree, by more fundamental causes +which are largely the same for both? Fisher would admit something of +this for transition periods. Even for normal adjustments, he admits that +an increase in T, unaccompanied by an increase in M, leads to some +increase in the V's, though he doesn't say how much.[213] He denies, +however, that an increase in the V's will increase T.[214] In general, +it is clear that he regards the V's and T as governed by different +causes. The control of the V's by T is not the only or the chief control +of the V's. The V's can increase greatly without an increase of T, in +his scheme. That this is so, will appear from a comparison of the list +of causes which he gives as governing the V's and T respectively: + +Causes governing V's: + + 1. Habits of the individual. + (a) As to thrift and hoarding. + (b) As to book credit. + (c) As to use of checks. + + 2. Systems of payments in the community. + (a) As to frequency of receipts and disbursements. + (b) As to regularity of receipts and disbursements. + (c) As to correspondence between times and amounts + of receipts and disbursements. + + 3. General causes. + (a) Density of population. + (b) Rapidity of transportation. + +Compare this list with the causes governing T:[215] + + 1. Conditions affecting producers: + Geographical differences in Natural Resources; the + division of labor; knowledge of technique of production; + accumulation of capital. + + 2. Conditions affecting consumers: the extent and + variety of human wants. + + 3. Conditions connecting consumers and producers: + (a) Facilities for transportation. + (b) Relative freedom of trade. + (c) _Character_ of monetary and banking systems. (Not + their _extent_.) + (d) Business confidence. + +These two lists are quite different, and indicate that in Fisher's mind +the magnitudes, T and the V's, in general obey different laws. The only +factor in both lists is facilities for transportation ("rapidity of +transportation," in the first list). Strangely enough, T, though later +recognized as having influence on the V's[216] is not included in these +lists in ch. 5. The "character of the monetary and banking systems" in +the second list is evidently not the same as "use of checks" in the +second list, though it will doubtless affect that factor, as also the +"habits as to thrift and hoarding," in some degree. "Business +confidence," which is, in the view I am maintaining, as in the view, I +should take it, of Horace White, the great variable affecting both T and +the V's, does not appear in the first list. Indeed, one wonders why +business confidence appears in either list, if only "normal," and not +merely "transitional" causes are to be considered, but it appears from +the fuller discussion on p. 78 that Fisher is not thinking of business +confidence as a _variable_ at all--his normal theory has nothing to do +with _variables_--but as a thing which either is or is not present, a +sort of Mendelian unit, not a thing of degrees.[217] It will be noted, +further, that most of the causes which Fisher lists as affecting T are +really causes affecting _production_--they would be just as important +under a socialistic as under an exchange economy. + +Now I propose to show, on the basis of Fisher's own list of causes, that +most, if not all, of the factors affecting the V's, will also affect T, +_and in the same direction_. He admits this as to transportation +facilities. It is surely true of thrift and hoarding. The miser neither +circulates money nor buys goods. It is emphatically true--though +Fisher's theory, as will later appear, is obliged to deny it,--of both +book credit and banking facilities. Without the use of credit, much of +the business now done simply would not be done at all. For Fisher, and +the quantity theory in general, the contention would be simply that the +same business would be done _on a lower price-level_. I reserve a full +discussion of this fundamental point till later, noting here, in +passing, that the function of banks is to assist in effecting transfers, +that that is why, from the social standpoint, banks are encouraged, and +that the extension of banking would be folly if they did not, in fact, +do this. As to book credit, let us suppose that, for example, in the +great cotton section of the South the stores should cease to give +advances of supplies on credit to negroes and small white farmers, +pending the "making" of the crop. The outcome would be starvation for +many of them, and no cotton crop at all. Under a system of private +enterprise, the very division of labor itself, including the +specialization of the capitalist, involves credit, and it is difficult +to conceive a form of credit which does not either dispense with the use +of money, or increase its "velocity." Admittedly, the division of labor +increases trade. + +The three factors listed under "Systems of payment in the community" +also affect trade. To the extent that receipts are frequent, regular, +and synchronous with outgo, we have a smoothly working economic system, +which facilitates commerce. + +Finally, density of population enormously increases trade. The +concentration of men in cities is essential for modern factory +production, and the great cities have necessarily grown up about good +harbors, or at strategic points for connecting lines of railroads. It +seems almost trivial to insist on so obvious a point, but Fisher seems +totally to ignore it, for he says: "We conclude, then, that density of +population and rapidity of transportation have tended to increase prices +by raising velocities. _Historically this concentration of population in +cities has been an important factor in raising prices in the United +States._"[218] (P. 88. Italics mine.) + +This is an astounding proposition. It is not merely that the +concentration of population in cities has _tended_ to raise prices +through raising velocities. It is a statement that this has been an +important historical cause of the actual increase in prices. For +Fisher's own theory, if the same cause had tended to increase T,[219] +that would have offset the rising V's on the other side of the equation, +and left prices little affected. But he sees in the V's an independent +cause here, divorces them from their connection with T, and follows his +logic fearlessly where it leads. I do not see how one could more +strikingly illustrate the essential vice of erecting the V's into causal +entities. + +In concluding the discussion of the role of velocity of circulation, I +think it worth while to mention Fisher's own efforts to measure them. I +examine his statistics in a later chapter. I do not regard the points at +issue as points which can properly be handled by inductive methods, +primarily. I do not accept his conclusions with reference to the +magnitudes of V, the velocity of money, partly because I do not accept +his doctrine that "banks are the home of money" (p. 287).[220] He finds +for V a fairly constant magnitude during the thirteen years from 1896 to +1909, the range being from 19 to 22, the figures for all the years +except 1896 and 1909 being interpolations.[221] For V, however, which is +much the more important magnitude, from the standpoint of his equation +of exchange for the United States, since deposits do so much more +exchanging than does money, he finds a wide range of variation, from 36 +to 54, and he states: "We note that the velocity of circulation has +increased 50% in thirteen years and that it has been subject to great +variation from year to year. In 1899 and 1906 it reached maxima, +immediately preceding crises" (285). I think Fisher's own statistical +results show that V', at least, is a child of the "state of +trade."[222] Critical analysis of these statistics show that they +greatly underestimate the variability of the V's.[223] + +In summary: V and V' are not, as Fisher contends, independent of the +quantity of money. Instead of resting on "technical conditions," and +having large elements of constancy and rigidity, they are highly +flexible, and vary, on the whole, with the same highly complex and +divergent sets of causes which govern the volume of trade. The biggest +factor affecting the variations of the V's on the one hand, and volume +of trade on the other is business confidence--a factor which Fisher's +normal theory is not concerned with, so far as it is considered as a +variable, but which, more than anything else, does affect the concrete +figures which go into the equation of exchange, either for a single +year, or for an average of a good many years. The V's are not true +causal entities, but merely abstract summaries of a host of +heterogeneous facts. I have indicated before, and shall later +demonstrate more fully, that the same is true of T. Even the "normal" +causes governing the V's, however, are factors which likewise affect T, +and in the same direction. + +Among the factors affecting both V and T, there is one which sometimes +makes them move in opposite directions, and that is the _value of money_ +itself. This is so well stated in Wicksteed's interesting criticism of +the quantity theory that I content myself with a quotation:[224] "Again, +the history of paper money abounds in instances of sudden changes, +within the country itself, in the value of paper currency, caused by +reports unfavorable to the country's credit. The value of the currency +was lowered in these cases by a doubt as to whether the Government would +be permanently stable and would be in a position to honor its drafts, +that is to say, whether this day three months, the persons who have the +power to take my goods for public purposes will accept a draft of the +present Government in lieu of payment. It is not easy to see how, on the +theory of the quantity law, such a report could affect very rapidly the +magnitudes on which the value of the note is supposed to depend, viz., +the quantity of business to be transacted, and the amount of the +currency. Nor is it easy to see why we should suppose that the frequency +with which the notes pass from hand to hand, is independently fixed. On +the other hand, the quantity of business done by the notes, as distinct +from the quantity of business done altogether, and the rapidity of the +circulation of the notes may obviously be affected by sinister rumors. +Two of the quantities, then, supposed to determine the value of the unit +of circulation, are themselves liable to be determined by it." + + + + +CHAPTER XIII + +THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION + + +In proving that an increase of money must proportionately increase +prices, it is necessary to prove that the volume of trade is independent +of the quantity of money and credit instruments by means of which trade +is carried on. Money on the one hand, and quantity of goods to be +exchanged on the other, are the two great independent magnitudes, whose +equilibration mechanically fixes the average of prices. This notion, as +to the essence of the quantity theory, finds expression in Taussig,[225] +"The statement of a quantity theory in relation to prices assumes two +independent variables: total money or purchasing power on the one hand, +total supply of goods or volume of transactions on the other." Taussig, +though he would maintain that this independence holds, so far as money +and trade are concerned, admits that it breaks down so far as trade and +elastic bank credit, bank-notes and deposits, are concerned. Trade and +elastic bank-credit are largely _inter_dependent.[226] This concession +on Taussig's part means virtually giving up the quantity theory for +Western Europe and the United States and Canada, though Taussig still +sees something left of the quantity theory tendency in view of the +"irregular and uncertain" connection which he finds between money and +bank-credit.[227] Fisher, however, makes no such surrender. He is quite +as uncompromising as to the independence of _deposits_ and trade as he +is with reference to the independence of _money_ and trade. He does, +indeed, make the concession that increasing trade tends to increase +deposits _indirectly_, by increasing the ratio of M' to M, by modifying +the habits of the people as to the use of checks as compared with cash +(p. 165),[228] but he denies stoutly that there is any _direct_ relation +between them. (P. 168.) Trade acts only _via_ a modification of the +ratio between M and M', and M still remains controlled, not by trade, +but by quantity of money. As to any control over T by M', he repudiates +it explicitly, (P. 163.) Increasing M', either through an increase of M, +or through an increase in the normal ratio between M and M', will have +no effect on T,--or, for that matter, on the V's. The introduction of +credit, therefore, leaves the quantity theory intact: an increase of M, +increasing M' proportionately, leaving the V's unchanged, and having no +effect on T, must exhaust its influence on P, raising P proportionately, +if the equation of exchange is to remain valid. + +The argument set forth to prove that T is not influenced by M or M' is +as follows: "An inflation of the currency cannot increase the products +of farms or factories, nor the speed of freight trains or ships. The +stream of business depends on natural resources and technical +conditions, not on the quantity of money. The whole machinery of +production, transportation and sale is a matter of _physical capacities +and technique_, none of which depend on the quantity of money. The only +way in which quantities of trade appear to be affected by the quantity +of money is by influencing trades accessory to the creation of money and +to the money metal.... From a practical or statistical point of view +they amount to nothing, for they could not add to nor subtract one-tenth +of 1% from the general aggregate of trade." (_Loc. cit._ p. 155. Italics +mine.) Something similar is said on p. 62, where "transitional" +influences of M on T are being discussed: "But the amount of trade is +dependent, _almost entirely_, on other things than the quantity of +currency, so that an increase of currency cannot, _even temporarily_, +very greatly increase trade. In ordinarily good times practically the +whole community is engaged in labor, producing, transporting, and +exchanging goods. The increase of currency of a "boom" period cannot, of +itself, increase the population, extend invention, or increase the +efficiency of labor.[229] These factors pretty definitely limit the +amount of trade that can reasonably be carried on. So, although the +gains of the enterpriser-borrower may exert a psychological stimulus on +trade, though a few unemployed may be employed, and some others in a few +lines induced to work overtime, and although there may be some +additional buying and selling which is speculative, _yet almost the +entire effect_ of an increase in deposits must be seen in a change in +prices. Normally the _entire_ effect would so express itself, but +transitionally there will be also _some_ increase in the Q's." (Pp. +62-63. Italics mine.) + +Fisher is here exceedingly uncompromising, even where transitional +periods are concerned, and it is not necessary, in order to do his +position full justice, to make much distinction between "normal" and +"transitional" effects in my counter-argument. I shall, however, take +account of the distinction as I proceed, in justice to other, more +moderate, quantity theorists. + +It is a familiar doctrine that the quantity of money is irrelevant, that +things go on in much the same way whether money is abundant or scarce, +the only difference being that in the one case prices are high and in +the other, low; that, in particular, it is a gross fallacy to connect +the rate of interest with the amount of money, since (as many writers +would put it) the rate of interest depends on the amount of _capital_ +rather than _money_. At the opposite extreme, we have writers like +Brooks Adams (_Law of Civilization and Decay_), who see the fate of +nations and the progress of civilization resting on the abundance or +scarcity of money. Fisher takes the first position in its extremest +form.[230] + +The truth, I think, is intermediate. The effects of the New World +discoveries of gold and silver after the voyage of Columbus on trade and +industry were tremendous. Trade was enormously increased. Walker, in his +_Inter__national Bimetallism_,[231] asking, from the standpoint of a +quantity theorist, why prices only increased 200% while money increased +470%, admits that the chief reason was the increase in trade, due in +large part to the very increase in money itself. Sombart, in his _Der +Moderne Kapitalismus_,[232] finds in this influx of money a tremendous +source of capitalistic accumulations, (a) for the Conquistadores, (b) +for the handicraftsmen whose prices rose faster than their costs, (c) +for tenants whose rents were fixed in money, (d) for landowners, whose +rents were fixed in kind [a point not obviously true], and (e) for +bankers, as the Fugger. An increase of capital, savings that would +otherwise not have been made, must have profoundly modified the whole +industrial system, and greatly increased both industry and commerce. If +it be objected that effects of this sort are not usual, that they came +in a world which had been starved for money, and which, by means of the +enormous increase in money was able to pass from a "natural" to a money +economy, I reply that the difference between such a case and the usual +effects of an increase of money are in degree rather than in kind. The +world of Columbus' day was in part on a money economy, and the world +to-day, despite Professor Fisher's emphatic denial,[233] still employs a +great deal of barter, or equivalents of barter. I shall revert to this +point later. But even this consideration would not rob Sombart's points +of their significance for modern conditions. Further, we have an even +more striking case, on Walker's own showing, in the effects of the +Californian and Australian[234] gold discoveries in the 19th Century on +trade, industry, and speculation.[235] + +Nor is the tremendous agitation over bimetallism, involving a literature +so great that no man could dream of reading it all, involving great +political movements, Presidential campaigns, great Congressional +debates, repeated legislation, international conferences, etc., for +twenty years, to be explained on any other ground than that the world +felt practical, important, and unpleasant effects on industry and trade +from the inadequacy of the money supply. + +The view of Hartley Withers[236] is interesting here. He says: "any such +great addition to currency and credit would have a great effect in +stimulating production, and so would lead to a great addition to the +number of real goods which humanity desires and consumes when it can get +them.... Trade would be more active." On p. 23 he speaks of the enormous +expansion of trade made possible by paper representatives of gold. On p. +83 he speaks of the attitude of the money-market toward gold, which the +orthodox economist is apt to think of as a survival of Mercantilism. +Withers thinks that the money market is right in a large degree. + +As illustrating Withers' statement about the views of "practical men" on +this point, the following extract from a recent address by Theodore +Price, quoted with approval in a "market letter," written by Byron W. +Holt,[237] is interesting: "The fact seems to be that the exigencies of +war in Europe are leading to an extension of credit such as would not +have been possible in peace, because the hesitant conservatism of +bankers would have then prevented it, and we are finding that instead of +working harm it is doing good, because huge masses of fixed capital are +thereby made productive, and are circulating with the increased velocity +that always quickens enterprise and accelerates the wheels of +industry.... All the precedents of history indicate that accelerated +activity will come with peace and continue until the exuberance of +success has led men to build faster than the world has grown and to +demand credit upon the basis of future rather than of present values." + +What is the essential causation in the matter? Well, viewed merely as a +matter of mechanical equilibration, the quantity theory view is not +strictly true, by any means. For a given country--and Fisher's quantity +theory is always a theory for a given country, and, indeed, for any +separate market, even a single city[238]--an increase of banking credit +means an increase in non-monetary capital, because, to a greater or less +extent it dispenses with the use of gold, which goes abroad, bringing +back wealth in other forms in exchange. Adam Smith saw this clearly, +and phrased it strikingly, likening gold and silver coins to the +wagon-roads of Scotland, which are necessary for transportation, but +which none the less prevent the use of the roadways for raising grain; +whereas bank credit is like a wagon-road through the air, which restores +the roadbeds to cultivation. Increased non-monetary capital, other +things equal, should mean increased trade. + +But, more fundamentally, an increase in gold itself within the country, +if not bought by the export of an equivalent amount of other goods, _is +an increase of capital_. Not all capital is money, but standard coin is +capital. Money is a tool of exchange, and exchange is part of the +productive process. More money means more exchanging. That is what money +is for. Part of the mechanism is in the money rates, which go down as +money becomes more abundant, making it profitable to effect exchanges +which would not have been profitable had the money rates been higher. +Granted that the money-rates and the general rate of interest tend, in +the long run, to keep--I will not say at the same figure[239]--a certain +fairly definite relation to one another, it still does not follow that +the new "normal" equilibrium will give us an interest rate which is the +same as the general rate of interest was before the influx of gold. On +the strictest static theory, this is not to be expected. Because the +total amount of capital in the country is increased, and this means a +lowered interest rate all around, in the marginal employment of capital. +The margin of the use of capital will be lowered everywhere, including +the margin for the use of money. This means permanently lowered money +rates in the country, even though the permanent level be higher than the +initial money rates immediately following the access of new gold. I +have put the argument in terms that suggest the productivity theory of +interest, because it is more simply stated that way. I do not accept the +productivity theory, as a fundamental explanation of interest, but for +many purposes, the results to be obtained by it coincide with the +psychological time theories,--which also, in their present form, seem to +me imperfectly developed. I need not try to construct a theory of +interest here, however, as the familiar theories lead to no trouble at +this point. It is enough to point out that the increased amount of +capital, meaning better provision for present wants--wants concerned +with gold in the arts and with money for productive exchanges, as well +as goods generally since part of the new gold will be exported for other +things--will lessen the pressure of present as compared with future +wants, and so lessen the rate of interest on the time-preference theory. +The final outcome will be an extension of the marginal use of money, and +a greater volume of exchanges. Of course, the increase in the supply of +any kind of capital good, apart from a prior increase in the demand for +its services, will, on the mechanical view of economic causation, +necessarily lead to some fall in its capital value. Gold money will be +no exception to this rule. As to how much the increase in its quantity +will lead its capital value to fall, however, we are unable to say. For +the quantity theory, the fall will be in proportion to the increase. For +the theory just outlined, the fall will depend on the elasticity of +demand for gold in the arts, and on the elasticity of "demand" for +money, meaning by demand for money simply the demand for the short-time +use of money as a tool of exchange, a demand which governs _directly_, +not the capital value of money, but rather the "money-rates." The +relation between the money rates and the capital value of money will +best be discussed at another point.[240] We have no reason at all to +suppose that either of these demands[241] exhibits the tendency to obey +the law of proportional variation which the quantity theory requires of +money. + +It is further important to note that as a country gets more abundant +capital, there seems to be a tendency to extend the use of money rather +more than the use of many other capital goods. Where the interest rate +is 10 and 12%, as in Arizona and New Mexico, money, even when brought +in, tends to leave in large degree to bring in other forms of capital +which the situation calls for more imperatively. The early American +colonies, needing money pressingly, and making shift with a great +variety of substitutes for good metallic money, thoroughly acquainted +with the advantages of a money-economy from their European experience, +and having "habits" as to the carrying and using of money which they had +brought with them from Europe, still found it impossible to keep a great +deal of metallic money, in view of the still greater importance of other +forms of capital. It is in the most highly developed commercial +communities, commercial centres, and _par excellence_, in the +speculative centres, that the demand for the money-service is most +elastic.[242] A country where the rate of interest is low, loses other +forms of capital, and gains money, in the process of reequilibration, as +compared with a new and undeveloped section, although the new section +also extends the margin of the money service, in effecting a greater +number of exchanges, when money is increased. + +And this leads to a vital distinction, which quantity theorists almost +always lose: the distinction between the volume of _production_, and +the volume of _trade_. Even in the mechanical system of causation which +they describe, it is true only of production and transportation that +_technical_ and _physical_[243] factors are of primary significance, and +that money is of minor significance. For trade and commerce, money is +always highly important. To the extent that a region is primarily given +over to the primary productive activities, mining, and agriculture, such +trading as is necessary can be done by means of a small amount of money, +supplemented by barter and long-time book-credit. A region or a city +whose chief business is _commerce_, however, needs a large part of its +capital in the form of money, and of banking capital, which is largely +invested in money for banking reserves. _Trade_, as distinguished from +industry (and it is after all trade that is under discussion), is helped +or hindered as its tools are more or less abundant. These considerations +would suggest that the elasticity of the demand for the use of money is +greater than the elasticity of demand for the use of capital in almost +any other form. Production is, indeed, limited by labor supply and +natural resources, in considerable degree. _Trade_,[244] however, even +from the standpoint of mechanical causation, is limited chiefly by the +relation between the profits to be made in commercial transactions, and +the "price" that must be paid for the money and credit that are required +to put them through. There are enormous numbers of transfers that could +be made to advantage if there were no cost at all involved. They are not +made, because exchanging requires pecuniary capital. Let the pecuniary +capital increase, however, and sub-marginal exchanges become worth +while, the general margin is lowered. Commerce is the most highly +flexible and elastic portion of the whole productive process. The +elasticity of demand for commercial capital is, thus, greater than the +elasticity of demand for any other form of capital. + +How widely the volume of trade differs from the volume of production, +and how great is the element of speculative transactions in trade, will +best appear, I think, from an analysis of the figures which Fisher +gives[245] for the volume of trade in the United States. His figure for +the volume of trade in the year 1909 is $387,000,000,000.00, three +hundred and eighty-seven billions of dollars! This figure is reached by +equating the figures he has reached for MV plus M'V' to PT, and assuming +P to be one dollar, by making the "unit" of T, arbitrarily, a dollar's +worth of each sort of commodity, at the prices of 1909. I have already +commented on the legitimacy of this method of summarizing T,[246] and +need not say more here, beyond calling attention to the fact that +"volume of trade," as commonly used, does in fact mean, not T alone, but +PT. Fisher for years other than 1909, however, makes use of a different +method of getting at T: he takes certain indicia of _relative_ amounts +of trade, compares them with the same indicia for 1909, and estimates +the trade for other years as being such a percentage of the trade for +1909 as their indicia are of the indicia of 1909. The indicia chosen +are: (1) quantities of certain commodities, cotton, fruit, cattle, etc., +_received at_ principal cities of the United States, taken as typical of +the variations of the internal _commerce_ of the United States; (2) +quantities of 23 articles of import and 25 articles of export, for each +year, taken as typical of variations in the foreign trade of the United +States; (3) sales of stocks. These three indicia, weighted in a manner +to be described in a moment, are then averaged. There is a second +element in the index, made up by taking the figures for railroad +_tonnage_, and the figures for _receipts on first class mail_, which are +averaged. The first average and the second average are then combined +into a third average, which is the final index. The relation between +this index for every year other than 1909 and the same index for the +year 1909 determines the amount of T for each year--the two indicia, +together with the figure, $387,000,000,000.00, giving the required +amount by the "rule of three." I shall not go into details with the +method of constructing these averages, but I wish to make clear the +comparative _weight_ given to each element in the final index: The first +three elements count _twice_ as heavily as the last two, and so +constitute the biggest factor. In the first average, based on the first +three elements, the item taken as typical of internal trade is _weighted +by 20_, the item taken as typical of foreign trade is _weighted by 3_, +and sale of stocks _by 1_. It appears from Fisher's figures (p. 479), +that the one really big _variable_ among all the indicia is the sale of +stocks, but the weight given it is so small that it makes virtually no +difference in the final result. Thus, as between 1898 and 1899, stock +sales increased over 50%, but total trade, as shown by Fisher, increased +only 5%. In the following year, stock sales _decreased_ over 21%, but +total trade, on Fisher's figures, _increased_. The following year, 1901, +stock sales virtually doubled, but Fisher's final figure shows only an +increase around 13%. Two years later, in 1903, stock sales fell off +about 40%, from the figures for 1901, but again, as compared with 1901, +total trade on Fisher's figures shows an appreciable gain. The influence +of stock sales on Fisher's index is, virtually, negligible. The +dominating factor is the _receipts_ of selected staples, cattle, +cotton, rice, pig iron, etc., in the principal cities of the United +States. There is not a _single year_ in which his final figure for T +does not move in harmony with this factor (p. 479). He gets, thus, for +the volume of trade through the fourteen years under consideration, a +surprising steadiness, and a pretty uniform progressive development. + +In defence[247] of his method of weighting, Fisher says, simply: "These +weights are, of course, merely matters of opinion, but, as is well +known, _wide differences in systems of weighting make only slight +differences in the final averages_." (Italics mine.)[248] + +Are these figures valid? Well, first one is struck with the absolute +magnitude assigned to T. The figures seem vastly greater than would have +been anticipated. The method of calculating it, for 1909, I shall +discuss in detail in the chapter on "Statistical Demonstrations of the +Quantity Theory." For the present, it is enough to note that the +absolute magnitude is derived from figures collected by Dean David +Kinley for the National Monetary Commission,[249] of deposits, exclusive +of deposits made by one bank in another, made in about 12,000 banks (out +of 25,000) on March 16, 1909. These deposits were classified as (1) +money (with subdivisions) and (2) checks and other credit instruments. A +cross-classification divided them into (1) retail deposits; (2) +wholesale deposits; (3) all other deposits. Kinley's object was to +determine the extent to which checks are used, as compared with money, +in payments, particularly in wholesale and retail business. Fisher's +total, briefly, was obtained as follows: Kinley's figures, for the one +day, were increased to make an allowance for the non-reporting banks; +they were further increased on the assumption that March 16 was below +the average for the year; the figure finally obtained for the day was +then multiplied by 303, assumed as the number of banking days in the +year, and the product, 399 billions, was taken as representing the total +circulation of money and checks in trade. For some reason not made +clear, this total was subsequently reduced to 387 billions. Counting the +average price, P, as $1, T was considered to be 387 billions.[250] + +In the statistical chapter to follow, it will be shown that this +estimate is a very decided exaggeration. Deposits made in banks greatly +overcount trade. Very many payments represent duplications, loans and +repayments, taxes, etc., and are in no sense trade. This is true of all +classes of deposits, wholesale and retail, as well as "all other." But +for the present, I am concerned with the question, not of the absolute +magnitude of the volume of trade, but rather, the questions of its +character, of the elements that enter into it, and, above all, of the +extent to which it is physically determined by technical conditions of +production, and the extent to which it is flexible, a matter of +speculation, etc. + +We may approach this question from the angle of several bodies of +statistical information. First, the question may be raised: what is +there in the country which could be bought and sold enough in the course +of a year to give us anything like so great a total? The subtractions +which we shall find it necessary to make will still leave us an enormous +total. + +The United States Census Bureau[251] in 1904 reached the conclusion that +the _total wealth_ of the country was only $107,000,000,000. Of this, +over $62,000,000,000 was in real estate; $11,000,000,000 in railroads; +street railways, over $2,000,000,000; telephone, telegraph, water and +light, and similar enterprises total nearly $3,000,000,000 more. None of +these things enter into ordinary wholesale and retail trade. The items +that one would ordinarily think of are agricultural products, +$1,900,000,000; manufactured products, $7,400,000,000; mining products, +$400,000,000. Can these things be exchanged often enough in the course +of a year to account for $387,000,000,000! + +These figures are for 1904,[252] whereas Fisher's figures are for 1909. +If the Census Bureau had taken an inventory in 1909, the figures would +doubtless be larger. The inventory for 1912 made by the Census Bureau +does show a very considerable increase, the largest item being due to a +rise in real estate values. The figures for agricultural, manufacturing, +and mining products are, also, figures for a given time rather than for +total production through the year. But, making all the allowance one +pleases, it is quite incredible that one should reach a figure of +$387,000,000,000 by taking only the exchanges necessary to bring raw +materials through the various stages of production to the consumer. The +greater part of the $387,000,000,000 is to be explained in another way! + +A detailed analysis of Kinley's figures, on which the estimate of total +trade is based, leads clearly to the same conclusion. Kinley's figures +for the banks that reported on March 16, 1909, are as follows: + + Retail deposits 60 millions + Wholesale deposits 124 millions + "All other" deposits 502 millions + +The "all other deposits" are vastly greater than retail and wholesale +deposits combined! Notice, too, with reference to the question as to how +often goods need to be turned over in getting to the consumer: wholesale +trade uses only about twice as much money and checks as does retail +trade. Goods are not, if these figures are in any way typical of actual +trade, turned over many times in the process of reaching the consumer. +The "necessary," or "physically determined" number of exchanges, in the +routine of trade, is small, per item. + +Retail deposits of 60 millions make up less than one-eleventh of the +total. Retail and wholesale deposits together make up about +three-elevenths. What is the other eight-elevenths, represented by the +"all other deposits"? It will help if we see where these "all other" +deposits are located. If we find them scattered evenly throughout the +country, in rural regions as well as in cities, we might be at a loss. +If, however, we find them bunched in the big speculative centres, we may +conclude that speculation accounts for a large part of them. We do in +fact find this. + +The following figures show the different classes of deposits (1) in the +South Atlantic States; (2) in reserve cities; (3) in New York City +alone: + + _South Atlantic States:_ _Per Cent._ + + Retail deposits $ 3,300,000 19.0 + Wholesale deposits 4,900,000 29.0 + "All other" deposits 8,900,000 52.0 + + _Reserve Cities (including New York City):_ + + Retail deposits $ 24,000,000 5.6 + Wholesale deposits 78,000,000 18.2 + "All other" deposits 326,000,000 76.1 + + _New York City:_ + + Retail deposits 9,000,000 3.7 + Wholesale deposits 34,000,000 14.0 + "All other" deposits 198,000,000 82.2 + +It is difficult, with Kinley's figures, to get figures which exclude +returns from cities of substantial size, except for a State like Nevada, +where the mining and divorce industries complicate the figures. As near +an approach as can be made, perhaps, is to take the State of Louisiana, +excluding New Orleans from the totals. Even here, however, we include +five cities of over ten thousand, among them Shrevesport, with 28,000 +people. The following figures are for the State and national banks in +Louisiana, exclusive of New Orleans: + + Retail deposits $179,915 24.1 + Wholesale deposits 246,647 33.1 + "All other" deposits 318,915 42.8 + +We cannot tell, in these figures for Louisiana, how many banks are +represented, or what the average figures per bank are. For the whole +State of Arkansas, however, including five cities of over 10,000, with +two over 20,000, and one of 45,000, we can get an average for ninety +reporting banks. Even here we do not know where these banks are located +within the State; though it is probable that they are in the larger +places, and so exceed the average deposits for the banks in the State as +a whole, to say nothing of the average for the smaller places. The +ninety banks are almost wholly State and national banks. + + _Arkansas:_ _Per Cent._ + + Retail deposits $232,017 25+ + Wholesale deposits 231,614 25+ + "All other" deposits 456,544 49+ + +The average for all deposits, per bank, in Arkansas is $10,224; the +average for all the 11,492 banks reporting for the whole country is, +approximately, $60,000; the average for the 659 banks reporting from New +York State is $502,136; the average for the banks in New York City alone +is doubtless much higher, but cannot be stated, as Kinley's figures do +not tell how many banks reported by cities.[253] + +The "all other deposits" in Arkansas are 27.8% cash, and 72.2% checks; +the "all other" deposits in the country as a whole are only 4.1% cash, +with 95.9% checks; the "all other deposits" of New York City are only 1% +cash, with 98.9% checks. + +Several facts are very clear from these comparisons: (1) the proportion +of "all other deposits" increases very rapidly as we get closer to the +great centres of speculation, and is lowest in rural regions; (2) the +great bulk of all the deposits is in the cities. The average for +Arkansas banks, for example, is only one-sixth the average of the whole +country, and is only one-fiftieth the average for the banks of New York +State. It is a much smaller fraction of the average for New York City, +but we cannot give an exact figure. The totals reported from the rural +regions are trifling, as compared with the totals reported from the big +cities. This, as will be made clear in the chapter on "Statistical +Demonstrations of the Quantity Theory," is not because the country +reports were less complete that the city reports. New York was probably +less complete than the country as a whole. It is simply because the +activity of country accounts is small, the amount of trading in the +country districts small, and (as shown) the _average_ for country banks +is small. (3) The character of the "all other" deposits in Arkansas +differs substantially from that of the "all other" deposits in New York +City, as indicated by the fact that the proportion of cash is high in +Arkansas--substantially higher, in fact, for the "all other" deposits in +Arkansas than for all deposits, or even for retail deposits, in the +country as a whole. The percentage of checks in total retail deposits in +the United States, in Kinley's figures, was 73.2; the percentage of +checks in the "all other" deposits in Arkansas was 72.2. We may count +these Arkansas "all other" deposits as, in considerable degree, deposits +made by farmers. What were the "all other deposits" made in New York +City? + +Dean Kinley's list of the miscellaneous elements that enter into the +"all other deposits," given on p. 151, contains only two that might be +expected to bulk large in New York without appearing in Arkansas. These +are: _brokers_, _and stock and bond financial corporations_. Of course, +theatres, hotels, publishing houses, railroads, public funds, "those +who have no specific business," and rich churches, will all be +absolutely much larger in New York City than in Arkansas. But these +things may be found in many places, scattered throughout the cities of +the country, without making anything like such "all other" deposits as +New York shows. It is not New York's foreign commerce that does it, +because that is represented in New York's "wholesale deposits," which +make up only 14% of New York City's total deposits for the day. It +cannot be the supposed "clearing house" function of New York City,[254] +whereby banks in different parts of the country pay their balances due +one another in New York exchange, because such transactions would appear +in New York chiefly in the figures for deposits made by one bank in +another, and these figures are excluded from Kinley's totals. It cannot +be the deposits of the "idle rich" for current expenses that swell New +York's "all other deposits" so greatly--these could not equal the total +retail deposits of the city, which are only 3.7% of the total in New +York. Moreover, similar deposits are made in many other cities, without, +in proportion to population, making any such totals. Figures, moreover, +for the aggregate yearly income of the United States, and for the +distribution of that income between rich and poor, make it clear that +any such items must be bagatelles in comparison with these enormous +figures. The only explanation that will really explain is the +speculative and investment and financial transactions that centre in New +York, and, in less degree, in the other great financial cities of the +country. + +This is Dean Kinley's opinion. In the "all other" deposits he makes a +50% allowance for speculative transactions. "A large proportion of +deposits in this 'all others' class undoubtedly represents speculative +transactions, all of which, or practically all of which, are settled +with credit paper."[255] It is also the opinion of General Francis A. +Walker, expressed concerning similar figures from earlier +inquiries.[256] + +Various kinds of evidence converge toward this conclusion. Thus, the +evidence of clearings, total items presented by banks to the clearing +houses of the country. New York clearings are usually nearly twice as +great as total clearings for the rest of the country. New York clearings +fluctuate in general harmony with transactions on the New York Stock +Exchange. This has been commented on many times. The extent to which it +holds has recently been carefully measured by Mr. N. J. Silberling, +whose results appear in the _Annalist_ for August 14, 1916, under the +title, "The Mystery of Clearings." Mr. Silberling applies the +"coefficient of correlation" to the problem, getting in one significant +figure a measure of the extent to which two variables, as share sales on +the New York Stock Exchange and New York clearings, vary together. This +coefficient has been used enough by economists not to require detailed +explanation here. It is a figure always between +1 and -1. +1 indicates +that the two variables in question are perfectly correlated, whereas 0 +indicates no correlation whatever. -1 indicates an inverse correlation, +such that two variables vary exactly and inversely with reference to one +another.[257] + +Mr. Silberling's studies show the following correlations: New York share +sales (numbers of shares, not values) to New York clearings, using +weekly figures, for the years 1909-10, r = .628. This is a high +correlation. Limiting the observations to the middle weeks of the month +for the same period, he gets r = .731(46). The reason for taking only +middle weeks in the month is that thereby the disturbing factor of +monthly settlements is avoided. The monthly settlements may be for stock +transactions, or may be for other things, but as they are not dependent +on the stock transactions _of the week_ in which they occur, their +effect is to lessen the evident degree of connection between stock +sales and clearings. Thus the middle weeks show a closer correlation +between the two variables than do all the weeks taken as they come. If +figures for the month were taken, this complication would be smoothed +out, and a fairer result might be expected to appear. The middle weeks, +eliminating monthly settlements, probably eliminate more other things +than they do share sales (which are in large degree paid for in 24 +hours[258]), and so exaggerate somewhat the relation between shares and +clearings. Monthly figures avoid both complications, though they lose +something of the concrete causation. An intermediate figure might be +expected for the monthly correlation, and this we find: r = .718(23). + +A striking single fact in connection with these figures, giving them +point as less extreme variations could not do, is found in the behavior +of clearings when the Stock Exchange was closed, during the crisis of +1914. At that time, New York clearings, which had been about twice as +great as country clearings, fell suddenly _below_ country clearings. +When the Stock Exchange was opened, the old proportions suddenly +reappeared. + +That speculation spreads far beyond New York, New York being the centre +for dealings in securities, etc., which involve the whole country, is, +of course, well known. The extent of this Mr. Silberling seeks to +measure by correlating clearings outside New York with New York share +sales. His weekly correlation for these two variables for 1909-10 gives +r = .368(103), and the correlation for the mid-weeks gives a higher +figure, r = .424(46). The monthly correlation shows r = .257(23), a +lower figure, "which is perhaps due in part to the fact that the bulk of +the outside monthly clearings show relatively moderate fluctuations, +because of their diverse composition, and are less sensitive than the +periods of shorter length." + +Seeking an index of the variations of that trade which is, in Professor +Fisher's phrase, governed by "physical capacities and technique"--a law +which Professor Fisher,[259] as we have seen, would apply to the great +total of 387 billions which he has constructed--Mr. Silberling chooses +the gross earnings of the principal railways as the best available test. +Railways deal with all manner of other enterprises. He correlates this +with clearings outside New York. "The question might arise at once +whether changes in traffic are strictly concomitant with changes in +payments involved by it, and therefore with the clearings resulting. The +preliminary hypothesis that a 'lag' ensued between traffic and the bulk +of the payments was first tested by correlating the railway figures with +clearings of one month[260] and two months later, but no correlation was +obtained. The direct month-to-month correlation yielded, however, a +result r = .524(23)." This suggests that outside clearings are, in +substantial degree, an index of physical trade, but Mr. Silberling calls +attention to certain chance agreements between railway traffic and +speculation in cotton and produce and grain, speculation in the crops +which are in current movement, and regularly recurring concomitances +between traffic and speculation in March, when the railway traffic +revives after the February lull, and when there is a large mass of +dealing in Spring deliveries in Chicago. In view of the facts later to +be developed, with reference to the small actual value of the necessary +physical exchanges (partially covered already) as compared with +clearings, this query is well put. We may easily have here a "spurious" +correlation. Taking it at its face value, however, and taking the +correlation as indicating the influence of physical trade on bank +transactions, we get the following results, when _total clearings for +the country_ are compared with (a) New York share sales, and (b) with +railway gross earnings: (a) r = .607(23); (b) r = .356(23). "Physically +determined trade" is at best a minor factor in that total "trade" +represented by bank transactions! + +Mr. Silberling has buttressed his results with a consideration of +various alternative possibilities which might give them a different +interpretation. I need not, for present purposes, go further into his +figures.[261] Taken in conjunction with the other data presented, and to +be presented, together with the theoretical discussion of the nature of +trade, and its relations to money and credit, which the present volume +contains, they give the present writer abundant confidence in the thesis +that the great bulk of trade in the United States is SPECULATION, rather +than that sort of trade which is determined "by physical capacities and +technique." + +The figures given above, of the inventory of wealth at a given moment of +time, by the Bureau of the Census, show only trifling magnitudes, as +compared with the estimated 387 billions of deposits made in 1909, of +items which could enter into ordinary trade, as distinguished from +speculation and dynamic readjustments. An effort to calculate ordinary +trade on the basis of figures running through the year may throw further +light on the problem. Railway, gross receipts for the year ending June +30, 1909, were less than two and a half billions. This is six-tenths of +1% of the total. Receipts of the Western Union Telegraph Company were +$30,451,073--less than one-hundredth of 1%. The Post Office in the +fiscal year ending in 1909 took in $203,562,383. This is something over +one twentieth of 1%. These are gigantic sums. But they are insignificant +indeed in this computation. Millions of smaller items simply do not +count at all--ten million items of $387 each would give only 1%. The +total net income of the United States, as estimated by W. I. King for +1910, including all forms of income, dividends, interest, wages, rents, +profits, salaries, etc., is $30,500,000,000[262]--around 7% of the 387 +billions. + +Let us sum up the major items of ordinary trade. From Kinley's figures, +we may get some idea of the proportions of wholesale and retail trade to +the total for 1909, assuming that the deposit figures indicate that +total. Retail deposits make up less than one-eleventh of the total, and +wholesale deposits about two-elevenths. The figures were: retail, 60 +millions, wholesale, 124 millions, and "all other," 502 millions. But +the "all other" deposits were lower than normal. New York City was, in +the first place, probably less complete than the rest of the country, in +the figures returned, and, in the second place, New York City, as shown +by the clearings of March 17 (the next day, when checks deposited in New +York would get into the clearings) was 28% below normal. The rest of the +country was within 3% of normal.[263] Not to refine matters too much, we +shall, on the assumption that the variable element in New York deposits +is connected with the Stock Exchange (as shown by Mr. Silberling's +correlations and other considerations), and on the assumption that +deposits connected with the stock market appear in the "all other" +deposits, add a little over 20% of New York's total of 198 millions, or +40 millions, to the "all other" deposits for the country, leaving the +wholesale and retail deposits unchanged. What error there is in this is +favorable to the wholesale and retail deposits. Our proportions, then, +are: retail, 60, wholesale, 124, "all other," 542, total, 726. If the +retail deposits correctly represented retail trade, we could then say +that retail trade was a little less than one-twelfth of the whole, and +wholesale trade about one-sixth. But there are many speculative +transactions engaged in by wholesalers, and a good many by retailers. +The writer knows a small delicatessen dealer on Amsterdam Avenue, in New +York, who frequently speculates in eggs and canned goods. A colleague in +the Harvard Graduate School of Business Administration is authority for +the statement that speculation in canned goods and some other things is +quite common among retailers, particularly "hedging" by the use of +"futures," in canned goods. Speculation among wholesalers is very +extensive. The same is true of manufacturers. The same authority cited +some cotton manufacturers whose profits from cotton speculation are +greater than their profits from manufacturing. We shall see reason to +suppose that a very substantial part of manufacturers' deposits were +included in the wholesale deposits. That the figures for retailers' +deposits exaggerate the retail trade may appear from several +considerations: (1) The proportion of checks to cash reported is too +high: 73.2%. Dean Kinley allows 5% of the checks deposited to be +"accommodation checks,"[264] cashed for customers, rather than taken in +in trade. (2) If retail deposits are taken as exactly representative of +retail trade, we should get a retail trade for the year of over 32 +billions (1/12 of 387 billions), which would exceed the total income of +the country as calculated by King for 1910. Dean Kinley reached the +conclusion that the retail deposits reported in 1896 also exceeded the +probable retail expenditures.[265] Of course, not all of retail trade is +in consumption goods. Hardware stores, lumber stores, and some other +retail establishments sell, not only to householders for domestic use, +but also things which enter into further production, and so do not come +out of annual income. If we include in retail trade various items which +were not included there in Kinley's figures, such as hotels, theatres, +newspaper receipts from subscription and street sales, physicians' fees, +etc.--all those items which enter into the domestic budget, including +domestic service, we should still not be justified in reaching a total +as great as the total income of society, since there would then be no +allowance for savings, which we should not count in trade, or for life +insurance, which we shall count separately. The items sold at retail +which enter into further production cannot make a great total, since +large producers buy such things at wholesale. Total retail trade, +therefore, and, in addition all the other items in the domestic budget, +must be held below the figure for total national income. Suppose, to be +very liberal, we allow 29 billions[266] for all these items, under the +general head of "retail trade." + +For wholesale trade, if we take the figures at face value, the estimate +would be 65-3/4 billions (124/726 of 387 billions, or 17% of 387 +billions). But we have seen that there is a great deal of speculation +among wholesalers. Not all of their deposits, by any means, represent +receipts from ordinary business. Moreover, there is much overcounting +here, several checks being used for one transaction, especially where +wholesalers have branch houses, and checks connected with loans and +repayments, and transfers of funds from one bank to another. How much we +should subtract for this there is no way to tell. In the case of retail +figures, we have the additional check of the figures for total net +income, but there is no such check here. We shall, therefore, make no +subtraction, but shall content ourselves with pointing out that we are +allowing many billions[267] to "ordinary trade" to which it is not +entitled, which will much more than offset errors in the opposite +direction which the reader may find in our computations. + +Do manufacturers' receipts from first sales belong in the wholesale +deposits, or must they be counted as a separate item? Dean Kinley does +not say. In his list of items, as reported by banks, that go in the "all +other" deposits,[268] he does not mention manufacturers, and the item is +far too important not to have been mentioned by so careful a writer had +he supposed that it belonged there. If manufacturers' first receipts +belong, not in the wholesale deposits, but in the "all other" deposits, +then we should expect manufacturing cities to show a high percentage of +"all other" deposits as compared with wholesale deposits. The city of +Pittsburg should be a good test case. The figures there, for State and +national banks and trust companies, are: + + _Per Cent._ + Retail deposits $1,061,420 9.6 + Wholesale deposits 3,368,004 29.7 + "All other" deposits 6,672,378 60.6 + +For Pittsburg, the percentage of "all other" deposits is lower decidedly +than the percentage for the country as a whole (about 75%), much lower +than for cities where there is active speculation, as Chicago and St. +Louis, to say nothing of New York, and is closer to the percentage of +the South Atlantic States, 52%, than to the average for the country. The +wholesale deposits of Pittsburg, however, rise to 29.7%, as against an +average for the country of 17%. There is nothing in these figures to +suggest that manufacturers' first receipts are exclusively in the "all +other" deposits. I should think it safe to hold that a substantial part +of them were included in wholesale deposits, and so already accounted +for in our estimate. The total value of products manufactured in 1909 +was $20,672,051,870. I shall allow $5,672,051,870 of this to have been +already accounted for in our estimate of wholesale trade, and count 15 +billions of it as a separate item. If there is an error here, it is very +much more than offset by our failure to subtract anything from the +wholesale figures for speculation. I think it probable that much more of +the figures for manufactures should be assigned to the wholesale figures +than I have assigned. + +To these figures, we may add a number of other items, absolutely great, +but insignificant, in comparison with the 387 billions not only, but +also with the figures for retail and wholesale trade already reached. +These are: total farm value of farm products (not nearly all of which is +sold off the farm) $8,760,000,000; total mineral products, +$1,886,772,843; total mill value of lumber, $684,479,859; total life +insurance premiums (much of which is savings, and in no proper sense +trade), $748,027,892; total fire, marine, casualty and miscellaneous +insurance, $362,555,850; total wages and salaries, $14,303,000,000; +total land rent, $2,673,000,000;[269] and the items for railway gross +receipts, post office, telegraph, already mentioned. The total of these +items, together with retail and wholesale trade and manufactures, is +$141,860,618,000. This is only 36.6% of the total of 387 billions. It +leaves over 245 billions unexplained. What can the 245 billions +represent? There is really no way in which ordinary trade can make up +more than a very few more billions, so far as I can see. There remain no +items as big as 1% of the total, and, as we have seen, small items, of +hundreds of dollars each, are like "infinitesimals of the second +order"--they simply do not count at all when such staggering figures are +involved.[270] + +There remains, then, a total of 245 billions of check and money payments +which are for something other than the ordinary trade of the country. +What do these payments represent? Much of this total represents +overcounting and duplications of various kinds, which we shall consider +in a later chapter. Much of it also represents speculation and dealings +other than speculative in securities. When we seek to find actual +figures of transactions in any field, retail, wholesale, or speculative +markets, or anything else, it is exceedingly difficult to find anything +that approaches the amounts indicated by the banking transactions +connected. I do not think that a record of all sales would show retail +sales or wholesale sales anything like so great as the figures as we +have allowed for them on the basis of the retail and wholesale deposits. +When we look at the recorded figures of transactions on the speculative +exchanges (or at estimates which competent observers make when records +are not available), the figures, though very large, do not begin to +equal the banking figures with which we have to deal. The New York Stock +Exchange in 1909 showed sales, recorded on the ticker, of nearly 215 +million shares of stock, with an approximate value of over 19 +billions[271] of dollars. This was not an extraordinary year. In 1901 +nearly 266 million shares were sold, in 1905, over 263 millions, in +1906, over 284 millions. A number of other years have approached the +figures for 1909. If stock sales be a good index of general speculation, +1909 is a very satisfactory year from which to have got figures, as +showing neither extreme speculation, nor extreme dullness--which latter +was the case in 1896 when Kinley's other big investigation was made. The +figures for shares sold, however, do not exhaust the business done at +the New York Stock Exchange. "Odd lots," _i. e._, sales of less than 100 +shares, are not recorded on the ticker. Mr. Byron W. Holt estimates that +from 25 to 30% would be added if they were counted. DeCoppet and +Doremus, of New York, who handle at least as much of the "odd lot" +business as any other New York house, have given me the following +information about the "odd lot" business: (1) the volume of odd lot +sales is, roughly, from 20 to 25% of the volume of hundred share sales; +(2) the odd lot business fluctuates in conformity to the hundred share +market; (3) the odd lot speculator is just as likely to be a "bear" as +is the hundred share speculator, and, in general, odd lot business is +like the hundred share business. If we take the figure on which these +two estimates agree, 25%, we may add 53-3/4 million shares to our 215, +getting 268-3/4 million shares for 1909, with a value of about 24 +billions. Bond sales recorded would add about 1 billion more. There are, +further, some unrecorded sales, indeterminate in amount, but sometimes +very substantial, when brokers have a number of "stop loss" orders. They +match these before the market opens, and, if the prices are reached in +the actual trading, these sales become effective automatically, without +getting on the ticker. How extensive this is cannot be stated. It may +sometimes add very substantially.[272] Thus, on the floor of the New +York Stock Exchange we have dealings in excess of 25 billions for 1909. +This is nearly as large as the figure we have assigned, on the basis of +the bank figures, to total retail trade of the country, and it may well +exceed the retail trade in fact. Recorded sales on other stock exchanges +do not, in the aggregate for the country, bulk very large. For 1910, +when New York shares reached 164 millions, the total for Boston, +Philadelphia, Chicago, and Baltimore was something over 21 million +shares.[273] The New York Curb has had "million share" days, but the +average value of shares is low. But the dealings on the floors on the +exchanges and "curbs" are far from all of the dealings in securities! +Only securities which have been admitted by the authorities are dealt in +on the exchanges. The volume of unlisted securities is enormous. +Moreover, not all, by any means, of the sales of listed securities take +place on the floors of the exchanges. The bond expert of a large banking +house in Boston informs me that the "over-the-counter" business in +Boston, both for stocks and for bonds, much exceeds the business in the +Boston Stock Exchange, and others among Boston brokers have expressed +the same opinion. The statement has been repeatedly made in the +financial press that of the bonds listed on the New York Stock Exchange, +ten are sold over the counter for one sold on the floor. Evidence on +this point is not to be had in definite figures, of course, but I have +found no one in Wall Street who regards it as extravagant. A single big +bank in New York sold $550,000,000 in bonds in 1911--more than half the +recorded bond sales on the Stock Exchange.[274] I should not know how +to estimate the volume of outside dealings within many billions of +"probable error." If ten billions of listed bonds are sold over the +counter in New York alone, we may well suppose that the volume of +over-the-counter sales of listed and unlisted securities at least is not +smaller than the recorded sales on the floors of the exchanges. But this +is all guess work. There are no definite data. + +For produce, cotton, and grain speculation we have, in general, +estimates rather than records. For the Board of Trade, in Chicago, there +is one quite striking piece of information. That is that the Federal War +Tax of 1 cent per hundred dollars on grain and provision futures on the +exchanges produced $2,000,000 in Chicago alone in 1915.[275] For the +purposes of the tax, deliveries within thirty days were counted, not as +futures, but as "spot" transactions. The tax was collected almost wholly +on grain. If the above figure is correct, then it is clear that dealings +in these futures of over thirty days aggregated 20 billions of dollars +worth. This gives no estimate of spot transactions, which are, however, +very great. All this trading involved less than 400,000,000 bushels of +grain received at Chicago--a little over a billion bushels were received +at all primary markets. The grain received at Chicago was, thus, (at +80 c. per bushel), sold sixty-two times over in these futures, and an +unknown number of times in spot transactions. There are further enormous +spot transactions in provisions of various kinds at Chicago. + +Chicago is the great centre, of course, for this kind of speculation in +the United States. It may well be the world's chief market, so far as +futures are concerned, though evidence to establish such a thesis is not +at hand. London and Liverpool are gigantic centres of commodity +speculation. But we have numerous cities in the United States where such +speculation is very great. St. Louis, Kansas City, Minneapolis, New +Orleans, and other cities are active speculative centres. New York, +while small in its volume of grain and produce speculation as compared +with Chicago, is the world's centre for cotton speculation, and the +world's centre for futures in coffee, though yielding precedence to +Havre, Santos and Hamburg,[276] ordinarily, in the volume of spot coffee +transactions, and though handling only a very small amount of spot +cotton. The volume of cotton sold in an ordinary year in New York is +50,000,000 bales,[277] though only about 160,000 bales are ordinarily +received there, in a year.[278] In the five years preceding 1909, the +sales on the New York Coffee Exchange averaged over 16 million bags of +250 pounds each.[279] In 1915, 32 million dollars were deposited as +margins in connection with this speculation in coffee, and in ordinary +years this runs from 25 to 30 millions, according to the Treasurer of +the Exchange. The relation between the margins put up and the total +pecuniary volume of trading is not indicated, but in most exchanges the +actual depositing of margins is a small fraction of the pecuniary +magnitude of the turnovers. Both the Cotton and the Coffee Exchanges are +international centres. The Coffee Exchange now handles large +transactions in sugar, also. + +Contacts between the organized exchanges and ordinary business are very +numerous. Producers in every line who can do so protect themselves by +"hedging" in the exchanges which deal in their raw materials. This is a +commonplace, so far as millers are concerned. The writer has found +millers in a town off the main lines of the railroads in Missouri who +regularly sell short a bushel of wheat on the St. Louis Merchants' +Exchange for every bushel they buy to grind. The business man who does +not sometime take a "flier" in the market for other than hedging +purposes is rare! But, apart from the organized markets there is an +immense volume of speculation. If a wholesaler buys only what he can +sell to retailers, it is not speculation. But if he buys in excess of +the anticipated demands of his retailers, expecting to sell the excess +at an advance to other wholesalers, he is speculating. If a farmer buys +cattle to feed, he is not speculating, but if he buys them thinking to +sell them at an advance in a short time, and does so, the transactions +are speculative. The line is not easy to draw, in practice. Intention is +shifting and uncertain. There is chance in every industrial, commercial, +and agricultural operation. But for the point at hand, the test is +simple: do more exchanges take place than are necessary, under the +existing division of labor, to advance the materials of industry through +the stages of production, and get things finally to the consumer? If so, +the excess of exchanges is speculative. Trading between men in the same +stage of production is speculation. It represents trading to smooth out +dynamic changes, to bring about readjustments which would have been +unnecessary had conditions really been static, and had the initial plans +of enterprisers been adequate. Trading in anticipation of further +trading with men in the same stage of production is speculative. This +sort of thing, in the wholesale business, especially, is exceedingly +common. This has been noted by Professor Taussig, and made by him an +important point in the theory of crises. Dean Kinley[280] called +attention to it as a matter of importance in connection with his +investigation in 1896. The coming of cold storage, and the development +of the canning industry have, I am informed by a colleague in the +Harvard Business School, enormously increased this speculation among +both wholesalers and retailers, and it is very important in most +wholesale lines. There is short-selling in materials for construction +purposes, and in metals, apart from organized exchanges, and, where +possible, contractors in the building trade often protect themselves by +means of future contracts with speculators who are selling short. + +Land speculation, in varying volume, is found in every part of the +country. There is speculation in leases, in options on real estate, and +in options on leases.[281] It may be noticed, too, that sales of +"rights," of puts and calls and straddles, and other contract rights, +are regular factors in the organized exchanges. Wherever profits are to +be made by leveling values as between different places or different +times, speculation arises, and, with dynamic change, this means +everywhere, in every business, and all the time! The shifting of labor +and capital from industry to industry, leveling returns to capital and +labor, involves an enormous amount of trading that would not occur in a +"normal equilibrium." Much of this the Stock Exchange does. That is what +it is for. But much of it has to do with unincorporated industry, and a +vast deal of speculative exchanging takes place to this end apart from +the organized exchanges. + +Speculation in bills and notes, by note-brokers and particularly by +dealers in foreign exchange, occurs on a large scale, and accounts for a +great deal of the banking figures. This has nothing to do with +physically determined trade. From the standpoint of Professor Fisher's +"equation of exchange," it must be barred, if the contention that +"trade" is determined by "physical capacities and technique" is to be +adhered to. Speculation in demand finance bills is barred in any case, +since "money against checks," and "checks against checks," are excluded +by his definition.[282] But as an explanation of no small part of our +unexplained 245 billions of dollars, these items must be brought in. +They are "double counting" from the standpoint of Professor Fisher's +equation. They are, however, speculation. An official in a great New +York banking house, in charge of the foreign exchange department, writes +that in times when exchange rates are fluctuating, enormous quantities +of drafts on Europe will be bought and sold, during a period of a couple +of weeks or months, whereas under other conditions such transactions +might amount to little with the same volume of imports and exports. The +part of this which is between banks, a very big item, would not count in +the 245 billions, but to the extent that foreign exchange brokers +outside the banks participate, their activity helps to explain our 245 +billions. + +If it be true that speculation, including all manner of readjustment to +dynamic changes, makes up the overwhelming bulk of trade in the country, +then Fisher's _indicia_ of variation in trade, weighted as they are, are +totally misleading. The same is true of Kemmerer's _indicia_ of "growth +of business."[283] These are: population, tonnage entered and cleared, +exports and imports of merchandise, postal revenues, gross earnings of +railways, freights carried by railways, receipts of the Western Union +Co., consumption of pig iron, bituminous coal retained for consumption, +consumption of wheat, consumption of corn, consumption of cotton, +consumption of wool, consumption of wines and liquors, market values of +reported sales on the New York Stock Exchange. Only the last of these is +in any sense an index of speculation. It is swallowed up by being put on +a par with the other fourteen items. Its influence on the final index, +made by averaging the others is, as inspection shows, virtually _nil_. +Out of the twenty-six years his figures cover, the general index moves +counter to the share sales 14 times! Utterly random figures would have +come nearer to the facts in the case. It is particularly striking that +Professor Kemmerer, whose total figures, as Professor Fisher's, rest for +their absolute magnitude on Kinley's investigation,[284] should assign +89% of his estimated trade (183 billions in 1890) to wholesale +commodities,[285] (with 3% to wages, and 8% to securities), when +Kinley's figures show that wholesale deposits are a minor fraction of +the total! + +The constancy in the figures of these two writers for trade from year to +year, a general steady, upward growth, does indeed suggest that trade is +determined "by physical capacities and technique," and that it does +stand as a great, independent, inflexible factor, independent of money +and deposits, constituting a real causal coefficient with them in +determining prices. If, however, speculation is as big a factor as our +analysis would indicate, then trade is a highly flexible thing, varying +enormously from year to year, moved by a multiplicity of causes, among +them _fluctuations_ in particular prices, and the ease and tightness in +the money market--the quantity of money and deposits. + +But quite apart from speculation, it is not true that trade is a mere +matter of physical capacities and technique, a passive function of +production. Rather, one would almost have to reverse the relation. +Production waits on trade! + +Production, as now carried on, is primarily conducted in the expectation +of _sale_, and of profitable sale. Trade does not go of itself, +automatically. Rather, it is a highly difficult matter, calling for the +highest order of ability, and the labor of innumerable men. In general, +I think it safe to say that in ordinary times, the manufacturer loses +vastly more sleep over the question of how he shall market his output, +than he does over the question of how he shall produce it. A clerk in +the Westinghouse Air Brake Company, engaged in the accounting +department, spoke recently to the writer of the "productive end" of the +business. On inquiry, it developed that he meant the selling department! +He stated that the manufacturing department also, in the language of the +employees, in that corporation, would also be termed "productive," but +that the selling department was _the_ productive department. + +If one reflects a little as to the proportion of "costs" that go into +selling, as compared with technical "production," I think my point will +be clearer. Advertising has developed so enormously that it needs little +discussion. It has been stated that the "Sapolio" people once tried, +after their reputation seemed thoroughly established, to stop +advertising, with such disastrous results that very extraordinary +efforts were required to reestablish the brand. Number 2 wheat is not +advertised, in the great magazines, but innumerable brands of flour get +newspaper and magazine advertising,--some of them in such a periodical +as the _Saturday Evening Post_, and even those which are locally +consumed are commonly advertised in the local press. Nor is it only +finished products, of the sort that must be sold to the fickle public, +that involve these heavy selling costs. The writer has in mind a +corporation producing a high-grade type of glazed retort, in the +production of which it has virtually a monopoly, since the clay with +which it is made does not coexist with the skill to make it in any other +place. The particular product is an indispensable part of many important +technical processes. Substitutes made of other clays, and by other +companies, are known by the trade to be unsatisfactory. The buyers are +all highly trained business men. Here, if anywhere, selling costs should +be slight. But the chief selling agent of the corporation has found it +necessary, in order to keep the business going, to incur huge expenses +for entertaining his customers, finds it necessary to incur great +travelling expenses, to use only the most expensive hotels, and, +incidentally, to drink a great deal more than his personal inclinations +would call for, in keeping the business for his house. I waive +discussion of the extraordinary fees which a trust promotor makes, in +effecting a consolidation of big business units,--a process of exchange. +I am speaking now of the ordinary costs involved in ordinary trade. The +army of travelling salesmen, the body of stenographers, who write +letters, with various "follow-ups," in the effort to get more business, +the growing complexities of such letter writing, in which all suspicion +of "circularizing" must be allayed, one-cent stamps being absolutely +taboo!--these things are the commonplaces of business. They are in the +primers in the "commercial colleges" and "schools of commerce." Only the +orthodox economist, with his doctrine of the impossibility of general +overproduction, is ignorant of them! + +This feature of modern business has been much elaborated in a recent +book which has not received the attention it merits--though its strength +is rather in criticism than in constructive doctrine. I refer to +Dibblee, _The Laws of Supply and Demand_.[286] Dibblee makes an +interesting contrast between commercial and manufacturing cities, +maintaining that the former necessarily outgrow the latter--a contention +which London, New York, Chicago and other places strikingly illustrate. +He presents a truly remarkable fact about London:[287] a recent report +of the Commission on London Traffic states that there were in London 638 +factories registered as coming under the Factory Acts, with an average +horse-power of 54. The total power employed within the London area under +the Factory Acts, chiefly used in newspaper printing, was 34,750 +horse-power--just one-half of what is required for the steamship, +Mauretania! This is the greatest city in the world. What do its millions +do for a living?[288] The town of Oldham,[289] he asserts, with 100,000 +inhabitants, has spindle capacity enough to supply more than the regular +needs of the whole of Europe in the common counts of yarn. To _market_ +the output of Lancashire, "the merchants and warehousemen of Manchester +and Liverpool, not to mention the marketing organization contained in +other Lancashire towns, have a greater capital employed than that +required in all the manufacturing industries of the cotton trade." +Accurate estimates of the proportion of "selling costs" to costs of +technical production are doubtless impossible, for the general field of +trade, and precision is unnecessary for my purposes. Dibblee's +conclusion, after contrasting retail and wholesale prices, and analyzing +the expenses incurred in selling prior to the wholesale stage, is that +the cost of marketing is at least equal to "real cost of production," +occasionally only slightly below it, and often far above it (62).[290] +If one considers how large the item of "good will" often bulks in the +value of "going concerns"[291]--good will being in large degree often +just a capitalization of prior costs of this nature--Dibblee's estimate +need not be exaggerated. Trade connections, trade-marks that have +reputation, etc., often represent enormous output in thought, work, and +expense. Selling costs may, like other costs, be divided into "prime" +and "overhead" costs. Some of the latter lead to long-time consequences, +pay for themselves only in the long run. These may be "capitalized" in +"good will."[292] Of course, not all good will is got at a cost. Much of +it is adventitious. + +In the light of the doctrine that trade is independent of money and +credit, one wonders why it should be thought necessary to extend +branches of American banks to the South American markets which we are +now reaching out toward. And why have Americans, from the beginning, +been constantly increasing commercial banks?[293] It is easy to sneer at +the efforts of the successive frontiers in our history to provide +themselves with banks of issue as based on a delusion, the delusion that +bank-notes are "capital," and to say that their real need was, not more +bank-credit, but more real capital. They needed more tools and +live-stock, doubtless, but is that the whole story? And were their banks +of no assistance in getting the additional capital of various sorts? And +was it a matter of no consequence that they had an abundant medium of +exchange? It seems almost childish to put such questions, but the +quantity theory has as its logical corollary that to multiply banks is +quite useless and wasteful, since the only result is to raise prices. If +increasing bank-credit cannot increase trade or production, this +corollary is inevitable. Indeed, the case may be more strongly stated. +Quite apart from the wasted labor of bank-clerks and the waste of +banking capital, the effect of increasing bank-development, on quantity +theory reasoning, is harmful. If increasing bank-credit is to raise +prices without increasing trade, then, on quantity theory reasoning, it +must _depress_ business. The reason is that rising prices in a given +region make that region a bad place to buy in, and so curtail its +exports. This is, indeed, the quantity theory explanation of +international trade, to which attention is later to be given. The +country which is expanding its banking facilities most rapidly will +suffer most in competition in the world markets. This is why the United +States have so little foreign trade! It also explains the rapid strides +that China and Central Africa have recently made in capturing the +world's markets. I submit that there is no flaw in this argument, if the +premise of the independence of volume of trade and volume of bank-credit +be granted. It follows from the quantity theory. That it is no +caricature of Fisher's argument will appear, I think, from the following +quotation,[294] which very nearly states what I have just been saying, +though it does not draw the conclusion that banking is a bad thing: "The +invention of banking has made deposit currency possible, and its +adoption has undoubtedly led to a great increase in deposits and +consequent rise in prices. Even in the last decade the extension in the +United States of deposit banking has been an exceedingly powerful +influence in that direction. In Europe deposit banking is in its +infancy."[295] Happy Europe, troubled only by war! It is greatly to be +hoped, in the interests of American agriculture, that the efforts to +increase agricultural credit facilities will fail! + +We are driven to one of the most fundamental contrasts in economic +theory, which appears under various guises and in different forms: +statics _vs._ dynamics; transition _vs._ equilibrium, theory of +prosperity _vs._ theory of goods; normal tendency _vs._ "friction."[296] +Perhaps Professor Fisher, and the quantity theorist in general, would +dismiss many of these considerations as not applicable to the general +principle, which is a "normal" or "static" or "long run" law, not +subject to considerations of this sort. It is scarcely open to Fisher to +defend himself this way, because of his exceedingly uncompromising +statement regarding even "transitional" relations between volume of +trade and money and credit. I shall not reply to anyone who offers such +an objection by a general tirade against "static economics." I believe +thoroughly in the method of economic abstraction, and in reaching +general principles by ignoring, provisionally, in thought the "friction" +and "disturbing tendencies" which often make the first approximations +look somewhat unreal. But I raise this question: to what feature of our +economic order do we chiefly owe it that we can make such abstractions? +By virtue of what does friction disappear? What is it that makes our +abstract picture of economic life, as a fluid equilibrium, with its nice +marginal adjustments, its timeless logical relations, correspond as +closely as it does to reality? The answer is: MONEY and CREDIT.[297] + +It is the _business_, the _function_, of money and credit, as +instruments of exchange, to bring about the fluid market, to overcome +friction, to effect rapid readjustments, to give verisimilitude to the +static theory, to make the assumptions of the static theory come true. +Where exchange is easy and friction slight, there will not be two prices +for the same good in the same market. Speculators, seeking profits of +fractions of a point, will prevent that. By multiplying exchanges, they +will level off values and prices. Because money and credit have done +their work so thoroughly in the "great market," it is possible for men +to talk about static theory, and to work out economic laws in +abstraction from friction, transitions, and the like. + +In the static state, all speculation is banished. There are no +price-fluctuations to be smoothed out, no new prospects to be +"discounted," no uncertainties to be guarded against by "hedging." +Seasonal goods will, of course, have to be carried over from one season +to the next, but this will involve merely warehousing and the use of +capital--"time speculation," involving many sales, does not come in. One +sale to the capitalist who carries the seasonal goods, with a sale by +him to the man who means to use them, will suffice. It has been shown +before that the great bulk of trade is speculation. But speculation is +banished from the static state. Speculation is a function of dynamic +change, waxing and waning with the degree of uncertainty that exists, +the new conditions to which readjustments have to be made, the +"transitions" that have to be effected. In other words, the laws +governing the volume of trade are dynamic laws, laws of "transition +periods," and so the whole notion which underlies the quantity theory, +of "normal periods," "static" relations, etc., is here irrelevant. +Volume of _trade_, as distinguished from volume of _production_, is +controlled by the number and extent of the "transitions" that have to be +made. The chief work of money and credit is done _in_, and _because of_, +"transition periods." Assume a normal equilibrium accomplished, and you +have little trading left to do. It will still be necessary, if you have +the division of labor, and private enterprise, for goods to pass through +as many different hands as there are different independent enterprisers +in the stages of production, and on, through merchants, to the consumer. +It will still be necessary to pay wages, rents, dividends and interest. +But there will be no selling of lands, of houses, of factories, of +railroads, or of securities representing these. By hypothesis these are +already in the hands best qualified to hold them. The "static +equilibrium" presents "mobility without motion, fluidity without +flow."[298] The static picture is a picture of completed adjustment, +where no one has an incentive to change his work, or his investments, +because he has already done the best that he can for himself. It is, +therefore, a picture of a situation where there is little incentive for +those exchanges which make up the great bulk of the volume of trade in +real life. + +Hence the curious phenomenon that very much of static theory has been +developed in abstraction from _money_ and _credit_. Mill's theory of +international values, for example, abstracts from money. "Since all +trade is in reality barter, money being a mere instrument for exchanging +things against one another, we will, for simplicity, begin by supposing +the international trade to be in form, what it is in reality, an actual +trucking of one commodity against another. So far as we have hitherto +proceeded, we have found the laws of interchange to be essentially the +same, whether money is used or not; money never governing, but always +obeying, those general laws."[299] Other writers have similarly held +that money is a mere cloak, covering up the reality of the economic +process. Schumpeter, for example, holds that money is, in the static +analysis, merely a "Schleier," and that "man nichts Wesentliches +uebersicht, wenn man davon abstrahiert."[300] _On the static +assumptions_, of the fluid market, with friction, etc., banished, money +is, indeed, anomalous and inexplicable. It is a cloak, a complication, a +vexatious "epi-phenomenon." There is nothing for it to do, and there can +be, consequently, no "functional theory" developed for it. Static theory +may be ungracious in ignoring its own foundation. But static theory is +grotesque when it seeks to support its own foundation! Static theory is +possible only on the assumption that the work of money and credit has +been done. What, then, shall we say of static theory which seeks to +explain the work of money and credit? Yet precisely this is what is +undertaken by the quantity theory, with its "normal" or "static" laws of +money and credit. A functional theory of money and credit must be a +dynamic theory. To talk about the laws of money, "after the transition +is completed" is to talk about the work money will do after it has +finished working. For a functional theory of money and credit, we must +study the obstacles that exist to prevent the fluid market. We must +study friction, transitions, dynamic phenomena. + +To this problem we shall come in Part III. For the present, I am content +to have disproved the quantity theory contention that the volume of +trade is independent of the quantity of money and credit. + + + + +APPENDIX TO CHAPTER XIII + +THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES[301] + + +The word, "trade," as used in connection with statistics of foreign and +domestic trade has been irritatingly ambiguous. Few writers, in speaking +of domestic trade, have meant the same thing by trade that they have +meant by the word when speaking of foreign trade, and hence we have had +many pointless efforts to institute comparisons between the two, and +some very misleading statements about the matter. Thus, figures have +been offered which would show that the foreign trade of the United +States is only a fraction of 1% of the domestic trade. This conclusion +is reached by taking the figures for banking transactions discussed in +Chapters XIII and XIX as representative of domestic trade, and comparing +them with the annual figures for exports and imports. This procedure is +fallacious for several reasons:[302] the figures thus reached for +domestic trade exceed even the total trading within the country, as +shown in Chapter XIX. In the second place, as shown in Chapter XIII, the +bulk even of these deposits which do represent real trading grow chiefly +out of speculation. Even in ordinary trade, goods are counted several +times before reaching the final consumer. It is clear, therefore, that +even an accurate figure for total trading within the country would have +little relevance when we are seeking a figure to compare with exports +and imports. Nor, if a comparison of the actual trading in which +foreigners participate with the trading exclusively between Americans is +sought, can we take the export and import figures as representative of +the foreign trading--they do not include a multitude of highly important +transactions in which foreigners participate. Very much of the business +of the New York Cotton Exchange, the New York Stock Exchange, the +Chicago Board of Trade, and other speculative markets represents foreign +buying and selling, especially arbitraging transactions, and the other +"invisible items" of foreign trade need merely to be mentioned for the +economist to recognize the fallacy of a comparison which omits them. + +What figures are relevant when we wish to compare foreign and domestic +trade? First we must make clear the purpose for which the comparison is +to be made. If we are concerned with the calls made by foreign and +domestic trade on the money market, we should make use of a different +method of comparison than that which will be here employed. The purpose +of the comparison here undertaken is to determine how much of our +American labor, land and capital is at work producing for the foreign +consumer, as compared with the land, labor and capital in America +producing for the American consumer. The comparison here undertaken is +concerned with the question which is usually uppermost in the minds of +those who undertake such a comparison, namely, _how important_ is our +foreign market to us? Obviously, for such a comparison as this, we +should not count a given case of eggs twelve times merely because it +changed ownership twelve times in getting from farm to breakfast table. +Items of export and import count only _once_ in the figures for export +and import. We must find a figure for domestic "trade" in which items +count only once, allowing no turnovers of the same goods to swell the +total, if we wish to make our figures comparable. + +The method proposed for making this comparison, for a long series of +years, is a modification of the method used by the writer in an article +in the _Annalist_ of Feb. 7, 1916. A figure based on the bank deposits +of _retail merchants_ in Kinley's 1909 investigation was there taken as +properly comparable with the export and import figures. The final sale +to consumer by retailer is "the one far off divine event" toward which +the whole productive process moves. Everything else in production and +exchange looks forward to this. Ultimately, from the demand of the final +consumer comes all the demand that is directed toward the agencies of +production, even though the laborer sees his immediate market in the +person of the employer, and the capitalist or landlord sees his +immediate market in the person of the active business man. The figure +reached for retail trade by the method then employed was $34,500,000,000 +for 1909. This figure was too high, as shown in Chapter XIII above, and +the figure reached now for retail _deposits_ by the same method is +$32,000,000,000. Even this figure is too high, however, as I there +concluded, to represent retail _trade_, and I shall use it only as a +check on King's figure for _the total income of the United States in +1910_, which I shall use as a base figure instead of my own. King's +figure for the total income of the United States in 1910 is +$30,500,000,000.[303] I take this figure as including all that the +American people spend for consumption, with retailers, physicians, +hotels, theatres, etc., and also their net savings for the year. Part of +this they spent for foreign products. The rest they spent at home. This +residue spent at home gives us a figure which we may properly compare +with the amount the foreigner spends in America, as indicating the ratio +of foreign to domestic trade for the purpose in hand. We subtract, in +other words, from the figure for total income the figure for _imports_. +Then we compare the residue with the figure for _exports_, and get our +ratio of foreign to domestic trade. The export and import figures must +first, however, be reduced to a _retail_ basis. That is, assuming that +wholesale prices are two-thirds of retail prices, we add 50% to the +figures for exports and imports (which are wholesale figures) before +making the subtraction and the comparison. The ultimate consumer, both +in Europe and America, pays for imports and exports on a _retail_ +basis.[304] This method, applied to the figures for 1910, gives us a +ratio of about 10:1 for domestic to foreign trade--the lowest percentage +for foreign trade which we shall find for any year in the period +investigated, 1890-1916. + +This comparison is still unfavorable to foreign trade. Domestic trade, +in our figures, includes savings and investments, including investments +made by Americans abroad. Import figures are marred by undervaluations, +exports are not all counted, and the figures for exports and imports do +not include foreign investments in America. American investments abroad +should not be counted as part of domestic trade. Moreover, our figures +take no account of travellers' expenditures, or of services performed by +professional men of one country for men in another, or of certain other +"invisible items." But while this makes our percentage for foreign trade +too low for all years, it probably does not greatly upset the results +for yearly variations in the ratio except for the year 1916, when the +figure for domestic trade is left decidedly too high, and the ratio for +foreign trade is too low, as compared with previous years. + +For years other than 1910, indirect calculations must be resorted to for +domestic trade. I have substantial confidence in the rough accuracy of +the figure chosen for 1910 in view of the convergence of two widely +different sets of data. My figure for retail deposits in 1909 is +$32,000,000,000. King's figure for total income is $30,500,000,000 for +1910. King's figure seems to me a better figure to use for the purpose +in hand. I use my own merely as a rough check on his. For years other +than 1910, the figure for net income is calculated as a percentage of +King's figure for 1910, by means of an "index of variation." It is +assumed that the net income of 1905, for example, bears the same +relation to the index for 1905 that the absolute figure for net income +of 1910 bears to the index for 1910, and net income for 1905 is then +computed by "the rule of three." The index of variation chosen is +_railway gross receipts_ weighted by _wholesale prices_. I think that +railway gross receipts are, on the whole, the most dependable and easily +manageable index of physical volume of production that we have, though +recognizing difficulties, later to be discussed, in using them for the +purpose in hand. Railroads touch virtually every kind of business in the +country. Variations in the _pecuniary_ volume of production and +consumption, however, if due to rising or falling _prices_, rather than +to changing physical volume, would not be indicated by changes in +railway gross receipts. The same volume of transportation might +represent widely varying pecuniary values of goods transported. Railway +rates do not vary from year to year with prices of goods, even though +high-priced goods are normally charged higher rates than low-priced +goods. The index, therefore, must include _prices_ as well as physical +volume of transportation. For 1910, therefore, railway gross receipts +and an index of prices are multiplied together, and counted as 100%. The +same thing is done for railway gross receipts and prices for other +years, and the results reduced to percentages of the result for 1910. +The figure for net income in any other year is then readily computed as +a percentage of the figure for 1910. The results, for the years +1890-1916, appear in the tables below.[305] + +It may be noticed that my figures for net income in 1900 and 1890 do +not correspond very closely with the figures for the same years as +independently estimated by King. My figure for 1900 is $12,900,000,000, +where his is $17,965,000,000; for 1890, my figure is $9,300,000,000, +where his is $12,082,000,000. I am inclined to the view that the figures +in my tables come closer to the facts for these years than do his +figures, assuming that _his figure_ for 1910 is correct. It will be +noticed that on his figures there was an increase of about 50% from 1890 +to 1900, and an increase of only about 66% in the decade following. This +seems to be an unlikely relation. One would expect a much greater rate +of increase for the decade 1900-10, as compared with the preceding +decade, than King's figures show. The period from 1890 to 1900 included +the terrible panic of 1893 and the prolonged depression ensuing. The +panic in 1907 was trifling in comparison, and recovery, as shown by our +index numbers in the tables below, was very much quicker. Moreover, +falling prices characterized much of the earlier decade. The highest +prices of the whole ten years were in 1891. The period from 1900 to 1910 +is a period of rapidly rising prices, on the whole. On the basis of our +general knowledge of the two periods, one would expect a greater +percentage gain by far for the second decade, and I therefore trust the +results of the index of variation here chosen, which show that. Similar +results are obtained by applying to the base figure for 1910 an index +of variation derived from Kemmerer's and Fisher's figures for trade[306] +and prices. My figure for 1890 may, moreover, be checked by comparison +with the figure given by C. B. Spahr in _The Present Distribution of +Wealth in the United States_ (p. 105) for the net income of the country +for that year: $10,800,000,000. It may be that my figure for 1890 is too +low, but I have not sought to "doctor" it by an arbitrary "correction +factor" to make it correspond more closely than it does with the other +estimates. It is striking enough that a figure derived from an index of +variation, twenty years away from its base, should come as close as this +to figures calculated from wholly different data. + +One brief comment may be made on the significance of these figures. It +may be questioned if figures showing the proportions of our industry +devoted to supplying goods for the foreign market correctly indicate the +importance of the foreign market to us. It may be urged that if we +should lose our foreign market, we should merely turn to producing more +for the domestic market, and that the loss would not be the whole of our +receipts from foreign trade, but merely the cost of transition, and the +loss that comes from shifting to production to which we are less suited. +This is, doubtless, true. But the loss reckoned this way may well be +greater than the loss reckoned on the basis of my figures! It is equally +true, moreover, that our domestic trade is not important to the extent +indicated by my figures, since if we lose part of our domestic trade, +our producers will turn to supplying more for the foreign market. But +one must not regard the cost of transition as a negligible matter! The +cost may easily be prolonged depression. Certain parts of our foreign +trade are really vital to us, both on the import and (to a less degree) +on the export side. The most important practical use to which the +figures here given may be put are in connection with short-run problems. +Foreign trade is so important to us that any sudden alteration in its +amount may bring great adversity or great prosperity--as the course of +the present War abundantly testifies.[307] + +An application of our method to the years 1850 and 1860 gives a +percentage for foreign trade of 12.7 in 1850, and 16.0 in 1860.[308] + +Certain other cautions are needed in presenting these figures. For one +thing, variations in railway rates will make a given volume of gross +earnings mean different things in different years as to the physical +volume of traffic. In the writer's opinion, which is confirmed by +Professor W. Z. Ripley, there is no possible way of making allowance for +this, as the cross-currents affecting railway rates are altogether too +numerous and obscure. Nor has any effort been made to allow for +variations in the proportions of freight and passenger receipts, or of +different classes of freight traffic. + +Again, the proportions of railway traffic connected with foreign trade +may vary greatly, and it may happen that a big increase in railway gross +receipts is due to increasing foreign trade, primarily. There is reason +to suppose that much of the increase of 1916 is to be explained that +way. This makes our comparison for 1916 particularly adverse to foreign +trade, since we count as domestic trade what is really foreign trade. +The figures, however, are presented as they stand. Moreover, for 1916, +the great increase in foreign trade is in _exports_. Merchandise imports +are not much greater than in previous years.[309] Our exports have been +chiefly paid for by "invisible items," gold and securities, and short +term credits. These do not appear anywhere in our figures. A substantial +source of error appears from this cause in our 1916 figure. I should +think it safe to put the ratio for foreign trade to domestic trade for +1916 at above 20%, instead of the 17.9% our table shows. + +The reader will wish to know for a given year how much of the increase +or decrease is due to physical growth of business, as represented by +railway gross receipts, and how much is due to changes in prices. To +give this information, and to make it easy for a critic to check the +results, a table showing the index numbers from which the figures for +net income are computed is subjoined.[310] + + TABLE I[311] + + 1 2 3 4 + Ratio of + Domestic Trade of Foreign Trade of Foreign + Calendar Net Income United States = United States = to + Years of the Net Income minus Exports at Retail Domestic + United Imports at Retail Prices Trade + States Prices + + 1890 $ 9,300,000,000 $ 8,100,000,000 $1,300,000,000 16.1% + 1891 10,400,000,000 9,200,000,000 1,400,000,000 15.2% + 1892 10,000,000,000 8,700,000,000 1,400,000,000 16.1% + 1893 10,100,000,000 8,900,000,000 1,300,000,000 14.6% + 1894 8,300,000,000 7,300,000,000 1,200,000,000 16.5% + 1895 8,400,000,000 7,200,000,000 1,200,000,000 16.7% + 1896 7,900,000,000 6,900,000,000 1,500,000,000 21.8% + 1897 8,000,000,000 6,900,000,000 1,600,000,000 23.2% + 1898 9,100,000,000 8,200,000,000 1,900,000,000 23.2% + 1899 10,900,000,000 9,700,000,000 1,900,000,000 19.6% + 1900 12,900,000,000 11,700,000,000 2,200,000,000 18.8% + 1901 14,600,000,000 13,300,000,000 2,200,000,000 16.5% + 1902 15,600,000,000 14,200,000,000 2,000,000,000 14.1% + 1903 17,700,000,000 16,200,000,000 2,200,000,000 13.6% + 1904 18,000,000,000 16,500,000,000 2,200,000,000 13.3% + 1905 19,600,000,000 17,800,000,000 2,400,000,000 13.5% + 1906 21,500,000,000 19,500,000,000 2,700,000,000 13.8% + 1907 26,600,000,000 24,500,000,000 2,900,000,000 11.8% + 1908 23,000,000,000 21,300,000,000 2,600,000,000 12.2% + 1909 27,600,000,000 25,400,000,060 2,600,000,000 10.2% + 1910 30,500,000,000 28,200,000,060 2,800,000,000 9.9% + 1911 29,600,000,000 27,300,000,000 3,100,000,000 11.4% + 1912 33,800,000,000 31,100,000,000 3,600,000,000 11.6% + 1913 34,800,000,000 32,100,000,000 3,700,000,000 11.5% + 1914 32,600,000,000 29,900,000,000 3,200,000,000 10.7% + 1915 35,400,000,000 32,700,000,000 5,300,000,000 16.4% + 1916 49,200,000,000 45,800,000,000 8,200,000,000 17.9% + + + TABLE II. INDEX NUMBERS FROM WHICH THE FIGURES FOR + NET INCOME ARE DERIVED + + 1 2 3 4 + Composite Net Income[312] + Dun's Prices R. R. Gross Index, R. R. Gr. of the United + Calendar with base Receipts, Rcts. multiplied States in + Years in 1910 reduced to by Prices. billions of + base of (Column 1 x dollars: + 1910 column 2.) 100:30.5::(3):$ + + 1890 76.5 39.8 30.8 $ 9.3 billions + 1891 81.5 42.0 34.2 10.4 + 1892 75.6 43.5 32.8 10.0 + 1893 77.3 42.9 33.2 10.1 + 1894 71.5 38.1 27.2 8.3 + 1895 68.0 40.7 27.8 8.4 + 1896 63.8 40.6 25.9 7.9 + 1897 62.2 42.4 26.4 8.0 + 1898 66.4 45.1 29.9 9.1 + 1899 72.3 49.6 35.8 10.9 + 1900 78.1 54.0 42.1 12.9 + 1901 80.6 59.4 47.8 14.6 + 1902 84.0 62.6 51.3 15.6 + 1903 83.1 70.1 58.2 17.7 + 1904 84.0 70.3 59.0 18.0 + 1905 84.0 76.4 64.2 19.6 + 1906 88.1 85.0 70.5 21.5 + 1907 94.0 92.9 86.3 26.6 + 1908 92.4 81.8 75.6 23.0 + 1909 99.0 91.7 91.0 27.6 + 1910 100.0 100.0 100.0 30.5 + 1911 98.1 99.0 97.0 29.6 + 1912 104.1 106.9 111.0 33.8 + 1913 101.7 112.5 114.0 34.8 + 1914 102.5 104.5 107.0 32.6 + 1915 106.0 110.0 116.0 35.4 + 1916 125.0 129.0 161.2 49.2 + + + + +CHAPTER XIV + +THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT + + +In the argument so far I have said nothing of the reverse relationship, +the dependence of the volume of money and the volume of credit on trade. +The two are indeed _inter_dependent. Interdependence suggests circular +theory, and is often a phrase to cover circular reasoning.[313] In the +case of the relation under discussion, however, I have, I trust, already +abundantly protected myself against the charge of circular reasoning by +_denying_ that either volume of money and credit on the one hand, or +volume of trade on the other hand, is a true cause at all. Both are mere +abstract names, designating highly heterogeneous individual occurrences, +which, _individually_ are cause or effect. In general, both volume of +money and credit, on the one hand, and volume of trade on the other +hand, are results of common causes, which are the _verae causae_ of +economic phenomena--values, psychological phenomena. The whole thing is +to be explained immediately and primarily in terms of social +relationships and mental processes,--in terms of social values. + +To show that increasing trade tends to increase money and credit is not +difficult. If one may venture a hypothetical illustration--and the sort +of hypothetical illustrations, like the dodo-bone case, of which +quantity theorists are fond make one hesitate to do so--let us assume a +communistic community, isolated from other markets, with a developed +system of production, including an extensive use of gold in the arts. +Let the communistic regime gradually pass over to an individualistic +regime. Assume that the inhabitants are acquainted with the use of gold +as money, and that their government is willing to coin it freely. As +individualism spreads, and trade grows, will not more and more gold be +taken to the mints? I am not here concerned with the principles +determining the apportionment of gold between the money employment and +the arts. It is enough to show that expanding trade tends to increase +the volume of money. + +Assume that the money supply meets difficulties in its expansion. Is +there not at once an incentive to extend credit? The seller finds his +customers unwilling to buy for cash, in amounts as great as before. In +order to sell as much as before (assuming that the use of credit is +known, to avoid trouble with historical origins), he extends +credit,--which, when practiced generally, lightens the strain on the +money supply. + +I have so far said nothing of the case where there are stocks of the +money metal to be got from outside markets. But if a country is +expanding its trade, does not money come in? The quantity theorists +would, indeed, admit this, in general, though their reason is a bad one, +namely: that expanding trade lowers prices, and lower prices make the +market attractive to foreign buyers, who then send in money for the +goods. I shall later discuss this aspect of the theory.[314] For the +present, I merely interject the question as to the probability of an +expansion of trade when prices are falling. Increasing _stocks_ of +particular goods may well mean lower prices for these goods and if they +be articles of export the lower prices may well increase the export +trade, and bring money in. But this increase in _stocks_ of articles of +_export_ is very different from total _trade_ within the country; and +lower prices in articles of export are very different from a generally +lower price-level.[315] + +Will expanding trade in a country increase credit? I come here to one of +the striking features of Fisher's doctrine--a feature in which I think +he is fundamentally true to the quantity theory. He finds no way in +which expanding trade can directly increase credit. Expanding trade can +increase credit, (a) only by changing the habits of the people, so as to +alter the ratio, M to M', or (b) by reducing the price-level, and so +bringing in money from abroad, whence, as M is now increased, M' rises +proportionately. "An increase in the volume of trade in any one country, +say the United States, ultimately increases the money in circulation +(M). In no other way could there be avoided a depression in the +price-level in the United States as compared with foreign countries. [He +should say, from the standpoint of his theory, that increasing trade +will cause a fall in the price-level, and so bring in more money.] _The +increase in M brings about a proportionate increase in M'._[316] Besides +this effect, the increase in trade undoubtedly has some effect in +modifying the habits of the community with regard to the _proportion_ of +check and cash transactions, and so tends somewhat to increase M' +relatively to M; as a country grows more commercial the need for the use +of checks is more strikingly felt."[317] In a footnote to this +paragraph, he defines the issue still more sharply. "This is very far +from asserting as Laughlin does that 'The limit to the increase in +legitimate credit operations is always expansible with the increase in +the actual movement of goods'; see _Principles of Money_,[318] New York +(Scribner), 1903, p. 82. We have seen, in Chapter IV, that deposit +currency is proportional to the amount of money; a change in trade may +indirectly, _i. e._, by changing the _habits_ of the community, +influence the proportion, but, except for transition periods, it cannot +influence it directly."[319] + +My own explanation of the causal sequence whereby expanding trade brings +money into a country would be radically different from that given by +Fisher in the first quotation. I should expect, first, that rising +_prices_ would encourage rising trade; I should then expect the rising +volume of trade, with higher prices, to lead borrowers to need, and +secure, larger loans from the banks, with, as loans and deposits rise in +proportion to reserves, some slight increase in "money-rates," just +enough to draw to the country the extra gold which bankers felt +desirable to add to their reserves. I should expect the causal sequence +to be the exact reverse of that which Fisher indicates. With falling +prices, or waning volume of trade--which would usually come +together,[320]--I should expect loans to be reduced, deposits to be +reduced, money-rates to fall, and gold then to leave the country again. +I should expect this sort of thing to happen normally, and not +infrequently, and I should expect gold to come in and go out many times +in the course of a business cycle. This would seem to be the sort of +explanation which our modern theory of _elastic_ bank-credit would give +in connection with this problem. I shall not here go into details with +the theory of elastic bank-credit. The theory has been too well +established in the debates between the "Currency School" and the +"Banking School"[321] in regard to bank-notes to need elaboration and +defence here, and the essential identity of deposits and elastic +bank-notes from this angle is one of the commonplaces of the literature +of banking. What I am here concerned with is the highly significant fact +that Fisher's "normal" theory finds no place for this highly important +phenomenon. The quantity theory has no explanation of elasticity to +give. On the basis of the quantity theory, and for all that the quantity +theory can say, the Currency School was right! Fisher offers us, +virtually, a "currency theory" of deposits. "Suppose, as has actually +been the case in recent years, that the ratio of M' to M increases in +the United States. If the magnitudes in the equations of exchange in +other countries with which the United States is connected by trade are +constant, the ultimate effect on M is to make it less than what it would +otherwise have been, by increasing the exports of gold from the United +States or reducing the imports. In no other way can the price-level of +the United States be prevented from rising above that of other nations +in which we have assumed this level and the other magnitudes in the +equation of exchange to be quiescent." (P. 162.) If "bank-notes" be +substituted for "M'", in this quotation, we have here a perfect +statement of the position of the "Currency School" in that great debate. +Must this old issue be fought all over again? And yet, I defy any +consistent quantity theorist to find any flaw in Fisher's argument on +this point. There is no place for a theory of elastic bank-credit +within the confines of the quantity theory. Fisher's recognition of this +seems full and complete. He relegates all mention of elastic bank-credit +to "transitions." The footnote quoted above, in which Laughlin's +(somewhat extreme) doctrine based on the theory of elasticity is stated, +denies categorically that there is any validity in it, except for +transition periods. There is nowhere in the book any explanation of the +theory of elasticity.[322] The references to it are few and grudging, +and _always_ in connection with the notion of transitions. The most +important statement regarding elasticity (less than a page long) is on +page 161, where again transitional influences are under discussion. What +is a theory of money worth which can offer no explanation of so +fundamental, important, and notorious a feature of modern money and +banking? + +There is a further, related, feature of banking for which the quantity +theory can find no explanation. Among the items in a bank's balance +sheet, the quantity theorist seizes upon reserves on the assets side, +and deposits on the liability side, and builds his theory on the +supposed close relation between them. We have seen that this close +relation does not, in fact, exist. The range of variation is +enormous.[323] But there is one close relation in the balance sheet of +the bank concerning which the quantity theory is silent, and that is the +relation between deposits and _loans_. For individual banks and for +banks in the aggregate, for long run periods and for short run periods, +for reasons that are clear and inevitable, these two magnitudes (or for +banks of issue on the Continent of Europe, _notes_ and loans), vary +closely together. The relationship between them is the only relationship +which does stand out as clearly beyond dispute, among all the items in +the banking balance sheet. No assumptions of a "static state" are needed +for its demonstration! The relation varies, of course. As banks increase +or reduce their capital, as their reserve-percentages rise or fall, as +they increase or decrease their holdings of bonds, we find reasons which +alter the proportion between deposits and loans. But, despite this, the +variation, as shown by figures for the United States, is slight. Assume, +for example, a statement showing "loans and discounts" of $1,000,000, +deposits, $1,000,000, cash reserve, $200,000. Reserves are then 20% of +deposits, and loans are 100% of deposits. If reserves be increased by +$100,000 and loans and discounts reduced, to compensate, by $100,000, we +have a 50% variation in the ratio of reserves to deposits, with only a +10% variation in the ratio of loans and discounts to deposits. Since +cash reserve is much the smaller item, almost always, the same absolute +variation in it will affect it, in percentage, vastly more than it will +affect loans and discounts. It is strange that a theory should seize on +this highly variable ratio of reserves to deposits, and ignore the much +more constant ratio[324] of loans and discounts to deposits. + +That this close relation between deposits and loans should obtain +follows naturally from the theory of elastic bank-credit. The two are +built up together. When there are expanding business and rising prices, +men borrow more from the banks; as they borrow, they receive deposit +credits; the individual who receives the deposit credit may check +against it, but it is redeposited by another man, and so, while the +deposits of one bank need not grow out of its loans, still, for banks in +general, deposits are large because loans are large. For a given bank, +the relation holds closely, because the bank lends, in general, to +active business men, who will have income as well as outgo, and whose +income will, on the average, at least balance their outgo. Thus, +_through loans_, deposits are linked with volume of trade and prices. +Trade and deposits wax and wane together.[325] On the other hand, in the +absence of rising prices and increasing trade, reserves may increase +greatly without forcing an increase in deposits. Loans cannot increase +without an increase in deposits. The linkage between deposits and trade +is definite, causal, positive, statistically demonstrable. The linkage +between reserves and deposits is, at most, negative--if reserves get too +low, deposits and loans may be checked in their expansion. But this--to +the extent that it is true, which we leave, for detailed analysis, for +Part III--gives a very much looser relation indeed than the direct +relation between loans and deposits. + +The quantity theory has offered no explanation of this relation between +loans and deposits. What explanation could a theory offer, which rests +in the notion that volume of trade on the one hand, and volume of money +and bank-credit on the other hand, are independent magnitudes?[326] I do +not mean that quantity _theorists_ are silent regarding the relation of +loans and deposits. I mean that they do not attempt, in any discussion I +have found, to apply the quantity _theory_ to the explanation of that +relation. What shall we say of a theory which, ignoring these easily +proved, easily explained, and vital facts regarding bank-credit, offers +as its sole explanation of volume of bank-credit a theory so untenable +as that of a fixed ratio between volume of bank-credit and volume of +money _in circulation_, with causation running from money to deposits? + +Professor Fisher says little about bills of exchange. Here, surely, we +have a credit instrument which grows directly out of trade, in general, +and whose volume expands and contracts with trade. When banks discount +bills of exchange, and issue notes, or grant deposit credits, against +such discounted bills, the connection of bank-credit and volume of trade +is obvious. The same thing holds largely, however, when promissory notes +are discounted. Such notes are usually given by those who plan to use +the credits granted in commercial or speculative transactions. The bill +of exchange differs from the promissory note in practice, however, in +that it itself is often a medium of exchange, without going into the +bank's portfolio. "The bill of exchange, therefore, before it gets to +the bank _usually_[327] performs a series of monetary transfers, for the +small dealer naturally prefers to pass on the bill, if possible, in +making a payment, instead of handing it over to his bank, which would +either deduct a certain percentage in the way of discount, or else +accept the bill at its face value, crediting the customer with the +amount on the date of maturity, while business men (other than bankers) +are in the habit of taking bills of exchange as they would cash."[328] +This quotation describes conditions in Germany. The same authorities (p. +176) give figures showing a rapid development in the volume of bills of +exchange, rising from about 13 billions of marks in 1872 to about 31 +billions in 1907. These figures show that bills of exchange are a big +factor in German business life,--a conclusion that is strengthened when +they are compared with the figures for giro-transfers on pp. 188-189 of +the same article, or with the figures for note issue on p. 209.[329] In +the United States, of course, the use of bills of exchange has become +comparatively unimportant in domestic commerce,[330] though there is a +movement to revive them, since the new Federal Reserve system has come +in. Their chief importance is in connection with foreign trade. Is it +possible that Professor Fisher's reason for wishing to minimize foreign +trade[331] is the unconscious desire to get rid of the annoying bills +of exchange, which so obviously tend to make bank-credit and volume of +trade interdependent, and which further spoil the quantity theory by +serving as a flexible substitute for both money and deposits? + +I regret the necessity for this elementary exposition of familiar +things. But Fisher's theory has no place for these familiar things--and +Fisher has merely made very explicit the logic of the quantity theory! + +As applied to modern conditions, the quantity theory is obliged to +assert--and Fisher does assert: + + (a) that there is a causal dependence of bank-credit on money, + and "normally" a fixed ratio between them; + + (b) that velocity of circulation of money and credit + instruments are independent of quantity of money and credit + instruments; + + (c) that, in general, money and volume of credit (taken + together), velocities, and trade, are independent magnitudes, + each governed by separate laws, though Fisher concedes _some_ + reaction of trade on velocities; + + (d) in particular, that volume of money and credit has no + influence on trade, and that trade has no direct influence on + volume of credit. + + All these doctrines are necessary if the contention that an + increase of money will proportionately raise prices is to be + maintained, or if it is to be maintained that a decrease in + trade will proportionately raise prices. I have analyzed each + of these contentions, and I find justification for none of + them. + +Not yet, however, have we reached the least tenable aspect of the +quantity theory. There remains the contention that prices are passive, +that a change, _originating_ in prices, and involving a change in the +average price, or the general price-level, cannot maintain itself--that +P is a passive function of the other five magnitudes of the equation of +exchange. To this central fortress of the quantity theory we shall +devote the next chapter. + + + + +CHAPTER XV + +THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES" + + +Is the price-level passive? Is it true that while change may occur from +causes outside the equation of exchange in volume of money, volume of +trade, and velocities of circulation, a change in the price-level from +causes outside the equation is impossible? Must the average of prices be +a passive function of M, the V's, M' and T? Such is the general +contention of the quantity theory, and such, very explicitly, is +Fisher's contention. The price-level is always effect, and never cause +(with slight modifications of the doctrine for transition periods) in +its relations to the other magnitudes in the equation of exchange. + +Now in one sense, it is my own contention that the price-_level_ can +never be a _cause_ of anything. The price-level is an _average_. +Averages may be _indicia_ of causation, but they are not themselves +causes. They are not, in reality, anything _at all_. Causation is a +matter which pertains to the particulars of which the average is made. +But this is not the doctrine of the quantity theory. The quantity theory +does, in certain connections, assign causal influence to the level of +prices, particularly in the theory of foreign exchange, where the +explanation of international gold movements rests on the doctrine that a +price-level in one country, higher than the price-level of another +country, drives money away.[332] It will be seen, in a moment, that +Fisher relies on this principle to prove that the price-level of a +country cannot rise without an increase of money--if it did so rise, it +would drive out the money, and so be forced down again. The point at +issue may be stated in terms of particular prices. The quantity theory +is that, while particular prices may rise from causes affecting them, as +compared with other prices, without a change in money, velocities, etc., +still there cannot be a rise in the general average, because other +prices will be obliged to go down to compensate. The issue is as to the +possibility of a rise in particular prices, uncompensated by a +corresponding fall in other particular prices, without a _prior_ +increase in money, or velocities, or decrease in trade. I take up the +issue in this form. I shall maintain that particular prices can, and do, +rise, without a _prior_ increase in money or bank-deposits, or change in +the volume of trade, or in velocity of money or deposits and also +without compensating fall in other particular prices. Putting it in +terms of Fisher's equation, I shall maintain, as against Fisher, that P +can rise through the direct action of factors _outside_ the equation of +exchange, that as a _consequence of such rise_ the other factors +readjust themselves, and that a new equilibrium is reached which, in the +absence of new disturbances from causes outside the equation, tends to +be as permanent and stable as the old equilibrium was. + +In the argument which follows, I shall respect thoroughly the +distinction between "normal" and "transitional" effects. I do not think +that this distinction is properly drawn by Fisher. In my discussion of +the relation between the volume of bank-credit and the volume of trade, +and in other connections, I have shown that Fisher leaves out of his +normal theory most of the concrete factors which do affect both the +concrete magnitudes, and the long run _averages_, of the factors in his +own equation. But for the present, I shall meet him on his own ground, +give his distinctions their fullest weight, and carry my argument +through the "transition" to a point where no further change among the +factors in the equation can be expected as a consequence of the initial +change assumed. + +Fisher's argument to show the passiveness of prices takes the form of a +_reductio ad absurdum_. "To show the untenability of such an idea let us +grant for the sake of argument that--in some other way than as effect of +changes in M, M', V, V', and the Q's--the prices in (say) the United +States are changed to (say) double the original level, and let us see +what effect this will produce on the other magnitudes in the +equation."[333] Then, if the equation of exchange is to be maintained, +either M or M' or their velocities must be increased, or trade must be +reduced. But he holds that none of these is possible. (1) Money will be +reduced. High prices drive money away to other countries. Nor can gold +come in via the mints. "No one will take bullion to the mints when he +thereby loses half its value."[334] On the contrary, men will melt down +coin. Nor will high prices stimulate mining. Rather, by raising the +expenses of mining, they will discourage mining. (2) Bank-deposits +cannot increase. Bank-deposits depend on the amount of money, and as +that is reduced, they must be reduced, to keep their normal ratio to the +volume of money. (3) The appeal to velocities is no more satisfactory. +These have been already adjusted to individual convenience.[335] (4) Nor +can trade be decreased. Since the average person will not only pay, but +also receive, high prices, there is no reason why he should reduce his +purchases. "_The price-level is normally the one absolutely passive +element in the equation of exchange._"[336] + +"But though it is a fallacy to think that the price-level in one +community can, in the long run, affect the money in _that_ community, it +is true that the price-level in one community may affect the money in +_another_ community. This proposition has been repeatedly made use of in +our discussion, and should be clearly distinguished from the fallacy +above mentioned. The price-level in an outside community is an influence +outside the equation of exchange of that community, and operates by +affecting its money in circulation and not by directly affecting its +price-level. _The price-level outside New York City, for instance, +affects the price-level in New York City only_ via _changes in the money +in New York City_."[337]... + +"Were it not for the fanatical refusal of some economists to admit that +the price-level is in ultimate analysis effect and not cause, we should +not be at so great pains to prove it beyond cavil." To explain this +"fanatical refusal," Fisher alludes to the "fallacious idea" that the +equation of exchange cannot determine the price-level, because the +price-level has already been determined by other causes, usually alluded +to as "supply and demand." He urges, however, that supply and demand, +cost of production, etc., relate, not to the price-level, but only to +particular prices: that the price-level is a factor prior to, and +independent of, the particular prices, and is presupposed by theories +like supply and demand, cost of production, etc.[338] + +The _reductio ad absurdum_, at first blush, looks impressive. One +obvious criticism suggests itself, however, and it will be found to give +a clue to a much more fundamental criticism: is it reasonable to assume +a doubling of _all_ prices? Above all, must the assumption involve the +doubling of the price of gold bullion? Part of the argument to show that +gold bullion would not be minted rests on that assumption. But, more +fundamental, for such an all round doubling of prices, no _cause_ could +be assigned. Of course the hypothesis of an increase in prices without +any cause is absurd, and Fisher easily disposes of it. But suppose we +assign some _concrete causes_, outside the equation of exchange, which +might affect prices, and see how the thing works then! + +Fisher states on p. 95 that "other elements in the equation of exchange +than money and commodities[339] cannot be transported from one place to +another." And in the passage quoted above he maintains that price-levels +in one country can influence price-levels in another country, or even +price-levels in one city can influence price-levels in another city, +only _via_ changes in money, in the second country or city. But other +elements in the equation are _directly_ transferable, in fact. +_Deposits_, _e. g._, in London, to the credit of New York bankers, may +be transferred to Paris, directly, by _cable_ or by _letter_, and +_prices_ are constantly being directly passed from one country or market +to another by the same media. Let us suppose a strong case, to put our +principle in relief. Assume an island, which produces a staple widely +used, whose chief centre of production is outside the island. Assume +that this staple, an agricultural product, rises greatly in price, owing +to a blight, which promises to be permanent, in the main producing +region. The blight does not affect the island, however. Let this product +be the main product of our island, which we shall assume to be small. +Let the island have communication with the outside world by boat only +once in three months. Let it be, however, in constant communication by +cable. Word comes by cable of the rise in the price in the staple. The +staple at once rises in the island. No new money has come in to cause +it. Will this be a rise in the price-level? Will there be compensating +reductions in the prices of other things to leave the price-level +unchanged? What prices can fall? Not the prices of goods that have been +imported to the island, surely. They will rather tend to rise, because +everybody on the island will feel richer than before, and will be +disposed to buy more freely. Meanwhile, merchants and bankers on the +island will be more ready to extend credit than before, so that they +will be able to buy more freely. What else can fall? Not the prices of +the land! Rather, the land will rise in price greatly, because the +increased price of the staple, expected to be permanent, will promise +bigger rents, and the price of the land, being a _capitalization_ of the +annual rental, will rise very much more than anything else--it will rise +to the extent of the capitalized price of the increase in the rents. +Wages, likewise, will rise, since the price of the product of labor has +risen. And the capital instruments in use in producing the staple will +also rise, though not so much as land and wages, inasmuch as they can be +brought in from outside at the end of three months. What is there that +can fall--except, perhaps, such goods as are exclusively designed for +the construction of poorhouses! A significant particular price +rises--that is the first step; then, from causes familiar to all +students of economics, other related prices rise; there is a general +_sympathetic_ rise in prices, the _price-level_ has risen independently, +from causes _outside the equation of exchange_. But now, can this rise +sustain itself? Well, what can bring it down? When the ship comes, at +the end of three months, it will bring in additional supplies of the +articles of import, and they will go down to their old level. Will they +go any lower than the old level? What is there to cause them to do so? +The outside price-level should be higher now, rather than lower, since +the _stock_ of the staple in question is reduced, and nothing else +increased to compensate. Nor can any reason be assigned why other prices +on the island: the staple in question, lands, wages, etc., should fall +at all from the level they reached when the news first came. + +Incidentally, our ship may also bring in more gold. The bankers, finding +their deposits expanding, may feel it well to cable orders for more gold +to increase their reserves, especially as they have been subject to +somewhat unusual calls for cash for hand to hand circulation--though +this last need they might well have been meeting by expanding their note +issue. + +Is there anything else to be said? Is not the new equilibrium stable? +And is not the causal sequence precisely the reverse of that assigned by +the quantity theory? _First_. a rise in prices; _second_, an expansion +of credit, book-credit, notes and deposits; _third_, money comes in. If +anyone is particularly anxious about the equation of exchange in this +process, he may add to my expansion of credit an increase in velocities +to keep it straight! + +I may add that I see nothing in the "transition" I have described to +cause trade to be reduced. Rather, I should expect the rising prices to +make trade more active--or better, I should expect the rising _values_ +of goods, etc., of which rising prices are the symptom, to make trade +more active, particularly as there would be an increase in speculation +to bring about readjustments, and to "discount" the prosperity. Nor can +I find any reason why trade should be reduced below the old level in the +new normal equilibrium. It would make no difference, however, if trade +were reduced either transitionally or normally, since the point at issue +is the possibility of a rise in prices originating from causes outside +the equation of exchange, and compelling a readjustment of a permanent +character in the other factors of the equation. The quantity theorist +is at liberty to make this readjustment in any way he pleases. My point +is made if he has to make the readjustment, and if the price-level stays +up! + +I have put my illustration in an extreme form to throw the whole thing +in relief, and to make the demonstration free from a host of +complexities. But is not the causal process essentially the same if we +substitute, say, the Southern States for our island, and cotton for our +staple? So long as the telegraph bringing news of the ruin of cotton +production in India and Egypt, with the higher price of cotton, can come +in ahead of the money that the quantity theorist might imagine rushing +in a race with it on the train to be offered for the cotton, my point is +made. In point of fact, there would be a general rise in prices and +wages in the South, which, leading to an expansion of credit, would only +gradually and in no definite ratio lead to an increase in money drawn +from outside. Buyers outside would pay, not with money, but with checks +drawn on New York, and Southern bankers would use their discretion as to +how much actual cash they would bring in. With the elastic note issue of +our Federal Reserve system, I see no reason to anticipate that money +would be drawn to the South in an amount proportionate to the increase +in prices. Even if it were, the causation would not run from money to +prices, and that is the point at issue. If _rising_ prices can cause +increasing money, the whole quantity theory is upset, whatever the +proportions involved. + +It will be noted that my illustration might be put partly in the form of +the supply and demand argument. Increasing demand for cotton in the +South leads to higher price of cotton; higher price of cotton makes +cotton-growers richer, and enables them to increase their demand for +imported goods, for land, and for labor. Supply and demand comes into +conflict with the quantity theory, and does not suffer in the conflict! +Supply and demand determine particular prices, and particular prices +determine the price-level! + +Now I wish to generalize this point. I shall show that the quantity +theory conflicts with most of our doctrines of prices, as worked out in +our systems of economics. I shall show that, in important cases, the +quantity theory conflicts with the law of supply and demand, with the +doctrine of cost of production, with the capitalization theory, and with +the doctrine of imputation as worked out by the Austrians, whereby the +prices of labor, land, and other agents of production rise or fall with +the prices of the consumption goods which they produce. I shall show the +conflict in important cases, and shall show also, in those cases, that +it is not the quantity theory which can be sustained. + +The general form of the conflict may be stated for all these theories. +They are theories of the _relations_ of particular prices, concerned +with showing that individual prices are so related that they tend to +_vary together_. A rise in one price, according to these theories, tends +to bring about _rises_ in others, and _vice versa_. The quantity theory, +on the other hand, asserts a relation among individual prices such that +a rise in one tends to bring about a _fall_ in others--it requires a +_compensatory_ fall at one point, if there has been a rise somewhere +else. + +Let us take some cases. I shall take, first, the conflict between the +quantity theory and the capitalization theory, as I can use the +illustration just given in connection with it. I have, in a preceding +chapter, given a statement of the capitalization theory. It is a theory +concerned with the prices of long-time goods and income-bearers, as +lands, houses, capital goods of various sorts that give forth their +services through a series of years, stocks, bonds, etc. The prices of +things of this sort, according to the capitalization[340] theory, depend +on two factors: one, the money income expected from the income-bearer, +the other, the prevailing rate of interest. This money income, except in +the case of bonds, commonly depends on the prices of the products of the +income-bearer, or (in the case of stocks) of the products of the +concrete capital-goods to which the income-bearer gives title. If we may +follow the Austrian division of goods into higher and lower "orders," or +"ranks," we may say that the prices of the goods of higher ranks are the +capitalizations of the prices of the goods of lower ranks specifically +produced by them. Thus, concretely, if the price of wheat rises, we may +expect the prices of land to rise, if the rate of interest remains the +same. If the price of steel rises, we may expect the stocks of the U. S. +Steel corporation to rise, also. If the prices of smokeless powder, and +other war munitions soar, we may expect the prices of the stocks of the +corporations involved to do precisely what they have done in the recent +course of the stock market. All this, on the assumption that the rate of +interest does not change, and that the risk factor remains constant. If +these factors vary, the results will not present the mathematical +exactitude that the formula calls for, but the general tendency will +remain the same. On the other hand, if the incomes remain unchanged, +but the rate of interest rises, then we may expect the capitalized +prices to fall, and if the rate of interest falls, we may expect the +capitalized prices to rise. From the standpoint of the present +discussion, I suppose it might be fairest and best to state the +capitalization theory on this point as Fisher himself states it. In his +_Elementary Principles of Economics_ (ed. 1912) after giving a table +showing in figures the difference made in different capital prices by +different rates of interest (p. 125) he states (126): "If the value of +the benefits derivable from these various articles continues in each +case uniform, but the rate of interest is suddenly cut down from 5% to +2-1/2%, there will result a general increase in the capital values, but +a very different increase for the different articles. The more enduring +ones will be affected the most." And in his book, _The Rate of +Interest_: "The orchard whose yield of apples should increase from +$1,000 worth to $2,000 worth would itself correspondingly increase in +value from, say, $20,000 to something like $40,000 and the ratio of the +income to the capital value, would remain about as before, namely, 5%." +(P. 15.) On the next page, he generalizes his notion: "One cannot escape +this conclusion (as has sometimes been attempted) by supposing the +increasing productivity to be universal. It has been asserted, in +substance, that though an increase in the productivity of one orchard +would not affect the total productivity of capital, and hence would not +appreciably affect the rate of interest, yet, if the productivity of all +the capital in the world could be doubled, the rate of interest would be +doubled. It is true that doubling the productivity of the world's +capital would not be entirely without effect upon the rate of interest; +but this effect would not be in the simple direct ratio supposed. +Indeed, an increase of the productivity of capital would probably result +in a decrease, instead of an increase, of the rate of interest. _To +double the productivity of capital might more than double the value of +the capital._" (_Rate of Interest_, p. 16.)[341] Fisher reiterates this +doctrine in his reply to Seager, in the _American Economic Review_, +Sept. 1913, pp. 614-615. + +Now my concern here is not with the points at issue as between Fisher +and Seager: the "impatience" vs. the "productivity" theories of +interest. For the present, I shall accept Fisher's doctrine on that +point as true.[342] I am here interested in Fisher's doctrine that a +doubling of the general productivity of capital would double, or more +than double, the prices of capital instruments, including land. How is +such a general rise in prices possible, if the quantity theory be true? +Is not this a rise in general prices from causes outside the equation of +exchange? That Fisher means the _money-prices_ of capital goods when he +speaks of capital-values is perfectly clear. In the second quotation, he +speaks of "capital-value of $40,000", and in general, his definition of +value runs in terms of _price_ (_e. g., Purchasing Power of Money,_ pp. +3-4, and _Elementary Principles_, p. 17). Fisher has no absolute value +concept in his system. We have in the passages cited two doctrines, both +of which contradict the quantity theory: (1) that a reduction in the +rate of interest will raise capital-prices (which are the largest factor +by far in the price-level), and (2) that an increase in the product of +capital goods means, not only more money paid for the products, but also +more money paid for the production-goods. Incidentally, the general +imputation theory would call for more money paid to laborers as well. +How can all this be, on the quantity theory? And what can the poor +equation of exchange do in such a case, if money does not increase, if +bank-credit is limited by money, if velocities of circulation are fixed +by individual habits and convenience, if trade _increases_ as a +consequence of the increased number of goods produced, and if prices +rise? It will not help much to assume that the productivity of gold +mines is doubled also. The quantity of money does not depend very much +on the annual production of gold. Besides, money need not, from the +standpoint of the quantity theory, be made of gold. It might be +irredeemable Greenbacks, fixed in quantity by law, or even dodo-bones! +Would not the capitalization theory apply in the Greenback Period? I +shall not try to solve the riddle. I am not responsible for it! + +The conflict between the capitalization theory and the quantity theory +may be more simply stated. Assume that the prices of consumers' goods +and services rise, quantity of money and volume of exchanges remaining +unchanged. On the quantity theory, other prices, the prices of +producers' goods and services, lands, and securities, would have to come +down enough to compensate, in order that the price-level might remain +unchanged. For the capitalization theory, however, the prices of lands, +securities, and long time capital goods in general would have to rise, +since the incomes on which they are based have risen. Wages of labor +engaged in making consumers' goods would also have to rise, on the +general imputation theory. + +The quantity theory conflicts with the capitalization theory. The +quantity theory as presented by Fisher conflicts with the capitalization +theory as presented by Fisher. Which theory is true? Would prices rise +thus, or would they be held down in some way by the limitations on the +quantity of money? I hold that I have already proved, in the reasoning +given in connection with my hypothetical island, and in the case of the +South with its cotton, that the capitalization theory tendency would +prevail. The prices of products rise, and then the prices of the labor, +land, and other capital goods which have produced them, rise, the rise +in the prices of the capital goods behaving in accordance with the laws +of the capitalization theory, and all of the rises after the initial +rise in products being in accordance with the imputation theory of the +Austrians. + +This conflict suggests an interesting point. Various elements in our +economic theory, added from time to time by different writers, have +necessarily come from different philosophical and sociological +view-points, and have behind them different philosophical, +psychological, and sociological assumptions. The quantity theory, +developing, as shown in the chapter on "Supply and Demand and the Value +of Money," largely in isolation from the general body of economic +theory, has a background of psychological and sociological assumptions +quite different from that of many other doctrines. In the chapter on +"Dodo-Bones," I stated these assumptions. The quantity theory rests in a +psychology of blind habit. It assumes a rigidity in the social system +such that it might be likened to a machine, with a hopper into which +money is poured, which grinds out prices at the other end. I set this in +contrast with the psychological assumptions underlying the commodity +theory of money. That theory rests on the "banker's psychology." It +assumes a highly reflective and calculating attitude on the part of +economic men, with the disposition to look behind appearances for the +security, to test things out, to get to bedrock in business affairs. Now +the capitalization theory likewise assumes this banker's psychology. In +its refinements, as represented by the mathematical formulae in the +appendices of Fisher's _Rate of Interest_, it assumes a degree of +precision in business calculation which few experts in bond departments +apply, and which the highly fluid and alert dealers in Wall Street +certainly have not time for, even if they had that degree of +mathematical knowledge! In practice, it need not be said, particularly +in the case of the prices of lands, the capitalization theory finds its +predictions very imperfectly realized! But the two theories, resting in +such divergent psychological assumptions, may be expected, _a priori_, +to conflict. That they do conflict is not remarkable. + +I shall show a similar conflict between the quantity theory and the law +of costs. In general, the quantity theorist thinks that he has +reconciled his theory with cost theory by pointing out that reduced +costs manifest themselves in increasing production, which means +increasing trade, which should, on the quantity theory, mean lower +prices.[343] I need not, for my purposes, analyze this doctrine in +detail, though I am disposed to consider it an accident that the two +theories converge at this point. For the present, I shall analyze a case +where reducing costs actually come as a consequence of the _reduction_ +in the volume of trade, and inquire whether such a case will lead, as +the cost theory would assert, to lowered general prices, or, as the +quantity theory would assert, to _higher_ general prices. The case is +that where by improved methods of handling goods, it is possible to +dispense with middlemen. Concretely, assume that retailers of milk get +in direct touch with dairymen, so that middlemen are eliminated, and +that as a consequence the price of milk is reduced two cents a quart. +What of the general price-level? T (trade) is reduced. There are less +exchanges. Volume of trade does not mean volume of goods _produced_, but +volume of _exchanges_. With a reduced trade, the quantity theory must +assert that prices of commodities other than milk must, on the average, +rise, not merely enough to compensate for the fall in milk, but more +than that, enough to compensate for the reduced trade as well. But how +can the other prices rise? Well, a point comes up obviously: the buyers +of milk save two cents a quart. They can spend it for something else. +This will raise the prices of other things. But, on the other hand, the +middlemen now have less to spend. They have _exactly as much less_ as +the others have _more_, the extra money that milk buyers have being, in +fact, the money that the middlemen would otherwise have had. The one +offsets the other. There is, then, no reason for the average of other +prices to rise. Suppose we carry the process one step further. After a +while, the middleman will find other work to do. Then they will have +incomes again to spend. But in going to work again, they will be engaged +in production, and so will, in general, be increasing the volume of +trade. The quantity theorist could not expect a rise in prices from +this! + +And here we are given a clue to a fundamental confusion in the quantity +theory, a confusion which, accepted by the reader, gives the quantity +theory much of its plausibility. I refer to the confusion between +_volume of money_, and volume of _money-income_.[344] The two need not +be the same. The two generally are not the same. In the case I have +described, the one has changed without a change in the other. Now if one +wishes to view the process of price-causation from the standpoint of +money offered for goods,--an essentially superficial,[345] but +frequently useful, view-point--it is clearly money-_income_, rather +than mere quantity of money in the country that is important. Into the +determination of volume of money-income, however, come factors of a high +degree of complexity, among them, prices for which there is no possible +place within the confines of so simple and mechanical a doctrine as the +quantity theory. + +In passing, I notice a point to which I called attention in discussing +Fisher's factors in the equation of exchange. I refer to his definition +of velocity of circulation as the average of "person-turnovers" of +money.[346] In the illustration given, there is no reason to suppose +that this average is changed. The middlemen simply drop out of the +average. They have no money to turn over! But velocity of circulation, +defined as "coin-transfer," (_cf._ _supra_, p. 204) has clearly changed. +The course of money has been short-circuited. It goes through fewer +hands in the course of a given period. This last concept of velocity of +circulation is clearly the one that must be used, if the equation of +exchange is to be kept straight. But this fact should make it clear that +velocity of circulation, instead of being the inflexible thing that +Fisher has described, resting in individual habits and practices, a true +causal factor in the price making process, is really a highly flexible +thing, in large degree a passive function of trade and prices. + +With this distinction between volume of money and volume of +money-income[347] clearly held, we are prepared to go further in our +attack on the quantity theory, granting the quantity theorist all his +most rigorous assumptions, and still demonstrating that prices can vary +independently, without prior change in quantity of money, volume of +trade, or velocity of money. Let us assume the extreme case of the +quantity theory: a closed market; no credit; no barter; a fixed supply +of money; a fixed volume of trade; a fixed set of habits affecting +velocity, namely, that everyone spends, in the course of the month, all +that he has accumulated by the first of the month. The quantity theorist +could not ask a more iron-clad set of assumptions than this! If the +quantity theory is not valid here, if the price-level is not absolutely +fixed, helpless to change, with these assumptions, then the quantity +theory, even as a minor tendency, must be surrendered, and the quantity +theorist must admit that the whole line of thought has been fallacious. +But is the price-level passive? Suppose we assume a combination of +employers of maid-servants, which forces down the wages of maid-servants +from $20 to $10 per month. Assume further that there is no alternative +employment for the maid-servants, so that they all remain at work.[348] +So far, we have made a change in _one_ price, the price of domestic +service. What of the general average of prices, the price-_level_? Well, +so far, the price-level is down. If nothing else takes place, we have +reduced the price-level by reducing one price. What else can take place? +Two things: (1) the masters now have $10 per month each more to spend +for other things than before. That tends to raise prices in their other +channels of expenditure. (2) The maid-servants now have $10 each less to +spend,--the same ten dollars! That lessens prices in the lines of their +expenditure. These last two changes exactly neutralize one another. The +first change, in the price of domestic service, remains unneutralized. +The general price-level is, then, lowered--by a cause acting from +outside the equation of exchange, directly on prices. The first change +comes in one price. In the final adjustment, that change remains +unneutralized. How is this possible? Is the equation of exchange still +valid? As a mathematical formula, yes. As expressing a causal theory, in +which prices are effect, and money, trade, and velocity causes, no. The +equation is kept straight by a reduction in velocity. _Because_ the +wages of maid-servants are reduced, _less_ money goes through their +_hands_; $10 per month per maid are short-circuited. But the _cause_ is +with the _prices_. The price-level, even under these absolutely rigorous +assumptions, is not passive. + +In general, I conclude that the price-level, under the laws governing +particular prices, supply and demand, cost of production, the +capitalization theory, the imputation theory, etc., can vary of its own +initiative, independently of prior changes in the quantity of money, or +of volume of trade, or other factors that the quantity theory stresses; +and that these changes in the price-level (or in the particular prices +which govern the price-level) can maintain themselves, and compel a +readjustment in trade, credit, money and velocities, to correspond. This +conclusion strikes at the very heart of the quantity theory, and, if +valid, leaves the quantity theory disproved. More fundamentally, I +should put it, prices can change because of changes in the psychological +values of goods. These values are _social_ values, and are to be +explained only by a social psychology. But for the present it has seemed +best to me, as a means of attracting sympathetic attention from a wider +circle of economists, to make use of the less debated doctrines of the +science in attacking the quantity theory. It is not necessary to rest +the case on my own special theory of value. Supply and demand, cost of +production, the capitalization theory, the imputation theory--the +general laws of the concatenations and interrelations of prices--are +quite adequate for the confutation of the quantity theory. They are laws +concerned with particular prices, and the price-level is nothing but the +average of particular prices. Whatever explains, really explains, the +particular prices, also explains the price-level. + +Fisher, as we have seen, is not of this opinion. Although he has defined +the price-level as an average of particular prices[349] he none the less +exalts this average into a causal entity, prior to and master of the +particular prices out of which it is derived, of which it is a mere +average.[350] This average, he maintains, is presupposed in the +determination of all particular prices.[351] This seems to me a wholly +untenable position. _Ex nihilo nihil fit._ There cannot be _more_ in the +average than there is in the particulars from which it is derived. In +point of fact, there is necessarily vastly less. All the concrete +causation is lost. The average, in itself, is nothing but a _statement_, +a summary of _results_. I know nothing more metaphysical in the history +of economic theory than this hypostasis of an average.[352] + +I reject Fisher's notion that the average of prices is an independent +entity. But I do not consider that the idea lying behind this untenable +doctrine is absurd. Cost of production, supply and demand, and the other +price theories _do_ presuppose something more fundamental. They do +presuppose _money_, and the _value_ of money, as has been shown at +length in Part I. The trouble with Fisher's notion comes in his +definition of the value of money in purely relative terms as the +_reciprocal of the price-level_, and his contention that the study of +the value of money is identical with the study of price-levels.[353] +Value is not a mere exchange relation.[354] Rather, every exchange +relation involves _two_ values, the values of the two objects exchanged. +These two values _causally_ determine that exchange relation. In the +case of particular prices, then, we must consider not only the value of +goods, but also the value of money. And the causes determining the +general price-level will therefore include not alone the values of +goods, but also the value of money. In the foregoing arguments by which +I have shown that the price-level can vary independently of the other +factors in the quantity theory scheme, I have been concerned only with +changes in the values of goods, measured by a constant unit of value. If +the value of money should also be varying, the concrete results on the +price-level would have been different. On the face of things, there was +nothing in the cases I discussed to require us to suppose that the value +of money would also vary. The argument ran on the assumption of a fixed +value of money. I have shown, in earlier chapters, that the assumption +of a fixed value of money is fundamental to the laws of supply and +demand, cost of production, and the capitalization theory. In point of +fact, this assumption is rarely true--never strictly true. For causes +which are in considerable degree independent of the causes governing the +values of goods (as the causes governing their values are in +considerable degree independent of one another), the value of money +varies, now in the same direction as the values of goods in general, now +in an opposite direction. Further, money itself does not escape the +general laws of concatenation of values. The value of money has causes +which are bound up with the values of other goods. Thus, when prices are +rising and trade expanding, there is a tendency--commonly a minor +tendency--for money also to rise in value, and so prices do not go +quite as high as they would have gone had money remained constant. This +tendency arises from the fact that there is more work for money to do in +a period of active trade and rising prices. Gold also tends to rise in +value in the arts, with prosperity. The reverse tendency manifests +itself when prices are falling: money tends, in some measure, to fall in +value with the goods,[355] and so prices do not fall as far as they +would fall if money remained constant. But in general, the causes +governing the values of goods, and the causes governing the value of +money, are sufficiently independent to justify us in studying each +separately, in abstraction, on the assumption that the other is +unchanged. Hence, supply and demand, cost of production, and the other +price theories, which assume a fixed value of money, are proper tools of +thought for the study of the prices of goods. + + + + +CHAPTER XVI + +THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS + + +The quantity theory explanation of international gold movements is as +follows: if money comes into a country, it raises prices. If the +price-level of the country is raised more rapidly than the price-levels +of other countries are rising, then the country becomes a bad place in +which to buy and a good place in which to sell; its exports fall off, +its imports increase, and finally the inflow of money is checked, and, +perhaps, money flows out again. The equilibrium of the gold supplies of +different countries is thus dependent on the price-levels of the +countries involved. The quantity of gold in a country determines its +price-level, and no more gold can stay in a country, on this theory, +than that amount which keeps its price-level in proper relation to the +price-levels of other countries. It is not necessarily asserted that the +price-levels of all countries must be equal--the facts too obviously +contradict that. But when this precise statement is not made, the +substitute statement of some "normal" relation between the price-level +of one country and that of another becomes a very vague one, and the +theory becomes pretty indefinite. + +I am here concerned chiefly with one contention: the price-_level_, the +average of prices, is not a _cause_ of anything--not of gold movements +or anything else. It is a mere summary of many concrete prices. Some of +these concrete prices have highly important influence on international +gold movements, tending, if they are low, to bring gold in, and if they +are high, to repel gold. Others work in the opposite direction, tending +if they are low to attract less gold than if they are high. Finally, +among all the prices affecting international gold movements, the one +which is most significant is commonly not included in the price-level at +all: I refer to the "price of money," the short-time interest rate. + +Let me elaborate each point. First, it is true that high prices of +articles which enter easily into international trade tend to repel gold +from the country--meaning by "high prices" prices that are higher than +the prices of the same goods abroad. This relates, however, not to the +general price-level, but only to a comparatively small set of prices. +Most prices in a country are not prices of articles of international +trade. High wages may, indeed, draw in immigrants. But high land rents, +and high prices of land cannot bring in land. Nor do high land prices +send away much gold to other countries for the purchase of land there. +Indeed, within a single country, the differences in the relation between +land yield and capital value of land are enormous. The following figures +are taken from an article by J. E. Pope:[356] In Yazoo Co., Mississippi, +farm lands are sold at $10 to $25 per acre. The average gross income per +acre is $28. In Cass Co., Iowa, the land prices are from $100 to $125 +per acre while the gross income amounts to only $11 per acre, if only +crops and dairy products are taken into account, and to $20 if the sales +of live stock are included. In Oglethorpe Co., Georgia, the average +price is from $10 to $25 per acre, and the average income $10. In +Paulding Co., Ohio, land is sold at from $75 to $100 per acre, and the +average income per acre, including returns from live stock sold, is $15. +Why should not landowners in Cass County, Iowa, sell their comparatively +unproductive land, at a high price, and go, with their money, to Yazoo +County, Mississippi? The answer is simply, that they would have to go +_with_ their money, and they prefer to stay at home! Absentee +landlordism is not generally popular with men who are seeking paying +investments. Land stands at one extreme. But then land is the very +biggest item in an inventory of wealth, and, while not _as land_, +actively bought and sold,[357] it is a big element in the values of many +active securities. The principle holds in less degree of many other +things, however. The securities of a local corporation, say a gas plant, +find their best market at home, as a rule, unless the city be large. If +they are held by foreign capitalists, they still find a very restricted +market in the foreign country. Only those who have investigated at first +hand will feel free in buying them--unless, indeed, they are guaranteed +in some way by a big and well-known house. Prices of personal and +professional services vary enormously in different sections of the same +country, to say nothing of variations between different countries, and +there is a very slow movement indeed toward bringing about higher +salaries for rural preachers in Kansas because the salaries of London +preachers have risen, or because of increased demand for preachers in +Germany. Great numbers of commodities are too bulky to move far. Their +prices vary with little relation to similar prices elsewhere. But the +principle needs no more elaboration. If the reasoning be simply that men +tend to buy where things are cheap, and to sell where things are dear, +it is clear that that establishes a very loose relation indeed between +the price-levels of different countries. + +The second point is that some prices, by rising, actually bring in gold +from abroad, while by falling they tend to release gold. I am not here +referring to the case discussed in the chapter on "Supply and Demand," +where a commodity, cotton, with an inelastic demand, is doubled, the +doubled quantity selling for a less aggregate price, and so bringing in +less money from abroad. That case would bear considerable +generalization. I am referring here to the case where _credit_ is built +on the value of long time goods, as lands, or railroads. Concretely, let +us suppose an increase in railroad rates allowed by the Public Service +Commission of Missouri. This is, in itself a rise in prices. It will, +further, on the capitalization theory, make the prices of stocks of the +roads operating in the State rise also, and give a margin of additional +security for bond-issues. This will make it possible for these roads to +float foreign loans (or would have done so before the War), and so will +tend to turn the exchanges in our favor. Gold will tend to come in, not +to go out. Similarly if the prices of dairy products, or truck gardens, +or orchards, or orange groves rise, leading to a rise in the prices of +the lands involved, foreign capital will tend to come in as loans--_i. +e._, the exchanges will turn more favorable to us, and the gold movement +tend to turn our way. I suppose, by the way, that something of a point +could be made against the Single Tax at this point: destroying land +values would lessen the security which a community could offer outside +lenders. The Single Tax would, thus, hamper the development of countries +which need capital from outside. Men who wish to use their own capital, +under their own management, might, as the Single Taxers claim, be +tempted to come in, if they could be free from taxation on the capital +they bring with them; but _lenders_, who wish a good margin of security, +would find less inducement to lend.[358] This is a digression, but one +feature of it is pertinent: though the foreigner does not care to +migrate from his high-priced land to _low_-priced land elsewhere, he is +often willing to trust a _loan_ to the owner of _high_-priced land +elsewhere. I will not venture the generalization that high-priced land +necessarily attracts loans, and tends to turn the gold movements in +favor of the country where prices are high. The point has been made that +if lands are being exchanged frequently, the new buyer tends to exhaust +his credit resources in paying for the land: _i. e._, puts so large a +mortgage on it that he has little margin of security to offer for +working capital.[359] I shall not here undertake to determine how far as +a matter of fact, in different places, the one tendency outweighs the +other. It is enough to point out that in many cases, where this factor +is absent (as in the case of the railroads cited), rising prices +attract, and do not repel, foreign gold, and that for none of these +cases is the consequence of rising prices for the gold movements to be +explained in the simple way that the quantity theory doctrine would +require. + +Finally, the international movements of gold[360] are enormously moved +by the short-time rate of interest. The raising of the Bank Rate in +England, supplemented, when necessary, by "borrowing from the market" by +the Bank of England, as a means of making the Bank Rate effective, +quickly turns the course of the exchanges. This is, as has been pointed +out, a more effective device when used by the English money-market than +when used by borrowing countries, since the borrower, by offering higher +rates, is not always able to borrow more, whereas the lender, by +demanding higher rates, is usually able to reduce his loans. But the +difference is one of degree, and in point of fact a rise in the short +time rates in New York City is commonly an effective means of bringing +in gold from abroad. It is true that this is not the only factor. I have +been at pains to point out how other factors work. I am as far as +possible from denying the powerful influence of the "balance of trade" +as treated by the older economists on international gold movements, when +both visible and invisible items are included. But my point is, first, +that these invisible items are numerous and flexible, and that a big +factor in their determination is the short time rate of interest; and +second, that the balance of physical items, even, depends, not on the +price-level as a whole, but merely on the prices of those particular +goods which enter into foreign trade. It is perfectly possible, and, +indeed, is very common, for rising prices in a country to lead to +expanding trade and expanding bank-credit, which causes bankers to wish +to expand their reserves, which leads them to raise their rates on short +time loans, which leads gold to come in from abroad. More simply still, +the bankers may merely offer an attractive rate to the foreign bankers, +and establish credits abroad, against which they draw "finance bills," +which influence the gold movements in the desired manner. + + + + +CHAPTER XVII + +THE QUANTITY THEORY _vs._ GRESHAM'S LAW + + +There is a pretty obvious conflict between the quantity theory and +Gresham's Law. The latter is, essentially, a "_quality_" theory of +money. For the quantity theory, dodo-bones, or anything else will do. +"It is the number, and not the weight, that is essential"![361] For +Gresham's Law, the weight makes all the difference in the world, if it +is a question as between full weight and light weight coins, and, in +general, the _value_ of the thing of which money is made, considered in +its commodity aspect, is the starting point of that doctrine. + +The quantity theorist seeks, indeed, to harmonize the two. His theory is +that Gresham's Law manifests itself only when there is a _redundancy_ of +the currency due to the issue of paper money, or overvalued metal. In +such a case, prices rise, he holds, and then the undervalued metal, or +the metallic currency, which count no more than the paper or the +overvalued metal in circulation, tend to leave the country, to another +country where prices are lower, or tend to leave the money use for the +arts. But the quantity theorist must maintain that it is only _via_ +increased issue, with consequent rising prices, that Gresham's Law comes +into operation. If there are a million dollars of gold in circulation, +and a half million of irredeemable paper is added, then only half a +million of the gold (or rather a little less than half) will leave. If +more than that left, prices would fall, because of the scarcity of +money, and then the gold would come back, because it would be worth +more in concurrent circulation with the paper than it would be worth as +money abroad, or in the arts. On the quantity theory, there can be no +difference in the value of gold and paper, in such a case, after enough +gold has left to balance the paper that has been issued. Falling prices +would prevent it. + +But Gresham's Law is not held by any such fetters! And the facts of +monetary history, in important cases, show Gresham's Law controlling, +despite the quantity theory. I will refer briefly to two such cases. + +The first centres about the suspension of specie payments by the +Northern banks and the Federal Treasury on January 1, 1862. This +suspension was not accompanied by any increase of money. Rather, there +was a _decrease_,[362] shortly following, in the amount of paper money. +The banks in New York, and certain other States, were bound so strictly +by their charters, and by the State laws, that they dared not leave +their notes unredeemed. Speculators, buying notes at a discount--for +virtually all bank-notes fell to a discount--were able to present them +to the banks in these States and demand gold, which led to a very +profitable business. The banks protected their gold by ceasing to issue +notes, or by reducing the volume of note issue. Certified checks were +used to a considerable extent instead. There was certainly no increase, +and probably a reduction, a considerable reduction, in the volume of +bank-notes in circulation. The only other paper money in circulation was +the Demand Notes of the Federal Government, which were not increased +after the date of the suspension, and which were in any case small in +volume as compared with the total amount of money. On the quantity +theory version of Gresham's Law, there was nothing to drive gold out. +Gold was _not pushed out_ by redundant currency. Rather, it _left_, +leaving a monetary vacuum behind. Coincidently, strangely enough, prices +_rose_. The vacuum in the money supply was so serious, that the +subsequent first issue of the Greenbacks brought a welcome relief. +Throughout the whole of the first year of the suspension, the volume of +money was less than it had been in the preceding year. None the less, +the gold stayed out of general circulation. It did not come back from +abroad. And prices _rose_.[363] + +A similar episode, the obverse of this, occurred when the Bank of +England _resumed_ specie payments in the early '20's. Then gold came +back, the currency was increased, and, coincidently, _prices fell_.[364] + +I conclude that the conflict between Gresham's Law and the quantity +theory is real and fundamental, and that in cases where different +_qualities_ of money are in concurrent circulation, the undervalued +money will leave, regardless of the question of quantity. + + + + +CHAPTER XVII + +THE QUANTITY THEORY AND "WORLD PRICES" + + +Some writers, who would call themselves quantity theorists, would +repudiate many of the doctrines for which Fisher stands, and which the +historical quantity theory involves. The recognition which Fisher's book +has received from quantity theorists generally, justifies me in treating +his book as the "official" exposition of the modern quantity theory, +and, indeed, it is easy to show that Fisher is fundamentally true to the +quantity theory tradition. With many writers, the disagreement with +Fisher would be a mere matter of degree; they would hold that Fisher has +set forth the central principle, that his qualitative reasoning is +correct, but that the relations among the factors in his equation are +less rigid than he maintains. As I reject even the qualitative reasoning +by which Fisher defends his doctrine, and reject even the qualitative +tendency which he maintains, my criticisms will apply as well to the +position of this group of writers, though I should have less practical +differences with them, to the extent that they admit qualifications and +exceptions to Fisher's doctrine. + +There is, however, a group of writers who seem to feel that the quantity +theory remains sufficiently vindicated if it can be shown that an +increase in _gold production_ tends to raise prices throughout the +world, while a check on gold production tends to lower prices, and who +rest their case on the necessity which bankers find of keeping reserves +in some sort of relation to the expansions of bank-credit. + +A view of this sort is presented by J. S. Nicholson, whose statement of +the application of the quantity theory to the modern world differs +almost _toto coelo_ from his original statement in the dodo-bone +illustration already discussed. Nicholson[365] declares that in our +modern society "the quantity of _standard_ money, other things remaining +the same, determines the general level of prices, whilst, on the other +hand, the quantity of _token_ money is determined by the general level +of prices." Nicholson's reasoning is, substantially, as follows: +Although the bulk of exchanging is carried on by means of credit +devices, there is still a certain part of exchanging, especially in the +matter of paying balances, for which standard money only can be used. He +regards the whole credit system as based on standard money, and says +that for any given level of prices there is a minimum amount of standard +money, absolutely demanded. If the volume of standard money falls below +this minimum, the price-level will fall to such a point that the volume +of standard money is again adequate. He takes, moreover, a world-wide +view, declaring that it is the relation between the volume of gold money +throughout the world and the demand for standard money throughout the +world which determines the relative values of money and commodities. +"The measure of values or the general level of prices throughout the +world will be so adjusted that the metals used as currency, or as the +basis of substitutes for currency, will be just sufficient for the +purpose. We see then, that the value of gold is determined in precisely +the same manner as that of any other commodity, according to the +equation between supply and demand." + +In the consideration of this doctrine, let us note several points in +which it differs fundamentally from the quantity theory proper, and from +the situation assumed in the dodo-bone illustration. First, it is not a +quantity theory of _money_. Money is not regarded as a homogeneous +thing, each element having the same influence on prices. Rather, _token_ +money is the child of prices. This doctrine would in no way fit in with +the logic of the equation of exchange, as presented by Fisher. Further, +the dodo-bone idea is entirely gone. _Gold_, a commodity with value in +non-monetary employments, is under discussion, and it is the quantity of +gold that is counted significant. This recognizes, if not the need, at +least the _existence_, of a commodity standard. Nicholson definitely +avows the necessity for the _redemption_ of representative money, even +going so far as to say that "all credit rests on a gold basis,"[366] +that all instruments of exchange derive their value from the volume of +standard money which supports them, and that if this basis were cut away +the whole structure would fall. Nicholson recognizes, further, that gold +has value independent of its use as money.[367] + +In evaluating Nicholson's doctrine, I wish to point out, first, the +inaccuracy of the statement that all credit rests on a gold basis. It is +true that credit instruments are commonly drawn in terms of standard +money, which is commonly gold. International credit instruments may even +specify gold, and the same thing happens at times within a country. But +commonly, in this connection, gold functions, not as the value basis +lying behind the credit instrument, the existence of which justifies the +extension of the credit, but rather as the _standard of deferred +payments_, by means of which the credit instrument may be made definite. +The real basis of the value of a mortgage is not a particular sum of +gold, but rather the value of the farm, expressed in terms of gold. The +basis of a bill of exchange is not a particular sum of gold, but rather +is the value of the goods which changed hands when the bill of exchange +was drawn,[368] supplemented by the other possessions of drawer, drawee, +and the endorsers through whose hands it has gone. Even a note unsecured +by a mortgage, or not given in payment for a particular purchase, is +based, in general, on the value of the general property of the man who +gives it, and on the value of his anticipated income.[369] So +throughout. Credit transactions, for the most part, originate in +exchanges, and carry their own basis of security in the goods and +securities which change hands, not in that small fraction of the world's +wealth, the stock of gold, which could, Coin Harvey asserted in the +middle '90's, be put in the Chicago grain-pit! And now let me extend +this idea. Although coin made from the standard of value is a great +convenience, there is yet no vital need, in theory, for a single dollar, +pound or franc made from the standard of value. If gold should cease +entirely to be used as a medium of exchange, or in bank or government +reserves, if the gold dollar should become a mere formula, so many +grains of gold, without there being any coins made of it, still, so long +as that number of grains had a definite, ascertainable value, +commensurate with the value of some other commodity which could be used +as a means of paying balances and redeeming representative money, the +gold dollar could still serve as a measure and standard of values. In +the situation I have assumed, silver bullion, at the market ratio, could +perform all the exchange and reserve functions now performed by gold, +even though not so conveniently.[370] Nicholson's description of the use +of gold as a reserve, while calling attention to an important fact, has +led him into the error of supposing that what may be true of gold, the +_medium of exchange_, and _reserve for credit operations_ is necessarily +true of the _standard of value as such_. + +Nicholson is correct, however, in looking to the standard of value for +part of the explanation of changes in prices. And, _since it so happens_ +that a considerable part of the value of the standard of value comes +from its employment as medium of exchange and reserve, he is correct in +looking to its use as money as part of the explanation of its value. His +error comes, however, in failing to see that independent changes in the +values of goods may also change the price-level, and that variations in +the demand for gold as a commodity may also change the value of gold, +and so change the price-level. + +Further, in so far as Nicholson clings to the notion of prices as +depending on a mechanical equilibration of physical quantities, he is +subject to the criticisms given before of the general quantity theory, +and in so far as he clings to the identity of the value of gold with the +reciprocal of the price-level,--the relative conception of value--he is +subject to the criticisms already urged. + +Again, even for a single country, the connection between volume of +reserves and volume of credit is very loose and shifting. A thousand +factors besides volume of standard money in a country determine the +expansions and contractions of credit, and the long run average of +credit. For the whole world, this connection is even looser. To assume a +fixed ratio between them for the whole world, one would have to assume +that all the world was simultaneously, and normally, straining its +possibility of credit expansion to the utmost, so that the minimum +ratio--a notion which is far from precise[371]--should also be the +normal maximum, and so that no country, in expanding its credit, could +draw in new reserves from other countries which had more quiescent +business conditions. + +Nicholson's notion of the world price-level, moreover, is subject to the +criticisms I have made in the chapter on "The Quantity Theory and +International Gold Movements." How can the world level have a close +connection with the volume of gold, if different elements in the world +price-level, the price-levels of different countries, can vary so widely +and divergently as compared with one another? Even granting--which I do +not grant, and which I maintain I have disproved--that the price-level +in one country has a close connection with its stock of gold, would it +not be true that the average price-level for the world would vary +greatly, with the same world stock of gold, depending on which countries +had the gold? + +There is nothing in Nicholson's doctrine which seems to me to justify in +any degree the doctrine that prices, in a single country, or in the +world at large, show any tendency to _proportional_ variation with the +quantity of money, or with the world's stock of gold. + +Is it not true, then, that there is _some_ sort of relation between gold +production and world prices? It is. Gold is like other commodities. Its +value tends to sink as its quantity is increased. As its value sinks, +prices tend to rise. As to the elasticity in the value-curve for gold, I +think it will be best to reserve discussion till a later chapter,[372] +in Part III. We shall there find reason for thinking that gold has much +greater elasticity in this respect than most other commodities. That its +value should fall _proportionately_ with an increase in its quantity, I +should not at all conclude. Even if its value did sink proportionately +with an increase, prices would rise proportionately only if the values +of goods remained unchanged. + +But why do we need a _quantity theory_ of _money_, with all its +artificial assumptions, and its law of strict proportionality, to enable +us to assert the simple fact that gold, like other commodities, has a +value not independent of its quantity? What theory of money would deny +it? Surely not the commodity or bullionist theory. For that theory, +which seeks the explanation of the value of money in the value of gold +in the arts, it would go without saying that an increase in the supply +of gold for the arts would lower its value there and consequently, its +value as money. Surely the theory which I shall maintain in Part III of +this book will not deny that increased gold production tends to lower +the value of money, and consequently to raise prices. With the "quantity +theorist" who is content with this conclusion, I have no quarrel--unless +he claims this obvious truth as the unique possession of the quantity +theory! + + + + +CHAPTER XIX + +STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY OF A +BURIED CITY + + +In the following chapter, as in most of the preceding chapters, +constructive doctrine is aimed at, even though the discussion takes, in +considerable part, the form of critical analysis of opposing views. We +shall seek to set forth the facts, as far as may be, regarding the +relations of banking transactions to trade, the relations of clearings +to amounts deposited in banks, the relation of New York City clearings +to country clearings, and of New York bank transactions to bank +transactions in the rest of the country. We shall seek to ascertain the +extent of variability in that highly elusive magnitude, "velocity of +circulation," particularly "V'." We shall indicate something of the +bearing of index numbers of prices on the theory of the value of money +as here presented. In reaching conclusions on these and related matters, +we shall build on the investigations of Dean Kinley, on the very +interesting statistical studies of Kemmerer and Fisher based on Kinley's +figures, on investigations more recently made by the American Bankers' +Association regarding the relation of bank transactions and bank +clearings, on figures from reports by the Comptroller of the Currency, +as well as on other sources. One purpose of the chapter is to criticise +the statistics which purport to prove the quantity theory. The bulk of +the chapter is given to this. But the work of Fisher and Kemmerer thus +criticised yields rich rewards for the study. The conclusions they have +drawn from their figures are, in the judgment of the writer, untenable, +but the figures themselves are of immense interest and importance. + +The controversy over the quantity theory has been waged with many +weapons. Theory, history, and statistics--to say nothing of +invective!--have been freely employed. In large measure, the statistical +studies have been concerned with the direct comparison of quantity of +money and prices, in their variations from year to year. One of the best +of these studies, that of Professor Wesley C. Mitchell, in his _History +of the Greenbacks_ (followed by his _Gold, Prices and Wages under the +Greenback Standard_), has, to the minds of many students, including the +present writer, put it beyond the pale of controversy that the +fluctuations in the gold premium, and in the level of prices, in the +United States during the Greenback period, both for long periods and for +daily changes, were not occasioned by changes in the quantity of +money,[373] but rather, primarily, by military and political events, and +other things affecting the credit of the Federal Government, together +with changes affecting the values of gold and of goods. Professor +Mitchell's discussion is so detailed and thorough, that what controversy +remains relates, not to his facts, but rather to the possibility of +interpreting those facts in harmony with the quantity theory, by +repudiating the notion that the direct comparison of gold premiums or of +prices with quantity of money gives a valid test.[374] + +Recent defenders of the quantity theory have undertaken the examination +of more complex statistics than those concerned with the simple +concomitance of quantity of money and prices. Two of these studies, the +first by Professor Kemmerer[375] and the second by Professor Fisher, +are so elaborate, have commanded such general attention, and have been +accepted by so many students as conclusive demonstrations, that I feel +it proper to give them detailed examination. I do this especially +because highly important facts for our construction argument emerge from +this critical examination. Kemmerer's and Fisher's studies reach +high-water mark in the effort to give statistical demonstrations of the +quantity theory. If they are invalid, then I know no other attempts +which many students would suppose to be possible substitutes. The theory +involved in both these studies is clearly stated by Professor Kemmerer: +"A study of this kind, to be of any value, must cover the monetary +demand as well as the monetary supply. Any test of the validity of the +quantity theory consisting merely of a comparison of the amount of money +in circulation with the general price-level is as worthless as would be +a test of the power of a locomotive by a simple reference to its speed +without taking into account the load it was carrying or the grade it was +moving over." This criticism of many previous studies is, in general, I +think, valid, though I should except from this list such detailed +studies as that of W. C. Mitchell, who takes account, as far as may be, +of all the variables involved, and who considers day by day and week by +week changes. I think the older studies of Tooke,[376] may also be +excepted. In point of fact, if one wishes to know how much reliance may +be placed in the quantity theory as a basis for prediction, when one +knows that money is increasing, the simple comparison of money and +prices is a fair test. If the "other things" which must be "equal" are +so numerous and complex that the quantity theory cannot manifest itself +in a direct comparison, much of its significance _as a basis of +prediction_ is gone. + +It is perfectly true, however, that studies running through long +periods, which give simply figures for general prices and figures for +quantity of money, omitting volume of trade, are not very relevant +either for proof or disproof.[377] And the conception underlying the +studies of Kemmerer and Fisher, that not merely money and prices, but +also volume of bank-credit, volume of trade, velocity of monetary +circulation, and velocity of bank-credit, must be measured, undoubtedly +represents a big advance in the conception of the statistical problem +involved. The mere stating of the problem is an intellectual achievement +of no mean order, and the ingenuity and scholarship involved in seeking +data for concrete measurement of these highly elusive elements must +command the admiration of every student of monetary problems. Volume of +trade, velocity of money and velocity of bank-credit had been generally +supposed, until these studies were undertaken, to be beyond the reach of +the statistician. There can be no doubt at all that the efforts to +measure them, or to measure variations in them, by Kemmerer and Fisher, +have greatly advanced our general knowledge of the phenomena of money +and credit. + +With great admiration for the magnificence of the problem undertaken, +and for the industry, ingenuity and scholarship which have been devoted +to its solution, I have nevertheless reached the conclusion that the +figures assigned by these writers to the magnitudes of their "equations +of exchange" are, with the exceptions of the figures for money and +deposits, widely at variance from the real facts in the case, and +second, that if they were correct, they could in no sense be said to +constitute proof of the quantity theory. + +In the critical analysis which follows, chief attention will be devoted +to Fisher's statistics. His is the later study, and it follows, in main +outlines, the methods laid down by Kemmerer. He has employed Kemmerer's +statistics in considerable part, amplifying them for later years, using +some data not available when Kemmerer wrote, and undertaking a fuller +solution of certain problems than Kemmerer did. I shall, however, from +time to time make reference to Kemmerer's figures, and show points of +difference between the two studies. + +Let me first briefly state the second point of my criticism of these +studies: namely, that even if the statistics are correct, they do not +constitute proof of the quantity theory. The statistics purport to be +concrete data filling out for different years the equation of +exchange.[378] But the equation of exchange, as we have seen, does not +prove the quantity theory. The quantity theory is a _causal_ theory, and +causation involves an order _in time_. The concrete figures for the +equation do not prove that. Even Kemmerer's concluding chart on p. 148, +showing a rough concomitance between "relative circulation" and general +prices does not show that changes in relative circulation are _causes_ +of changes in general prices. The causation might be the reverse for +anything his figures tell us. Fisher himself recognizes this, in +considerable degree: "As previously remarked, to establish the equation +of exchange is not completely to establish the quantity theory of money, +for the equation does not reveal which factors are causes and which are +effects."[379] Again: "But, to a candid mind, the quantity theory, in +the sense in which we have taken it, ought to appear sufficiently +secure without such checking. Its best proof must be _a priori_."[380] + +The main criticism here, however, relates to the figures themselves, +rather than to their meaning. The figures given by Professor Fisher are +concrete magnitudes to fill out his equation of exchange, MV + M'V' = +PT[381] for the years since 1896. Thus, for 1909, the figures are: M = +1.61 billions; M' = 6.68 billions; V = 21.1; V' = 52.8; P = $1; T = 387 +billions.[382] + +Now in what follows, I shall challenge all these estimates except P for +1909, V for 1896 and 1909, and M and M' for all years. The figures for M +and M', being the results of fairly simple computations based on +Governmental statistics, need not be questioned. P for 1909 is +arbitrarily placed at $1.00. V for 1896 and 1909, for reasons which will +later appear, is better based than for other years, though Kemmerer and +Fisher have differed greatly in their estimates for V, the former +placing it at 47 and the latter at 18 or 20.[383] My criticisms with +reference to V, however, will relate to the years other than 1909 and +1896. + +The sources from which these absolute magnitudes are drawn are, +primarily, two investigations by Dean David Kinley, one in 1896 and the +other in 1909, in cooeperation with the Comptroller of the Currency.[384] +The purpose of these investigations was to ascertain the proportions of +checks and money in payments in the United States. Banks of all kinds, +national and State banks, trust companies, private banks, etc., were +requested by the Comptroller to supply data for a given day (March 16 in +1909) showing what their customers deposited on that day. They were +asked to classify these deposits as cash, on the one hand, and as +checks, drafts, etc. on the other. They were also asked to give a cross +classification of the same deposits, as "retail deposits," "wholesale +deposits," and "all other deposits." In 1909, over 12,000 banks of all +kinds, out of about 25,000 banks, replied, and of these replies 11,492 +were in available form. These replies showed a total of deposits of over +688 millions of dollars. Of this total, 647 millions were in checks, so +that checks made up 94.1% of the whole. About 60 millions of this total +were retail deposits, about 125 millions were wholesale deposits, and +the rest, about 503 millions, were classed in the "all other" category. +Kinley's use of these figures, _for his purpose_, seems to me in every +way conclusive and safe. He was interested merely in the question of the +_proportions_ of checks and money in _payments_, retail, wholesale, and +"_all other_." The absolute magnitudes of the elements in the equation +of exchange he was not trying to measure. Professor Fisher's use of the +figures presents a different problem.[385] + +Let us consider, first, Professor Fisher's estimate of M'V', taken +together. M'V' is considered to be equal to the total amount (in +dollars) of checks deposited during the year.[386] To get this, for +1909, Kinley's figure, above, for checks deposited in 11,492 banks on +March 16, 1909, is used. This figure is 647 millions. As half the banks +had not reported, an estimate for the non-reporting banks was obtained +from Professor Weston, who had aided Dean Kinley in the investigation, +and who had access to the original data. Professor Weston estimated the +total checks deposited during the day at 1.02 billions.[387] The +question then arose as to whether this day was typical for the year. +Professor Fisher found New York City bank clearings of March 17 (the day +after, on which these checks would get into the clearings) to be 28% +below the average for the year. He assumed the rest of the country to be +half as abnormal as New York City, and increased the 1.02 billions to +1.20 billions, getting what he conceived to be the daily average of +checks deposited in the United States in 1909. Multiplying this figure +by 303, the number of banking days in New York City (and so, presumably, +a fair average for the number of banking days in the country), he +obtained 364 billions for the checks deposited in 1909. This figure he +considered to be M'V', the volume of bank deposits,[388] multiplied by +its velocity of circulation. To obtain V', therefore, his problem was +simple: he divided the figure for M'V' by the figure for M' previously +obtained from government statistics, and obtained V'. + +Now I wish to call attention to three important errors involved in this +calculation of M'V' for 1909. (1) The assumption that the total check +circulation is the same as the volume of checks actually used in _trade_ +is a violent one. _Payments_ may be tax payments, loans and repayments, +gifts, what not. Many checks may be used in a single transaction. Surely +not all of this is properly to be counted in the M'V' of the equation of +exchange. But this topic is better discussed in connection with the +estimate for T, and I reserve its fuller discussion till then. (2) The +assumption that the rest of the country was abnormal in its clearings on +March 17, 1909, is a pure assumption, which investigation does not +verify. The rest of the country was, in fact, nearly normal! The error +that comes for the year from increasing the total on this assumption +amounts to at least 31 billions! The total for the year, on Professor +Fisher's method of computation, with the correction to make the +assumption regarding outside clearings correspond with the facts, is 333 +billions, instead of 364 billions! As the figure for 1909 is a basic +figure, on which figures for other years are calculated, this error is +extremely significant.[389] + +(3) A yet more serious error in this computation is the assumption that +New York City was complete in Kinley's figures, while the rest of the +country was incomplete. This error, as we shall see, largely neutralizes +the error above, so far as the "finally adjusted" figure for 1909 is +concerned, but it makes a vital difference in the figures for other +years, as will appear, since it affects the "weighting" of New York +clearings and outside clearings in the index of variation by means of +which M'V' for years other than 1909 is determined. The assumption that +New York is complete, in Kinley's figures, and that all of the extra +hundreds of millions added by Professor Weston in his estimate for the +non-reporting banks belongs to the country outside New York, is made by +Professor Fisher both on pp. 444-445, in estimating M'V' for 1909, and +on p. 446, in finding an index of variation for M'V'. The only reason +given, so far as I can find, is the following: "This figure, _being for +New York_, [Italics mine], is probably nearly complete." (_Loc. cit._, +p. 446.) With this as a basis, Professor Fisher proceeds in his +calculations to treat the figure for New York, 239 millions, as +absolutely complete, and gives the rest of Professor Weston's 1.02 +billions for the day, or 786 millions, to the country outside. The error +above mentioned, of assuming the rest of the country to be abnormally +low on March 17 in its clearings, still further increases the amount +assigned to the rest of the country in the total figures for the +year.[390] The conclusion finally is that New York had deposits of 93 +billions in checks for the year, while the rest of the country had +deposits of 271 billions in checks. As New York clearings for the year +were 104 billions, while clearings for the rest of the country were only +62 billions, Professor Fisher concludes that New York clearings +overcount New York check deposits, and outside clearings greatly +undercount outside check deposits, so that, in the index of variation of +check deposits, for years other than 1909 and 1896, New York clearings +should be given a weight of only 1, while outside clearings should be +weighted by 5. "That is, on the basis of 1909 figures, five times the +outside clearings plus once the New York clearings should be a good +barometer of check transactions." (P. 447.) All this rests on the +assumption that New York figures for March 16, 1909, were complete, and +the only reason assigned is, "being from New York!" + +Now the figures from New York were not complete. And New York clearings +do not overcount New York check deposits. Outside clearings do not +undercount outside check deposits nearly to the extent that Professor +Fisher assumes. For each of these three statements I shall offer what +would seem to be conclusive evidence, and I shall attempt to get an +estimate of the real relation between New York check transactions and +check transactions for the rest of the country. + +First, the figures for New York were far from complete. It may be noted +that Dean Kinley, in his volume for 1909,[391] is very careful to +repudiate the assumption that the cities were complete more than the +country: "Moreover, it is a mere assumption that the non-reporting banks +are mainly the small banks in the country districts. _A great many city +banks also did not report._" (Italics mine.) That this is true for New +York is abundantly evident from figures there given for the private +banks and the trust companies, not to consider at all the State and +national banks. New York shows only $1,751 in checks deposited in the +"all other deposits" in private banks! This is a city which includes +among its private bankers J. P. Morgan & Co., Kuhn, Loeb and Co., J. & +W. Seligman & Co., and others! Figures from these banks appear nowhere +in Kinley's totals, since deposits made _by_ these banks in other banks +are also excluded from Kinley's figures.[392] Of course, exact figures +cannot be given to show how much New York would be increased had the +private banks made full reports. We have no reports of any kind from +these institutions. Every feature of their business is kept from the +lime light, as far as possible--a practice which is much to be +regretted, since it arouses hostility and suspicion, where a statement +of the facts in the case would frequently entirely dispel them. We have, +however, some information regarding the magnitude of their deposits, +meaning by deposits, not what Kinley means in this investigation, +namely, checks, etc., _deposited_ on a given day, but rather, deposits +in the balance sheet sense of demand obligations to depositors. In Nov. +1912, J. P. Morgan and Co. held deposits of $114,000,000, exclusive of +49 millions on deposit with their Philadelphia branch of Drexel & Co. +About half of these were deposits of interstate corporations. Kuhn-Loeb +held, on the average, for the six years preceding 1913 over 17 millions +of deposits of interstate corporations. What their aggregate deposits +were, we do not know. These figures are obtained from the report of the +Pujo Committee.[393] Morgan's deposits were equalled by only three banks +and two trust companies in New York (as of April 3, 1915), and +Kuhn-Loeb's deposits for interstate corporations alone exceeded the +total deposits of any one of the great majority of the New York Clearing +House banks and trust companies. Of course, large deposits in the +balance sheet sense need not mean large deposits made on a given day. +Private bankers' deposits may be inactive. But we know, first, that half +of these figures for Morgan, and the whole of the figures given for +Kuhn-Loeb, represent the deposits of active business corporations, +engaged in interstate business. They are not mere trust funds lying +idle, or awaiting investment in securities. What the rest are we can +only conjecture. That they are deposits of men and firms connected with +the Stock Exchange in some way is highly probable. The whole drift of +the statistics presented in this book, and of the argument developed in +this book, would serve to show that such deposits are likely to be more +than ordinarily active.[394] I refrain from assigning any figures as to +the amount of checks deposited in private banks in New York on March +16, 1909. It must have run high into the millions.[395] It certainly +exceeded the two thousands, or less, reported to Kinley! The figures for +New York were, thus, incomplete. + +But the trust companies were also incomplete. The national banks in New +York reported checks totaling 186.5 millions, for all three classes of +deposits; the State banks reported only 38.1 millions; the trust +companies only 14.2 millions. With aggregate deposits, as shown by their +balance sheets, exceeding the deposits of national banks[396] the New +York City trust companies reported, as deposited on March 16, 1909, less +than half as much as the State banks, less than a tenth as much as the +national banks, and only 6.8% of the two combined--5.9% of the total +from all three classes of institutions! + +These figures are hard to reconcile with the assumption that the trust +companies in New York were complete on that date. + +It is, of course, possible that the trust companies, though having large +deposits, have inactive deposits. This is sometimes held to be the case. +But that the difference is so great in activity of deposit accounts +between banks and trust companies is hardly credible. I have looked into +this matter with considerable care, and have secured information and +opinions from men intimately acquainted with the trust companies of New +York from the inside. The only available quantitative measure of the +activity of deposits would seem to be the volume of a bank's clearings. +This is not perfectly accurate, by any means, but it is the best +available test. Through the courtesy of a Vice President of one of the +largest New York trust companies, I have obtained figures from an +official of the Clearing House, which show that in New York trust +company clearings run from 20 to 25% of the whole. On this basis, the +trust company figures for 1909 were incomplete to the extent of from 33 +millions to 46 millions, on the day in question. These clearings +figures, however, are for the year, 1915, and not for the period before +May, 1911, when the trust companies were admitted to the Clearing House. +Prior to that time they did not deal directly with the Clearing House, +but _through_ the member banks. Do these figures, therefore, represent +the situation as it existed in 1909? The possibility was entertained +that entering the Clearing House had made a difference in the reserve +policy of the trust companies, and so had made them change the character +of their business, in such a way as to bring about greater activity of +accounts. This question was put to the official of the trust company +before mentioned, and his reply is that the State law regarding reserves +(passed after the Panic of 1907) had already brought about this change +in reserve policy, and so no difference was made upon entering the +Clearing House. + +The same gentleman, by the way, replying to a question regarding the +deposits in private banks in New York, and the influence of such +deposits on clearings, writes: "The actual figures could not be obtained +from the Clearing House..., consequently can only say that deposits made +with these houses add to the Clearing House totals very large sums." + +There is one piece of evidence which would seem to negative these +conclusions regarding the trust companies. In the Report of the New York +State Superintendent of Banks, for Dec. 31, 1907, p. xxxv, is a +statement that during the two years, 1903-05, the trust companies of New +York cleared only 7% as much as the banks. The statement relates, +however, to a period during which the trust companies not only had no +Clearing House membership, which of course was true up to 1911, but also +had largely withdrawn from the privilege of clearing _through_ member +banks.[397] Under these circumstances, even 7% would seem quite high. +Inquiry was made of the Honorable Clark Williams, who was State +Superintendent of Banks at the time the report was made, as to the +source of the figures.[398] Mr. Williams, in reply, defends the figures +as correct for that period, but authorizes the writer to quote him as in +no way surprised at the percentages given above, 20 to 25% of the total +clearings, in view of developments and changes in trust company +business. + +I conclude that the trust company figures for March 16, 1909, were +exceedingly incomplete. The national bank figures were probably more +nearly complete than any others, first because they are large, and +second, because national banks would feel more obligation than other +banks to reply to questions from the Comptroller. The State bank +figures, 38.1 millions, as against national bank figures of 186.5 +millions, were probably incomplete also, to a considerable extent, +though State banks are not dominating factors in New York City. That +they should exceed the figures for trust companies is surely evidence of +the incompleteness of the trust company figures. The private banks are +incomplete, with absolute certainty, since they are virtually not +represented at all. + +Further evidence that the New York figures were incomplete, however, +will appear in the data regarding our second thesis, namely, that New +York clearings do not overcount New York check deposits. The aggregate +check deposits reported from New York, on the date in question, is 239 +millions. Clearings for that day were 268 millions,[399] substantially +exceeding the reported check deposits. Now do clearings exceed check +deposits in New York City? + +Evidence with reference to outside clearings, in connection with bank +transactions, we now have in very definite and abundant form, and it +will be convenient to approach the question of New York clearings, +first, indirectly, _via_ country clearings. We shall, therefore, take up +first the thesis that clearings outside New York do not undercount bank +deposits outside New York nearly as much as Professor Fisher thinks. +According to his estimate, checks deposited during the year in banks +outside New York (exclusive of checks deposited by one bank in another) +were 271 billions. (_Loc. cit._, 446.) Outside clearings were only 62 +billions, and his conclusion is that the ratio of deposits to clearings +is 4.4 to 1, or, in other words, that outside clearings amount to less +than 22.8% of outside check deposits. + +Now an extensive investigation, covering the period from June, 1913, to +Oct. 1914, inclusive, has been made by the American Bankers' +Association, through Mr. O. Howard Wolfe, Secretary of the Clearing +House Section. This investigation covered cities of various sizes, in +various parts of the country. Its results are immensely more trustworthy +than any results based on a single day, as Professor Fisher's results +are, could be, even had Professor Fisher's method been otherwise +correct. An account of this investigation is to be found in the +_Annalist_ of Dec. 7, 1914.[400] This investigation involves, for the +period in question, a comparison of "total bank transactions" in each +city with the clearings of that city, together with a summary covering +all the cities. "Total bank transactions" consist of all debits against +deposit liabilities of each member of the Clearing House, whether they +come through the Clearing House or over the counter. They include +payrolls, for example, which, of course, never get into clearings. They +include drafts on deposits of one bank in another. In a letter to the +Editor of the _Annalist_, Mr. Wolfe states that "total bank transactions +include all debits against deposit liabilities, whether by check, draft +or charge ticket. The only exceptions are certified checks and certain +cashier's checks, both of which to an extent represent a duplication." +For the period in question, clearings amounted, on the average, for all +cities, to 40% of "total transactions." The cities did not include New +York City, as stated. + +Now we cannot apply this 40% at once to the question in hand. Professor +Fisher's 22.8% relates to the relation between clearings and checks and +drafts _deposited_, _excluding_ items deposited by banks, and excluding, +of course, cash deposited. What is the relation between Kinley's +"deposits" and Wolfe's "total transactions"? + +It is clear that "total transactions" must, in a period of time, +_exceed_ Kinley's "deposits" very considerably. In a general way, what +goes out of a bank, and what comes into a bank, must approximately equal +one another in a period of time. In a general way, a depositor finds his +income and his outgo balancing. Of course, some accumulate, paying in +more than they withdrew, but in general such accounts are made with +savings banks. The business man borrows from his bank, getting a +"deposit credit" (without "depositing" in Kinley's sense), then checks +against his "deposit," then receives checks in payments to himself, +"deposits" them, building up his deposit balance again, and then checks +against his deposit balance, in favor of the bank, to pay off his loan. +What comes in and what goes out--abstracting from the growth of a +rapidly expanding bank--balance. But notice, in the case cited above, +that "total transactions" include more items than Kinley's "deposits" +show. When the bank makes a loan, and gives a deposit credit, this does +not, usually, show in Kinley's deposits. When, however, the loan is paid +off by a check to the bank, it does show in "total transactions." +Moreover, when a man deposits cash in the bank, it does not show in +Kinley's figures for checks deposited. When, however, he withdraws cash +from the bank, or his check to another is "cashed," it does appear in +"total transactions." Further, checks deposited to the credit of one +bank in another do not appear in Kinley's figures. Checks drawn, +however, by one bank on another do appear in total transactions. How +great the difference is between "total transactions" and "deposits" in +the banks outside New York we cannot say precisely. The cash items +alone, on the basis of Kinley's figures, would make a difference of +about 9%.[401] To allow 11% excess to "total transactions" over +"deposits" for the other reasons listed, is surely not to make an +exaggerated allowance. We thus count "deposits" in Kinley's sense, for +the banks outside New York City, as 80% of "total transactions." Since, +then, clearings are 40% of "total transactions," they will be 50% of +"deposits." This figure is more than twice as great as Professor +Fisher's figure of 22.8%. Even if we counted deposits as equalling total +transactions, Professor Fisher's estimate would be clearly very much too +low. + +How, then, do we stand? On Professor Fisher's showing, the overwhelming +bulk of checks deposited were in the country outside New York--271 +billions for the year, outside, as against 93 billions in New York City. +If the ratio (50%) for outside clearings to deposits was the same for +1909 that it was in 1913-14 for the outside banks, we shall have to +revise this radically. We have 62 billions of country clearings in 1909; +we would have, then, 124 billions[402] of country check deposits! If +Fisher's total figure for the country is correct, 353 billions as +"finally adjusted," the balance, or 229 billions, would belong to New +York! New York clearings, 104 billions, would thus be less than half of +New York deposits! If we count outside clearings for 1909 as only 40% of +outside check deposits, outside deposits would be, for 1909, only 155 +billions, as against Professor Fisher's 271 billions, _a difference of +116 billions_! I am sure that his error in estimating outside check +deposits is at least as great as that, and that we cannot assign to New +York City less than a major part of the total check deposits of the +whole country. + +This result fits in with the figures actually reported to Dean Kinley, +corrected to fit the known facts about March 17 clearings, better than +Professor Fisher's estimate, by a good margin. According to Professor +Fisher's estimate, New York City checks deposited are only 25.5% of the +total. Kinley's actual figures give 239 millions to New York City, and +408 millions to the country outside. But New York clearings were 28% +below normal on March 17, while country clearings were only 2.45% below +normal. Adding 28% to the figure for New York checks, we get 306 +millions. Adding 2.45% to the outside checks, we get 418 millions. Of +the total, 724 millions, New York checks would be, then, 42.3%. We have +shown reasons for considering New York deposits to be very incomplete +for March 16, particularly as regards the private banks and trust +companies. Comparison of the New York figures with the results indicated +by the ratio of country clearings to country deposits would thus +indicate that New York was much less complete than the country as a +whole. Even so, I need to add but 7.3% of the total to Kinley's actual +figures for New York, corrected in the light of next day clearings, to +give New York half of the check deposits. Professor Fisher must subtract +16.8% of the total from the actual figures for New York, as corrected in +the light of next day's clearings, in order to get his figure of 25.5%. +To vary as widely from the actually reported figures as Professor Fisher +does, I should have to assign 59.1% of total check deposits to New York +City. I refrain from making an exact estimate. I am content with the +conclusion that something more than half of the checks deposited in 1909 +were in New York. This seems to be too clear for serious controversy. + +The indirect approach to the relation between New York clearings and New +York deposits, _via_ the study of outside clearings in 1913 and 1914, +taken in conjunction with the figures for check deposits in 1909, would +seem to make it quite clear that New York clearings do not exceed New +York deposits, or, indeed, constitute a substantially higher percentage +of them than is the case with country clearings and deposits.[403] +Logically, assuming the correctness of the estimate for checks +deposited, the case is complete: we have a simple problem in arithmetic: +given country clearings for 1909, 62 billions; given the ratio of +country clearings to country deposits (and a minimum for this ratio is +clearly given, in the 40% which country clearings are of "total +transactions"), we can fix a maximum for country deposits, which is 155 +billions. Then, given our estimate of 353 billions for total check +deposits, we subtract the maximum possible for country deposits from it, +and get a minimum possible for New York City of 198 billions of check +deposits. Comparing this with the known clearings of 104 billions in New +York, we find that New York clearings constitute, as a maximum possible, +52.5% of New York check deposits. If the reasons given for holding check +deposits in the country to be less than total transactions are accepted, +the ratio of clearings to deposits in New York City is lower. + +Indirect calculations, however, even when logically complete, ought to +be checked up by other methods, when possible. We have some further +data, drawn from an earlier period, 1890-91-92, which suggest the same +conclusion. + +The reason commonly offered for holding that New York clearings +exaggerate local New York transactions, as compared with country +clearings and country transactions, is that New York is the clearing +house for the country. Country banks send their idle cash there; country +banks pay other banks by drafts on their New York balances; country +banks send out of town checks to New York for collection; business men +in St. Louis pay business men in Chicago with New York exchange, etc. +These items are supposed greatly to swell New York clearings. + +Now several of these reasons are not at all valid. Cash shipped back and +forth between New York and the interior does not get into clearings. +Secondly, New York, because of the charges made for collecting out of +town checks, has tended to lose much of the collection business. Chicago +probably does a great deal more of it than New York does.[404] However, +even if checks on out of town banks were sent largely to New York for +collection, they would not get into the clearings. New York banks send +checks on country banks directly to country correspondents. Checks on +out of town banks sent in for collection do swell clearings in Boston +and Kansas City, where arrangements have been made, to the advantage of +all concerned, to have the clearing houses handle this business. But New +York has not made provision for it.[405] The only checks that get into +New York clearings will be checks drawn on New York banks.[406] + +These checks will be of two kinds: (1) checks drawn by individuals and +firms on New York banks. These checks will commonly be drawn by people +in New York, and, in so far as they come from out of town, will +represent business between New York and other places, hence, New York +business. (2) Drafts by banks on their New York balances. These will be +of three kinds: (a) drafts sold, especially by country banks, to their +customers who need to make payments in other cities. Many of these will +represent payments to New Yorkers for transactions between New York and +the country, hence New York business, and will appear in the check +deposits of individuals, firms, and corporations in New York, (b) There +will also be drafts from one country bank, on New York, to another +country bank, in which New York is truly being used as a clearing +house, New York exchange taking the place of an intercity shipment of +cash.[407] (c) Drafts by New York banks on New York banks, to avoid +deficits at the Clearing House, or--especially in the case of private +bankers, between whom and brokers the line is hard to draw,--for general +purposes. + +Now, fortunately, we have some data, trustworthy, even though old, for +the volume of bank-drafts on New York, and, more important, for the +proportion of drafts on New York to drafts on banks in other cities. +These figures are, as stated, from the three years, 1890, 1891, and +1892. For the purpose in hand, however, they are relevant, since then, +as now, New York clearings were nearly twice as great, on the whole, as +country clearings, and if this excess of New York clearings is due to +that cause, it should have manifested itself in these figures. If the +proportion of these drafts on New York to the total of bank-drafts was +greater than the proportion of New York clearings of total clearings, we +might find reason for supposing that New York clearings were unduly +swelled by this fact. But in fact, drafts on New York are not out of +proportion. The figures are virtually complete for drafts drawn by all +the national banks on national and other banks for the years in +question. They will be found in the Comptroller's _Reports_ for the +three years, under the caption, "Domestic Exchanges." For 1890 the +figures are: + + Drafts on (000,000 omitted) + New York $ 7,284 (63.07%) + Chicago 1,084 ( 9.30%) + St. Louis 188 ( 1.64%) + Other reserve cities 2,537 (21.88%) + Other cities 464 ( 4.02%) + Total 11,550 ( 100%) + +The Comptroller (_Report_ of 1890, p. 19) gives an estimate for drafts +drawn by State and private banks of an additional 6,089 millions. He +does not try to apportion these among New York and the other cities. +There is no reason to suppose that the percentage for these banks of +drafts drawn on New York would be higher than for national banks, and +there is some reason for supposing that they would be lower: namely, +that these institutions would lack the incentive supplied by the +National Bank Act for depositing reserves in a Central Reserve City. The +Comptroller's figures probably do not include the great private banks in +New York, which deposit in New York commercial banks, and draw huge +checks against their deposits. These checks, probably, however, chiefly +represent stock exchange collateral loans to brokers, and so appear in +brokers' deposits as well as in New York clearings--represent New York +deposits. I do not use this estimate in my computations. If I did, the +results, so far as proportions are concerned, would be the same, since I +could do nothing but assign the same proportions to them. It will be +seen that my argument rests on the proportions, chiefly. + +Now what difference would be made if we wiped out all these draft +transactions, and reduced clearings to correspond? New York clearings in +1890 were 37,660 millions; country clearings were 21,184 millions. Let +us subtract the drafts on New York from New York clearings, and the +drafts on other places from the country clearings. The result is: New +York clearings, 30,376 millions; country clearings, 16,918 millions. New +York clearings still retain their former status! New York clearings are +still nearly twice as great as country clearings! It is not the bank +drafts used in making New York the "clearing house" for the country that +swell New York clearings as compared with the rest of the country! It is +something else! The main explanation, as we have in part seen, and shall +further see, is a mass of speculative transactions, chiefly Stock +Exchange transactions, and loan transactions connected therewith! New +York clearings grow out of New York business, primarily. + +The figures for the other two years vary little from those of 1890. What +variation there is shows a growth of drafts on interior cities, and a +decline of drafts on New York. New York showed 63.07% of these drafts in +1890, 61% in 1891, and 60.77% in 1892.[408] + +As we have seen, the only checks or drafts that get into New York +clearings are those drawn on New York banks. The checks on New York +banks probably almost all represent business in which one party is a New +York individual, firm, or corporation. The drafts by out-of-town banks +will contain all the items, virtually, that represent "clearings" +through New York. Not all of these, by any means, will represent such +clearings. A very substantial part of them will represent exchange sold +to customers to make payments in New York. We exaggerate the "clearing +through New York" when we subtract all these drafts from New York +clearings. Since, however, we treat country clearings in the same way, +no error results, so far as the proportions between them are concerned. + +The two sets of data converge. Both from the figures of 1913-14, in +conjunction with estimated check circulation in 1909, and from the +figures of 1890-92, can we conclude that New York clearings do not +overcount New York transactions. The conclusion would seem to be +inevitable that New York is really as important in our volume of banking +transactions as its clearings would indicate. This may be qualified by a +recognition of the possibility that New York clearings are more +efficient in handling check deposits than are clearings in other cities. +Some scattering data from national banks for single days at a time +indicate that a higher percentage of checks is cleared in New York than +elsewhere in the country,[409] and one observation for five national +banks for a ten-day period shows 67% of checks deposited cleared.[410] +These checks include deposits made by other banks, as do the figures of +Kemmerer's observations. But there are no direct observations covering +New York for a long enough period, or for enough institutions, to +warrant any definite conclusions.[411] + +The error of assuming clearings of March 17 in the country outside New +York to be abnormally low, swelled Professor Fisher's total figure for +check circulation by 31 billions, as we have seen. On the other hand, +the error of assuming New York City to be complete in Kinley's figures +tended to make the total smaller than it would have been, since New York +City was 28% below normal, and an increase of 28% applied to half of +Professor Weston's figure of 1.02 billions, gives about 70 millions more +for the day, or 21 billions more for the year, than when the 28% +increase is applied to only a quarter of Professor Weston's figure. +These two errors roughly neutralize one another, and we may accept +Professor Fisher's "finally adjusted" estimate of 353 billions[412] for +the year as roughly approximating the amount of checks deposited.[413] +How "rough" an estimate one gets by taking a single day as the basis for +a year need not be here discussed. I should be disposed to think that an +indirect calculation, _via_ clearings, in view of our more extensive +knowledge of the relation of clearings to "total transactions," might +well be worth more, so far as deposits outside New York are concerned. +Since, however, we lack any extended figures for the relation of +transactions and clearings in New York, and since even for the country +we are obliged to make guesses as to the relation of "checks deposited" +to "total transactions," I refrain from trying to improve further on +Professor Fisher's estimate for checks deposited in 1909--even though +questioning that "check deposits" and M'V' are identical. + +What, however, shall we say of M'V' for other years? In the calculation +of this, Professor Fisher relies on the absolute figures for 1909 (and +1896, similarly calculated), together with an "index" based on New York +and country clearings. In this index he weights country clearings by +5,[414] and New York clearings by 1. The result is, of course, that +country clearings dominate the index. But New York clearings are much +more variable than country clearings. The range of variation in New York +clearings for the years 1897 to 1908, inclusive, is from 33.4 billions +in 1897, to 104.7 billions, in 1906; the latter figure being more than +three times as great as the former. The range in country clearings is +from 23.8 billions, in 1897, to 57.8 billions, in 1907, the latter +figure being 2-10/23 as great as the former. But more significant is the +degree of _year by year_ variability. The country clearings, with the +exception of 1908, always rise,--a steady, if not quite symmetrical, +increase. New York clearings, however, go up and down, 42 billions in +1898, 60.8 billions in 1899, 52.6 billions in 1900, 79.4 billions in +1901, 66.0 billions in 1903, 104.7 billions in 1906, 87.2 billions in +1907, 79.3 billions in 1908. New York clearings are highly variable in +both directions, while country clearings vary almost wholly in one +direction, with a maximum difference of 6.4 billions between any two +consecutive years, and with an average yearly variation of only 3.5 +billions.[415] When country clearings are weighted by 5, almost all of +the high degree of variability of New York clearings is covered up, and +volume of checks deposited for years other than 1909 and 1896 is thrown +hopelessly away from the facts. It is too large by far in most years. In +1905, 1906 and probably 1901 it is too small. It does not vary nearly +enough. As V' for years other than 1909 and 1896 is determined, for +Professor Fisher's equation, by dividing the M'V' thus estimated by the +M' for the year, it is clear that V' as estimated by Professor Fisher is +very much less variable than it is in fact. It is pretty variable even +in his figures, but his figures do not nearly show how variable it +is.[416] + +Again, this undue weighting of country clearings, swallowing up New +York, vitiates Professor Fisher's estimates for V, the velocity of +money, for years other than 1909 and 1896. One of the elements in the +calculation of V is the estimated V'.[417] Since V' is wrong, V will +also be wrong. V is probably much more variable than Professor Fisher's +figures would indicate. With great admiration for the ingenuity of +Professor Fisher's speculations regarding V, I find too many elements of +conjecture, and too many arbitrary assumptions, to give me confidence in +the figure for any year. I refrain from going into any general criticism +of his method of calculating V, however, contenting myself with the one +clear point that, to the extent that the values of V for years other +than 1909 and 1896 depend on the estimated M'V' for those years, they +are less variable than they ought to be.[418] + +The same conclusion regarding Professor Fisher's estimates for V' have +been reached, by a different method, by Professor Wesley C. Mitchell. +He, too, concludes that V' is, in fact, more variable than Professor +Fisher would indicate.[419] + +I conclude, therefore, that neither V' nor V has been correctly +calculated, for years other than 1909 and 1896. I pass now to a +consideration of T, the volume of trade, after which I shall consider P, +the price-level, in the equation of exchange. + +Let us first recall the point made in the chapter on "The Equation of +Exchange," that P and T, the price-level and the volume of trade, are +not independent even in idea. If one is given an independent definition, +the other cannot be given an independent definition. If the equation is +to be true, then P must be weighted by the numbers of each item (as +hats) exchanged. P is not a mere average, but is a _weighted_ average, +and T is always the denominator in the formula for P. In developing +statistics for P and T, therefore, this fact must be kept in mind, and +the elements entering into each must coincide, and vary together year by +year. + +In our chapter on "The Volume of Money and the Volume of Trade," we +showed that the great bulk of trade is speculation. We showed that the +_indicia_ of variation which Fisher[420] and Kemmerer have constructed +for trade, dominated by inflexible physical items of consumption and +production, give wholly misleading results for every year except the +base year. They give a steadily growing, inflexible figure, with little +variation from its steady path. Trade, if chiefly speculation, is highly +flexible, varies enormously from year to year, waxes and wanes. This +point need not be further developed. At best Fisher's figure for trade +can be accepted only for one year, 1909. + +Is, however, the figure for 1909, 387 billions, an acceptable figure? Is +it not decidedly too large? It is made up, it will be recalled, by +taking the figures for MV and M'V', adding them together to get one side +of the equation, and declaring them equal to PT. P is then declared to +be $1, by the arbitrary device of taking as the unit of T one dollar's +worth of every sort of good at the prices of 1909. T is, then, 387 +billions, since MV plus M'V' equals 387 billions. The theory underlying +this is that deposits made in banks correctly represent trade.[421] Our +criticisms as to the absolute magnitude assigned to T (and hence to MV +plus M'V') will rest in large measure in challenging this assumption. It +is our contention[422] that deposits made in banks very greatly +overcount trade. + +Deposits made in banks include taxes and other public revenues; they +include loans and repayments, and interest-payments; they include gifts +and benevolences, money sent by parents to children away from home, +pensions, payments of insurance losses, annuities, dividends on stocks, +payments to and from savings and loan associations, fines, contributions +to churches, and other non-commercial organizations, etc., etc. None of +this represents trade. + +But further, whether payments are in trade or not, many times indeed +does it happen that several checks are drawn in connection with the same +transaction. Professor Kemmerer, entertaining this possibility, thought +it might be neutralized by cases where the same check passes through +several hands, making payments in several different transactions. He +calls this, however, a "gratuitous assumption of unverifiable +accuracy,"[423] and makes no claim to have given the matter careful +study. + +In general, I think it safe to hold that the case where a single check +passes through several hands is not important.[424] It will happen +chiefly with small checks in small places, or with small checks paid to +laborers. It is the pecuniary magnitude of checks, rather than their +number, that counts here. I am informed by several bankers that large +checks are almost universally deposited at once. This is for several +reasons: (1) The recipient of the check wishes to make sure that it is +good. (2) It is unlikely that the check is of the right size for another +transaction, unless the recipient is a mere agent for a third party, in +which case he should (but commonly does not) pass it on to his +principal, if double counting is to be avoided. (3) Every person who +handles sums of any size wishes a record of the transaction, and his own +canceled check is a receipt which he would not have if he passed on the +check of another. + +This last point will go far toward explaining why bank transactions may +multiply without a corresponding multiplication of trade. The banks do +the bookkeeping for modern business in increasing degree. Checks are +records, of high legal value. A colleague recently told me that he, in +his own capacity, had just drawn a check to himself, as trustee, +transferring a sum from one account to another. Another colleague, with +eight different bank accounts, estimates that over 50% of the deposits +in three of them represent transfers from other accounts. This kind of +duplication, where trust relations are involved, is enormous. +Intercorporate relations and separate bank accounts within a corporation +complicate it still further. + +A check is drawn by a subsidiary corporation to its dividend account, +and deposited; a check on this dividend account[425] is then deposited +in the general account of the parent corporation; a third deposit, of +the same funds, is then made in the dividend account of the parent +corporation; a fourth deposit of the same funds is made in a trust fund +which holds stock in the parent corporation; a fifth deposit in the +personal account of the beneficiary of the trust fund; a sixth deposit +may be made of a check on this fund in the personal account of the +beneficiary's wife. The first three of these deposits, at least, will be +made of the total dividend of the subsidiary corporation. _Not one_ of +these six deposits represents _trade_. Payments of wages and rents +should count as trade, but payments of interest and dividends stand on a +separate footing. When a man has bought a stock or a bond, he has +already bought all the income which is to come from them, and to count +the interest and dividends as separate items is double counting. They +are _payments_, but not _trade_. Even if the dividend payment be counted +as trade, however, it is counted _six_ times. + +There is enormous overcounting as a consequence of the combinations of +corporations, each of which retains its own numerous bank accounts. The +Interstate Commerce Commission calls attention to great duplications +from this cause in connection with railway income accounts.[426] Even +within single corporations the duplications[427] are very great. Thus, +the local agent of a railroad deposits his receipts in a local bank. His +check, or, more usually, the draft of the bank, is subsequently +deposited in a bank at headquarters. Subsequent disbursements, in places +away from headquarters, particularly of wages, will frequently be +preceded by deposits in other local banks. This duplication will be true +of telegraph, telephone, insurance and other companies which have +scattered agencies, including the wholesale trade. Advertising agencies +will illustrate it. _All_ checks between agent and principal, customer +and broker, etc., will illustrate it. There is a great deal of double +counting in stock transactions from this source. Thus, a Boston broker +takes orders, with a check for margin, for execution in New York. The +order is executed by a New York broker, who deals with another New York +broker, who represents a Louisville broker, who represents a Louisville +client. Now to the extent that any checks at all pass between the Boston +broker and his client, the Boston broker and the New York broker, the +other New York broker and the Louisville broker, or the Louisville +broker and his client, we have overcounting. Only the check between the +two New York brokers is properly counted. It is, of course, well known +that a small percentage of the dealings of a customer of a brokerage +house is represented by checks between broker and customer. Professor +Fisher states this to be about 5%.[428] It is, however, 5% of +overcounting! Moreover, through keeping "open accounts," with irregular +settlements of "margins" only, the Boston broker and the New York broker +reduce markedly the checks passing between them. There is a back and +forth flow of items which in large degree cancel one another, since the +Boston broker sells in New York as well as buys there, and the New York +broker, to a less degree, both buys and sells Boston securities, through +his Boston correspondent. But not all by any means is canceled, and +_all_ the checks that pass in this way represent double counting. The +total is large. + +_Public funds_ are included in the deposits reported to Kinley. Taxes +are not _trade_. Double, triple and multiple counting comes as revenues +are received by local authorities, transferred to State accounts, +subsequently redistributed to local accounts, or to the treasurers of +State institutions, transferred from one bank to another, etc. The State +of Massachusetts scatters its deposits in banks all over the State, and +makes transfers from one account to another. The City of Boston has many +bank accounts. The Federal Treasury deals largely with banks over the +country. + +Whenever a retail store has branches, duplications are likely to occur. +"Chain stores" make great overcounting. "Kiting" swells bank deposits. + +Replying to these contentions, Professor Fisher has urged that there is +large _undercounting_, also, and that the undercounting balances the +overcounting. I have myself called attention to a good deal of +undercounting in the chapter on "Barter." A substantial amount of +ordinary trade is carried on by means of partially offsetting +book-credit, time bills of exchange, simple barter, etc. The amount +might even run high, as compared with ordinary trade, when the clearing +arrangements in the stock and produce exchanges are taken into account. +But it is impossible to figure out anything at all in this line which is +to be compared with the great gap between the 141 billions of trade we +were able to find,[429] and the 387 billions Professor Fisher assigns to +trade. The gap of over 245 billions is much too great. Besides, in our +141 billions, we have counted barter items, book-credit items, time-bill +of exchange items, etc., already. + +The main item of undercounting must be in connection with the clearing +arrangements in the speculative exchanges. This would seem to be +Professor Fisher's view, as well.[430] Data are at hand for the two +great exchanges of the country which enable us to measure, with some +precision, the amount of the undercounting--_i. e._, to tell the extent +to which checks are dispensed with in the trading of these two great +exchanges. The two exchanges are the Chicago Board of Trade and the New +York Stock Exchange. + +For the New York Stock Exchange, figures are taken from Pratt's _Work of +Wall Street_, 1912 ed., pp. 166-167, 180, 273. The figures are for the +big year, 1901, when 266 million shares were sold, more than in 1909 by +51 millions of shares, and when the Stock Exchange Clearing House should +have done better, in the magnitude of the undercounting, than it did in +1909. Figures since 1901 are, Pratt states,[431] not available. Pratt +also gives figures for 1893, but does not give data as to the percentage +of stocks handled by the Clearing House, so that comparison with the +1901 figures cannot be made. + +In 1901, 265,944,659 shares were sold. Of these, 15% were "X-Clearing +House," _i. e._, not on the list of stocks handled through the Stock +Exchange Clearing House. This 15% was paid for in full by check. The +bond sales are not cleared, and so another billion dollars of checks is +required for this item.[432] If we assume (on the basis of the estimates +given to the writer by DeCoppet & Doremus, and Mr. Byron W. Holt, for +recent years) that 25% of the 100 share sales would be added if "odd +lots" were counted, we have another large item that does not go to the +Clearing House. "Private clearings" reduce the number of checks in +connection with odd lots, but not so effectively as is the case with +hundred share sales put through the Clearing House. So far the Clearing +House has done nothing. What did it do with the 85% of the stocks in +hundred share lots offered for clearing? + +The figures are perfectly definite. The 85% of the 266 million shares +sold was 226 million shares. The "share balance" remaining after the +Clearing House had done its best was 134 million shares.[433] The number +of shares sold, then, for which checks did not have to pass as a result +of the clearing process was 93 millions. In terms of dollars, we may put +the same figures. The estimated money-value of the 266 million shares +sold was 20.5 billions;[434] 85% of this is 17,425 millions. The +certifications required to pay for the 134 million share balance was +10,930 millions. The saving in checks was, thus, 6,495 millions of +dollars. This is the full extent to which the Stock Exchange Clearing +House undercounts recorded share sales. This is less than 1.7% of +Professor Fisher's 387 billions! To offset this, however, we have +_over_counting in the 5% of checks for all dealings on the Exchange +which pass between brokers and customers, as shown, and all the checks +between brokers and out-of-town brokers. We shall also find items of +_over_counting which vastly more than offset this undercounting, in +_loan_ transactions between brokers, and between banks and brokers, to +which we shall shortly give attention. + +This six and a half billions in checks saved on account of sales of +stocks is no small matter, absolutely. But this, though measuring the +extent of undercounted _sales_, by no means measures the services of the +Clearing House to the Stock Exchange. Not merely stocks _sold_ have to +be cleared. Stocks _borrowed_ are also cleared. Borrowing of stocks is +not _trade_, but borrowing of stocks requires the passage of money and +checks. When stocks are borrowed, money is _loaned_. A bear sells short. +He has to deliver next day. He accomplishes this by having his broker +"borrow" the stock he needs from a broker representing a bull, who is +long on the stocks, and who needs money to "carry" them. The bull, who +lends the stock, receives dividends from the bear, as they accrue, and +pays the bear interest on the money lent. An enormous lot of this takes +place. Moreover, to some extent, these transactions are increased +artificially, in order that the broker may make his "clearing sheet" +misleading, and avoid revealing his position with reference to the +market.[435] Loans of stock and sales of stock appear alike in the +transactions of the Clearing House. Moreover, apart from the necessities +of the bears for stocks to deliver, we have the necessities of the +bulls for money to carry their stocks. If a broker who has borrowed +largely from the banks finds his customers turning to the bear side of +the market, he has an excess of funds. He may repay his loans, but they +may be, in part, time loans, and in any case, he may find it just as +well, if he can make a small fraction of 1% in interest, to lend to +another broker, among whose customers the bulls are increasing. A vast +deal of money is thus transferred, on collateral security, by means of +"loaning stocks." Brokers prefer to borrow money from one another in +this manner, since no margins are required, in general, whereas banks +would require margins. These various reasons make a vast deal of +"borrowing and carrying" transactions, and a regular place is set aside +for them on the Floor--Post 4, commonly called the "Money Post." At this +post, also, the banks, through brokers, lend on call, and the published +call rates are established there. Of this, however, we shall have more +to say later. + +The extent to which this loaning of stocks takes place at the "Money +Post," as compared with the loaning done privately, varies. It makes no +difference, however, from the standpoint of the volume of these +transactions that go to the Clearing House whether they are put through +at the "Money Post" or outside. The loans made by the _banks_ at the +"Money Post" do not affect the Stock Exchange Clearing House +totals.[436] Formerly the "Money Post" was a place where the position of +the bears could be gauged in a given stock. If the demand for a stock +was great, the bulls could take heart, and increase the pressure. To +avoid giving away this information, however, borrowing is done on a +large scale privately, at present.[437] Of course, if the pressure gets +too strong, it will manifest itself at the money post anyhow, since +bears borrowing particular stocks will forego all or part of the +interest, or even pay a premium for the stock.[438] + +Now it is possible, from the figures given for the total clearings of +the Stock Exchange Clearing House, in conjunction with the figures of +recorded sales, and the percentage of "X-Clearing House" sales, to get a +fairly accurate idea of the magnitude of these stock borrowing +operations between brokers. The total number of shares offered for +clearing by "both sides" in 1901 was 926,347,300! This is double the +actual amount, since both buyer and seller report the same transaction +to the Clearing House, the former with a "receive from" sheet, and the +latter with a "deliver to" sheet. Half this amount, or 463,173,650 +shares, represents the actual number of shares to be handled. As we have +seen, 226 millions of this (85% of the recorded sales of 266 millions) +represents sales. The rest, or 237,173,650, represents borrowing of +stocks.[439] Borrowing exceeds actual sales, if the figures for 1901--a +year of enormous sales--are representative. We have, now, an +explanation of the prevailing opinion among brokers that the Stock +Exchange Clearing House dispenses with the major part of the checks that +would otherwise be required. _For their purposes_, it does make a vast +difference. Pratt's figures[440] show that, without the Clearing House, +certifications of $27,995,896,400 would have been required; that +certifications of $17,065,042,800 were obviated[441] by the Clearing +House, leaving the balance of $10,930,853,600 of certifications which +had to be used. This balance, as we have seen, is the major portion of +what would have had to be paid anyhow for the stocks actually sold and +offered for clearing. The saving on the actual sales is only 6.5 +billions. But the saving to the brokers was, of course, much greater. +Even six and a half billions is no slight matter for any purpose except +the explanation of our 245 surplus billions! Pratt gives an estimate at +another place of the certifications required by the Stock Exchange +sales, reaching virtually the same conclusion that we have reached by a +somewhat different combination of his figures. He indicates that 14 +billions of certifications were required, counting in the bonds, in +1901.[442] This compares with the 20.5 billions estimated value of +stocks sold, and approximately one billion of bonds. This leaves 7.5 +billions of certifications obviated on sales. This takes no account of +the "odd lots." If they run to an additional 25%, we have five billions +more which are not put through the Clearing House. My information is, +however, that "private clearings" reduce the checks in connection with +these, though not so efficiently as is the case with the big Clearing +House. + +Do the figures that get into the "all other" deposits from those +connected with the Stock Exchange undercount sales made there? Not yet +have we taken account of an item which swamps all that we have +considered. I refer to loan transactions by the banks, particularly call +loans. The volume of these is enormous. At the "Money Post" alone, the +figures average between 20 millions and 25 millions a day.[443] The +range is from 10 to 50 millions. The major part of these loans are not +made on the Floor of the Exchange, however, but privately, between banks +and brokers. Even on the Floor, no records of the loans are kept, and +only estimates are available. For the loans made privately, no figures +are attainable at all. The total must be enormous. One authority writes, +in a letter, "The total amount of money loaned at the post varies +considerably, depending upon the rate. For instance, when money is under +3%, loans are largely made directly between the banks and the brokers, +but when it gets over 3% and gets strong, more loans are made at the +post. Some national banks make all their loans there right along, so I +understand." My information from an officer of the National City Bank is +that it lends the major part of its demand money on the floor of the +Exchange. The other chief lenders, according to the Pujo Report,[444] +are the National Bank of Commerce, The Chase National, the Hanover +National, J. P. Morgan and Co., and Kuhn-Loeb. The same report states +that the bulk of such loans are made directly between banks and brokers, +and not at the "Money Post." + +How do these transactions affect Kinley's figures for deposits, and so +Fisher's total of 387 billions? The small dealer deals, usually, with +one bank. When he borrows, he gets a "credit" on his deposit account, +but makes no "deposit" that would get into Kinley's figures. But +stockbrokers deal with many banks. They have one bank which "certifies" +for them, and with which they regularly keep a "balance." But for their +loans, they deal with whatever bank gives them the best rate, or has the +funds to spare. In time of tight money, they shift their loans with +great frequency. They borrow also from one another. "Money" is "worth +money" in New York, and idle funds will be lent by whomever has them for +whatever the market will pay, on collateral security on call. When a +broker deposits money in his bank borrowed from another bank or another +broker, he gets a deposit credit which does get into Kinley's +figures--he deposits a certified check, or a bank draft. The following +has been described as a typical transaction by the bond expert of a +Boston banking house, and has been amplified by several Wall Street men +with whom I have discussed it. A, whose home bank is Bank W, has +borrowed, on call, $500,000 from Bank X. Bank X calls the loan. A finds +Bank Y willing to lend him enough to pay it off. Before he can get the +new loan from Bank Y, however, he must get his collateral released by +Bank X. Before he can do that, he must pay off the loan at Bank X. His +recourse, then, is to Bank W, his regular bank, which certifies for him, +and with which he keeps his balance. Bank W gives him a certified check +(either an overcertification, or a "morning loan" transaction), for +$500,000, with which he pays off the loan at Bank X. He then takes the +collateral from Bank X to Bank Y, and makes a new loan. He gets a draft +from Bank Y, which he deposits with Bank W, and then draws another check +against his deposit with Bank W to pay off the "morning loan," in case +the transaction took that form. Here are three checks for this loan +transaction, two of which get into clearings, and one of which gets into +"all other deposits." But the checks may be multiplied. A, instead of +getting a new loan at Bank Y, may call a loan from broker B, who may +then call a loan from broker C, who may go to Bank Y to get the funds he +needs to pay B. Here are two new checks in the series, both of which get +into the "all other" deposits. Checks fly about recklessly in Wall +Street, and men will turn over money many times, if an eighth of 1%, or +less, can stick by the way, on a good sum, for a few days! This is +strikingly illustrated by a fact which caught my attention in the +monthly bank statement of a brokerage house which I was allowed to +examine. The deposits made during the month, and the checks drawn during +the month, balanced to within five hundred and fifty dollars out of +several millions. The broker said of this: "It would be true even for a +single day, and it would be true for a year. The bank requires us to +keep a minimum balance; it is to our interest not to keep more than +that. If we have more at the end of the day, we lend it out; if we have +less, we borrow to make up the deficiency. We try to have just that +balance, and no more, to our credit at the bank at the end of every +day." The handling of funds by a brokerage house is a fine art, +involving both technical skill and a philosophic grasp of the factors of +the "money market." Are rates going up? Then it is well to reduce call +loans, and borrow more on time. If lower rates are anticipated, more +call money will be employed--with the possibility of a "squeeze" if too +much is taken that way. Hidden dangers must be foreseen. The sums +borrowed are enormous, and brokers' profits depend in very substantial +degree on their skill in borrowing as cheaply as possible, and in +utilizing their funds to the utmost. + +It is here, I think, in loan transactions between banks and brokers and +between brokers, that we have a major part of the explanation of the +huge deposit figures for New York City, and for the tremendous influence +of stock sales on clearings, which Mr. Silberling's[445] figures show. +This is the opinion of Professor O. M. W. Sprague, who first called my +attention to the volume of call loans, and rapid shifting of call loans, +in New York, and it is the opinion of every Wall Street man with whom I +have discussed the matter. The actual pecuniary magnitude of the share +sales and bond sales is not enough to do it. The mass of connected loan +transactions, however, substantially greater in volume than the actual +sales of securities, is, with the security sales, enough to do it. + +When the call rate is high, which will particularly happen when bank +reserves are low, the shifting in loans will be much increased. One bank +will have money to lend one day, but the next day will have to call it, +to meet heavy demands at the Clearing House, while some other bank will +have the surplus funds to lend. The brokers, by bidding up the rate, +will tempt the temporary lending even of small surpluses, if their +necessities are great. The volume of "all other deposits" and of bank +clearings will be swelled by this much beyond ordinary. That this should +not be revealed to ordinary statistical tests is due to the fact that +speculation tends to fall off at such a time, so that the other factors +in the stock exchange operations tend to reduce daily deposits and bank +clearings. Mr. Silberling has applied to this problem the technique of +a refinement of the correlation method, the method of partial +correlation, with the result of confirming this view.[446] + +I conclude, therefore, that stock exchange transactions, instead of +being undercounted in bank deposits, are very greatly overcounted.[447] +The big item that does it is loan transactions between brokers and +brokers and between brokers and banks. + +The evidence from the Chicago Board of Trade, with reference to the +extent of clearings within the exchange there, comes in a letter from +the Secretary of the Board of Trade to Professor Taussig. The only +clearing house transactions are in connection with "futures." All +"spot" transactions are paid in full by check. All futures other than +those offset by clearing are paid in full by check. The total amount put +through the Clearing House in 1915 was 118 millions, of which the +balances paid were 41 millions (saving checks to the extent of 77 +millions). This 77 millions is a trifle indeed as compared with the gap +of 245 billions we are trying to fill! It is a trifle also as compared +with the business done on the Board of Trade. The Secretary estimates +that commodities to the value of $375,000,000 actually arrived on the +exchange in 1915. On the average, the figure would be $350,000,000. For +the Stock Yards "it is approximately the same--last year was +$375,000,000. Of fruits, vegetables, poultry, butter, eggs, etc., sold +in South Water Street, it is claimed by their statisticians, the value +is $350,000,000, or a total of about eleven hundred millions _arriving_ +[Italics mine] yearly at this great market place, all of which is paid +for by checks, and when the ownership changes, the change of ownership +is always paid by check." How many times the goods change hands, cannot +be stated on the basis of records of the Board of Trade. The Secretary +contents himself with saying that they are "sold and resold many times." +We have discussed this, on the basis of reputed figures of the Federal +tax on grain futures in 1915, in our chapter on "Volume of Money and +Volume of Trade." In any case, it is clear that the 77 millions of +checks economized, though absolutely great, is relatively a bagatelle. +It is, moreover, more than compensated for by loan transactions. The +Secretary estimates that for a sixty-day period, when grain is coming +in, from two to four millions will be lent by the banks daily on +_arriving_ grain. How great the loan transactions on subsequent sales +will be we can only conjecture. + +While able to find, then, important cases of trade and speculation +which dispense with the use of checks, I cannot find anything of +magnitude sufficient to aid Professor Fisher's case, and I find, on the +other hand, enormous overcounting in every field where business and +banks meet, as well as in the relations of banks to non-commercial +depositors. + +I conclude, therefore, with reference to the figures of Fisher and +Kemmerer[448] for volume of trade, that they are much exaggerated for +the base year, and that for every other year they are wholly wrong, both +because of their excessive magnitude, and because the index of variation +has been wrongly chosen. + +The discussion of P, the price-level, in the statistics of Kemmerer and +Fisher need not be extended. P, for the equation of exchange, and for +the quantity theory, is a _weighted_ average, each price that goes into +it being weighted by the number of exchanges involving the commodity of +which it is the price. The weighting of P should correspond to the +elements in T, the volume of trade, and should vary from year to year, +as the elements in T change.[449] Now Kemmerer's P is weighted as +follows: wages, 3, security prices, 8, wholesale prices, 89.[450] If our +conclusions with reference to the composition of the volume of trade, as +developed in the chapter on "Volume of Money and Volume of Trade," are +valid, this weighting gives us a P which has no relevance to the +equation of exchange. The wholesale items should have a weight of not +more than one-sixth of the total for 1909. Certain commodities, as wheat +and cotton, in which there is heavy speculation, should be given great +weight, and securities should have, probably, the greatest weight of +all. If "trade" is to be extended to cover transactions in bills of +exchange and loan transactions (as it is by Kemmerer),[451] then P +should contain these things, weighted more than all else put together, +particularly if call loans are included. The weights should be radically +altered from year to year. We should then get a P which would fit the +"equation of exchange"--though what else it would be good for is hard to +say! The same criticism applies to Fisher's P. It is dominated by +wholesale prices.[452] It therefore has no relevance to an equation of +exchange in which only one-sixth at the very most of the items are +wholesale items. Neither Fisher nor Kemmerer alter their weights in P at +all, to correspond to yearly alterations in the composition of T. + +As _indicia_ of changes in the _absolute value_ of money, Kemmerer's and +Fisher's index numbers, or other index numbers of numerous wholesale +prices, with a substantial weighting of wages, are probably better than +an index dominated by stocks. Stocks fluctuate more widely than +wholesale prices and wages, their values are more affected by variations +in business confidence, and by variations in the rate of interest. For +measuring _the value of money_, the index numbers here criticised are +very good. But for the purpose for which they are chosen, namely, to +fill the equation of exchange, and to measure variations in a +_price-level_ of the sort the quantity theory and the equation of +exchange are concerned with, they are simply irrelevant. If it were +really true that such an index number varied with the quantity of money, +then the quantity theory would be effectively disproved! + +Now, in general summary of our criticisms of the figures of Kemmerer +and Fisher: they have systematically buried New York City, and +systematically covered up speculation. All the errors converge in this +direction. The _indicia_ of trade cover up speculation and the other +things that go on in New York, and other financial centers. The +_indicia_ of prices do likewise. Fisher weights New York clearings only +1, while weighting country clearings 5, in his index of variation of +check transactions. He also counts New York returns for March 16, 1909, +as complete, and gives all of his estimate for non-reporting banks to +the country. Kemmerer does not do this, but he does exaggerate the +importance of money, as compared with checks, and does not allow the +velocity of money to vary at all in his figures, thus getting a much +greater constancy in the figure for total circulation of money and +checks than is proper, and covering up the flexibility and variability +which New York gives to our system.[453] In general, our task in this +chapter has been an archaeological excavation--we have rediscovered a +buried city. + + + + +PART III. THE VALUE OF MONEY + + + + +CHAPTER XX + +RECAPITULATION OF POSITIVE DOCTRINE + + +The chapters which have gone before have been, in considerable degree, +concerned with the analysis of unsuccessful efforts to solve the problem +of the value of money, as the quantity theory, or the attempts to apply +the notions of supply and demand, marginal utility, and cost of +production, to the problem. Not all that has gone before has been, even +in form, primarily critical. The chapter on "Economic Value" lays the +foundation for the main constructive theory of the book, and in +virtually every chapter some portion of our positive doctrine has been +developed. In the doctrines criticised, elements of truth have been +noted, and in showing the errors of the doctrines considered, +constructive doctrine has been presented by way of contrast. The +theories criticised, moreover, even where they have gone astray in +solving problems, have at least the merit of _stating_ problems, and so +have aided in clearing the way for theories better based. + +It is the task of the present chapter to present, in a series of theses, +the main constructive results so far attained. No effort will be made to +follow the order of the exposition which has preceded. A summary of that +will be found in the detailed analytical table of contents. Rather, we +shall seek to draw from what has preceded the positive doctrine which is +scattered through the preceding chapters, and to present it by itself, +as a basis for the more systematic formulation of constructive theory +which the following chapters are to contain. + +1. The theory of the value of money is a special case of the general +theory of value. + +2. Value is a phenomenon of psychological nature. Not physical +quantities, but psychological significances, are relevant when the +problem of value and price causation is involved. + +3. Value is not a ratio of exchange, or "purchasing power," but is an +absolute quantity, prior to exchange. It is the fundamental and +essential attribute or quality of wealth, the common or homogeneous +element present amidst the diversities of the physical forms of wealth, +by virtue of which comparisons may be instituted among different kinds +of wealth, and different items of wealth may be added to make a sum, put +into ratios of exchange, and so on. + +4. Economic value is a _species_ of the _genus_, _social value_, +cooerdinate with legal value, and moral value. It is part of a system of +social motivation and control.[454] Psychological in character, it none +the less presents itself to an individual as an objective, external +force, to which he must adapt himself. + +5. Individual prices have two cooeperating causes: (a) the social +economic value of the money-unit, and (b) the social economic value of +the unit of the good in question. + +6. The average of prices, or the "price-level," is a mere mathematical +summary of the particular prices. The causation involved in the average +of prices is nothing more than the causation involved in the particular +prices. + +7. The value of money is to be distinguished from the "reciprocal of the +price-level," or the "purchasing power of money." The value of money is +an absolute quantity, one of the factors, determining each particular +price. Particular prices and general prices may change because of +changes in the values of goods, with no change in the value of money. +Or, particular prices and general prices may change because of changes +in the value of money, with goods remaining constant in value. + +8. The absolute value of money, assumed constant, is presupposed by the +great body of present day price theory, as supply and demand, cost of +production, and the capitalization theory. These theories are, +therefore, inapplicable to the problem of the value of money. + +9. But supply and demand, cost of production, the capitalization theory, +and other laws concerned with the concatenation and interrelations of +prices, being applicable to the problem of particular prices, are also +applicable to the problem of general prices. (Chapter on "The +Passiveness of Prices.") + +10. The general price-level, as a consequence of changes in particular +prices, growing out of changes in the values of goods, may rise or fall, +without antecedent changes in the value of money, or the quantity of +money, or the volume of credit, or the volume of trade, or in the +"velocities of circulation" of money or credit. (Chapter on "The +Passiveness of Prices.") + +11. The general laws of prices, supply and demand, cost of production, +the capitalization doctrine, the imputation doctrine, etc., conflict +with the quantity theory. In the cases where they conflict, the first +named doctrines are correct, and the quantity theory is wrong. (Chapter +on "The Passiveness of Prices.") + +12. The value of money, being a special case of economic value, is +subject to the same general laws. This means, from the standpoint of my +theory, that the theory of social value is applicable to the problem of +the value of money. + +13. This is not the same as saying that the whole value of money is to +be explained by the social value of gold bullion, conceived of as a mere +commodity. A hypothetical case was constructed in the chapter on +"Dodo-Bones," in which gold is the standard of value, but is not +employed as a medium of exchange or in reserves, where the whole value +of money is to be explained by the value of gold bullion, conceived of +as a commodity. + +14. But, in general, money gets part of its value from its monetary +employments. (Chapter on "Dodo-Bones.") + +15. The additional value which comes to gold bullion as a consequence of +its employment as money, is itself to be explained on social value +principles. It grows out of the social value of the services which money +performs. + +16. The functions of money remain to be examined in detail. And the +relation between the value of particular services of money and the +capital value of money, has not yet been analyzed. There is a relation +between the two--a relation which varies under different +conditions--even though it has been shown in the chapter on the +"Capitalization Theory" that the relation is not the simple one which +holds between the values of services and the capital value of ordinary +income-bearers. There must be an increment to the value of gold bullion +as a consequence of its being coined, however, since otherwise there +would be no force leading it to be coined. + +17. This increment in value to bullion, as a consequence of coinage, +becomes evident when free coinage is suspended. An agio of coin over +uncoined bullion may easily appear. + +18. But this is not to assert the doctrine of the quantity theory. +Because + +19. The money service presupposes the existence of value for money from +some source other than the monetary employment (chapter on +"Dodo-Bones"); and + +20. Hence the monetary employment can explain only a differential +portion of the value of money. + +21. The proposition that money must have value from some source other +than the monetary employment does not mean, necessarily, that money must +be made of precious metals, or be convertible into precious metals. The +value of money is, indeed, most stable and best sustained when such is +the case. But it is possible for money made of paper to have value apart +from the prospect of redemption--though no clear case has been made, in +the writer's opinion, for the view that this has historically occurred. +But as a hypothetical possibility, my theory holds that paper money may +attain a value of its own, growing out of various factors which a social +psychology can explain, including law, patriotism, and custom. Social +values in every sphere are imperfectly rationalized. Values which in +their origin are secondary and derived may become substantial and +independent of their "presuppositions." This is true of legal and moral +values. It is true of the capital value of land. It may be true of paper +money. This matter has been discussed in the chapters on "Economic +Value" and on "Dodo-Bones." The social value theory has not the +limitations of the utility theory in dealing with such cases, nor is it +tied to a metallist or bullionist interpretation. Legal, moral, and +patriotic factors, and the influence of social custom, all fall readily +into the social value doctrine. + +22. The "measure of values" function, and the "standard of deferred +payments" function, need not require the actual use of money, and need +not add to the value of money. The function of "medium of exchange," and +other functions to be analyzed in a later chapter on that topic, do +involve the actual employment of money, and are sources of value for +money. + +23. The quantity of money and credit are matters of high importance in +economic life. They affect vitally the smooth functioning of production +and exchange. While not accepting the extreme view of those writers who +see in scarcity or abundance of money the primary cause of the ebb and +flow of civilization, I maintain that the quantity of money and credit +does make a vast difference, and that the quantity theory contention +that, after a transition is effected, the only consequence of a change +in the quantity of money is a proportional change in the price-level, is +wholly indefensible. (Chapter on "Volume of Money and Volume of Trade.") + +24. Very much of economic theory has been developed in abstraction from +money. For economic statics, with its delicate marginal adjustments, on +the assumption that friction is banished, that the market is fluid, that +labor and capital and goods are mobile, etc., money does appear a +needless complication. But the static assumptions are only possible +because money and credit have smoothed the way. It is the business, the +function, of money and credit to overcome "friction," to effect +"transitions," to make it possible for "normal" tendencies to manifest +themselves. (Chapter on "Volume of Money and Volume of Trade.") + +25. The main work of money and credit is in effecting "transitions," +bringing about readjustments, enabling society, with little shock, to +adapt itself to dynamic change. The great bulk of the actual exchanging +that takes place is speculation, and would not occur if economic life +were in static equilibrium. This is true both as a matter of theory and +as a matter of statistics. More than half of the checks deposited in the +United States are deposited in New York City, where "wholesale" and +"retail" deposits are a small factor. Bank clearings fluctuate in close +conformity with stock exchange transactions. Great banks, and the bulk +of banking transactions, are everywhere found in the speculative +centres. (Chapters on "Volume of Money and Volume of Trade," and "The +Rediscovery of a Buried City.") + +26. Hence a functional theory of money must be essentially a dynamic +theory: must rest in a study of "friction," "transitions," and the like. +And, + +27. Hence a theory of money like the quantity theory, concerned with +"long run tendencies" and "normal equilibria" and "static adjustments" +touches the real problem of the value of money not at all. + +28. An increase of money tends to increase trade. (Chapter on "Volume of +Money and Volume of Trade.") + +29. An increase of credit tends to increase trade. (Same chapter.) + +30. An increase of trade tends to increase the volume of credit, and, +where the money supply is flexible, tends to increase the money supply +also. (Chapter on the "Volume of Trade and the Volume of Money and +Credit.") + +31. Production waits on trade. The problem of marketing in the modern +world is often more important than the problems of production in the +narrower sense. Selling costs are probably greater than strict "costs of +production." "Volume of trade," far from being dependent on "physical +capacities and technique," is almost indefinitely flexible, with +changing tone of the market, with changing values, and with other +changes, including changes in the volume of money and credit. (Chapter +on "Volume of Money and Volume of Trade.") + +32. The relation between the volume of money and the volume of credit is +exceedingly flexible. The relation between the world's volume of credit +and the world's volume of gold is likewise exceedingly loose, uncertain, +and flexible. (Chapters on "Volume of Money and Volume of Credit," and +"The Quantity Theory and World Prices.") + +33. "Velocity of circulation" is a blanket name for a complex and +heterogenous set of activities of men. It is a passive resultant of many +causes, and is itself a cause of nothing. The safest generalization +possible concerning it is that it varies with the volume of trade and +with prices. + +34. Barter remains an important factor in modern economic life, and is a +flexible substitute for the use of checks and money, increasing when the +money market "tightens." It is greatly facilitated by the "common +measure of values" function of money. + +35. The general criticism of the mechanistic scheme of causation +involved in the quantity theory has, as its positive corollary, the +doctrine that psychological explanations must be given--that the +phenomena are intricate and complex, as intricate and complex as the +play of human ideas and emotions, and the network of social +relationships. + +36. This means that the theory of value, and of the value of money, as +here presented, cannot assume the simple form, or the mathematical +precision, which have made the quantity theory so alluring. It means, +further, that the present study, as in part pioneer work, will lack +finish and definiteness in many places, will contain errors and gaps, +and will leave many problems unsolved, and many distinctions undrawn. At +many points, the analysis is confessedly incomplete, and the problems +imperfectly thought through--often inadequately _stated_, if seen at +all. + +In what follows, these theses, with doctrines yet to be developed, will +be woven together into a systematic theory of money and credit. + +The study of the functions of money, in relation to its value, will best +be approached, I think, through a study of the origin of money. In this, +I shall base my conclusions chiefly on the work of Karl Menger and W. W. +Carlile, who seem to me to have done most in this field. + +On the basis of the general theory of value developed in the first +chapter, and the results of the two chapters which are to follow on the +origin and functions of money, I shall reach my main conclusions as to +the laws of the value of money. On the basis of this theory of value, +and of the theory of the functions of money, I shall also try to develop +a psychological theory of credit, and to assimilate credit phenomena to +the general phenomena of value. The development which the theory of +credit has had, at the hands of men whose chief interest was that of the +jurist or accountant, is valuable and important. I do not wish to +discredit what has been done. Many important doctrines concerning credit +have been developed. The general theory of elastic bank-credit, worked +out in the controversy between the "Currency" and the "Banking" Schools, +is of the highest importance. This theory I have discussed in the +chapter on "The Volume of Trade and the Volume of Money and Credit." I +still feel, however, that there are gaps in the prevailing ideas on +credit which only a social psychology can fill. I shall undertake to +construe credit as a part of the social system of motivation and +control, and to differentiate it from other parts of that system by an +analysis of its functions. I think, too, that the theory of the relation +of credit and money is in especially unsatisfactory shape, particularly +with reference to the factors governing reserves. + +A final chapter, in Part IV, will undertake to bring together the +various points in our discussion which deal with the theory of +prosperity, and will seek to bring the notions of "theory of prosperity +_vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._ +transitional tendencies," and certain other similar contrasts, into a +higher synthesis, which will, to be sure, not rob these contrasts of +their significance, but will rather find certain generic principles +which they share, and so make it possible to measure considerations in +one sphere in terms of considerations in the other sphere. In very large +degree, students of dynamics and students of statics have been talking +at cross-purposes, missing the force of one another's arguments, and +have been quite unable, even when understanding one another, to come to +agreement, precisely because they have lacked principles by means of +which they could compare in any quantitative way the forces which each +studies. A higher synthesis, which would give static and dynamic +theories common ground, would seem to be a desideratum of high +importance. Such a synthesis would go far toward unifying the science of +economics. I believe that the theory of money and credit, approached +from the angle of the social value theory, will meet this need. + + + + +CHAPTER XXI + +THE ORIGIN OF MONEY, AND THE VALUE OF GOLD + + +This chapter is not concerned with history or anthropology for their own +sake. The present writer has made no independent historical or +anthropological researches, in connection with the question of the +origin of money. The chapter is primarily concerned with giving an +exposition of the theories of two writers, Karl Menger and W. W. +Carlile.[455] It is not important, for my purposes, whether either +writer has presented a theory which anthropology will accept as a +correct account of actual origins. The theories do throw light on +present functioning, and seem to me to be correct as analytical +theories, whether historically adequate or not. There are two main +questions with which the chapter is concerned: + +(1) How did money come to be? + +(2) Why should gold and silver have passed all rival commodities in the +competition for employment as money? + +Viewing these questions from the standpoint of present functioning, +rather than from the standpoint of historical origins, we may restate +them as follows: + +(1) Why should men accept small disks of metal, or paper representatives +of these metal disks, for which, _as_ metal, they have no use, or at all +events far in excess of the amount which they can make use of as metal, +in return for economic commodities which they can use? The social +utility of a money economy may well be granted, without giving an answer +to this question. Granting that social economic life works better by +far when men do accept these disks of metal in payments, the question +still remains not merely as to why the practice started, but also as to +why it continues. Granted that it is to the individual, as well as to +the social advantage, that each individual should accept these metal +disks in excess of his personal need for the metal, _if he is assured +that he can pass them on to others at will_ in return for the goods he +wishes to consume, the question still remains as to why the individual +should have this assurance, as to why the general practice should +continue. Menger quotes Savigny as holding that the thing is downright +"mysterious," and the Aristotelian answer of social convention +(sometimes interpreted as "social contract") is, in effect, a confession +that the thing does baffle explanation on the ordinarily understood laws +of exchange. The convergence of individual and social advantage, which +English economic theory has done so much to emphasize, is less clear by +far in connection with money than with the case where A trades a sheep +(of which he has a surplus) to B for a quantity of grain (of which B has +a surplus), while A has not enough grain, and B has not enough sheep. +This exchange is clearly to the advantage of both A and B, and the +practice of making such exchanges is clearly to the general advantage. +But in the case of money, A trades sheep (of which he may not have an +excess, so far as his capacity to consume is concerned) for disks of +metal which he probably does not intend to consume at all. The social +advantage of a general practice of the sort is easily established, but +it is not clear that it is to A's advantage, _unless we assume the +practice general_. But there are many practices which could be shown to +be socially advantageous if all men practiced them, and, indeed, +individually advantageous, if generally practiced, which can, none the +less, not be made a general practice. If thieves would cease stealing, +we could dispense with a vast expense now incurred in police and safe +deposit vaults and heavy locks, etc., and with a small fraction of the +savings could give pensions to the thieves which would surpass by far +their present incomes! Individual and social advantage would converge. +But for many reasons the practice could not be instituted, and would +break down quickly if instituted. Very powerful social pressure indeed +is needed to make an advantageous social institution--like +morality--work, so long as individuals sometimes find advantage in +breaking the general practice, even though the general practice, _on the +part of other people_, is of advantage to every individual. Now it is +clear that the institution of money is to the social advantage. It is +clear that it is to the advantage of every individual who has money that +everyone else should be ready to accept it in unlimited amount, in +return for his goods and services. But it is not clear, on the surface, +why everyone should be ready to take metal disks in unlimited amount in +return for goods and services. People will not take coal or horses or +hay or land or white elephants in unlimited amount in return for goods +and services. Why should there be such a general practice regarding +metal disks or pieces of paper? + +This question, to one who has always lived in a money economy, may seem +childish. Such questions regarding anything to which we have grown +accustomed seem childish to those who have not been used to raising +them. Why does the sun rise? Why does seed-corn sprout? But these also +are proper scientific questions, the answer to which is of high +practical importance! The answer to the question just raised regarding +money will go far toward explaining the functions of money, and the +theory of the functions of money, together with the general theory of +social value, will give an answer to the question as to _how the money +function adds to the value of money_. The answer which I shall give on +the first question will in large measure follow the lines laid down by +Menger. + +(2) The second question needs little revision, when stated from the +standpoint of present functioning, rather than of historical origin. We +have more recent history to deal with in connection with this question, +and Carlile, in his answer, offers substantial historical and +anthropological proofs. It is still, however, present functioning that +is important, and the question may be restated thus: + +Why are gold and silver, and particularly gold, the standard money of +the great part of the world to-day? The principles of social psychology +which Carlile employs in explaining the historical development, are also +important in explaining the present attitude of mankind toward gold and +silver, and will serve, together with the general theory of social +value, to answer the question as to the value which money receives from +the employment of the money metal _as a commodity_. + +It is worthy of note that neither of these questions has been seriously +raised or discussed by most recent writers of the quantity theory type. +Professors Kemmerer[456] and Fisher give no attention to them at all. +Both assume money as circulating, as the starting point of the argument, +without noticing how much is involved in the assumption. Neither, +moreover, gives an _analysis_ of the functions of money. Considerations +drawn from the question as to the origin and functions of money are hard +to bring into the quantity theory scheme. If money circulates, there are +causes for it. Fully to understand those causes, would be to understand +also the _terms_ on which money circulates, that is to say, the +_prices_. But then a quantity theory would be superfluous! And if the +quantity theory answer should not be obviously in harmony with the +answer already given by the theory of origin and functions, then doubt +would be cast on the quantity theory explanation. The quantity theorists +do well to avoid mixing up with their discussion considerations drawn +from the general theory of value, and from the theory of the origin and +functions of money. + +The answer to the first question rests primarily in the fact that there +are differences in the _saleability_ of goods. Value and saleability are +not the same thing. A copper cent has high saleability; a farm has low +saleability.[457] Some valuable things cannot be exchanged at all. The +Capitol at Washington cannot be exchanged, yet has value. Under a +communistic or socialistic regime, exchange, as we now know it, would +largely or wholly cease. An entailed estate cannot be sold, yet has +value. If society should really come to the stable equilibrium of the +"static state," most of the exchanges of lands,[458] securities, and +other long-time income-bearers would cease, but they would still be +valuable. I have developed these notions in my article on "Value" in +the _Quarterly Journal of Economics_, Aug. 1915, and have referred to +them again in the chapter on "Value" in the present book, and so need +not expand the discussion here. Exchangeability and value are different +characteristics of goods. Value is an essential precondition of +exchangeability, but can exist without it. Value is, however, commonly +increased by exchangeability. But the theory of exchangeability is a +separate matter, and cannot be deduced from the theory of value alone. + +Menger points out the difference between "buying price" and "selling +price." You can buy a piano for $400. If you try the next minute to sell +it for $375 you will probably fail. You may pay ten thousand dollars for +a farm. The income of the farm may increase. The tax assessment may +increase. The capital value of the farm may increase. And yet, you may +have to wait for a long time before you find a buyer who will pay you +ten thousand dollars for it. One buys pianos or farms, as a rule, only +when one wishes to use them, or when one has such special knowledge of +the market that one knows pretty definitely where purchasers can be +found for a resale, at a profit. Even in such highly organized markets +as the stock and produce exchanges, one cannot usually buy in quantity +and sell immediately without some loss. "Buying price" and "selling +price" of such a stock as Industrial Alcohol Preferred are sometimes +five points apart, at a given time. The forced sale of land in +bankruptcies, or for taxes, notoriously often bring prices far below the +price which would correctly express the value of the land. It is only in +the ideal fluid market assumed by static theory, where adjustments are +instantaneous, where causal-temporal relations have become timeless +logical relations, that values are perfectly expressed in prices.[459] + +All these difficulties were enormously greater in days of primitive +barter, before money and organized markets had been evolved. The +difficulties of barter have been much elaborated in the literature of +money. I shall recur to the topic in my chapter on the "Functions of +Money." Part of the trouble arises from the "want of coincidence" in +barter--the failure to find the man who has what you want, and who at +the same time wants what you have. Goods have high or low saleability, +depending, in considerable degree, on the _universality_ of the desire +for them. They may have high _value_ if only a few rich men desire them, +provided they be scarce. The paintings of old masters would be a case in +point. Incidentally, the difference between buying price and selling +price is often enormous in this case, and the making of a sale may well +involve long and expensive negotiations. The difficulties of exchange +here arise not alone from the limited market, however, but also from the +fact that each painting is a unique, and a unique of high value. A good +might have high saleability despite the fact that the ultimate demand +for it comes from only a few rich men, if it could be easily subdivided +and standardized. + +Menger enumerates a number of circumstances connected with a good which +increase its saleability. Among them are the following: + +1. Widespread and intense desire for the thing (to which should be +added, adequate wealth on the part of those who desire it). + +2. Scarcity of the commodity in question. + +3. Divisibility of the commodity. + +4. Considerable development of the market. + +5. That the demand for the article should be more than local. + +6. That it be cheaply transportable. + +7. That commerce between localities in the article be unrestricted. + +8. That demand for the article be constant, not fluctuating, in time. + +9. That the article be durable. + +10. That it be uniform in quality, so that standardization is easy. + +In general, Menger's list meets the requirements often laid down for a +good _medium of exchange_. In general, to the extent that any commodity +meets these tests, it will be _saleable_. Commodities will vary +indefinitely in the extent of their saleability. + +Starting with the distinction between value and saleability, and with +the analysis of the circumstances affecting saleability, we may now +undertake to see how money tends to develop out of a barter economy. +Suppose that a man, in a barter economy, has a good of low saleability, +which he wishes to trade for some other specified commodity. He finds no +one who possesses the commodity he wants who is willing to trade with +him. But if he can trade his article of low saleability for some other +commodity of higher saleability, _still not the thing he wants_, he has +yet made progress, he has got _one step nearer_ the object which he does +want. It will be possible now, perhaps, to trade the new article, of +higher saleability, for the commodity he wants. If not, he can trade it +for some article of still higher saleability, which he can finally +trade for the article he wants. By several indirect exchanges, he +finally reaches his object. Incidentally, it is erroneous to distinguish +money and barter economies as economies based on direct and indirect +exchange. The barter economy may well involve much more indirection than +the money economy, in many cases. + +If there be in the market some one commodity which has a conspicuously +higher degree of saleability than any other, the more sagacious men in +the market will make it a point to get hold of it and accumulate it in +excess of their anticipated consumption of it. They will do this, +because they will see that they can thereby get other things which they +do need more easily than in other ways. With the accumulation of a given +kind of highly saleable goods, in excess, by a few men in the group, in +the expectation that the surplus will subsequently be used to buy other +goods,--as yet perhaps not specifically determined--we have, not money, +but a big step toward money. At first only a few grasp the great idea. +They succeed and become wealthy. Then others see the advantage of the +thing, and imitate them. The prestige of the wealthy and successful men +would induce imitation even if the advantage were not clearly seen. Then +a tradition and a custom grows up. With the growth of tradition and +custom, picking out one or a small number of things as particularly +desirable objects to accumulate because of their saleability, with the +practice of accumulating these articles in excess of intended +consumption, money becomes an accomplished fact. There is no need for +agreement or legislation. Money is not, in its origin, certainly, a +matter of law or conscious public planning. + +With the development of a highly saleable article into money, moreover, +we have further a great increase in that saleability itself. The +quality which made the practice possible becomes greatly enhanced by the +practice. Menger thinks that this leads to an absolute difference +between money and goods, the money article, which formerly was merely +superior to other goods in saleability, now becomes absolutely saleable. +The absoluteness of this distinction, which would make it a distinction +in kind, rather than in degree, seems to me not to be sound. I think +that the distinction remains a distinction of degree. For one thing, the +development of money, while it adds to the saleability of the +money-commodity, _also adds to the saleability of other goods_. _Two_ +things must be exchanged, in order that _one_ may be! It is the business +of money to facilitate exchange, to overcome the difficulties of barter, +to bring about the fluid market. And it does this not merely by acting +as a medium of exchange. The fact that goods can be _priced_ in terms of +money, can have a common measure of value, makes barter itself easier, +as I have shown in my chapter on "Barter" in Part II. There are many +articles in trade at the present time whose saleability is not much less +than that of money, in ordinary times. Wheat in the grain pit is surely +highly saleable. Stocks and bonds are. If it be objected that in the +wheat market there is always some difference between buying price and +selling price, if considerable quantities are involved, it may be +answered that the same is true in the "money market" The man who has +just negotiated a three months' loan of five hundred thousand dollars at +3-1/2% may well have trouble in turning that loan over to someone else +immediately without shaving 1/4% from the money-rate! Besides, it is not +true that values remain unchanged when a big buyer shifts from the bull +to the bear side of the market. Buying price is higher than selling +price in that case partly because _his economic power_ has ceased to +sustain the value of the wheat, and the price would not correctly +express the value if it remained uninfluenced by that fact. + +Further, as we shall see when we come to the analysis of credit, one +chief function of modern credit is to increase the _saleability of +goods_, and to enable men to use the value of their goods in effecting +exchanges without actually alienating their property in the goods. It +seems to me that the drift of modern systems of exchange is toward +closing up the gap between money and goods, in respect of saleability, +rather than to widen it.[460] But this is to anticipate later +discussion. + +It is not necessary, in answering our second question, as to the reasons +why gold and silver have become the standard money of the world, to go +far in the study of primitive moneys. Wheat has almost never been money. +The value of wheat sinks rapidly with increase in supply, and is very +unstable. Wheat meets some other tests that fit it for money, as easy +divisibility, ease in standardization, and even has some degree of +durability, though subject to deterioration and waste with keeping, and +involving expense in keeping. Carlile and Ridgeway think that wheat was +used to some extent among the Greeks in Southern Italy as money, at one +time.[461] But this was possible because there was a regular export +trade in wheat--the same thing that made tobacco available as money in +Virginia. In general, however, commodities which minister to easily +satiable wants are ill-adapted for money. And that is especially true of +current stocks of goods currently consumed. + +The accumulation of money, moreover, implies a stage of human +development where the accumulation of _capital_ is possible. It implies +foresight, the suppression of present wants in the interest of future +wants, and almost always money has been a commodity well suited to serve +as provision against future contingencies. Cattle, slaves, knives, +fish-hooks, cooking implements, and similar things have been money. The +"store of value" function manifests itself early. + +But very early a different sort of commodity comes in. Articles of +_ornament_ early begin to take the place of articles that minister to +more animal wants. It seems strange that articles meeting wants which +are commonly counted frivolous and fanciful should distance those +obviously necessary in the race for a place as money. It seems strange +that the nations now at war should seem more concerned about their gold +supplies than about their wheat supplies.[462] But it is none the less a +fact that men in all ages have been enormously concerned about ornament. +In warm regions, ornament has commonly preceded clothing. Very early, +necklaces, bracelets, rings, earrings, nose-pendants, etc., became +objects of exceedingly great desire. And very early, gold and silver +were used for such purposes, and men made long expeditions for them and +fought wars for them in very early times, before the money economy was +developed far. Other ornaments than those made of gold and silver have +also become money. Wampum, polished shells, iron ornaments, etc., have +all been money. The Karoks of California were accustomed to use strings +of shell ornaments as money. When this was supplanted by American +silver, they used strings of silver coins as ornaments, dressing their +women lavishly with rows of silver dimes, quarters, and half-dollars! +Ornament and money are freely _inter_changeable in primitive life. +To-day, in the Western world, the thing is more specialized and +differentiated, and the interchange of money and ornament is largely +confined to jewelers, bankers, especially international bankers, gold +brokers, and the mints, _through_ whom the rest of society make the +interchange. In India, however, the peasant's hoard takes the form of +bracelets, bangles, and earrings for his wife and daughters, and the +peasant himself seems to regard them in the double light of provision +for future needs, and as conferring social distinction. They are both +ornament and savings bank, and are superior to a savings bank from the +standpoint of effective saving, since the natives would spend what they +put in the bank, but only famine can make them dispose of the ornaments +of their women.[463] Saving is a practice not easily started. There are +powerful motives in human life making for prodigality. Social prestige +comes to the man whose hospitality is lavish. Social expectation, which +is the most powerful steady motive power in human life, makes powerfully +for prodigality. Thrift is a virtue little esteemed among primitive men, +and none too highly esteemed among the masses in most countries. The +grudging person, the tightwad, the man who fails to do his share of the +treating, the woman who entertains her guests with inadequate fare--none +of these enjoy high social esteem. To offset this, a motive equally +powerful must manifest itself. It would be considered mean and +contemptible for the Hindu to put money away instead of spending it on +feasts at marriages and funerals, and in hospitality on other festive +occasions. But he gains, instead of losing, in social esteem and +prestige, if he decorates his women with gold and silver. Later, the +advantage of such a practice as a matter of provision against future +wants would get into men's minds, and would become an added incentive to +maintain and increase the practice. Thus the frivolous and fanciful side +of men's nature furnishes a powerful lever for the development of both +money and capital. In the store of value function we find one of the +earliest and most significant functions of money. Carlile offers a +wealth of evidence to show this interchangeability of money and ornament +among many peoples, at different stages of culture. + +Three powerful elements of human nature work together in sustaining the +value of the metals which become widely used as ornament: + +(1) love of approbation; + +(2) the sex impulse; + +(3) the spirit of rivalry, or competition. + +In these three we have, perhaps, the firmest basis which it is possible +to construct for the value of anything! When religion is added, as has +often been the case with the precious metals, the basis becomes solid +indeed! Modern social psychology has increasingly made clear the power +of the first. Social expectation can take the raw stuff of human nature, +and mold it into almost any form it pleases. Original, hereditary +differences remain. Some raw stuff is so inferior that no high social +organization can be built out of it. Some stuff cannot respond very +effectively to the social stimuli. But _qualitatively_, the tendency is +for men to become what society expects. Individuals succeed more or less +in meeting social expectation. But the very elements of individual +aspiration and ambition, the very self of the individual, are molded to +the social pattern, and, with the same racial stock, vary almost +indefinitely from time to time and from place to place, with the +_mores_. If ornament confers distinction,--and almost everywhere it +does--men will seek to possess ornaments. + +Commonly it is for the sake of the other sex that men seek ornaments. +Ornaments are an aid in wooing! Men gain wives by being able to give +them ornaments.--Not that this is the whole story!--And social +expectation, almost everywhere, requires that men decorate the wives +that they have won. Wives usually reinforce social expectation in this +matter. + +Further, the desire for ornament is competitive. One's women must be +_better_ ornamented than the women of one's neighbors, if _distinction_ +is to be gained thereby. But this sets a faster pace for the neighbors, +and the standard of social expectation is raised as to the necessary +amount of ornament. It is the same sort of competition that arises among +armed nations. A new battle-ship for one requires that all increase +their naval strength. New armies in Germany call for new armies in +France. A vicious circle is created. The desire for ornament, unlike the +desire for food, becomes insatiable. And hence, the value-curve for the +metal used as ornament sinks very slowly, being reduced, not by +satiation of want, but by limitation of economic resources. I need not +elaborate these notions further. They are of the same sort that Veblen +has developed in his _Theory of the Leisure Class_. They rest on +fundamentals in human nature, however much they differ from the +psychology of the "economic man." They give assurance, I think, that, +unless radical change in tastes and fashions come in, which displace +gold and silver from their position as ornaments and as means of +display, we may expect the value of gold to maintain itself at a high +level regardless of great increase in quantity. I do not share the view +which Carlile himself seems, at times, to express[464] that gold does +not sink in value with the increase in quantity. It seems to me easily +demonstrable that it has sunk, and does sink. But I should expect the +value of gold to survive the shock that might come if gold were entirely +displaced from monetary use vastly better than any commodity which +serves wants of a different character could stand a similar shock. The +demonetization of silver has, of course, not entirely displaced silver +from the monetary employment. It has, however, made it necessary for the +arts to absorb a greatly increased proportion of the new silver,[465] +and not a little of the old silver. The demonetization of silver, +moreover, was accompanied and followed by a great increase in silver +production. But silver has stood the shock amazingly well.[466] + +It is, of course, thinkable that the attitude of mankind, under new +social conditions, and with new tastes and fashions, may change, with +reference to gold and silver. Love of approbation and distinction, the +sex impulse, and the spirit of rivalry, are eternal elements in human +nature. But their manifestations may change. There have been times when +love of distinction gratified itself in poverty and filth and +asceticism. Almost anything may be exalted into a social ideal. Society +may even reach ideals of such a sort that a man may gain social approval +and the love of woman in high competition with his fellows in the +service of mankind! But even here gold and silver may have a place. They +are beautiful, as we now see beauty, and beauty itself is good! The +world is better if it has beauty in it. + +It is just as well to conclude at this point what I shall have to say +regarding the value of gold as a commodity.[467] The same quantity of +gold and silver may have widely varying values, depending on the +distribution of wealth and power. It is not alone intensity of +individual desire that controls values, but also the social weight of +those who manifest the desire. And this depends on the legal and other +institutional values concerned with social organization. The point is +strikingly illustrated by Walker's[468] account--designed for another +purpose--of the effect on the values of gold and silver of the conquests +of the great Eastern empires by Alexander the Great and the Romans. The +production of gold and silver, for the great Eastern empires, was like +the rearing of the pyramids in Egypt. All power was centered in the +hands of a few despots. Control of vast masses of laborers was in their +hands. The social values--it is difficult to classify them as legal, +economic and religious, since all three are blended--gave little weight +indeed to the desires of the masses, and tremendous weight to the +slightest whims of the despot. Thus, since the love of gold and silver +was intense in these despots, and since religious considerations also +called for the accumulation of great treasuries of gold and silver, +enormous numbers of laborers, living miserably, toiled in the mines to +produce them, and amazing stores of gold and silver were accumulated. +The precious metals had, in these Eastern empires, a high value per +unit, since so large a portion of the social energy of motivation +attached itself to them. With the conquests by Greeks and Romans, +however, a great change came. The old, gold-loving despots lost their +power. The conquerors had vastly less love for gold and silver for their +own sake. Moreover, the leaders among the conquerors had very much less +power in their own social systems than had the oriental despots. Their +soldiers were in considerable degree free mercenaries, who had a right +to a share in the spoils, and who cared much less for hoards of precious +metals than for many other things. In the new regime, the social centre +of gravity was changed. There remained few who loved great stores of +precious metals who had power enough to accumulate them. Mining on the +old basis was impossible. Though slavery persisted, more and more of +the labor of slaves went into the production of things that the masses +of men could consume. Gold and silver sank enormously in value. + +Radical readjustments in the distribution of wealth in our own day, +might well make substantial changes in the value of gold, without any +change in its quantity. That a more equal distribution of wealth and +power, however, would lower the value of gold now, as in the case just +discussed, is not so clear. The masses in the Western countries are +already fed and clothed, as a rule, even in times of adversity, and +usually increasing income for them means increasing expenditure to +satisfy less pressing wants, and particularly to satisfy wants connected +with social esteem. The laborer's wife gets an expensive cab for her +baby when she can afford it. The negroes have gold fillings put in their +front teeth--sometimes when the teeth are sound! The practice of giving +wedding rings, and even engagement rings, is spreading among the poor. +Our American rural poor, of pioneer stock, have had less concern for +gold and silver ornament than the masses of the Asiatics and recent +European immigrants. But among the rural poor in America, as city +standards spread, the tendency to use gold and silver ornaments seems to +be increasing, while we may with considerable confidence expect, I +think, that the rise of the immigrant to better economic conditions will +mean a larger use of gold and silver on his part. Gold leaf on ceilings +and radiators would cease, doubtless, except for public buildings, if +great fortunes disappeared, and the use of gold, at least, for plate, +would be impossible in an economic democracy.[469] Silver might well +gain in value at the expense of gold if there were radical changes in +the distribution of wealth. It is notorious that prosperity among the +agricultural masses of India is promptly followed by absorption of gold +in that country. I venture no concrete conclusions on this point, beyond +the general conclusion that a redistribution of wealth, with no change +in the quantity of gold, might well be expected to alter the value of +gold. + +It may be added that the general impoverishment of Europe, growing out +of the present World War, will probably lower the marginal value of gold +in the arts (and hence as money) in considerable degree. From this cause +alone, to say nothing of causes growing out of the money-employment of +gold, and growing out of the values of goods other than gold, we might +expect higher prices after the War than before the War, for articles of +consumption.[470] + + + + +CHAPTER XXII + +THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY + + +In preceding chapters, I have spoken of the "money-service" as a source +of additional value of money, under certain conditions. Before money can +function as money at all, it must have value from some non-monetary +source.[471] But, given this prior value, money performs valuable +services. These valuable services, in certain cases, add to the value of +money. Moreover, the fact that money, when made of a metal used in the +arts, lessens the amount available for use in the arts, raises the +marginal value of that metal there, and consequently raises its value in +monetary form as well. It is now necessary to analyze the money-service, +and to see in precisely what ways it does affect the value of money. And +first, we must notice that the money-service is not simple, but +compound; that in fact there are several services of money, in many ways +distinct from one another; that not all money can perform all of these +services; that most of them may be performed by things other than money, +that these services are not all equally important as sources of the +value of money, and that the same service varies, from time to time and +from place to place, in its significance from this angle; and finally, +that one of these services which is of the greatest social importance, +namely, the "common measure of values" function, does not add to the +value of money at all. + +I shall not now undertake a history of theories of the functions of +money. Many of the points which follow are common property of many +writers.[472] The nature of some functions has been more clearly +explained than that of others. I have not found in the literature of the +subject any very clear statements, moreover, as to the relations of +different functions to the value of money. I shall try in what follows, +by a series of hypothetical cases, to isolate each function of money, as +far as may be, and shall try, by varying my hypotheses, to indicate +variations in the influence of the different functions on the value of +money. + +The functions of money have been variously described and named. The +following list seems most satisfactory to me: + +1. Common measure of values (standard of value). + +2. Medium of exchange. + +3. Legal tender for debts (_Zahlungs-_ or _Solutions-mittel_). + +4. Standard of deferred payments. + +5. Reserve for credit instruments, including reserve for government +paper money. + +6. Store of value. + +7. Bearer of options. + +The common measure of value function rests in the intellectual needs of +man. It grows out of the necessity for calculation, for bookkeeping, for +understanding what is going on. Any object of value may be used to +measure the value of anything else, just as any object of weight--say +an irregular mass of iron--may be put in the balance against some other +object, and the relation between the absolute weights of the two objects +thus more or less definitely ascertained.[473] But it helps little, in +getting at the aggregate weight of a collection of objects, to know that +A among them is heavier than B, while D is lighter than F. To get a +knowledge of the situation adequate for quantitative manipulation, it is +best to compare all of the objects with some _one_ object, chosen as the +standard of weight, or common measure of weights. Thought is thus +immensely simplified. If we may imagine the calculations of a dealer in +a rural region, where no common measure of values is used, it will help +to make clear the nature of this function. Let us suppose that he deals +in nails, wire, cotton cloth, eggs, butter, hams, sugar, and moonshine +whiskey, and that his customers also make and use most of these things, +using him as a central clearing house in their rude division of labor. +Without a common measure of values, it is necessary for him to keep in +mind the price of every commodity in terms of every other commodity. If +there are twelve commodities, this means 66 ratios which he must +remember, according to the formula for permutations and combinations. In +general, in such a situation, there would be the following ratios: (n - +1) + (n - 2) + (n - 3) + ... (n - (n - 1)). Let him choose, however, one +of his commodities, say eggs, as the common measure of values, and he +needs to bear in mind only eleven prices, namely, the prices of each of +the other eleven articles in eggs. Thinking is immensely simplified. In +general, with a common measure of values, dealers need bear in mind only +(n - 1) prices. Suppose that at the end of the day, after considerable +trading, our dealer finds the following changes in his stock: + + _He has gained_ _He has lost_ + 8 doz. eggs 12 lbs. nails + 3 gallons whiskey 8 lbs. wire + 4 hams 13 lbs. butter + 5 yards cloth 10 lbs. sugar + +Has his trading been profitable? How can he tell? Reduce all the items +in both columns to their equivalents in eggs, however, and the answer is +very easy. No complicated business is possible without this common +measure, and common language, of values. + +Be it noted that this common measure of values does not necessarily +involve the use of a medium of exchange. The practice of _thinking_ in a +common measure is what is involved. If the article chosen be eggs, which +all are accustomed to use, the service of a common measure might easily +be performed without the practice of indirect exchange, assuming that +other physical difficulties of barter to which I shall shortly refer, +were absent. Indeed, as I have pointed out in the chapter on "Barter" in +Part II, a great deal of barter goes on in modern life, made very much +easier by the fact that we have a common language of values, a common +measure of values. For the easy working of the system, it is important +that the common measure of value be an article with whose value the +group is well acquainted. The frequent testing of this value in actual +exchanges vastly facilitates this. But actual exchange is not necessary +for the performance of the measure of value function. We have cases +where the measure of values and the medium of exchange are different. +Thus, in the Homeric poems, we find indications that cattle served as a +measure of values, even though payments were made in gold. The +Virginians commonly _thought_ in pounds, shillings and pence, even when +using tobacco as a medium of exchange. The need for a common measure of +values would manifest itself in any complex socialistic society, even +though exchange were largely dispensed with. No systematic plans for +utilizing the resources of such a society would be possible, no +bookkeeping would be possible, without some such device. + +For this function, I prefer the term, "common measure of values," to the +term often used instead, "standard of values." The latter term, as used +in connection with the expression "standard money," sometimes carries +the connotation of "money of ultimate redemption," and its main function +is thought of as serving in reserves. The reserve function is a separate +function, however. It is common to have money made of the standard metal +in reserves. But this need not be the case. I would refer once more to +the hypothetical illustration developed in the chapter on "Dodo-Bones": +gold, not coined, as the "standard of value"; paper as the medium of +exchange; silver bullion, at the market ratio with gold, as the reserve +for redemption of the paper. This may suggest that a distinction may +properly be drawn between measure of values, and ultimate standard +money. The paper money, in this case, would be the thing of which the +masses would ordinarily _think_, so long as the system worked smoothly. +And the paper could serve as a measure of values. The case is not unlike +the case where a "standard yard," or "standard pound" is kept for +ultimate reference in a government bureau, while yardsticks or pound +weights in the shops and warehouses do the actual measuring. The cases +do not, indeed, run on all fours. The measurement of weights and lengths +involves physical manipulation; the measurement of values is an +intellectual operation, made by comparing two objects of value. The +comparison may be made in actual exchanges; it may be made by an +accountant's estimate; it may be made by comparing the results of +several exchanges, in sorites form, only one of which involves the +ultimate standard measure. The yardsticks actually used may vary more or +less, by accident or design, by variations of temperature, etc., from +the standard yard. The paper dollars, under a smooth working of the +system described, would be held closely to the ultimate standard, and +would, in any case, not vary as compared with one another at the same +time and place. + +When the medium of exchange diverges in value from the ultimate +standard, as in the case of the American Greenbacks during the period +from 1862 to 1879, we have, sometimes, shifting relations among the +functions. The Greenbacks were the measure of value most commonly in +use. They were legal tender for debts, except where gold was specified +in the contract. They were commonly the standard of deferred payments. +To a considerable extent, however, gold was used in reserves, and even +as a medium of exchange. People _thought_ in both standards. And +finally, gold remained an ultimate standard to which the Greenbacks were +referred, and by which variations in their value were measured. The +terms, "primary standard" (gold) and "secondary standard" (Greenbacks), +have been employed to aid in straightening out this confusion.[474] I +think, on the whole, that the term, "common measure of values" describes +the function which I wish to emphasize more clearly than the term, +standard of values, and I shall, in general, employ it for that +purpose.[475] + +The medium of exchange function grows out of the physical difficulties +of barter, rather than out of intellectual needs. The discussion in the +preceding chapter of the origin of money has emphasized the nature of +the difficulties which a medium of exchange meets. A has an ox, which he +wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor +nor grocer cares to take the ox, however, and, besides, no one of them +could supply A with all three of the things he wishes to get. Moreover, +even if A should meet a man who had all three things, he would not care +to give up the ox for them, since the ox is worth more than all three. +If there be a medium of exchange, however, A may sell his ox to the +butcher, and take his pay in that medium, which will be something easily +and minutely divisible, buy coat and sugar and shoes, and take the +surplus of his medium of exchange home, waiting for another occasion. +The medium of exchange function overcomes the difficulties arising from +low saleability of many goods, due to limited number of possible buyers, +lack of divisibility, etc., etc. + +The common measure of values aids greatly in determining the prices, the +terms, at which exchanges may be made; the medium of exchange makes +possible exchanges which could not be made at all in its absence. + +The measure of value function does not add to the value of money. The +medium of exchange function is commonly a cause of additional value for +money. The source of this extra value is the gains that come from +exchange. + +Exchange is an essential part of the productive process, where you have +division of labor with private ownership of the instruments of +production, and private enterprise. Values[476] may be created by +changing the forms, the time, the place, or the ownership of goods. All +these operations are necessary in an economic system like our own. Those +who possess money are in a position to take toll, in values, from those +who wish to get rid of the goods which they have produced, and to get +hold of the goods which they wish to consume. The holders of money do +this by means of the money, and under the laws of economic imputation, +these gains are attributed to the money itself, first in the form of a +rental value, and sometimes, under conditions later to be discussed, as +increments to capital value. + +Before giving full discussion to this topic, it will be well to consider +certain other functions, which are, or may be, sources of value for +money. + +The reserve for credit instruments function cannot be fully discussed +till we take up credit. Provisionally, it may be said that it is a +source of absolute value for money, _per se_, even though the effect on +prices may be that, owing to a rise in the values of goods, the prices +rise. The fact of credit may even tend to lessen the absolute value of +money itself, by lessening the value that comes to money from the medium +of exchange function. On the other hand, credit increases exchanges, +making possible a vast mass of transactions which without it would not +occur at all. Of course, in our hypothetical case above, where the +reserve for credit instruments is silver bullion, the reserve for credit +instruments function does not add to the value of money at all. + +The "bearer of options" function of money is also a source of value for +money. It is a valuable service. The man who holds money, waiting his +chance in a fluctuating market, anticipates a gain which justifies him +in holding his capital without return upon it. Money is not alone in +performing this service. High grade bonds also perform it. They bear a +lower yield per annum to compensate. The service of bearing options is +itself a part of the yield, and is itself capitalized, in their case. +Two 5% bonds, each equally secure, but one of which has a wide market, +while the other has a restricted market, will have a very unequal value. + +This "bearer of options" function is often identified with the "store of +value" function. The two are properly distinguished. If a man has in +mind a definite contingency, at a definite future time, for which he +wishes to hold a store of value, he may well find that a high yield +bond, or a loan upon real estate, or many other productive investments, +will serve him better than money or bonds with wide market. So far as +money is concerned, the "bearer of options" function is much more +important than the "store of value" function to-day. The reserve of +value in liquid form, for undated emergencies (like the War Chest at +Spandau, or the big reserve accumulated between 1900 and 1913 by the +_Banque de France_), would, from the point of view of this distinction, +come under the "bearer of option" function, rather than the "store of +value" function. The important thing about the distinction is that for +one purpose a high degree of saleability in the thing chosen is +necessary, while in the other, such is not the case. The most common +case of the "bearer of options" function arises when men hold money, +liquid securities of low yield and stable value, short loans, call +loans, or bank-deposits, waiting for special opportunities in the +market. + +The medium of exchange function would exist in a society where business +goes always in accustomed grooves, where uncertainty is banished, and +where most of the assumptions of static economic theory are realized. +If we push static assumptions to the limit, and assume "friction" of all +sort gone, assume that all goods can flow without trouble or expense to +the places and persons where their values are highest, etc., even the +medium of exchange function would disappear. But if we make our static +assumptions a bit more realistic, leaving the "friction" of barter, but +banishing the need for readjustment, and the uncertainties that grow out +of dynamic changes (whether caused by growth of population, or changes +in laws and morals, or in fashions and tastes, or in technical methods, +or by accidents of various kinds), then the medium of exchange function +will still remain. Given dynamic changes, we have need for a vast deal +more of readjustment, and a vast deal more of speculation. I have shown +in the chapter on "The Volume of Money and the Volume of Trade" that the +great bulk of trading in the United States to-day is speculation, which +increases or decreases with the amount of dynamic change, with its +accompanying uncertainty and need for readjustment. The major part of +the medium of exchange function arises from this. The whole of it arises +from factors which purest static theory is accustomed to abstract from. +The _whole_ of the "bearer of options" functions arises from dynamic +change. _This is the dynamic function_ of money _par excellence_. It is +commonly treated by economists as an unusual and unimportant function. +Merged with the store of value function, it is frequently treated as of +historical, rather than present, importance. In my own view, it is of +high present importance.[477] I should count it as in considerable +degree a _function_ (using function in the mathematician's sense) of +"business distrust"[478] waxing and waning in importance as business +distrust increases and decreases. In past ages, this function was +primarily concerned with consumption, money and other goods being held, +at the loss of interest, as a safeguard against personal danger and as a +means of subsistence in emergency. Increasingly to-day, it is concerned +with _acquisition_ of wealth in _commercial_ transactions. When war and +domestic violence were the main cause of social disturbance, the +consumption aspect was most prominent. That aspect came strongly to the +fore at the outbreak of the present war. The heavy selling of +securities, which closed the bourses of the world, grew out of men's +efforts to get money and bank-credit as a "bearer of options" for the +old reasons. The old reasons explain in large measure the accumulation +of gold by the _Banque de France_, and by the German Government, +referred to above. But to-day, in general, the main purpose of those who +use money, or other things, as a "bearer of options" is to make gains, +or avoid losses, in industry and trade. The man who, in a given state of +the market, is afraid to lend, or afraid to invest, foregoes the income +which lending and investing promise, and holds his money. The man who +sees uncertainty and fluctuation in the market, and expects them to give +him bargains in time, foregoes income for a time, and holds his money. +The man who has investments of whose future he is uncertain, and who +fears to try any other investment for a time, sells what he has, +foregoes income, and holds his money. It is not always possible, in +discussing the money functions, to preserve the distinctions between +money and credit, or money and "money" in the money-market sense. How +much difference is made by these distinctions will best be discussed in +our chapter on "Credit." + +The significance of the "bearer of options" function is especially +manifest, I think, in connection with call loans. The "call rate" is +commonly well below the regular "discount rate," or rate for thirty-day, +sixty-day, or ninety-day paper. The explanation is to be found, I think, +in the fact that the lender of call money does not entirely dispense +with its service. He reserves a part of the "bearer of options" +function. To be sure, he will, in practice, have to wait an hour or two, +or even more for it,[479] and this may well mean that he cannot take +full advantage of an option. But the right to demand money on even +twenty-four hours' notice is more available than a high-grade bond, as a +means of meeting rapidly changing situations. This principle will +explain, too, I think, why money-rates in general, including even +ninety-day paper, are usually lower than the long-time interest rate on +safe farm mortgages, or on real estate mortgages in a city. The +thirty-day rate will commonly be lower than the sixty- or ninety-day +rate--though exceptions can easily be found, if the thirty-day period is +to cover a time of active business, which is expected to grow less +active during the second or third month. The influence of the bearer of +options functions is not the only influence at work on the rates. If it +be objected that the long-time interest rate on high grade railroad +bonds or government securities is sometimes lower than current +money-rates, or just as low, the answer is that these bonds also share +the "bearer of options" function, and that the interest rate on them is, +like the money-rate, lower than the "pure rate" of interest. +Writers[480] have been accustomed to look for the "pure rate" of +interest, _i. e._, an interest unmixed with insurance for risk, in the +highest grade of government securities. I think that this is a mistake. +I think that the "pure rate" should be sought in long-time loans, of +assured safety, which lack a general market. Such loans, _at the time +they are made_, should represent the "pure rate" _for that time_.[481] + +I shall recur to the question of the money-rates, and the question of +the relation of the money-rates to the general rate of interest, in the +chapter on "Credit." + +For the present I would call attention to the interesting case of +Austria, where the money-rates are normally very low, because the volume +of commerce and speculation is small, and the volume of banking capital, +politically fostered, is large; and where, on the other hand, the +general rate of interest on long-time loans is high, owing to the +scarcity of capital in industry and agriculture, as distinguished from +commerce.[482] This case may illustrate, incidentally, that even as a +"long run" or "normal" tendency, an excess of currency in a country may +lead, not, as the quantity theorists contend, to high prices, but rather +to low money-rates. Austria presents simply a striking case of what I +should regard as the general tendency. The money-rates and the +interest-rates tend to approach one another to the extent that paper +representatives of many different industries get into the "money +market"--to the extent that industrial investments in general become +saleable enough for it to be safe to finance them by means of short-time +banking credit. When banks lend on collateral security of corporation +stocks to the buyers of those stocks, they are, in effect, financing the +corporation itself.[483] Industries differ widely in the extent to which +they depend on the money market for their finances. The difference +depends often less on the nature of the industry than on the type of the +industrial organization. An individual farmer cannot get the bulk of his +credit that way! But there is no reason why a well-organized +corporation, assuming it successful in agriculture, might not draw on +the money market, even if not so freely as a manufacturing corporation +does. + +For the contention that the money-rates for short periods are lower on +the average than the rates on longer loans, and that the call rates are, +on the average, well below all time rates, there is abundant statistical +evidence. From 1890 to 1899 in New York City, the average rate on 4- to +6-month paper was 5.99%; the average rate on 60- to 90-day paper was +4.58%; the average call rate was 3.29%. In the same city, for the period +from 1900 to 1909, the averages were: 4- to 6-month paper, 5.61%; 60- to +90-day paper, 4.78%; call rate, 4.05%.[484] This last figure for call +loans represents an average of quotations at the "Money Post" at the +Stock Exchange. While normally the call rates are well below this, +occasional high figures, like those in 1907, pull this average up. The +high rates at the "Money Post," however, are not always representative. +Banks frequently do not charge their regular customers as much as the +quoted rates. + +Even more detailed evidence for our thesis is to be found in W. A. +Scott's investigation of New York money-rates, for the period, +1896-1906.[485] He studies _two_ sets of quotations for call loans, +those at the Stock Exchange "Money Post" and those at the banks and +trust companies; _seven_ sets of quotations (five of which appear +regularly) under the head of "time loans," namely, 30-, 60-, 90-day, and +4-, 5-, 6-, and 7-month; and _three_ under the head of "commercial +paper," namely, double name choice 60- to 90-days, and two varieties of +single name paper. + +He finds a clear tendency for the rate to vary with the length of the +loan, although noting many exceptions. "The difference between these +quotations rarely exceeds one-half of one percent, and the general rule +seems to be that the influence of time in raising the rate grows less as +the length of the loan increases. For example, there is apt to be a +greater difference between the quotations of 60-and 90-day paper than +between 90-day and four months. Likewise there is a greater difference +between 90-day and four months than between 4-months and 5-months +paper." + +The call rate, though much more variable than all time rates, and +sometimes high above them, is, on the average, well below them. For the +period, 1901-06, the averages are: call loans, 3.3%; time loans, 4.5%. + +The declining influence of differences in time as the length of the +loans increases, is what our theory would require. If the "bearer of +options" functions of short loans is the explanation of the lower rate +on them, it is a factor which would count for less and less as the +length of the loan increases. A month's difference is all-important, +when the month involved is proximate, say the difference between 10 and +40 days. But it is of virtually no importance, from the standpoint of +the man who wishes to meet sudden and indeterminate emergencies, +whether the note he holds matures in eleven months or twelve months. The +difference between a one-year loan and a five-year loan might, on the +other hand, still be important from the angle of bearing options. The +factor should cease to have any meaning at all, or at least any +appreciable meaning, when the difference is between, say, twenty and +twenty-five years. + +I have no statistical evidence that the one-year loan can normally +expect a lower rate than the five-year loan. At times, short time +financing may be even more expensive than long time financing. But such +study as I have given to quotations of short-term notes of corporations, +as compared with the longer term bonds of the same corporations, would +leave the distinct impression that short-term notes fare better in the +security market, and yield less return. A complication arises, here, of +course, that the short-term note may often lack the safety which a first +mortgage bond of the same corporation would have. + +The legal tender for debts function calls for a brief discussion. +Whatever gives legal quittance from contract obligation, or from legal +obligation as for taxes, performs this function. "Legal tender" money, +in the strict sense, is not alone in performing this function. Usually a +government will by law or administrative practice with the force of law, +bind itself to accept forms of money which it will not compel other +creditors to accept. Thus, silver certificates, without being "legal +tender," are a means of legal quittance from obligations to the Federal +Government. Sometimes governments will receive only gold at the customs +house. This was true in the Greenback period, when Greenbacks were +"legal tender," but not good for payments of customs duties. The reader +who is interested in refinements of the legal distinctions among +different kinds of money will find the thing elaborately worked out by +G. F. Knapp, in his _Staatliche Theorie des Geldes_.[486] But "legal +tender" money is not always an adequate means of quittance. If the +contract calls for corn, or wheat, or Northern Pacific stock, the best +legal tender money is a poor substitute! Witness the "Corner" in +Northern Pacific in 1901. It is doubtless true, as Davenport[487] points +out, that all contracts, whatever they call for, may be ultimately met, +under the common law, by money damages, but that does not mean that a +man can maintain his solvency or position in business by offering money +when Northern Pacific is designated in his contract. Doubtless even +there money will free him, _at a price_, but Northern Pacific stock is +at least more convenient for the purpose! A man does not need money to +get free from debts, even when money is required by the contract. He can +turn in whatever he has in an assignment for the benefit of his +creditors, and get free _via_ the bankruptcy court. In other words, the +legal tender function of money, while it does distinguish money from +other goods as a matter of _degree_, does not erect an absolute +difference of _kind_. + +Under a smoothly working monetary system, where all forms of money are +kept at a parity by constant and ready redemption, and where people have +no doubt that this redemption will occur, the legal tender quality which +attaches to part of the money is a matter of no consequence. It adds +nothing to the value of the money. In times of stress, the legal tender +quality may be a source of a considerable temporary value. This is +especially likely to be true of an inconvertible money. The legal tender +quality of the Greenbacks led to a very considerable fall in the gold +premium in the Panic of 1873. I have mentioned this point in the chapter +on "Dodo-Bones," where part of this discussion has been anticipated. In +general, the legal tender quality may be recognized as a factor in +sustaining the value of money, if as a consequence of this quality men +take the money when they would not otherwise take it, or take it on +terms which they would otherwise not agree to. Where, however, the money +is money which they are glad to get in any case, the legal tender +quality is a matter of supererogation. + +The standard of deferred payments function, as distinguished from the +legal tender function and the medium of exchange function, does not add +to the value of money. Of course, if the standard of deferred payments +is actually used in making the deferred payment, then it finally becomes +assimilated to the other two functions. But it is quite possible to +divorce them completely. Suppose, for example, that the standard named +in a contract in the Greenback Period was gold, but that payment was +made in Greenbacks at the market ratio. Or, suppose that the standard of +deferred payments should be a composite of commodities, the tabular +standard, with the understanding that the index number on the day of +payment should determine the amount of money to be paid. In neither of +these cases does the standard of deferred payments function supply any +reason for an increase in the value of the thing which serves as the +standard. + +In general, the standard of deferred payments and the measure of value +functions do not, _per se_, add to the value of money. The legal tender +function may or may not do so. The medium of exchange function, the +store of value function, the reserve for credit function, and the bearer +of options function, normally do occasion an added value which is to be +attributed to money, either as a capital increment, or as a rental. + +The question remains, however, as to the relation of the rental value, +and the capital value, of money. This question is not easy to answer. +As I have already shown, in the chapter on "Capitalization" and +elsewhere, various complications present themselves in the case of +money. (1) In the case of money, the rental, and the prevailing rate of +interest at which rentals are discounted to make a capital value, are +not independent variables, but tend to vary together. Thus, whereas +increased rentals would in the case of most income-bearers tend to give +a higher capital value, this is offset, in the case of money, by the +fact that rentals are subject to a higher discount. (2) In the case of +income-bearers generally, the magnitude of the income, or rental, is +causally prior to the capital value. The capital value, in our +illustration of the candle, the disk and the shadow on the wall, is the +shadow, while the rental is the disk. This is the general relation +insisted upon by the Boehm-Bawerk-Fetter-Fisher line of capital and +interest theory. Productivity theories of capital have been criticised +on the ground that capital value is not productive, that only concrete +capital-instruments are productive, and that they produce, not value, +but goods, that these goods receive value from the market, which is +reflected back, but discounted, to the capital instruments which +produced them, so that, in value-causation the line of causation is +precisely the reverse of the line of technological causation. Capital +instruments produce consumption goods, but the value of the consumption +goods is the cause of the value of the capital instruments. In the case +of money, however, this is not true. It is the _value_ of the money, the +capital value, which does the work that makes a rental value. The value +of the money is a precondition of the money-function. So far as money is +concerned, both "productivity theories" and "use theories" seem +vindicated. There is a "use," an "enduring use" in addition to the +"uses."[488] (3) The capitalization theory, as hitherto formulated, +assumes money and a value of money. It is a part of the general body of +price theory for which this assumption has been shown to be needed. + +With reference to the second, at least of these points, however, it has +been shown that money is not unique. Diamonds, and all other goods which +have as part of their function the conspicuous display of wealth, +likewise perform this function _because_ they have value. This gives +them an additional value. Diamonds are bought for this purpose, when +they would not otherwise be bought, or when they would not otherwise be +bought in such quantity. This additional value makes diamonds still more +effective as a means of displaying wealth, with a further increment in +their value, etc. We seem, here, to have an endless, and vicious, circle +in value causation, the value mounting indefinitely, building upon +itself, a sort of "pyramiding" process. But the limitation comes from +several angles. In the first place, _as_ diamonds rise in value, from +whatever cause, a smaller and smaller number of diamonds is required to +display a given amount of wealth! The increase in the value makes each +diamond so much more effective for the purpose in hand that it tends to +cut under the cause of the increase. These two tendencies come into some +sort of equilibrium. I suppose that by making strict enough assumptions, +and limiting the problem rigidly, it would be possible for the +mathematician to work out a formula for this equilibrium, letting the +increment in value grow feebler with each rebound, till at last it is +dissipated in infinitesimals. In the second place, diamonds are not +alone in performing this service. They must compete with other precious +stones, with the precious metals, with limousines and Turkish rugs, +with servants and livery, with houses and lots in restricted +neighborhoods, with opera boxes and memberships in clubs which confer +prestige, with a very wide range of goods, for the detailed discussion +of which I would refer again to Veblen's _Theory of the Leisure Class_. +The _differential_ advantage of diamonds, when it is borne in mind that +the conspicuous display of wealth is not the _only_ purpose, as a rule, +for which any of these things are bought, that the concrete diamond, or +other good bought, is a _bundle_ of valuable services,[489] of which the +displaying of wealth is only one, is not, necessarily very great. For +many people, other forms of wealth do better. And, as a rule, diamonds +would not perform that service satisfactorily alone. A large number of +diamonds, without proper "setting," in clothing, servants, house, opera +box, etc., would excite ridicule, and fail[490] in their purpose of +gaining social prestige. They must be part of a complex of goods of the +same sort, to accomplish their purpose. + +Now it is the _differential_ advantage of diamonds which makes possible +the extra value, in this use. If all wealth were equally serviceable in +conspicuous display, if cattle and barns and shares in a coal mine or +slaughter-house or glue factory could display themselves as well as +diamonds can, and if possession of these things conferred prestige as +much as possession of diamonds does, this differential advantage of +diamonds would disappear, and with it all extra value from that cause. +Diamonds are members of a _class_ of goods, a restricted, but still +large class, which possess this advantage. We may apply the old +Ricardian rent analysis here, arranging goods in a series from the +standpoint of their capacity to perform this additional service. Bread +would, for the purpose in hand, be a "no-rent" good. Ford automobiles +are probably nearly no-rent goods now! That the differential factor is a +_cause_ of value in land, as the Ricardian doctrine seems to hold, is +not, I think, true. If all land were of equal quality, and of equal +accessibility to the market, all land would still bear a rent, if it +produced goods which had value, and if the land were sufficiently +restricted in quantity.[491] But here is a case where the differential +factor is an actual _cause_ of value. If all wealth were equally +effective in displaying itself, no form of wealth could gain in value as +a means of display. + +This proposition calls for one important qualification. The fact that +wealth, in general, confers prestige is, undoubtedly, a source of +stimulus in wealth creation and acquisition, and a big source of the +value[492] of total wealth. It is probable, however, that it is so great +a stimulus to production that it defeats itself so far as the values of +_units_ of goods are concerned. It stimulates production, which reduces +the marginal values that arise from other causes. Thus, while a source +of additional value to the _aggregate_ of wealth, it probably reduces +the values of given items. + +I have dwelt at length on the case of diamonds, because principles +applying there will give us important clues to the case of the value of +money. + +Money, by being valuable, is so far equipped to perform the money +service. But its _differential_ advantage over other valuable things +comes from its superior _saleability_. Its original value comes from +non-monetary causes, and has been sufficiently explained in the chapter +on "Dodo-Bones" and in the chapter on the "Origin of Money." The extra +value which comes from the money functions rests chiefly in its superior +_saleability_. Saleability is itself a cause of additional value. But +here again we may arrange goods in a series, starting with the least +saleable, and ending in money. Money has an advantage, but its advantage +is not absolute. Under a system of free coinage, gold bullion is +virtually on a par with coin, and even without free coinage, bullion is +for many purposes as good, and for foreign exchange may be better. +Modern credit, moreover, as has been indicated before, tends to add to +the saleability of all goods, and so to lessen the differential +advantage of money. + +Here, again we may see the principle that the extra value that comes +from the differential advantage tends to limit itself. As the money-use +adds to the value of money, a smaller amount of money is required to do +the money work, and hence the source of the increment of value is cut +under. This principle will partly explain why the rental of money cannot +be capitalized in the same way that the rental of land can be. +Increasing the capital value of land is not the same as increasing the +productive power of land. But increasing the capital value of money does +mean an addition to the power of a dollar to do money work. It tends, +moreover, to lessen the work that there is for money to do, both by +reducing the total amount of trading, and by increasing the incentive to +the use of substitutes for money. Only a part of the value of the +services of money, thus, can be added to the capital value of money. +There is a further point which is important, as differentiating money +from diamonds: much more of the value of the services resting on the +value of diamonds can be added to the capital value of the diamonds than +is the case with money. The reason is that diamonds may give forth a +continuous flow, _in the same hands_, of the service of conspicuous +display of wealth. Money, however, can perform most of its services for +a given owner _only once_. For a given owner, it can serve only once as +a medium of exchange. For one owner, it can serve only once as legal +tender for debts. It can serve indefinitely as a store of value, or as +"bearer of options." In these cases, however, the relation between value +of service and capital value does work out in accordance with the +capitalization theory. The money thus held brings in no money income. It +is held thus only if the services which it performs are equivalent to +the income which would come if it were alienated, and something which +would bring in a money income were purchased in its place. Money may +have added to its capital value the value that is created by _one_ +marginal exchange, but the whole series of values which a dollar may +create in exchanges cannot be capitalized, if only because the same +owner cannot get them all. This holds strictly true only so long as no +credit arrangements exist. If loans of money can be made, then the +lender can take toll on successive exchanges, and get an income which +may be capitalized in part, subject to the limitation already discussed, +that increasing capital value of money cuts into the rental, and so, in +large measure, destroys its own source. + +Where money is not freely coined, there may be an increment, growing out +of the capitalization of the money-services, in the value of the coin. +The coin may be worth more than the uncoined bullion. This need not be +true. If the amount of money work to be done is not increasing, it will +not be true, unless the value of the bullion declines, and need not be +true then. But an agio on coined over uncoined metal is quite possible, +and has frequently occurred. Such an agio has limits, however. In the +first place, the bullion may be used as a substitute for coin, so +lessening the amount of work there is for coin to do, and lessening the +source of the agio. Bullion would tend to rise in value from being thus +employed, and coined money would lose in value from a reduction in the +services it performed. Further, _anything_ which has more than ordinary +saleability may be used as a substitute, in one or another capacity. +Again, the agio, if it appeared in a country where men are accustomed to +thinking about money, might well arouse distrust, lessen the scope of +the coin still further, and so cut into its own source. But such agios +have appeared, and while a pure case, where the sole source of the agio +is the values created in the money-functioning, is hard to find, I think +it is not to be questioned that cases where this is part of the +explanation have arisen. I should be disposed to find part of the +explanation of the rise of the rupee in India after the closing of the +mints in 1893 in this factor. There seems to be evidence, however, that +Laughlin is right, in part, in ascribing the rise to an expectation of +the adoption of the gold standard.[493] + +Modern money, in general, however, rests on a system of free, even +where not strictly gratuitous, coinage. Coined metal thus rarely gets, +save to a limited extent or temporarily, an agio over uncoined bullion. +Uncoined bullion is acceptable in a host of places where coin would +otherwise be used, particularly in reserves for credit instruments. +Bullion is even superior in international trade as a medium of exchange. +Credit paper (particularly bills of exchange), is superior to both in +international exchange, as a medium of exchange, because of various +reasons of economy. Such paper is even used in reserves in many places, +particularly by the Austro-Hungarian Bank. + +The fact of free coinage means, substantially, that the state has made +the money form a free good. How much value is thereby destroyed we may +best see if we ask precisely how much the money form could mean _at the +limit_. Initially, the money form means simply the certification of +weight and fineness by a trusted authority. It saves, therefore, the +delay and expense of testing the weight and fineness by assay, etc. It +saves the trouble and delay of subdivision of a formless metal. It +averts many difficulties. For small retail transactions, indeed for +retail transactions in general, the conveniences of coined over uncoined +metal are very great. Small transactions do not justify the trouble and +expense of assaying and weighing and subdividing gold! In a country, +therefore, where the bulk of the money work is in effecting small +transactions, we might expect a considerable agio for coined over +uncoined metal. This would be especially true if that country had few +facilities for credit substitutes for the coin, particularly for small +transactions. In a country like the United States, however, where checks +are often drawn for amounts less than a dollar, and where the bulk of +the gold, or standard money, is to be found, not in circulation but in +reserves, one need not anticipate that the medium of exchange function +would give a big agio to gold coin, even if free coinage ceased. So long +as coinage means merely a certification of weight and fineness, this +conclusion will hold. For purposes of large transactions, the item of +weighing and assaying would not be serious. Indeed, American banks are +accustomed to weigh even gold coin, in quantity. It goes by weight, +rather than by tale, and if light-weight, it counts for less than its +nominal value. The writer knows a bank which has a considerable store of +light-weight gold coin that has been in its vaults for over twenty +years. Such coin may be counted at par in reports by the bank to the +Government.[494] It might be paid out through the window to customers, +who would not weigh it, in case of a "run" on the bank. But it cannot be +used in dealings with other banks without loss. + +Does the legal tender aspect of coin count for more? Under a smoothly +working system of free coinage, where moreover, all forms of money are +kept at a parity by ready redemption, we have seen that the legal tender +feature makes no difference. Would it make a difference where coinage is +restricted? If we assume that the use of checks for small payments, and +the use of bullion in reserves, in a given case, prevents the existence +of an agio growing out of the other functions of money, I think it clear +that the legal tender feature alone will not create one. But suppose +that there is an agio from other causes, will not the legal tender +aspect of money tend to increase it? Will not men demand coin, which +bears an agio, rather than bullion, when they have the right to demand +either? And will not the agio then, in a way, grow out of itself, a +bigger agio appearing, because an agio has already appeared? It does not +seem to me that this need follow. If there be an agio, then creditors +will demand either coin, or bullion _on a different basis from coin_. +But so long as they get the benefit of the agio, either in the form of +coin, or of a larger amount of bullion, particular circumstances, rather +than a general rule, will determine which they will demand. The banker +might well prefer bullion. The international banker would prefer +bullion. The man who wishes money for retail transactions will take +coin. Men will use the legal tender quality of money as a means of +getting the benefit of what agio there is (though contract right, where +the contract calls for coin, would accomplish all that a legal tender +law would accomplish), but whether they take 23.22 grains of coined +gold, or 25.5 grains of gold bullion, will depend on which they prefer +in the circumstances. I do not see that the legal tender feature adds +anything to the case of restricted coinage that it does not add to the +case of free coinage.[495] In either case, there will be temporary +emergencies, when panics arise, when legal tender money gets an agio +over any possible substitute. Solvency may depend on it. This might +arise under free coinage, if the panic were acute, and if settlements +had to be made immediately. But as long as there is time for men to +work things out, I should not expect the legal tender feature, _per se_, +to add to the agio of coined metal even under restricted coinage. + +In general, the possibility of an agio for coined metal, under +restricted coinage, rests on the extent to which coin has a unique +function. In so far as substitution is possible, there is no room for an +agio. For many purposes, bullion may be substituted. To the extent that +credit is developed, and is flexible, various other substitutes are +possible. To the extent that barter can be used, still other substitutes +are possible. + +Among an ignorant people, little accustomed to developing new +expedients, having an economic life that is not flexible, having an +economy based on petty economic units, having little development of +credit, accustomed to the use of money in most transactions, money might +well be, in many connections, highly important if not indispensable. In +England, before the War, where no bank-notes under five pounds were in +circulation, and where small checks were little used, an agio on coin +might appear if coin got so scarce as to be inadequate for retail trade, +but for bank reserves bullion would have served virtually as well as +coin, and with the stock of coin she had at the time England could have +gone on for a long time indeed with no more agio than just enough to +prevent the melting down of the coin. In the United States, where checks +can be used for very small transactions, and where a high percentage +(very conservatively estimated by Kinley at from 50 to 60%) of retail +business is done with checks, the agio on coins of a dollar or over +growing out of retail trade might be expected to be very slight. On the +other hand, the legal requirements for reserves in specified types[496] +of money might, in time, lead to some agio. I do not think that the +reserve function in England would ever do so. If we could combine our +use of checks in retail trade with England's absence of legal reserve +requirements, I should think that the agio would have little chance +indeed of growing great! If to this could be added Canada's extensive +use of small elastic bank-notes, the chance would be still less. If +bank-notes of one dollar could be issued, the agio would be less still. + +It is in the case of coins of very small denomination that the agio +might appear most readily. Such coins, if limited in amount, and if +given the usual restricted legal tender,[497] do not need redemption to +circulate at face value, even when made of baser metals. It is quite +thinkable that such coins should, even when redeemable, circulate at an +agio over the redemption money. In small retail transactions the need +for money to do business is most imperative. Even here, however, there +is large flexibility. The present writer, during the period of money +stringency in the Panic of 1907, made much larger use of checks in very +small payments than was his usual practice, and the same was true of +various of his acquaintances. + +I think that the quantity theorist, with his doctrine of an unlimited +agio through the restriction of coinage proportionate to the +restriction, is best understood if we say that he has taken an +exaggerated estimate of the imperativeness of the need for formed money +in the smallest retail transactions as typical of the whole +situation.[498] I have elsewhere shown, however, that, in so far as +Kinley's figures for 1909 give us a clue,[499] the total retail trade of +the United States is less than one-eleventh of the total of all +transactions calling for the use of money and checks. Of that total +retail trade, the part in which money is actually used is, on Kinley's +high estimate, between 40 and 50%,[500] and the part in which money is +imperative is much lower still. Small retail transactions do not give +the type for the pecuniary transactions in the United States! They more +nearly do so in India, and the possibility of agio is, doubtless, +greater there. For our larger transactions, there is an almost +indefinite possibility of substitutes for coined money, if profits can +be made by making the substitutions. Beating the agio would be a source +of profits. + +I repeat what was said in the chapter on "Dodo-Bones" differentiating +this doctrine of the agio from the quantity theory doctrine: (1) This +doctrine presupposes value for the money article from some non-monetary +source. It relates only to a differential portion of the value of money. +(2) This doctrine denies the law of proportionality even for this +differential portion. (3) This doctrine is concerned, not with the +general level of prices, but with the absolute value of money measured +in the ratio of coin to bullion. + +Under the system of free and gratuitous coinage, no agio of coined over +uncoined bullion is possible. Where small brassage charges are made, as +in France (or as in England, where the interest lost during the period +of coinage is charged to the man who exchanges bullion for coin at the +Bank of England) there may be an agio of this amount, though it often +happens that this agio disappears, particularly in England. So perfectly +is bullion a substitute for coin in England, that the Bank of England +will often forego its privilege of taking the slight toll in interest, +and will credit men depositing bullion with as much as if they had +deposited coin. From what has gone before, as to the possibility of an +agio, I conclude that the United States, England, Canada, and possibly +France, would be unable to make large brassage charges. If the brassage +charge were much larger than the charges made by reputable and +well-known jewelers for assaying and weighing, etc., there would be a +large substitution of bars for coins, and the mints would have little to +do. However, it needs no arguing that with free coinage, and either very +low or no brassage charges, the value of bullion and of coin will, +quality for quality and weight for weight, be virtually identical, +within a narrow range of variation. + +What, then, shall we say of the way in which the forces drawing gold +from the arts into money manifest themselves? + +How describe the equilibrium between the value of gold as money and the +value of gold in the arts? How construct intersecting curves, presenting +a marginal equilibrium? The problem is baffling, and I frankly confess +that what I shall have to say does not satisfy me. I hope that some +critic may solve the problem better. I can point out the difficulties of +the situation, and can indicate reasons why the sort of solution which +the economist's training in marginal analysis leads him to desire are +not easily found. But I fear that I shall fail to satisfy the demand +for an application of curves to the problem! + +The first difficulty is that we are barred from the use of our +yardstick. Money is the measure of all things in economic theory--except +money and gold bullion! Of course there are economic values other than +those of gold which do not actually come into the market, but even there +we can commonly, by the accountant's methods, make use of the money +measure. In very high degree, our conventional curves of all sorts run +in money terms, and assume a fixed value of money. Clearly the money +curve of diminishing value for gold would tell us nothing. The value of +gold might sink as its quantity increased, but then the value of the +money-unit would sink _pari passu_, and so the curve, with ordinates +expressed in numbers of dollars per ounce, would not sink. The +value-curve of gold, expressed in money, is a straight line, parallel to +the X axis. Possible substitutes in the form of abstract units of +value,[501] or of composite units of goods, of an assumed fixed value, +will have to be used if anything is used, but they are less satisfactory +in the application, and leave the analysis a good deal less realistic. + +If this were all, the problem would be easy! But there is a second +difficulty. We find the factors requiring gold as money, if summed up in +a curve, presenting themselves as a call for the temporary rental of the +gold. The money functions are performed, in general, not by keeping +gold, and getting an endless series of uses from it, as in the arts, but +by passing it on, sooner or later. Even in the case of the reserve +function, the bearer of options function, and the store of value +functions, it is not expected to hold the gold indefinitely--always +there is the anticipation of some time when it will be passed on again. +A curve for gold in the monetary employments, therefore, would be a +curve showing the diminishing values of rents, or particular services +rather than a curve for capital values. The curve for gold in the arts, +however, would be a curve showing the diminishing _capital values_ of +units of gold, as the supply in the arts is increased. The two curves do +not run in common terms. But another and more fundamental difficulty. In +the case of wheat, we may construct our curve free from complications, +in idea, at least. On the base line, we lay out quantities of wheat. For +each quantity of wheat, we erect an ordinate, a sum of money, or a +number of abstract units of value, as the case may be. Connecting these +ordinates, we have a curve, showing how the value (or the money-price) +of wheat descends as the quantity of wheat increases. Given the shape of +the curve, and given the number of bushels of wheat, the marginal value +of the wheat is given. In idea, at least, it does not matter, for the +shape of the curve, whether the amount of the wheat is great or small, +whether the marginal value of the wheat is low or high. If there are ten +thousand bushels only in the market, wheat will be worth $5 per bushel. +With 100,000 bushels, it is worth 40c. The fact that there are 100,000 +bushels does not lessen the magnitudes on the higher portions of the +curve. The nature of the services which wheat performs is not affected +by its value. This is _not true of gold_, either in the arts or as +money. In the arts, I have already shown that one function of gold is as +a means of conspicuously displaying wealth. Gold is like diamonds in +this. _Because gold is a valuable_, it gets an additional valuable +service. This additional valuable service enhances its value. The thing +is checked, however, before an endless circle is created, by the fact +that as gold rises in value a smaller amount of gold will display a +given amount of wealth. The value-curve for gold in the arts, +therefore, is not a simple thing like the curve for wheat. It turns upon +itself, in ways that I see no graphic device for presenting. This is +even truer for money. Men wish to have, when they seek money, a quantum +of _value_ in highly saleable form.[502] The curve for the value of the +services of money presupposes a fixed capital value of money. It is the +capital value of money which does the money work. Given a value of +money, and given the values of goods, we may see how much money is +required to effect a given exchange or perform some other money service. +Then, knowing how much value will be created by each exchange, or other +money service, we may arrange the services in a series, a scale of +descending importance, and get a curve. This curve is, in fact, the +curve which presents itself in the money market. There we find a curve, +running in terms of money itself, so much money for the use of money for +such a length of time. But this is a curve of demand for money funds, +rather than for gold as such. The "supply" that corresponds to this +"demand" is, not gold, but all manner of credit instruments, chiefly +bank-deposits, expressed in terms of gold. Such a curve is clearly not +to be put into equilibrium with the value-curve for gold in the arts, +(1) because it assumes a fixed value for money (2) because it is +concerned with temporary rentals, and not capital values, and (3) +because the demand it expresses is not for the use of gold alone. + +We may get some aid in reducing these complexities to familiar terms if +we employ the device of assuming an equilibrium between gold in money +and gold in the arts, without trying to explain in quantitative terms +how that equilibrium is arrived at, and then see what causes will lead +that equilibrium to shift. In getting the laws of _change_, we may get +closer to the causes of the phenomenon itself. The effort to reduce the +thing to precise mathematical form requires a degree of simplification +which seems to me likely to rob an answer of much significance. + +Assuming that the equilibrium is reached, we may see what factors would +tend to cause gold to go into the money-use, and what factors would tend +to draw gold into the arts use. We may also see how these changes from +one side or the other would modify the value of gold. + +Assume that a manufacturing jeweler has extra demand for his products. +His products, of course, are composites of gold, labor, and other raw +materials, etc., but part of the extra value that comes to his products +attaches itself to the gold that is in them. He now has an incentive, +which was lacking before, to melt down full weight gold coin in his +possession, or to buy gold bars which might otherwise have been coined. +To buy the gold bars, however, probably means that he must have +accommodation at the bank. He borrows from the bank the amount he needs, +giving a short-time note, since he expects to make up his gold and +market it in a fairly short time. The paper of manufacturers of gold +will commonly stand well in the "money market," and this is especially +true of those in whose hands the gold is not worked up into such +specialized forms that the value of the bullion is a minor matter. (I +find it necessary to refer frequently to the money market, though a full +analysis of money-market phenomena cannot come till after our discussion +of credit.) If he must borrow to get the gold, _then the money-rates +will come into comparison with the profits he expects to make from +working up the gold_. This will usually be true even if he melts down +gold coin already in his possession. He might deposit that gold, and so +reduce his expenses at the bank, either buying back his own discounted +paper, or getting interest on daily checking account. If he has to +borrow to get the gold, he may get it either by drawing gold from the +bank directly, or by giving a check on the bank to a bullion dealer, +which may ultimately lead to a diminution in the bank's supply of gold. +However he gets the gold, there is bound to be some reaction, (1) on the +bank's supply of gold, (2) on the supply of loanable funds in the money +market, and hence (3) on the money-rates themselves. If he borrows from +the money market, he affects the money-rates directly (even though +probably, in a given case, not noticeably); if he melts down coin, +instead of depositing it (or paying it out to others who may ultimately +deposit it) there tends also to be less gold in the bank's vaults; if he +buys gold with his own funds in the bullion market, the supply of +current bullion for which the banks also compete is reduced. In any of +these cases, the banks have less gold than would otherwise be the case. +The relation between gold reserves and the supply of money-funds has +been partly discussed already. We have seen that there is no +proportional relation, as Fisher, and other quantity theorists contend. +Loanable funds, on a given gold reserve, are highly elastic. But the +elasticity calls for higher money-rates, and higher money-rates tend to +reduce the volume of trading, and check the demand. Borrowings from the +money market by workers in gold, therefore, are much more significant +than borrowings by other manufacturers or merchants, because the latter +are content with credit devices, for the most part, while the workers in +gold withdraw gold itself from the money market. It is, moreover, harder +for the money market to resist extra demand from the jewelers than from +many other interests. The assets of the jewelers, especially from those +who do not work the gold up in highly specialized forms, are exceedingly +liquid. Their paper, therefore, is exceptionally good in the discount +market. Usually, too, the larger jewelry houses have specially good +general credit and high reputation. There is, then, less disposition for +the market to look askance at an unusual supply of their paper than +would be the case with many other sorts of paper. They tend to get about +as low rates as anyone else in the market. A money market under +centralized control seeking to protect its gold, might tend to raise +discount rates on jewelers' paper, but a competitive money market is +very unlikely to do so. + +An increase in the value of gold in the arts would, thus, reflect itself +pretty quickly in the money market, first in the form of added value for +the services of money, and then, secondly, in an increase in the capital +value of money. Indeed, an increase in the value of a single rental is +an increase in the capital value also, since the value of the single +rental is one portion of the capital value. Not only does it mean a +higher capital value for gold, but it consequently tends to mean a +higher "price." It does mean a higher "price" for present money as +compared with future money. It tends, also, to mean a higher "price" of +money in terms of other goods. Meeting higher money-rates, all borrowers +tend to borrow less, and to buy less, to offer less money for goods. It +need not follow, however, that the rising value of gold reduces prices. +The rise in the value of gold in the arts may well be a manifestation of +a general rise of values. General prosperity, rather than causes +affecting the value of gold in the arts alone, may have occasioned the +increasing demand for gold in the arts. This would mean rising values +for goods at large. It might well be, therefore, that the rise in the +values of goods would offset the rise in the value of money, and that +prices of goods would rise at the same time that gold is being withdrawn +from the money market to the arts. + +Business in general, as well as the jewelers, may be making increased +demands on the money market. This would tend still further to raise the +money-rates. It would also, however, tend to increase the supply of +money-funds. Commercial and industrial paper, in a time of buoyancy and +expansion, is particularly acceptable to the banks, and they are likely +to expand their loans despite the failure of gold reserves to keep pace. +They simply get along with smaller reserves. Higher money-rates in such +a case tend to reduce the volume of business, but need not actually +reduce it, if there are bigger profits than before anticipated in +business transactions. Not absolute money-rates, but money-rates in +relation to anticipated profits from the use of money, are significant. +There is large room here for flexibility, elasticity, etc. There is much +slack to be taken up by the money-rates, much slack in the fluid +substitutes for money in various functions, and much slack to be taken +up by the volume of trade. But all this will best appear after our +discussion of the money market. + +I have said enough to indicate the character of the factors immediately +determining the equilibrium between gold in the arts and gold in the +money employments. In the preceding discussion, also, I have discussed +the more fundamental factors governing the value of gold in both +employments. The problem of translating the fundamental theory of value +into money market terms, and of translating the phenomena of the money +market into terms of fundamental values is not easy. Most of our value +theory in the past has been concerned with individual psychology, Crusoe +economics, trading in small markets with a few buyers, barter +transactions, etc. It has been abstract and unrealistic. The practical +students of the money market, who are immersed in the facts of modern +money, have got little help from it, and have often been scornful of it. +I hope to be able to contribute something to bringing the two methods +of approach to common terms. They are correlative aspects of the same +problem. Each gives highly important clues to the understanding of the +other. Neither can be understood without some understanding of the +other. A theory of value which cannot be applied in the money market, +the stock exchange, and the great field of modern business generally, +has small _raison d'etre_. + +In the next chapter I shall take up the problems of credit, and the +money market. + + + + +CHAPTER XXIII + +CREDIT + + +Analysis and description are much more important than definition. +Definition at the beginning of a study is frequently a fetter, rather +than an aid to thought. This is especially true in a field where +phenomena overlap and interlace, and where the "pure principle," +"essence" or "_Wesen_" of the thing defined never presents itself, but +is only to be reached by violent abstraction. To pick out one +element--as "futurity"[503]--as marking off credit from other things +would be an illustration of this. Or to take the notion of _promise_, or +contract obligation, in connection with futurity, is likewise to limit +the field unduly, on the one hand, and to include things which do not +belong there on the other. Thus, a contract whereby A is to build a +house for B by the end of a year, receiving at that time, or in +instalments as the work proceeds, a sum of money, is not a credit +transaction. We have, however, promise, futurity, and a future payment +of money all called for in the contract. On the other hand, if A sends B +a telegraphic order for money, which B receives three minutes after the +money is entrusted by A to the telegraph company, we have a credit +transaction, with no element of futurity in it. Certainly there is less +of futurity there than in the case where a laborer, working all day, is +paid only at night for work done in the morning. Futurity enters into +the values of all goods which are not destined for immediate +consumption--capital values of long-time goods are discounted present +worths of _future_ values. Contracts, promises, and beliefs in promises +run through the whole range of economic life,--the domestic servant, +paid weekly, illustrates all three. Yet only a special class of these +economic activities are commonly counted as credit transactions. Credit +is really a part of the system of economic value relations not easily +marked off in economic nature from the rest. Its clearest _differentiae_ +are juridical rather than economic. It will be the purpose of the +present chapter, in part, to blur, rather than to make precise, the line +between credit and non-credit in economic phenomena, and to assimilate +the laws of credit to the general laws of value. + +This will involve, however, a careful analysis and precisioning of +certain phenomena commonly counted as credit phenomena. Buying and +selling on the one hand; borrowing and lending on the other: the +distinction seems clear. It is in law. But what is it in economic +nature? When a merchant discounts his own note at the bank, it is +borrowing. When he discounts the note of another, his debtor, it is +selling. If he writes before his endorsement of the note, "without +recourse," (unusual at a bank, but common enough with real estate +mortgage-notes) he has made a perfect sale, and is entirely out of the +transaction. Is it, however, in economic nature a different transaction +from the original one in which he got the note from a borrower? Legally +bonds are credit instruments, and stocks are not. Stocks represent +_ownership_. But practically, as an economic matter, both represent the +alienation of control, on faith, to a small group of men, and +practically, too, the difference between preferred stocks and bonds is +often very slight. Whatever the legal rights of a bondholder, under the +terms of his contract, the legal fact itself often is, under the growing +practice of receiverships, that he cannot exercise his right to +foreclose without such difficulty that it doesn't pay to do it. Very +frequently indeed the junior bondholder will come out of a +reorganization as simply a preferred stockholder--which is what he +practically was all the time. He couldn't vote as a bondholder, but his +voting rights as a stockholder commonly mean little! As a bondholder, if +he held enough bonds, he might even have more influence on the affairs +of the corporation than as a stockholder. The market is moved by other +forces than the legal distinctions in corporate contracts! And market +facts are not necessarily correctly told by the accountant's categories +either. I shall trouble myself little, in what follows, with the +juridical and accountancy problems of credit, save in so far as these +bear directly on the more pertinent economic aspects of the matter. I am +interested in the question of credit as a part of the problem of value +and prices--and particularly from the standpoint of the problem of the +value of money. + +What difference is made in values and prices by lending and borrowing? +What kinds of lending and borrowing are there? What shall we say of +bank-notes, of bank-deposits, of bills of exchange? What difference is +made by the money market? Behind the legal forms and the technical +methods, what are the psychological forces at work? How are these +psychological forces modified by the technical forms and methods? What +are the economic differences between long and short time loans? How +shall we draw the distinction between the "money-rates" and the long +time interest rate on "capital?" Why can some things serve as collateral +in the money market when others cannot? What sorts of credit are +appropriate to commerce, to manufacturing, to agriculture? Is credit +capital? Is an increase in credit an increase in values? The last two of +these questions imply that we have a definition of credit. Perhaps the +answers to some of the other questions may have given us such a +definition. But analysis and description will precede definition. + +The etymology of "credit" has sometimes been taken as the clue to the +meaning of the word for economics, and the idea of confidence, or +belief, has been made the heart of the matter. A man has good credit +when others have confidence in his integrity, etc. Men lend to others +when they can trust them to repay. Doubtless something of this sort was +responsible for the original choice of the word. But when loans are made +on good mortgage security, or on collateral security, the personality of +the borrower may count for little or nothing. Confidence there is, but +not confidence in the intentions of the borrower. The confidence is in +the "goodness" (_i. e._, the value and marketability) of the collateral. +The same questions are raised by the lender here which he would raise if +he were going to buy the thing, instead of lending with it as security. +None the less, I think that in the etymology of the word we have an +important clue. We must generalize the notion, however, beyond the +limits of confidence in personal intentions. It involves confidence in +the general economic situation, in the future of business, in the +permanence of values, in the certainty of future incomes, etc. Thus +viewed, the element of confidence, though important in highest degree, +is not peculiar to the phenomena which we call credit phenomena in +economics. It appears wherever there are values which depend on future +events. One does not need much confidence in buying potatoes or apples +or meat--though in the case of meat quite a lot of confidence may be +involved--and misplaced! But whenever the future is involved, whenever +capital values of any kind are involved--lands, stocks, bonds, houses, +horses, manufacturing equipment, etc.--the element of belief, +confidence, hopeful attitude toward the future, is quite as much present +as in the case of a loan. Nor is the element of personal confidence +less present, often, in these things than in the case of a loan. Very +often the value of a horse may depend in considerable degree on the +integrity of the man who offers it for sale; the value of a piece of +land may be much enhanced if a trustworthy owner makes certain +statements as to the yields he has got from it; the values of stocks +(really credit instruments, from the angle of economic analysis) may +depend very much on the personality of the organizers and managers of a +corporation. Personal prestiges may count for much more in these cases +than in the case of a collateral loan. + +Further, in connection with the element of belief, or confidence. +Borrowing is expensive, and men do not borrow for amusement. That +borrowing and lending may increase, it is not enough that lenders have +confidence in the ability of borrowers to repay. Borrowers must also +have confidence in the future of their businesses, in their ability to +make enough out of the loan to pay the expense involved, and have a +surplus left over. I abstract here from consumption loans. They play a +very minor role.[504] The analysis in an earlier chapter, based on +Kinley's figures, showing that retail trade is less than one-eleventh of +the total pecuniary transactions in 1909, and that the percentage of +credit instruments used in retail trade is much lower than in other +transactions, will justify us, when quantitative questions are involved, +in abstracting from consumption loans. Since such loans will be chiefly +employed in retail buying, and since we know that most retail buying +does not result from loans for consumption purposes, we may conclude +that modern credit is overwhelmingly of a different sort. Most of it +arises from business activities of one kind or another, and rests on +expectation of profit and loss.[505] Such loans are not made when +borrowers, as well as lenders, have not confidence in the transactions +they mean to put through. + +So far the thing has run in terms of individual calculation of profit +and loss. But even the most sagacious business men do not play a lone +hand. No one is uninfluenced by the expectations and feelings of others. +In general, business confidence is in large degree a matter of social +psychology, resting on suggestion, contagion, etc., as well as on cool +calculation of profit and loss. Even where men are able in considerable +degree to free themselves from the prevailing optimism or pessimism, +they must take it into account. The man who extends his business when +nobody is in the mood to buy, when no one will make contracts with him, +runs a very fair chance of bankruptcy, even though there be, in the +technical facts of industry, no reason for the prevailing pessimism. A +man with large resources, which are not fully employed, seeing that the +prevailing "bad business" is "largely psychological" may, indeed, take +advantage of the fact, get his labor and raw materials cheaply, and +produce some staple in advance of his market. If he can afford to hold +his surplus, he may make large profits by so doing. But usually business +men will not, in such a situation, have the surplus resources to enable +them to put through such an undertaking, and hence, even though they may +recognize that the rest of the business world is irrational, they must, +perforce, conform to its irrationality, and their sober estimate of the +prospects of a given undertaking may be just as much adverse as if they +shared the feeling of gloom which all about them feel. They meet it +from the banker from whom they wish to borrow. Even if able to borrow, +they meet it from the dealers to whom they are accustomed to sell their +products. The prevailing gloom is as much a fact with which they must +reckon as is the price of their raw materials, or the technical +qualities of those raw materials. + +Further, business confidence is not a matter in which each man counts +one! There are centers of prestige, men and institutions whose attitude +toward the future counts heavily indeed in determining the attitudes of +others. These prestiges may arise from various causes. Recognized wisdom +and probity may give a man great prestige in economic matters. There are +financial writers and students of the market, not necessarily men of +great wealth, whose opinions are exceedingly influential in making +business confidence. The wisdom without the probity is not enough. Some +men, known to be sagacious students of the market, have been known to +succeed in their plans by telling the truth, with the result that +everybody else did the wrong thing! They made business confidence, but +not the sort that was complimentary to them. Other men have prestige, +influence in making business confidence, by virtue of possession of +large wealth. They are, first, in position to lend largely. Their +decisions count directly for more than the decisions of thousands of +other men. The very fact that they have confidence in the future, apart +from anything else, means a tremendous increase in _effective_ business +confidence--which we are here concerned with. The optimism of a man who +can neither buy nor sell nor borrow nor lend, because he himself has no +economic resources, and no prestige, is like the desire of a penniless +beggar for an economic good--its effect on the market is not great! But +further, the fact that a rich man is lending makes possible activities +which would not otherwise be possible, and so justifies confidence on +the part of those who wish to deal with those to whom he lends. Such a +man may, on the other hand, borrow. His borrowing, for business +activity, justifies confidence on the part of those who would deal with +him. Quite apart, therefore, from any influence on the opinions of +others growing out of respect for his judgment, or less rational +reaction to him, he can do much to make or unmake business confidence. +But commonly, also, such a man is a center of prestige, as well as a +controller of economic power by virtue of his wealth. Men look to him +for their cue. If _he_ has confidence enough in the future to risk his +great wealth, surely smaller men with smaller interests need not be +afraid. Vitally important centres for the making and controlling of +business confidence are the banks. Having intimate knowledge of the +affairs of many business men, of business men in many different lines, +they are in a position to judge wisely of business prospects. Having +great power to make or refuse loans, they can encourage or chill the +enthusiasm which business men may independently develop. The whispered +word of a banker may well count for more than the half-page +advertisement of a promoter. But the banker is not all powerful. His +influence is much greater, often, in restraining than in evoking +business confidence. Bankers may during long periods be quite unable to +increase their loans, though they tempt borrowing by easy rates. + +Business confidence is a fact of social psychology. It is an organic +phenomenon, with radiant points of control. It is a matter of +inter-mental activity, rather than a thing in which each man makes an +independent choice. + +But this is to say nothing of credit phenomena that is not true of all +value phenomena. All economic values are social values. The values of +wheat or sugar or bicycles are social values. There are centers of power +and prestige, growing out of the distribution of wealth, or various +other social factors, which have a dominating influence on economic +values, as a rule. Credit phenomena are merely part and parcel of the +general system of economic motivation and control. + +In _Social Value_ (pp. 102-103) I have denied the doctrine of Meinong +and Tarde that explicit belief, existential judgments, are essential to +the existence of values, taking value in the generic sense, which +includes aesthetic value, religious and patriotic value, legal, moral, +and other values. I have pointed out that we do, at times, value ideal +objects, the creatures of our imaginations. The dead sweetheart, or the +Beatrice that never was (or that never was what she was imagined to be) +may have tremendous value. Not merely things hoped for, but things +hopelessly gone, as "The Lost Cause" to the Southerner, may be objects +of value so high that other things, known to be real, may sink into +insignificance beside them. Even in these cases, however, there must be +a "reality-_feeling_" an unconscious presumption or assumption that the +object valued is real. Indeed, belief, as distinguished from mere +ideation, is an emotional "tang," an essentially emotional, rather than +intellectual, fact. If it be present, the ideation and explicit judgment +may be dispensed with. + +It is, however, characteristic of economic values, particularly of the +values of instrumental goods and of the goods with which business men +make profits, that the tendency to raise the question of reality, to +require explicit judgment, is strong. The successful business man is +necessarily the man who does this, who does not too highly value the +creatures of his imagination, when he imagines a vain thing. One need +not, perhaps, seriously raise the question as to the reality of the loaf +of bread he buys. Explicit judgment there would be superfluous. But +very serious questionings come in whenever lands or houses or +securities or bills of exchange come in. One needs to know what the +facts are, and to make judgments based upon them. Hence, for all values +of capital goods and income-bearers, for the values which pass in +wholesale and speculative trading in general, the matter of _belief_ is +vitally important. Here, again, then, we have nothing in the +psychological principles underlying credit phenomena to mark them off +from the general field of value phenomena. + +The general laws of value, then, apply in the case of credit phenomena. +We find nothing unique in essence in them. The juridical relations, +also, in so far as they have economic significance, shade into one +another. To buy a bond from a bondholder is purchase and sale. To pay a +borrower money for his personal note is lending. But from the standpoint +of the theory of value and prices this distinction may be ignored. We +may extend the idea of buying, selling, and price to cover all contracts +where values are balanced against values, and expressed in terms of each +other. Future money has its price in present money, just as much as +present wheat has its price in present money. Really it is not future +money against present money. It is a case of _rights_, which involve the +payment of money in the future, sold for money, and priced in money. In +general, it is _rights_, rather than _things_, which pass in economic +exchange. Physical delivery does not constitute selling. Delivering a +load of wheat to a railroad does not constitute sale of the wheat to the +railroad; selling a farm does not involve any physical moving of the +farm. Rights, _in personam_ or _in rem_, are objects of economic value, +and the exchange of these rights makes up the bulk, if not the whole, of +economic exchange. (Exchange may be limited to the transfers of juristic +rights, without value being so limited. I have discussed the relations +of value and exchange in the chapter on "Value," above.) Property rights +are commonly conceived of as the proper objects of buying and sale. +Contracts involving the future services of free men stand legally on a +different footing from contracts regarding physical goods. But economic +analysis is not greatly concerned with these distinctions, except in so +far as they affect the values of the things exchanged, and so the terms +of the exchanges. I do not believe that the legal distinctions can be +made to run on all fours with any significant economic distinctions, and +shall not undertake to make them do so. In the phenomena we have simply +cases of buying and selling (in a generalized sense of those terms) of +_rights_, at _prices_ (by a very slight extension of the term, price, to +which the market is well accustomed). The terms of these exchanges, the +prices, are governed by values, social economic values, in no wise +different from the values which govern the prices in exchanges which we +do not class as credit transactions. I say that credit phenomena are +exchanges of rights. This is true of all exchanges. We do not exchange +rights for money. We exchange rights to other things for rights to +money. The mere physical transfer, even of money, does not give rights +to the money. I may merely be giving you the money for safe keeping, or +for use for my purposes. While the law makes the rights to money that +has left the hands of its owner less lasting, as against innocent third +parties, than in the case of other objects, and while the right to money +is always, or almost always, met by returning other money of equal +amount, even in the case of money it is a right, and not a mere physical +transfer, that is significant. + +Our problem regarding credit is, then, much simplified. We have simply +to pick out certain economic exchanges to which the name of credit +transactions has been applied,--a various and heterogeneous set of +exchanges, in many ways--and study them, to find their peculiarities. +These peculiarities will not make them exceptions to the general laws of +value. They will make them merely special cases. To find essential +principles marking off credit transactions, at large, from non-credit +transactions is an exceedingly difficult thing. There are more +differences among credit transactions themselves, than there are between +the genus, credit transactions, and the class of things not called by +that name. + +Thus, monthly payments of rent, of wages, of college professors' +salaries, are not commonly called credit transactions. The monthly +payment of grocery bills, or of telephone bills, involves credit. Where +is a real difference to be found? On the other hand, between book credit +between grocer and patron on the one hand, and a bank-note or deposit +credit on the other, the difference is large, in many practically +important ways. Between a call loan and a ten year agricultural +mortgage-note, the differences are even greater. + +One may be disposed to find the differences between credit transactions +and non-credit transactions in the fact that the former stipulate a +definite sum of money, due at definite times. This would partly +differentiate a bond, say, from a stock. The bond not merely calls for +stipulated yearly payments, but also calls for a definite payment at the +end. This would, however, exclude British Consols from the list of +credit instruments! British Consols differ from safe preferred stocks in +legal, rather than in economic, ways. Legally they are alike in that no +terminal payment is called for. Practically they are alike in that +annual regular sums may be expected. It may at least be said of credit +transactions that stipulated money payments, either at a different time +or a different _place_, are called for. This would include the +telegraphic transfers of funds, and would exclude the case where A, a +farmer, does a day's work for B, a neighbor, for the promise of a day's +work in return at a later season. The latter transaction involves many +of the elements that definitions of credit have included, but I think +that we may at least limit our conception of credit transactions to +transactions within a money economy, where money, as a measure of +values, functions in the calculations. Shall we, however, limit credit +transactions to cases where a stipulated _amount_ of money is named in +the contract, for a stipulated time? + +Shall we exclude contracts where the payment of money is made contingent +on anything? By contingency here I mean legal contingency. This test +would exclude the highest grade preferred stock. It would include the +shakiest bonds that contained, in the terms of the contract, no +contingency. But where, then, would one place such an instrument as the +Seaboard Airline Adjustment 5% Bonds, which may default in a given year +half of the interest, if it is not earned,[506] and which yet call for +the payment of the principal at a stipulated time? + +What shall we say of "borrowing and carrying" transactions on the stock +exchange? Is not the loan of stocks a real credit transaction? +Ordinarily, when stocks are put up as collateral, one thinks of the +money as being lent, and the stock merely as a pledge. But in the case +of borrowing stocks by a bear to deliver next day, the transaction is +definitely thought of as a loan of stock. It is sometimes paid for, the +bear paying the bull a premium, instead of receiving interest on the +money he has turned over to the bull as a "pledge." The more usual +thing, is, of course, for the bull to pay the bear interest. But in a +contract like this, there are many contingencies. As the stock rises in +value, the bear must lend more money to the bull; if the stock falls, +the bull must return part of the money to the bear. Both times and +amounts are here contingent, even though in the end the amounts lent and +repaid balance. Call loans, of course, do not call for payment at a +stipulated time, and the same is true of bank-deposits and bank-notes, +and of many other forms of credit. Interest on deposits in mutual +savings banks is contingent, legally, as to amount. Are insurance +policies credit instruments? What of endowment policies? + +It is easy to draw legal distinctions in all these cases, but to show +that definite and uniform economic consequences flow from these legal +distinctions is quite impossible. Rather, it is easily possible to show +that uniform or certain economic consequences do not, in general, flow +from them. + +I shall refrain from the effort to give a general, fundamental +definition of credit. I shall rather discuss certain of the more +important types of what have been called credit, with a view to seeing +what bearing they have on the problems with which this book is +concerned; the value of money, and prices. The general class of +transactions to which the name, credit transactions, has been applied +may be roughly designated as transactions in which the consideration on +one side, at least, is the assumption of a debt, running in terms of +money (though not necessarily to be paid in actual money), payable +either at a future time or at another place. Objections can be found to +this definition. It does not meet the fundamental test of a definition +that, for the purpose in hand, it should seize upon the essential and +unique characteristic of the things marked off. I am not sure that it +meets the tests of inclusiveness and exclusiveness even for those +transactions which we call credit transactions. Thus, if A and B go to +the bank together, and A there buys B's horse, standing in front of the +bank, giving B in return a check, which B immediately cashes in the same +room where the check is drawn, the idea of different time or different +place is not realized in any but a technical sense. A, in drawing the +check is, of course, assuming a debt. The check, if repudiated by the +bank, becomes a note, which A must pay. A, moreover, is paying B, not +with money, but with the transfer of a claim on the bank, and the fact +that his check, if unpaid, becomes a note is not the main fact about the +check. Understanding our definition of credit to cover this case also, +however, and attaching no fundamental importance to the definition save +as a means of marking off a class of more or less related phenomena +which we mean to discuss, the definition will serve. + +Thus defined, we have in credit a concept susceptible to quantitative +treatment. Debts, in terms of money, can be summed up, and we may have +the concept of the "volume of credit" as the sum of such debts at a +given time, or through a given period of time, or as an average through +a period of time. We may distinguish credit transactions from credit, +defining credit as the volume of debts, and credit transactions as +transactions in which the debts are passed in exchange. This would be to +broaden the notion of credit transactions beyond the usual conception, +since it would include transactions in which A sells ("without +recourse") B's note to C. It would also include cases where bonds are +sold. It would exclude cases where stocks are sold, since they are not +legally debts. Some would prefer to limit the notion of credit +transaction to transactions in which there remains some contingent +responsibility on the part of the one who uses the credit instrument, +but this would be to deny the name, credit transaction, to cases where +bank-notes or government paper are used in payments, as well as to deny +it to the case where bonds are sold. It is not important, for my +purposes, to draw a sharp line about the concept, credit transaction, +however. And about the concept credit itself I have drawn a line resting +on a legal, rather than an economic, distinction. + +Within the field of credit, thus defined, we may single out for especial +consideration certain forms of demand or short time credit, particularly +bills of exchange, bank-notes and bank-deposits, and merchants' +book-credit. We shall also have something to say regarding long-time +credit, including bonds, and mortgage-notes that have no general market. + +All these debts in terms of money, to which, in the aggregate, we have +given the name, volume of credit, have grown out of _exchanges_. +Exchange is here used in a wide sense, and is not confined to the case +where goods or services are bought and sold. It is an exchange, if a man +gives his note to a banker in return for a deposit credit. But, on the +assumption that exchanges are made only when gains are to be realized, +it follows that all debts, and so all credit, have been created in view +of anticipated gains (or to avert anticipated losses). In a society +where everything is in equilibrium, a "static state," where there are no +"transitions" to be effected, where there is no occasion for +speculation, and where exchanges of lands, etc., are negligible, the +volume of all exchanges, including those where debts are passed in +exchange, would be small. The occasion for the creation of the debts +which make up the volume of credit would not be nearly so numerous as +under dynamic conditions. The _volume_ of credit, in other words, is +largely a function of dynamic conditions, even though credit would exist +in a static condition of economic life. The bulk of credit, as the bulk +of exchanging, grows out of dynamic conditions, transitional changes, +and the like. + +This will be clearer when we raise the question as to _why_ debts are +created, as to what function debts perform in economic life. Why should +a man borrow? Let us suppose that a farmer has 600 acres of land. He +wishes to sell 100 acres, and use the proceeds in buying equipment for +his farm. But he finds it difficult to sell the 100 acres. There is no +ready market. He can sell it immediately only at a great sacrifice. By +waiting, and looking industriously for a customer, or by engaging a real +estate dealer to do so, he could finally find a buyer, but the thing is +slow and uncertain, and he wishes to get the equipment at once. He +borrows, therefore, giving his farm as security, or a part of the farm +as security. He exchanges a claim on the future income of the farm for +present money, and with this he can buy the equipment he needs. The net +result has been that the credit transaction has transformed his +unmarketable quantum of value into a marketable form of value. He has +been able, by an indirect step, to do what he could not do directly--to +trade a part of the farm (which in its economic essence is a prospect of +future income) for the equipment. In this illustration, _credit has +functioned as a means of increasing the marketability or saleability of +non-pecuniary forms of wealth_. Credit is primarily a device for +effecting exchanges that could not otherwise be effected, or for +effecting exchanges more easily than they could otherwise be effected. +This means that credit transactions are a part of the productive +process, and that they increase values. It is the function of credit to +universalize the characteristic of money, high saleability. It is the +function of credit to "coin," so to speak, rights to goods on shelves, +lands, etc., etc., into liquid rights, bearing the dollar mark, which +are much more highly saleable than the rights in their original form +were, and which often become as saleable as money itself, functioning +perfectly as money. + +Credit thus tends to universalize that characteristic which Menger[507] +considers the unique characteristic of money. By means of credit +transactions, a man borrows up to 50% of the value of the farm, makes +his farm in effect, 50% saleable or fluid. The man who owns livestock +may not be able, on a given day, to market them without loss, but he can +use their value in the market, up, say, to 75%, by a loan. The man who +owns a hundred shares of United States Steel may not be able, at a given +time, to market them to his satisfaction--though in the case of articles +and stocks dealt in the speculative markets saleability is very high +indeed, and in the case of United States Steel, in particular, the +"spread" between "buying price" and "selling price" is very narrow--but +he can borrow, with the stock as security, up to 80% of its value. On a +bond of the United States government, he may borrow up to 100%.[508] The +process of creating credit is a process of transforming rights from +unsaleable to saleable form. Often this means the subdivision of rights, +preferential rights to a _portion_ of the value of a piece of wealth +being more saleable, because of greater certainty, than the total right +to the whole. Another reason why partial rights may be more saleable is +that the value represented by each partial right is smaller. It is +easier to market things worth a thousand dollars than things worth fifty +thousand, as a rule. In any case, a chief economic function of credit +is,--_the_ chief function for our purposes--to make fluid and saleable +articles of wealth other than money; to universalize the quality of +saleability. + +This justifies us in our contention made before that _all_ corporate +securities, whether stocks or bonds,[509] are, in economic nature, +alike. Driven to a legal concept for a definition of credit, we were +obliged to exclude stocks from our rough definition. But corporate +organization does precisely what the various other transactions that we +have called credit transactions do. Lands and buildings and machinery, +or the roadbed and rolling stock of a railroad, are highly specialized, +often unfit for use in any form other than that in which they now +appear. As concrete instruments of production, they would be highly +unsaleable. In their totality, as a going concern, they are highly +unsaleable, because in the aggregate so very valuable. Grouped together, +however, but still subdivided, the objects of many thousands of partial +rights, represented by stocks and bonds, they become saleable in high +degree. + +As objects other than money gain in saleability, they tend to gain in +value, also. This is not necessarily true, always. If wealth is already +in the best place, at the proper time, and in the proper hands, no point +is involved in further exchanges. Additional saleability--or an increase +in the qualities that make for saleability--could make no difference. +But when objects could be employed to greater advantage if in different +hands, if, in other words, there is occasion for exchange, then whatever +adds to the saleability of a good adds to its value. What would +otherwise have gone into the trouble and expense of marketing now is +saved. In general, items of wealth tend to gain in value as they gain in +saleability--though not in any definite proportion. + +Further, as objects of value other than money gain in saleability, money +tends to lose its _differential advantage_ in this respect, and so +tends to lose that part of its value which comes from the money-uses. If +all things, including gold, were equally saleable, there would be no +_raison d'etre_ for money, and gold would have only the value that comes +from its commodity functions. In so far as credit-arrangements give to +partial rights to wealth the capacity to serve as a medium of exchange +or for other money purposes--and this is true to a high degree of +bank-credit--this tends to cut under the sources of value of money. +Credit thus, from two angles, tends to raise prices; it raises the +values of goods; and it tends to lower the value of money. The limits on +this, however, are reached when gold ceases entirely to function as +money, and when all items of value are perfectly saleable. Then credit +has done its perfect work for prices, and can do no more. No incentive +remains for further borrowing, if all items of value that need to be +exchanged are perfectly saleable. + +These theses will meet objection, particularly from those who are +accustomed to quantity theory reasoning, and who look upon the volume of +credit as something independent of the volume of trade. On the logic of +the quantity theory there is no reason why prices might not mount +indefinitely, if only credit could increase indefinitely. The causes +controlling the volume of credit are, on this view, quite independent of +the volume of trade. I have given this line of thought sufficient +criticism, perhaps, in Part II, but shall find occasion to recur to it +at a later point in this chapter. However, writers not bound by quantity +theory ideas, may still find reason to question these theses, and it is +necessary that I should take account of various complications, and make +what may well be called substantial qualifications and modifications, +before the theses are acceptable. + +First, objection will be offered to the doctrine that all credit is +merely rights to wealth, that credit rests on wealth. It will be urged +that many loans are made without collateral, or mortgage security, that +the "personal credit" of the borrower is the only security, and the only +basis of the loan. This objection is not serious. There are, doubtless, +loans which are disguised benevolences, where the lender gets nothing +good in return for his loan. I abstract from such cases. Quantitatively +they are not important, and qualitatively they are not really commercial +transactions. In general, when a good merchant borrows at the bank on +his personal note, the bank knows very well what goods he has in stock, +what prospects he has for marketing them, what other debts he has, what +his "net worth" is. And the bank knows that it has legal claims, even +though not preferred claims, on his wealth. When a young business man +borrows capital from a neighbor, giving no security because he has no +marketable wealth which would serve as security, he is, none the less, +exchanging a valuable right for the loan. He is giving the lender a +right to a preferential share in his future income. The lender has +considered the young man's abilities as sources of income, in +conjunction with the capital lent. Incidentally, the lender retains +rights, preferential rights as against the young man himself, in the +quantum of value he has turned over to him. If a young man borrows the +resources with which he buys a farm, the lender takes a mortgage on the +farm itself. Transactions of this sort frequently have in them the +element of benevolence, and the considerations are not always strictly +commercial. In the case of a young man of unusual ability, however, who +insures his life for the benefit of the lender, such transactions may be +perfectly good commercial transactions, value balancing value in the +exchange. The thing traded is commonly present money (or its equivalent) +for rights to future money income. + +Public loans present no exception to our rule. They represent the +transfer of present wealth for the future income which the government, +by virtue of its public domain, or, more commonly, its taxing power, may +expect to receive. With a strong government, this future income may be a +very substantial part of the total income of the people. Public loans +may often be for commercial purposes, as when municipalities borrow to +build or extend municipal enterprises. In cases of this sort, the market +frequently will consider the prospects of commercial success of the +enterprises in fixing the value of the municipal bonds. Where the +proceeds of the loan are for non-commercial purposes, as war, the +question of the future income of the government will still, ordinarily, +be a dominant factor in determining the value of the securities. Often, +however, there is the direct action of patriotic fervor, etc., enhancing +the values of government securities. We have seen this in the case of +government money. It is no part of our theory to maintain that men's +calculations are always rational, or that the whole of the value of a +long-time income-bearer rests on the anticipated income. But this is no +peculiarity of credit phenomena. The same thing is true of lands, for +example. Capital values often get independent in part of their +"presuppositions," as we have seen in the chapter, _supra_, on "Economic +Value." War security issues often represent the effort of the +government--as at the present time--to bring into the present every +possible bit of future values, as a means of increasing their power in a +desperate struggle. The high prices of goods in such a situation +represent the concentration of future values into the present, an +increase in the motivating power which stimulates the people to unwonted +exertions. In war time, moreover, many _ideal_ values,--those whose fate +is dependent on the outcome of the war--enter into and increase the +values of those goods which are needed for carrying on the war. This +leads to larger sacrifices of future income than would ordinarily be +tolerated. It is not so much a case of present goods rising because of +extra credit, as of extra credit because present goods are more +valuable. + +A second objection would be raised that in many cases, the values +pledged by the borrower could not exist if the lender did not make the +loan. This would be particularly the case with credit granted for the +starting of a new or novel enterprise, which as yet exists only in idea. +The established merchant, with goods on his shelves, or with a bill of +lading for goods which he has sold, has a very tangible, concrete basis +for a loan, whose value is independent of the decision of any given +banker. If my doctrine is to be taken as holding that all credit rests +on concrete physical goods, very many exceptions indeed could be found. +But this is not my doctrine. It is that credit rests on valuable +_rights_. These rights may be rights to existing concrete goods; they +may be rights to future incomes. In any case, it is the values, rather +than the physical quantities, that are significant. Witness cotton +before and after the outbreak of the World War. Ultimately, in +general,[510] economic values come from the "primary values" or "first +order" values of consumption goods and services. These values are +reflected back, by the imputation processes, to the various "factors of +production" which have made the existence of the goods and services +possible, in accordance with well-known laws which need not be here +elaborated. But the category of "factors of production" is far from +exhausted when we have named land, labor, and produced instruments of +production! Some writers have rejected the notion of "factors of +production" largely or altogether, and prefer such a term as "agents of +acquisition."[511] I certainly have no intention to give to the term, +factor of production, any ethical connotation. Even though a factor of +production be, like land or labor, a _sine qua non_ of production, it +does not follow that the owner of that factor gets his proper, or +ethically just share, under the laws of economic imputation. Many of the +"factors of production," in the sense of factor which derives a value +from the economic laws of imputation, may well be parasitic from the +angle of ultimate social welfare. The only test is as to whether, under +existing social arrangements, a portion of the income _of a given +establishment_ would cease to exist if that factor should disappear, or +be reduced. From the angle of this test, monopoly power, trade-marks, +established trade connections, the big idea of an entrepreneur, a +dynamic personality, capacity for winning other men's confidence and +good will, and sometimes that brutal selfishness which makes other men +shrink from conflict, or the reputation of being a dangerous and +vindictive man, may be equally "factors of production" with land, labor, +and produced instruments of production. In Part IV of this book, "The +Reconciliation of Statics and Dynamics," we have discussed the +"intangible capital items" of this class, and have indicated that many +of them perform really important and necessary social functions. Others +are doubtless pernicious. Production involves leadership, organization, +the making and maintaining of "interstitial connections," as well as the +technology of muscle and machine. But credit is based on values, rather +than on concrete goods as such, and if these "intangibles" have value, +they may have credits based upon them.[512] + +That some of these values exist only by virtue of the fact that credit +is granted is no marked peculiarity. The granting of credit is an +exchange of the rights of the creditor for rights to the future income +of the borrower. If the exchange were not made, in certain cases, the +borrower would have no future income to which he could give rights. The +entrepreneur with a big idea cannot actualize that big idea unless he +can bring it into conjunction with land, labor, capital, and a market +for the products. The exchange of rights to the value of the products +for the banker's deposit-currency, or the private lender's money is +merely one of many necessary exchanges required to bring about the +combination which will create the products. If there were no possibility +of marketing the products, he would be equally helpless, and his idea be +equally valueless. The general range of values, under our present system +of division of labor, private property, private enterprise, etc., depend +on the possibility of exchange. Men produce for the market, rather than +for their own consumption, or for the consumption of a communist +society. Without exchange, many values would persist, but most values +would at least be diminished. Exchange is part of the productive +process. The only peculiarity in the case under discussion is that the +man getting credit for the exploitation of a big new idea commonly has a +very limited market--is dependent on the decision of one bank or lender, +or at most of one out of a few possibilities. The narrower the market, +the more dependent are the values of things that must be exchanged upon +the decisions of a few men. Wheat is free, virtually, from individual +caprices, though even there a big operator may organize a pool and +temporarily affect the value very greatly. But the immediate power of a +few men on values is increasingly great as we get closer to those things +which are unique, which are capable of only specialized employment, and +which call for the cooeperation of elaborate and expensive systems. And, +of course, the influence of individual caprice, or individual decisions, +on all values grows greater as wealth and power are concentrated. +Economic social value is an institutional value, specially weighted and +controlled by individuals, classes and institutions.[513] + +Joseph Schumpeter, in his _Theorie der wirtschaftlichen Entwicklung_, +has made much of the role of the banker in economic evolution. He sees +in the banker a creator of "_Kaufkraft_," by means of which an +entrepreneur, a dynamic man who has a new idea which he wishes to +actualize, is able to wrest from the unwilling "static economic +subjects" their land, labor and instrumental goods for the purpose of +putting his new plan through. This new _Kaufkraft_ is the true _Kapital_ +which the new enterprise requires. Capital, thus defined, is not an +accumulation of goods, is not embodied in goods. It is an _agent_, a +_power_, which the banker creates. It makes dynamic change possible. +Schumpeter is particularly anxious, in clearing the way for his new +theory of interest, to get rid of all the notions of saving, +accumulations of stocks of goods, etc., which have commonly been made +prominent in the discussion of capital and interest. We need not here +discuss his theory of interest.[514] He maintains that the new dynamic +credit, credit granted by a banker for a really new enterprise, as yet +not concretely in existence, represents something new in the world, +anomolous from the angle of static values, and static credit. Indeed, he +regards credit as unessential for the static analysis, and banishes it +from the "_Wesen_" of his static state. But this new credit is different +from such credit as there may be in the static state, because, he holds, +the new credit does not rest on goods, and has no _Deckung_. Schumpeter +himself calls these doctrines "heresies." They become less dangerous, +however, when we learn that by "saving" Schumpeter means mere trenching +upon accustomed expenditure, so that the entrepreneur who saves part of +unusual profits is really not saving at all, and when one discovers that +his contention that there need be no accumulation of goods prior to the +starting of a new enterprise means merely that there need be no special +accumulation of goods _ad hoc_. Of course if saving means trenching upon +accustomed expenditure, it is banished by hypothesis from the static +state, but there may still be plenty of capital (in the ordinary sense +of accumulated produced means of production) for Schumpeter's +entrepreneur to get hold of by means of his new _Kapital_. His +contentions that the new credit does not rest on goods, that it has no +_Deckung_, and that we have a new thing in the world since in dynamic +credit we have a case of temporal discrepancy between the making of +obligations and the ability to pay them, calls for further analysis. + +It is true that there is a time during which the new credit has no basis +in concrete goods. Very speedily, however, the new credit is exchanged +for concrete goods, and the enterprise is started. Further, the banker +commonly insists on a margin at the start. Further, the claims of the +borrower on the banker are themselves, prior to their expenditure for +the things needed in the enterprise, assets to which the banker may look +as a basis for his confidence in the goodness of the entrepreneur's +promise to pay him. There is never a moment when the new credit does not +rest on _values_. The loan by the banker to the borrower is, +essentially, like the case of the purchase of any bearer of future +incomes, say a machine, or a factory. The machine is, after all, in +economic nature, merely a "promise" of future goods and future values, +as an Austrian economist should be quick to recognize, and machines are +almost as frequently poor performers as borrowers--indeed, most +commonly, the borrower's inability to repay comes from the failure in +the value of the goods which his physical equipment produces. The +_raison d'etre_ of the new credit is the new values which have come into +existence: the new plan of the entrepreneur, _validated by the banker_, +attains a value equal to the present worth of the extra products which +it promises. I repeat that it is values which are significant as the +basis of loans, that values are not all embodied in physical goods, and +that value is essentially a psychological thing. + +The banker's validation of the plan may be an essential factor in its +value. _Belief_ is often an essential factor in values. The new value, +and the new credit, have a large element of belief in them. The value of +the new plan rests proximately in the belief of the banker, manifested +by his granting of credit. But the value of the _bank-credit_ rests +ultimately in the _prestige_ of the banker, which is a fact of social +psychology, resting in a massing of belief on the part of the public in +him, in the validity of his bank-notes and deposit-currency, coupled +with support from legal and other institutions. But this is to +anticipate the discussion of the nature of bank-credit. The point +involved is sufficiently illustrated by the case where a man who is not +a banker lends his money to an entrepreneur of a new undertaking. Here +again the enterprise is impossible without the loan. Here the loan is +made on the basis of an anticipated income. Here again the anticipated +income is made possible only by the loan; one of the values that enters +into the exchange exists only because the exchange is possible. None the +less, the credit rests on value. It is a right to an anticipated income. +The man who has made the loan has his security in the value which he has +lent, plus the present worth of the extra income which the new idea is +expected to create. + +Now a great practical difference is made in the course of economic life +by the decisions of lenders to lend to men who plan new things, instead +of to men who plan old things. It makes an enormous difference whether +or not new plans appeal to the imaginations of those who control the +economic resources of society. It makes a great difference whether +static values (the capital values of incomes to be created in familiar +ways) or dynamic values (capital values of incomes to be created in +novel ways) win out in the competition for loans from those who have +loans to make. But _as values_, the two are of the same psychological +stuff and substance: futurity and belief are essential elements in both +of them. + +Stable belief, and strong belief, are easier to evoke in the case of the +established and the familiar. New ways of creating wealth must promise +larger returns, and make more dramatic appeals to the imagination, than +old ways. Schumpeter indicates that it is the essential function of the +banker to give preference to the new ways, that the mass of men are +"static" in their attitude, and that, for some reason which he does not +clearly indicate, the banker is not. This has not been our American +experience, on the whole. The contrast which Schumpeter makes between +the timid, static masses, and the few highly important dynamic +entrepreneurs, holds very much less true in America than in Continental +Europe. There it is doubtless true that new industrial enterprises have +had their main encouragement from bankers. Here, such enterprises have +appealed largely to the mass of men, to the investing and speculative +public. Our commercial banks have lent largely upon stock exchange +collateral, which means that, indirectly, bank-loans have gone to +finance industry. The extent of this is enormous, as will later appear. +However, the banks, as banks, have not been large _buyers_ of stocks. +They have guarded themselves by requiring "margins" from those to whom +they have lent on such collateral. Seasoned bonds have been bought in +great volume by our commercial banks, but few stocks. Even the +underwriters and investment bankers have been primarily intermediaries, +expecting to pass on to private buyers the securities they hold +temporarily. My point here is, merely, that there is nothing in the +distinction between static and dynamic credit, when by that is meant the +distinction between credit for new enterprises and credit for old +enterprises, to mark off a peculiar or essential province for +bank-credit. The need for bank-credit does arise out of dynamic +conditions, primarily, but it is not the need for credit to _start_ +dynamic changes, even though bank-credit may do, and does do, that. The +chief reason for bank-credit is to enable economic society to readjust +itself quickly and readily to dynamic changes, by putting through +without friction the necessary exchanges that such readjustment +requires, and by holding in liquid form a fund of rights which can meet +the emergencies and unexpected occurrences which dynamic conditions +involve. To this we now turn. + +Bank-credit is the debt of responsible institutions, payable on demand +in money. It may take the form of notes, or of the right to draw checks. +Long evolution has begot a system of legal relationships, and of banking +technique which makes these promises easily performed. The same process +of development has led to social reactions toward banks and bankers +which give them enormous prestige. Legal regulation, in the case of many +banks, requiring adequate capital, and, in this country, requiring +minimum cash reserves, have added to that prestige. The promise of the +bank is commonly so liquid and saleable that the banks are not called +upon to fulfill it by the actual payment of money--the promise alone is +an object of value which is perfectly saleable, which runs in terms of +money, and which functions as a perfect substitute for money in almost +every use except for very small retail transactions. Even there, it is +very much used. + +Among the features of banking technique to which we must give especial +attention are the following: (1) the banker has substantial resources of +his own, his "capital," which constitutes the "margin" of protection +which he offers to those who give him valuable things in return for his +promises to pay money on demand; (2) the banker exchanges his promises +to pay on demand, as far as possible, for those things which have a high +degree of "liquidity," _i. e._, for those things which he can quickly +dispose of for cash, or for the promises of other bankers which are the +equivalent of cash. Farm mortgages are not good assets for a banker to +hold in large amount. They are long-term obligations, with a very +limited market, and they will not help him in emergencies to meet his +obligations to pay on demand. Agricultural loans, and other mortgage +loans are made in considerable volume by our State banks and trust +companies. All classes of commercial banks make many non-liquid loans, +as we shall later see. But all of them get as high a proportion of +liquid loans as they can. Bills of exchange, running ten, thirty, sixty +or ninety days, growing out of commercial transactions which +automatically terminate themselves in the payment of cash or the +promises of other bankers, constitute admirable assets. In return for +these, the banker may give his promises freely. This is especially true +where there is, in the banking practice, a wide "rediscount market," in +which he can sell these bills before maturity if he wishes to get even +more liquid assets. Promissory notes, for short periods, thirty, sixty, +or ninety days, growing again out of commercial transactions, which, +like those for which the bills of exchange were drawn, automatically +bring in cash or the promises of other banks, are in many respects like +the bills of exchange, even though the rediscount market for such notes +has not been so highly developed as the market for bills of exchange in +Europe. Whether such notes are as available for rediscount as bills of +exchange is a question of technical banking which we need not here +discuss in detail, though I venture the opinion that bills of exchange +are superior decidedly for this purpose, especially "documentary" bills. +The element of personal credit is commonly larger in the promissory +note, and that limits the market. Banking organization, and particularly +our new Federal Reserve System, may greatly reduce the disadvantages of +the promissory note from this angle, but it seems not unlikely that the +bill of exchange may be a factor of increasing importance in our +internal banking arrangements. The general test, however, of what is +available for a banker's assets depends on varying conditions, and is +not to be answered by a simple formula. A bank in a rural region which +loads up heavily with the safest local bonds is little better off than +with farm mortgages. For neither is there a quick market in an +emergency. A city bank, near the stock exchange, may very safely buy in +large amounts highly saleable as a profitable substitute for part of its +cash reserve. Even country banks may, and do, safely own such bonds. +Short loans on stock and bond security, constitute the most important +single type of bank-loan in the United States, as we shall later see. +(3) The third feature of banking technique to which attention must be +given is the reserve policy. The banker must keep some actual money on +hand (how much we have in part considered in Part II, and shall again +discuss). + +I shall give attention to these points in what follows. The first point +needs little discussion. Large "capital" for a bank gives prestige and +security. Some capital is a _sine qua non_ for a bank which expects its +notes or deposit currency to have general acceptability. + +It will be well to consider further the circumstances determining the +form which a bank's assets shall take. Though commercial banks own +enormous quantities of high grade bonds, it is rare for commercial banks +in America to buy stocks of corporations.[515] They will often lend to +owners of such stocks with the stocks as collateral, up to a high +percentage of the value of the stocks, but they will rarely trade their +demand obligations for the stocks directly. In general, a bank wishes +to have its assets in the form of obligations of other people, expressed +in terms of dollars, and having a definite term to run (or callable on +demand). + +One reason for this is a bookkeeping reason. "Par value" of stocks has +little meaning any more. Market-prices of stocks, even the best stocks, +are not absolutely fixed. They fluctuate, even though within narrow +limits. This fact presents complications to the bookkeeper! Of course, +the bank's buildings and fixtures, listed among its assets, fluctuate +also, in value, and in the price that could be obtained on a given day, +but the bookkeeper can abstract from that, since the bank has no +intention of selling its buildings and fixtures. The notes and bills +held in the bank's portfolios also in fact fluctuate in value, and in +the price at which they might be sold on a given day, but they are +expressed in terms of dollars, and the bookkeeper commonly has no need +to look beyond the figures written on them. At irregular intervals, a +small percentage of them may be marked off the books as "bad," but +usually the minor fluctuations are abstracted from. The bank does not +like to have assets whose published prices fluctuate. But this is, I +suppose, not the main objection which banks have to stocks as assets +since it does not prevent their buying bonds. I abstract from the legal +restrictions that prevent many banks from buying stocks. The fundamental +reason is to be found elsewhere. The point is to be found here: the +transaction whereby property rights in roadbed, rolling stock, etc., +were collected into property rights in a going, organic whole increased +the saleability of all these rights; the further subdivision of these +rights into many thousands of equal parts enormously increased the +saleability of these rights, especially when coupled with listing in an +organized market; the further transaction, by which a preferential claim +upon these subdivisions of rights is embodied in a collateral note +still further increases the saleability of the value of these rights. +The whole of the value embodied in a share of stock has not the +certainty and saleability which a banker wishes for his assets. It might +not be possible to market the stock on a given day without loss. But a +collateral note, embodying 80% of that value, with provision for +additional collateral in case the margin is reduced, is highly liquid +and the banker has no doubt that, with watchfulness, he can always +realize the full face value of such a note. It becomes saleable enough +for his purposes. The transaction by which this note is exchanged for +the banker's demand obligation gives the drawer of the collateral note a +perfectly saleable form of value with an almost universal market, which +he can convert without loss into practically anything that money can +buy. We have here a series, a scale, saleability of rights growing +steadily greater, through a series of transformations and exchanges, +till at last the virtually perfect saleability is reached. Again we are +reminded of Menger's analysis[516] of the methods of primitive barter, +whereby the man who possesses a good of low saleability, through +successive exchanges, gradually gets goods of higher and higher +saleability, until he finally reaches his goal. Bank-credit, this most +highly saleable of all forms of rights except the rights to actual money +in hand, and in general not inferior to money, cannot usually be had by +direct offer to the bank of crude property rights. These must be refined +and distilled, till a central core of highly saleable value emerges, and +then they may enter the bank's assets in return for bank-credit. The +best bonds likewise offer such a central core of highly saleable value. + +A further point is to be noticed about this scale of saleabilities. At +each stage of the exchanges of less saleable for more saleable rights, +the holder of the less saleable rights must make concessions to the +holder of the more saleable rights. And the degree of his concession is, +in general, correlated with the lack of saleability of what he offers. +Commonly this takes the form of giving up a right which has a higher +yield for one which has a lower yield. Or, viewed more fundamentally, +from the angle of the capitalization theory, income-bearers of low +saleability are capitalized at a higher discount rate than +income-bearers of higher saleability, with the same yield. Farm lands +may be capitalized on a 10% basis. (There will be great differences +between regions in this, depending in considerable measure, often, on +the activity of farm sales. I would refer here to the facts mentioned in +my chapter on "The Quantity Theory and International Gold Movements," +contrasting Cass Co., Iowa, with Yazoo Co., Mississippi. Of course, the +risks of agriculture count heavily, also, and the prestige of owning +land as compared with other forms of property.) The farmer's mortgage +note may bear 7%. A merchant who holds that note may use it as +collateral, with a margin, backing his own note, and get accommodation +for three months at 6%. The bank may rediscount the note of the +merchant, giving it its own endorsement, on a 4-1/2% basis. The coal +mine owned by a small company may yield 12%; sold to a large iron +company, which combines mining and smelting and manufacturing, that mine +may be represented by 7% stock; a collateral loan, for sixty days, based +on 80% of the value of the stock may be had for 4%; the demand liability +of the bank given in exchange for the collateral note will either yield +nothing at all, or else yield a low per cent, one, one and a half, or +2%, on large checking accounts. If the collateral note be a call note, +the rate will be lower, in general, than on a time note. I here refer to +what was said in the chapter on the functions of money with reference to +the relation of short loans, especially call loans, to the "bearer of +options" function of money. Part of the yields of these loans is in the +bearing of options. This function grows out of the uncertainties of a +dynamic market. It would disappear if uncertainties, "friction," and +dangers disappeared. + +The importance of liquidity and saleability in the assets of a banker +needs little discussion. It has been reiterated by virtually every +writer on the subject. Its connection with the need for meeting demand +obligations is obvious. The point that I would here emphasize is, +however, that this, too, grows out of dynamic changes, uncertainties, +etc. An economic life in "normal equilibrium," in static balance, with +all things going smoothly, in anticipated ways, could dispense in large +measure, or wholly, with such liquidity. Obligations which matured at +the time that the holders of the obligations had maturing obligations, +would serve their purpose perfectly. Again I would emphasize the fact +that the theory of money and bank-credit is essentially a dynamic +theory, and that the notion of "normal equilibrium" which underlies the +quantity theory has no bearing whatever on these fundamental matters. + +The market where fluid bank-credit is exchanged for less fluid rights +has been given the name, "the money market." The prices fixed in this +market are "money-rates," figured as percentages on the amounts of +bank-credit exchanged for the less fluid rights. It is, of course, +strictly speaking, not a money market. Money, as the term has been used +in this book, has been taken to mean gold coin, subsidiary coin, +government paper, and for the United States, bank-notes. In a country +where much bank-credit is elastic bank-notes, it is better to +distinguish money from bank-notes. The term, money, is not one easily +defined in a logical manner. A good logical definition should seize on +some essential characteristic of the object defined, should include all +the objects of that class, and should exclude all others. We can meet +the tests of inclusiveness and exclusiveness in a definition of money, +but we can hardly meet the first test. The differences between gold +money, for example, and gold bullion are less than the differences +between gold money and government paper. The differences between +bank-notes and bank-deposits are less than the differences between +bank-notes and government paper, or bank-notes and gold. The term, +money, covers a group of more or less miscellaneous things, concerning +all of which few general laws are possible. Gold, or other standard +money, in particular, may obey different laws from other forms of money. +I have been careful, in the foregoing, to avoid the danger of letting +the argument rest on any ambiguity in the meaning of the term, however, +and for the present shall not attempt further definition. For the +present, we shall use the term, "money market," in its familiar sense, +as meaning that market in which bank-credit is exchanged for less fluid +rights. An organized money market commonly appears only in larger +cities. In smaller places, relationships between banks and customers are +much more personal, and indeed, even in larger cities, regular business +houses have particularly intimate relations with special banks. A fluid, +impersonal market, to which men may repair without reference to anything +but the marketability of the collateral they have to offer, is a +distinctively metropolitan affair. Only large dealers commonly have +relations with more than one or two banks. Larger houses in the big +cities often do sell their "commercial paper" through brokers, and some +of the big New York mercantile houses have had their paper scattered a +good deal throughout the country. The lack of protection which houses +which sought such credit faced during the Panic of 1907 tended to check +the practice in some measure, but it has revived, and even +increased.[517] In the matter of a wide market for commercial paper, +however, an impersonal market, with great fluidity, we are well behind +not only England, but also Continental Europe. The London acceptance +house has especially contributed to an impersonal market. The American +money market is _par excellence_ a New York market, and the primary type +of paper discounted in the American money market is stock exchange +paper, and foreign bills of exchange. For commercial paper, however, +there are innumerable more personal, more restricted, markets, and +commercial paper constitutes a very considerable part of banking assets, +though much less than is often supposed. But this we shall discuss in +the next chapter. + + + + +CHAPTER XXIV + +CREDIT--BANK ASSETS AND BANK RESERVES + + +In traditional discussions of banking, the impression is given that +commercial paper is the normal and dominant type of banking assets.[518] +To one accustomed to this view, the figures of the Comptroller of the +Currency for banking investments in the United States for 22,491 banks +of all kinds (State, national, private, and savings banks, and trust +companies) in 1909,[519] will occasion dismay: + + (000,000 omitted) + Loans on real estate $ 2,505 + Loans on other collateral security 3,975 + Other loans and discounts 4,821 + Overdrafts 69 + United States bonds 792 + State, county and municipal bonds 1,091 + Railroad bonds and stocks 1,560 + Bonds of other public service corporations 466 + Other stocks, bonds, etc 703 + Due from other banks and bankers 2,562 + Real estate, furniture, etc 544 + Checks and other cash items 437 + Cash on hand 1,452 + Other resources 111 + -------- + Total Resources $21,095 + +These figures, however, call for further analysis. They include figures +from institutions which should not be counted with commercial banks. The +percentage of real estate loans, especially, is too high to represent +the workings of commercial banks, a very high percentage of real estate +loans being held by stock and mutual savings banks. The other items, +however, are not much changed by the inclusion of savings banks and +private banks. It will be well to draw some conclusions from these +aggregate figures for all classes of institutions, before taking up a +more detailed analysis of State and national banks, and trust companies. + +Where, among these items, does one find "commercial paper"? In the +reports of the metropolitan papers, giving daily variations in interest +rates, it is usual to find "commercial paper" listed as a separate +category, cooerdinate with "sixty day paper," "ninety day paper," etc. +Recent periodical discussion has gone elaborately into the question as +to what should be called "commercial paper," from the standpoint of the +policy of the Federal Reserve Banks. I think it safe to say that no two +markets, at present, in the United States will use the term in precisely +the same way, and that all would restrict the term to a small portion of +the "other loans and discounts" listed above. The most general +definition of "commercial paper" would be paper bought through +note-brokers. Despite the decided increase in loans and discounts which +our war prosperity has involved, there has been very frequent complaint +of the scarcity of "commercial paper." I shall use the term, "commercial +paper" in a much more liberal sense than the American money market does, +and shall mean by it all loans of a really liquid character, made by +banks to merchants and others to pay for the purchase of goods in +anticipation of a resale within the term of the loan which will enable +the loan to be repaid at maturity. From this should be excluded, +however, loans made to speculators. With this liberal, and not very +precise, definition of commercial paper, we raise again the question as +to where it may be found in the items above given. + +Virtually all of it, I think, must be found in the item, "other loans +and discounts"--an item which, in all, is slightly less than 23% of +total banking assets.[520] But not all of this "other loans and +discounts" is commercial paper. Very much indeed represents loans of a +non-liquid character, regularly renewed, which manufacturers and others +have put, not into moveable goods, but into fixed forms of +capital-goods, as machinery, and even buildings. One case in New York, +which the writer is informed by a business man well acquainted with both +banking and business in many sections of the country is typical of many +cases, is as follows: a New York bank is at present lending to a small +manufacturer of automobile supplies about $30,000. Of this, about +$10,000 is liquid, periodically covered by "bills receivable," and if +the bills receivable should fail, in the period in question, to cover +the $10,000, the bank would insist on a reduction of the loan. The +remaining $20,000, however, is not liquid. It was spent for non-moveable +equipment; the bank expects to renew the notes for this loan +periodically, and is well aware that it could not force collection +without bringing the business to a close--or else forcing the factory to +get accommodation elsewhere. The $10,000 that is liquid is by no means +all spent for goods, but is spent, in part, for wages. _None_ of the +$10,000 is spent for goods which are to be resold without being +transformed by manufacture. None of the $30,000, therefore, is, in the +strict sense, "commercial paper." It is manufacturer's paper. Part of it +is virtually as liquid as commercial paper; two-thirds of it is not +liquid. + +A very large part indeed of bank-loans are of this character. A large +part of the loans made to farmers are in no sense liquid: when the loan +is made, for, say, six months,[521] it is perfectly understood by both +bank and borrower that a renewal will be asked for and granted. It is +impossible to say what fraction of this $4,821,000,000 of "other loans +and discounts" is really liquid commercial paper, or liquid paper of any +kind, in the sense that it can be automatically paid off at maturity. I +venture the statement with entire confidence, however, that the +proportion of liquid paper is not one-half of the amount. I should +question if more than one-fourth of it is truly liquid, in the sense in +which that term is commonly used: meaning that the loan is made to put +through a transaction which will be completed during the term of the +loan, and permit the loan automatically to be paid off. I do not mean by +this merely that the banks could not reduce this item by one-fourth +suddenly. Even in a market made up wholly of highly liquid paper, an +arbitrary refusal to renew one-fourth of the loans, with the effort to +reduce loans and discounts by one-fourth, would occasion great +embarrassment and even disaster. The test of liquidity here applied +relates to the items separately, on the assumption that other things are +not radically changed. Even in this sense, however, viewing each loan +transaction separately, it may well be questioned if the banks in the +United States could find among their "other loans and discounts" items +exceeding a fourth of the total (in value) which they could refuse to +renew, at least in large part, without disappointing reasonable +expectations, and embarrassing good business men.[522] + +Of this paper, not truly liquid, no doubt a good deal is advanced to +wholesale and retail merchants, and is, in this sense, commercial paper. +The terms, "liquid paper" and "commercial paper" by no means run on all +fours! As will later appear, the bulk of liquid banking assets are not +commercial paper at all. And only that part of a bank's loans to a +merchant may be called "liquid" which can be paid off by the merchant +without disappointing his reasonable expectations,--causing him to seek +other banking connections. + +There is, however, another item in which we may find some commercial +paper, and this is the item, "loans on other collateral security." This +has commonly been supposed to be virtually all stock exchange loans. +Thus, Conant[523] cites the growth in this item in New York as evidence +of the growth of loans on stocks and bonds. For New York, loans on +stocks and bonds do make up the great bulk of this item. Even in New +York, however, there are other factors in it, absolutely, even though +not relatively, important, and in the country outside, the other +elements are not at all negligible, even though for the outside country +the part secured by stocks and bonds is the major part, and even though +the growth of this item in our total banking assets is, in general, +fairly indicative of the growth of loans secured by stocks and bonds. +Figures for the other items are not available for State banks, trust +companies or savings and private banks. They are not till very recently +available for national banks. In 1915,[524] however, the Comptroller +separates the item, "loans on other collateral security," for national +banks, into two parts, (1) loans "secured by stocks and bonds" +($1,750,597,273), and (2) loans "secured by other personal securities, +including merchandise, warehouse receipts, etc." ($882,749,812). Is +there any commercial paper in this last, not inconsiderable, item? + +Let us locate the item, in the effort to find out. The percentage runs +highest in Chicago, where this class of collateral loan exceeds the +loans on stocks and bonds. The inference is strongly suggested, +therefore, that much of it, there, at least, represents advances to +live-stock, grain and produce traders and speculators on the Board of +Trade, at the stock yards, etc. The inference is strengthened by the +fact that St. Louis, where there is a good deal of grain and commodity +speculation, shows more than twice as much of this kind of paper as does +Boston, where this kind of speculation is unimportant--despite the fact +that Boston's aggregate collateral loans of all kinds greatly exceed +such loans in St. Louis. In New York, where there is a great deal of +coffee and cotton speculation, and some other commodity speculation, the +amount of this paper, though relatively small, is absolutely greater +than in any other city. No doubt, in New York, which is the country's +centre for foreign commerce, a fair amount of the paper secured by +"other personal securities, including merchandise, warehouse receipts, +etc.," is really commercial paper, representing advances to importers +and exporters--though the difficulties of giving this kind of security +where goods are in transit would prevent most of our foreign trade being +financed in this manner. The total of this kind of paper in New +York--all these figures are for national banks alone--was only 113 +millions on June 23, 1915.[525] It may be doubted if very much of this +paper, in the great cities, represents goods in transit. With the +caution that the view here expressed is based on inference, and not on +actual knowledge of what the large city banks are doing, the writer +concludes that probably the bulk of this paper, in large cities, +represents loans to speculators rather than to merchants. It is liquid, +but it is not commercial paper. + +What of such paper in the country districts? Nearly +one-half--$436,000,000 out of $882,000,000--of these national bank-loans +on "other personal security, including merchandise, warehouse receipts, +etc.," are in the country, outside the Reserve and Central Reserve +Cities. Much of it is in the South. Much of it in the grain and +live-stock producing regions. What do such loans mean?[526] Much of it +is loans to farmers and planters. In the South, much of it is on crop +liens. The loans on cotton warehouse receipts, at least in the country +parts of the South, are not as great as is commonly supposed. In the +North and West, there are a great mass of farmers' chattel mortgage +loans, including loans on horses, grain in cribs, hogs, sheep, cattle, +mules, etc. The use of this type of paper for financing the breeding and +feeding of live-stock, particularly hogs, cattle and sheep, is very +extensive. Virtually all loans to farmers and feeders for these purposes +are secured by such chattel mortgages. It seems improbable that a great +deal of this paper could represent ordinary commerce. Neither +wholesalers nor retailers can easily handle merchandise on which chattel +mortgages have been given. The usual method of granting credit to them +is to advance loans on one and two name paper, unsecured. Not many +loans to retailers and wholesalers will fall in the category under +discussion. + +To what extent are the loans of this type to farmers liquid? Well, the +crop lien loans in the South have a natural term, and, though commonly +longer loans than bankers have in mind when speaking of liquid paper, +are liquid in the sense that they are automatically paid off at +maturity. Loans on work-animals need not have a natural term. Loans on +animals being fed for the market have such a natural term, and are truly +liquid. Loans, however, on breeding animals are not thus liquid, such +loans are commonly regularly renewed at maturity, and the banks do not +count on them in emergencies. It is the opinion of Dr. J. E. Pope that +fully two-thirds of the aggregate loans on live-stock chattel mortgage +security are to breeders rather than to feeders, and hence are not +liquid. Of course, none of these loans are commercial paper. + +I conclude, therefore, that the thesis with which we started that the +overwhelming bulk of commercial paper is to be found in the item, "other +loans and discounts" is correct. I see no reason to suppose that an +analysis of the loans of State banks and trust companies would show a +different conclusion. We lack the figures for breaking up the collateral +loans of State banks and trust companies into the two classes, "secured +by stocks and bonds" and "secured by other personal securities, +including warehouse receipts, merchandise, etc." We have merely the +gross figures for collateral loans. As the State banks are in large +degree country banks, it is probable that the percentage of commodity +collateral as compared with stock exchange collateral for State banks +would be larger than for national banks. However, the total of +collateral loans for State banks is relatively small--559 millions, for +1909, as against "other loans and discounts" for State banks in that +year of 1,112 millions, and as against a total of collateral loans of +all banks reporting in that year of 3,975 millions. On the other hand, +the collateral loans of the trust companies are very large: 1,222 +millions for 1909, as against "other loans and discounts" for the trust +companies in the same year of 460 millions. As the trust companies are +chiefly city institutions, and as the concentration of trust company +loans and capital in New York City is relatively very great, it would +seem pretty clear that taking both State banks and trust companies into +account would substantially lessen the percentage of loans "secured by +other personal security, including merchandise, warehouse receipts, +etc.," to total collateral loans. As the amount of commercial paper in +this class of loans for national banks is probably small, it may be +expected to be still smaller in the aggregate of collateral loans. + +The following figures, for State and national banks, and trust +companies, only, will, in the light of the foregoing, give us basis for +some further conclusions regarding the character of banking assets in +the United States. As before, the year 1909 is chosen: + + (000,000 omitted)[527] + + _State _National _Trust _Aggre- + _Resources_ Banks_ Banks_ Companies_ gate_ + + Real estate loans 414 57 377 848 + Collateral loans 559 1,939 1,222 3,720 + All other loans 1,112 2,966 460 4,538 + U. S. bonds 5 740 3 748 + State, county and municipal + bonds 65 156 155 376 + Railway stocks and bonds 75 351 362 788 + Bonds of other public service + corporations 50 148 168 366 + Other bonds, stocks, etc 95 208 769 1,072 + Total of items here listed 2,375 6,565 3,516 12,456 + ----- ----- ----- ------ + Total Resources 3,338 9,368 4,068 16,774 + +This table makes clear that the figures for real estate loans given in +the table for all banks, a few pages preceding, were much too high. It +leaves the relations among the other items, however, not greatly +changed. "All other loans" increase from slightly less than 23% of total +assets to 27%. If we concede that one-half of the "all other loans" +represents liquid "commercial paper"--a very liberal estimate, as we +have previously concluded--we get about 13-1/2% of the assets of these +institutions in the form of "commercial paper," an increase over the +11-1/2% to be assigned on the basis of the other table. The figure is +the roughest sort of approximation. I attach little importance to the +exact percentage, and the argument which follows is not dependent on any +exact figure here. The proportion of collateral loans to total resources +is changed also, and even more: collateral loans are 18% of total bank +resources when all kinds of banks are included, and are over 22% of +total bank resources when only State and national banks and trust +companies are counted. If the foregoing is correct within very wide +limits of error as to the amount of commercial paper, collateral loans +very substantially exceed commercial paper. If all the "all other loans" +should be counted as commercial paper, collateral loans are still not +far behind them--22% as against 27-1/2%. + +What is the significance of this? We have seen that for national banks, +the great bulk (over 66%) of the collateral loans were secured by stocks +and bonds in June, 1915. We saw reasons for supposing that a higher +percentage of stock exchange collateral would be found when State banks +and trust companies are included. Suppose we assume that 75% of the +collateral loans of all three classes of institutions here in question +are based on stock exchange collateral.[528] This would mean 16-1/2% of +the total resources of these institutions in stock exchange loans--still +well above the 13-1/2% we have assigned to "commercial paper." In any +case, it is at least justifiable to contend that loans on stock exchange +collateral are as great in volume as commercial loans. I think that they +very substantially exceed them. But further, we have another large +percentage of bank resources invested in stock exchange securities +outright--chiefly in bonds. The aggregate for those investments in the +institutions under consideration is 3,250 millions. This is something +over 19% of the total assets of these institutions. Combining this with +the loans on stock exchange collateral, we get nearly 36% of bank and +trust company assets invested, directly or indirectly, in stock exchange +securities, as against an assumed 13-1/2% in commercial paper. Conceding +that all the "all other loans" are commercial loans, the stock exchange +assets still exceed them in the ratio of 36 to 27-1/2. + +In our second table, we have listed items which aggregate only 12,456 +millions of the total resources for these institutions of 16,774 +millions. The items listed, however, represent virtually all the credit +extended by banks to industry, commerce, agriculture, the stock market, +other speculation, and the State. The excluded items of main importance +are: Due from other banks and bankers, 2,302 millions; checks and other +cash items, 432 millions; and cash on hand, 1,411 millions--the three +items aggregating 4,146 millions, which virtually closes the gap. These +three items are of immense importance as making for liquidity in +banking assets, and as making possible extensions of credit to the +business world, but it is not proper to count them when an estimate of +the extent of bank-credits is in question. Our second table contains, +for the three classes of institutions, all the items properly counted +there, except overdrafts (small in amount) and one other big item which +does not get into bank statements at all, namely, _overcertifications_ +and "_morning loans_." Of this last item, more later. We may, then, +recalculate our percentages on the basis of the credit extended by the +three classes of institutions, instead of on the basis of total +resources. On this basis, the percentages are: + + Real estate loans, 7.4%; + + Collateral loans, 30%, of which we assign to stock exchange + collateral, 22-1/2%, and to other collateral, 7-1/2%; + + All other loans, 36.4%, of which we assign to "Commercial + paper" 18.2%; + + Total stocks and bonds, 26%. + +Adding the percentages for stock exchange collateral loans and for +stocks and bonds owned, we get 48-1/2% of all extensions of bank-credit +for these three classes of institutions in the form of credits extended +to the security market. If everything else except the real estate loans +should be counted as "commercial loans" the stock exchange credit would +still exceed the commercial credit. If my estimate of 18.2% of +bank-credit based on commercial paper is high enough,[529] the banks and +trust companies have extended over two and a half times as much credit, +at a given time, to the security market as they have to commerce. This +on the face of the record. But there is, as above indicated, a further +item which does not get into the record, namely, overcertifications and +"morning loans." Every day in the great speculative centres, and very +especially in Wall Street, enormous advances are made to brokers, which +are canceled during the day, but which, during their short life, are a +real addition to bank-credit. To attempt to estimate this with any +accuracy is hopeless, but the total on any ordinary day is enormous, and +most of it is extended in connection with stock market transactions. + +A final comparison,[530] which will conclude this perhaps too wearisome +analysis of these figures, will consider the loans alone, neglecting the +securities owned: + + Of total loans: + + Real estate loans, 9.3%; + + Collateral loans, 40.8%, of which we assign to stock exchange + collateral, 30.6%, and to other collateral, 10.2%; + + All other loans, 49.6%, of which we assign to "Commercial + paper," 24.8%. + +The development of bank loans on stock exchange collateral is a +remarkable feature of the three or four decades preceding 1909. The +following figures, of national bank loans in New York City,[531] +illustrate the tendency: + + (000,000 omitted) + + _Loans on _Advances on + _Date_ Commercial Paper_[532] Securities_ + + 1886 146 107 + 1890 151 145 + 1892 160 183 + 1894 168 192 + 1896 151 162 + 1898 181 260 + 1900 185 384 + 1902 210 396 + 1903 239 391 + 1904 268 538 + +The tendency is not peculiar to America, however. The following table +gives a classification of the loans and discounts of all the great +European banks[533] in selected years from 1875 to 1903: + + (Figures in francs, 000,000 omitted) + + _Note _Commercial _Advances on + _Date_ Circulation_ Loans_ Securities_ + 1875 9,699 4,027 828 + 1880 10,482 3,384 1,112 + 1885 11,662 4,050 1,231 + 1890 13,194 5,192 1,549 + 1895 15,896 5,328 3,669 + 1899 14,992 8,352 4,037 + 1900 15,906 8,514 4,171 + 1902 16,215 6,939 4,178 + 1903 16,539 6,147 4,129 + +We conclude, therefore, that the great bulk of banking credit in the +United States, even of "commercial banks," is not commercial credit. +Much of it, in the smaller places, especially, represents in fact, +whatever the form, long time advances to agriculture and industry. Most +of it, in the great cities, and to a large extent in even the smaller +places, represents advances to the permanent financing of corporate +industry. Excluding real estate loans, more than half of bank-credit +represents either ownership of bonds (with some stocks) or else advances +on stocks and bonds. Another important part of bank-credit, which I +shall not even attempt to measure, is employed in financing commodity +speculation. + +It is worth while to compare our figures concerning bank loans with +Kinley's figures, which we have previously considered, for deposits made +on March 16 of 1909, the year we have chosen for the bank loans figures. +It is important to remember that "deposits," as used by Kinley in this +investigation, does not mean what the term means in a bank balance +sheet. Kinley's figures relate to the actual items deposited on the day +in question, and not to the net balance after deposits and withdrawals +have been compared when the bank has closed for the day. A large deposit +in the balance sheet sense might show no "deposits" in Kinley's sense, +in a given day; while enormous "deposits" in Kinley's sense might be so +offset by incoming checks that virtually nothing is left on the balance +sheet at the end of the day, for a given depositor. Kinley's figures +thus give us a means of getting at the degree of _activity_ of different +classes of deposits in the balance sheet sense, and so, indirectly, of +different classes of _loans_. + +Loans and deposits (in the balance sheet sense) are, as we know, closely +correlated. This is true for banks in the aggregate, and for banks +individually at a moment of time. It is not generally true of a given +individual deposit account at a moment of time, but through a period of +time, for business deposits, it tends to be true that the items +deposited offset the amounts borrowed.[534] If the items deposited are +numerous, if the depositor has an "active" deposit account, receiving a +large flow of banking funds, as compared with his net deposit balances, +we may infer that his loans are also active, that he pays off loans +frequently, that his paper, in the assets of the bank, is "liquid." + +I need not give the details of Kinley's figures again, as they have been +elaborately analyzed in connection with the estimate of the "volume of +trade."[535] The figures show that retail and wholesale deposits between +them make up about 25% of the total deposits. This would serve to show +that "commercial paper," which we have allowed to be about 24.8 of total +loans, is slightly more active (and hence "liquid") than the average of +loans.[536] It will also suggest, however, that our figure for +"commercial paper," truly liquid, is too high, since we should expect +this kind of paper to be more active than the average--unless, indeed, +stock exchange collateral loans are so exceedingly active as to make a +tremendously high average. I refrain from trying to get a definite +answer on this point, since there are many indeterminate elements: among +others, uncertainty as to the extent to which wholesale deposits and +retail deposits _include_ all commercial deposits, and uncertainty as +to the extent to which they _exclude_ manufacturer's deposits. The great +bulk of Kinley's deposits, however, fall into the "all other" class, and +the great bulk of the "all other deposits" are located in the great +financial and speculative centres, particularly New York. We have +concluded that they represent chiefly (a) transactions in securities; +(b) other speculation; (c) loan and other financial transactions, +particularly the shifting of call loans on stock exchange collateral. It +is, then, the deposits of those connected with the great financial and +speculative markets, particularly the stock market, whose deposits are +most active, and whose loans are most liquid. Stock market collateral +loans thus constitute the most perfectly satisfactory sort of bank loan, +from the standpoint of liquidity. Though such loans do not make up the +bulk of bank loans (we have concluded that they constitute 30.6% of the +loans of State and national banks and trust companies in 1909), they do +account for the bulk of banking activity, and supply the greatest part +of the liquidity of total bank loans. + +When we consider further the item of securities (chiefly bonds) in +banking assets, we find another highly important source of liquidity. +The sales of bonds in the great banking centres are enormous. The +figures of bond sales on the exchanges do not begin to tell the story. +One big bank in New York in 1911 sold more than half as many bonds as +were sold in that year on the floor of the Stock Exchange.[537] It has +been frequently stated that ten bonds, of those listed on the Exchange +are sold over the counter for one on the floor. This is truer of Boston +than New York. The "outside market" for unlisted bonds is a very +important matter. Dealings among banks in these items and in foreign +exchange are exceedingly important. This is especially true of the +business of the great private bankers, as Morgan, Kuhn-Loeb and others. +Much of this does not appear in Kinley's figures, since neither the +deposits of the great private banks in other banks, nor the deposits +made in the private banks themselves (so far as New York City is +concerned) figure in his totals.[538] Had they been included, the +percentage of the "all other deposits" would have grown, and we should +have had still more impressive evidence of the fact that modern banking +in the United States is largely bound up with the security market, and +that modern bank-credit gets its liquidity chiefly from that source. + +The story is even more impressively told by the figures for bank +clearings, which include the transactions between banks, and the +transactions of the private bankers. In New York, in 1909, total +clearings for the year were 104 billions, as against 62 billions for the +whole country outside New York.[539] That bank clearings are closely +correlated with stock exchange transactions, has been demonstrated fully +by N. J. Silberling, who has shown the following correlations: New York +Stock Exchange share sales with New York clearings, r = .718; total +clearings for the country with New York share sales, r = .607; total +clearings for the country with railway gross receipts (as representative +of ordinary trade), r = .356.[540] The active deposits and the liquid +loans are chiefly connected with activities in finance and speculation. + +Now two important practical conclusions are suggested by this analysis. +The first is that the complaint of many farmers, merchants, politicians, +and even scientific writers that too much money and bank-credit are at +the disposal of Wall Street and other speculators rests on a +misunderstanding of causal relations. Wall Street does not, by using a +large amount of bank-credit, take just that much away from ordinary +business. Rather, it increases the amount available for ordinary +business! Wall Street, and the other financial and speculative centres, +supply the _liquidity_ for bank assets, and so make possible loans on +non-liquid paper. Banks do not need to have all their assets liquid. If +they did, American banks would have long since gone under! The foregoing +discussion of loans to farmers, and manufacturers and even merchants +should have made that clear. But banks do need a substantial margin of +liquidity, to protect the rest. They get it from stock exchange +collateral loans, and from ownership of listed and easily marketable +bonds, primarily. They get part of it from true commercial paper. Thus, +the director of a country bank in Iowa told the writer that banks in his +section--where banks owned in large measure by farmers, and dealing +largely with farmers, are very numerous and important--make a regular +practice of buying, through brokers, a considerable amount of notes of +outside merchants. They do this to protect themselves. Their other +loans, to farmers, while good, are slow. If pressed themselves, they +cannot press their depositors. These notes bought through note-brokers, +however, are impersonal. They can refuse to renew them. They can sell +them again. They thus buttress the rest of their assets. They can thus +lend more, rather than less, to local customers. They can safely get +along with much smaller cash reserves. Similarly with the practice of +country banks of sending a large part of their cash to Wall Street banks +to be lent on call, for which the country banks get, say, 2% from the +Wall Street banks. Their country customers would pay 6% or more for +that money in some cases, but the banks dare not tie up more of their +assets in non-liquid local paper. They lend more, rather than less, at +home, because they send part away. Wall Street is not "draining our +commerce of its life blood"![541] Wall Street is rather preventing that +life blood from coagulating! + +A second important practical conclusion relates to the provision in the +Federal Reserve Act which forbids Federal Reserve Banks to rediscount +stock exchange paper. This provision was intended to keep funds from +being diverted from commerce to stock speculation, and doubtless met the +approval of many very good students of the subject. If the foregoing be +true, however, that provision is a mistake. It is a mistake, first, +because it will lessen, rather than increase, the power of the Reserve +Banks to provide relief to commerce through aiding in making bank assets +liquid _via_ the stock market. It will limit the liquid assets of the +Federal Reserve Banks in too great a degree to gold. It is a mistake, in +the second place, because it prevents the Reserve Banks, particularly in +New York and Boston, from making satisfactory profits--which is one +important purpose of a bank! Even more important, however, is the third +objection: it prevents, in large degree, the Federal Reserve Banks from +being effective weapons against the "Money Trust." How far we have a +"Money Trust" need not be here argued. The Pujo Committee, relying in +considerable degree on admissions of prominent financiers that +"concentration had gone far enough," and on the inability of Mr. Baker +to find more than one issue of securities of over $10,000,000 within ten +years, without the cooeperation or participation of one of the members of +a small group, concluded that we have a "Money Trust" in the sense that +there is "an established and well-defined identity and community of +interests between a few leaders of finance ... which has resulted in a +vast and growing concentration of control of money and credit in the +hands of a comparatively few men."[542] How far this conclusion is +justified is, of course, a matter that would require elaborate +discussion. There seems to be evidence that there is, since the death of +the elder Morgan, a decided loosening of ties. One feels the need, +moreover, of discounting very considerably many of the conclusions of +the Pujo Committee. The present writer feels that the case has been +made, however, that there has been, and probably continues, a much +greater concentration of such control than is desirable. Whether or not +there is at present such a "Money Trust," it seems pretty clear that +temporary, if not permanent, alignments, may give effective monopoly +control when the issue of very big blocks of securities is involved. For +present purposes, however, it is enough to note that _if_ there is, or +should come to be, a "Money Trust," it is a trust concerned with +_financing industry, through handling security issues_, and not a trust +_in the granting of ordinary commercial credit._[543] If, therefore, the +Federal Reserve Banks are to compete with it, and break its monopoly, +they must do it by entering the market with funds for the financing of +corporate industry. Power to rediscount commercial paper seems a feeble +and hardly relevant weapon against a combination concerned with +purchasing securities, and making collateral loans! No doubt, this power +is worth something. If an independent investment banker wishes to +compete with a "Money Trust" in financing a new enterprise, he can go to +his commercial banker, and offer collateral security for a loan; if the +commercial banker wishes to aid him, but is short of lending power, he +may, if he has plenty of commercial paper available for rediscount, +rediscount it with the Federal Reserve Bank, and so get the additional +funds. But a New York bank, or trust company, with the bulk of its +assets in stock exchange investments, may well not have enough +commercial paper eligible for rediscount, and the Federal Reserve Bank +could help very much more effectively if it could take collateral loans +directly. A fourth, and even more important objection to the restriction +on stock exchange collateral loans for Federal Reserve Banks relates to +the power of these banks to aid in a crisis. Crises first hit the stock +market. Financial panics are most acute there. The need for immediate +and drastic relief is greatest there. If stock exchange loans lose their +liquidity, what of the rest of bank loans? Power to lend on stock +exchange collateral, in the hands of the Federal Reserve Banks, may well +prove, in crises, an essential, if we wish to make our system definitely +"panic proof."[544] + +And now for a vital theoretical conclusion from this lengthy analysis of +bank loans. For the quantity theory, and the "equation of exchange," all +exchanges stand on a par. If one exchange takes place, that lessens the +money and credit available for another exchange. The more exchanges +there are, the less money and credit there are per exchange, and the +lower prices must be, as a consequence. Nothing could be more false. +Exchanges are not on a par.[545] Some classes of exchanges increase, +rather than decrease the funds available for handling others. The +activity of the speculative markets, making loans fluid, enormously +increases the lending power of the banks for all purposes. Exchanges of +securities, especially, instead of lowering prices, make it easier for +prices to rise.[546] The years of extraordinary stock sales have always +been "bull" years. There have been big "bear" days,[547] but never big +bear years, in the record of New York Stock Exchange share sales. The +selling and reselling of speculative goods of securities, and of notes +and bills are especially important as making it easier for banks to +expand loans. To list all manner of items, as Professor Fisher +does,[548] "real estate, commodities, stocks, bonds, mortgages, private +notes, time bills of exchange, rented real estate, rented commodities, +hired workers," and count them all as "actual sales," all part of the +"goods"[549] which make up the "volume of trade," is to put the theory +utterly beyond the pale. Seasonal calls on an inelastic money supply for +actual cash to move crops and pay agricultural wages may make a real +difference in the value of money; scarcity of money of the right +denominations for retail trade may give an agio to such money,[550] but +the money and credit used by speculators, bill brokers, dealers in +foreign exchange, investment bankers, etc., increases, rather than +decreases, the funds available for ordinary industry and commerce. + +I have made clear the distinction between the direct and indirect +financing of industry by banks. Great banks in Continental Europe often +_buy_ the stocks of new corporations, hold them permanently, put bank +officers on the boards of directors, and supervise closely the +operations of the companies. In America, while officers of +commercial[551] banks often are members of boards of directors of the +companies which borrow heavily from the banks, the practice is to make +short-time loans to such companies (in form, if not in fact), and to +lend on their securities, rather than to buy them. Our banks own +securities in enormous amount, but they are chiefly seasoned bonds, +rather than stocks of new or even well-proved, enterprises. + +It is commonly supposed, too, that collateral loans are chiefly or +almost wholly made to speculators, who buy securities in the expectation +of holding them only till investors take them off their hands, and that +investors buy them, not with bank-credit derived from loans, but with +money or bank-credit which they accumulate by saving out of current +income. It is particularly true of the higher grade securities, which +savings banks and insurance companies can buy, that this is the case. +The bank-credit thus serves for temporary, rather than for permanent +financing, to the extent that this is true. I think, however, that the +extent to which bank-credit serves for permanently financing industry is +underrated. A good many investors have learned that the short-time +money-rates are, on the long time average, lower than the yield on +long-time securities.[552] They have learned, too, that high-yield +securities--securities high in yield as compared with the long-time +average of money-rates--can be obtained which can safely be carried on +margins of thirty, forty and fifty points, without danger that even such +catastrophes as the slump in security prices at the outbreak of the War +will wipe the margins out. The old distinction between investors and +speculators, the former those who buy for the yield, and the latter +those who buy for an anticipated rise in capital value, no longer +corresponds to the distinction between those who buy outright and those +who buy on a margin. The investor, buying a 6 or 7% preferred stock, +carrying it on a forty point margin, with money from his bank or broker +at 4 or 5%, is making 6 or 7% on his own forty dollars, and is making +the difference between 6 or 7% and 4 or 5% on the sixty dollars lent him +by his banker or broker. He substantially increases his yield thereby, +and his risks, if he chooses his stocks carefully, and scatters them +among a number of issues, are not great. For the banker or broker, such +a loan is perfectly satisfactory. The margin of security is wider than +that demanded on more speculative securities. Such a borrower will +receive consideration when more speculative loans are being called, or +not renewed. The investor of this type is, in effect, engaging in a form +of banking business. He is lending to the corporation funds which he has +borrowed from others; he has put up his own capital for the same purpose +that the bank uses its capital--to supply a margin of safety to those +who have taken his short-term promises to pay. Like the bank, too, he +converts rights to payments at a later date into rights to payment at an +earlier date. He is one of the links in the chain whereby the wealth of +low saleability employed in industry becomes distilled and refined till +it enters the money market. His profits come in the difference in the +yield as between more saleable and less saleable forms of rights. + +The extent of this practice cannot be stated, so far as any data to +which the present writer has access are concerned. The writer has met +the practice in a good many cases. One brokerage house, with whose +operations the writer has considerable acquaintance, makes a practice of +advising its more conservative customers to do this. A good many +brokerage houses sell investment securities on the "instalment plan," +which often means, in practice, that the initial margin put up by the +investor is his only payment, and that the security is gradually paid +for by letting the yield increase the margin. During the extremely easy +money of the present War period, occasional reference has been made in +the financial papers to the practice of buying even the highest grade +bonds on this basis--the yield of the bonds being very substantially +higher than the money-rates, giving a comfortable profit to those who +hold the bonds on a margin. + +That the practice is not wider spread is due primarily, probably, to the +temperamental qualities required. The investor, proper, is commonly a +very conservative person, who has an unreasoning distrust of +speculation, and to whom the word, "margin," necessarily suggests +speculation. That buying a stock on a margin is the same sort of thing +as buying the equity in a mortgaged farm, does not occur to him. On the +other hand, the man who knows the market well enough to be willing to +deal on margins, frequently is not content with the slow process of +accumulation which comes from annual yields, and prefers to take larger +chances in speculation on capital values. But there is an intermediate +class, who buy investment securities, with narrow range of fluctuation +in capital values, for the sake of the yield, and who buy them on +margins, margins ample to enable them to sleep at night, and to neglect +the daily market reports. I think that there are indications that this +class is growing larger, and more important. Doubtless much more +important than individual "bankers" of this sort, however, is the +enormous number of houses dealing in securities, "wholesalers" and +"retailers," who find profit on their "wares" even while on their +"shelves," through the differential between the yield and the charge +made by commercial banks on collateral loans. A very large percentage of +collateral loans is made to institutions of this type. As this practice +becomes more important, the result must be to widen the money market, to +increase the proportion of banking capital that goes permanently into +financing industry, and to reduce the difference in yield between +short-time paper and long-time securities--in other words, to bring the +"money-rates" closer and closer to the long-time interest rates. + +This would have seemed very strange and weird to Adam Smith. It means, +in effect, that the bulk of our banking credit is, directly or +indirectly, financing our industry rather than our commerce. Adam Smith +thought that a bank could safely lend to its customers only so much as +they would otherwise keep by them in the form of money. Perhaps this +notion, as growing out of some speculations regarding the general theory +of money, should not be taken as the statement of Smith's practical +attitude on the matter, but that practical attitude, as clearly +expressed in the paragraph[553] following, is that a bank can afford to +lend only for mercantile operations that are carried through in a very +moderate time, that the bank can afford to supply only the minor part of +the circulating capital, and no part of the fixed capital, of a +merchant, or manufacturer, no part of his forge and smelting house, etc. +Such loans lack the liquidity which the bank must insist upon. Only +those persons who have withdrawn from active business, and are content +with the income upon their capital, can afford to lend for such +purposes. The theory is sound, on the basis of the facts as Smith knew +them. But modern corporate organization and modern stock markets have +changed all that. Anything that is highly saleable can come into the +money market, and the modern corporation organization of business, +coupled with organized stock exchanges and a large and active body of +speculators, has made the forge and the smelting house as saleable as +the finished product. + +This is not to accept Schumpeter's doctrine,[554] so far as the United +States are concerned, that it is primarily the bankers, the +manufacturers of bank-credit, who make the decisions that turn industry +from old to new lines. They do not, on the whole. In Continental Europe, +particularly Germany, they do to a much greater extent. Criticism has +been made of our American commercial bankers, as contrasted with German +bankers, that the former are parasites, who insist on sure things, and +refuse to take chances with other business men in the development of +industry. To the present writer, our banking system seems to be rather a +more developed system than that of Germany, in that the "division of +labor" has gone further with us, and risk-bearing and the manufacturing +of bank-credit have been more sharply differentiated. We have bankers +enough who are "risk-bearers." But they are, on the whole, "private +bankers," "investment bankers," and the like, who do not manufacture a +great deal of deposit credit, but rather borrow heavily from the +commercial banks, which are the great manufacturers of bank-credit. +Under our system, the decisions which divert industry from old to new +lines are more democratically made, by speculators and investors under +the leadership of private bankers, and sometimes without that +leadership. These constitute the important intermediary which transforms +stock exchange securities into the basis of bank-loans. The commercial +banker buys, in general, not the stocks, but the note of the private +banker, broker, speculator, or investor, with the stocks as collateral. +If investment bankers, speculators and investors decide to support old +ways of doing things, the banks lend on the securities of the old kinds +of businesses; if investment bankers, speculators and investors turn to +new things, the commercial banks follow suit. Commercial banks can and +do discourage certain types of enterprises by refusing loans with their +securities as collateral, or by requiring very heavy margins with such +loans, but even these may be developed, and are with us on a large scale +developed, on banking credit, advanced by the speculators and private +bankers who borrowed it from the commercial banks with other securities +as collateral. The commercial banks of the United States may to a very +considerable degree check dynamic tendencies, but in general, they do +not lead and direct them. Bank-credit, directed by others than +commercial bankers, does, however, enormously facilitate both the +starting of new enterprises and social readjustment to them. + +How far can the total wealth of the country, agricultural as well as +industrial, be brought into the circle of the money market? The full +answer to the question would go far beyond the limits of this book. If +agriculture can be brought under the control of large corporations, +there is little reason for supposing that it, too, might not come in. +There are some peculiarities of agriculture, special dangers of drought +and flood, dangers of over-production and low prices, wide seasonal +fluctuations in conditions, which make it hard to standardize in any +case. But mining and even the manufacturing of such things as primary +steel products have wide variations in prosperity too. So long, however, +as agriculture remains a matter of families on a homestead--and for +social and political reasons, we may hope that this will always be the +case--it is difficult to bring it in. Bonds of agricultural associations +or of agricultural banks have had limited sale on the bourses of Europe. +The present writer, for example, found it impossible to find in four +great libraries in New York and Boston any quotation of the bonds of the +_Bayerische Landwirtschaftsbank_. Apparently, in general, such +securities have not high saleability. While this remains true, +agriculture may expect to remain under a handicap of higher interest +rates than industry and commerce. + +If, however, all forms of wealth could be made equally saleable, we +should find interest rates rising for those loans and securities which +now have the highest saleability. They would lose the peculiarity which +now enables them to perform a service as bearer of options. Money-rates +and long-time rates of interest would tend to come together. Long-time +rates on formerly unsaleable loans would fall, and rates on highly +saleable loans would rise. The present low rates in the "money market" +grow out of _differential_ advantages. + +We turn now to the third important aspect of the technique of banking, +namely, the matter of cash reserves. First I would point out that this +is merely a part of the more general problem of liquid assets. The +difference between cash and liquid paper is a matter of degree. There is +large possibility of substitution of the one for the other, as it +becomes more profitable to use one or the other. When money-rates are +low, it may well be worth while to carry large reserves; when +money-rates are higher, the gains to be made by substituting paper for +cash in the bank's assets are much greater. I have pointed out the use +which great European banks, notably the Austro-Hungarian Bank, make of +foreign bills of exchange as "reserve," selling bills when money is +"easy," and the yield on bills is small, buying bills when money is +"tight," and the yield on bills is large.[555] The great Joint Stock +Banks of England, the chief sources of bank-credit in the great banking +country of the world, also make use chiefly of deposits with the Bank of +England as their "reserves." Some cash they keep, but it is "till +money," rather than reserve. They carry, also, "secondary reserves" in +highly liquid paper, stock exchange loans and commercial bills. The +differences are differences in degree. The Bank of England does keep a +large reserve in cash (including notes of the Issue Department and gold +bullion) but it denies that it has any definite ratio in mind,[556] and +it protects its reserves, when they are low, not by ceasing to loan, but +by raising its discount-rate. The whole thing is highly flexible. + +This is, in general, true throughout the world,[557] where banking is +highly developed. A country which has expanding business, based on +rising values of goods and rising capital values of anticipated incomes, +which in turn grow out of increasing business confidence, etc., and out +of the development of new enterprises which make readjustment necessary, +expands its bank-credit to meet the situation. Expanding bank-credits in +time grow so large that bankers feel larger cash reserves to be +desirable. Their reserves may be also, in some measure, drawn upon by +the growing retail trade and wage-payments, which call for more money +in circulation. They meet the situation by raising money-rates. This +tends to prevent the exportation of gold, and tends to encourage the +importation of gold, which finds its way into bank reserves. Banks may +even borrow directly from banks in other countries, to get the gold they +need, or to prevent the exportation of the gold they have. The higher +money-rates, also, tend to check marginal borrowing--the borrowing by +those who see only very small profits to be made by the use of the +bank-credit they borrow. If the rising values of goods, however, and the +profits to be made by effecting exchanges, speculative and other, are +large, the volume of bank-credit will, none the less, grow. If the tide +of rising business confidence is strong, the banks will be disposed to +accept securities and rights as collateral which they would distrust at +other times. A very big difference indeed may appear between bank +reserves in active times and bank reserves in dull times. The banks need +less reserves in proportion to deposits in active times, because the +very activity itself increases the liquidity, the saleability, of their +paper assets, and so makes actual cash less necessary. Even in this +country, the practice of counting deposits in other banks as reserve is +well developed. This is not only true of country banks, or banks outside +the reserve cities. It has been, in considerable degree, the practice of +the big trust companies in New York City. It is the practice of private +bankers connected with the stock exchanges, and the practice of brokers, +who are, for many purposes, bankers, especially those who allow their +customers to check on their accounts. Such houses may carry no cash at +all. One, with whose workings the writer is somewhat familiar, makes the +rule--"We pay by check and receive only checks." None the less, this +house allows its customers to check upon it, and checks drawn on it +perform all the functions of checks drawn on banks which keep a cash +reserve. Of course, our new Federal Reserve system is built, in part, on +the principle of collecting reserves in central reservoirs, and our +banks will doubtless increase the practice of counting deposits with +other banks as reserve.[558] They will feel the need for less reserves, +also, with a wider rediscount market. + +_Within a given country_, I think that we may safely generalize the +doctrine that the causal relation between reserves and deposits is +exactly the reverse of that asserted by the quantity theory, within very +wide limits indeed. That is to say, increasing reserves are a _result_, +and not a _cause_, of increasing loans and deposits. We shall further +hold that the relation between them instead of being definite, is highly +flexible. This is not to assert that reserves may not increase without a +prior increase in loans and deposits. That has happened in the United +States during the present War. It does mean, however, that increasing +loans and deposits will pull gold into a country, and that increasing +reserves do not force increasing deposits and loans.[559] If a country's +business is growing, if that business is soundly based, so that +expectations are being met, obligations being paid out of the income +which arrives, on schedule time, to meet anticipations, there need be no +effective check to the amount of gold that will come into the country to +serve as reserves, within limits that are rarely reached. It is +miscalculation, maladjustment of costs and prices in particular +enterprises, failure of "interstitial adjustments," especially failure +of particular crucial links in the business chain, as the businesses +engaged in producing iron and steel, to respond to the needs of other +expanding businesses, that check movements of expansion in business, not +inadequacies of bank reserves.[560] As long as only wise plans are made, +as long as they meet no mishaps, as long as the carrying out of the new +plans does not itself so change the facts on which the calculations of +business men have been based as to cut under anticipated profits, so +long may business, within a given country, expand without danger from +inadequate reserves. Of course, if the whole world is simultaneously +expanding, the competition for gold in the international money markets +may be so severe that all may be hampered. + +That reserves will increase, as expanding credit, due to increasing +business or rising prices, requires increased reserves, can hardly be +disputed, I think, if we look at a country of small size, or (what is +the same thing from the angle of economic analysis, so far as the +present problem is concerned) if we take a particular part of a country. +Seasonal movements of cash for reserves in this country have been +obviously determined by the movements of credit, rather than the +reverse. Expanding business at crop moving seasons, requiring advances +of credit by country banks, and an unusual drain on the cash resources +of the country banks, has regularly meant that the country banks draw +cash from the New York banks. When the need for such cash in the country +banks passes, when they can no longer employ it to advantage at home, +they send it back to New York. New York, to meet the emergency caused by +the withdrawal of cash, draws to a considerable extent on Europe for +gold. It is not as easy for New York to get gold quickly from Europe as +it is for France to get gold in an emergency from England. More time is +required. Inelasticity, too, in the forms of currency most needed for +small transactions, has made very real difficulties for us. But that, +within the country, the sections whose business and credit were +expanding take cash reserves from those sections where credit is less +urgently demanded, needs no debating. This is seasonal. But the same +thing is true in the long run. As business and bank-credit have +expanded, year by year, in Oklahoma, Oklahoma's cash reserves have +grown. Bank-credit in a country cannot go on indefinitely mounting, if +bankers are making unsound loans, if the values on which the loans rest +are based on vain imaginings, if anticipated profits are not realized. +But if a country have rich resources and intelligent entrepreneurs, with +sagacious bankers who can discriminate between sound and unsound +business, it may, within very wide limits indeed, expand its bank-credit +without check from inadequate reserves, as its business expands, and as +prices, particularly prices of lands and securities, rise.[561] + +If the country in question be a very large country, however,--large in +the sense that its business and volume of bank-credit are very large, +and particularly in the sense that bankers' assets are of such character +that a large volume of reserves is desirable--restraints on the process +of expansion may come. Reserves will come in, but the resistance in +stiffer money-rates will be felt. Bankers in other countries will +compete with the bankers in the country in question for reserves. Rising +money-rates will put an end to many marginal exchanges. They will lessen +the saleability of many rights which might otherwise be available as +banking collateral. The extension of bank-credit will feel a drag. There +is large flexibility here. But, in a long run period of many years, the +volume of gold in the world will impose a maximum limit upon the +possibility of expansion of bank-credit in the world as a whole. This +limit is doubtless never reached. Within the limit, the variations in +the volume of the world's credit are primarily determined by the other +concrete factors we have been discussing. Proportionality between the +world's gold and the world's volume of credit does not at all obtain. +Under certain conditions, much higher proportions of reserves to +bank-credit will be found in a given country than at other times, and +the same will be true in the world at large. + +I would refer again to the discussion by J. M. Keynes, quoted in Part +II.[562] Reserves have absorbed enormous quantities of gold, easily +obtained as a consequence of abundant gold production, in the past +fifteen years. Proportions of gold reserves to bank-credit have grown. +In the preceding period, when gold production went on less rapidly than +business development, percentages of reserves were lower. Most bankers +feel better with large reserves. When they can get gold, they prefer +gold to other substitutes. When they cannot easily get gold, they use +other substitutes, of the various kinds of paper, particularly, which +have been described. Gold differs from other things, in bankers' assets, +in degree, rather than in kind. Instead, therefore, of the law of the +proportionality of reserves to volume of bank-credit, I venture the +generalization[563] that, as gold production increases rapidly, the +tendency is for the proportion of gold reserves to volume of bank-credit +to rise; with diminished gold production, the tendency is for the +proportion of reserves to fall, assuming that the factors other than +volume of gold production which make for expansion of business maintain +themselves. + +Increasing volume of gold tends to increase the volume of trade. But +there are other causes for the increase or decrease of trade as well. +These causes, working in harmony with rapidly expanding volume of gold, +lead to a very rapid growth of trade.[564] Working in the face of a drag +from less rapidly growing gold supply, they strain the possibilities of +bank-credit expansion. Various substitutes for gold in bank reserves are +employed. Substitutes in the form of other forms of credit are employed. +Barter is resorted to increasingly. Methods of employing other things +than gold in the retail trade of a country are resorted to. +"Gold-exchange" standards are devised. Countries "wait their turns " to +come on the gold standard. Cooeperation, not only within countries, but +among countries, seeks to economize the scanty stock of the precious +metal. Very large slack is thus revealed. But the expansion of business +is checked, the volume of business confidence is reduced, the values of +future incomes in enterprises is lowered, production is checked, and +prices are reduced, (a) because the value of money rises; and (b) +because the values of goods and income-bearers is reduced. The exchange +side of production is hampered. Substitutes for gold, through increased +activities of bankers and other agents of exchange, are costly. Greater +tolls on values are taken by those who handle the mechanism of exchange. +It does make a difference whether or not the world's gold is abundant! +But the difference is not made solely, or even mainly, in the +price-level.[565] + +The reserve function of money is essentially a _dynamic_ function. The +reserve function is merely a phase of the bearer of options +function.[566] It is the practice of quantity theorists to speak of +"normal" ratios between reserves and deposits (or reserves and demand +liabilities), and to speak of the "static" laws governing this relation. +This in true of Kemmerer, of Fisher, of A. P. Andrew, and, in general, +of contemporary quantity theorists. Kemmerer very explicitly puts it as +a matter of static theory, "If we divide the money of the country into +two parts; one, that used directly in daily cash transactions, and the +other, that kept in banks as reserves, it may be said that, _under +perfectly static conditions_ [italics mine], the proportion of the total +represented by each of these parts would be constant. Each banker would +find from experience what proportion of reserve to liabilities it was +advisable for him to maintain, and would order his business, as far as +possible, so that his reserve would neither exceed nor fall below that +most desirable proportion."[567] Kemmerer quotes the following passage +from A. P. Andrew: "In the long run, _as apart from cyclic +oscillations_, the quantity of bank-credit is governed by the quantity +of money."[568] Fisher's view we have considered at length in Part II. +It is essentially the same. He is working with the statics of the +problem of money and credit. These different writers differ greatly in +the extent to which they would insist on the validity of their static +tendency in real life. Professor Fisher, as we have seen, is exceedingly +uncompromising, holding tenaciously to his principle as subject only to +slight modification during transition periods. Professor Kemmerer, in +the chapter from which the quotation just given is taken, gives an +important realistic analysis of dynamic conditions and makes liberal +concessions to the view that the ratio is no constant in real life.[569] +Professor Taussig, whose view was summarized at length in chapter IX, +finds, in real life, so many exceptions to the doctrine of +proportionality of reserves and deposits that he virtually abandons that +doctrine. What I wish to insist on here, however, is that there are no +static laws _possible_ in this connection. The reserve function is a +dynamic function. The theory of reserves must rest in an analysis of +friction, of transitions, of dynamic uncertainty and dynamic change. It +is a part of the general theory of liquidity of bank assets, of +saleability of rights, and the like. If one can find a "normal" amount +of dynamic change, a "normal" amount of uncertainty, a norm for the +coming of technical inventions, a normal prospect of war, a normal rate +of gold production, a normal rate of growth for population, a normal +amount of Jew-baiting in Russia, with a norm for migration, and if one +can hold these norms, and a multitude of similar norms, in fixed +relation to one another, one might have justification for speaking of a +"normal ratio" of bank reserves to bank demand liabilities! + +Apart from dynamic changes, from frictional elements which create +uncertainties, in general, apart from uncertainty and irregularity and +lack of "normality," there would be no occasion for bank reserves at +all! To the extent that static conditions are realized, bank cash +reserves may be, and _are_, dispensed with. It is well known that +England gets along with surprisingly little gold. The total stock in the +country has been smaller than the gold reserve of the Banque de France, +and much of the gold in England was in use among the people, since small +paper money (before the War) was not in use in England. The gold reserve +of the Bank of England has been usually only a fraction of that of the +Banque de France. Some years since, the distribution of gold as between +England and the United States, was, roughly, England six hundred million +dollars, the United States, one billion, six hundred million. A larger +proportion of gold was in reserves in the United States than in England. +Yet England was doing the banking business of the world, while we had +trouble in doing our own! The Bank of England carries virtually the only +reserve in the country. The Joint Stock Banks, with demand liabilities +vastly in excess of the demand liabilities of the Bank of England, carry +only "till money" in cash or Bank of England notes, and for the rest, +carry as their "reserve" their deposit credits with the Bank. A great +deal of criticism, from Bagehot down (to go no further back) has been +directed at the "inadequacy" of English banking reserves, and many dire +predictions have been made as to the dangers that impended unless the +reserves were increased. We shall probably hear less of this after the +War! The Bank of England still stands! It has never failed to pay out +gold over its counters, even though it has, with the aid of the +government, doubtless restricted and controlled foreign shipments of +gold. But it has met the unprecedented emergency better than any other +bank in Europe, and to-day (Sept. 1916) is in exceedingly good shape. +Sterling exchange at New York seems "pegged" at the "lower gold point," +and apprehensions regarding the stability of the English financial +system seem definitely allayed. It is aside from our present purpose to +discuss war time conditions. I am rather interested in analyzing the +features of the English money market which have made it possible, in the +period preceding the War, for English bankers to get on with so little +gold. As will appear, it is because English business and financial +affairs have been more nearly "static," have come nearer to realizing +the assumptions of static economic theory, than is true of any other +country on earth. + +The very fact, for one thing, that England is the great _international_ +banker has meant a scattering of risks. Acute panics do not come in all +countries on the same date. Bad business in one country may be offset by +good business in another; drains of gold to one country may be met with +gold flowing in from others. The same considerations which tend to +stabilize the railroad business, as compared with, say, cotton-growing, +apply to the international banker as compared with the banks of a single +country or section. But further, the London market has developed +cooeperating agencies for smoothing out friction and eliminating +uncertainties to a degree unknown anywhere else. An anonymous writer in +_The Americas_ for April, 1916,[570] has given an exceedingly +interesting account of this organization of the London market,--the +product of the development of generations. Let us enumerate some of the +points: There is nowhere in the world so much expert judgment in the +grading and evaluating of hundreds of commodities from all parts of the +world. There is, coupled with this, a worldwide reputation for the +experts of absolute integrity, so that producers in remote countries +regularly ship ("consign") to London cargoes without definite +arrangements, knowing that there are in London organized facilities by +which the commodities are warehoused, expertly and fairly judged, and +either sold at once or else made the basis of a collateral loan against +which they can draw immediately. The institutions which make this +possible are (a) the system of warehousing, with its certificates or +warrants which give absolute title to the goods, and which are easily +negotiable; (b) the organized arrangements in connection with the +warehouses by which commodities are received and either graded as they +are, or separated and mixed with others to form standard blends readily +marketable--this with rigid integrity and expertness which the whole +world trusts; (c) a speculative community which has unlimited banking +credit, ready to buy at a concession in price virtually any +commodity--honey in the comb, sealing wax, pianos, farm machinery, what +not; (d) the organized markets or periodical auctions which speculation +and final purchase together support; (e) the banks, which, relying on +the standardization of the commodities and the readiness of the +speculative community, can without hesitation lend the money on which +the distant shipper is relying to conduct his business. + +What comes to London is fluid. Everything comes to London! The +multiplicity of items dealt in gives stability to that business which +deals with all--the banking business. The London Stock Exchange is no +provincial affair, easily demoralized by an adverse rate decision! +Securities of every country on earth are listed there, and speculated +in. It must be a world catastrophe which really demoralizes the London +stock market! + +It will doubtless seem strange to many to say that New York cannot +displace London as the centre of world finance, that the dollar cannot +displace the pound sterling in financing international trade, because +New Yorkers do not speculate enough! They do speculate enormously, but +not in many things. A restricted list of stock exchange +securities--almost wholly American; cotton--in which New York is the +world centre; coffee, in which New York has the largest volume of +speculative futures, though yielding precedence, ordinarily, to Havre, +Hamburg and Santos[571] in spot transactions. There is extensive sugar +speculation at the New York Coffee Exchange, which has, indeed, recently +changed its name to indicate the fact. There is a produce exchange in +New York, but it is a very small affair as compared with the Chicago +Board of Trade, and its operations and scope are infinitesimal when +compared with the produce speculation in London. Of course, there is a +vast deal of _unorganized_ speculation in many things in New York, as in +business everywhere, particularly in America. But, while the pecuniary +magnitudes of organized speculation in New York are very great, the +range of items dealt in is restricted. New York banks cannot possibly +get such a variety of collateral, based on standardized and readily +marketable goods and securities, as can London. New York, consequently, +cannot finance international trade, save as an auxiliary to London--and +New York banks must have vastly more gold in their vaults than London +bankers need! As goods and securities become _more_ marketable, +gold--whose services are needed because of its _superior_ +marketability--becomes _less_ necessary. + +The whole story of London's organization would be a long one. London +financial institutions have a degree of expertness, growing out of +specialization, in large part, which makes all manner of paper fluid in +the London money market which would lack fluidity in New York. The +Acceptance Houses are a sort of international Bradstreet and Dun. They +know intimately the standing and business of houses all over the world. +They do not give out their information, but they do put their stamp on +the paper of business houses, thus standardizing it, lending, not money, +but "pure credit," while the other banks, relieved of the necessity of +investigating the paper, can buy it as a miller might buy No. 1 wheat. +There is the extraordinary extension of insurance, so that virtually any +kind of risk may be shifted to those well able to bear it. All this +makes for liquidity, for "static" conditions in the money market, and +dispenses with the need for gold. + +As we approach static conditions, we need less and less gold reserve +behind bank demand liabilities. _The static law of bank reserves is that +none are needed!_ I think we have here the real reason why writers who +have sought to give us the law for a "normal" ratio have given us such +vague phrases as "shown by experience to be necessary," and the like. +When irregularity of income and outgo in a bank's business, non-liquid +assets, business cycles, uncertainties, legislative changes affecting +business, crop failures, changes in demand, new inventions, wars, are +abstracted from, no reason can be given why a banker should keep any +reserve at all! But these things are dynamic things. And it is +characteristic of irregularities that they are irregular. To get a +"normal" ratio out of them is not easy. + +On the static assumptions, an "ideal credit economy" is perfectly +possible. If everything that needs to be marketed is perfectly +marketable, if the stream of business flows regularly and without +friction in the same channels, if all contingencies are foreseen and +dated in advance, a bank needs no cash reserve. All payments can be made +by bank-credit. Banks bookkeeping becomes merely a refinement of barter, +with _money_ remaining as a measure of values, a unit for reckoning, but +not being used as a medium of exchange, or as a bearer of options, or in +reserves. The measure of values function is the great static function of +money. + +To the extent that static assumptions are not realized, we need money in +bank reserves. This extent is a thing that varies from time to time, and +from place to place. It is not the same for a given place from time to +time, nor is it the same at all places at a given time. It is not the +same for the whole world from time to time. + +Since friction, preventing the free marketing of goods and securities +and services, exists, since there are dynamic changes which require +readjustments through exchanges, we need the work of the banker and he +needs cash. But there are other things than money which make for the +"statification" of the market. The speculator does it. And the other +agencies of the sort represented in the London market do it. They are +substitutes for gold. Gold has no monopoly. The services performed by +gold can be performed in many other ways, and by many other agencies. +There is enormous flexibility in the matter. + + + + +PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS + + + + +CHAPTER XXV + +THE RECONCILIATION OF STATICS AND DYNAMICS + + +In the foregoing discussion of the value of money it has appeared that +the value of money is not an isolated problem! Not only have we found it +necessary to consider it as part of the general theory of value, but it +has been advisable to bring it into relation with a large number of the +special theorems of economics, including the law of supply and demand, +cost of production, the capitalization theory, the doctrine of +appreciation and interest, the theory of international gold movements, +Gresham's Law, the theory of elastic bank-credit, and the general theory +of prosperity. The book has thus become a book on general economic +theory, viewed from the standpoint of the theory of money. It has been +as contributing to the problem of the value of money that these other +doctrines have been discussed, but I trust that they, too, have gained +something of clarification from being considered in this relation, and +that the emphasis on the role of money in general economic theory has +helped in bringing the various elements in our current theory into a +closer-knit interdependence. + +The present chapter seeks to carry the conclusions so far reached toward +a further unification of economic doctrine, by finding for certain +contrasts, like that between statics and dynamics, a higher synthesis, +so that it may be possible for students of dynamics and students of +statics to speak a common language, to use common measures, to find that +their phenomena are not, after all, of essentially different nature, and +to come to agreement as to the relative importance of "static" and +"dynamic" tendencies. It will appear that the theory of money and +exchange plays an important role in effecting that higher synthesis, and +is itself clarified by it. + +The "theory of goods vs. the theory of prosperity," "statics vs. +dynamics," "normal vs. transitional tendencies," "long run vs. short +run" laws, "market vs. normal price," "abstract theory vs. concrete +description," "historical or evolutionary study vs. cross-section +analysis," "temporal vs. logical priority," "causation as a temporal +sequence vs. causation as timeless logical relationships"--these, and +similar contrasts have appeared frequently in the history of social +thought, and have been especially refined and elaborated in the history +of economics. We have even compounding of the notions into more +complicated distinctions, as by Seligman,[572] in his two statements of +the law of costs: in the short run, normal price tends to be the maximum +cost of production; in the long run, normal price tends to be minimum +cost of production. Seligman has illustrated his notion by an adaptation +of the familiar figure of the sea-level and the waves: for short-run +purposes, we may contrast the surface waves, the market prices, with the +sea-level, the normal price; for longer run purposes we may see the +level of the sea itself changing, under the influence of the tide, and +may have a dynamic normal, which is still to be distinguished from the +fluctuations due to the play of winds on the surface. + +We have further an increasing recognition of the up and down play of +forces accelerating and retarding the processes of industry and trade. +For earlier writers, panics and crises were anomalies; since Mill's +_Principles of Economics_, to go back no further, we have had increasing +recognition of such occurrences as more or less periodic and +inevitable, bound up in the very nature of economic life itself, and of +late there has been a fairly general acceptance of the notion of the +business cycle, of an alternating rhythm of prosperity and depression. +The explanation of this alternation has been attempted by numerous +theories, one of which, that of Joseph Schumpeter,[573] rests the whole +case definitely in the distinction between static and dynamic +tendencies, and in the conflict between the opposing sets of forces +which statics and dynamics undertake to describe. + +We are told by the orthodox economist that war is wasteful, destroying +laborers and goods, and lessening the wealth and productive power of +society. We are told that it diverts labor from productive employments, +that it turns huge masses of capital and labor to the production of +goods which men cannot enjoy, that it burdens the people with taxes, +etc. Static theory can see nothing but evil in war, from the standpoint +of minimizing human sacrifices, and maximizing human enjoyments. None +the less we see many war periods--notably that of our Spanish-American +War, and the present World War, so far as the United States are +concerned--periods of marked prosperity, growing out of the new +expenditures which war itself involves. Mules and other farm products +rose in price with the Spanish-American War, as the Federal Government +bought them for the army; various factories concerned particularly with +war munitions increased their activity, the gains of factory owners and +farmers led them to increase their purchases, wages rose, and rose in +part because part of the labor force was in the army. The Civil War did +spell demoralization and economic ruin for the South, but for the North +it gave a great dynamic impetus to trade, transportation and +industry--an impetus, strangely enough, that was so great that the new +industries and enterprises which had grown up were able to absorb with +little shock the million men set free from the Northern armies when the +great struggle was over.[574] + +For static theory, scarcity is an evil. A general overproduction is +impossible. For the practical business man, confronted with the +momentous problem of marketing his output, overproduction is a vital +reality, and there are few times indeed when much more could not be +produced if only a satisfactory market could be found for it. Static +theory would see the whole explanation of this in maladjustment, too +much of some things being produced, too little of others. This simple +statement does explain much of the phenomenon, but it is far from +telling the whole story, and even if it were a complete explanation, it +would by no means dispose of the reality of overproduction as a constant +menace, even when not a dire reality, facing almost every business man. +Static theory at best tells what a completed adjustment would be; it +does not touch the problem of how adjustment is brought about, and +maladjustment overcome. Yet just that problem is the vital concern of +the business man. + +For static theory, high or low prices are matters of no concern. And +abundance or scarcity of money and credit make no real difference in the +economic process. Abundant money and credit exhaust themselves in +raising prices, and the rest of economic life goes on unchanged. This +doctrine of the quantity theory is, as I have undertaken to show in Part +II, bad even as a matter of static theory. But it is only as a matter of +static theory that it is even thinkable. + +The economic theory of the 19th Century, following the lead of Adam +Smith and Ricardo, has been accustomed to dismiss as utter folly the +notions of the Mercantilists as to the balance of trade, and the +importance of an inflow of gold, and has conclusively proved that +protective tariffs tend to divert the labor, capital and land of a +country from those lines of production they are best adapted to to lines +for which they are less well suited. Critics have pointed out, as in the +"infant industries" argument, that we cannot treat the labor capacity +and technical knowledge of a country as constants, that the temporary +encouragement of one line of industry by a tariff may so modify the data +of the situation that the country may in time become better adapted to +the protected industry than to other lines. And I think that we may well +go further, and make substantial concessions to the doctrines of the +Mercantilists as they themselves stated them, seeing in a favorable +balance of trade, and in expanding exports and diminishing imports +sources of impetus which are not subsequently neutralized by the static +process of equilibration. I do not conclude from this that protective +tariffs are commendable, any more than I conclude that war is +commendable. Both may give dynamic impetus, and lead to economic +development. Both may lead to political corruption, to iniquities in the +distribution of wealth, to waste and suffering of various kinds, in +which honest and patriotic men suffer, and cunning and unworthy men +gain. The point here is simply that static theory does not tell the +whole story regarding either tariffs or wars. It may well be true--I +think it is true--that static theory offers the more important +principles for judging the results of wars and tariffs.[575] It is the +central problem which I have set myself at the outset of this discussion +to find a way to bring static and dynamic considerations _under a common +measure_, to reduce them to homogeneity so that comparisons may be +instituted, and so that the student of statics and the student of +dynamics need not talk merely at cross-purposes. But we do not achieve +this result by ignoring considerations in either sphere. + +Bastiat, with a fine show of logic, has sought to rule out of court the +doctrines that extravagance and tariffs, etc., are sources of prosperity +by his emphasis on the "Unseen," as opposed to the "Seen." The +prosperity growing out of the extravagant expenditures of one brother is +open to all eyes. The consequences of the savings of the frugal brother +men do not see so easily, and do not attribute to his frugality. +Doubtless Bastiat is right in his main theses. But one point needs +emphasis: that which is "Seen" stirs the imagination of men. And +imagination energizes human activity. The motivation of economic life is +a psychological matter. + +And so at a host of points the contrast may be drawn, in one or another +form. The pure, abstract, static theory gives one conclusion; the other +approach suggests one different.[576] + +How is it possible to give proper weight to considerations drawn from +such divergent spheres of thought? Indeed, how shall we weigh the +dynamic considerations at all? Static theory presents itself in +quasi-mathematical form. At times, it parades itself in equations, and +it readily enough, without arousing a feeling of incongruity, expresses +itself in mathematical curves, with ordinates and abscissae. One static +tendency finds itself in marginal equilibrium with another, and the +margin is expressed in quantitative units, commonly sums of money. +Static doctrine does, indeed, lay claim to precision and exactness, and +static tendencies may be weighed against one another. But how shall one +undertake to give quantitative measure to such a thing as the +educational influence of a tariff on silk manufacture? How measure the +dynamic impetus of a new chain of banks on the industry and trade of the +region affected? How gauge the importance of a new advertising scheme, +or a new invention? Dynamic considerations are commonly presented in +vaguer, looser form than static theories. Usually we have merely a +statement of a qualitative tendency, without effort to make the +importance of the tendency quantitative. Indeed, I think it safe to say +that one chief difference between statics and dynamics is that those +tendencies which can be most easily formulated have been recognized by +statics, while those which are less understood, and less precisely +formulated, are left to dynamics! A big part of the difference is +methodological, rather than inherent in the nature of the phenomena +themselves. + +I think that it needs little argument to show that all the contrasts +listed at the beginning of this chapter do not run on all fours. +Compare, let us say, the contrast between "statics and dynamics" with +that between "historical and cross-section" study. Concrete, realistic +history is not dynamic theory. A realistic description of society viewed +at a given short period of time is not static theory. Both statics and +dynamics are _abstract_. _Laws_ are not the same thing as description +and narration. The assertions of both statics and dynamics are commonly +made on the assumption, "_caeteris paribus_." A new bank will stimulate +business in a western town if bank-robberies do not come into fashion! A +tariff on wool will tend to educate the farmers in sheep-raising if the +habit of relying on governmental assistance does not develop, and make +them more, rather than less, inert,--or sharpen their political rather +than their economic acumen. Concrete history need not always verify +dynamic laws![577] It is, above all, important to insist that the +distinction between statics and dynamics is not the same as the +distinction between theory and description, or between the abstract and +the concrete. Evolutionary study may result either in concrete history, +or generalized laws; cross-section study may be either concrete +description or abstract formulae concerning forces in equilibrium. And +there may be varying degrees of abstractness in both cases. + +The contrast between long-run and short-run tendencies is not +necessarily the same as that between statics and dynamics. This former +distinction does recognize one factor which is sometimes classed as +"dynamic," namely, "friction."--"Friction," by the way, is a blanket +term which covers a multitude of sins of imperfect analysis and lazy +thinking! It is far from a simple, unitary thing. Sometimes it seems to +mean the action of the whole social order, other than the economic +values!--But dynamic, as used by the two writers who have used the term +most precisely, J. B. Clark[578] and J. Schumpeter,[579] is reserved for +those factors in economic life which make for constructive _change_. +Neither writer would call mere habit and inertia, which make +readjustments slow, or the necessities of physical nature, which retard +readjustment, by the name, "dynamic." It may be noted, in passing, that +both writers limit the term quite strictly to changes _in_ economic life +growing _out of_[580] economic causes. Schumpeter narrows the dynamic +factors to one, namely, _enterprise_, while Clark gives five general +classes of dynamic factors, all of which are primarily economic in +character. Neither extends his study to cover forces which are not +primarily economic in character, but which none the less lead to +economic changes. + +Again, the "theory of prosperity" is not identical with "economic +dynamics," though the two in large measure overlap. For one thing, while +some writers, as Schumpeter, find the business cycle to be a necessary +consequence of dynamic changes, and would maintain that no business +cycle, no up and down of tempo in production, no panics or crises, are +necessary if changed methods of industry, etc., did not come in, not all +writers would so explain the business cycle. Some writers would find the +explanation in the inherent instability of a money and credit economy, +some in the inherent weakness of a capitalistic system, quite apart from +necessary dynamic change. Irving Fisher makes no use of changed methods +of production in his explanation of business cycles, though he does +mention invention as one possible cause of a disturbance in normal +equilibrium.[581] But further, dynamics is largely concerned with +problems, like invention, changes in the economic habits of a people, +methods of organizing industry, etc., which, while they may well bear on +the problems of prosperity and depression, yet have interest for their +own sake, and would be studied if there were no business cycles. +Further, the notion of statics, the other term in the static-dynamic +contrast, is not identical with the "theory of wealth," or "theory of +goods," or "theory of the wealth of nations" which such a writer as +Veblen[582] would put in contrast with his "theory of prosperity." There +is a normative, or practical, and polemical coloring in the body of +doctrine growing out of Adam Smith, which Veblen would term, the "theory +of the wealth of nations," which is lacking in the more colorless +"statics" of to-day. + +I do not find any of the contrasts thus far discussed quite +satisfactory. I have been using the terms, statics and dynamics, as +general terms to cover all these contrasts. I shall try to formulate a +general contrast which includes most of the ideas passed in review, from +a somewhat different angle, and then try to show that the contrast, +while useful, is not absolute, and that it is possible to measure +considerations drawn from one viewpoint in terms of considerations drawn +from the other. + +Let us take as our starting point the notion of a cross-section picture +of society. I have set forth this notion in ch. 13 of my _Social Value_, +and have elaborated it in the discussion of von Mises' theory in the +chapter on "Marginal Utility" in this book. A cross-section picture may +be made more or less concrete and descriptive, or abstract and +analytical. If one looks at the picture of society in cross-section as +given by Giddings in his _Principles of Sociology_ (Bk. II, chapters on +"The Social Population," "The Social Mind," "The Social Composition," +and "The Social Constitution"), one finds a picture in which +organization and system are made clear, but in which vivid description +of concrete social facts is the primary concern. The account given is +largely qualitative rather than quantitative. It is a picture of flesh +and blood, as well as an account of functioning. It is, perhaps, not +easy to realize that Giddings is doing the same general sort of thing +that the pure economic theorist is doing, with his picture of a static +equilibrium of economic values. But what economic theory is concerned +with is, after all, to be found in Giddings' scheme. The pure theorist +takes for granted the physiographic environment, whose influence +Giddings takes into account. The theorist abstracts from biological and +racial factors. He assumes a social population, a social order, a +political system. He has not taken into his purview the social mind as a +whole, in his static theory. Rather, he has been concerned with only one +part of the social mind, namely, the economic values. Economic values, +and the objects of economic value, have been the data of the static +theorist. Given scales of economic value, such that for one quantity of +goods of a given kind, a given value per unit will obtain, given all of +these value-scales, and given the quantities of goods and services whose +values are in question, and static theory will furnish an equilibrium +picture, in which the price relations of different kinds of goods are +made clear, and their values are measured. The value-scales, and the +absolute magnitudes of value at different points on the scale, are +assumed, are data. Further, in order that the notions may be made +mathematically precise, a unit of value is needed, and this is commonly +the value of the money-unit, which is assumed to be constant. The +picture then becomes systematic. There is a system of values, expressed +in prices, which is stable, so long as the data do not change. It is +mechanically conceived, and illustrated by various mechanical symbols, +as balls in a bowl, or connecting reservoirs, or, best of all, by +intersecting curves. It is an abstraction from the living, pulsing, +organic whole of the social mind--the inter-mental life of men in +society. It squeezes much of the life out of the phenomena it +describes. It makes them exact, only by making them mechanical. It thus +becomes exact by becoming, in considerable degree, superficial and +abstract.[583] This is not to condemn static theory. Static theory has +proved its usefulness by solving too many problems for such a statement +of its limitations to involve a condemnation. But the statement of its +limitations will aid us in seeing its relation to that vaguer body of +doctrine which we call dynamics, or the theory of prosperity, etc. + +Now this means that static theory is not _value_ theory. It assumes a +theory of value. It assumes the value-scales as data. It assumes the +value of money as a datum. Static theories of supply and demand, cost of +production, capitalization, etc., assume the value of money, as has been +shown in Part I, and static theory, resting in the notion of +accomplished transition, normal equilibrium, abstracting from the +difficulties of readjustment, abstracting from friction, etc., misses +the whole point as to the functions of money, as shown in Part II. +Static theory proceeds by assuming a change in one of the elements of +its situation, say one of the value-scales, and then tells what the new +equilibrium will be after readjustment takes place, assuming that other +value-scales remain constant, and that quantities of the objects of +value do not change. Or, it assumes a change in the quantity of one of +the objects of value, and then predicts the new equilibrium. The new +equilibrium will often involve changed values and prices all around, and +will often involve altered quantities of other objects of value. But the +initial change comes from an alteration _from outside_ the system in one +or more of the data of the system.[584] + +Now dynamics, theory of prosperity, etc., are concerned with the causes +of changes in the data with which statics works, in large measure. Among +the problems with which statics has not adequately dealt, and in large +measure cannot deal, are (1) the nature of value itself, and the laws +governing changes in the value-scales; (2) the problems of readjustment, +including the problems of money, credit and exchange; (3) the psychology +of invention, of enterprise, and the like. (4) The reactions of economic +values and economic organization on the non-economic phases of social +life. (5) The reaction of the non-economic factors, as law, morals, art, +religion, etc., on economic life. (6) The problem of prosperity and +depression. I say that statics has not dealt adequately with these +problems. Statics in its present narrow form cannot deal with them. But +in considerable degree, I am convinced, statics can be made to deal more +adequately with them, if its scope be broadened, and its limitations be +made less rigid. Schematically, at least, the central ideas of statics +can be applied to a large part of these problems. I may add that my list +of six classes of problems with which statics has not adequately dealt +is not meant as a system of categories. The list is incomplete, and the +classes are not mutually exclusive. Rather, they overlap in large +measure. In a large way, it might be said that statics is concerned with +the laws of the equilibration of values, and that dynamics, theory of +prosperity, etc., are concerned with the nature and causes of variations +in the values themselves. The contrast may be put, in general, as the +contrast between the _theory of value_, and the _theory of price_, +statics being price-theory, and dynamics being value-theory. But this is +a thesis which calls for much elaboration and qualification before its +significance is made clear, to say nothing of its justification being +established. + + * * * * * + +We may approach the problem of bringing the two terms of the contrast +together from either of two angles: (1) we may show that dynamic factors +tend, in large degree, to submit themselves to measurement in terms of +money-prices, which obey the laws of static marginal equilibrium. (2) We +may show that all static prices presuppose values whose explanation is +in terms of the same phenomena with which dynamics, the theory of +prosperity, etc., have busied themselves, namely, considerations drawn +from the study of social psychology, including the psychology of +suggestion, imitation, mob-mind, the functional organization of minds +into a social mind, social beliefs, social values of other than economic +nature, and social institutions. (1) The evidence on the first point is +already in considerable measure worked out, particularly by Veblen, in +his _Theory of Business Enterprise_, and in his other writings on the +nature of capital, etc. Something more in this direction I have done in +my _Social Value_, and other writers have elaborated the notion. (2) The +case for the second contention has been made in detail in my _Social +Value_, and in what follows I shall rely chiefly on the discussion +presented there, and in the chapter on "Value" in this book. + +I take up first the thesis that dynamic factors may come under the +static measure. Veblen has made much of the contention that modern +"capital" is not, as Smith thought, and as orthodox economists in +general have contended, a matter of physical accumulations of goods. The +volume of business capital is a pecuniary concept, and may wax and wane +with little variation in the physical stocks. "Under modern conditions +the magnitude of the business capital and its mutations from day to day +are in great measure a question of folk psychology rather than of +material fact." (_Theory of Business Enterprise_, p. 149.) And in large +measure Veblen's work is given to showing how factors of legal and +social psychological nature get a money-measure. The actual capital of a +business enterprise does not rest chiefly on the physical equipment, +stocks of raw materials, etc., etc., which it possesses. To be added is +"good will," and this includes (p. 139) established customary business +relations, reputation for fair dealing, franchises, privileges, +trade-marks, brands, patent rights, copyrights, exclusive use of +processes guarded by law or secrecy, exclusive control of particular +sources of materials, etc. Veblen contrasts things of this nature +sharply with the concrete equipment, saying that the former are +serviceable only to the owners, while the latter are serviceable to the +community at large as well. The physical, tangible, and ethically +commendable character of the physical equipment is everywhere stressed, +while the pathological, anomolous, and sinister character of the less +tangible and more recent "capital items" is always set before us--all +the more effectively because Veblen maintains a satirical attitude of +moral indifference, and presents the case with Olympian aloofness. I am +not here concerned with the social welfare aspect of the matter, though +I shall later speak of that. My present purpose is to make clear two +points in Veblen's doctrine: (1) that he does bring these intangible +things, which are the variables involved in his theory of prosperity, +under the price measure; and (2) that he considers these prices as +anomalies from the standpoint of the general laws governing the values +and prices of concrete goods. To this last point I shall later take +sharp exception. For the present, I wish to develop further the extent +to which such factors may be brought under the general static measure. + +The feature of static theory which Veblen chiefly employs in giving a +money-measure to his "intangible capital" is the capitalization +theory.[585] The capital magnitude of the items of good will previously +mentioned is a capitalization of the _income_ which they are expected to +bring in. And it may be said that a large part of Veblen's doctrine of +the causes of the ups and downs of business rests on the complaint that +this capitalization process is not rationally carried through--that +incomes are overestimated, and that business men are tenacious of +capital magnitudes once built up, and refuse to mark them down properly +when the facts in the situation have changed. His theory of prosperity +thus rests on non-rational enthusiasm on the one hand, and a certain +kind of "friction" on the other hand, and apparently the difficulties in +the situation as he sees it would largely disappear if these two +elements could be rationalized, and the static theory work more +perfectly. The elements involved in the capitalization theory, as shown +in the chapter on that topic, are three: the anticipated income, the +prevailing rate of discount, and the capital value, the last named being +the child of the first two. The capital magnitude is a shadow, where the +income is the substance. Veblen seems to find the trouble arising in +that the capital magnitude takes on a substantial character, and refuses +to play the passive role of shadow. It is interesting, in passing, to +compare this theory of Veblen's with the theory of crises developed by +Irving Fisher, from the standpoint of a body of doctrine which is purely +static, and which Veblen has criticised as "taxonomic" in a high degree. +For Fisher[586] the trouble arises from friction in connection with +another element in the capitalization problem, namely, the interest +rate. Business men think that "a dollar's a dollar," and refuse +to let the interest rate be marked up in accordance with the +doctrine of "appreciation and interest." This, likewise, leads to +overcapitalization, leaves the passive shadow too big. I must confess +that it seems to me that one theory is about as "taxonomic" as the +other--that both rest on pointing out divergences from a static, +"taxonomic" norm. In general, Veblen's work in this field consists in +assimilating the "intangible" capital to the class of land, and other +long time concrete income-bearers, but that is after all classification, +systematization, "taxonomy." In saying all this, I am as far as possible +from questioning the value of Veblen's work. Rather I rate it as of +extreme significance. "Taxonomy" does not appear to me so dreadful a +word as it does to Veblen. I should rather say that some taxonomy is +good and some is bad, depending on whether or not it leads to fruitful +generalizations, and deeper insights. + +It is, as I have said, chiefly the capitalization theory which Veblen +applies to these newly important intangible "capital-items." The +phenomena of the stock-market, where such things are most actively +bought and sold, and where they appear as differential portions of the +capital values of securities, doubtless first called attention to +them--though the item of "good will" as a business asset, for which a +money-price is paid when businesses change hands, is doubtless older and +wider than modern corporation finance. The capitalization theory applies +to them most readily and obviously, as compared with other elements in +the static theory of prices. + +But as we become better used to the large role which these phenomena +play,--not that the phenomena are new, but that their present importance +is new, and hence our serious study of them is new--we are increasingly +able to see that other elements of static theory also apply. _Static +theory applies increasingly as understanding increases!_ The vaguely +discerned, the novel, the imperfectly analyzed, can be stated only in +qualitative terms. As things are better understood, the mind seeks +system, taxonomy, quantitative measurement. Business men to-day are well +accustomed to applying _cost_ concepts to many of these intangible +magnitudes. Advertising, for example, is being worked out with +increasing exactness, and business men are increasingly applying +accounting processes to the determination of the question of _how much_ +advertising "pays." Well-known brands are capital items. Well-known +brands have cost money! Business men contemplating the marketing problem +may well balance the cost of creating a new brand against the cost of +buying an old one, and may balance the cost of creating a new brand +against the profit to be made from allowing an old one to deteriorate, +through cheapening its process of manufacture. Trade-connections are +capital items. They are also items which have been created by patient +thought and labor and expense. Franchises, since the days when the +public awoke to their value, have cost money to the corporations that +possess them, and figure in corporate bookkeeping often. Even in the old +days, they often had a cost, which commonly stayed _out_ of the +corporations' books, at least in that form,--bribes, entertainments to +legislators and members of councils, and so on. In Part II of this +book,[587] I have discussed "selling costs" as contrasted with costs of +production in the narrow sense, and have pointed out how high a +proportion of total costs these selling costs are. I have also indicated +how many of these costs tend to be "capitalized." These selling costs +are static measures of the elements of "friction" which interfere with +the smooth working of static laws! An extension of statics, however, +can in considerable degree take account of them. It is, of course, far +from true that cost doctrine will explain all of these intangible +capital magnitudes. But this is likewise true of the prices of many +tangible items. Cost doctrine does not hold universal sway even in the +confines of the strictest static theory. + +I have said that dynamic factors tend to come under the rules of static +taxonomy to the extent that they become more accurately understood. The +understanding here referred to is not merely on the part of the +scientific theorist! The subject-matter of economic science is itself +psychological. It includes the psychology of the business man, as well +as the psychology of purchasers and laborers, and the general field of +social-mental life that bears on economic processes. It includes the +theories of the business men, as well as their aspirations and +"motives." It includes their methods of computation, and the accuracy or +inaccuracy of their prognostications. It has been pointed out recently +that at the current price of copper (22c. per pound in Jan. 1916) the +prices of copper stocks are very much lower than they were when copper +reached the same price some years ago. Calumet and Hecla stands some two +or three hundred points lower than it did then, and the same percentage +difference is manifest in the case of many other stocks. But the +explanation which the broker and market writer offer is that people have +awakened to the fact that mining stocks are stocks with wasting assets, +that the incomes from copper stocks cannot, therefore, be capitalized on +so high a basis as similar incomes from other securities; that people +to-day realize this fact as they did not some years ago; that the +earlier capital-prices of copper stocks were vastly exaggerated on the +basis of a careful estimate of probable total future income, etc. Japan, +little used to the great prosperity growing out of sudden great +increases of special kinds of business, found herself in such an orgy +of war stock speculation that it was necessary to close the stock +exchange in 1915. The United States, better familiar with the phenomena +of boom and depression, seasoned by many experiences of similar nature, +have found that on the whole,--at least in the opinion of many competent +judges in January of 1916,--war stock speculation has been kept in +reasonable bounds, thanks in large part to the conservatism and caution +of bankers and brokers, and that the general economic situation is in +fairly stable equilibrium, with most of the probable sources of disaster +foreseen and "discounted." To "discount" is to make "static"![588] +Whatever the business man can reduce to bookkeeping terms, and whatever +he can measure by money in the market, the economist should be able to +bring within the "orderly sequences of economic law." + +In _Social Value_, I have pointed out how wide is the scope of the money +measure. Waves of public opinion, of waning or waxing hope and belief, +of patriotic fervor, of religious exaltation, of political movements of +one or another kind--all these find some sort of money measure in the +market. In the gold market in the early '60's in New York, the "bulls" +sang "Dixie," and the bears sang "John Brown's Body"! It was patriotic +to be a bear, and unpatriotic to be a bull. These considerations +affected the prices very appreciably, at times, especially at the +beginning of the speculation in Greenbacks. Waning and waxing belief in +the triumph of the Northern armies manifested itself very strikingly in +the prices in the gold market, as W. C. Mitchell has conclusively +proved, with a wealth of detailed evidence, in his _History of the +Greenbacks_. But in less systematic markets, in less organized and +regular ways, many things besides are given a money measure: "Against +what, indeed, shall wealth be measured? Where are the markets which +measure its fluctuations? + +"But such markets exist, always have existed. Are there not streets +where woman's virtue is sold? Are there not commonwealths where there is +a ruling price for votes? Do not the comparative rewards of occupations +indicate what inducements will overcome the love of independence, of +safety, of good repute? We see men sacrificing health, or leisure, or +family life, or offspring, or friends, or liberty, or honor, or truth, +for gain. The volume of such spiritual goods Mammon can lure into the +market measures the power of money.... When gold cannot shake the +nobleman's pride of caste, the statesman's patriotism, the soldier's +honor, the wife's fidelity, the official's sense of duty, or the +artist's devotion to his ideal, wealth is cheap. But when maidens yield +themselves to senile moneybags, youths swarm about the unattractive +heiress, judges take bribes, experts sell their opinions to the highest +bidder, and genius champions the cause it does not believe in, wealth is +rated high." (Ross, _Foundations of Sociology_, pp. 171-172.) Ross is +here interested chiefly in the problem of measuring the varying +significance of wealth, symbolized by money, in terms of other and +non-economic, goods. But it is equally true that money measures these +goods. The range of the money measure is very wide. Nor is it confined +to the exchanging process. Gabriel Tarde[589] has pointed out that money +may function as a measure of non-material goods through gifts, public +subscriptions, etc. + +It is surely no extravagant claim to make that the methods of static +economics may be extended at least as far as the money measure goes! We +shall later see reason for believing that fruitful results may come from +an even wider extension of the static notion, at least as a schematic +device. + +In reducing static and dynamic considerations to common terms, we have +now gone far. We have shown that a wide range indeed of the phenomena +deemed dynamic, and largely ignored by current static theory, left to +the discussion of such innovating students of the "theory of prosperity" +as Veblen, are really in the actual practice of the business world +treated in the same way as are the "static" phenomena of the values of +physical goods and concrete services. And we have further shown how wide +indeed is the scope of the static yardstick, the dollar. But this is +only a part of the story. We have generalized statics. Can we similarly +generalize dynamics? Or has our generalization of statics merely +narrowed the field of dynamic considerations? + +To this I reply that we may view the whole field likewise from the angle +of what we have called dynamics, or theory of prosperity, or similar +name. These terms are not satisfactory, in my view, and I have already +used terms that appear to me better. My exposition on this point will be +briefer than in the generalization of statics, since I may refer to what +I have said elsewhere. In stating Veblen's contrast between "business +capital" and "the wealth of nations," I quoted him as follows: "Under +modern conditions the magnitude of the business capital and its +mutations from day to day are in great measure a question of folk +psychology rather than of material fact." The capital, or the wealth in +general, of older and simpler days was a material matter, concrete goods +and services, in his view. The newer items of capital are anomalies, +presenting something strange and novel, and sinister. I should maintain +that, whether sinister or no, they are in principle at least not _novel_ +or _anomalous_. _All economic values are matters of folk-psychology!_ +All economic values are social values. All are to be explained on the +same general principles that explain the values of the most complicated +stock-market phenomena--except of course, that the application of the +principles involves less complication in the case of such values as that +of a loaf of bread. But value is always a matter of psychological +significance, and never a matter of mere material fact. And these +psychological significances are not explained by such simple individual +phenomena as labor-pain, or marginal utility, but always by reference to +the total social-mental system, including its laws, its mores, its +institutions, its centres of power and prestige, its modes and fashions, +etc. If Veblen has in mind the contrast between goods whose values rest +in labor-pain or marginal utility, on the one hand, and values which +rest in a folk-psychology on the other hand, the contrast is a false +one. The first class does not exist. I shall not elaborate this point. I +have developed it at length in _Social Value_, and in the chapter on +"Economic Value" in this book. I should make the contrast, then, which +seems to me to gather up the central significance of most of the +contrasts we have been discussing, as follows: on the one hand, we may +view the matter mechanically and abstractly, in terms of the +equilibration of values conceived of like physical forces, expressed in +prices; on the other hand, we may view the economic situation more +fundamentally and realistically, seeing the interplay of men's minds, +viewing economic values as parts of a social mind, a functional unity of +many minds. We may treat society as a mechanism, or we may treat it as a +living, pulsing, psychological organization. In short terms, our +contrast may be between the theory of value, and the theory of price. +And here we are back to our thesis set forth on p. 559 of this chapter. + +The theory of value, as thus marked out, is still an abstraction from +the totality of our cross-section picture of social, or even of +economic, life. The essence of society is indeed psychological. But men +have bodies, and live in a material world, and have an elaborate +technology. Many of the factors which students of dynamics are concerned +with grow out of biological and technological relationships, and are +connected with physiographic influences. Can we bring all these into our +scheme? Giddings and Spencer would answer affirmatively. For Giddings +(_Principles of Sociology_, ed. 1905, p. 363): "All social energy is +transmuted physical energy." Giddings guards himself (pp. 365-366) +against a thoroughgoing monism, which would leave no distinction between +mind and matter, but in general he would hold to the scientific goal of +reducing the physical and psychical phenomena in society to a +parallelism, so that concomitant percentage variation could be +predicated of them, and so that considerations in one sphere could be +expressed by considerations in the other. In the hands of Giddings and +Spencer, such notions are handled with caution and discrimination, and +command respectful consideration. One feels, however, that the starting +point is a monistic metaphysics, and that the philosophical doctrine +does not justify itself in its scientific application. In the hands of +such a writer as Winiarski, however (_Rev. Philosophique_, vol. XLV, pp. +351-386; vol. XLIX, pp. 113-134; summarized by Ross, _Foundations of +Sociology_, pp. 156-157), who makes all mental states mere forms of +physical energy, and applies to mental processes the laws of mechanics, +the doctrine becomes merely bad poetry! From the standpoint of +the needs of social science, and from the standpoint of our present +knowledge of social facts--to say nothing of general philosophical +considerations--it seems clearly best to me to assume the common-sense +doctrine of dualism as a premise: mind and matter are two different +things; mind acts on matter, and matter acts on mind. We are then at +this position, when it comes to bringing technological and physiographic +factors into our scheme: on the one hand, the values control +technological applications, and control the course of industry. New +technological devices will be employed when the present worth of their +anticipated products is great enough to overcome the values that compete +with them. Land will be employed on that crop which gives the largest +rent, etc. Men's physical activities, and their employment of their +physical resources, are _motivated_ by values. That is the _function_ of +values. On the other hand, physiographic and technological factors +modify the lives and characters of men and peoples. _Values_ are in part +controlled by physiographic and technological conditions of life. But +these technological and physiographic factors, in order to influence +economic _conduct_, must first influence the value system. This they do, +(1) by affecting the quantities of _objects_ of value, and so modifying +the marginal relations among the value-scales and the marginal values; +(2) by affecting the lives of the people directly, and so modifying the +value-scales themselves. Similarly I see no way of bringing the vitally +important factor of heredity into our scheme in a direct manner, _in +propriore persona_, but only mediately, as it (1) affects the character +of the society, and so changes its value-system or its technological +activity and volume of products, or (2) as heredity becomes a matter of +concern to the society, and so an object of value, with its own place in +the value-system. + +There remains, therefore, in the field of technological, biological, and +physiographic features affecting economic life a considerable residuum +of economic problems for which, so far as I can see, no extension of the +static method can be devised. I propose no scheme of static price +analysis for balancing the effects of poor land and good heredity on the +character of a society.[590] The problem must be approached by other +methods specially suited to it, which we need not here discuss. But, +given the values that rule in that society, we may be sure that our +static picture of that value system will sum up much of the influence of +the bad land and the good heredity, mingled with the other factors which +have determined that set of values. + +Once a factor has been introduced into the value system, once it has +modified the value-scales, we may treat it by the methods of static +price theory. The analysis of the factors controlling the value-scales +is the problem of value theory. And here is, indeed, the central problem +of the "theory of prosperity." What are the causes controlling the +_mutations_ of values? What factors cause values to rise, intensifying +economic activity, stimulating trade, spreading prosperity? What brings +about the crash in economic values (and consequently in prices), in +panics and crises? Why the low values of the period of depression, +giving slight stimulus to industry and trade, leaving economic life +lethargic, inert? Increasingly it is recognized that the problems are +problems of values and prices. It is no part of my plan to give answers +in specific terms to these questions. That were the task of a large +book! And very much of it has already been done. It is my purpose here, +simply, to show that price theory, as developed on the basis of static +notions, may be extended, and has in considerable measure been extended, +to cover these problems, and that for the same reason that price theory +is unable to give really fundamental answers to them, often, it is +likewise unable to give fundamental answers to the value problem +anywhere--that the phenomena of value are of the same stuff and +substance as the phenomena treated by "dynamics" and "the theory of +prosperity," and that static theory has been busied chiefly with a +limited portion of the field only because the problems were easier +there. Much has been made, especially in such a book as W. C. Mitchell's +_Business Cycles_, of technological factors, and of factors in the +psychology of the business man and of the laborer in the ups and downs +of business, and particularly of certain elements of scarcity or +overabundance of productive resources at critical parts of the economic +system, which raise values and prices unduly at certain points, +compelling radical readjustments of values and prices elsewhere. +Virtually all of these considerations will fit into the scheme here +outlined. They work _through_ modifications of the system of values and +prices. H. L. Moore's recent _Economic Cycles_ lays heavy emphasis on +physiographic factors, particularly variations in rainfall. But these, +too, act on the economic situation through affecting the quantities of +objects of value, and so through modification of the marginal values of +goods. The psychological theory of economic value by no means excludes +any amount of influence one can find in physiographic or technological +factors. + +One of the most important factors in the minds of many writers who would +treat business cycles, and a factor to which virtually all writers give +attention, is the waxing and waning of business confidence, and of the +volume of credit. I have given an extended analysis of the psychology of +confidence, and of the psychological nature of credit, in my chapters on +that topic. It is enough to say here that we have in credit phenomena +things which are of the very stuff of economic values in general. +Beliefs and hopes are factors in economic values, and values wax and +wane with them. There is little indeed in the psychological and +institutional aspects of the theory of prosperity which an adequate +theory of value would not contain. + +The theory of _prices_, as an abstract formula of description, is of +primary interest to the scientist, who has nothing to do with the +manipulation of concrete values, and who has no interests at stake in +the behavior of particular values at a particular time. His purposes are +ultimately practical, no doubt, but the practical ends he has in view +are, after all, only to lay down general rules of public policy, of a +high degree of generality, and he consequently may abstract from a great +deal of the concrete causal process. The theory of _value_, in its +concrete fulness, is the special interest of the active business man, +and especially of the business man who wishes, not merely to _adapt +himself_ to changes in values, but also in part, to _control_ and +_manipulate_ those values. _He_ must study every factor which does, in +fact, bring about changes in the value system. We do not find the +market-letter of a brokerage house, or the calculations of a captain of +industry, or trust promoter, troubling themselves about marginal +utilities or labor-pains! Notions of supply and demand, and the +relations of the prevailing interest rate to the capital values of +securities, they do employ. Notions of money-costs of production they +make use of. But they also give very close attention to questions of +governmental policy, to court decisions, to movements in the field of +labor organization, to money-market phenomena, and particularly to gold +movements and the state of the exchanges, to political campaigns, to the +strength of the prohibition movement, to changing fashions and modes, +and, above all, to the general _tone_, the _consensus_, so far as it is +ascertainable, as to whether business is good or bad, whether men are +buoyant or depressed, to the ups and downs of business confidence. They +pay marked attention to the opinions expressed by certain men, great +bankers or industrial leaders, not merely because they think these men +good judges, but also, and in part primarily, because these men are +centres of power, "radiant points of social control," whose opinions +make the opinions of others, and whose statements that times are good +tend to make them good, and that times are bad tend to make them bad. +For static theory, nothing is more contemptible than the view which +"demagogues" often express in Congress that great men in Wall Street +make and unmake prosperity, bring about and check panics. For static +theory, the only way that big men can lower prices is by selling, and +the only way they can raise prices is by buying.[591] Their power to +raise and lower prices is thus limited by the amount of their wealth +which they are willing to employ in this way. As it is not likely to be +profitable to be a bull when the general condition of the "fundamentals" +calls for falling prices, and as bear operations, contrary to the +fundamentals, are likewise usually costly, the inference would be that +the big men will not, even if they could, alter the course of the +market. Their wealth is, after all, not so tremendous, as compared with +the aggregate wealth of the rest of the community. But the market takes +the big men more seriously! When they are selling heavily, other men are +often _afraid_ to buy, such is their prestige. When they give out +opinions, these opinions _become_ the opinions of a host of others, +almost automatically. When Morgan stepped into the breach in the Panic +of 1907 with $25,000,000, it was quite as much the fact that _Morgan_ +had acted, as it was the millions themselves, which relieved the +situation. Indeed, it was in no small degree the prestige of Morgan +which relieved the _disorganization_, which restored the discipline, and +made it possible for the elements in the market to work in harmony and +cooeperation again. Society is a functional unity, and the "tone of +business," the ups and downs of prosperity, depend in large measure +indeed on the degree to which the lines of communication between the +different parts are kept open, on the question of whether each part does +its expected task at the right time and in the right way, on the +all-together-functioning, the _integration_, of the elements. These are +phases of the matter from which static theory abstracts. They are +organic problems, not mechanistic problems. Of course, mechanisms get +out of order too. But tightening a bolt is a very different thing from +restoring confidence and discipline to a market! + +Those who wish to control values have their own technology. There +is a technology of industry, a mechanical technology, running in +terms of pistons and levers and soil-fertility-equivalents, and +butter-fat-content, and ton-miles, which is governed by the values. +But there is also a technology of _controlling_ values which involves +advertising, making sentiment, keeping up social discipline, effecting +the equilibration of values by exchange, keeping "interstitial" +adjustments smooth, which involves a different kind of activity, +thought, and ability, and which employs different instrumentalities. Its +problems are problems of human nature and social relationships, its laws +are psychological laws, particularly the laws of suggestion, imitation, +and the like, its tools are the newspaper, the sign-board, the whispered +word, the cigar and the dinner with wine, sound logic, money and credit +instruments, the prestiges of men and institutions. For men whose work +lies in controlling and making values, rather than in making passive +technical adjustments to existing values, the theory of value, as I have +defined it, is of supreme importance. + +This, I may say for the critic who may consider the social value theory +a highly speculative and theoretical notion, does not mean that the +active business man or the advertising writer, has formulated the social +value theory in terms of a social mind, conceived of, in the light of +modern functional psychology, as a functional unity of individual minds! +The advertising writer is a student of modern psychology, and reads +books on the psychology of advertising, which discuss the psychology of +suggestion, and the like. But long before such books were written for +him, he studied the phenomena involved in his own way. It is not his +business to construct a theoretical economics! It is his business to +make a market for his wares. He is interested in the scientific theories +of modern social psychology only in so far as they help him in that +task. He has no occasion to construct a vast conspectus, which shall +summarize the whole economic situation, in its social setting. But my +point is, simply, that the kind of phenomena which he does study are +indicated and stressed and brought into a system in the theory of social +value which I have tried to elaborate. As his purposes are different +from those of the economist, his method of approach, and his range of +investigation, will necessarily be different. + +The notion of dynamics has been in a way connected with the idea of +evolution, of historical process in time, while the notion of statics +has been essentially connected with the notion of a cross-section, a +stage, an equilibrium of contemporary forces. How, then, bring the two +together? Of course, we may conceive the evolutionary process itself as +a series of stages, and the mind does tend almost inevitably to do that. +The fact is, of course, a perpetual flow, with unceasing change. The +mind grasps such a notion with difficulty, if at all. Logic is +mechanical and mathematical, and mathematics and mechanics are +static.[592] But further, we may in large measure bring the historical +considerations into a cross-section picture, when it is a value system +that is involved. _Past_ facts exert their influence through _present_ +values; and _future_ facts, which may be expected to modify future +values, come into the present equilibrium as discounted _present_ +worths. + +When we view the situation realistically, moreover,--which means, when +we view it as a living organic, psychological process,--our +cross-section does not need to be narrowed to a moment of time. We may +see the values not yet in stable equilibrium, but in process of +equilibration, with marginal values and prices fluctuating, tending +toward a static goal, but hindered by various cross-currents, of +"friction," of uncertainty, of momentary values which rest on beliefs +regarding the process of transition itself--as when a "bull" on the +war-stocks turns bear temporarily, because he thinks that prices may +fall before recovering themselves, and going higher. We may see +obstacles in the way of readjustment whose importance is itself subject +to static measure--labor temporarily out of work, and labor-time lost, +at so much per day; uncertainties which give rise to speculation, which +calls for the employment of extra banking credit, at such and such per +cent; capital-instruments which have to be "scrapped," representing the +loss of so many dollars. We may see the process of building up new +trade connections, at such and such a cost, to replace others which +formerly functioned, but which no longer serve, which were once worth so +much, and which now are valueless. Watching the realistic process of +transition, through a period of time, we may still apply our static +yardstick to many of its features. + +Above all, do we get in this connection a realization of the fact that +the "immaterial capital" of which Veblen speaks is true social +wealth.[593] Whatever is necessary for the carrying on of economic life, +whatever, if destroyed, must be replaced, before the economic process +can go on, and will be replaced by the expenditure of labor and thought +and money, is capital. The sales-force is as truly a part of the +labor-force of a corporation as are the mechanics. The trade connections +which the sales-force has built up is as truly a part of the capital of +the business as the machines which the mechanics have made. The static +theory which abstracts from this easily leads to dangerous conclusions. +Removing a tariff may well, _after the transition is completed_, give a +greater productive efficiency to a country. But what of the cost of +transition? May not the values destroyed, and to be recreated, in the +form of trade connections, social organization, accomplished +adjustments, and the like, be greater than the new values to be gained +by better adaptation of industry to the physical resources or the +capacities of the labor supply, of the country? In large measure, this +question, in a given case, is susceptible to a quantitative answer. The +statesman who reckons only the gains which the final static adjustment +will bring, and neglects the costs of reaching it, costs not alone in +"scrapped" machines, but also, in "scrapped" social organization, has +missed a substantial part of his problem. + +The theory of prosperity, and the theory of value, are largely concerned +with just this system of social control, by means of which value scales +are altered, and by means of which altered values are brought into a new +equilibrium. It is a complicated fabric of psychological relationships, +partly institutionalized, partly non-institutional. The institutions--as +banks, big corporations, speculative exchanges, and the like, are the +nuclei, about which centre much that is temporary, shifting, and +flexible. Given time, the whole system is highly flexible--it is +organic, and not mechanical. + +The serious injury of this system in a country may well be a greater +disaster than the destruction of physical items. Let unscrupulous +men--or misguided men--bring about a legal repudiation of debts, and the +disaster may be greater than the destruction of a city by an earthquake. +That creditors have been robbed is a minor matter, but that credit has +been shaken, so that men will fear to lend again or to sell except for +cash, may well mean industrial paralysis. + +Considerations like these enable us, in substantial degree, to reduce +"transitional" considerations to common terms with "normal" +considerations. We can apply the static measure to the "transitional +considerations," and we find the values which come into equilibrium in +the "normal" period to be generically like those whose variations +interest us in the period of transition. Indeed, the "normal +equilibrium," if it were ever reached, would also contain these +intangible capital items, though many of them would be much reduced, +since the work that they have to do would be largely gone, if the normal +equilibrium were persistent. + +It does not follow from the foregoing that many of the elements in +"modern business capital" are not, as Veblen's analysis suggests, +sinister and anti-social. To say that their values are true social +economic values, generically the same as the values of wheat or corn or +whiskey or opium or Sanatogen or milk or tickets to burlesque shows, or +silver sacramental sets, or Ford automobiles, is not necessarily to give +them a good moral character! Some of these intangible capital goods are +thoroughly anti-social, and should be destroyed. This is particularly +true of monopoly power, and of popular brands whose value rests in +popular delusion. But even here, caution is needed. Is it socially wise +to destroy a wine cellar, containing an hundred thousand dollars worth +of fine wines, even assuming that Demon Rum is as black as he is +painted, and that Veuve Cliquot is his favorite daughter? Will not the +economic values which have been destroyed in this moral fervor be +recreated? And will not this tend to divert labor and capital from the +creation of a corresponding amount of more wholesome economic goods? +Might it not be wiser from the standpoint of the temperance movement +itself, to sell the wine cellar--at private sale, of course!--and use +the proceeds in the campaign fund of the prohibition party? Of course, +there is more still to the story. The destruction of the wine cellar may +be done so dramatically, and may be so well advertised, that it will +arrest public attention, and tend to create new social values, of a +moral and legal sort, which will prevent the recreating of that wine, by +changing the direction of demand, and by lessening the sources of +supply. Similarly with trade connections, and other intangible capital +items. If destroying one means merely that labor and capital will be +employed in making others no better, the social gain is very doubtful. +And some sort of system of control of interstitial adjustment, of +overcoming friction, etc., there must be. + +I wish to contrast the view I have been here presenting with that +developed by Schumpeter, in his _Theorie der Wirtschaftlichen +Entwicklung_. In Schumpeter's view, the division between statics and +dynamics is much more than methodological. The phenomena of statics and +dynamics are different phenomena. Statics is concerned with the +influence of individual utility-scales, or utility-scales and psychic +cost-scales, hedonistic phenomena. Dynamics is concerned with the +influence of "_energisch_" (as distinguished from "_hedonisch_") +factors. (_Loc. cit._, 128.) Most men are moved by hedonic +considerations. Their economic activity tends toward the equilibrium +described in static theory. Seeking to maximize satisfactions, and to +minimize pains, they tend to get into the "best-possible" situation +("best-possible" under the "given conditions") and stay there. The +"energetic" type of men, moved by motives like love of activity for its +own sake, love of creative activity, love of distinction, love of +victory over others, love of the game, etc., undertake activities which +tend to alter the "given conditions" themselves, to alter the structure +and technique of economic society, to introduce new ways of doing +things, and so to break the static equilibrium. This last type of men is +small in number, but tremendously important. Schumpeter's theory of +value rests solely in an analysis of the hedonic factors mentioned, +conceived of as individual psychological magnitudes. I have discussed +his theory of value in the chapter on "Marginal Utility" in this book, +and would refer to that discussion here. He makes virtually no use of +the value concept there developed in explaining the causation of dynamic +change, but instead, as I have pointed out in that chapter, invents new +concepts, which do the work of the value concept, which he calls +"_Kaufkraft_," "_Kapital_," and "_Kredit_," which do not rest on +marginal utility, but rather on the activities of certain centres of +economic power, particularly of banks.[594] His picture of economic +evolution is that of a conflict between these static and dynamic forces, +between "utility-curves" and the psychological factors of the +"energetic" type, the former represented in a set of static +price-ratios, the latter in a set of dynamic "powers," conceived of, not +as sums of money (even though expressed in money-terms), but as +"abstract power," which grows, not merely out of the individual +psychologies of the entrepreneurs, but also, and primarily, out of the +social influence centered in the banker. This power which the banker +to-day supplies was in earlier periods supplied by the political power +of the despot, and is distinctly a matter of social organization, and +social control, an over-individual, social phenomenon, analogous to the +"social value" which I have sought to put behind all prices, whether +"static" or "dynamic." The dynamic man needs "power," either political +or financial, to "force" the "static" men out of their accustomed ways +of activity. They fear and resist him. He must coerce them. The contrast +is thus sharply made between abstract price-ratios, resting on +individual feeling-scales, and quantitative "powers," measured in money, +resting on a social basis. Between the factors underlying static prices, +and those underlying dynamic prices there is, thus, nothing in common. +Statics and dynamics are concerned with fundamentally different +phenomena.[595] + +If my criticisms of the utility theory of value are sound, and if what +has gone before in this chapter holds good, we must restate Schumpeter's +contrast.[596] The static tendencies do not rest on any peculiarities of +the psychological "stuff" from which static values are derived. They +rest rather in the universal tendencies of all values, whatever the +psychological factors behind them, to come to an equilibrium. The reason +that values, whether they be the values of new and novel things, or the +values of old and familiar things, tend to come to an equilibrium is +that gains come from equilibrating them. When some values are too low, +and some are too high, the opportunities for speculative gain are +evident. Arbitraging transactions, as between different places, +time-speculation, transferring labor and capital from one enterprise to +another, increasing the supplies of some goods and reducing the supplies +of other, changing land from wheat to corn, etc., etc.,--all these +things are sources of gain, and they will be done, whatever the origin +of the values involved. The new, dynamic enterprise, before it becomes +actualized in concrete machinery, factory building, etc., and long +before its income is actualized in money-receipts from the goods it is +destined to produce, becomes an _object of value_. The value is a +_future_ value. But it comes into the present as a discounted present +worth. As such it functions like any other value, tending to attract in +its own direction the land, labor and capital necessary for its +realization. It does not differ in its functioning from the present +worths of future goods of familiar sorts.[597] It tends, after a process +of reequilibration--which Schumpeter, with his theory of crises, has +done much to elucidate--to come into equilibrium with the older, +"static" values, becomes itself a static value. Indeed, from its +inception, it comes under the static, money measure. It enters at once +into the scheme of static values and prices, even though it causes +readjustment there. + +The preexisting 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 preexisting static values +are of the same stuff as the dynamic values. But this has already been +made clear. + + * * * * * + +The possibility of presenting an equilibrium picture of social forces, +to the extent that those social forces submit themselves to the money +measure, the possibility of applying the methods of static price-theory +wherever pecuniary concepts may be carried, does not exhaust the +possibilities of the static notion, at least as a schematic device. +There are many social values, particularly in the legal and moral +sphere, which do not readily come under the money measure, and where +such measurements as may be made in money terms seem obviously +inadequate. Of these values, as of all values, however, the law of +equilibration holds. _All_ tend to come into adjustment of a sort that +will allow the maximum of values to be realized. Something of the +exactness of the static method has recently appeared in a decision by a +famous jurist, confronted with the fact of the conflict of two legal +principles. Most judges would go on the legal theory that there can be +no conflict in the laws of a single sovereign. Of course, we have +courses in "Conflicts of Laws" in our law schools, but the subjects +treated in such courses relate to conflicts, say, between the laws of +New York and the laws of New Jersey. When a judge is presented with a +case of conflict between two laws of New York, he will commonly feel it +to be his duty to "remove" the conflict, by making distinctions, till +the conflict is whittled away. Not a little bad law has thus originated! +The law is "absolute." It knows no exceptions. It does not obey the law +of diminishing significance. Of course, "_de minimis non curat lex_," +but that means, not that there is a delicate margin, where the law +ceases to apply, but merely that the law disregards trifles too +insignificant to attract its attention at all. They are, in mathematical +phrase, "infinitesimals of the second order," discontinuous with the +interests of magnitude great enough to attract the attention of the law. +There is little room in such a legal theory for notions of the sort +discussed in this chapter to find place! But a different theory of the +law is implied, and partly expressed, in a recent decision by Mr. +Justice Holmes: "All rights tend to declare themselves absolute to their +logical extreme. Yet all in fact are limited by the neighborhood of +principles of policy which are other than those on which the particular +right is founded, and which become strong enough to hold their own when +a certain point is reached. The limits set to property by other public +interests present themselves as a branch of what is called the police +power of the State. The boundary at which the conflicting interests +balance cannot be determined by any general formula in advance, but +points along the line, or helping to establish it, are fixed by +decisions that this or that concrete case falls on the nearer or farther +side.... It constantly is necessary to reconcile and adjust different +constitutional principles, each of which would be entitled to possession +of the disputed ground but for the presence of the others." (Hudson +County Water Co. vs. McCarter, 209 U. S., 349, 1908.) Here we have a +scheme very like that of static economic theory! "The boundary at which +the conflicting interests balance"--the _margin_ where the curves of +diminishing value of the two legal principles intersect! A plurality of +legal values, in marginal equilibrium! Lacking a tool of thought so +convenient as money has proved for the economist, the jurist finds +trouble in making his margins precise. He is dealing with quantities for +which he has found no common measure. There is no "standard or common +measure" of legal values. Hence, most lawyers content themselves with +qualitative reasoning, seeking to avoid the necessity of quantitative +weighing and comparison of the factors in their problem by making +distinctions of _kind_. Mr. Justice Holmes recognizes the necessity and +the existence of legal _quantities_, and of making quantitative +distinctions, _i. e._, distinctions of _degree_. He sees a generic +essence common to the whole body of laws, such that marginal equilibria +are possible and actual. + +So far we have a static system of laws. But the same writer, in a later +decision, has said: "And yet again the extent to which legislation may +modify and restrict the uses of property consistently with the +constitution is not a question for pure abstract theory alone. Tradition +and the habits of a community count for more than logic." (Laurel Hill +Cemetery _vs._ San Francisco, 216 U. S. 358, 1910.) As these traditions +and habits of a community may change, so may the legal values change, +and new equilibria need to be reached in a process of readjustment. + +But further, in this view, and in the view of the best students of +jurisprudence in general, the legal values are not an insulated, +self-contained system. In the sentence last quoted, Justice Holmes sees +their root in a total social situation. And it is easy to show that +economic values, in particular, are part of that social situation out of +which legal values derive their power. Legal values enter into economic +values. Economic values enter into legal values. And between legal +values and economic values are marginal equilibria. There is a vast +social system of values, legal, economic, moral, religious, etc., in +constant dynamic change, but tending also to static equilibrium. Changes +at any part of the system compel readjustments throughout. The process +of equilibration is often slow, but slow or rapid, smooth or violent, it +is in constant process. For the further elaboration of notions like +these, I refer again to my _Social Value_. Here, as in the narrower +economic sphere, we have men and institutions whose chief activity is +concerned with the manipulation and control of these values, with +effecting the readjustments, and bringing about the reequilibrations. +They have their appropriate tools and technology. Money and credit are +merely part of a much wider system concerned with social control and +social adjustment! + + * * * * * + +To summarize: The problem of this chapter has been to harmonize statics +and dynamics, the "theory of wealth" and the "theory of prosperity," +"normal" and "transitional," and similar notions, commonly held to +belong to different spheres, and to be incapable of reduction to common +terms. A number of such contrasts have been passed in review, and +numerous illustrations of the various types of contrast have been given. +It is the contention of the present chapter that the most fundamental of +these contrasts, and the one which gathers up the meaning of most of +them, is that between the theory of value, and the theory of price. The +theory of value is dynamic, is concerned with the phenomena of +prosperity and depression, is realistic enough to deal with transitions +and readjustments; the theory of price is static, and rests in the +notion of accomplished equilibrium, abstracting from the problems of +friction and transition. The reconciliation comes from two angles: on +the one hand we have generalized price theory, showing that in large +measure the phenomena with which value theory, theory of prosperity, +dynamics, deal come under the money measure, are made "static" by +"discounting," and by the application of accounting principles; that +this tends to be more and more true as knowledge grows more accurate; +that "statics" means especially quantitative, as opposed to merely +qualitative, thinking. We have shown further that the static schema is +applicable even where the money measure is inapplicable, and even beyond +the economic sphere, as illustrated by a recent decision of Justice +Holmes. The other angle of approach was to universalize value theory, +dynamics, theory of prosperity, by showing that all prices, whether +"static" or "dynamic" have the same fundamental sort of explanation, +that value is always a matter of social psychology, and never a matter +of mere individual psychical magnitudes, or of "material fact." This is +not to deny that physical facts have their bearing in the scheme: (a) +they are among the objects of value, even though not the only objects, +and (b) material facts, technological, physiographic, and biological, +are the basis on which human nature rests, out of which it has +developed, even though human culture including social values has +increasingly emancipated itself from immediate dependence on them, and +has acquired a partially independent movement of its own. The effort was +not made to reduce mind and matter to common terms, but the case was +rested in an irreducible dualism, and the causal influence of +non-mental factors on the value-scales themselves cannot be measured by +the static scheme. The static scheme, assuming the value-scales, gives a +precise answer as to the influence of the quantities of physical objects +on the marginal values. The significant fact about the values with which +dynamics, theory of prosperity, etc., deal is that they are the values +of immaterial social relationships and institutions, in large part, +which are concerned with the problems of social adjustment and control, +with affecting equilibria in the economic sphere, with overcoming the +friction and effecting the transitions from which static theory +abstracts. This is a phase of production quite as important as the +physical activities of laborers or machines. It has its own technology, +appropriate to its problems. In particular, money and credit are part of +its tools. Since its problems are to control men's minds, it uses +psychological forces. Where the mechanic uses a storage battery, charged +with electricity, to move material things, the technologist of economic +readjustment employs a dollar, charged with social value, which is power +over the action of men. It is as a bearer of value, in form adapted to +the problem, that is in highly saleable form, that the dollar functions. +It is the psychological significance of the dollar, and not its physical +qualities _per se_, that enables it to do its work. The physical weight +in gold, which itself is an object of social value, is commonly the +immediate basis of the value of the dollar to-day, but money may get its +primary value from other sources than valuable bullion. Given this +primary value, the dollar may get an enhancement in that value from the +services which it performs in the social technology of adjustment. + + * * * * * + + + + +INDEX + + +A + + Aborn, W. H., 252, n. + + Absolute _vs._ relative conceptions of value. + See VALUE, ABSOLUTE _vs._ RELATIVE. + + Abstinence, 67ff., 484-85. + See COST OF PRODUCTION, INTEREST. + + Abstraction, legitimate and illegitimate, 189-90, 553-54. + + Acceptance house, 497, 542. + + Acquisition _vs._ production, 482. + + Adams, Brooks, 219. + + Adams, T. S., 13. + + "Adaptation," 573, n. + + Advertising, 257-58, 367, 565. + + Agger, E. E., 140, n. + + Agio, 148-50, 390, 442-50. + See PREMIUM. + + Agricultural credit, 262, 318-19, 430, 492, 504-05, 528-29. + + "All other deposits," see "DEPOSITS" in KINLEY'S FIGURES. + + _Americas, The_, 540. + + Analytical _vs._ historical theories, 397-400. + See also HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS, STATICS, + DYNAMICS, ETC. + + Andrew, A. P., 170, n., 179, n., 537. + + Animism, social explanation of, 16-17. + + Ansiaux, M., 4, n. + + "Appreciation and interest," 76ff., 333, n. + See INTEREST. + + Aquinas, Thomas, 30. + + Arbitrage, 268, 585. + + Aristotle, 118, n. + + Ashley, W. J., 181, n. + + Assets of banks, 285, 489-97, Ch. XXIV; + bonds in, 250, 488, 498, 506, 508, 523; + stocks in, 491-93, 498, 506, 523; + stock exchange items chief factor in, Ch. XXIV, especially 523ff. + See Loans, "COMMERCIAL PAPER," COLLATERAL LOANS, RESERVES, ETC. + + Atwood, A. W., 173, n. + + Auspitz and Lieben, 91, n. + + Austrian School, 56, 70, 94, 300, 486, 562, n. + + Austria, paper money in, 140, 434, n.; + foreign exchange policy of, 181-82, 434, n., 444, 530; + money rates and interest rates in, 429. + + Averages, meaning of, 178, 292, 312-13, 315. + See CAUSATION. + Weighted. See WEIGHTING. + + +B + + Babson and May, 501, n. + + Backwardation, 146. + + Bagehot, W., 18, 37, 540, n., 580. + + Baker, G. F., 518, 519, n. + + Balances, required by banks, 173, 377. + + Balance of trade, 320, 551. + + Baldwin, J. M., 18, 37. + + Balkan Crisis, hoarding of bank-notes in Austria in, 140, n. + + Banks. See ENGLAND, BANK OF, STATE BANKS, PRIVATE BANKS, ETC. + As book-keepers for business, 365; + correspondent relations of, 355, n.; + bank capital, 489, 491, 524; + bank-credit, Ch. IX, 261, 484ff., 489-97, Ch. XXIV; + elasticity of, 129, 183, 216, 281-88, 299, 320; + relation of, to trade, 260ff., 281. + See Trade. Functions of, 484-89, 492-95. + See CREDIT, FUNCTIONS OF. + Technique of, 489-97, Ch. XXIV; + bank-drafts, 355-58, 367; + on New York and other centers, 356-58; + bank-notes, 129, 139, n., 289, 322-23, 447, 448, 472, 473, 487, 495, + 496, 511, 530, 539; + as "capital," 261, 484-88; + elasticity of, 129, 298, 448. + + Banking School, 283ff., 395. + See CURRENCY SCHOOL. + + Banker as centre of power, 32, 466, 484ff., 577, 583. + + Banker's psychology, 141, 304. + + Barbour, David, 154, 218, n. + + Barnett, G. E., 347, n. + + Barter, 99, 100, 130, 133, Ch. XI, 220, 226, 265, 369, 394, 404-07, + 419-21, 493, 536; + highly important in modern life, Ch. XI, 394; + made easier by money as a measure of values, 201, 394, 421; + intellectual difficulties of, 418-20; + physical difficulties of, 423. + + Bastiat, F., 552. + + Bears. See BULLS AND BEARS. + + "Bearer of options" function of money, 148, 201, 314, n., 418, 424-32, + 436, 442, 451, 495, 536, 543; + distinguished from store of value, 425; + dynamic function of money _par excellence_, 426, 495, 536; + reserve function a special case of, 426, n., 536ff. + + Belgium, National Bank of, 182. + + Belief, as element in values, 40, 136, 462-68, 486ff., 574-75; + relation of, to credit, 262, n., 462-68, 486ff., 581. + See CREDIT. + + Bendixen, F., 435, n. + + Bergson, H., 579, n. + + Bilgram, H., 3, n. + + Bills of exchange, 167, 181-82, 201, 254-55, 288-90, 369, 444, 490-91, + 530; + speculation in, 254-55, 514, 515, n.; + as reserves, 181-82, 444, 530. + See also FOREIGN BILLS, AND GOLD MOVEMENTS, INTERNATIONAL. + + Bimetallism, 219, n., 221; + not logically related to quantity theory, 219, n. + + Biological factors in social life, 571-73, 590. + + Boehm-Bawerk, E. von, 9, n., 44, 48, 51, 70, 78, n., 91, 94, 96, n., + 113, n., 146, n., 301, n., 303, n., 437, 563, n. + + Bonds, as bearers of options, 147-48, 425, 428; + listed, sold "over the counter," 250, 514; + bonds sold on Stock Exchange, not "cleared," 370; + held by banks. + See ASSETS OF BANKS. + "One house bond," 147. + + Book-credit See CREDIT. + + "Borrowing and carrying," See STOCKS. + + Bosanquet, B., 18, n. + + Boston, 289, n., 354, 368, 429 n., 503. + + Brassage, 450. + + Brokers, 168, 199, 235, 287, n., 367-68, 371, 372, 374-79, 409, + 496-97, 429, n., 521, n., 531, 575. + + Brown, H. G., 301, n. + + Business, speculation in, 252ff. + + "Business capital" vs. capital-goods, 482, 484ff., 560-61, 569, + 580-82. + See also "GOOD WILL," STATICS, DYNAMICS, FRICTION, ETC. + + Business confidence, 40-41, 97, 118, 185, 210-11, 214, 463-68, 530-31, + 536, 574-75, 577. + + Business cycle, 187-89, 254, 548-49, 555, 573-75. + + "Business distrust," 426, 427, n. + + Business man _vs._ economist, as value theorist, 573-78. + + Bulls and bears, 145, 371-73, 406, 471-72, 522, 576, 579. + + "Buying price" _vs._ "selling price," 402-04, 406-07, 476. + + +C + + Cairnes, J. E., 47, 50, 55, n., 57-59, 62, 64, 67-69, 220, n., 428, n. + + Call loans, 73, n., 375-78, 382, 425, 428ff.; + as "bearers of options," 425, 428ff. + + Call rates, why low, 428ff. + See MONEY RATES, INTEREST. + + Canada, 216, 284, n., 448, 450. + + Cannon, J. G., 347, n. + + Capital, Ch. IV, 98-99, 220, 222-23, 408, 410, 425, 429, 461, 484ff., + 526, 551, n, 560-62, 564-66, 569-70, 580-82; + circulating _vs._ fixed, 526. + + Capital goods. See GOODS, INSTRUMENTAL. + + Capitalist, 264. + + Capitalization theory, Ch. IV, 260, 297, 300ff., 316, 318, 389, + 416, n., 436-42, 459-60, 494, 562-64, 575; + assumes "banker's psychology," 305-06; + assumes fixed absolute value of money, 76ff., 313-14, 389, 438; + limitations of, 305-06,316-17, 481, n., 562, n.; + applied to value of money, Ch. IV, 111, 424, 436-42, 456; + conflicts with quantity theory, 300ff., 310-11, 389. + See also INTEREST, CAPITAL, RENT. + + Capital value, Ch. IV, 149, 224, 318-19, 402, 424, 436ff., 452, 459. + + Carey, H. C., 106. + + Carlile, W. W., 37, n., 397, 400, 407, 411, n. + + Carver, T. N., 4, n., 419, n., 453, n., 573, n. + + Causation, 142-43, 190, 204, 224, 279, 292, 312, 315, 336, 403, + 433, n., 437, 438, 454, 548; + exhibited by _change_, 190, 454-55. + + Causal theory of value, 14ff., 90ff., 96, 114, n., 163, 165-66, + 176-77, 186, 192, 204, 296, Ch. XV, 310, 336, 400-01, + 433, n, 437-38. + + Cause, a definition as, 143, 400-01. + + Checks, 167, 168, 184, 281, 339ff., 354ff., 364-81, 499; + "accommodation checks," 243; + certified, 200, 322, 349, 370, 376; + cashier's, 349; + collection of, 354ff.; + proportions of checks and money in payments, 174, 338, 447, 449, + 463. + + Checking accounts, 173-74. + See DEPOSITS. + + Chen-Huang-Chang, 407, n. + + Chicago, 246, 259, 289, n., 354, 379-80, 503, 542; + chief centre for check collections, 354; + Board of Trade, 252-52, 268, 327, 379-80, 503, 542; + Board of Trade clearing house, 369, 379-80. + + Circular reasoning in value theory, 15, 88, 89, 92, 100-01, 105, 112, + 113, 115, 117, 132, 135, 143, 279, 438, 452. + + Clark, J. B., 12-13, 48, 96, n., 264, n., 439, n., 440, n., 554-55. + + Clark's Law, 439. + + Clark, J. M., 3, n., 11, n., 14, n., 98, n., 413, n. + + Classical School, 69. + See COST OF PRODUCTION, CAIRNES, SENIOR, RICARDO, JAS. MILL, + J. S. MILL, LABOR THEORY OF VALUE, ETC. + + Clearing houses in speculative exchanges. + See STOCK EXCHANGE. + + Clearing houses, bank. + See CLEARINGS. + New York Clearing House, 346, 354; + New York Clearing House banks, 179, 344. + + Clearings, 200, 237-41, 345-46, 378, 392; + as index of "ordinary trade," 240-41, 516; + as index of speculation, 237ff., 378, 392, 516; + in New York City, 237-41, 339, 341-42, 345-47, 357-59, 360, 516; + of New York City trust companies, 345-47; + outside New York City, 239-41, 339, 340, 342, 348-53, 357-59, + 516, n.; + ratio of, to "deposits," 341-42, 348-59, 516, n.; + ratio of, to "total transactions," 348-51, 353, 359, n. + + Clow, F. R., 135, n., 144, n. + + Coin, 139, n., 167, 443-50; + coinage, 443-50; + statistics of, 412, n. + + Collateral loans, 461, 462, 463, 493, 494, 497, 502-06, 513, 523-26; + percentages of, on stocks and bonds, and on "other collateral + security," 502-09; + on "other collateral security" analyzed, 502ff. + + Collection of out of town checks, 354-55. + See CHECKS. + + Commerce. See TRADE. + + Commercial banks, 357, 488, 490, 498-99, 519-20, 523-29; + financing commerce no longer the chief function of, Ch. XXIV, + esp. 523ff. + + Commercial cities, outgrow manufacturing cities, 259. + + "Commercial paper," 431, 457, 490, 496-97, 498-520. + + _Commercial and Financial Chronicle_, 272. + + Commodity theory (Metallist theory, Bullionist theory), 81, 85, 129, + 135, 144, 151-53, 330, 390, 391, 435, n.; + hypothetical case illustrating, 151-53, 327-28, 390, 421; + contrasted with quantity theory, 151-53. + + Competitive display, relation of, to value, 410-11, 438-42, 452. + + Conant, C. A., 73, n., 182, n., 323, n., 347, n., 412, n., 418, n., + 428, n., 502, 510, n., 511, n., 535, n. + + Conant, L. Jr., 252, n. + + Concatenation of values and prices. + See VALUES, PRICES. + + Consols, 470. + + Contango, 145. + + Cooley, C. H., 3, 4, n., 19, 21, n., 30, 37, 484, n. + + Corporations. See STOCKS, BONDS, STOCK EXCHANGE. + Consolidations of, 198-258, 366-67; + lead to duplications of "deposits," 366-67; + corporation finance, 198-99, 201, n. 3, 432, 460-61, 476-77; + corporation securities as credit instruments, 460-61, 476-77, + 492-93, 527. + + Correlation, coefficient of, 237, 237, n. + + Cost of production, Ch. III, 193, 221, n., 257ff., 295, 300, 306-07, + 309, n., 389, 562, n., 565-66; + inapplicable to value of money, Ch. III, 389, 451; + relation of, to supply and demand, 50, Ch. III; + not related to quantity theory, 46ff.; + conflicts with quantity theory, 300, 306-07, 310-11, 389; + assumes fixed absolute value of money, Ch. III, 313-14, 389, 451; + "real costs," 44-45, 64ff., 96, 117, n. See LABOR THEORY OF VALUE. + Money costs, Ch. III, 90, 95; + Austrian cost theory, 56, Ch. III, 90, 95, 116, n. + See also SELLING COSTS. + + Cotton speculation. See NEW YORK COTTON EXCHANGE, AND SPECULATION. + + Credit, 42, 98-99, 130, 143-44, 166ff., Ch. IX, Ch. XIII, + Ch. XIV, 318, Ch. XVIII, 392-393, 395, 427, 441, 447, + Ch. XXIII, Ch. XXIV, 581; + not based on money, 326-27; + based on values, 326-27, 478-86, 485-86, 528-29; + part of general system of values, 40-41, 460, 462-68, 480, 486ff., + 574-75; + definition of, 459-60, 472-74, 489; + distinguished from credit transaction, 473; + juridical aspects of, 395, 460-61, 468-73; relation of, to belief. + See BELIEF. + Functions of, 263-66, 391-92, 395, 407, 441, 475-78, 484ff., 511-12, + 523-29; + relation of, to money, Ch. IX, Ch. XVIII, 393, 395. See also + RESERVES. + Relation of, to trade, Ch. XIII, Ch. XIV, 391-92, 393; + volume of, a function of dynamic change, 474; + elastic. See BANK CREDIT. + As "capital," 261, 461, 484ff.; + in "equation of exchange," 166ff.; + book-credit, 167ff., 226, 369; time-credit, 168. + See LOANS, INTEREST. + See also BANK-CREDIT, DEPOSITS, LOANS, COLLATERAL LOANS, CALL LOANS, + ASSETS OF BANKS, BELIEF, BUSINESS CONFIDENCE, etc. + + _Credit Lyonnais_, 530, n. + + Credit theory of paper money. See PAPER MONEY and GREENBACKS. + + Crises, 213, 254, 520, 548-49, 555. + See PANICS, BUSINESS CYCLES, BUSINESS CONFIDENCE, THEORY OF + PROSPERITY. + + Cross-section analysis. See HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS. + + Curb, 250. + + Currency School, 283ff., 395; + "currency theory of deposits," 283. + + Curves applied to money, 451-53. + See MARGINAL ANALYSIS. + + Custom, 36, 109, 135, 136, 183-84, 205ff., 391, 405, 562, n., 589. + See HABIT. + + +D + + Davenport, H. J., 12, n., 14, n., 21, n., 25, 65, n., 67, 78, n., 80, + 91, n., 94, 103, n., 113-15, n., 218, n., 314, 418, n., + 419, n., 426, n., 429, n., 434, 447, n., 482, n. + + Davidson, T., 18, n. + + Dean, Rodney, 354, n. + + Debtor Class, 139. + + Debts, 433, n. ff., 472-75, 489; + repudiation of, 581. + + DeCoppet and Doremus, 249, 370. + + Definition, a, as cause for the circulation of money, 143, 400-01. + + DeLaunay, L., 412, n., 415, n. + + Demand. See SUPPLY AND DEMAND. + Increase of, 53; + nominal increase of, 54; + elasticity of, 55, 224-27, 411-13; + for money, in what sense used, 62; + elasticity of, 224-27; + demand curves, 51; + applied to gold, 451ff.; + social value explanation of, 42, Ch. II, 93; + distinguished from utility curves, 49, 52, 70, 80, 113, n., + 115, n., 116. + + "Demand Notes," 322, 448, n. + + Deposits, 129, 143, Ch. IX, 186, 296, 344, 345-47, 453, 472, 487; + by one bank in another, 358, n., 349, 355, n., 357, 365, n., + 367, n., 500, n., 508, 515, n., 530-32; + relations of, to "money in circulation," Ch. IX, 185, 294; + relation of, to reserves, Ch. IX, 286-87, 298-99; + activity of, 345-47, 512-16; + in Europe 262. + SEE GIRO-SYSTEM. + Deposits as "bearers of options," 425; + relation of, to loans, 285ff., 512; + relation of, to trade and prices, Ch. XIII, Ch. XIV, 287; + of private banks, 344; + deposits distinguished from "deposits," 339, n., 343-44, 512; + relation of, to "deposits," 512ff. + + "Deposits" in Kinley's studies of payments, 230, 232-36, 242-43, + 338ff., 392, 512-16; + retail "deposits," 232, 243, 269, 338, 367, n., 368, 392, 513; + wholesale "deposits," 232, 243, 338, 392, 513; + "all other deposits," 232, 235-37, 243, 338, 514; + relation of, to trade, 230, 243-45, 248, 339-40. + See OVERCOUNTING AND UNDERCOUNTING. + New York City, 233, 234, 242, 246, 340ff.; + country, 246; + in Pittsburg, 245-46; + check "deposits," volume of, 339, 360-62, 392. + + _Deutsche Bank_, 530, n. + + Dewey, John, 17, n., 22, 579, n. + + Dibblee, G. B., 259-60. + + Differential principle, and theory of rent, 430-41; + applied to money, 439-41, 529. + + Director of the Mint, statistics of gold consumption, 413, n. + + Discount. See TIME-DISCOUNT and CAPITALIZATION THEORY; + rate of, see INTEREST; + rate of, _vs._ money rates, see INTEREST; + on Greenbacks, see GREENBACKS, PREMIUM, AGIO. + + "Discounting," 298, 597. + + Distribution of wealth, 15, 31, 33, 37, 38, 97, 102-03, 246, 247, n., + 413-16, 465-67. + See also INTEREST, CAPITAL, CAPITALIZATION THEORY, RENT, IMPUTATION + THEORY. + + Division of labor in banking, America and Germany contrasted, 527; + extent of in England, 530, 540-41, 542. + + Dodo-Bones, 82, CL VII, 155, 280, 304, 321, 325. + + "Dollar exchange," 541. + + "Domestic trade" _vs._ foreign trade, appendix to Ch. XIII. + See TRADE. + + Double counting in estimating volume of trade. See OVERCOUNTING. + + Dualism, most useful metaphysics for social sciences, 571-72. + + _Dun's Review_, 272, n., 273, n. + + Dynamics, 42, 106, 178, n., Ch. X, 254, 262-66, 392-93, 395-96, 426, + 474, 484-89, 495, 527-28, Ch. XXV; + dynamics and statics, reconciliation of, 42, 395-96, Ch. XXV; + "dynamic credit," 484-89. + See TRANSITION PERIODS, PROSPERITY, THEORY OF, STATICS, "NORMAL," + FRICTION, FLUIDITY, LIQUIDITY, SALEABILITY, EQUILIBRIUM, + BUSINESS CAPITAL, INTANGIBLE CAPITAL, etc. + + +E + + Elasticity. See DEMAND, ELASTICITY OF, AND BANK-CREDIT, ELASTICITY OF. + + Ellwood, C. A., 4, n., 21, n. + + Emery, H. C, 146, n., 371, n., 576, n. + + England, 142, 184, 447-48, 450, 530, 534, 536-43. + See LONDON, and LIVERPOOL. + Bank of England, 183, 319, 323, 350, 538ff.; + "Bank Restriction" in, 323, n. + + English School, 96. + See CLASSICAL SCHOOL. + + Entrepreneur, 67, 485ff., 539, 583-85. + + "Epi-phenomenon," money as, 266. + + "Equation of Exchange," Ch. VIII, 186, 188, 191, 204, 283, + Ch. XV, 326, 363, 520-22, 527, n., 528, n.; + as equation of "values," 159; + mathematical analysis of, 158-66; + factors in, highly abstract, 162-63, 176-77; + "equation of exchange" _vs._ causal theory, 163, 165-66, 186, + 189, n. + See CAUSAL THEORY OF VALUE. + Statistics of, Ch. XIX. + See QUANTITY THEORY, DEPOSITS, VELOCITY, TRADE, VOLUME OF, + PRICE-LEVEL, etc. + + Equation of supply and demand, 51. + See SUPPLY AND DEMAND. + + Equilibrium, 91ff., 105, 115, n., 116, 117, 119, 156, 187, 190, 222, + 225, 254, 262-66, 293, 298-99, 328, 333, n., 392-93, 401, + 451-57, 557, 570-73, 583, 586-89. + + European Banking, 262, 497, 511, 523, 527, 530. + See ENGLAND, GERMANY, FRANCE, AUSTRIA-HUNGARY, BELGIUM, etc. + + Exchange, 9-11, 133, 224ff., 398ff., 468-69, 520-23; + creates _values_, + not _utilities_, 111, n., 145, 423-24, 424, n.; + in static state, 262-66, 401-02; + relation of, to value, 9-11, 401ff., 468-69. + See TRADE, GOLD MOVEMENTS, INTERNATIONAL, ETC. + + Exchangeability. See SALEABILITY. + + +F + + Fashion. See SUGGESTION. + + Federal Government, 147, 322, 332, 368, 432, 476, 549; + Federal war tax as index of grain speculation, 251. + + Federal Reserve System, 299, 490, 499, 518-20; + should rediscount stock collateral loans, 518-20; + "money trust" and, 518-20. + + Fetter, F. A., 7, n., 48, 78, n., 301, n., 303, n., 437, 440, n., + 562, n. + + Fiat theory, 136, 142. + See also LEGAL THEORY, _Staatliche Theorie_. + + Fichte, J. G., 22, 137. + + Fisher, I., 47, 56, 81, 91, n., 99, 117, n., 124, 128, 130, 143, 152, + 154ff., 172ff., 186ff., 196, 200, n., 203ff., 209ff., 216ff., + 222, 226-29, 231, 240, 247, 248, n., 254, 256, 261, 262, 274, + 281ff., 291ff., 301, n., 302-04, 306, 308, 311, 312, 324, + 326, 331, 333, n., 335ff., 348-49, 351-52, 360ff., 371, 376, + 381-83, 400, 437, 455, 522, 537, 555, 559, 563. + + Fite, W., 21, n. + + Fluidity, 143, 403, 456, 476, 542, 563, n. + See also LIQUIDITY, SALEABILITY, STATIC THEORY, ETC. + + Flux, W. A., 49. + + Foreign bills of exchange, in reserves, 181-82. + See BILLS OF EXCHANGE AND GOLD MOVEMENTS, INTERNATIONAL. + + Foreign trade, 261, 265, 503; + ratio of, to "domestic trade," appendix to Ch. XIII. + See TRADE, BILLS OF EXCHANGE, GOLD MOVEMENTS, INTERNATIONAL. + + France, 136, 139, n., 450, 530, n., 533; + _Banque de_, 136, 183, 425, 538-39. + + Friction, 11, 94, 262-66, 392, 426, 543-44, 554-55, 563. + See also STATICS, DYNAMICS, SALEABILITY. + + Functions of money, 76, 81, 83, 93-94, 110-11, 144-48, 151-53, 201, + 263-66, 313-14, 327-28, 390-91, 394, 399, Ch. XXII, 536ff., + 543; + in relation to value of money, 144ff., 390-91, 309-400, Ch. XXII. + + Functions of value. See VALUE, FUNCTIONS OF. + + "Futures," 243, 251. + See STOCKS, "BORROWING AND CARRYING" OF. + + Future values, 40, 107, 459-60, 480, 486, 585. + See CREDIT, PART OF GENERAL SYSTEM OF VALUES. + + Futurity, not peculiar to credit, 459-60, 475. + + +G + + George, Henry, 78, n., 301, n. + + Germany, 136, 139, n., 145-46, 167, 425, 433, n., 435, n., 527, + 530, n.; + giro-system in, 150, 167, 289; + great use of domestic bills of exchange in, 288-89; + limited division of labor in banking in, 527; + Reichsbank, 182, 183. + + Giddings, F. H., 87, n., 556-57, 571, 573, n. + + Giro-system. See GERMANY. + + Gold, 84, 143, Ch. XXI, 422, 432, 436, 441-43, 443-44, n., 530, + 535-56, 538-39, 567, 591; + in arts, 84, 135, 151-53, 224, 314, 330, 390, 400, Ch. XXI, 451-57; + as money, 84, 135, 141, 146, 224, 304, 322-23, 390, 408-16, 441-43, + 445, 451-57, 495-96, 530, 535-56, 538-39; + value of, 84, Ch. XXI, esp. 408-16, 451-57; + in reserves, 147, 180-81, 324-28. + + Gold mining camps, high prices in, 220, n. + + Gold movements, international, 60-61, 129, 142, 181-82, 183, 261, + 280, 292, Ch. XVI, 434, n., 531, 533-34. + + Gold production and prices, Ch. XVIII, 535-36; + new world discoveries, 219ff.; + Californian and Australian discoveries, 220-21, 221, n. + + Goods, consumers', 34ff., 82, 96, 481; + ranks or orders of. See RANKS. + Instrumental, 38, 81, 297, 482, 484, 500, 569, 579. + + "Goods side" of "equation of exchange," no, 159. + + "Good will," 260, 482-83, 561, 564. + See BUSINESS CAPITAL, INTANGIBLE CAPITAL, SELLING COSTS, ETC. + + Grain speculation. See SPECULATION, COMMODITY. + + Greenbacks, 141, 146, 147, 194, 304, 322-23, 332-33, 422, 432, 435, + 436, 567-68. + + Gresham's Law, 129, 140, n., Ch. XVII; + conflicts with quantity theory, Ch. XVII; + quantity theory version of, 321-22. + + +H + + Habit, 104, 109, 138, 225, 554-55, 589. + See also CUSTOM. + + Hadley, A. T., 157. + + Haig, R. M., 552, n. + + Hamburg, coffee speculation in, 252; + Giro-Bank, 150. + + Haney, L. H., 3, n. + + Harvey, "Coin," 327. + + Havre, coffee speculation in, 252. + + "Hedging," 243, 253, 264. + + Hegel, G. W. F., 18, n. + + Helfferich, Karl, 14, 82, n., 110, n., 134, 418, n., 419, n. + + Heredity, 571-73. + + Hermann, F. B. W. von, 438, n. + + History, economic interpretation of, 33. + + Historical vs. cross-section viewpoints, 101ff., 119-20, 135-39, + 397-400, 548, 553-54, 578-81. + See also STATICS, DYNAMICS. + + Hoarding, 140, n., 174, 207, 208, 211, 333, n. + + Hobson, J. A., 73, n., 308, n. + + Hollander, J. H., 154, 250, n. + + Holmes, Justice O. W., 24, 587-90. + + Holt, Byron W., 222, 249, 370. + + Hubbard, Guy C., 260, n. + + Hughes Commission, 252, n. + + Hume, David, 21, 47. + + +I + + Ideal credit economy, 543. + + Ideal values, 467, 480. + + Imitation. See SUGGESTION. + + Imputation theory, 28, 38-40, 99, 300, 389, 424, 481; + conflicts with quantity theory, 300, 303-04, 310-11, 389. + + Income, money. See MONEY INCOME. + + Income, net, of the United States, appendix to Ch. XIII. + + Index numbers, of check circulation, 361-62, 383; + of net income of the United States, 278; + of prices, 278, 381-82, 383, 436; + of railway gross receipts, 278; + of trade, 227-29, 255-56, 278, 363, 381, 383. + See STATISTICS. + + India, 140, 143, 149, 181, 443, 444, n., 449; + a liability, rather than an asset, to quantity theory, 444, n. + + Individual interest and social advantage, 397-99. + + Individual values, 19, 43-45. + See also VALUE, SUBJECTIVE, PERSONAL, SUBJECTIVE EXCHANGE. + + Individualistic theories, 14-16, 20, 21, 22ff. + + Individuality, a social product, 16-19. + + Industry, rather than commerce, chiefly financed by modern banks, + Ch. XXIV, esp. 523-29. + See ASSETS OF BANKS, BANK CREDIT, FUNCTIONS OF. + + Inertia. See HABIT, CUSTOM. + + Institutional values, 29-30, 413, 484. + + Institutions, 19, 27, 484, 487, 562, n., 570. + + Insurance policies as credit instruments, 472. + + Intangible "capital" _vs._ capital goods, 482-83, Ch. XXV. + See also GOOD WILL, BUSINESS CAPITAL, ETC. + + Interest, 146, 219, 223-24, 225, 301ff., 333, n., 416, n., 428-32, + 437, 471, 472; + "appreciation and," 76-78; + productivity theory of, 224, 302-03, 437; + "use" theory of, 437, 438, n.; + "pure rate" of, 75, 76, 77, 428-29; + _vs._ "money rates," Ch. IV, 224, 428-32, 461, 521, n., 523-24, + 526, 529. + See also MONEY RATES, CALL RATES, CAPITALIZATION, TIME DISCOUNT. + + International banker, 409, 446, 539ff. + See GOLD MOVEMENTS, INTERNATIONAL. + + International trade. See FOREIGN TRADE. + + Investment, 270, 523ff., 528; + _vs._ speculation, 521, n., 523-26; + banker, 489, 519, 523, n., 527-28. + + "Invisible items" in foreign trade, 268, 270, 320. + + +J + + James, William, 579, n. + + Jenks, J. W., 260, n. + + Jevons, W. S., 25, 48, 91, n., 107, 522, n. + + Jewelers, 409, 454-57; + paper of, in the money market, 454-57. + + Johnson, A. S., 4, n., 13, 105, 115, n., 265, n., 403, n., 440, n., + 563, n. + + Johnson, J. F., 73, n., 333, n., 418, n. + + Joint Stock Banks, 184, 530, 539. + See LONDON, ENGLAND. + + Jurisprudence, 23-24, 588. + See LAW, LEGAL VALUES. + + Juristic thinking, 24-25, 29, 433, n., 586-88; + contrasted with economic thinking, 433, n. + + +K + + Kant, I., 22, 137. + + Kemmerer, E. W., 48, 129, 135, 140, 141, 156, 157, 167, 170, 175, n., + 220, n., 226, 240, n., 254, 256, 274, 312, n., 321, 334-37, + 359, n., 361, n., 363-65, 381-83, 400, 426, n., 443, n., + 444, n., 522, n., 537, 538, n. + + Keynes, J. M., 180, 181, 182, n., 184, 207, 443, n., 535. + + King, W. I., 242, 243, 246, n., 247, n., 248, n., 269, 271-72, 275, n. + + Kinley, D., 13, 48, 78, n., 80, 110-11, 174, 208, n., 230, 233-36, + 237, n., 242-45, 249, 254, 256, 269, 321, 337-45, 349, + 350-52, 360, 365, n., 368, 376, 383, n., 419, n., 447, 449, + 463, 498, n., 512-15. + + Kirkbride and Sterret, 347, n. + + "Kiting," 368. + + Knapp, G. F., 49, 150, 418, n., 433-5, n. + + Knies, Carl, 12, 133, 323, n., 418, n., 419, n. + + Kuhn, Loeb & Co., 343-44, 515, 515, n. + + +L + + Labor theory of value, 12, 44-45, 64ff., 139, 570. + See VALUE, COST OF PRODUCTION, ADAM SMITH, RICARDO, MARX, CAIRNES. + + Land speculation, 254, 264, 317. + See SPECULATION. + + Laughlin, J. L., 48, 135, 141, 144, 146, 177, 219, n., 281, 282, n., + 283, n., 284, 312, n., 319, n., 327, n., 418, n., 419, n., + 443, n., 444, n., 459. + + Law, theories of, 23ff., 586-89; + statics and dynamics of, 586-88. + + LeBon, G., 37. + + Legal tender, 147, 418, 422, 432-36, 442, 445-47, 448, n. + See FUNCTIONS OF MONEY. + + Legal theory of money, 134, 136, 405, 433n., ff. + See _Staatliche Theorie_. + + Legal thinking. See JURISTIC THINKING. + + Legal values, 23-29, 40, 138-39, 413, 414, 435, n., 562, n., 586-89. + + Lewes, G. H., 87, n. + + Liabilities of banks, 285; + relation of, to loans, 286. + See DEPOSITS, BANK-NOTES, ETC. + + Liquid paper, 455, 489-91, 499ff., 513-18. + + Liquidity, 455, 475, 489, 495, 499ff., 508, 513-18, 526-27, 529-44. + See SALEABILITY, STATICS, FRICTION. + + Liverpool, 252, 259. + + Loans, on call. See CALL LOANS. + On cotton, 481, 504, 508, n.; + on grain, 380, 503, 508, n.; + to stock market, 375ff., 379, n., 430, 488, 502-03, 507-12, + 518-20, 523-28; + to wholesalers and retailers, 504-05; + consumption, 463; + war, see WAR LOANS. + Collateral, see COLLATERAL LOANS. + Activity of, 512-14; + relation of, to deposits, 285ff.; + relation of to "deposits," 375-81, 512-14; + relation of, to trade, 287, 287, n.; + relation of, to international gold movements, 318-19; + short loans as bearers of options, 425, 428-32. + See also ASSETS OF BANKS, "COMMERCIAL PAPER," "MORNING LOANS," + "OVERCERTIFICATIONS." + + Locke, John, 47. + + London, 145, 251, 259, 259, n., 497, 522, n., 539ff.; + stock exchange, 451; + money market, illustrates assumptions of static theory, 539ff. + + +M + + "Manipulation," of values and prices, 575ff., 589. + + Manufacturers' "paper," 454, 457, 500, 513, n. + + "Margins," 372, 488, 489, 493, 521, n., 523-26, 528; + "margin operator" as "banker," 524-26. + + Marginal analysis, 24, 51, 440, Ch. XXV; + applied to law, 586-89; + applied to money, 152-53, 199, 208, 225, 227, 451-57, 534. + + Marginal utility, 13, 14-15, 30, 34-35, 38, 40, 42, 44, 46, 49, + Ch. V, 137, 440, n., 562, n., 570, 583-86; + applied to value of money, Ch. V, 137; + essentially static theory, 106ff.; + Schumpeter's version of, 44, 90ff., 113, n., ff., 583-86; + limitations of, 92ff.; + "relative marginal utility," 113-114, n., 115, n., 440, n.; + quantity theory and, 46. + + "Market letter," 222, 575. + + Marshall, A., 48, 105, 265, n. + + Marx, Karl, 12. + + Mathematical economics, 91, n., 117, 139, 142, Ch. VIII, 310, 438, + 553. + + McCulloch, J. R., 66. + + Mead, G. H., 4, n. + + Meade, E. S., 198, n., 202, n., 477, n. + + Measure of values, 133, 150-53, 201, 265, n., 325, 327-28, 391, 417, + 418-23, 436, 451, 543, 567-69, 538; + must have value, 133, 326; + relation of, to commodity theory, 151-53; + applied to non-economic values, 567-69. + See also FUNCTIONS OF MONEY. + + Medium of exchange, 133, 201, 327-28, 391, 404, 418, 420-24, 425-26, + 433, n., 434, n., 436, 442, 543; + must have value, 133. + See FUNCTIONS OF MONEY. + + Meinong, A., 467. + + Menger, Karl, 14, 48, 82, n., 88, 96, n., 110, 397, 398, 400, 401, n., + 402-04, 406, 407, n., 418, 476, 493. + + Mercantilism, 225, 551. + + Merriam, L. S., 13, 419, n. + + Metallist theory. See COMMODITY THEORY. + + Middlemen, effect of eliminating, on price level, 306-07. + + Mill, James, 66. + + Mill, J. S., 46, 47, 50-52, 55, n., 58, 59, 61, 67, 69, 94, 129, 132, + 161, n., 172, 192, 193, n., 265, 285, n., 319, n., 333, n., + 548. + + Minneapolis, bills of exchange in, 289, n. + + Mises, L. von, 14, 48, 49, 80, 83, 88, 100, 109-11, 120, n., 182, n., + 418, n., 429, n., 434, n., 556. + + Mitchell, W. C., 91, n., 179, n., 188, 213, n., 265, n., 286, n., + 323, n., 329, n., 332-34, 363, 412, n., 430, n., 448, n., + 449, n., 522, n., 533, 536, 568, 574. + + Mode. See SUGGESTION. + + Money, abstracted from by static theory, 99, 265-66, 392; + definitions of, 167, 169, 325-26, 495-96; + functions of, see FUNCTIONS OF MONEY; + must have value from non-pecuniary source, Ch. VII, 326, 390-91, + 417, 440, 449, 591; + origin of, 394, Ch. XXI; + money not unique, 82-83, 85, 137, 145, 147, 148, 325, 329-30, 389, + 406-07, 417, 425, 437-50, 477-78, 535, 542, 544; + peculiarities of, 3, 57-58, 64, 69, 71, 74ff., 78-79, 81-83, 85, + 88, 91, 101, 124, Ch. VII, 132, n., 134, 144-45, 153, 392-93, + Ch. XXI, Ch. XXII, 406, 437ff.; + tool or instrumental good, Ch. IV, 82-83, 224, Ch. XXII, 591; + theory of, developed in isolation, 46ff.; + theory of, must be dynamic, 262-66, 393. + See also STATICS, DYNAMICS. + Value of, _vs._ "reciprocal of price-level," 8, 56-57, 77, 100, + 123, 128-29, 155-56, 312-13, 382, 388-89, 433, n., 449. + See VALUE, ABSOLUTE _vs._ RELATIVE. + Relation of, to credit. See CREDIT, RESERVES, RATIO, FIXED, M:M'. + Relation of, to trade, Ch. XIII, Ch. XIV. + See TRADE. + See ANALYTICAL TABLE OF CONTENTS. + + "Money in circulation," Ch. VIII, 173, 175, n., 179, 185. + + Money economy, 90, 220, 225, 265, n., 397, 399, Ch. XXI, + Ch. XXII, 555. + + "Money-funds," distinguished from money, 63, 427, 453, 495-96. + + Money income, distinguished from real income, 89; + distinguished from quantity of money, 90, 307-310. + + Money market, 32, 62, 221, 222, 319, 406, 427, 430, 453-58, 461, + 495-97, 516-20, 522, n., 524, 529-44, 575-76. + + "Money Post," on New York Stock Exchange, 372, 375, 430-31. + + Money rates, Ch. V, 145, 149, 183, 223, 224-26, 316, 319-20, 378, + 406, 428-32, 453-57, 461, 495, 523-24, 526, 529-30, 534; + _vs._ interest rates. See INTEREST. + Relation of, to bank reserves, 378; + to clearings, 378; + to international gold movements, 316, 318-20; + to dividend and interest payments, 522, n.; + to plans for corporate consolidations, 198; + to jewelers' profits, 454; + to trade, 223, 224, 226; + to volume of speculation, 378, 522, n. + + "Money Trust," 518-20. + + Monism, unsatisfactory metaphysics for social sciences, 571-72. + + Moore, H. L., 237, n., 238, n., 574. + + Morality, theories of, 22-23. + + Moral values, 22-29, 40, 137-38, 480, 562, n., 567-69, 582, 589. + + Morgan, J. P., 140, 519, n., 577; + J. P. Morgan & Co., 343-44, 375, 515, n. + + "Morning loans," 376, 377, 509, 510. + See "OVERCERTIFICATIONS." + + +N + + National banks, 234, 338, 342, n., 343, 345, 347, 355, n., 359, 375, + 498-99, 502-03. + + National City Bank, 375, 521, n., 540, n. + + Negative values, as "real costs," 71, n. + + New York City, 233-35, 259, 259, n., 340ff., 383, 392, 430-31, + 439, n., 502, 503, 506, 511, 514-16, 520, 541-42; + as "clearing house" for country, 236, 353ff.; + contrasted with London, 541-42; + "deposits" in, 233, 340ff., 392, 515; + "all other deposits" in, 235-37; + Cotton Exchange, 252, 503, 541; + Coffee Exchange, 252, 268, 503, 541; + Stock Exchange. See STOCK EXCHANGE. + Money market. See MONEY MARKET. + Clearings. See CLEARINGS. + + Newcomb, Simon, 156. + + Nicholson, J. S., 81-82, 124, 129-32, 134, 151, 167, 325-29. + + "Nominalism" in monetary theory, 433, n., ff. + See _Staatliche Theorie_. + + "Normal tendency," 176, 218, 254, 262-66, 293, 298-99, 315, 392-93, + 395, 536ff.; + "normal _vs._ transitional." + See "TRANSITION PERIODS," STATICS, DYNAMICS. + + Norton, J. P., 179, n., 287, n. + + Note-brokers, 496-97, 499. + + +O + + "Odd lot" dealings in securities, 249, 370. + + "One house bonds," 147. + + Origin of money, 394, Ch. XXI. + + Ornament, and origin of money, 408ff. + + Orthodox economist, 258, 549, 560. + + "Other collateral security," analyzed, 502ff. + + "Other loans and discounts," analyzed, 500ff. + + "Overcertification," 200, 376, 509, 510. + See "MORNING LOANS." + + Overcounting in estimates of volume of trade, 168, n., 200, n., + 230, 243-45, 247, n., 255, 339-40, 364-81. + See UNDERCOUNTING. + + Overproduction, 258, 550. + + "Over the counter" dealings in securities, 249, 370. + + +P + + Panics, 174, 273, 435, 446, 448, 520, 548-49, 555. + See CRISES, BUSINESS CYCLES. + + Paper money, 143, 150, 151, 418, 421, 473, 495, 496, 538; + inconvertible, 57, 84, 108, 132, 134, 136, 140, n., 141, 321-23, + 391; + credit theory of, 141, 146. + See GREENBACKS, AUSTRIA. + + Parasitic occupations, 482; + gold mining as, 262, n.; + American banking as, 527. + + Patten, S. N., 558, n. + + Paulsen, F., 22. + + Payments, 177-78, 338, 367, n.; + proportions of money and checks in, 174, 338, 383, 447, 449, 463; + wage, 174, 531; + relation of, to volume of trade. + See OVERCOUNTING, UNDERCOUNTING, BARTER. + + Pay rolls, money for, 174, 349. + + Pearson, Karl, 237, n. + + Perry, R. B., 3, n., 16, n., 21, n., 25, n., 97, n., 117, n., 118, n., + 119, n. + + Persons, W. M., 241, n., 276, n. + + Phillips, C. A., 174, n. + + Phillips, Osmund, 272, n., 353, n., 354, n. + + Physiographic factors in social life, 571-73, 574, 590. + + Pierson, N. G., 221, n. + + Pittsburg, "deposits" in, 245-46. + + "Platform" of quantity theorists, 155. + + Poker chips, 132. + + Pope, J. E., 316, 317, 319, n., 502, n., 504, n., 505. + + Populists, and quantity theory, 141. + + Positive doctrine, in Parts I and II, summarized, Ch. XX. + + "Power in exchange," 9-10, 388. + + Pragmatism in economic theory, 41-42, 93, 96-97, 98-99, 553, 571-72. + + Pratt, S. S., 248, n., 251, n., 252, n., 369, 370, 374, 476, n. + + Premium, 146, 194, 322, 332, 390, 442-50, 471. + See AGIO. + Gold, _vs._ general price level as index of value of money, 194. + + Prestige as economic power, 33, 37, 41, 405, 409, 411, 438-42, 463, + 465-66, 487, 489, 570; + prestige values. + See VALUES. + + Price, Theodore, 222. + + Price, 7ff., 388, 440, n.; + and value, 8ff., 298. + See VALUE. + "Buying price" _vs._ "selling price," 402-04, 406-07, 476; + "just price," 24. + + Price level, 56, 86, 87, Ch. VI, Ch. VIII, 188-89, Ch. XV, 315-17, + 328, 381-82, 388-89, 416, 416, n., 456, 520-23; + relation of, to particular prices, 156, 183, 295, 311-12, 315-17, + 388-89; + _weighted_ average, tied to T, 163ff., 363, 381-82; + supposed "passiveness" of, 126, 186, 187, 192, 290, Ch. XV, 389; + "reciprocal of," _vs._ value of money. + See MONEY, VALUE OF. + + Price-theory _vs._ value-theory, 49, 78, 389, 558-59, 570-77, 589-90. + See SUPPLY AND DEMAND, COST OF PRODUCTION, CAPITALIZATION THEORY, + IMPUTATION THEORY. + + Prices, concatenations of, 112-13, 300, 310, 313-14; + customary, 144; + fluid, 143; + world prices, and gold production, Ch. XVIII. + + Private banks, 338, 343-45, 348, 355, n., 357, 488, 498-99, 514-16, + 527-28, 531; + deposits in, in New York City, 344, 515; + "deposits" in, in New York City, 343-45, 515-16. + + Produce exchanges, 200, 251ff., 406, 541. + See SPECULATION, COMMODITY, CHICAGO BOARD OF TRADE, LONDON MONEY + MARKET, NEW YORK COTTON EXCHANGE, ETC. + + Production, confused with trade. See TRADE. + Relation of, to trade, 257ff., 269, 393; + exchange as. + See EXCHANGE. + Factors of, 268, 481-82; index of, 278; + money as instrument of. + See MONEY. + + "Productive," meaning of, 257, 591. + + Prosperity, theory of, 262, 395, 548, 555, 556, 569, 573ff. + See STATICS, DYNAMICS. + + Protective tariffs, 550-52, 553, 580-81. + + Pujo Committee, 344, 373, n., 375, 491, n., 515, n., 518-19. + + "Purchasing power," 9-10, 88, 98-99, 484; + of money, 86, 88, 155-56, 388, 583-86. + + +Q + + Qualitative _vs._ quantitative thinking, 191-92, 195, 324, 433, n., + 553, 586-88, 590. + See JURISTIC _vs._ ECONOMIC THINKING. + + Quantity theory, 42, 79, 81, 99, 110, Pt. II, esp. Ch. XV, 435, n., + 444, n., 448-49, 478, 520-23, 537ff., 550, 558, n.; + modicum of truth in, 195, 330, 448-49; + as basis of prediction, 334-35; + doctrine of, that quantity of money is of no importance, 219, + 219, n., Ch. XIII, _passim_, 265, 391-92; + conflicts with other theories, see SUPPLY AND DEMAND, COST OF + PRODUCTION, CAPITALIZATION THEORY, IMPUTATION THEORY, + GRESHAM'S LAW. + "Long run" _vs._ "short run" versions of, 170-71, 188-89, 192ff., + 262, 393; + not a functional theory, 262-66, 400-401; + not logically related to bimetallism, 219, n.; + applied to international trade, 61, 129, 183, 280-81, 292, + Ch. XVI; + not related to general theory of value, 46ff., 305; + psychological assumptions of, 143-44, 305, 444; + relation to medium of exchange function, 152, 266; + contrasted with commodity theory, Ch. VII, esp. 151-53; + types of, Ch. VII, Ch. VIII, 172, 177, n., 182-85, 192-94, + 210, n., 216-17, 218, n., 219, n., 220, Ch. XVIII, 521, n., + 522, n., 537, 538, n. + See RICARDO, MILL, J. S., TAUSSIG, NICHOLSON, FISHER, WALKER, + F. A., JOHNSON, J. F., JEVONS, BARBOUR, ANDREW, + DAVENPORT (p. 218, n.), KEMMERER. + + +R + + Railway gross receipts, 240-41, 278, 516; + relation of, to clearings, 240-41. + + "Ranks" or "orders" of goods, 34, 38, 96, 481, 562, n. + See IMPUTATION THEORY, AUSTRIAN SCHOOL, CAPITALIZATION THEORY. + + Ratio of exchange, 6ff., 25, 92, 388, 584; + abstract, as value, 25, 92. + See VALUE, ABSOLUTE _vs._ RELATIVE, PRICE, "PURCHASING POWER." + + Ratio, fixed, M:M', Ch. IX, 187, 206, 281, 288, 290, 294, 328-29, + 529-44. + See RESERVES, DEPOSITS, "MONEY IN CIRCULATION." + + Real estate trade. See TRADE. + + Rediscounting, 490, 494, 518-20. + + _Reichsbank._ See GERMANY. + + Religious values, 414. + + Rent, 316, 439-41; + as cost, 70; + of money, as "money rates," Ch. IV, 145, 149, 424, 438-42, 451-57; + capitalization of. See CAPITALIZATION. + + Reserve cities, 233, 343, n., 357, 359, n. + + Reserve function of money, Ch. XVIII, 418, 421, 424, 436, 536-44; + special case of "bearer of options" function, 426, n., 536ff. + See FUNCTIONS OF MONEY. + + Reserves, Ch. IX, Ch. XVIII, 393, 395, 447, 451, 491, 517, 529-44; + bills of exchange as, 181-82, 444; + legal reserve requirements, 175, n., 184, 447, 448, 449; + ratio of, to deposits, 175, n., 179, 286-87, 298, 324ff., 529-44; + ratio of, to "money in circulation," 175, n.; + relation of, to money rates, 378; + "secondary reserves," 530. + + Resumption of specie payments, 146, 323. + + Retail "deposits," see "DEPOSITS." + + Retail trade. See TRADE. + + Ricardo, David, 47, 50, 51, 64, 65, 66, 106, 131, 550. + + Ridgeway, W., 407, n. + + Ripley, W. Z., 275. + + Risk, 67, 527, 542-43. + See DYNAMICS, "BEARER OF OPTIONS." + + Ross, E. A., 37, 568, 571. + + Royce, J., 18, n. + + Rupee. See INDIA. + + Rural banks, 232-35, 491, 517-18; + "all other deposits" in, 233-35; + loans by, in Wall Street, 517-18; + small volume of transactions of, 235, 342, n. + + +S + + Saleability, 10, 94, 99, 401-07, 430, 440-41, 453, 475-78, 489, + 493ff., 524-25, 526-27, 529, 540ff., 591. + + Santos, coffee speculation in, 252. + + Savings banks, 342, n., 409, 472, 498-99, 523. + + Savigny, F. C., von, 24, 398. + + Schumpeter, J., 44, 49, n., 80, 83, 90-100, 111, 113, n., ff., + 264, n., 265, 401, 429, n., 484-85, 488, 526, 549, 554-55, + 558, n., 583-86. + + Scott, DR, 78, n. + + Scott, W. A., 13, 48, 81, 132, 141, 144, 327, n., 418, n., 419, n., + 422, n., 431, n., 498, n., 501, n. + + Seager, H. R., 301, n., 303. + + Sea Board Air Line Adjustment 5's, 471. + + Seasonal changes, 187, 192, 533. + + Seignorage, 131. + + Self, the, 19. + + Seligman, E. R. A., 73, n., 301, n., 418, n., 548. + + Selling costs, 257ff., 393, 565. + + "Selling price" _vs._ "buying price." See "BUYING PRICE." + + Senior, N. W., 14, n., 67. + + Sex, social transformation of, 35-36; + role of, in origin of money, 409-13. + + Shakspere, 25. + + Share sales. See STOCK EXCHANGE, CLEARINGS. + + Shaw, A. W., 259, n. + + Silver, 139, n., 150, 151, 152, 219, 221, n., 327, 397, 412, 414, + 415, 421, 434; + certificates, 432. + + Simmel, G., 101, 418, n. + + Single tax, 318-19, 552, n. + + Smith, Adam, 12, 50, 64, 65, 222, 526-27, 550, 556. + + Smith, B. F., 366, n. + + Smith, Munroe, 24. + + Social control, Ch. I, 395, 409, 435. n., 482, 584; + technology of, 577ff., 589, 591; + "radiant points of," 37, 576. + + Social psychology, 17, 36-37, 143-44, 560, 569-70, 577-78, 586. + + Social value theory, Ch. I, 87, n., 98-99, 137ff., 158, 279, 310-11, + Ch. XX, 402, n., 408-16, 433, n., 435, n., 438-42, 464-67, + 469, 480, 560, 569-82, 586-89; + pragmatic character of, 40-42; + applied to law, 24, 586-89; + applied to morals, 22-24, 589. + + Social advantage, relation of, to individual interest, 397-99. + + Social "consciousness," 16; + social expectation, 409; + social forces, 26; + "social marginal utility," 12; + social mind, 7, 12, 34, 87, n., 557, 560, 570, 578; + social objectivity, theories of, 20ff.; + social organism, 16, 577; + social "oversoul," 16; + "social use-value," 12; + social _vs._ individual values, 43-45. + + "Socially necessary labor-time," 12, 15. + + Society and individual, 16-26, 118. + + Soetbeer, A., 413, n. + + Sombart, W., 220. + + South Atlantic States, "deposits" in, 233, 246. + + Spahr, C. B., 274. + + Specie, 182. + + Speculation, 60, n., 85, 143, Ch. XIII, 221, 225, 231, 233-41, 248ff., + 267, 298, 363-64, 382, 392, 503, 514-28, 540ff., 566-67, 579, + 585; + by manufacturers, wholesalers, and retailers, 243-44, 252-54; + commodity, 251ff., 379-80, 406, 503, 540-42; + influence of, on bank clearings, 237-41; + land, 254; + in London, 540ff.; + "odd lot," 249, 370. + + Speculators, 31, 249, 263, 322, 488, 499, 523-27, 529, 544; + _vs._ investors. See INVESTMENT. + + Spencer, Herbert, 571. + + "Spot" transactions, 251. + + Sprague, O. M. W., 174, n., 200, 354, n., 378, 502, n. + + _Staatliche Theorie_, 433, n., ff. + + Stabilizing the value of money, 152, 194. + + Standard, of deferred payments, 326, 391, 418, 436; + of value, 133, 201, 390, 418-23. + See MEASURE OF VALUES. + Money, 135, 325-26, 421, 445; + "primary" and "secondary," 422; + tabular, 152, 436. + + State banks, 234, 322, 338, 342, n., 343, 345, 347, 498-99, 505-09; + collateral loans in, 505-06, 507. + + Static theory, 11, 42, 93, 106ff., 176, n., 177, n., Ch. X, 219, n., + 223, 254, 262-66, 292-93, 395-96, 403, 426, 433, n., 474, + 481, n., 485, 487, 488, 536-44, Ch. XXV; + abstracts from money, 99, 265-66, 392; + relation of, to speculation, 263ff., 392, 474; + dynamics and, reconciliation of, Ch. XXV. + See also, SALEABILITY, LIQUIDITY, FLUIDITY, "NORMAL TENDENCY," + EQUILIBRIUM, "WEALTH OF NATIONS, THEORY OF," DYNAMICS, + TRANSITION PERIOD, PROSPERITY, THEORY OF, GOOD WILL, + "BUSINESS CAPITAL," FRICTION, HISTORICAL _vs._ CROSS-SECTION + VIEWPOINTS. + + Statistics, 237, n., 272, n., Ch. XIX; + of banking assets, 498, 503-04, 506, 509-11; + of bank-drafts on New York and other centres, 357; + of "equation of exchange," 191, 213, Ch. XIX; + of foreign and domestic trade, appendix to Ch. XIII; + of gold consumption, 412, n.; + of money in banks, _vs._ money in circulation, 179; + of money-rates, 430-31; + of net income of the United States, 246, 247, n., 278; + of prices, 278; + of quantity theory, 285, n., Ch. XIX; + ratio, loans to deposits, 286-87, n.; + reserves, 178-79, 286-87, n.; + of speculation, 248ff.; + of trade, 227ff., Ch. XIII, 363-81; + "ordinary trade," 240-47; + of velocity, 339, 361-63. + See WEIGHTING IN STATISTICS. + + Stevens, W. S., 199, n. + + St. Louis, 246, 252, 289, n., 503; Merchants' Exchange, 253. + + Stock exchange, 31, 145, 254, 282, n., 369ff., 406, 458, 491, 520, + 521-23, 527, 541, 564; + New York Stock Exchange, 242, 248ff., 268, 344, 430-31, 514, 521-23, + 541; + clearing house in, 199-200, 369-75; + share sales on, volume of, 248ff., 521, n., 522, n., 541; + share sales on, correlated with bank clearings, 237ff., 516; + bond sales on, 249, 370; + "odd lot" dealings on, 249, 370, 374; + security dealings outside, 250-51, 514; + compared with other exchanges, 250, 541. + + Stocks and bonds, essential identity of, 460-61, 476-77; + "borrowing" of, 145-46, 371-74, 471-72; value of. + See VALUE. + + "Stop loss" orders, 249, 373, n. + + Store of value, 314, n., 408, 418, 424, 426, 451. + Sec FUNCTIONS OF MONEY. + + Substitutes for money. See MONEY, NOT UNIQUE. + + Suess, Eduard, 413, n. + + Suggestion, 18, 36-37, 97, 118, 405, 410, 411, 464-66, 560, 570, + 577-78. + + Supply and demand, Ch. II, 80, 295, 299-300, 311, n., 389, 453; + applicable to general price level, 299-300, 389; + assumes fixed absolute value of money, 52ff., 313-14, 389; + conflicts with quantity theory, 299-300, 310-11, 389; + not related to quantity theory, 46-47, 59-61, 295; + inapplicable to money, Ch. II, 389; + applied to money, 59-62, 325, 453, n.; + in "money market," 62-63, 224, 453; + relation of, to cost of production, 50, 69-70; + relation of, to marginal utility, Ch. II, Ch. V, esp. 94-95, + and 114, n. + + +T + + Tabular standard, 152, 436, 451. + + Tarde, G., 18, 37, 466, 568. + + Tariff. See PROTECTIVE TARIFF. + + Taussig, F. W., 48, 49, 107, 123, n., 129, 151, n., 155, 182-85, 192, + 216, 254, 276, n., 379, 532, n., 537. + + "Taxonomy" in economic theory, 563-64, 565, 566. + + Taylor, Jas. H., 252, n. + + Taylor, W. G. L., 13. + + Technology, 571-74, 576, 590-91; + "technology of social control." See SOCIAL CONTROL. + + Temporal _regressus_. See HISTORICAL _vs._ CROSS-SECTION VIEWPOINTS. + + Thompson, Burton, on barter in New York City real estate dealings, + 198, n. + + Ticker, 248-49, 373, n. + + "Till money," 183, 530, 539. + + Time credit. See CREDIT, FUTURITY, BOOK-CREDIT, BILLS OF EXCHANGE. + + Time discount, Ch. IV, 92, 93, 224. + See INTEREST, CAPITALIZATION. + + Time, influence of, of money-rates, 428-32. + + Timeless-logical _vs._ causal-temporal, relationships, 403, 548. + See CAUSATION, STATICS. + + Token money, 325, 326. + + Touzet, A., 412, n. + + Trade, various meanings of, 267ff.; + "domestic" _vs._ foreign, appendix to Ch. XIII; + "ordinary," volume of, 241-47, 369. + + Trade, volume of, 59-61, 117, Ch. VI, 144, 149, 159ff., 194, 215, + Ch. XIII, 332, n., 339-40, 363-81, 521-23; + an abstract number, distinguished from concrete goods, 161; + a pecuniary magnitude, 16-64, 271, 277-78; + confusions of, with production, or with stock, 225ff., 281, + 296, n., 306-07, 363, n., 521, n.; + governed by dynamic causes, 262-66, 392, 474; + quantity theory doctrine of causes governing, 217-18, 218, n., + 240, 255, 256, 257, 294, 522, n.; + real estate trade in, 198, 254, 264, 317; + relation of, to money and credit, Ch. XII, Ch. XIV, 391-92, + 532-36; + relation of, to price level, 160-66, 363, 381-82, 536; + retail trade in, 173, 184, 232, 242-44, 369, n., 444-45, 447, + 448-49, 463, 489, 531; + speculation chief factor in, Ch. XIII. + See SPECULATION. + Wholesale trade in, 232, 243, 244-46, 253-54, 369, n., 381. + See also BARTER, TRANSACTIONS, PAYMENTS, OVERCOUNTING, + UNDERCOUNTING. + + "Transactions, total," relation of, to bank clearings, 348-51, 353, + 359, n., 360; + relation of, to "deposits," 349-51, 353. + + "Transition periods," Ch. X, 196, 218, 262-66, 293, 298-99, 392-93, + 537ff., 548, 578-81, 589. + See "NORMAL TENDENCY," STATICS, DYNAMICS. + + Trosien, 319, n. + + Trust companies, 338, 342, n., 343, 345-48, 498-99, 505-09, 516, n.; + New York City, "deposits" in, 345-48; + clearings of, 345-47; + deposits of, 345, 516, n.; + collateral loans of, 505-07; + reserves of, 346-47, 531 + + Turgot, 78, n., 301, n. + + +U + + Undercounting in estimates of volume of trade, 168, n., 200, n., + 231, n., 364-65, 369-81. + See OVERCOUNTING, BARTER. + + Underwriters, 32, 488, 523, n. + + Urban, W. M., 29, n. + + "Use theory." See INTEREST. + + Utility. See MARGINAL UTILITY. + + +V + + Vacuum, monetary, 323. + + Value, Part I, 388-89 and _passim_; + absolute _vs._ relative, 7ff., 56-57, 77-78, 81, 86ff., 109-110, + 123, 156, 158-59, 303, 312, 328, 388-89, 402, n., 440, n., + 449; + abstract units of, 451; + exchange and, 9-11, 401ff., 483-84; + wealth and, 5, 41, 388; + as generic, 26, 288, 467; + _differentiae_ of species of, 26ff.; + as quality, 5, 41, 97-98, 388; + as quantity, 5, 41, 97, 98, 388; + control over, 575ff.; + causal theory of. See CAUSAL THEORY. + Definition of, 5-7, 388; + derived, becomes independent, 40, 137ff., 391, 480, 481, n., + 562, n., 563, n. + See also IMPUTATION THEORY, CAPITALIZATION THEORY, RANKS OR ORDERS + OF GOODS. + Formal and logical aspects of, 5ff., 41, 86, 98, 388-89, 401-02, n.; + functions of, 10, 27, 43, 57, 87, n., 388, 440, 487, 552, 562, n., + 572, 585-86; + "human nature," 30, n.; + "inner objective," 13, 88, 110, 402, n.; + institutional. See INSTITUTIONAL VALUES. + "Intrinsic," 24; + "intrinsic causes of," 14, n.; + objective, 85, 87, 100; + of consumers' goods, 34ff., 300; + of diamonds, 438-42; + of gold. See GOLD. + Of instrumental goods, 38ff., 297, 300ff., 304, 467; + of money. See MONEY and ANALYTICAL TABLE OF CONTENTS. + Of stocks and bonds, 30-31, 32, 36-41, 300ff., 462; + "participation," 29, 30, n.; + "personal," 19, 86, 88, 89; + "prestige," 410-11, 438-42, 452-53; + "public economic," 13, 86, 88, 89; + "something physical," 135; + subjective, 85, 86, 88, 99, 100, 401-02, n.; + subjective, in exchange, 88, 89, 91, 99, 100, 101, 112-119, + 137, n. + See MONEY, VALUE OF, SOCIAL VALUE, PRICE, RATIO OF EXCHANGE, + "PURCHASING POWER," "POWER IN EXCHANGE," MARGINAL UTILITY, + COST OF PRODUCTION, SUPPLY AND DEMAND, ETC. + + Value theory _vs._ price theory. See PRICE THEORY. + + Values, concatenation of, 313-14; + simultaneous rise or fall of, 8. + + Van Antwerp, W. C., 372, n., 374, n. + + Van Hise, C. R., 208, n. + + Variables and constants, 97, 119, 143-44, 204-05, 256-57. + + Veblen, T. B., 37, n., 411, 439, 477, n., 556, 560-64, 569, 570, 580, + 582, 585. + + Velocity of circulation, 85, Ch. VI, 117, 131, 143, 194, Ch. XII, 290, + 292, 298, 309, 310, 333, n., 339, 361-63, 394; + "coin transfer" _vs._ "person-turnover" concepts of, 203-04, 308; + as causal entity, 204, 209, 213-13, 214; + quantity theory analysis of causes governing, 143, 203, 205ff., 309; + most highly flexible factor in "equation of exchange," 205; + varies with trade, 209ff., 306-08, 394; + varies with prices, 308-10, 394; + varies with value of money, 215; + meaningless abstract number, 204. + + +W + + Wagner, A., 25, n. + + Walker, Amasa, 401, n. + + Walker, F. A., 46, 62, 169, 170, n., 219, 220, n., 237, 414, n., + 419, n., 521, n. + + Wall Street. See NEW YORK CITY, STOCK EXCHANGE, NEW YORK CITY CLEARING + HOUSE, SPECULATION, MONEY MARKET, "MONEY TRUST," ETC. + + Walras, L., 91, n. + + Walsh, C. M., 188, n. + + Wants, social nature of, 35ff.; + competitive. See COMPETITIVE DISPLAY. + + War, 108, 140, n., 194, 427, 549-51; + World War, 136, 139, n., 142, 416, 427, 481, 521, 539, 550, n.; + American securities returned during, 521, n. + + War loans, 463, n., 464, n., 480-81. + + Wealth, 440; + definitions of, 5, n.; + relation of, to value, 5; + distribution of. See DISTRIBUTION OF WEALTH. + + "Wealth of nations," theory of, 262, 395, 556, 569. + + Weighting, in statistics, 163ff., 229, 229, n., 272, n., 341, 361, + 383. + + Weston, N. A., 339, 341, 342, n., 360. + + Wheat as money, 407. + + Whitaker, A. C., 65, 154, 319, n. + + White, Horace, 209, 211, 345, n., 401, n. + + Wholesale "deposits." See "DEPOSITS." + Trade. See TRADE, VOLUME OF. + + Wicksell, Knut, 128. + + Wicksteed, P. A., 91, n., 115, n., 116, 117, 214. + + Wieser, F. von, 14, 48, 49, 70, 80, 83-90, 99, 100, 101, 102, 106, + 109, 111, 308, n. + + Williams, A., 152. + + Williams, Clark, 347. + + Willoughby, W. W., 18, n. + + Wilson, E. B., 164, 165. + + Withers, Hartley, 221, 222, 540, n. + + Wittner, Max, 289, n. + + Wolfe, O. Howard, 349, 353, n., 359, n. + + Wolff, S., 289, n. + + +X + + _xy = c_, 149. + + +Y + + Yule, G. U., 237, n. + + +Printed in the United States of America + + * * * * * + + + + +FOOTNOTES + + +[1] _Social Value_, Houghton Mifflin, Boston, 1911. + +[2] Cooley, C. H., "Valuation as a Social Process," _Psych. Bull._, Dec. +15, 1912; "The Institutional Character of Pecuniary Valuation," +_American Journal of Sociology_, Jan. 1913; "The Sphere of Pecuniary +Valuation," _Ibid._, Sept. 1913; "The Progress of Pecuniary Valuation," +_Quart. Jour. of Econ._, Nov. 1915. Clark, J. M., "The Concept of +Value," and "A Rejoinder," _Quart. Jour. of Econ._, Aug. 1915. Anderson, +B. M., Jr., "The Concept of Value Further Considered," _Ibid._; +"Schumpeter's Dynamic Economics," _Pol. Sci. Quart._, Dec. 1915. Perry, +R. B., "Economic Value and Moral Value," _Quart. Jour. of Econ._, May, +1916. Bilgram, Hugo, "The Equivalent Concept of Value," _Ibid._, Nov. +1915. Haney, L. H., "The Social Point of View in Economics," _Ibid._, +Nov. 1913 and Feb. 1914. Johnson, A. S., in _American Economic Review_, +June, 1912, pp. 320 _et seq._ Carver, T. N., in _Jour. of Pol. Econ._, +June, 1912. Mead, G. H., in _Psych. Bull._, Dec. 1911. Ellwood, C. A., +in _American Jour. of Sociology_, 1913. Ansiaux, M., in _Archives +Sociologiques, Bulletin de l'Institut de Sociologie Solvay_, May 25, +1912, pp. 949-55. + +Professor Cooley's articles, which I have listed first in this note, +have in certain important particulars shifted the emphasis and changed +the method of approach. He is more interested in the general +sociological aspects of the value problem than in the technical economic +aspects. In considering economic value, he is more interested in its +general social functions than in its function as a tool of thought for +the economic theorist. He has, therefore, been less bound by schemata +than I have in the discussion. This different method of approach, +coupled with a singular charm in exposition which characterizes +everything Professor Cooley writes, makes it seem probable to me that +readers who may find the doctrine as I set it forth unconvincing, will +be convinced by Professor Cooley's exposition. I hope, too, that +Professor Cooley's articles, which have been scattered among three +periodicals, may soon appear together under one cover. + +[3] Including many whose formal definitions are quite different, and who +would repudiate the contentions here advanced! _Cf._ my article, "The +Concept of Value Further Considered," _Quarterly Journal of Economics_, +Aug. 1915, and _Social Value_, chs. 2 and 11. + +[4] Definitions of wealth differ, and there are few if any definitions +of wealth broad enough to make it true that only items of wealth have +value. All wealth has value, but not all value is embodied in wealth. +Thus, stocks and bonds, and "good will" have value. Few writers would +classify them as wealth. The distinction between wealth and property is +employed by many writers to meet the difficulty here presented, and it +is held that these intangibles have only the value of the wealth to +which they give title. In a logical schema, on the assumption of a +fluid, static equilibrium, this may serve. It is true in fact, however, +that many of these intangibles have value apart from the wealth to which +they give title. But these are complications which I reserve for a later +part of this chapter, for the chapter on "Statics and Dynamics," and (in +the case of irredeemable paper money) for the chapter on "Dodo Bones." + +[5] The notion of ratio of exchange as a ratio between values is +strictly accurate only under static assumptions. Goods, in actual life, +are not always exchanged strictly in accordance with their values. _Cf._ +my article, "The Concept of Value Further Considered," _Q. J. E._, Aug. +1915, pp. 698-702. In cases where prices, or exchange relations, are not +in accord with values, the term "ratio of exchange" is inapplicable, +since there are no quantities to be terms of the ratio--except the pure +abstract numbers of the commodities, each measured in its own unit, +exchanged. + +[6] In chapter 17 of _Social Value_, I have followed the German usage in +broadening the term, price, to cover all exchange relations. This has +led to misunderstanding on the part of some readers, and it has seemed +best to me to return to what appears to be the more familiar usage. It +is purely a question of convenience. Practically, ratios of exchange +which are not money-prices rarely come in for discussion, outside the +preliminary chapter on definition! Professor Fetter, in his article on +the "Definition of Price," in the _American Economic Review_, Dec. 1912, +proposes to broaden the term price in the manner which I am here +abandoning, and his count of economists would seem to leave usage about +equally divided between the broader and narrower uses of the term. It +does not seem to me to be a point worth arguing about, however, and +since I am practically convinced that cause of misunderstanding will be +removed by using price to mean "money-price," I shall so use the term in +this book, using ratio of exchange, or exchange relation, to express the +broader concept. + +[7] E. g., Boehm-Bawerk, _Grundzuege der Theorie des wirtschaftlichen +Gueterwerts_, Conrad's _Jahrbuecher_, 1886, p. 478, n.; Carver, "Concept +of an Economic Quantity," _Quarterly Journal of Economics_, 1907. + +[8] This distinction is elaborated _infra_, in the chapter on the +"Origin of Money." + +[9] It is a matter of high importance that the value notion should be +extended beyond exchange, if the economist is to be able to apply his +theory to such highly important economic problems as socialism. _Cf._ +Schaeffle, _Quintessence of Socialism_, and Clark, J. M., _Quart. Jour. +of Econ._, Aug. 1915, p. 710. + +[10] As shown, _infra_, in the chapters on "Supply and Demand," "Cost of +Production," "Capitalization Theory," etc. + +[11] _Vide Social Value_, p. 176, n. _Cf._ Davenport, _Value and +Distribution_, chapter on "Ricardo." + +[12] Knies, _Das Geld_, vol. I of _Geld und Credit_, Berlin, 1873, pp. +113-125, esp. 124. + +[13] Chapter on "Value" in the _Philosophy of Wealth_, and ch. 24 of the +_Distribution of Wealth_. + +[14] _Social Value_, ch. 7. + +[15] T. S. Adams, "Index Numbers and the Standard of Value," _Jour. of +Pol. Econ._, vol. x, 1901-02, pp. 11 and 18-19; Kinley, "Money", p. 62; +W. G. L. Taylor, "Values, Relative and Positive," _Annals of the Amer. +Acad._, vol. ix; Merriam, L. S., "The Theory of Final Utility in its +Relation to Money and the Standard of Deferred Payments," _Annals of the +American Acad._, vol. iii. and "Money as a Measure of Value," _Ibid._, +vol. iv; Scott, W. A., "Money and Banking", 1903 ed., ch. III. Professor +Scott, in a letter to the writer, expresses the opinion that a value +concept which makes the value of a good a quantity, socially valid, +regardless of the particular holder of the coin or commodity in +question, and regardless of the particular exchange ratio into which the +value quantity enters as a term, "is absolutely essential to the working +out of economic problems." Johnson, A. S., "Davenport's Economics and +the Present Problems of Theory," _Quarterly Journal of Economics_, May, +1914, and _American Econ. Rev._, June, 1912, p. 320. + +[16] Cf. also Wieser's _Natural Value_, p. 53, n. Senior's "intrinsic +causes of value" comes to the same thing. + +[17] Cf. _Quarterly Journal of Economics_, Aug. 1915, pp. 681-82, esp. +681, n. + +[18] Among the leading figures in economics to whom this doctrine is +unacceptable, I would mention especially Professor H. J. Davenport, +_Value and Distribution_ and _The Economics of Enterprise_. A writer who +seeks to minimize the importance of the issue between the relative and +the absolute conceptions of value is Professor J. M. Clark, in +_Quarterly Journal of Economics_, Aug. 1915. Professor Clark seems to +agree with much of what has been said here, and the present writer would +agree with Professor Clark, as indicated above, that for many purposes +we do not need to look behind prices--entering a _caveat_ that this is +true only so long as we can assume a fixed absolute value of money. + +[19] The psychology of this statement, which involves hedonism, needs +improvement, but the issue need not be discussed here. _Cf. Social +Value_, ch. 10. + +[20] As Professor R. B. Perry, _Quart. Jour. of Econ._, May, 1916. + +[21] In this I am following a line of thought developed by Professor +John Dewey in a lecture delivered before the Harvard Philosophical Club +in 1913-14. + +[22] For the elaboration of these ideas, cf. Hegel, _Philosophy of +History_, _passim_; Willoughby, _The Nature of the State_, _passim;_ +Davidson, T., _History of Education_, New York, 1900, _passim_; +Bosanquet, B., _Philosophical Theory of the State_; Royce, J., _The +World and the Individual_. + +[23] Tarde, _Laws of Imitation_; Baldwin, _Social and Ethical +Interpretations_. + +[24] _Human Nature and the Social Order._ + +[25] _Cf._ Ellwood, C. H., _Some Prolegomena to Social Psychology_, +Chicago, 1901, and Cooley, C. H., _Social Organization_, New York, 1909. +See also _Social Value_, ch. 9. + +[26] _Cf. Social Value_, ch. 8. H. J. Davenport is the best modern +representative of this extreme individualism in economics. Individualism +is nearly dead in modern political, ethical, and sociological theory. +Revivals of it appear, however, in W. Fite, _Individualism_, and in a +recent article by R. B. Perry, "Economic Value and Moral Value," _Quart. +Journal of Economics_, May, 1916. (I have discussed Professor Fite's +views in the _Pol. Sci. Quart._ of June, 1912.) Professor Perry would +there appear to reduce ethical value to a purely individual phenomenon. +But he really brings in a "categorical imperative," not derived from the +values of the individual, by the "back door." "Now our general moral law +prescribes that an agent shall take account of all the interests which +his conduct affects, or shall judge his conduct by its consequences all +round." (_Loc. cit._, p. 481.) Just how this "general moral law" is to +be derived from individual values, is not made clear. That the wants of +every man should count equally with the wants of the agent is a +principle which one would expect from Kant or Fichte, but hardly one +which individualism can expect to maintain. + +[27] I use "volition" here in that wide sense which makes it cover both +the motor and the affective phases of mind. Munroe Smith would emphasize +the motor aspect, where Savigny stresses feeling and sentiment. + +[28] "Jurisprudence," a lecture delivered before the faculty of Columbia +University, Feb. 1908, New York, The Columbia University Press, 1909, p. +14. + +[29] I ran across this in Wagner's _Grundlegung_. Wagner had found it in +Raul. It is from _Troilus and Cressida_, Act II, Scene II. + +[30] Davenport, _Value and Distribution_, pp. 184, n., and 330-31, n.; +Jevons, _Theory of Political Economy_, pp. 14, 78-84, esp. 83. _Cf. +Social Value_, ch. 4. This seems to be the position of Professor R. B. +Perry, also, though he is not so extreme as Davenport. _Loc. cit._ + +[31] This term carries no connotation of teleology, as here used. I am +merely trying to state what the different kinds of value _do_, as a +matter of fact. + +[32] The _extent_ to which the values of consumption goods and services +are reflected in other economic values will receive attention below, in +the present chapter. + +[33] _Cf. Social Value_, p. 125, and Urban, _Valuation, passim_. Urban's +idea of "participation values" is better expressed by Cooley's phrase, +"human nature values," while Cooley's excellent phrase, "institutional +values" characterizes the more complex values in which classes and +institutions are specially _weighted_. _Cf._ Cooley's articles referred +to above, and _Social Value_, chs. 11-15, inclusive. + +[34] "The Institutional Character of Pecuniary Valuation," _American +Journal of Sociology_, Jan. 1913, p. 546. + +[35] This, unfortunately, is not high praise, as the Federal Judiciary +in general sets a lamentably low standard in these matters. + +[36] Neither "desire" nor "satisfaction" is really accurate here, but I +do not wish to digress for a discussion of the psychology of value in +the individual mind. The present argument can be developed without it. +The matter is discussed in detail in ch. 10 of _Social Value_. + +[37] Ross, E. A., _Social Psychology, passim_. + +[38] _Cf._ Veblen, T. B., _Theory of the Leisure Class_, and Carlile, W. +W., _Evolution of Modern Money_. + +[39] _Social Value_, chs. 3-7, esp. ch. 5. + +[40] But land does often have value which it is impossible to explain on +the basis of any income which may reasonably be expected from it, even +in the remote future. + +[41] P. 174. + +[42] _Cf._ the discussion of Wieser, Schumpeter and von Mises in the +chapter on "Marginal Utility," _infra_. + +[43] Flux, W. A., _Economic Principles_, London, 1904, pp. 4, 27, 29; +Taussig, F. W., _Principles of Economics_, New York, 1911, vol. I, pp. +141-143. _Cf._ my _Social Value_, ch. 5. + +[44] _Cf._ the present writer's _Social Value_, chs. 3-6, inclusive. + +[45] I am here abstracting from an important factor, namely, that not +all prices are affected equally by changes in the value of money. Some +prices are fixed by law and custom, and some incomes are tied by long +time contracts. Thus, it will happen, in many cases, that supply and +demand for a given good will be unequally affected by a change in the +value of money. This means that certain values are _tied_ to the value +of money, rising and falling with it, so that the amount of _power_ +which some elements in the economic situation are able to exert through +supply-price-offer and demand-price-offer are at the mercy of changes in +the value of money. But this is an element which is incalculable, on the +basis of the supply and demand concepts, and must be abstracted from if +we are to make any definite assertions as to the effect of increase or +decrease of demand in the active sense on supply in the passive sense, +or vice versa. Unless we make this abstraction, and unless we assume a +fixed value of money, we might find increase of demand in the active +sense (nominal) leading sometimes to an increase, and sometimes to a +decrease of supply in the passive sense, or rather, being accompanied by +either increase or decrease of supply in the passive sense. No law would +be possible. In practice, both of these abstractions are more or less +consciously assumed. + +[46] I think that it is a feeling that Mill has left out the +psychological factors in supply and demand which led Cairnes to the +effort to give definiteness to other and vaguer notions on the subject. + +[47] _Cf. Social Value_, ch. 2; "The Concept of Value Further +Considered," _Quart. Jour. of Economics_, Aug. 1915. For the doctrine +that supply and demand, and other elements of current price theory, +assume a fixed absolute value of money, see _Social Value_, p. 166, n., +and ch. 17. + +[48] _Leading Principles_, ch. on "Supply and Demand." + +[49] _Cf. Social Value_, pp. 29-30, and 64-71. + +[50] _Cf._ the discussion, _infra_, of "T" in the "equation of +exchange." + +[51] Cotton is chosen for this illustration because it has actually +happened, more than once, that a large crop has sold for a smaller +aggregate price than a smaller one. Thus, not to take an extreme +illustration, the crop of 1910-11 was 11,568,334 bales. That of 1911-12 +was 15,553,073 bales. The average price of spot cotton at New York from +Oct. 1910 to June, 1911, inclusive, was almost 15c. per lb.; the average +price of spot cotton in New York during the same months in 1911-12 was +not quite 10 cents per lb. On this basis, the eleven million odd bales +of 1910-11 sold for substantially more than the fifteen million odd +bales of 1911-12. + +[52] Nor is there anything in the hypothesis to reduce the number of +times any good needs to be exchanged against money. Rather there would +be an increase of exchanging, as speculation took place to bring about +the needed readjustments. For the present, I abstract from this. _Cf. +infra_, the chapter on "Volume of Money and Volume of Trade." + +[53] I shall recur to this point in the chapter on "The Quantity Theory +and International Gold Movements." + +[54] _Quart. Jour. of Economics_, 1894-95, p. 372. + +[55] _Cf._ Davenport, _Value and Distribution_, and Whitaker, _Labor +Theory of Value_. + +[56] _Cf. Social Value_, pp. 29-30; 64-71. + +[57] I incline to the view that the explanation of costs by foregone +positive values needs supplementing by a recognition of the role of +_negative social values_, and that thus interpreted, "real costs" have a +minor part to play. But I have not thought the matter through +satisfactorily, and shall find no occasion to use the doctrine in the +present volume. + +[58] This doctrine as applied to rates on call loans appears in +Seligman's _Principles of Economics_, 1912 ed., p. 395. The +peculiarities of call loans have also been discussed by C. A. Conant, +_Principles of Money and Banking_, I, p. 171. Conant there refers to a +discussion by Joseph F. Johnson, in _Pol. Sci. Quarterly_, Sept. 1900, +p. 500. There are some very interesting distinctions between the "hire +price" and the "purchase price" of money developed by J. A. Hobson, in +his _Gold, Prices and Wages_, pp. 153 _et. seq._ + +[59] One "pure rate" of interest, for loans of all periods over, say, +three years, is doubtless, a myth, or better, a methodological device +for simplifying thinking in connection with the theory of interest, and +the capitalization theory. It is not necessary for our purposes, +however, to give detailed analysis to the notion. We shall discuss the +capitalization theory as we find it, assuming that, as a matter of fact, +the difference between loans of 20 years and loans of 35 years, or in +perpetuity, of equal quality in other respects, may be abstracted from, +with safety. + +[60] The price-level is a _weighted_ average. These elements dominate +it. _Cf._ our discussion, in the chapter on the "Volume of Money and the +Volume of Trade," _infra_, of the elements entering into trade. We shall +make use of the capitalization theory at various points in our +discussion of general prices. _Cf._ the chapter on "The Passiveness of +Prices," where it is shown that the capitalization theory and the +quantity theory are irreconcilable. + +[61] There is an extensive body of controversial literature connected +with the capitalization theory, which it is unnecessary, for present +purposes, to consider. One interesting line of doctrine is that +developed by DR Scott (_Jour. of Pol. Econ._, Mar. 1910) and H. J. +Davenport (_Yale Review_, Aug. 1910), in which ordinary formulations are +criticised as assuming a "social rate" of interest, and in which the +effort is made to work the thing out on the basis of extreme +individualization, each man having a rate of discount of his own. I have +accepted the doctrine in the general form in which it has been developed +by Boehm-Bawerk (in criticism of Turgot and Henry George in his _Capital +and Interest_), by Fetter, in his _Principles of Economics_, and by +Fisher in his _Rate of Interest_, abstracting from points on which these +writers disagree. My criticism of their doctrines, were it necessary +here to develop it, would rest on the ground that their treatment of the +general interest problem is too individualistic, and I should side with +them as against Scott and Davenport. But these matters are aside from +our present problem. + +In our chapter on "Marginal Utility" we shall meet the capitalization +theory again, as applied to the value of money by David Kinley. We shall +also take it up in the chapters on "Dodo Bones," and "The Functions of +Money." + +[62] _Social Value_, chs. 3-7. The point is discussed _infra_ in the +present chapter. + +[63] Fisher, I, _Purchasing Power of Money_, p. 32. + +[64] Edition of 1903. + +[65] _Cf._ the chapter on "Dodo Bones," _infra_. + +[66] _Cf._ Menger's art. "Geld," Conrad's _Handwoerterbuch_, 328, 3rd +ed., vol iv, p. 566. + +[67] _Cf._ Helfferich, _Das Geld_, ed. 1903, p. 480. + +[68] Discussed more fully _infra_, chapter on "Dodo Bones." + +[69] I make virtually no reference to the "spoken" part, which is +chiefly concerned with index numbers. + +[70] Chapter on "Dodo Bones." + +[71] Chapter on "Barter." + +[72] In its psychological explanation, this bears somewhat the same +relation to the social value concept of the present writer that the +social mind concept of Giddings and Lewes bears to the social mind +concept of the present writer. _Cf._ _Social Value_, ch. 9. Wieser's +concept excludes individual peculiarities. It is an abstraction from +individual values, a distillation of their common essence. The social +value concept of the present writer is a focal point in which are +summarized all the individual values, whether alike or divergent, and +not merely the individual marginal utilities of the goods in question +(Wieser's only factors) but also the individual emotions which affect +the distribution of wealth. Wieser's concept is based on a study of +individual marginal utilities considered as atomic elements; that of the +present writer looks on the social mind as an organic whole, in which +individual mental processes are phases, and does not try to synthesize a +social value out of elements, but rather, to analyze it into elements. +In the function in economic theory for which they are destined, however, +the two concepts have much in common. Both seek to be the fundamental +economic quantity. Both seek to be causal forces, lying behind prices, +even though expressed in prices; both oppose the conception of value as +merely relative. + +[73] _Social Value_, chs. 5, 6, 7, and 13. _Infra_ in the present +chapter. + +[74] See especially the chapter on "The Passiveness of Prices." + +[75] _Cf._ the writer's "Schumpeter's Dynamic Economics," _Political +Science Quarterly_, Dec. 1915. Schumpeter's theory, as there presented, +is based on the brief discussion in his _Theorie der wirtschaftlichen +Entwicklung_ (Leipzig, 1912), pp. 61 et seq., 105, 166-667, 116, 464, +and on Schumpeter's verbal expositions of the theory during his American +trip. Since that account was published, Professor W. C. Mitchell has +given an account of Schumpeter's doctrine, based on the fuller +discussion in Schumpeter's _Wesen und Hauptinhalt der theoretischen +Nationaloekonomie_, which is in accord with the account here given. +(Mitchell, in _Papers and Proceedings_, Supplement to March, 1916, +_American Econ. Rev._, p. 150.) Mitchell attributes the essential +elements of Schumpeter's theory to Walras. The first exposition in +English of the conception, so far as the present writer is aware, is in +Irving Fisher's _Mathematical Investigations in the Theory of Value and +Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. Professor +Fisher, in his preface, accords priority to Jevons, Auspitz and Lieben, +and to Walras. The conception is not to be found in Jevons, though many +of the ideas involved in it are. The first non-mathematical exposition +of the doctrine, so far as I know, is by Schumpeter. As will be made +clear in a footnote at the end of the present chapter, neither Wicksteed +nor Davenport has really forced the problem through, to the full +equilibrium picture, and neither has escaped the Austrian circle. I do +not concur with Professor Mitchell's interpretation of Wicksteed on this +point. It may well be that mathematical method, with a system of +simultaneous equations, was necessary for the development of the idea. +If so, it illustrates both the strength and the weakness of mathematical +economic theory: it clarifies thinking, but it gets no causal theory! At +all events, no causal theory emerges in this case. + +[76] _Positive Theory of Capital_, Bk. IV, and _Grundzuege der Theorie +des wirtschaftlichen Gueterwerts_, in Conrad's _Jahrbuecher_, 1886. The +writer who would adhere to Schumpeter's doctrine must give up all notion +that any individual occupies a critical "marginal" position. All men are +equally marginal in Schumpeter's scheme. + +[77] _Positive Theory of Capital_, p. 156. + +[78] Schumpeter's scheme gives no money-prices. No form of this scheme +gives any quantitative values. Nothing but ratios can come from it. + +[79] _Supra_, chs. on "Value" and "Supply and Demand." + +[80] See, _infra_, the chapters on "Volume of Money and Volume of +Trade," and "The Functions of Money." + +[81] _Infra_, chs. on "Origin of Money," "Functions of Money," and +"Credit." + +[82] _Supra_, ch. on "Supply and Demand." + +[83] See note at the end of this chapter. + +[84] _Supra_, chapter on "Cost of Production." + +[85] That this is wholly alien to Boehm-Bawerk's thought is sufficiently +indicated by Boehm-Bawerk's vigorous criticism of Professor J. B. Clark, +in "The Ultimate Standard of Value," _Annals of the American Academy_, +vol. v, pp. 149-209. It may be noticed that Schumpeter makes use of +Menger's and Boehm-Bawerk's general doctrine of imputation of the value +of goods of the first order to goods of higher orders, without seeing +that his equilibrium picture gives no basis for such a procedure. + +[86] _Cf._ comments on Professor R. B. Perry's view, in the long note at +the end of this chapter. + +[87] _Cf._ Boehm-Bawerk, _Grundzuege_, etc. (_loc. cit._), pp. 5, 478, n.; +_Social Value_, chs. 2 and 11; J. M. Clark and B. M. Anderson, Jr., in +_Quarterly Journal of Economics_, 1915--"The Concept of Value." I may +add that this equilibrium scheme is, in my judgment, equally useless as +the basis of a hedonistic theory of _welfare_, since it is _absolute_ +amounts of utility that are significant there. + +[88] _Theorie der wirtschaftlichen Entwicklung_, pp. 83-84. + +[89] _Loc. cit._, ch. 3, part ii. + +[90] _Ibid._, p. 199. + +[91] For the assimilation of credit phenomena to the general phenomena +of value, by means of the social value doctrine, see _infra_ our section +on "Credit." The social value doctrine is still further generalized in +the chapter on "The Reconciliation of Statics and Dynamics." + +[92] _Ibid._ p. 169. + +[93] _Vide Mathematical Investigations_, _loc. cit._, p. 62, where +Fisher assumes _one_ price to be unity, "to determine a standard of +value." _Purchasing Power of Money_, pp. 174-175. + +[94] _Loc. cit._, pp. 72 _et seq._ + +[95] Pp. 132-136. + +[96] See _Social Value_, chs. vi and vii. + +[97] Bk. ii, ch. vi. + +[98] "_Cf._ Davenport, _Value and Distribution_, 560. 'For, in truth, +not merely the distribution of the landed and other instrumental, +income-commanding wealth in society, but also the distribution of +general purchasing power ... are, at any moment in society, to be +explained only by appeal to a _long and complex history_ [italics mine], +a distribution resting, no doubt, in part upon technological value +productivity, past or present, but in part also tracing back to bad +institutions of property rights and inheritance, to bad taxation, to +class privileges, to stock-exchange manipulation ... and, as well, to +every sort of vested right in iniquity.... _But there being no apparent +method of bringing this class of facts within the orderly sequences of +economic law, we shall--perhaps--do well to dismiss them from our +discussion_....' [Italics are mine.] It may be questioned if the +'orderly sequence' is worth very much if it ignore facts so decisive as +these! It is precisely this sort of abstractionism which has vitiated so +much of value theory. Most economists slur over the omissions; Professor +Davenport, seeing clearly and speaking frankly, makes the extent of the +abstraction clear. We venture to suggest that the reason he can find no +place for facts like these within the orderly sequence of his economic +theory is that he lacks an adequate sociological theory at the basis of +his economic theory. A historical _regressus_ will not, of course, fit +in in any logical manner with a synthetic theory which tries to +construct an existing situation out of existing elements. Our plan of a +_logical_ analysis of existing psychic forces makes it possible to treat +these facts which have come to us from the past, not as facts of +different nature from the 'utilities' with which the value theorists +have dealt, but rather as fluid psychic forces, of the same nature, and +in the same system, as those 'utilities.'" + +[99] Of course, we do not mean to question the immense light which +history throws upon the nature of existing social forces. + +[100] _Theory of Political Economy_, 4th ed., p. 34. + +[101] Art. "Geld," in _Handwoerterbuch der Staatswissenschaften_. + +[102] _Cf._ Helfferich, _Das Geld_, Leipzig, 1903, for the same +terminology, pp. 485-486. + +[103] Exchange creates _values_. It does not necessarily create +_utilities_. Wheat going from a famine-stricken part of India to a place +where it will sell for higher prices does not gain in utility thereby. + +[104] A possible exception to this general statement might be made for +Professor H. J. Davenport, who would insist that his version of the +utility theory is based on "relative marginal utility," rather than on +marginal utility in Boehm-Bawerk's fashion. No critic has been more +merciless than he in the criticism of the Austrian confusions of +demand-curves with utility-curves, etc. But it is not clear to me that +Professor Davenport has freed himself from the general doctrine that he +criticises. I am not sure that he would accept Schumpeter's version of +the Austrian theory as correct. It may be possible to _read_ +Schumpeter's doctrine _into_ chapter 7 of Davenport's admirable +_Economics of Enterprise_, but it is not clear that one could read it +_in_ the chapter! That individual price-offer depends on the marginal +utilities of alternative goods, in comparison with the marginal utility +of the good in question, Davenport does emphasize. But the complication +that not merely the utilities of alternative goods, but also their +_prices_, have to be taken into account, and that this involves circular +reasoning when an effort is made to give a summary of the whole system +of prices by means of individual utility calculations, he does not, so +far as I can see, grapple with. He summarizes the thing on p. 104: "The +steps, then, are from (1) utility to (2) marginal utility, thence to (3) +the comparison of marginal utilities, and finally to (4) price-offer." +He takes no account here of the complication that the third step is in +large degree a comparison, not of marginal utilities proper, but rather, +of "subjective values in exchange." Yet just in this lies a vital +difficulty of utility theory, in so far as it attempts to explain +causation. Moreover, Professor Davenport is seeking to explain the +_causal_ relation of utility to _demand_, the old Austrian problem. The +explanation of demand is, indeed, the problem with which all theories of +value must come to terms, if they are to be of any use. As we have seen, +Schumpeter's schema has no bearing whatever on the explanation of +demand, or on _causation_ of any sort. Schumpeter's scheme leaves money +out, and demand-curves run in money terms. Davenport's scheme assumes +money--and "purchasing power." (_Loc. cit._, 91.) We have seen in the +chapter on "Supply and Demand" that the notion of demand and supply +involves money and a fixed absolute value of money. Professor Davenport +is thus doubly assuming value, the thing to be explained! Laws of +"relative marginal utility" developed on the assumption of money, and in +abstraction from changes in the value of money, are not likely to be of +service when the problem of the value of money itself is taken up. On +pp. 95-96, Davenport comes closest to Schumpeter's doctrine, saying that +"the total situation is directive of each individual in it," and that +there are "mutual reactions," such that particular facts are both +effects and causes, illustrated by the last person who jumps on a +crowded raft--does he sink the others, or do they sink him? This +recognizes the complexity of the problem, but it is not clear that it +even purports to do more than that. What is called for is a _definition_ +of the essential elements in that "total situation," with precise +statement as to what is assumed constant and what is allowed to vary, +and an analysis of the "mutual reactions," with a starting point and a +_terminus ad quem_,--an equilibrium in which "mutual reactions" cease to +trouble with their endless circle! Schumpeter's schema, though meeting +criticism on other scores, does meet this logical test, but Davenport's +does not appear to do so. + +It is interesting to note that Professor Alvin S. Johnson, in his review +of the _Economics of Enterprise_, concludes that Professor Davenport, +instead of meaning by "relative marginal utility" anything of the sort +that Schumpeter has in mind in his equilibrium picture of all utilities +to all individuals, really has an absolute value in mind. (_Quarterly +Journal of Economics_, May, 1914, pp. 433-436.) There is much in +Professor Davenport's book to justify this interpretation. + +Professor Davenport's application of "utility" to the problem of the +value of money will be found on pp. 267-275 of the _Economics of +Enterprise_. The general discussion of money and credit in the +_Economics of Enterprise_ has been exceedingly illuminating to me, and +my indebtedness to it will appear in the present book. + +Much of what has been said of Davenport's "relative utility" theory may +also be said of Wicksteed's. (_Common Sense of Political Economy_, +London, 1910.) This is in many ways a remarkable book, characterized by +excellencies of many different sorts. But it fails to present the +utility theory in such a way as to avoid circular reasoning. Wicksteed +sees the confusion of utility-curves with demand-curves, and protests +vigorously and at length against it. (_E. g._, pp. 147-150.) He starts +out by assuming money and a set of market prices. His earlier chapters +are given to showing how the individual adjusts himself to the market, +bringing his "marginal utilities" of various goods into harmony with the +market prices. He recognizes that he has made these assumptions (pp. +130-131), and that he cannot use the results thus achieved as an +explanation of the market prices. They are "our goal, not our starting +point." But by pp. 161-162 he finds himself with the "suspicion" that +nothing special or peculiar is to be found in the laws of "market or +current prices--a phenomenon which it is obviously impossible to regard +as ultimate, which demands explanation, and which we have not yet +explained.... Much remains to be done, but we can already see that the +preferences of each individual help to determine the terms or conditions +under which the choice of other members of the community must be +exercised. If you take the individuals of the community two and two it +is clear that the marginal preferences of each determine the limits +within which direct exchanges with the other can be entertained, and we +must already have at least a presentiment that the collective scale is +the register of the final and precise 'resultant' of all these mutually +determining conditions and forces." + +This seems to forecast Schumpeter's doctrine, but in the development +which follows, we do not find it. The heart of his analysis of the +causation of prices is in ch. vi, on "Markets." The "summary" which +precedes that chapter again suggests Schumpeter's analysis--the notion +of an all-embracing equilibrium. But when we get into the detailed +analyses of the chapter we find nothing more than an exceedingly good +account of the process by which supply and demand of particular goods, +considered separately, become equated, through two-sided competition, +and under conditions of monopoly. Instead of "relative marginal +utilities," we see customers coming into the market with various +money-prices in mind, and sellers trying out various money-prices--not +marginal utilities, nor yet two or more marginal utilities in comparison +with one another, but rather, money-prices, which, in the minds of the +buyers may be supposed to represent "subjective values in exchange," +based on both marginal utilities _and_ objective prices of other things +that enter into the budget, and which, in the minds of sellers, +represent estimates of the prices which buyers may be induced to pay. +Wicksteed does not transcend the circle. Finally, despite his caution to +avoid the more glaring forms of the circle, and the confounding of +demand-curves with utility-curves, and of utility with value, he does +lapse into it in its completest form in expounding the Austrian doctrine +of cost of production. "The only sense, then, in which cost of +production can affect the value of one thing is the sense in which it is +itself the value of another thing. Thus what has been variously termed +utility, ophelemity, or desiredness, is the sole and ultimate +determinant of all exchange values." (P. 391.) Here is the illicit leap +from marginal demand price to marginal utility which all utility +theorists make, sooner or later! It is true that costs in one place are +reflections of _demand_ elsewhere. But it is not true that costs in one +place have any definite quantitative relation to _utilities_ in another +place! + +When Wicksteed comes to discuss the value of money, he makes slight use +of the notion of abstract ratios among relative utilities, and employs a +concept which he has nowhere vindicated or explained: the _value_ of +money, as distinct from the reciprocal of the price-level, treating the +value of money as something which can be directly influenced by sinister +rumors affecting the credit of the Government, and which can be an +independent cause affecting velocity of circulation, and the amount of +trade done by means of money. _Loc. cit._, p. 623. See _infra_, our +chapter on "Velocity of Circulation." + +The only writers I know at first hand who have really thought the thing +through, and avoided the circle in form, are Schumpeter and Irving +Fisher. (_Mathematical Investigations in the Theory of Value and +Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. See +bibliographical note, _supra_, in this chapter.) I have given an +exposition of Schumpeter, rather than Fisher, because the former has put +the doctrine in non-mathematical form. In the text I have indicated the +limitations of their doctrine. Fisher definitely avows the impossibility +of applying the doctrine to the problem of the value of money. +_Purchasing Power of Money_, p. 174. Schumpeter doesn't apply it to +money, and when he tries to work out a utility doctrine of money, he +lapses into the Austrian circle in a very obvious form. In later +writings, Fisher also seems to forget the limitations imposed on utility +theory in his earlier essay. In his _Elementary Principles_, ed. 1912, +Fisher lists (pp. 408-409) a great multitude of factors that might +affect the price of pig iron, and then says: "Back of these causes lie +other causes, multiplying endlessly as we proceed backward. But if we +trace back all these causes to their utmost limits, they will all +resolve themselves into changes in the marginal desirability or +undesirability of satisfactions and of efforts, respectively, at +different points of time, and in the marginal rate of impatience as +between any one year and the next." Here these marginal psychic +magnitudes, which in the earlier essay appeared merely as surface +phenomena, resultants of a total situation, proportional to prices, +causes of nothing, merely symptoms of a completed equilibrium, are +erected into atomic _verae causae_, the ultimate ultimates! + +It is interesting to contrast this with a yet more recent statement by a +philosopher who has undertaken a defence of the utility theory of +economic value, Professor R. B. Perry, in the _Quarterly Journal of +Economics_, for May, 1916. Considering the contentions of the present +writer that many general social causes, in addition to the individual +utilities concerned with consumption, are needed to explain changes in +the values of goods, such as changes in fashion, mode, in general +business confidence, in moral attitude toward different sorts of +consumption, in the distribution of wealth, in taxes and other laws, +Professor Perry says: "If the Austrian School has neglected this, then +it needs to be corrected. But the essential contention of that school +remains, so far as I can see, unaltered; _in that these changes work +through individuals_ and have their _point of application_ in a more or +less rational _comparison of needs_ made by the _individual buyer or +seller_. Whatever affects these _individual schedules_ on a sufficiently +large scale will affect prices. But to ignore the individual channels +through which these forces pass, is elliptical." (Pp. 469-470. Italics +mine.) Now I call attention to several points in the foregoing. First, I +would contrast it with the doctrine quoted from Professor Fisher's +_Elementary Principles_. Where Fisher puts the utilities far back in the +realm of ultimate causation, making them the source from which spring +all the proximate social causes which might affect the price of pig iron +(such as "a trade war," "a change in fashion," a "change in incomes," +"decreasing foresight," etc., _loc. cit._, p. 409), Professor Perry +would make individual utility schedules the final focal point, toward +which converge, and through which pass, all the causal forces, however +richly explained by antecedent social factors, which affect prices. The +utility theory of value means all things to all men! + +But a second point with reference to Professor Perry's doctrine. It is +perfectly true that _all_ social activities are the work of +_individuals_. Society is nothing apart from the individuals who make it +up. To think of society and the individual as separate and antithetical +is a fallacy which I have criticised in detail in Part III of _Social +Value_. The social value theory does not mean that there are social +forces which do not run through individual channels. This is not to +accept the notion that individuals are really, in their psychical +nature, isolated monads, however. There is a functional unity of +individual minds, and no individual can be understood in abstraction +from society. But this view is as old as Aristotle. I have not contended +that prices can change apart from the mental activities of individual +men, working upon one another. So far there _may_ be no issue with +Professor Perry. + +But there is a big issue when he contends that all the causation is +focussed in _individual utility schedules_, and in a more or less +rational comparison of needs made by the _individual buyer and seller_. +This is _demonstrably erroneous_. Let us assume, for example, that +utility schedules of every individual New Yorker remain unchanged, but +that, through a change in the law (the work of individual men, under the +influence of their own individual emotions and ideas, of, say, ethical +character), incomes in New York City are _equalized_. Hold rigidly to +the assumption that there are no changes in utility schedules. Will +there not be, none the less, a radical readjustment of prices? Will not +the prices of Riverside palaces and steam yachts sink and the prices of +things which the poor esteem rise? The utility-curves of the erstwhile +rich, assumed to remain unchanged, no longer count for so much as before +in the market. The rich cannot go so far down their curves in the +consumption process as before. The poor, or those who had been poorest, +now count for more in the market. They can lower their margins. In other +words, the forces affecting the distribution of wealth, in so far as +they are legal and moral in character, at least, may affect the +price-situation, _without_ altering _utility schedules_. Some social +factors, as changes in mode and fashion, will work _through_ the utility +schedules, but others will not. One big _variable_ affecting prices +which need not, in idea, at least, affect utility schedules at all, and +whose main influence is anyhow not directed through them, is the volume +of business confidence. This factor we shall analyze in our discussion +of credit, _infra_. Professor Perry thus escapes only part of the +criticism which we have made (_Social Value_, pp. 45 and 56) of the +Austrian theory: (1) that it abstracts the individual from his vital +contacts with other individuals, and (2) that, within the individual +mind thus abstracted, the Austrians make a further abstraction, taking +as relevant only the interests concerned with _consumption of economic +goods_, summed up in the utility schedules. The second criticism applies +to Professor Perry as well. Men's total interests are not summed up in +utility schedules, and do not affect prices exclusively _via_ utility +schedules. + +It may be noticed, also, with reference to Professor Perry's discussion +that he has misconstrued the Austrian theory in conceiving it as an +analysis of an historical _process_, with a beginning and an end, +instead of a static picture, in which preexisting individual factors +come into equilibrium. (_Loc. cit._, 475.) He seeks thus to avoid the +Austrian circle, but as we have shown in the discussion of von Mises in +the text, this way is not open to the Austrians. + +Able and penetrating though Professor Perry's discussion is, on the +psychological side, it fails, I think, to take adequate account of the +complexities with which the economist and sociologist must deal. + +In general, I find no version of the utility theory of value which is +defensible, and, above all, no effort to apply it to the value of money +which has met with success. + +[105] _Vide_ Taussig, _Principles_, I, 432. + +[106] "Der Bankzins als Regulator der Waarenpreise," Conrad's +_Jahrbuecher_, 1897. + +[107] _Loc. cit._, ch. 8. + +[108] _Cf._ ch. on "Economic Value." + +[109] Nicholson, J. S., _Money and Monetary Problems_, pp. 64-66; 71-73. + +[110] _Works_, McCulloch ed. 1852, p. 213. + +[111] _Cf._ the criticism of Nicholson by W. A. Scott, _Money and +Banking_, 1903 ed., ch. 4. + +[112] _Cf._ Mill, _Principles_, Bk. III, ch. xiii, par. 1. "Nothing more +is needful to make a person accept anything as money, and even at any +arbitrary value, than the persuasion that it will be taken from him on +the same terms by others." It is not quite fair to identify Mill's +doctrine with the circle stated above, however, since Mill couples it +with a reference to convention, resting on the influence of +government--a mention, without analysis, of some of the factors to be +discussed shortly. + +[113] _Cf._ Knies, _Das Geld_, I, p. 140. + +[114] _Cf. Social Value_, ch. 2. _Infra_, our chapter on "The Functions +of Money." + +[115] _Das Geld_, Leipzig, 1903, p. 477. + +[116] Laughlin, rejoinder to Clow, "The Quantity Theory and its +Critics," in _Jour. of Pol. Econ._, 1902. + +[117] _Principles of Money_, _passim_. + +[118] _Cf. Social Value_, pp. 132-136, and _supra_, ch. on "Marginal +Utility and Value of Money." + +[119] Strictly speaking, there is no marginal utility, but only a +"subjective value in exchange," for money of the sort here discussed. +See _supra_, the chapter on "Marginal Utility." + +[120] The psychological reactions of the people in times of stress and +uncertainty toward different kinds of money cannot be predicted with any +certainty, and there seems to be absolutely no definite or universal law +governing the matter. The present writer collected a lot of newspaper +clippings at the outbreak of the present World War. From these it +appears that in both Paris and Berlin there was a very great distrust of +bank-notes, and an insistence by retailers, restaurants, landladies, +etc., on _coin_. But _silver_, which was not standard money, seems to +have been accepted without question. When hoarding is referred to in +these clippings, it is invariably gold that is mentioned. A similar +hoarding of gold took place during the Balkan crisis at the time of the +outbreak of the war between the Balkan Allies and Turkey. Professor E. +E. Agger informs me, however, that he has found some evidence that +bank-notes as well as gold were hoarded in Austria, at this time. + +Sometimes we have a suspension of Gresham's law, and an acceptance of +all kinds of money at varying ratios. The following clipping from the +_Boston Herald_ of March 17, 1914, illustrates this: "Douglas, Ariz., +March 16.--Four kinds of money are now circulating in the Mexican +territory controlled by the Constitutionalists. These are United States +currency, the first issues of the Constitutionalist government and of +Sonora state, and 'Villa money,' or that issued by Chihuahua at the +instance of the rebel military commander. United States takes +precedence. Merchants in Sonora, in order to protect themselves and at +the same time observe the laws requiring acceptance of the rebel +currency issues, have established a sliding scale of prices. This was +discovered when five merchants were arrested at Cananea by +Constitutionalist secret service men, who found that for American money +they could buy goods for less than half the amount exacted when payment +was offered in Mexican currency. The uncertainty of the rebel campaign +against Torreon is reflected in the money market. To-day +Constitutionalist sold for 22 and 28 cents American on the peso. Mexican +federal currency commanded from 30 to 32 cents." In the experience of +travellers who have discussed the matter with the writer, there was +little of this flexibility of relation between paper money and coin in +Berlin, or Paris at the outbreak of the present War. Where paper was +refused, it was absolutely refused, and where it was accepted, it seems +to have been accepted without discount. No doubt, a fuller investigation +would reveal all manner of variation in the behavior of different people +in different centres, and at the same centres, at the outbreak of the +War. + +[121] _Money and Banking_, 1903 ed., pp. 58-60; 101-104. + +[122] _Principles of Money_, p. 530. + +[123] Written in December, 1914. + +[124] _Cf._ Clow, F. R., "The Quantity Theory and its Critics," _Jour. +of Pol. Econ._, 1902, p. 602. + +[125] _Cf._ Emery, _Speculation_, pp. 90-91. + +[126] _Cf._ Boehm-Bawerk's criticisms of the "use" theory of interest. +(_Capital and Interest_, _passim_.) Both use theories and productivity +theories are probably suggested, in part, by peculiarities which money +possesses in pre-eminent degree. See _infra_, the chapter on the +"Functions of Money." + +[127] A more precise analysis of all these points will be given in the +chapter on "The Functions of Money." + +[128] _Cf._ Professor Taussig's account of expansions and contractions +of the silver currency in his _Silver Situation_, _passim_. + +[129] For bibliography, see _Am. Econ. Rev._, Dec., 1914, pp. 838-839. + +[130] New York, 1911. All references to this book in the present volume +are to the 1913 edition, which contains some new matter. + +[131] _Standard of Value_, London, 1912, p. 48, n. + +[132] _Papers and Proceedings_, Supplement to March, 1913, number of +_American Econ. Review_, p. 131. + +[133] _American Econ. Rev._, Supplement to March, 1916, number, p. 138. + +[134] _Loc. cit._, pp. 31-32. + +[135] _Loc. cit._, pp. 175ff. + +[136] "The Passiveness of Prices," _infra_. + +[137] Particularly in view of the elaborate statistics, to be considered +below, with which it is sought to make the equation realistic. + +[138] _Loc. cit._, p. 16ff. + +[139] _Loc. cit._ p. 25. + +[140] _Ibid._, p. 26. + +[141] _Ibid._, p. 27. + +[142] Where it is not meaningless, as at various points in the theory of +mechanics, the product is always of a different denomination from either +factor. + +[143] _Vide_ our ch. on "Supply and Demand," _supra_, for a discussion +of Mill's doctrine as to the "demand" for money. + +[144] What is here said of Fisher's equation of exchange applies, for +the most part, to all versions of it. + +[145] _Loc. cit._, p. 298. _Cf._ our chapter, _infra_, on "Statistical +Demonstrations of the Quantity Theory." + +[146] _Purchasing Power of Money_, p. 290. + +[147] The amplified equation is MV + M'V' = PT, which takes account of +bank-credit. This is explained, _infra_. + +[148] _Loc. cit._, p. 487. I recur to this point in discussing the +statistics of the "equation of exchange" in ch. 19. + +[149] _Infra_, ch. on "Quantity Theory and World Prices." + +[150] _Loc. cit._, p. 48. + +[151] _Loc. cit._, p. 370. The same position is taken by Kemmerer, +_Money and Credit Instruments_, pp. 68 _et seq._ Mill denies the +validity of these distinctions. See _Principles_, Bk. III, ch. 12, Par. +8. + +[152] The above was written before the discussion in the _Annalist_ +(Feb. 7, Feb. 21, March 6, March 13, March 20, 1916) in which the +present writer urged that Professor Fisher had greatly exaggerated the +volume of trade in the United States by taking banking transactions as +representative of trade. In reply (see especially the number for Feb. +21, pp. 245 _et seq._) Professor Fisher maintains that the overcounting +to which I call attention is offset by undercounting, and considers +offsetting book-credits, which actually dispense with the use of money +and checks, an important element in the undercounting. I am unable to +reconcile this position with the reasons given for excluding +book-credits from the "equation of exchange." A detailed discussion of +the points at issue appears in later chapters, particularly in the +chapter on "Statistical Demonstrations of the Quantity Theory." + +[153] _Quarterly Journal of Economics_, vols. 8 and 9; _Political +Economy_, pp. 169-175; _Money_, chs. 3-8. + +[154] In our analysis of bank-loans, _infra_, we shall find reason to +hold that Walker, though false to the logic of the quantity theory, +comes nearer to a tenable doctrine than do Kemmerer, Fisher, Andrew, and +most other quantity theorists. + +[155] _Principles_, Bk. III, chs. 11 and 12. + +[156] _Purchasing Power of Money._ + +[157] _Loc. cit._, pp. 50-51. + +[158] _Loc. cit._, p. 280. + +[159] A. W. Atwood, "Hoarded Gold," _Saturday Evening Post_, Dec. 12, +1914, p. 26. + +[160] _Cf._ Kinley, D., _The Use of Credit Instruments_, Senate Document +399, 1910, pp. 192-194. + +[161] _Ibid._, pp. 102-103. In the same volume, on p. 200, the figures +are given _incorrectly_, as 70% checks and 30% cash. C. A. Phillips, +_Readings in Money and Banking_, 1916, p. 151, repeats this erroneous +statement. + +[162] _Cf._ Sprague, _Crises under the National Banking System_, Nat. +Monetary Commission Report, pp. 71-75; 200, 202. + +[163] _Cf._ also p. 280 of Fisher's _Purchasing Power of Money_. + +[164] Kemmerer (_Money and Credit Instruments_, p. 80) maintains that, +"under perfectly static conditions," money in circulation and money in +bank reserves will keep a fixed relation to one another. He offers no +argument to support this view. Of course, "under perfectly static +conditions," everything keeps in fixed relation to everything else. The +volume of credit will keep a fixed relation to the number of laborers +and to the supply of clocks. But this would hardly establish causal +connections! Fisher multiplies "fixed relations" of various kinds, +without, so far as very diligent search can tell, offering any argument +to support them. Thus, we have on p. 105 the statement, "We have seen +that normally the quantities of other currency are proportional to the +quantity of primary money, which we are supposing to be gold." Where +this thesis has been demonstrated, he does not indicate. In view of the +fact that gold has been the one really flexible element in our money +supply, the thesis is hardly credible. On pp. 146-147, facing this +difficulty, Fisher says: "Since, however, almost all the money can be +used as bank reserves, even national bank-notes being so used by state +banks and trust companies, the proportionate relations between money in +circulation, money in reserves, and bank-deposits will hold +approximately true as the normal condition of affairs. The legal +requirements as to reserves strengthen the tendency." Here is a very +substantial growth in the doctrine, with only one new argument, namely, +that concerning legal reserve requirements--which gives minimal ratios, +not _fixed_ ratios. In what way the fact that most kinds of money can +serve as legal reserves gives reason for the doctrine of fixed +proportions is not made clear. For Professor Fisher, however, it seems +quite enough, for on p. 162, in the heart of his causal theory, he +boldly announces: "There must be some relation between the amount of +money in circulation, the amount of reserves, and the amount of +deposits. Normally _we have seen_ that the three remain in given ratios +to each other." (Italics mine.) It is doubtless somewhat dangerous to +make a confident negative statement concerning a book which has no +index. But careful reading of all that has preceded this statement +reveals no references to this topic except those quoted above. "We have +seen" is not a legitimate premise when so important an issue is +involved. In our discussion of reserves in the section on credit, as +well as in the discussion of the volume of trade, it will appear that no +"normal" or "static" relations of this kind are possible. + +[165] "The price-level outside of New York City, for instance, affects +the price-level in New York City only _via_ changes in the money in New +York City. Within New York City it is the money which influences the +price-level, and not the price-level which influences the money. The +price-level is effect and not cause." (_Loc. cit._, p. 172.) + +[166] _Loc. cit._, p. 50. + +[167] W. C. Mitchell, _Business Cycles_, p. 306. + +[168] _Ibid._, p. 325. + +[169] J. P. Norton, _Statistical Studies in the New York Money Market_, +p. 71, and chart opposite p. 72. + +[170] _Ibid._, chart facing p. 72. + +[171] _Cf._ Mitchell, _loc. cit._, chart, p. 298, and text, p. 295. As +the ratio of _reserves_ to _money in circulation_ was greater in 1911 +than in 1894, and as the ratio of _deposits to reserves_ was also +higher, we have a still wider variation in the ratio of money in +_circulation to deposits_--M:M'. + +[172] See the striking figures collected by A. P. Andrew for 1907. +_Quart. Jour. of Econ._, Feb. 1908, p. 297. + +[173] _Infra_, our discussions of the relations of volume of money and +credit to volume of trade, and our discussion of credit in the +constructive part of the book. The theory of money and credit must be a +dynamic theory. + +[174] Senate Document, No. 405, 1910. For the Bank of England, see p. +25; for the Credit Lyonnais, pp. 224-226; for the Deutsche Bank, pp. +374-375. + +[175] _Statist_, 1912, p. 577. + +[176] "The Prospects of Money," British _Economic Journal_, Dec. 1914. + +[177] _Cf._ Ashley, W. J., _Gold and Prices_, N. Y., 1912, pp. 21 _et +seq._ + +[178] _Cf._ von Mises, "The Foreign Exchange Policy of the +Austro-Hungarian Bank," British _Econ. Jour._, 1909, vol. 19. _Cf._ +Keynes, _Indian Currency and Finance_. + +[179] Conant, _Principles of Money and Banking_, vol. II, p. 50. In +1899, the reserve of the Bank of Belgium consisted of 107 millions +(francs) in specie, and 108 millions in foreign bills. + +[180] _Principles of Economics_, vol. I, pp. 432 _et seq._ + +[181] In the chapter on "Quantity Theory and International Gold +Movements," _infra_. + +[182] The Joint Stock Banks in England keep "till money" in cash, even +though their "reserves" are chiefly deposits at the Bank of England. + +[183] Fisher, _loc. cit. passim_. _Vide_ especially ch. 8. + +[184] _Purchasing Power of Money_. + +[185] _Business Cycles_, pp. 580, 595-596. + +[186] _Cf._ C. M. Walsh, _The Measurement of General Exchange Value_, +pp. 480-481. + +[187] On pp. 314-315, and elsewhere, Fisher indicates that _all_ the +causes affecting prices operate _through_ the factors in the equation of +exchange. _Cf._ p. 74. This would require a concrete equation of +exchange throughout. + +[188] Chapter on "Passiveness of Prices." + +[189] _Loc. cit._, p. 169. + +[190] _Cf._ his _Silver Situation_. 1878 to 1891 do not give time enough +for quantity of money to dominate volume of credit, in his exposition! + +[191] Mill, _Principles_, Bk. III, ch. 12, par. 1. + +[192] Fisher, _loc. cit._, p. 62. + +[193] "A Compensated Dollar," _Quart. Jour. of Econ._, Feb. 1913. + +[194] The chapter on "Dodo-Bones," _supra_, and the chapter on "The +Quantity Theory and World Prices," _infra_. + +[195] _Loc. cit._, p. 156. + +[196] _Ibid._, p. 160. + +[197] Or organs for pianos, etc. A common practice--less common in the +North than formerly--is the payment of bills at country stores in +produce. There is not a little barter at secondhand stores in New York +City. + +[198] Mr. Burton Thompson, of No. 7 Wall St., who knows the real estate +situation there intimately, states that while dealers do not like to +"swap" real estate, and do little of it when business is good, they are +forced to do it extensively when business is sluggish, "as has been the +case for the past four or five years." + +[199] _Cf._ E. S. Meade, _Corporation Finance_, p. 376, and _passim_. + +[200] The same thing often happens when a bond issue is paid +off--bond-holders may take their pay in new bonds. "Conversions" of +bonds into stocks, or of preferred into common stock, are also barter +transactions. $220,000,000 of the $420,000,000 which Mr. Carnegie and +his associates received from the Steel Trust for their plants, etc., was +paid, not with money and checks, but with bonds. _Vide_ Stevens, +_Industrial Combinations and Trusts_, p. 101. + +[201] The foregoing had been written before the discussion in the +_Annalist_ of Feb. and March, 1916 (pp. 183-184, 245-272, 313-317, 344, +377), in which Professor Fisher and the present writer joined issue with +reference to Professor Fisher's estimate, 387 billions, for the volume +of trade in the United States in 1909. The present writer contended that +the banking transactions which Professor Fisher took as representative +of trade greatly overcounted trade, since they included loans and +repayments, taxes, several checks in one transaction, gifts, etc., etc. +Professor Fisher contended that the overcounting was offset by +undercounting, and instanced particularly the clearing-house +arrangements in the speculative exchanges, where checks are in part +dispensed with, and the offsetting in "running accounts" through +book-credit. This indicates a substantial change in Professor Fisher's +view as compared with that set forth in the _Purchasing Power of Money_, +where he maintains, as shown above, that barter is virtually +non-existent, that money and checks are "for all practical purposes and +all normal cases," "necessities of modern trade," (p. 160), and that +book-credit merely postpones, and does not dispense with, the use of +money and checks (p. 370). + +The extent of the offsetting by barter, clearing-houses in the +exchanges, and book-credit, though very great, is quite small as +compared with Professor Fisher's 387 billions, and does not nearly +offset the overcounting. The writer has obtained some fairly definite +data on this point, which will be presented in the chapter on +"Statistical Demonstrations of the Quantity Theory," in discussing the +volume of trade. + +[202] _Miscellaneous Articles on German Banking_, Report of National +Monetary Commission, p. 175. _Cf. infra_, pp. 288-290. + +[203] _Cf._ our chapter on "The Functions of Money," _infra_. + +[204] One familiar feature of corporation finance makes barter much +preferable to money transactions, in one connection, which involves very +many corporations indeed, at their inception. Stock, in order to be +marketable, must be "full-paid and non-assessable." If the corporation +sells its stock to the first stockholders, this means that money must be +paid for it to the full par value, dollar for dollar. This is usually +not easy. An especial difficulty would then present itself that the +promotor would have trouble in getting any pay for his work. (Meade, +_Corporation Finance_, _passim_; Sullivan, _American Corporations_, +_passim_.) If, however, the stocks are paid for in _goods and services_, +the courts are much less exacting in looking to see if full value has +been received. Barring obvious fraud, the courts will usually count the +stock full paid and non-assessable even though the value of the goods +and services received is not very great. The first sale of the stocks of +a new corporation, therefore (if it is important enough to wish to have +a public market for its stocks), is a _barter_ transaction, as a rule. + +[205] _Purchasing Power of Money_, p. 152. + +[206] _Ibid._, pp. 352 _et seq._ + +[207] _Infra_, ch. on "Passiveness of Prices." _Weighted_ averages of +"person-turnovers" will not save the situation here, if incomes stop +entirely, since the persons involved then drop out altogether. Moreover, +_weighted_ averages would clearly depend on _incomes_, and hence on +_prices_, and hence could not depend on _habits_ exclusively, or +_causally explain_ prices. + +[208] _Loc. cit._, pp. 152-153. + +[209] _Ibid._, p. 154. Italics mine. + +[210] _Supra_, ch. on "Volume of Money and Volume of Credit." _Infra_, +ch. on "Bank Assets and Bank Reserves." + +[211] _Cf._ Kinley, _Money_, pp. 145 and 205-206, for the discussion of +various moveable margins of this sort. + +[212] Van Hise, _Concentration and Control_, p. 16. The tendency to +accumulate hoards when money is plentiful is notoriously strong in +countries like India. + +[213] _Loc. cit._, pp. 167-168. + +[214] _Ibid._, p. 164. + +[215] _Cf._ Davenport's analysis of the causes governing volume of +trade, _Economics of Enterprise_, p. 272. + +[216] _Loc. cit._, p. 110. + +[217] Perhaps not quite correct, since he does recognize differences in +degree as between different places, though, perhaps properly, from the +standpoint of his normal theory, saying nothing about differences in +degree as between different times in the same place. + +[218] _Cf._ also p. 315, _loc. cit._, where this is placed as one of +three main causes of the historical rise in prices. + +[219] That the overwhelming bulk of trade is in the cities will appear +in our chapter, _infra_, on "Volume of Money and Volume of Trades." + +[220] On the average, in the United States, the banks have less money +than the people have. _Vide_ Mitchell, _Business Cycles_, pp. 295 and +298. + +[221] Based on arbitrary assumptions as to variability. _Cf._ his p. +477. _Cf._ our chapter, _infra_, on "Statistics of the Quantity Theory." + +[222] Other passages might be cited to show that Fisher thinks that T +and the V's are fundamentally governed by different causes. For example, +he says "an increased trade in the Southern States, where the velocity +of circulation of money is presumably slow, would tend to lower the +average velocity in the United States, simply by giving more weight to +the velocity in the slower portions of the country." _Loc. cit._, p. +166. + +[223] _Cf._, _infra_, our chapter on "Statistical Demonstrations of the +Quantity Theory." + +[224] _Common Sense of Political Economy_, p. 623. + +[225] _Principles_, I, 432. + +[226] _Loc. cit._, pp. 432, 438-439. + +[227] _Ibid._, p. 439. _Cf._ our chapter, _supra_, on "Volume of Money +and Volume of Credit," where Taussig's view as to the relation of money +and bank-credit is analyzed. + +[228] _Loc. cit._ + +[229] Virtually the same expression is to be found in Barbour, David, +_The Standard of Value_, London, 1912, p. 43. Barbour denies vigorously +that more money can increase business, since it cannot increase the +number of laborers, or of machines, or the amount of food, etc. The +doctrine that volume of trade is fixed by (1) volume of products, and +(2) degree of specialization of production, and hence is independent of +volume of money, appears in Davenport, _Econ. of Enterprise_, 271-273. + +[230] In this view, Fisher typifies the general position of the quantity +theory, and, indeed, in part even of those who do not agree with the +quantity theory, but who, with the quantity theorists, view the problems +of money and banking as matters of static theory. High or low prices, +once the transition is made, exhaust the effects of increasing or +decreasing the money supply. During the period of transition, certain +readjustments in relations between creditors and debtors arise, which +lead to either temporary prosperity or temporary distress, but after the +transition, it is a matter of indifference whether or not money is +abundant. Though the view is, logically, an essential part of quantity +theory reasoning, we find much of it vigorously maintained by Laughlin, +_Principles of Money_, ch. on "Amount of Money Needed by a Country." +Laughlin and Fisher would seem to be at one in maintaining that the +quantity of money in a country is a matter of indifference, and from the +views of both would follow a condemnation of the idea that any long run +consequences for volume of trade, efficiency of production, etc., could +follow from increasing or decreasing the volume of money. + +It may be just as well here to indicate the conviction of the present +writer that the relation between the quantity theory and the bimetallic +movement is historical rather than logical. Indeed, in laying the stress +they did on the importance of an inadequate stock of money in accounting +for the depression of the latter part of the 19th Century, the +bimetallists were out of harmony with the quantity theory. + +[231] P. 50. + +[232] Pp. 358-372, vol. I. + +[233] _Loc. cit._, p. 160. _Cf._ our chapter on "Barter." + +[234] The fact that prices are often high in gold mining regions, as +compared with prices in the general world markets, has been taken by +many writers as proof of the quantity theory. _Cf._ Kemmerer, _Money and +Credit Instruments_, pp. 50-51, 58; Cairnes, J. E., _Essays in Political +Economy_, particularly the discussion of the Australian episode. It +seems to me that this is particularly inconclusive. High prices +characterize remote mining regions of all kinds, whether gold, silver, +copper, diamonds, tin or what not be the quest. Prices are not lower in +the tin and copper region in the northern part of the Seward Peninsula +in Alaska than they are in the gold region about Nome in the southern +part of that peninsula. They are high in both places, not because of the +abundance of gold or of money, but because of the great value of goods, +which have to be brought with great trouble and expense from the United +States. They are higher in the region of the Saw Tooth Mountains, in the +centre of this peninsula, where hydro-electric power for the use of the +gold miners about Nome, and for the copper and tin mines further north, +is being developed, than they are at Nome itself, on the coast, where +the gold is being mined. They were high in Australia because the +discovery of gold led everybody to abandon everything but gold mining, +and to bring in virtually everything from a distance. Wooden beams were +imported to Australia from Sweden! (Pierson, N. G., _Principles of +Economics_, I, p. 389.) One would expect prices in gold money to be +higher in a silver or copper mining region, which is prospering, than in +a gold mining region, equally remote, where a great deal of gold is +being mined, but at a cost too great to make the region prosperous. + +[235] _Loc. cit._, p. 51. + +[236] _Meaning of Money_, p. 18. + +[237] Price's address before Western Econ. Asso'n, Nov. 26, 1915; Holt's +letter; Dec. 2. + +[238] _Loc. cit._, p. 172. + +[239] See our discussion of "money rates" and "interest rates," _supra_, +in the chapter on "Capitalization," and _infra_, in the chapters on "The +Functions of Money," and on "Credit." + +[240] _Infra_, chapter on "Functions of Money," and _supra_, chapters on +"Capitalization" and "Dodo-Bones." + +[241] _Cf._ our chapters on "Supply and Demand," and "The Origin of +Money." + +[242] New York City can always use idle funds, "at a price." + +[243] Kemmerer, as well as Fisher, allows physical production and +consumption to dominate his "index" of trade variation. _Loc. cit._, pp. +130-131; Fisher, _loc. cit._, p. 479. _Cf._ our discussion of their +statistics, _infra_. + +[244] This confusion of volume of trade and volume of production is a +companion of the confusion discussed on p. 307, _infra_, of quantity of +money with volume of money-_income_. The two confusions, found in +virtually all expositions of the quantity theory, give it most of its +plausibility. + +[245] _Loc. cit._, ch. 12, and appendix to ch. 12. + +[246] _Supra_, ch. on "Equation of Exchange." + +[247] In a letter to the writer, Professor Fisher states that the +figures for the physical receipts at the cities, which dominate his +index for T, have not been available for recent years, and that since +they were discontinued, he has relied chiefly on the indirect +calculation of T _via_ the other factors in the equation. These figures +were discontinued in 1912. In the _American Economic Review_ for June, +1916 (p. 457, n.) Professor Fisher states that the indirect calculation +of T has always had more weight in his figures than the direct +calculation. This would serve in some degree to lessen the errors of his +index of variation. The extent to which he has allowed his T as directly +calculated on the basis of the index to be modified by the indirect +calculation, is indicated on p. 302 of the _Purchasing Power of Money_, +as follows: "The alterations in T, as shown in Figure 16, though still +greater than the preceding, are nevertheless so small and uniform as to +preserve an almost perfect parallelism between the original and the +altered curve. The differences rarely exceed 10%." Even an indirect +calculation of T, however, would not avoid the criticisms here urged, +since the other factors, MV, M'V', and P are all, as we shall see in the +chapter on "Statistical Demonstrations of the Quantity Theory," +calculated by methods which give very excessive weight to trade outside +New York City and to non-speculative transactions. + +[248] _Loc. cit._, p. 485. + +[249] _The Use of Credit Instruments in Payments_, Senate Document No. +399, 61st Congress, 2nd Session. + +[250] This brief account will be amplified for critical discussion in +the statistical chapter below. Fisher in fact calculated MV and M'V' +separately. The account above given is strictly accurate only for that +part of T, 353 billions, which is carried on by means of checks. The +calculation of MV, however, is also based on Kinley's figures. My +account here is adequate for the question at issue, which is, not as to +the absolute magnitude of trade, but rather, as to the _proportions_ of +speculation and other elements in trade. + +[251] The substance of the argument here presented first appeared in +articles in the _Annalist_, to which I am indebted for permission to use +it here. See the numbers of Feb. 7, March 6, and March 20, 1916. +Professor Fisher's replies, directed wholly against the charge of double +counting, appeared in the _Annalist_ of Feb. 21 and March 13, 1916. +Professor Fisher does not question my contention that speculation makes +up the overwhelming bulk of trade, in these replies. He rather seeks to +meet the charge of overcounting by holding that bank-transactions do not +fully count speculation! This he thinks particularly true of stock +exchange transactions. _Cf._ his article of Feb. 21, 1916. + +[252] The Census Bureau figures have been subject to a good deal of +criticism, and I therefore refrain from trying to draw precise +conclusions from them. + +[253] The figures showing the number of banks reporting from each State, +together with the number of reports rejected, will be found on pp. 47-49 +of his monograph. The figures above are combinations of figures from his +various tables. These tables are so carefully indexed in Dean Kinley's +monograph that detailed page references are unnecessary here. + +[254] _Cf._ our discussion of this topic in the statistical chapter, +_infra_. + +[255] _Loc. cit._, pp. 153-154. + +[256] _Discussions in Economics and Statistics_, I, 204. Quoted by +Kinley, _loc. cit._, 152. + +[257] The coefficient of correlation has been developed by the +biologists, chiefly Karl Pearson, but has been applied to problems in +many fields, especially economics, sociology, psychology, and education. +A good source is Yule's _Introduction to the Theory of Statistics_. +Professor H. L. Moore has made extensive use of the method in his _Laws +of Wages_, and his _Economic Cycles_. + +Connected with the coefficient of correlation, usually, is a figure for +"probable error," which depends, primarily, on the square root of the +number of observations. When the probable error is low, and the +coefficient of correlation high (as .8), it is commonly supposed that a +very high degree of causal connection is established. I shall not go +into detail in discussion of the method. My personal judgment is that it +is overrated, that "spurious" correlations, leading to quite erroneous +conclusions, have frequently resulted from it, and that the labor +involved in calculating coefficients of correlation is frequently too +great for the results obtained. I should never be disposed to accept +conclusions based on a "correlation coefficient" unless there were other +converging evidence to support it. In effect we have, in the coefficient +of correlation, nothing more than a refinement of the method of +comparing two curves on a graph. The curves tell the story, in a general +way, whereas the coefficient of correlation sums up all the comcomitant +variations (and disagreements) in one figure. The eye does not readily +compare the degree of relation between two curves with the degree of +relation between two others. When it is desired to know which, of +several relationships, is closest, the graphic method, or the method of +comparing series of figures, burdens the attention. The coefficient of +correlation condenses the information to such a degree as to make +comparison easy. It is, then, merely a refinement of familiar +statistical methods. Used wisely, guided by sound theory, it aids in +presenting facts. It enables us to state quantitatively things we +already know qualitatively. But there is no magic in it! As I have +mentioned both Mr. Silberling and Professor Moore in this connection, it +is proper to say that both of them are fully alive to the dangers and +limitations of the method, and that Professor Moore emphasises strongly +the need for sound _a priori_ testing of hypotheses before submitting +them to the test of correlation. One danger, that of getting a high +correlation merely because both of the variables compared are _growing +rapidly_, has been avoided by Mr. Silberling by the use of successive +_percentage_ deviations, instead of absolute figures. For reasons +explained by Mr. Silberling in a footnote, he uses, instead of the +"probable error," a statement of the number of observations. Thus, +"r = .78 (46)" means that the coefficient of correlation is .78, and +that there are 46 observations for each of the two variables compared. + +[258] They get into clearings, however, _two_ days after. + +[259] Professor Kemmerer, also. See his index of variation of trade, +_op. cit._, pp. 130-131. + +[260] It is unfortunate that weekly figures from railways do not exist +in such number, or for roads of sufficient importance, to justify +correlations of the weekly figures with clearings. + +[261] Professor W. M. Persons informs me that Mr. Silberling's results +are in accord with calculations which he has made. _Vide_ his article in +the _Am. Econ. Rev._ of Dec. 1916. + +[262] _The Wealth and Income of the People of the United States_, New +York, 1915. + +[263] See our chapter, "Statistical Demonstrations of the Quantity +Theory." + +[264] _Loc. cit._, pp. 78-79. + +[265] _Jour. of Polit. Econ._, vol. v, p. 165. + +[266] Even this is too high, for 1909, on the basis of our estimate for +net income in 1909, in the Appendix to this chapter. + +[267] The extent of speculation in wholesale trade is discussed in this +chapter, _infra_. "Double counting" is discussed in the chapter on +"Statistical Demonstrations of the Quantity Theory." + +[268] _The Use of Credit Instruments_, p. 151. + +[269] The figures for rent and wages are from W. I. King, _op. cit._ The +other figures are from the _Statistical Abstract of the United States_, +unless otherwise stated. King's estimates are for 1910. The other +figures are for 1909. Compare this list with my discussion in the +_Annalist_, March 6, 1916, p. 317, where I made computations purposely +much too large. In that computation I clearly greatly exaggerated +salaries and professional incomes, and rent as well as retail and +wholesale trade. My figure there included the rent of houses as well as +the rent of land. King's figure is only for land rent. However, in view +of the fact that a high percentage of real estate is used by the owner, +with the result that no rent-payments are required, I think King's +figure high enough for the whole item. + +[270] Professor Fisher has estimated total real estate exchanges in the +country at less than 1% of the total 387 billions (_op. cit._, p. 226), +and a colleague of the Harvard Business School has given me an estimate +of $1,300,000,000 for total advertising in the United States. Neither of +these items is properly counted part of the "static" trade that would +occur were things in "normal equilibrium." If, however, we counted them, +we should add only 1%, say, of the total. When it is seen how +insignificant, in comparison with the 387 billions indicated by +deposits, the figures for total manufactures, total farm products, and +total wages, are, there really is little need to argue the case. It is +impossible to find, in the "ordinary trade" we have not mentioned, items +whose total will equal the least of these three. Moreover, we have +allowed for a multitude of these items in permitting the figure for +retail trade to be as high as it is, and have left large leeway in +making no deduction for the speculation in wholesale trade, and in +counting farm products in full. Interest and dividends I have not +counted. They are not "trade." When we have counted stock sales, we have +already counted the exchanges in which dividends were sold. The man who +buys the stocks has already bought the dividends. To count the dividends +in addition would be a case of that double counting of capital and +income against which Professor Fisher has warned us in his _Nature of +Capital and Income_. Rents and wages represent payment for current +services, and are properly items of trade. Interest and dividends are +one-sided money payments, completing transactions for which money has +already passed, and in which a man is merely getting a delivery of +something he has already bought. In general, loans and repayments are +not properly counted as part of ordinary, or physical trade. If, +however, we counted total corporate dividends and interest we should get +only $4,781,000,000 (King's estimate, _loc. cit._, p. 262). This is a +little over 1%. What else is there? In his article of March 13, 1916, in +the _Annalist_, Professor Fisher failed to meet my suggestion that a +bill of particulars was called for! + +[271] See the table of shares and approximate values in Pratt's _Work of +Wall Street_, 1912 ed., p. 187. This table covers the years, 1890-1911. + +[272] Boston _Transcript_, "Tape Record of Sales Incomplete," May 6, +1916, Pt. I, p. 12. The _Transcript_ quotes as authority the New York +_Commercial_. Following the extraordinary market of Sept. 25, 1916, when +the ticker recorded 2,317,000 shares sold on the New York Stock +Exchange, the newspapers estimated that missed sales, odd lots, and +unrecorded sales on stop loss orders, would bring the total above +3,000,000 shares. There was an unusual number of stop orders caught that +day. There will be very few other sales of 100 shares missed by the +ticker, except in times of extraordinary pressure. See _Boston Herald_, +Sept. 26, 1916, p. 1. + +[273] Hollander, J. H., _Bank Loans and Stock Exchange Speculation_, +Senate Document 589, 61st Congress, 2nd Session, p. 23. + +[274] Pratt, _Work of Wall Street_, 1912 ed., p. 264. + +[275] _Annalist_, Dec. 27, 1915, p. 719--"Selling Phantom Grain." + +[276] My information regarding the Coffee Exchange in New York comes +from the Treasurer of the Exchange, Mr. Jas. H. Taylor, through the +courtesy of Mr. W. H. Aborn, of Aborn and Cushman, New York. + +[277] Report of the Hughes Commission, in appendix to Pratt's _Work of +Wall Street_, Rev. ed., p. 417. This report gives information regarding +all the organized exchanges in New York. + +[278] L. Conant, Jr., "The United States Cotton Futures Act," _American +Economic Review_, March, 1915, p. 1. + +[279] Hughes Commission, _loc. cit._, p. 418. + +[280] Taussig, _Principles of Economics_, I, p. 405; Kinley, _Report of +the Comptroller_ for 1896, p. 89. + +[281] This is probably more extensive in London than in the United +States. + +[282] _Loc. cit._, p. 47. + +[283] _Loc. cit._, pp. 130-131. The very title, "_growth_ of business," +suggests the fallacy to which we refer in the text, namely, that we have +a steady upward movement, with little variation. This is largely true of +production and consumption. It is in no sense true of "trade," as +distinguished from production. + +[284] Kemmerer relied on the investigation of 1896, whereas Fisher used +more the figures of 1909. Kemmerer does not, in general, assign an +absolute magnitude for "trade," but for 1890 he gives a figure. _Loc. +cit._, p. 136. _d._ + +[285] _Loc. cit._, p. 136, _d._ + +[286] A recent discussion of these problems is to be found in Shaw, A. +W., _Some Problems in Market Distribution_, Harvard Univ. Press, 1915. + +[287] _Op. cit._, pp. 51-52. + +[288] London, Paris, and New York all do a great deal of manufacturing, +particularly of finer things, whose value is high, and which require a +high proportion of labor, as compared with machinery. _Cf._ our +discussion of the London "Money Market," _infra_, in Part III. + +[289] _Ibid._, p. 47. + +[290] _Cf._ Jenks, _The Trust Problem_, Rev. ed., p. 29. The doctrine +that these costs are net social loss is challenged by the present writer +in an article, "Competition _vs._ Monopoly," in the New York +_Independent_, of Oct., 1912. + +[291] "Royal" has been estimated at $5,000,000; "Spearmint" at +$100,000,000. Mr. Guy C. Hubbard, of the _Dry Goods Economist_, New +York, has given the writer some exceedingly interesting data regarding +the value, as bankable collateral, of various trade-marks and firm +names. + +[292] _Cf._ our discussion of "The Reconciliation of Statics and +Dynamics," _infra._ + +[293] Significant in this connection, is the contention of recent +students of American agriculture, that the great need is better +organization and credit, facilities for _marketing_. + +[294] _Loc. cit._, p. 89. Though Fisher does not conclude that banking +is bad, he does conclude that gold mining is a parasitic and socially +injurious industry, like the making of burglars' "jimmies." See his +_Elementary Principles of Economics_, N. Y., 1912, pp. 499-500. + +[295] Fisher does admit that the _character_ of the banking system, and +of the money system, will affect the volume of trade. "There have been +times in the history of the world when money was in so uncertain a state +that people hesitated to make many contracts because of the lack of +knowledge of what would be required of them when the contract should be +fulfilled. In the same way, when people cannot depend on the good faith +or stability of banks, they will hesitate to use deposits and checks" +(78). But there is nowhere an admission that the _amount_ of bank-credit +has any influence on the volume of trade, and there are repeated +assertions, as already instanced in the text, that the volume of trade +is quite independent of the volume of money and bank-credit. + +[296] Part IV of this book gives a detailed analysis to the problems +involved in these contrasts. + +[297] This thesis was set forth by the present writer at the 1915 +meeting of the American Economic Association. See _Papers and +Proceedings_, Supplement to March, 1916, _Amer. Econ. Rev._, pp. +168-169. + +[298] _Cf._ J. B. Clark, _Distribution of Wealth_, _passim_, and J. +Schumpeter, _Theorie der wirtschaftlichen Entwicklung_, pp. 1-101. See +also the present writer's "Schumpeter's Dynamic Economics," _Pol. Sci. +Quart._, Dec, 1915, and A. S. Johnson, in _Quart. Jour. of Econ._, May, +1914. + +[299] _Principles_, Bk. III, ch. xviii, par. 1. + +[300] _Theorie der wirtschaftlichen Entwicklung_, p. 77. Since the +foregoing was written, Professor W. C. Mitchell has presented an +admirable historical paper on "The Role 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 role of money, which he conceives of primarily +as an institution which has rationalized economic behavior, by forcing +upon the individual bookkeeping habits of thought. This still leaves it +legitimate to abstract from money, however, for "pure theory." Highly +important as is the "measure of values" function, it does not explain +the main work which money, as money, actually _does_ in economic life, +nor need it be a source of value for money. _Cf._, _infra_, our chapter +on "The Functions of Money." Professor Mitchell's paper will be found in +"Papers and Proceedings," Supplement to the March, 1916, number of the +_Am. Econ. Rev._ + +[301] The materials in this appendix are taken from an article published +in the _Annalist_ of Jan. 8, 1917, pp. 39, 53-54, and the New York +_Times_ Annual Financial Review of Dec. 31, 1916, and are reprinted by +the courtesy of the New York Times Company. + +[302] _Vide Annalist_, Feb. 7, 1916, pp. 183-184, and Feb. 21, 1916, p. +246. + +[303] _Wealth and Income of the People of the United States_, p. 129. + +[304] The justification of this procedure is argued more fully in my +article in the _Annalist_ of Feb. 7, 1916, above referred to. + +[305] The figures for railway gross receipts are taken from the +_Commercial and Financial Chronicle_, rather than from Government +reports, in order to get figures for calendar rather than fiscal years, +and in order to get the latest possible figures. As the absolute figures +are not strictly comparable throughout, the method employed has been to +calculate _percentage_ gains or losses for the _same roads_ for +successive years. This would lead to a cumulative error, if large new +roads had been built during the period, and had retained their +independence. In point of fact, however, the curves for the absolute +figures and for the percentage changes run pretty closely parallel down +to 1909, at which time a large number of small roads, not previously +counted, are brought into the figures. As the number of roads reported +varies, the percentage changes on the same roads give us the more +accurate measure of year by year variation. It is, at the date of +writing (December, 1916), the only possible method for 1916, since the +_Chronicle_ figures which come to the end of November are based on only +37 roads, with a mileage of 84,452 out of over 240,000 miles usually +reported. For these roads, a gain of 19.63%, for the first eleven months +of 1916 over the same months in 1915, is reported, and our figures for +1916 rest on the assumption that the gain for the whole year over 1915 +is 17.27%. (The greatest gains are for the earlier months, as the end of +1915 was a period of great activity.) Much fuller figures supplied me by +Mr. Osmund Phillips, of the _New York Times_, for the first _ten_ months +of 1915 and 1916 serve to justify this estimate for the gain of 1916 +over 1915. For the _Chronicle_ data, see vol. 102, p. 930, vol. 103, p. +2112, and _passim_. + +The index of prices chosen is Dun's. (See especially _Dun's Review_ of +May 11, 1907, Jan. 9, 1915, and later months, and the discussion of +Dun's index number in the _Bulletin of the United States Bureau of Labor +Statistics_, Whole Number 173, July, 1915, pp. 148 _et seq._) Dun's +index number is chosen partly because it is complete for 1916, and +partly because it is weighted in accordance with the consumption of +different classes of goods, and so particularly suited to this inquiry. +I venture to express strong preference for rationally weighted index +numbers, and for the use of different index numbers for different +purposes. (_Vide_ the discussion of index numbers in ch. 19.) Our price +index for each year is an average of the twelve monthly figures given by +Dun from 1894 to 1916. For the years 1890-94, our price index is an +average of the figures for January and July. This average is lower, in +most years, than the average for the whole year, and may well be lower +than the average for these years, but no attempt has been made to +rectify this possible source of error. The index is recalculated from +Dun's figures (where it is not a percentage, but a sum of prices), and +made a true percentage index, with a base in 1910. + +The figures for exports and imports are for _calendar_ years. They were +obtained, for the years 1890-1909, from _Statistics of the United +States, 1867-1909_ (National Monetary Commission Report), and, for the +years since 1909 from the _Commercial and Financial Chronicle_. For +1916, November and December are estimated. + +[306] Their indicia of variation for "trade," though failing to meet the +problems for which they were designed, as shown in chs. 13 and 19, are +good indicia of variation for physical production and consumption. + +[307] That this should have been seriously denied during the recent +Presidential campaign, on the basis of the estimate that foreign trade +is minute as compared with domestic trade, gives special point to the +present discussion. + +[308] King's figures, for which he estimates a margin of error of 25% +are used for these years. (_Loc. cit._, p. 129.) The export and import +figures used are for fiscal years. + +[309] Probably the apparent moderate increase in imports is due wholly +to higher prices. The actual physical volume has possibly been reduced, +as compared with the period before the War. + +[310] I am indebted to several colleagues for advice and criticism in +connection with these tables, particularly Professors Taussig and W. M. +Persons. Mr. N. J. Silberling has been particularly helpful, aiding in +the choice of the statistical sources, suggesting methods of handling +and interpreting them, and making virtually all the computations in the +tables. + +[311] Retail prices of exports and imports are obtained by adding 50% to +the wholesale figures reported, on the assumption that wholesale prices +are two-thirds of retail prices. The percentages in the final column are +obtained by dividing the figures for foreign trade by the figures for +domestic trade. The percentage would reach 100 when foreign trade +becomes equal to domestic trade. + +[312] The figures in column 4 are obtained for any year, say 1905, by +taking the index in column 3 for 1905, the index in column 3 for 1910, +and the absolute figure in column 4 for 1910, and solving by the "rule +of three." + +[313] The notion of interdependence need not involve circular reasoning, +if the facts really justify it. The whole cosmos is, doubtless, +interdependent. Often certain systems within the cosmos manifest enough +_in_dependence of the rest of the universe to justify us, for some +purposes, in thinking only of _inter_relations within the systems. The +important thing is to make the circle in theory as big as the circle in +fact. _Cf. Social Value_, p. 152, n. + +[314] In chapter XVI. + +[315] _Cf._ our chapter, _infra_, on "The Quantity Theory and +International Gold Movements." + +[316] Italics mine. + +[317] _Loc. cit._, p. 165. + +[318] The resemblance of the view here maintained to that of Professor +Laughlin is at many points close. I am indebted to his _Principles of +Money_ for many suggestions. + +[319] _Loc. cit._, p. 165, n. The doctrine is reiterated on p. 168. + +[320] This is strikingly true in the stock market--the place where more +trade takes place than in any other market. See the figures in the +preceding chapter with reference to stock transactions, and the chapter +on "Bank Assets and Bank Reserves." + +[321] For a history of this debate, with bibliography, see Laughlin's +_Principles of Money_, ch. 7, on the "History and Literature of the +Quantity Theory," esp. pp. 260 and 263-264. Laughlin shows the +connection of the currency principle and the quantity theory. + +[322] It may be that in the brief discussion of elastic bank-notes on p. +173 (_loc. cit._), Fisher means to given an explanation of the theory of +elasticity from a quantity theory standpoint. The statement there is +that money not only tends to flow away from _places_ where prices are +high, but also from _times_ when money is high. "If the price-level is +high in January as compared with the rest of the year, bank-notes will +not tend to be issued in large quantities then. On the contrary, people +will seek to avoid paying money at high prices and wait till prices are +lower. When that time comes they may need more currency; bank-notes and +deposits may then expand to meet the excessive demand for loans which +may ensue. Thus currency expands when prices are low and contracts when +prices are high, and such expansions and contractions tend to lower the +high prices and to raise the low prices, thus working toward mutual +equality." + +If this be the quantity theory account of elasticity--and it would seem +to be about the only thing the quantity theory could say--it is about as +far from giving an account of the real facts as any theory could be! +Something of this sort is suggested, perhaps, by the behavior of +Canadian bank-notes, which do expand in the fall, when prices of wheat +are lowest, and contract in January, when wheat prices are higher. This +grows, however, out of the peculiarities of an agricultural country, and +does not at all illustrate the general doctrine maintained. First, wheat +prices in the fall are low because wheat is most abundant then. Wheat +prices in January, under the influence of speculation, commonly differ +from wheat prices in the fall by an amount about equal to the elevator +charges, rattage, insurance, interest, and other carrying charges +involved. Second, wheat prices are only one element in the general +price-level. Low wheat does not prove that the level is necessarily low. +A good wheat crop may mean increases in general prices, and often does. +Third, and more important, the real reason for an expansion in Canadian +notes at such a time is that the wheat _has to be moved_. The farmers do +not want to carry it; the speculators are ready to carry it; and it must +be sold. Expanding _trade_, at the season, is the cause of expanding +bank-notes. The influence of the _price_ of wheat is exactly the reverse +of that which Fisher assigns. If the price of wheat is low in the +crop-moving season, _less_ notes will be issued than if the price is +high. In other words, the greater the increase in PT, not P or T alone, +the greater will be the expansion of bank-notes. Decrease either P or T, +and less notes will be issued. + +In general, the phenomenon of elastic bank-credit is the phenomenon of +an expanding bank-note or deposit issue accompanied by rising prices and +volume of trade, and a decrease when trade and prices decrease. This is +all commonplace, but I feel it best to refer to familiar sources to show +how old and well recognized my statement of the case is. The following +is from Mill's _Principles of Economics_, Bk. III, ch. 24, par. 1: "Not +only has this fixed idea of the currency as the prime agent in the +fluctuations of price made them shut their eyes to the multitude of +circumstances which, by influencing the expectations of supply, are the +true causes of almost all speculations and of almost all fluctuations of +price; but in order to bring about the chronological agreement required +by their theory, between the variations of bank issues and those of +prices, they have played such fantastic tricks with facts and dates as +would be thought incredible, if an eminent practical authority had not +taken the trouble of meeting them, on the ground of mere history, with +an elaborate exposure. I refer, as all conversant with the subject must +be aware, to Mr. Tooke's _History of Prices_. The result of Mr. Tooke's +investigations was thus stated by himself, in his examination before the +Commons Committee on the Bank Charter question in 1832; and the +evidences of it stand recorded in his book: 'In point of fact, and +historically, as far as my researches have gone, in every signal +instance of a rise or fall of prices, the rise or fall has preceded, and +therefore could not be the effect of, an enlargement or contraction of +the bank circulation.'" + +I see nothing in Fisher's discussion of credit to differentiate it from +the position of the old Currency School. And the reason is a very simple +one: Fisher has followed the quantity theory to its logical conclusions! + +[323] See our chapter on the "Volume of Money and the Volume of Credit." + +[324] How close the relation between loans and deposits is may be seen +from Professor Mitchell's chart, _Business Cycles_, p. 344. The same +chart exhibits the variations in the reserve percentage, which is very +much greater. The New York Clearing House banks, which we have seen +(_supra_, "Volume of Money and Volume of Credit") have a spread of from +24.89% to 37.59% in the yearly average of percentage of reserves to +deposits--a spread of over 50%--show a variation in yearly average for +the percentage of loans to deposits of only 24.3%--the range being from +83% to 104%. _Ibid._, pp. 325 and 331. For a partially different series +of years, see the chart of J. P. Norton, _Statistical Studies in the New +York Money Market_, facing p. 104. + +[325] Neither deposits nor loans vary _proportionately_ with trade. Very +active trade may merely increase the activity of loans and deposits, +causing both to be shifted more rapidly--larger outgo, larger income, +loans more frequently contracted and paid off, larger amounts +"deposited" on a given day, but balances, both of loans and deposits, at +the end of the day not increased proportionately with the activity. This +is strikingly illustrated in the business of the stockbroker. + +[326] _Supra_, p. 47. + +[327] Italics mine. + +[328] "Miscellaneous Articles on German Banking," in _Report of Nat. +Mon. Commission_, p. 175. Art. by Max Wittner and Siegfried Wolff. + +[329] The figures are not easily compared, as the figures for +giro-_transfers_ do not indicate the volume of giro-_accounts_, which is +doubtless much smaller. I know no estimates for the turnover either of +notes or of bills of exchange. To determine what _proportion_ of +business is done by each would, thus, not be easy. The volume of bills +of exchange for the year is three times as great, for 1907, as the +figures for note issue. The giro-system, as is well known, is relatively +unimportant as compared with notes. But I do not undertake to assign +figures showing proportions of business done. + +[330] Inland bills of exchanges in connection with the grain trade are +still very important, especially at Chicago and Minneapolis. The writer +has met frequent reference to cotton bills at St. Louis. Wool bills are +frequent in Boston. + +[331] _Vide_ my criticism of his statistical fallacy in this connection, +in the _Annalist_ of Feb. 7, 1916. He rules out foreign trade from his +"equation of exchange" by the device of assuming that imports and +exports cancel one another. This, however, to the extent that it is +true, makes the bill of exchange more, rather than less, important as a +substitute for money and deposits. Fisher, _loc. cit._, pp. 306, and +374-375. See appendix to chapter XIII of the present book. + +[332] _Vide_ ch. 16 for a more precise statement of this part of +quantity theory doctrine. + +[333] _Purchasing Power of Money_, pp. 169-170. + +[334] _Ibid._, p. 170. + +[335] _Ibid._, p. 171. + +[336] _Ibid._, p. 172. + +[337] _Ibid._, p. 172. Italics mine. + +[338] _Ibid._, pp. 174-181. + +[339] I call attention, in passing, to Fisher's confusion, in this +sentence, of "commodities" with "trade." This occurs frequently in his +argument. _Cf._ pp. 225-226, _supra_. + +[340] The Capitalization theory is briefly outlined by Boehm-Bawerk, in +the critical and historical volume of his _Kapital und Kapitalzins_ +(English title of the volume, _Capital and Interest_), in his criticisms +of the theories of Henry George and Turgot. It has subsequently been +elaborated, and much improved, by Fetter, in his _Principles of +Economics_, and, more recently, has been restated, with mathematical +formulae, by Fisher, in his _Rate of Interest_. A good brief statement +will be found in Seligman, _Principles of Economics_, ch. on "The +Capitalization of Value." Extensive use has been made of it by Veblen. +More recently, it has been elaborated in the controversy over the theory +of interest participated in by Seager, Fisher, Brown and Fetter, in the +_American Economic Review_, 1912-13-14, and the _Quarterly Journal of +Economics_, 1913. + +[341] Italics mine. + +[342] The criticisms I should make of the present formulations of the +time-preference theory of interest, as presented by Boehm-Bawerk, Fetter +and Fisher, rest on the individualistic method of approach, and are at +many points analogous to the criticisms I have made of the utility +theory of value. These criticisms need not affect the points at issue +here. On the particular point involved, I agree with Fisher that the +productivity theory gives a wrong answer. + +[343] _E. g._, Fisher, _Purchasing Power of Money_, p. 179. + +[344] This confusion is a companion of the confusion between volume of +_goods in existence_, or volume of _production_, and volume of goods +_exchanged_. The errors growing out of this confusion have been dealt +with in ch. 13, especially pp. 225-226. Virtually all quantity theorists +make both these mistakes. + +[345] The fundamental causation is psychological, and calls for a theory +of _value_, as distinguished from exchange-relations. + +[346] _Supra_, chapter on "Velocity of Circulation." + +[347] This distinction is clearly made and developed by von Wieser, in +the two articles referred to in our chapter on "Marginal Utility." It is +used by him in criticisms of the quantity theory. "Der Geldwert und +seine geschichtlichen Veraenderungen," _Zeitsch. fuer Volkswirtschaft, +Sozialpolitik und Verwaltung_, XIII, 1904; discussions in _Schriften des +Vereins fuer Sozialpolitik_, 1009, no. 132. A similar distinction runs +through J. A. Hobson's _Gold, Prices and Wages_, London, 1913. The +present writer had worked out the line of argument here presented before +reading either of these discussions. + +[348] I have chosen maid-servants, to avoid complications of costs of +production in the reasoning that might come if other labor, engaged in +producing goods for the market, were selected. To tighten the argument a +tittle further, I assume that the masters receive their monthly incomes +on the first day of the month; that they pay the maids on the same day; +that the rest of the expenditures, both of masters and maids, are strung +out through the rest of the month. + +[349] _Op. cit._, p. 27. + +[350] A possible alternative interpretation of Professor Fisher's +conception is suggested in two or three sentences in the passage of the +_Purchasing Power of Money_ I have been discussing. On p. 175 he makes a +distinction between individual prices _relatively to each other_ and the +price-level. But the distinction which he _discusses_ in the passage as +a whole is between the price-level and individual prices _not_ +considered in relation to each other. Comparison, moreover, with his +original enunciation of the notion (Papers and Discussions, 23d Annual +Meeting of the American Economic Association, pp. 36-37), would serve to +justify the interpretation I give, as nothing at all is said there about +super-ratios between individual prices. But the internal evidence is +even more convincing. Demand and supply, and cost of production, find +their problem, not in the relation between the money price of aspirin +and the money price of caviar, but in the money-price of aspirin or the +money-price of caviar considered separately. Professor Fisher thus +conceives supply and demand in his _Elementary Principles_ (p. 260). +This interpretation is especially necessary, since Professor Fisher is +joining issue with writers who surely use demand and supply and cost of +production as means of explaining money-prices, and not super-ratios +between them. Further, the price-level is _not_, on Professor Fisher's +own scheme, a factor in determining the relations of the prices of sugar +and of wheat _inter se_. With a given price-level, wheat might be worth +a dollar and sugar nine cents, and the ratio of their money equivalents +would be 100:9; with a price-level twice as high, wheat would be worth +two dollars, and sugar eighteen cents, but the ratio between their money +equivalents would be still 100:9. The whole discussion is quite +meaningless unless the contrast be between concrete money-prices of +particular goods, and their average. On either interpretation, moreover, +my criticism of the exalting of the average into an entity would stand. + +[351] _Purchasing Power of Money_, pp. 175-179. + +[352] I am glad to find myself in agreement with Professors Laughlin and +Kemmerer in holding that this notion of Professor Fisher's is untenable. +"The distinction Professor Fisher draws between the prices of individual +commodities and the general price-level appears to me, as to Professor +Laughlin, to be untenable. It is, moreover, contradictory to his general +philosophy of money. His index numbers recognize no general price-level +distinct from individual prices.... Professor Fisher's illustration of +the ocean would be more apposite if he called it a lake whose level was +continually changing, and if he considered each particular wave as +extending to the bottom." Kemmerer, _Papers and Discussions_, 23d Annual +Meeting of the American Economic Association, p. 53. At the same time, I +agree with Professor Fisher that there must be something more +fundamental than the particular prices to make the scheme work. This +something I find in the absolute value of money. + +[353] _Loc. cit._, p. 14. + +[354] _Cf. Social Value_, chs. 2 and 11, and "The Concept of Value +Further Considered," _Quart. Jour. of Econ._, Aug., 1915. See also, +_supra_, the chs. on "Value," "Supply and Demand," "Cost of Production," +and "Capitalization." + +[355] This tendency may be more than offset by the increasing +significance of money as a "bearer of options" or "store of value" in +periods of panic and depression. See, _infra_, the chapter on "The +Functions of Money," and Davenport, _Economics of Enterprise_, pp. +301-03. + +[356] "Agricultural Credit in the United States," _Quart. Jour. of +Econ._, Aug., 1914, p. 708, n. + +[357] Iowa farm lands are exceedingly active, 18% of the farms being +sold annually. The Mississippi lands are much less active. I am indebted +to Dr. Pope for information regarding Iowa on this point. + +[358] The Single Taxer could at least retort that this need not protect +landlords in countries, like England, which lend surplus capital abroad. + +[359] _Cf._ Trosien, _Der landwirtschaftliche Kredit und seine +durchgreifende Verbesserung_, p. 29, cited by J. E. Pope, _loc. cit._, +p. 705, n. + +[360] This was seen by Mill, (_Principles_, Bk. III, ch. viii, par. 4), +and has been especially emphasized by Laughlin, _Principles of Money_, +ch. 10. _Cf._ A. C. Whitaker's discussion in the _Quart. Jour. of +Econ._, Feb. 1904. + +[361] _Supra_, p. 124, and ch. on "Dodo-Bones." + +[362] Comptroller of the Currency estimates the State bank-notes in 1861 +at 202 millions; in 1862, at 183 millions. _Report of the Comptroller of +the Currency_, 1915, vol. II, p. 37. + +[363] W. C. Mitchell, _History of the Greenbacks_, ch. on "The +Circulating Medium," and _passim_. + +[364] See Conant, _Modern Banks of Issue_, New York, 1896, p. 114. An +interesting analysis of the course of the gold premium and of prices +during the period of the Bank Restriction in England, and of the +controversies relating thereto, will be found in Knies, _Der Credit_ +(vol. II of _Geld und Credit_), pp. 247 _et seq._ The same period is +studied in detail by Thos. Tooke in his _History of Prices_. + +[365] _Money and Monetary Problems_, p. 105, and preceding. + +[366] Nicholson, _loc. cit._, 84ff. + +[367] _Ibid._, 76ff. + +[368] _Cf._ Laughlin, J. L., _Principles of Money_, and Scott, W. A., +_Money and Banking_. + +[369] _Cf._ _infra_, our discussion of credit. It is not maintained that +credit needs to be based on _physical_ goods, but it is maintained that +credit is based on _values_, which are generally not the value of a sum +of gold. + +[370] I have elaborated this notion in a hypothetical case in the +chapter on "Dodo-Bones," to which I would now refer. See also the +analysis of an "ideal credit economy" in the discussion of reserves in +the section on Credit, in Part III. + +[371] _Infra_, the discussion of reserves in Part III. + +[372] _Cf._ the chapter on "The Origin of Money," _infra_. + +[373] See especially _History of the Greenbacks_, pp. 188ff.; 207-208; +275-279. + +[374] Various efforts have been made by adherents of the quantity theory +to meet the facts developed by Mitchell with reference to the +Greenbacks. Thus, it has been suggested that the coming to par of the +Greenbacks shortly before the resumption of specie payments was an +accidental coincidence, due to the fact that the volume of trade in the +United States just happened to grow to the right amount to bring the +Greenbacks to par at that time. No statistical evidence has been offered +for this thesis, I believe. It is, indeed, the only logical thing which +a quantity theorist could say on the matter, except one alternative, (F. +R. Clow, _J. P. E._, vol. II, p. 597) namely, that if the Greenbacks +should exist in such quantity that, under the quantity theory, their +value ought to fall below the discounted future value of the gold in +which they were to be redeemed, speculators would take them out of +circulation, holding them for the interest, and so reduce their quantity +that the value would rise to that discounted future value. The first +thesis, that based on putative changes in the volume of trade, though +highly improbable in fact, is logically possible. The second thesis, +however (_Purchasing Power of Money_, p. 261) meets serious +difficulties. What motive would a speculator have for taking the +Greenbacks out of circulation, and hoarding them? The answer is, he gets +thereby the "interest," as the Greenbacks approach the date for +redemption in gold. If this were the only way in which he could get this +gain, the answer would be good. But there is another way in which he can +get it, and something more besides, namely, by _lending out_ his +Greenbacks. In that case, since the creditor gets the full benefit of an +appreciating standard of deferred payments, he would get all the +"interest" which he could get by hoarding, and, in addition, he would +get contract interest on his loan. Of course, if the principle of +"appreciation and interest" worked out with perfect smoothness, he would +find his contract interest reduced as the other rose, and one might even +expect, if the Greenbacks were very redundant, that contract interest +would disappear. There is no evidence that this did happen, however! And +so long as any contract interest existed, we have a thoroughly valid +reason why a holder of Greenbacks would lend them rather than hoard +them. + +Another effort to harmonize the facts with the theory consists in the +contention that _anticipated_ future increases in the Greenbacks would +work in the same way as actual increases. But this is to shift the whole +basis of the quantity theory, which rests in the notion of a mechanical +and--in the mass--unconscious equilibration of quantity of money and +number of exchanges. The quantity of money is not increased until it is +increased! _Cf._ Mill, _Principles_, Bk. III, ch. 12, par. 2, and Jos. +F. Johnson, _Money and Currency_, Rev. ed., p. 235. + +Professor Fisher has another way to meet the facts of the Greenback +regime, and that is by holding that they prove his case! I do not think +that anyone, however, who examines the figures he offers on p. 260 +(_loc. cit._) will be impressed by the degree of concomitance between +money and prices which they exhibit, especially after Mitchell's careful +analysis of changes in detail. + +At another point, Professor Fisher maintains (p. 263) that the rapid +changes in gold premium which came with news from the military +operations (_e. g._, the 4% drop in Greenbacks after Chickamauga), were +due to alterations in velocity of circulation and in volume of trade! As +the gold market usually got the news by wire, before the newspapers got +it, however, this thesis is not very convincing. + +[375] Kemmerer, E. W., _Money and Credit Instruments in their Relation +to General Prices_, New York, 1907; Fisher, _Purchasing Power of Money_, +New York, 1911; subsequent yearly continuations of "The Equation of +Exchange" in the _American Economic Review_. The references here, as +throughout, are to the 1913 edition of Professor Fisher's book. + +[376] _History of Prices._ + +[377] To this type would belong Professor Fisher's figures with +reference to the years, 1860-66 on p. 260 of his _Purchasing Power of +Money_. + +[378] This relates particularly to Fisher's figures. + +[379] _Loc. cit._, p. 298. + +[380] _Ibid._, p. 297. + +[381] _Cf._ our chapter, _supra_, on the "Equation of Exchange." + +[382] These are the "finally adjusted" figures. _Loc. cit._, 304. + +[383] _Ibid._, p. 277. Fisher's estimate for V, as corresponding more +closely to Kinley's figures for the proportions of money and checks in +trade, is to be preferred to Kemmerer's. _Cf._ our comments on this +point, _infra_, in this chapter. Even the figures for M' are not +correct, since they do not include deposits growing out of "morning +loans," cancelled during the day. _Infra_, ch. 24. + +[384] _Report of the Comptroller_, 1896; _The Use of Credit Instruments +in Payments in the United States_, National Monetary Commission Report, +Washington, 1910. + +[385] I am indebted to the _Annalist_ for permission to use here +materials first published in the _Annalist_ in articles by the present +writer: "Home vs. Foreign Trade," Feb. 6, 1916; "Tests of Home Trade +Volume--a Rejoinder," March 6, 1916; "Home Trade Volume," March 20, +1916, p. 377. To these articles Professor Fisher replied: "A +Multi-Billion Dollar Nation," _Annalist_ Feb. 21, 1916; and "Over and +Under Counting," _Ibid._, March 13, 1916. + +[386] Except checks deposited by one bank in another. Kinley's figures +exclude these in 1909, but not in 1896. + +[387] The methods and data employed by Professor Fisher are described at +length in his _Purchasing Power of Money_, ch. XII, and Appendix to ch. +XII. + +[388] M' is the _average_ of bank deposits, as shown by the balance +sheets, for all banks in the country for the year. Throughout, the +reader must distinguish this from the "deposits" of Kinley's +figures--amounts "deposited" on March 16. + +[389] It is easier, sometimes, to make an assumption regarding a set of +facts than to find out what they are! In this case, some work was +involved. Old newspapers had to be hunted up for various cities, and +letters had to be written, to find out, for various cities, (a) +clearings for March 17, 1909, and (b) the number of banking days in the +year 1909. This work was done by Mr. N. J. Silberling, who got figures +from 12 cities which had 69% of all clearings outside New York. These +cities are: Chicago, Philadelphia, Boston, St. Louis, Pittsburg, San +Francisco, Baltimore, New Orleans, Atlanta, Providence, St. Paul, and +Seattle. The daily average of clearings for these cities in 1909 was +$136,222,436; the actual clearings for March 17, 1909, was $132,961,273. +The ratio of average daily clearings to actual clearings on March 17 was +1.0245:1. The increase needed in the figure for deposits outside New +York, then, was only 2.45%. Mr. Silberling, wishing to be conservative +in view of the 31% of outside clearings not investigated, allows outside +clearings to be 3% below normal. On this basis, following Professor +Fisher's method of computation, he multiplies the deposits assigned by +Professor Fisher to New York by 1.28, and the deposits assigned to the +country outside by 1.03, getting total deposits for the day of 1.11 +billions, as against Professor Fisher's figure of 1.20 billions, and a +total for the year of 333 billions, as against a total obtained by +Professor Fisher of 364 billions. + +[390] To this 786 millions is added all that comes from the erroneous +assumption regarding outside clearings, when figures for the whole year +are obtained. Country deposits, for the year, are thus still further +exaggerated by 31 billions! + +[391] _The Use of Credit Instruments_, etc., p. 152. There is abundant +evidence in Dean Kinley's figures that only a decidedly minor part of +the amount (373 millions) of checks allowed by Professor Weston for the +non-reporting banks could have been outside the larger cities. The +amount deposited in a day in a country bank is so small that a great +multitude of these banks would be required to show as much as a single +New York City institution. Thus, ninety banks (27 national banks, 58 +State banks, 3 private banks, 1 stock savings bank, 1 trust company) in +Arkansas, report only $728,148 in checks, an average of $8,090 per bank. +If all the 13,000 non-reporting banks were country banks, and if this +ratio held, we should have 105 millions more for the day (instead of +Professor Weston's 373 millions), or 31 billions more for the year. This +average is based chiefly on State and national banks. The average is too +high for the private banks (whose daily average as reported is $4,010), +and for the mutual savings banks (whose daily average is $1,254). It is +well above the daily average of the stock savings banks, which are, in +many States, practically commercial banks ($6,405). In the non-reporting +banks there are comparatively few national banks, and about 5,000 +private banks and savings banks, of these the great majority being +private banks. We cannot make up the 373 millions in the country +districts. Nor can we make up the 373 millions by taking in all the +reserve and central reserve cities, exclusive of New York. Chicago, in +the returns, shows 42.6 millions in checks; St. Louis, 14 millions; +Boston, 48.8 millions; Philadelphia, 28.6 millions; the other reserve +cities show 40.2 millions--a total of 174 millions. If we doubled the +returns for these cities, we should still be 200 millions short of the +373 millions added by Professor Weston to the total! Neither in the +country districts, nor in the major cities outside New York can we find +enough to make up that addition. Very much of the amount added for +non-reporting banks must be found in New York City itself. + +[392] Dean Kinley's questionnaire asked the banks reporting their +deposits for the day to exclude deposits made by other banks. These +deposits were not excluded in the 1896 investigation. + +[393] House Committee on "Money Trust." Feb. 28, 1913. Pp. 57, 78, 145. + +[394] _Cf._ _supra_, and _infra_ our discussion of the volume of trade, +and _infra_, our discussion of credit, particularly the analysis of +bank-loans. + +[395] _Vide_ the opinion expressed by an official of a New York trust +company, quoted below, on p. 346. + +[396] _Cf._ Horace White, _Money and Banking_, 5th ed., p. 364. + +[397] Kirkbride and Sterret, _The Modern Trust Co._, New York, 1905, pp. +59-60; Cannon, _Clearing Houses_, _Nat. Mon. Com. Report_, p. 178; +Conant, _Principles of Money and Banking_, II, p. 244. + +[398] Inquiry was also made of Professor George E. Barnett, who had +cited the figures given by the New York Supt. of Banks at p. 133 of his +_State Banks and Trust Companies_. Professor Barnett writes, in part, as +follows: "I made no independent inquiry at the time, and accepted the +statement of the superintendent of banks without critical examination of +its basis. From what you say, it appears highly probable that he was +mistaken in his conclusions. The only question in which I was interested +was whether the reserves of the trust companies could be reasonably +lower than those of the national banks. I did not care so much about the +exact ratio of clearings and only quoted that incidentally." For the +purposes which both Professor Barnett and Mr. Williams had in view, the +exact ratio was unimportant. The higher figures which I have given above +would support the thesis in which both were interested, namely, that +trust company accounts are less active than bank accounts, and so lower +reserves may be safely held by trust companies than by national banks. + +[399] Fisher, _loc. cit._, p. 444. + +[400] P. 443. Other discussions of this investigation are in the +_Journal of the American Bankers' Association_, Jan. 1914, p. 487; +_Ibid._, Feb. 1915, p. 555; _National Banker_, March, 1915. + +[401] None of the cities covered in the figures given in the _Annalist_ +were in New York State. Kinley's figures show that the percentage of +checks received in deposits of March 16, 1909, in banks outside New York +State was 91%. _Loc. cit._, p. 180. + +[402] Multiplying the 408 millions of checks deposited outside New York +on March 16, 1909 by 303, the assumed number of banking days, gives +123.6 billions. Probably, therefore, 124 billions is too small a figure. +But we should be slow in modifying a figure based on 17 months' +observations because of the figures from one day's observations. + +[403] I have greater confidence in this conclusion, since seeing a +letter from Mr. Howard Wolfe, who made the investigation of outside +clearings and "total transactions" for the American Bankers' +Association, to Mr. Osmund Phillips, Editor of the _Annalist_. Mr. Wolfe +writes: "I do not believe that the experience of the New York banks +would differ from that of other institutions which now supply [these +figures]." + +[404] My information on this point comes from Professor O. M. W. +Sprague. It is corroborated by an official of the Bankers Trust Company +in New York. + +[405] _Vide_ Rodney Dean, of the Fifth Avenue Bank, New York, "The +Problem of Collecting Transit Items," _Journal of the American Bankers' +Association_, Jan. 1914, p. 537. Boston inaugurated the system in +1890-1900; Kansas City five years later. Since the above was written, I +have learned that New York, in recent months, has introduced the new +system. This does not affect our argument regarding the figures for +1909. + +[406] Since the foregoing was written, my attention has been called by +Mr. Osmund Phillips, Financial Editor of the New York _Times_, and +Editor of the _Annalist_, to indirect ways in which items on out of town +banks sent to New York for collection will affect New York clearings. +Country correspondent banks to which New York banks send these items for +collection, may remit for them in four ways: (1) by sending cash; (2) by +sending items on out-of-town banks, which the New York bank will send on +to some other correspondent for collection; (3) by draft on the New York +bank which has sent the items to be collected; (4) by draft on some +other New York bank. In the last case, New York clearings are affected. +The first case is not, quantitatively, important. The second and third +cases would seem to be the normal types, assuming correspondent +relations between New York banks and country banks to be _reciprocal_, +since the New York bank would be disposed, as far as possible, to turn +over its collection business to its own depositors among the country +banks. Mr. Phillips says, however, that the fourth case is important. To +the extent that this is true, our conclusion that out of town collection +items do not affect New York clearings must be modified, and it becomes +a matter of importance whether these items are large or small. My +information, as stated above, is that Chicago exceeds New York City in +this. + +If, however, the Kansas City and Boston arrangements held in New York, +these collection items would be represented _twice_ in New York +clearings. The fact that the items do not themselves get into the +clearings remains. + +Direct information regarding New York clearings is very desirable. Our +indirect approach must be considered inconclusive until more detailed +figures for New York City are at hand. We need figures covering all +types of banks in New York, for a period of, say, a year (to allow for +seasonal changes), in which deposits made by one bank in another are +separated from other deposits. National banks alone would exaggerate the +item of deposits by one bank in another, especially as they are the +depositories of the great private banks. + +[407] Or, in some cases, taking the place of cash dealings between banks +and a local clearing house. On the face of it, it is incredible that +_balances_ between cities, or _within_ cities, after the country +clearing houses have done their work, should be so great as to account +for a very great part of New York clearings. These balances between +cities other than New York, and balances within country clearing houses, +must be a minor fraction of _country_ clearings, and country clearings +are little more than half of New York clearings. Ordinary commerce, as +shown in chapter XIII, cannot give rise to great sums in the aggregate, +to say nothing of giving rise to great _balances_. + +[408] The whole thing is summed up on p. 25 of the Comptroller's +_Report_ for 1892. + +[409] _Cf._ Kemmerer, _Money and Credit Instruments_, p. 117. + +[410] _Annalist_, July 6, 1914, p. 8. The editor of the _Annalist_ gives +me the following information: data for twenty banks, six in New York and +fourteen in Chicago, Philadelphia, Boston, and St. Louis, for the week, +Aug. 28-Sept. 2, 1916, show that clearings are 71% of "total +transactions" in New York, and about 40% in the other cities. These +figures are all for national banks, except for one bank in St. Louis. + +[411] There is one further generalization developed in connection with +Mr. Wolfe's investigation of the ratio of clearings to "total +transactions" which seems to have relevance here, though I am not sure +how it should be interpreted. The average ratio, as stated, is about +40%. This varies, however, for different cities. "The rule seems to be +that the larger the proportion of bank deposits to individual deposits, +the smaller will be the figure representing this ratio. In Cincinnati, +for example, it is 31.4% while in Los Angeles it is 59.7%." (_Jour. of +American Bankers' Ass'n_, Jan. 1914, p. 487.) How safely based this +generalization is cannot be told from the context, as no further facts +are offered. Nor is its bearing on the question at issue, as to whether +or not New York clearings bear a higher ratio to New York deposits than +country clearings do to country deposits, entirely clear. It would seem +to indicate that deposits made by outside bankers in the banks of +reserve cities make smaller contributions to clearings than individual +deposits do, and this would fit in with the fact that checks on outside +banks, deposited for collection by one bank in another, do not get into +clearings. What further explanation or significance it has I leave to +the reader. It is possible that there are a number of important relevant +facts missing regarding New York clearings, and that the conclusions +here reached may require later revision. + +[412] _Loc. cit._, p. 304. + +[413] But not as a correct estimate of M'V' for the equation of +exchange! We do not know what part of these checks were used in "trade." +_Cf._ our discussion of the estimate of T, _infra_. + +[414] Kemmerer does not do this, but takes total clearings for the +country as his index of variation. _Loc. cit._, 118-120. His figures for +"check circulation" are, thus, more variable than Fisher's. In this, +Kemmerer's results are much to be preferred. + +[415] I have taken the figures for clearings from Professor Fisher's +table, _loc. cit._, p. 448. + +[416] _Loc. cit._, p. 304. _Cf._ our chapter on "Velocity of +Circulation," _supra_. + +[417] _Loc. cit._, pp. 477-478. + +[418] There is, of course, the further point, to be emphasized in the +discussion of T, _infra_, that MV (and hence V), assuming the +calculation otherwise correct, is too large, to the extent that it +includes tax payments, loans and repayments, dealings between agent and +principal, etc. But this criticism does not so clearly apply to MV as it +does to M'V'. + +[419] _Business Cycles_, p. 308. + +[420] That volume of trade and volume of physical goods are virtually +interchangeable in Fisher's thought is strikingly illustrated on p. 195 +of the _Purchasing Power of Money_: "A doubling in the quantities of all +commodities _sold_, or (_what is almost the same thing_) a doubling of +the quantities _consumed_." Italics are mine. + +[421] This is strictly true only of the part of T which comes from the +figure for M'V', 353 billions. In calculating MV, Professor Fisher +introduces more complexities, into which we shall not enter, as the +absolute amount is small--only 34 billions!--and the possible error from +this source not great enough to affect a calculation where 20 billions +one way or the other is within the "margin of error." + +[422] _Vide_ _Annalist_, Feb. 17, Feb. 21, March 6, March 13, and March +20, 1916, for a discussion of this point by Professor Fisher and the +present writer. + +[423] _Op. cit._, pp. 112-113. It is interesting to note that Kemmerer's +argument takes the form of proving, not that bank transactions do not +overcount trade, but merely that they do not _undercount_ trade. With +this contention I am in hearty agreement! The overcounting is worse in +Kemmerer's figures for 1896 than for Fisher's in 1909, since the 1896 +figures included deposits made by one bank in another, while the 1909 +figures do not. _Cf._ Kemmerer, p. 105, and Kinley, in _Report of the +Comptroller_ for 1896 and in the 1909 monograph, _passim._ + +[424] _Vide_ the present writer's discussion in the _Annalist_, March 6, +1916, p. 313. + +[425] I am informed by Mr. B. F. Smith, Treasurer of the Cambridge Trust +Company, that the practice of having separate dividend accounts is a +very widespread one, especially with the larger corporations. + +[426] _Statistics of Railways_, 1909, p. 71. + +[427] Professor Fisher, in his _Annalist_ article of Feb. 21, 1916, +quotes Dean Kinley (_The Use of Credit Instruments_, p. 151), as holding +that duplications have largely been eliminated from his 1909 figures. +Professor Fisher overlooks the fact that Dean Kinley is here referring, +not to money value of trade, but merely to volume of checks. Dean Kinley +merely indicates that by eliminating deposits made by one bank in +another, he has avoided having the same check counted in deposits made +in two or more banks on the same day. Even this is not wholly avoided. +(_Ibid._, pp. 158-159.) It was extensive in the 1896 figures. Dean +Kinley thinks, properly enough, that he has a sufficiently close +approximation to the volume of checks, for the reporting banks, but what +the checks were drawn for he does not undertake to say. His problem was +_payments_, not _trade_. From the angle of volume of trade, he finds +duplications even in the retail deposits (_Jour. of Polit. Econ._, vol. +5, p. 165). + +[428] _Annalist_, March 13, 1916, p. 344. + +[429] Chapter on "Volume of Money and Volume of Trade," pp. 241-248. We +really did not "find" nearly that much. The figures assigned to retail +and wholesale trade rest on figures for retail and wholesale bank +"deposits," and are, especially the wholesale figures, much too large. + +[430] _Annalist_, Feb. 21 and March 13, 1916. + +[431] _Loc. cit._, p. 180. + +[432] _Ibid._, pp. 166-167; 187; 273. + +[433] Pratt, _loc. cit._, p. 166. + +[434] _Ibid._, p. 187. + +[435] Emery, _Speculation on the Stock and Produce Exchanges_, pp. 89; +74-95. A Boston broker expresses the opinion that the magnitude of +artificial borrowing to make the clearance sheet misleading is not +great, so far as Boston is concerned. I have got no estimates for New +York. + +[436] The banks, of course, are not borrowing stocks. + +[437] Van Antwerp, _The Stock Exchange from Within_, New York, 1913, p. +290 + +[438] It recently happened that Alaska Gold was being "loaned flat" on +the Boston Stock Exchange, which was a prelude for a six point advance +in the next two or three days, as the bears were driven to cover. + +[439] One factor complicates this. Are all the hundred share sales +recorded? In our chapter on "Volume of Money and Volume of Trade," we +called attention to a statement to the effect that brokers get together +before the market opens, and compare "stop loss" orders, matching these +with other orders, with the understanding that they automatically go +into effect if the "market" reaches the prices indicated. The statement +indicated that this substantially increases sales beyond the recorded +totals, as such sales do not get on the ticker. I think, however, that +this cannot throw our reckoning out greatly. The great majority of sales +are not on "stop loss" orders. None of the sales of "floor traders," who +average a third of the total trading (_Pujo Committee Report_, Feb. 28, +1913, p. 45), would be on "stop loss" orders. The bulk of the rest is +not. Moreover, not all stop loss orders, by any means, would be executed +in this manner. It is not easy to see how, under the rules and practices +of the Exchange, many other sales could go unrecorded, except on days of +greatest stress. On September 25, 1916, when over 2,300,000 shares were +sold, the daily paper spoke of sales missed by the ticker, which was +swamped with sales to be recorded, as an item of some magnitude. But the +Ticker is wonderfully efficient. It sometimes gets behind the market by +several minutes, but it rarely misses anything, under ordinary +conditions. + +[440] _Ibid._, p. 166. + +[441] This explains the estimates of Wall Street men that the Clearing +House reduces checks by two-thirds. For _their purposes_, the saving is +almost that much, of the items offered for clearings. _Cf._ Van Antwerp, +_The Stock Exchange from Within_, pp. 121-122. + +[442] _Ibid._, p. 273. There is one billion difference between Pratt's +estimate and mine. I incline to the view that mine is correct, the more +as he puts his figure, 14 billions, as a safe lower limit. But a billion +one way or the other is trifling! + +[443] An official of the Bankers Trust Company has secured for me from a +broker at the "Money Post" an estimate of 20 to 25 millions as an +average, with 50 millions as a maximum, for 1915. The Pujo Committee, in +its report in 1913, p. 34, gives a similar estimate. + +[444] P. 34. + +[445] _Annalist_, Aug. 14, 1916. + +[446] N. J. Silberling, "The Mystery of Clearings," _Annalist_, Aug. 14, +1916, p. 223. + +[447] There is one further piece of evidence which has been obtained +through the courtesy of a New York brokerage house. At the request of +the gentleman who has supplied the figures, I have altered them by a +constant percentage, to prevent possible identification, but the +proportions among them hold as they were given. The figures show the +business of the house for the month of March, 1916. The figures show: + + Market value of stocks and bonds bought, 1,644,630 + Total deposits made during month, 1,475,502 + Average borrowed from banks, 952,000 + +For this house, then, for this month, the deposits were less than the +value of securities sold, by 11.5%. The month, however, was unusual. It +was a month of reduced activity, following large activity. This is +strikingly shown by the figure for the _average_ bank loans for the +month--over two-thirds of the _total_ deposits for the month. The house +had a large bull _clientele_, which was holding its stocks, and not +selling on a bear market. The turnover was very slow, as Wall Street +goes. It was a time of extraordinarily easy money when banks called few +if any loans. The broker, in explanation of his figures, says: "The most +of our checks were to other brokers. Checks to banks about equaled +checks to customers. Your assumption that we did not pay off many loans +in March is, I think, right." The same broker states in another letter +that he thinks that, in general, the bulk of checks to and from brokers +are in dealings with banks. In this month, then, with this factor +reduced to a minimum, we still have deposits undercounting sales by only +11.5%. The figures do not prove my thesis that brokers' deposits greatly +overcount their sales, but they at least show that they do not greatly +undercount them. In view of the peculiarities of the month chosen, with +transactions between banks and brokers cut to the minimum, they are +quite consistent with the contention that normally the brokers' deposits +will much exceed their sales. + +[448] Kemmerer's main figures are merely _indicia_ of variation, rather +than absolute magnitudes, for trade. On p. 136, _d._ (_loc. cit._), +however, he indicates that his figures for "total monetary and check +circulation" is also a figure for "total business transactions"--and +counts 89% of it as wholesale trade. + +[449] _Cf._ the discussion of the relation of P and T in the chapter on +"The Equation of Exchange." + +[450] _Op. cit._, p. 136. + +[451] _Ibid._, pp. 70-71. + +[452] _Loc. cit._, p. 487. + +[453] Kemmerer does not accept Kinley's estimate of 75% for checks as +compared with money in payments as a "sure minimum" for 1896, but rather +counts it as a "fair maximum." (_Loc. cit._, p. 106.) Using this as a +basis, he gets a monetary circulation for 1896 of 47.7 billions, and a +"velocity of money" (since the monetary stock in circulation in 1896 was +a little over 1 billion) of 47. (_Loc. cit._, p. 114.) Kinley's fuller +investigation in 1909 has made it clear that his 1896 conclusions +understated, rather than overstated, the proportion of checks to money. +His "sure minimum" was needlessly low. He concludes in 1909 that 80 to +85% for checks is safe. (_Op. cit._, p. 201.) _Cf._ Fisher's comments, +_loc. cit._, pp. 430; 460 _et seq._ Fisher's V is about half as great as +Kemmerer's, and varies to some extent. I think Fisher, since his results +are closer to Kinley's later figures, has made much the better estimate +here. + +[454] Since I have already compressed the contents of a book of 200 +pages into Chapter I of the present book, it seems undesirable to +attempt here a further compression of that chapter. These theses, +therefore, do not give the substance of the social value theory. + +[455] Menger, "Geld," _Handwoerterbuch der Staatswissenschaften_; +Carlile, _Evolution of Modern Money_. + +[456] We should make a slight and unimportant qualification as to +Kemmerer. _Cf._ our chapter on "Dodo-Bones," _supra_. + +[457] It seems necessary to point out this essential lack of correlation +between value and exchangeability, since Mr. Horace White, in his _Money +and Banking_ (5th ed., p. 135), identifies value and exchangeability: +"Value is an ideal thing in the same sense that weight is. The former +means exchangeability; the latter means force of gravity. A dollar is a +definite amount of exchangeability." _Cf._ also Amasa Walker's +contention that "exchangeable value" is tautology, equivalent to +"exchangeable exchangeability!" _Science of Wealth_, 5th ed., p. 9. +_Cf._ my article "The Concept of Value Further Considered," _Quart. +Jour. of Econ._, Aug. 1915, pp. 696 _et seq._ + +[458] This is stated by Schumpeter, so far as land is concerned. _Vide +Quarterly Journal of Economics_, Aug. 1915, p. 704. It is due Menger to +point out that he does not make the distinction between value and +exchangeability which I have just made. His theory rests in an analysis +of the saleability or exchangeability of goods. But Menger's conception +of value is essentially different from my own. He commonly means by +"_Wert_" merely subjective value, or marginal utility. He objects to the +notion that one good measures the value of another, or that goods, when +exchanged, are equivalent in value, on the ground that there must be a +surplus in value (subjective value) for each exchanger, or exchange +would not take place. He has, as a primary concept, no absolute social +value. "_Tauschwert_" is for him a relative value, though he is finally +driven to constructing what is virtually an absolute value notion, by +distinguishing "_aeusserer Tauschwert_" from "_innerer Tauschwert_" in +the case of money, the latter being concerned exclusively with the +causes affecting prices _from the side_ of money, ignoring changes +in prices due to causes affecting goods. (_Cf._ art. "Geld," in +_Handwoerterbuch der Staatswissenschaften_, 3d ed., pp. 592-593. He does +not make this distinction in developing the theory of saleability of +goods, however. _Cf._ the chapter, _supra_, on "Marginal Utility and the +Value of Money." It is absolute social value which I am here +distinguishing from exchangeability. It is equally true, however, that +subjective value and exchangeability have no necessary correlation.) + +[459] _Cf._ A. S. Johnson, "Davenport's Competitive Economics," _Quart. +Jour. of Econ._, May, 1914, p. 431. + +[460] The man who wishes to "break" a twenty dollar bill may well have +to go through Menger's process, getting two tens from one man, breaking +one of these into two fives with another, and so on. Or he may have to +buy something which he does not want to get "change." + +[461] Ridgeway, _Origin of Metallic Currency_, p. 327; Carlile, +_Evolution of Modern Money_, p. 233. Grain is said to have been used in +ancient China as money,--not as a standard of value, but as a medium of +exchange. Chen Huan Chang, _Economic Principles of Confucius and his +School_, vol. II, p. 437. + +[462] Written in 1914. + +[463] The Hindu law of inheritance is a factor here. The Hindu woman may +retain, after the death of her husband, father or brother, the ornaments +he has given her during his lifetime. But all of the rest of the family +property must go to male heirs, even remote male heirs coming in before +the closest female relatives. + +[464] _Cf._ Carlile, _Monetary Economics_, introductory chapter. The +whole question may hinge on terminology, so far as Carlile is concerned. +It is not clear what he means by "value of gold." + +[465] _Cf._ Conant, _Principles of Money and Banking_, I, ch. 7, esp. p. +102. + +[466] I do not believe that we have sufficient agreement among the best +students of the statistics of the precious metals to justify any +statistical conclusions regarding the laws governing the industrial +consumption of gold and silver. Even the facts as to the proportions of +annual production of gold in recent years going to money and to the arts +are in dispute. Thus, DeLaunay (_The World's Gold_, New York, 1908, p. +176), divides the annual output as follows: Exportation to the East, and +loss, 16%; coinage, 44%; industry, 40%. The industrial employments are +divided as follows: jewelry, 24% (of total annual gold production); +watch cases, 10%; gold leaf, 2.25%; watch chains, 1.75%; plate, 0.75%; +various uses, as pens, dentistry, chemical works, etc., 1.25%. +DeLaunay's competence as an authority is attested by various writers, +among them W. C. Mitchell (_Business Cycles_, p. 281). Mitchell, +comparing DeLaunay's estimates with divergent estimates of other +authorities, concludes that there is not sufficient evidence to justify +definite conclusions. I do not think that anyone who has read the +criticisms which Touzet has brought together (_Emplois Industriels des +Metaux Precieux_, Paris, 1911, pp. 49-52) of the methods employed in the +investigations by the Director of the United States Mint in 1879, 1881, +1884, 1886, and 1900, will have large confidence in the exactness of the +results reached in those investigations. (See annual reports of the +Director of the Mint for the years in question.) Touzet's careful and +elaborate study employs the figures of these investigations as the best +available, but with substantial misgivings. There are many indeterminate +elements in the problem, as shown by both Touzet and DeLaunay, among +them, the extent to which coin is melted down for industrial purposes. + +The Director of the Mint would assign a much higher proportion of the +annual output to coinage than would DeLaunay. + +Earlier studies, by Soetbeer and Suess, seem quite out of harmony with +these conclusions. (Suess, Eduard, _The Future of Silver_, Washington, +Government Printing Office, 1893, pp. 51-53.) Suess thinks that +virtually as much gold was going into the arts uses as was being +produced, in 1892, and quotes Soetbeer (_Litteraturnachweis_, p. 285) as +admitting that such a contention may not be demonstrable, but at the +same time holding that it cannot be disproved. + +In the face of what seems to be a really indeterminate statistical +problem, I content myself with the theoretical conclusions in the text. +Because I cannot find adequate grounds for confidence in the main source +from which he has drawn his statistics, I refrain from a criticism of +the theory and method underlying Professor J. M. Clark's ingenious +effort to derive statistical laws for the elasticity of the arts demand +for gold. (_American Economic Review_, Sept. 1913.) + +[467] _Cf._ our chapter on "Economic Value," _supra_, and "Social +Value," _passim_. + +[468] F. A. Walker, _International Bimet_. + +[469] See DeLaunay, _The World's Gold_, New York, 1908, p. 176. +DeLaunay's figures indicate that the use of gold for gold leaf and plate +is quantitatively a minor factor in the industrial consumption of gold. +Jewelry and watch cases are the most important items. + +[470] Capital prices of lands and securities might well be lower, if +interest rates are markedly higher, and if land rents and "quasi-rents" +suffer from higher wages and higher interest. + +[471] _Cf._ chapter on "Dodo-Bones," _supra_. + +[472] Among the writers who have treated this topic, I would mention +especially Menger, "Geld," in _Handwoerterbuch der Staatswissenschaften_; +Laughlin, _Principles of Money_; Scott, W. A., _Money and Banking_; +Knies, _Das Geld_; Walker, F. A., _Money and Political Economy_; Conant, +_Principles of Money and Banking_; Seligman, _Principles of Economics_; +Johnson, J. F., _Money and Currency_; von Mises, L., _Theorie des Geldes +und der Umlaufsmittel_; Helfferich, K., _Das Geld_; Simmel, _Philosophie +des Geldes_; Davenport, H. J., _Economics of Enterprise_. The difference +between the standard of value (common measure of values) function, and +the medium of exchange function is particularly well illustrated by +Scott, _loc. cit._, ch. 1. The legal functions of money are especially +treated by Knapp, _Staatliche Theorie des Geldes_. + +[473] For discussions of the idea of measuring values, and the +dependence of this on the conception of value as an absolute quantity, a +common or generic quality of wealth, see Knies, _Das Geld_, I, 113ff.; +Kinley, _Money_, 61-62; Merriam, L. S., "Money as a Measure of Value," +_Annals of the American Academy_, vol. IV; Carver, "The Concept of an +Economic Quantity," _Quart. Jour. of Econ._, 1907; Laughlin, _Principles +of Money_, 1903, pp. 14-16; Davenport, _Value and Distribution_, p. 181, +n.; Anderson, _Social Value_, chs. 2 and 11, and "The Concept of Value +Further Considered," _Quart. Journal of Econ._, 1915; Helfferich, _Das +Geld_, 1903 ed., pp. 470-478; Scott, _Money and Banking_, ch. 1. + +[474] See Scott, _Money and Banking_, ch. 3. + +[475] A further reason for preferring "common measure of values" is that +expression carries dearly the connotation of absolute values. "Relative +values" cannot be "measured," _Social Value_, pp. 26-27. + +[476] Current text-books, following the Austrian doctrine, define +production as the creation of "utilities." This is incorrect. Production +is the creation of _values_. _Cf. Social Value_, pp. 119 and 189. + +[477] This is the view of H. J. Davenport (_Economics of Enterprise_, +pp. 301-302). + +[478] Kemmerer has shown this to be true of bank reserves. As we shall +see, the reserve function is merely a special case of the "bearer of +options" function. For Kemmerer's discussion of business distrust, see +_Money and Credit Instruments_, pp. 124-126, and 144. + +[479] "In New York, for instance, loans by banks 'on call' are subject +to repayment within an hour or two after notice is given that repayment +is desired." Conant, _Principles of Money and Banking_, vol. II, p. 56. +In general, the banks are content if the loan is repaid by 3 o'clock on +the day it is called. + +[480] _E. g._, Cairnes, J. E., _Leading Principles of Political +Economy_. + +[481] _One_ "pure rate" is a myth, but the notion has some significance, +as setting off a body of causes distinct from the money-market factors +under consideration. _Cf. supra_, the ch. on "The Capitalization +Theory." + +[482] See von Mises, "The Foreign Exchange Policy of the +Austro-Hungarian Bank," British _Economic Journal_, 1909, pp. 208-209. +An able Boston broker, in Feb. 1917, calls attention to the growing +difficulty of placing long-time bonds, without very high yield, in view +of the scarcity of real capital, despite the exceedingly low +"money-rates." I venture to predict an increasing "spread" between +"money-rates" and the yield on long-time investments, the longer the War +lasts. The view of Davenport and Schumpeter (_Annalist_, Feb. 28, 1916, +and _Theorie der wirtschaftlichen Entwicklung_), which would deny the +validity of the distinction between money-rates and interest rates, and +would make the money-market phenomena the primary cause of all interest +phenomena, seems to me indefensible, alike in theory and in fact. + +[483] _Cf._ the analysis of bank-loans in the United States, _infra_. + +[484] Mitchell, _Business Cycles_, p. 146. + +[485] _Journal of Political Economy_, XVI, May, 1908, pp. 273-298. + +[486] Leipzig, 1905. This book has had wide influence on German thinking +on money. It is typical of the tendency in German thought to make the +State the centre of everything. Recognizing the historical fact that +money has originated in a commodity, it holds that the commodity basis +is a phenomenon of historical significance only, that modern money is a +creature of the State. The money-unit is not definable as a quantity of +metal, of given fineness, but rather is a "nominal" thing, present +monetary standards being defined by legal proclamation in terms of past +standards. The necessity for this reference to past standards grows out +of the existence of past _debts_. The State must preserve the continuity +of juristic relations, between debtors and creditors as elsewhere. Knapp +holds that the _Zahlungsmittel_ (legal means of quittance, legal tender) +function is the primary function of money, and that it is not a concept +subordinate to _Tauschmittel_ (medium of exchange). It is not necessary +for our purposes to take account of Knapp's theory in detail. He really +has little to say about the value of money. Indeed, he confesses, in a +later discussion, that his theory is not concerned with that subject! +(_Schriften des Vereins fuer Sozialpolitik_, No. 132, 1909, pp. 559-563.) +The amount of economic analysis in the book is not great. It is a +striking illustration of the fact that legal thinking is largely +concerned with _qualitative distinctions_, rather than with quantitative +causal conceptions. (_Cf._ my discussion in the chapter on "The +Reconciliation of Statics and Dynamics," _infra_, of the "statics" of +the law.) Knapp's book has a forbidding appearance, because of the large +number of new terms, based on Greek roots, which he has coined. The +German language is inadequate to express his ideas! The Germans +themselves have complained much of this. Careful reading of the book +discloses, however, that the new terms are admirably adapted to express +the distinctions he draws. I think, too, that English readers of the +book, who remember enough of their Greek to recognize an occasional +Greek root as vaguely familiar, will find less difficulty in giving +fixed meanings to his new terms than would be the case with new German +compounds. One who takes the trouble to master Knapp's vocabulary will +find the effort worth while. Knapp has a high order of dialectical +acumen. But the main part of the book has little direct bearing on the +problem of the value of money, whether one understand by "value of +money" the absolute social value of money, or the reciprocal of the +price-level. The main points to be drawn from his discussion are (1) the +fact that past debts may tend to sustain the value of an otherwise +worthless money; and (2) that the State's willingness to accept money +for taxes, etc., may also contribute to its value. Knapp lays heaviest +stress on this last point. He seems to concede, however, that the role +of the State here is not different from that of any other big factor in +the market, and that the State's power in this particular is a function +of the magnitude of its fiscal operations. Both of these doctrines fit +readily into my social value theory. Knapp's discussion of methods of +regulating the international exchanges by methods other than gold +shipments is interesting, and might well be studied by those who are +concerned with the exchange situation in the present war. His thesis +that the value of silver depended on the course of the exchanges between +gold and silver countries, instead of the course of the exchanges +depending on the values of gold and silver, seems to me an absurd +exaggeration of a minor qualification into a main theory. His doctrine +that international relations alone make the purely legal money, without +commodity basis, unsatisfactory, I do not accept. I have discussed this +general topic in my chapter on "Dodo-Bones," however, and may content +myself with now referring to that chapter. It is not true, as a matter +of fact, moreover, that the money-unit is no longer defined as a +quantity of metal. Our own American practice is sufficient evidence on +this point. Knapp has sought to generalize his own interpretation of the +history of Austrian paper into universal laws of money! That his +interpretations meet authoritative dissent in Austria is sufficiently +evidenced by von Mises' discussion, in his _Theorie des Geldes_ (ch. on +"Das Geld und der Staat"), and in his English article on "The Foreign +Exchange Policy of the Austro-Hungarian Bank," British _Economic +Journal_, 1909. The notion that the legal tender function is prior to +the medium of exchange function I regard as quite indefensible. It is +doubtless true, in certain cases, that a government may debase its +money, defining the new debased money in terms of the old, and that +people who have debts to pay may, for a time, accept the debased money +as a medium of exchange. But the limit of this is reached when the old +debts have been paid. Unless other factors (not necessarily redemption), +then come in to sustain the value, the value will sink, to a level +commensurate with the debasement. The value would generally sink to a +considerable degree, in any case, if only the legal factors worked to +sustain it. I have gone over this in the chapter on "Dodo-Bones," +_supra_. It was only by being a valuable object, and commonly only by +being a medium of exchange, that the money could have become a means of +legal quittance in the first place. Men would not have made contracts in +terms of it, otherwise. And men would cease making contracts in it as +soon as it (or other things tied to it in value) ceased to be an +acceptable medium of exchange. + +Knapp finds a good many phenomena in the history of money for which the +quantity theory, and the metallist theory, can give no explanation. He +has an exceedingly poor opinion of both theories, and makes many telling +points against both. In so far as his doctrine asserts that the +phenomena of money are matters of social organization, psychological in +nature, I find myself in harmony with it. My dissent comes when he seeks +to erect the abstractions of the jurist into a complete social +philosophy! Law is only a part of the system of social control, and +economic values, while influenced by legal values, are far from being +explained when legal factors only are taken into account. Legal factors +often play a more direct part in connection with the value of money than +in connection with other values, but they do not dominate the value of +money. + +Recent German literature on money (_e. g._, Fr. Bendixsen, _Geld und +Kapital_, Leipzig, 1912) has been a good deal influenced by Knapp, and +there is a fair chance that American students may have to read his book +if they wish to understand the next decade of German monetary history. +It will be well for Germany if this is not the case! + +[487] _Economics of Enterprise_, p. 257. + +[488] _Cf._ Boehm-Bawerk's _Capital and Interest_, _passim_, particularly +his discussion of Hermann, for an exposition and criticism of the "use" +theory of interest. + +[489] _Cf._ Clark, J. B., _The Distribution of Wealth_, pp. 210-245. + +[490] This is not necessarily true among Asiatics, or on the East Side +in New York City. + +[491] The adherent of the Ricardian analysis who would deny this may +fight it out with Clark, Fetter, and A. S. Johnson! + +[492] A friendly critic--with a radically different theoretical point of +view--feels that I am here playing fast and loose with the word, +"value," meaning sometimes "total utility," sometimes "marginal +utility," sometimes "relative marginal utility," and sometimes "price." +I _never_ mean any of these things by "value," when used without +qualification, in this book. I mean always _social economic value_, +conceived of as _absolute_. + +[493] I have been unable to satisfy myself that anyone has made a +sufficiently thorough study of the course of the gold premium on the +Rupee, the agio of the Rupee over its bullion content, or the course of +prices in India, during the period from 1893 to 1898, to justify +confident statements as to the comparative strength of different +elements in the explanation of that history. Kemmerer states (_Money and +Credit Instruments_, p. 38) that he can find no evidence at all to +support Laughlin's view of the matter. (See Laughlin, _Principles of +Money_, pp. 524 et seq.) J. M. Keynes, however, in his _Indian Currency +and Finance_, p. 5, says: "The Committee of 1892 did not commit +themselves; but the system which their recommendations established was +_generally supposed_ [Italics mine.] to be transitional and a first step +toward the _introduction of gold_ [italics mine.]." In the arrangements +of 1893, moreover, a ratio between English gold and the Rupee was +established, of 16d. to the Rupee, even though provisions for holding +the Rupee to this ratio were left till the establishment of the "gold +exchange standard," several years later. Keynes, on p. 3, discusses the +arguments of the silver party against the introduction of gold, which is +further evidence that the action of the Committee was understood as +looking toward a gold standard. There is _some_ evidence at least for +Laughlin's view. That his view offers a complete explanation, I think +unlikely. + +Kemmerer's admirable _Modern Currency Reforms_ (Macmillan, 1916), is at +hand while the proof sheets are being revised. It is interesting to note +that he finds the statistical evidence regarding Indian prices, trade, +etc., far too scanty to justify positive conclusions as to the causes +governing the course of the rupee. He prefers, rather, to rest the case +for the quantity theory on _a priori_ reasoning and statistics for the +United States. _Loc. cit._, pp. 70-71. In the chapter on "Dodo-Bones," I +have suggested that India might come nearer than other countries to +actualizing the assumptions of the quantity theory. On Kemmerer's +showing, however, it appears to be a liability, rather than an asset! + +[494] This is a national bank. In the same community, the writer asked +the president of a State bank about his gold reserve, and was told that +light-weight gold coin could not be used, since the State bank examiner +made a practice of _weighing_ the gold of State banks. + +[495] Legal tender can add to value of money only when it confers an +option on the _debtor_. In the case discussed, it is the _creditor_ who +has the option. But options are not necessarily valuable. + +[496] As Davenport has pointed out, money is really moneys--there is a +hierarchy. _Cf. Economics of Enterprise_, pp. 256-259. + +[497] The restricted legal tender of small coins, where the coins are +limited in amount to the needs of retail trade, is virtually an +unrestricted legal tender, in practice, and amounts, in fact, to +redemption. The coins are capable of being used where large coins, of +standard metal, would otherwise be used, or where checks, redeemable in +standard coin, would be used. Legal tender is vastly more effective with +reference to a small part of the money system than it would be with the +whole of the money supply. The same is true of the privilege of using a +particular form of money in paying taxes. _Cf._ W. C. Mitchell's +discussion of the "Demand Notes," _History of Greenbacks_, _passim_. + +[498] _Cf._ Mitchell's account, (_Ibid._, pp. 166-173), of the premium +on minor currency, during the Civil War. Pennies were used in rolls of +25 as a substitute for silver quarters, which had left the country under +Gresham's Law. The premium was due primarily to the need for small +change, rather than to bullion content, though the latter was a factor +even for coins made of baser metals, in 1864. + +[499] _Cf._ my article in the _Annalist_, Feb. 7, 1916, "The Ratio of +Foreign to Domestic Trade," and the chapter, _supra_, on "The Quantity +of Money and the Volume of Trade." + +[500] Kinley's figures show a much lower percentage of money than this. +He is anxious not to overestimate the extent to which checks are used, +however, and so gives the figures of 50 to 60% of checks as a safe lower +limit. + +[501] _Cf. Social Value_, 183-184. + +[502] _Cf._ Carver's contention that "the demand for money is a demand +for value." "Concept of an Economic Quantity," _Quart. Jour. of Econ._, +1907. + +[503] _Cf._ Laughlin's _Principles of Money_, p. 73. + +[504] The main modern type of loan for non-business purposes is the +public loan for war purposes, or to meet fiscal deficits. In the case of +war loans, the emergencies are often so great that the rate of interest +makes little difference. + +[505] No longer true of Europe, probably, since the huge war debts have +been incurred. + +[506] The interest so defaulted is cumulative, like a preferred +dividend, for years after 1909. Wall Street speaks of this issue as a +"half-bond." + +[507] _Supra_, chapter on "Origin of Money." + +[508] "It is needless to say that Government bonds always rank as the +very highest class of collateral, and the banks require no margin on +such security." Pratt, _Work of Wall Street_, 1912 ed., p. 287. This, it +need not be said, is not always true! + +[509] Veblen has elaborated the doctrine that stocks and bonds are much +the same. _Cf._ the discussion in Meade's _Corporation Finance_ of the +relation of junior bonds and preferred stocks in reorganizations. + +[510] I do not accept the imputation theory, or the capitalization +theory, without qualification, except as static first approximations. +Values of "factors of production" may easily become, and do become, in +large part independent of their "presuppositions," _Cf._ the chapter on +"Dodo-Bones", _supra_, and the chapter on "Economic Value." + +[511] This would seem to be Davenport's view. See his article in the +_Quarterly Journal of Economics_, Nov. 1910. + +[512] To a high degree, "good will," trade-marks, etc., are bankable +assets. + +[513] _Social Value_, 1911, _passim_, especially ch. XIII. Cooley, C. +H., "Institutional Character of Pecuniary Valuation," _Am. Jour. of +Sociology_, Jan. 1913. + +[514] _Cf._ my article, "Schumpeter's Dynamic Economics," _Political +Science Quarterly_, Dec. 1915, and the chapter on "Marginal Utility," +_supra_. That the new bank-credit, without the painful _preliminary_ +"abstinence" which the classical economics has stressed, is enough to +provide capital for a new enterprise is, as Schumpeter insists, true. +Schumpeter has made an important contribution in his emphasis on this +too much neglected point. But it should be noted that this does not +dispense with curtailing of consumption, and "abstinence." It merely +shifts the necessity for curtailing consumption to some one else. The +new plan of the dynamic entrepreneur, by means of bank credit, draws +labor and capital away from the existing static enterprises. That +curtails their output. That leaves less goods of the old kinds for +people to consume. That means higher prices for consumption goods, in +the interval between the starting of the new enterprise and the time +when its finished products are added to the "real income" of the +community. Extensions of bank credit, there, shift the burden of +"abstinence" to the consumer, and to the static producer. "Saving" is +still the source of capital, but it is involuntary saving. + +[515] In 1912, the First National Bank of New York owned 43 millions of +bonds, but no stocks. Report of Pujo Committee, Feb. 28, 1913, p. 66. +The National City Bank had 33 millions in bonds, but no stocks. _Ibid._, +p. 72. State banks own few stocks; trust companies own a good many. + +[516] _Cf._ the chapter on "The Origin of Money," _supra_. + +[517] In March, 1916, one of the largest banking houses in Boston +informed the writer that over one-fourth of its notes and discounts +(including all forms of loans) had been bought through note-brokers. + +[518] _Cf._, _e. g._, pp. 135ff. of Scott's excellent _Money and +Banking_, Rev. ed., New York, 1910. + +[519] The year 1909 is chosen, in order that comparison may be more +readily made with the figures of Dean Kinley's investigations based on +reported deposits made on March 16 of that year. The figures quoted are +taken from p. 39 of the Report of the Comptroller for 1913. + +[520] Even excluding the item "due from other banks and bankers," as +representing duplications, the item "other loans and discounts" remains +approximately only one-fourth of total banking assets. + +[521] Almost all agricultural processes require more than six months +from their inception to the marketing of the product. + +[522] This view would seem to correspond with the view of Babson and May +(_Commercial Paper_, 1912), and of W. A. Scott ("Investment vs. +Commercial Banking," _Proceedings of Investment Bankers' Association of +America_, 1913, pp. 81-84). Both of these discussions appear in Moulton, +_Money and Banking_, Pt. II, pp. 70 and 75-77. Dr. J. E. Pope considers +the view correct. On the other hand, Professor O. M. W. Sprague thinks +the "other loans and discounts" of large city banks are more liquid than +my statement would indicate. + +[523] _Principles of Money and Banking_, II, p. 52. + +[524] _Report of the Comptroller of the Currency_, vol. II, pp. 145 _et +seq._ + +[525] Total collateral loans in New York City on that date were +$719,327,596. This is for national banks alone. _Report of Comptroller_, +1915, II, 144. There is every reason to suppose that if trust companies +and private banks were included, the _proportion_ of stock exchange +collateral loans would be very much higher. + +[526] I am very fortunate in having the views of Dr. J. E. Pope on this +question. I know no one whose knowledge of agricultural credit, whether +of American or of European conditions, is so thorough and extensive. + +[527] This table is constructed on the basis of data in the _Report of +the Comptroller_ for 1913, pp. 774-78. + +[528] A single observation does not justify very confident conclusions, +and figures for subsequent years may alter this. There is reason for +supposing that commodity collateral was unusually large in proportion in +the Comptroller's figures for national banks in June, 1915, (1) because +the banks had been trying to reduce stock collateral loans, following +the collapse of the outbreak of the War, (2) because they were aiding +cotton owners to tide over a period of stress, and (3) because of great +grain speculation. Later: 1916 figures show this. Comptroller's +_Report_, I, p. 30. Stock loans increase from 66% to 71.2%, of +collateral loans. + +[529] The preceding argument would indicate that it is much too high. + +[530] The figures for 1909 are fairly typical of the proportions of +these items in the assets of the three classes of institutions for the +ten years from 1904 to 1914. Since 1900, there has been some increase in +the percentages of real estate loans and "all other loans," at the +expense of the percentage of securities owned, and collateral loans, as +these years have been years of reduced activity on the Stock Exchange. +The changes are not important enough, however, to modify any conclusions +which we shall base on the figures here given. All classes of loans have +grown, and investments in securities have grown, but real estate loans +and "all other loans," particularly the latter, have grown somewhat more +rapidly. + +[531] These figures are taken from Conant, _Principles of Money and +Banking_, vol. II, p. 52. + +[532] The term "commercial paper," as here used by Conant (whose source +is the _Comptroller's Report_ for 1904 and preceding years), doubtless +includes a good many items which we have decided not to count as +commercial paper. The item, "advances on securities," also includes some +items other than stock exchange loans, but not a high percentage in New +York City. In 1913 the figures for all reporting banks in New York City +were: collateral loans, 1,070; "other loans," 658. _Report of +Comptroller_, 1913, p. 779. + +[533] Taken by Conant (_Ibid._, p. 51) from the _Economiste Europeen_ +(April 29, 1904), XXV, p. 546. + +[534] For the depositor who borrows from several banks, but deposits +only in one,--as a stockbroker--the items deposited will, of course, +substantially exceed the amounts borrowed at the bank where the deposits +are made. But this will not affect our argument for _classes_ of +depositors from _representative_ banks in the community as a whole. + +[535] _Supra_, chapters on "Volume of Money and Volume of Trade," and +"Statistical Demonstrations of the Quantity Theory." + +[536] The relevance of comparing wholesale and retail figures with +figures for "commercial paper" may well be questioned, since our +conception of commercial liquid loans would include manufacturers' paper +which represents raw materials, work in process, and bills receivable. +However, we have found reason to conclude that Kinley's wholesale +deposits include a large percentage of manufacturers' deposits. +(_Supra_, p. 245.) The comparison here is in any case rough. We do not +need precise figures for the argument. + +[537] Pratt, _Work of Wall Street_, 1912 ed., p. 264. + +[538] Returns from private banks in Kinley's investigation of 1909 are +virtually negligible, so far as absolute amounts are concerned, for the +whole country. For New York City, they are absolutely negligible. The +"all other deposits" reported by private banks in New York City for +March 16, 1909, are one thousand, nine hundred and eighty-four dollars, +in all! The grand total, "all other deposits" for all classes of banks +reporting in New York, is over a hundred and ninety-eight millions. The +great private banks are, thus, clearly not represented. They are not +represented in any form, since Kinley's figures exclude deposits made by +such banks in other banks. How important they would be, if included, one +cannot be sure, since they keep their affairs pretty secret. Some +information, however, is available. Thus, the Pujo Committee reports +(_Report_, Feb. 28, 1913, p. 145) that on Nov. 1, 1912, there was +$114,000,000 on deposit with J. P. Morgan and Company, exclusive of +$49,000,000 on deposit with their Philadelphia branch of Drexel and Co. +It is understood to be the practice of J. P. Morgan and Co. to keep no +cash on hand, and to deposit with other banks all their cash and checks. +On this date, they had on deposit with other banks $12,094,000, "which +presumably included all their own funds." It may be assumed, therefore, +that the remaining 102 millions was loaned out. There can be no doubt at +all, I suppose, that practically all they had lent out was on stock and +bond collateral. They are known to be one of the biggest lenders at the +"money post" on the Stock Exchange. They are not supposed to do much +business with ordinary merchants in the usual discount and deposit way. + +I have found no figures for Kuhn-Loeb & Co., for total deposits made +with them, nor for their deposits in other banks. The Pujo Committee +(_Ibid._, p. 73) states that for the six years preceding 1913 this firm +held, on the average, deposits from interstate corporations amounting to +over 17 millions. For J. P. Morgan & Co., this class of deposits +amounted to about half of total deposits. (_Ibid._, p. 57.) There is, of +course, no assurance that this proportion holds with Kuhn-Loeb's +deposits. + +These figures are very great, however. For the week ending April 3, +1915, for example, only three banks (the National City Bank, the +National Bank of Commerce, and the Chase National Bank), and only two +trust companies (the Bankers Trust Company and the Guarantee Trust +Company), held deposits exceeding those credited to J. P. Morgan and +Co., and only one of these, the National City Bank, very markedly +exceeded the Morgan deposits. The majority of the New York Clearing +House banks had less than the deposits of interstate corporations with +Kuhn-Loeb. + +As all the big private bankers deal chiefly in stock exchange loans and +securities, and foreign exchange, and as this kind of business has been +shown to be exceedingly active and to call for large checks and +clearings, we may assume that Kinley's figures would be greatly +increased if they were included. + +The trust company reports for New York in Kinley's figures are also very +incomplete. New York trust companies report less than twice as much as +Boston trust companies, and an absurdly small amount as compared with +banks. _Cf._, _supra_, the chapter on "Statistical Demonstrations of the +Quantity Theory." + +[539] It has been supposed by many writers that New York clearings +exaggerate New York transactions as compared with the extent to which +outside clearings represent transactions. Such evidence as we have would +show that this is not true to a sufficient degree to modify the present +argument. Clearings are less than deposits in both New York and the +country outside, _Supra_, chapter on "Statistical Demonstrations of +Quantity Theory." + +[540] "The Mystery of Clearings," _Annalist_, Aug. 14, 1916, p. 198. +_Supra_, chapter on "Volume of Money and Volume of Trade." + +[541] See any Congressional debate on "the Money Trust." + +[542] _Pujo Committee Report_, Feb. 28, 1913, p. 130. _Cf._ also p. 138 +(statements of Messrs. Baker, Reynolds, Schiff, and Perkins), and p. 160 +for Statements regarding the testimony of Messrs. Morgan and Baker. + +[543] I know no responsible writer who has charged that there is a +monopoly, or a tendency toward monopoly, in this matter. + +[544] I am not naive enough to suppose that this suggestion can be much +more than an illustration of the bearing of my theory! I should even +agree that the political difficulties are so great that we would do well +to try out our system in times of stress before seriously raising the +question of giving the Federal Reserve Banks the power to rediscount +loans on stock exchange collateral. + +[545] Walker's version of the quantity theory, excluding credit +transactions, escapes much of this criticism. _Supra_, chapter on +"Equation of Exchange." + +[546] It is nothing for Wall Street to "turn over" many times two +billion dollars worth of securities. In a big bull year, this will be +accomplished twelve or more times without effort--prices rising merrily, +so long as no new supply of stocks and bonds comes in to make trouble. +(See our estimate of New York security transactions, _supra_, chapter on +"Volume of Money and Volume of Trade.") But let there be a liquidation +by investors of anything like two billions, sold once, and the market +feels a tremendous drag. It seems universally agreed that foreign +selling of securities during the present War has been a great factor in +checking advances in security prices in New York. The actual amount of +liquidating by foreign investors, however, has been trifling as compared +with the volume of sales since the War began. The best estimate of +foreign liquidation is probably that of the National City Bank, which +has taken careful account of previous estimates, and which has unrivaled +sources of "inside information." The estimate of this institution is +that from a billion and a half to a billion six hundred million dollars +worth of foreign held securities have been liquidated in America since +the beginning of the War. (This does not include foreign loans placed +here.) This estimate is given in October of 1916. (Monthly circular of +the National City Bank on "Economic Conditions, etc.," Oct., 1916, p. +3.) It is safe to say that no amount of "churning" of securities already +in the market could have anything like the depressing effect on security +prices that an unusual amount of liquidation by investors has. It is not +increase in number of _exchanges_ that depresses prices. It is increase +in the floating _supply_. Activity in the floating supply makes it +easier, rather than harder, for speculators to get banking +accommodations which enable them to "hold" and "carry" securities, and +activity in sales therefore positively tends to _increase_ rather than +to decrease, security prices. The broadening of the range of securities +dealt in, moreover, instead of depressing the prices of those already +active, helps to sustain them. Thus, brokers and bankers welcomed the +recent revival of activity in the rails, following the bull market in +war stocks. It gave a broader basis for loans. Banks would lend more +liberally, and on narrower margins, if railroad stocks could be mixed +with the brokers' war stock collateral. + +Here again we see the significance of the distinction between long-time +interest rates, connected with the volume of real capital, and the +"money-rates." + +Again, periodic payments of interest and dividends, temporarily locking +up considerable sums of bank deposits which have to be built up in +anticipation of such payments, have a very much more serious effect on +the money market than do payments many times greater in connection with +stock sales. The tension in the London money market growing out of +periodic accumulations and disbursements of the British Government is +well known. The summer of 1916 witnessed a temporary tightening in Wall +Street (in what was, generally, the period of easiest money the Street +has ever known), from a similar cause--a bunching of dividend and +interest payments, with some other large financial transactions. Money +rates in New York regularly show the influence of such payments, +temporarily. Money rates also show the influence of active speculation, +as a rule, as shown by Mr. Silberling's investigations ("The Mystery of +Clearings," _Annalist_, Aug. 14, 1916), but it takes a very much greater +volume of stock sales than of dividend and interest payments to produce +a given effect on money rates. + +[547] As May 9, 1901, when 3,336,695 shares were sold. Compare +Mitchell's stock barometer, 1890-1911, _Business Cycles_, p. 175, with +records of share sales for those years. + +[548] _Purchasing Power of Money_, 1913 ed., p. 186. The same criticism +applies to Kemmerer, and Jevons. _Cf._ Kemmerer, _Money and Credit +Instruments_, pp. 70-71. It is applicable to most quantity theorists. + +[549] _Ibid._, p. 185. It will be noted that at this point, Fisher +lapses from the doctrine that volume of trade is determined by "physical +capacities and technique." _Ibid._, p. 155. + +[550] _Cf._ our discussion, _supra_, in the chapter on the "Functions of +Money," of money in retail trade. + +[551] Our great private banks, bond houses, and investment bankers, +etc., of course do buy stocks of new enterprises on a huge scale. Many +of our big commercial banks have taken part in underwriting operations. + +[552] See pp. 428-432, _supra_. + +[553] _Wealth of Nations_, Bk. II, ch. 2, ed. Cannan, I, pp. 187 and +290-291. + +[554] _Theorie der wirtschaftlichen Entwicklung_, chs. 2 and 3. + +[555] _Supra_, chapter on "Volume of Money and Volume of Credit." + +[556] _Interviews on the Banking and Currency Systems of England, +Scotland, etc._, Senate Document No. 405, 1910 (National Monetary +Commission Report), p. 25. + +[557] This is clearly the opinion of European bankers, as indicated in +their statements to interviewers for the Monetary Commission. See, _e. +g._, statements by the _Deutsche Bank_, _Ibid._, pp. 374-375, and the +_Credit Lyonnais_, _Ibid._, pp. 224-226. + +[558] The item, "Due from other banks and bankers" in our table of total +bank resources for 1909, is 2,563 millions--about 12% of the whole and +slightly more than the amount we assigned to "commercial paper." It is a +highly important factor making for liquidity. For State, and National +banks and trust companies it is almost as great--2,302 millions. The +first figure does not include many great private banks. + +[559] _Vide_ Professor Taussig's history of the years, 1878-1890, in his +_Silver Situation_. + +[560] _Cf._ Mitchell's _Business Cycles_, pp. 495-496; and _passim_. + +[561] _Cf._ the chapter, _supra_, on "The Quantity Theory and +International Gold Movements." + +[562] "The Prospects of Money," British _Economic Journal_, Dec. 1914. + +[563] _Cf._ Conant's discussion, _Principles of Money and Banking_, I, +ch. 7. + +[564] This would seem to be Mitchell's view. _Cf. Business Cycles_, p. +494. + +[565] _Cf._ chapter XIII. + +[566] _Cf._ the chapter on "The Functions of Money," _supra_. + +[567] _Money and Credit Instruments_, p. 80. + +[568] _Ibid._, p. 82. Italics mine. + +[569] Kemmerer, in general, is less concerned, apparently, with +defending a causal quantity theory than with defending the "equation of +exchange." To the extent that this is true, I have little quarrel with +his doctrines. To "prove" the "equation of exchange," however, is, +first, a work of supererogation, and, second, in no sense a proof of the +quantity theory. _Vide_ the chapters, _supra_, on the equation of +exchange and on statistics of the quantity theory. + +[570] Published by the National City Bank of New York. _Vide_ also +Bagehot. _Lombard Street_, introductory chapter, and Withers, _The +Meaning of Money_. + +[571] This information is supplied me by an official of the New York +Coffee Exchange, through the courtesy of Mr. W. H. Aborn, of Aborn and +Cushman, Coffee Brokers, 77 Front St., New York. + +[572] _Principles of Economics_, _passim_. + +[573] _Theorie der wirtschaftlichen Entwicklung._ + +[574] The writer has ventured some tentative predictions as to +conditions following the present War in the New York _Times_ Sunday +magazine of Dec. 10, 1916, pp. 10-11. + +[575] There are important dynamic and "frictional" considerations +opposed to protective tariffs, as well as static considerations. Very +many of the "intangibles" later to be discussed depend on free trade. A +high percentage of England's "capital" would be destroyed by protective +tariffs and trade restrictions, and to a less degree this is true of all +countries. _Vide_ N. Y. _Times_ Sunday magazine, Dec. 10, 1916, pp. +10-11. + +[576] A case in point is the discussion of the effects of increment +taxes on the building trade, participated in by Professor R. M. Haig and +the present writer in the _Quarterly Journal of Economics_, Aug. 1914, +and Aug. 1915. The doctrines criticised in my article were static +theories, and my criticisms made the static assumptions. Professor Haig, +accepting the validity of my criticisms on the assumptions laid down, +for the most part, seeks to recast the argument on a dynamic basis, +emphasizing dynamic and "frictional" considerations from which my +argument had abstracted. I think that what difference of opinion remains +between us would probably be removed if the distinction between static +and dynamic were clearly drawn and rigidly adhered to. + +[577] _Cf._ my review-article, "Schumpeter's Dynamic Economics," _Pol. +Sci. Quart._, Dec. 1915, p. 645. + +[578] _Distribution of Wealth_; _Essentials of Economic Theory_. + +[579] _Theorie der wirtschaftlichen Entwicklung_. + +[580] _Cf._ my _Social Value_, pp. 139-140, n. + +[581] _Purchasing Power of Money_, ch. 4. + +[582] _Theory of Business Enterprise._ + +[583] _Vide_ my discussion of Professor Patten's _Reconstruction of +Economic Theory_ in the _Political Science Quarterly_ of March, 1913, +and the _American Economic Review_, Supplement to the March number, +1913, pp. 90-93. + +[584] _Cf._ Schumpeter, _loc. cit._, pp. 1-101, and _passim_. That the +quantity theory is essentially "static" will appear strikingly if the +statements in the text be compared with Fisher's discussion in chs. 5-7 +of _The Purchasing Power of Money_. + +[585] It is only as a matter of highly abstract statics that the +capitalization theory (as presented in earlier chapters) can be +maintained with any strictness. In fact, capital values are not always +passive shadows, yielding freely to changes in anticipated income, and +to changes in the rate of discount. Very often capital values become +themselves substantial, become divorced from their presuppositions, can +no longer be explained by any imputation process. This is particularly +likely to be the case with lands in inactive markets. The income-bearer +is as much an object of value as is the income; is often _immediately_, +for its own sake, an object of value. The long-run tendency to +assimilate this value to a capitalization of prospective incomes may be +exceedingly slow in working out, if it ever works out. Indeed, a high +capital value may sometimes be a means of increasing the income, since +in the minds both of lessor and lessee the usual percentage return on +capital will be a factor in determining what is a "proper" rental. If a +capital value, no longer justified by prospective income, has behind it +the sanction of actual cost-outlay, there may easily be a reflex from it +on the size of the income itself. Such a capital value, unjustified by +prospective income, but still believed in by the market, may function +just as effectively as any other capital value. Book-values, not marked +down to correspond with changed income-prospects, even when they cannot +command purchasers, may still serve as a basis for _loans_--Veblen's +theory of crises rests, as we shall see, in part on this fact. + +Considerations of this sort strengthen still further the case against +the marginal utility theory of value. To pass,--as Fetter and the +Austrians in general seek to do--from marginal individual consumption +values to market prices of consumption goods, then to prices of +production goods, or to magnitudes of distributive shares, then, simply, +by the capitalization theory, to capital values, with the notion that +the original marginal utilities supply the psychological explanation at +every stage of the process, the remoter values being merely built up of +the original marginal utilities, is quite invalid. At every stage there +is a hitch: the marginal utilities do not explain the prices or values +of the consumption goods, as has already been elaborately pointed out; +and the relation between the values of consumption goods and the capital +values is very much looser and less direct than the static theory +requires. Institutional, legal, and moral forces come in, not alone at +the first step, in giving social weight to the wants of special classes +and individuals, but also at the second, giving prestige to certain +enterprises, and so higher values to their securities, giving banking +support here and refusing it there, giving popular and patriotic support +here, and not there, giving direct action of law, custom and tradition +on certain _prices_ (whence, indirectly on values), and leaving prices +free to change readily in other cases. (_Cf._ my discussion in _Quart. +Jour, of Economics_, Aug. 1915, pp. 699-701.) The static theory of +capitalization describes an ideal logical relation, while capital values +are, in fact, built up by a psychological process which is logical only +in part. In large degree, especially when the market lacks perfect +fluidity, capital values are _immediate_, and not merely _derived_, +values. In this, I think, I am in accord with the view briefly stated by +A. S. Johnson in his recent review of Boehm-Bawerk (_Am. Econ. Rev._, +March, 1914, pp. 115-116). + +[586] _Loc. cit._, ch. IV. _Vide_ Veblen's discussion of Fisher in the +_Pol. Sci. Quart._ of 1908, and his discussion of Clark in the _Quart. +Jour. of Econ._, Feb. 1908. + +[587] Chapter on "Volume of Money and Volume of Trade." + +[588] On Oct. 9 of 1916, I still venture the opinion that the stock +market has shown wonderful conservatism in the face of extraordinary +temptations. From Oct. 1915, to Aug. 1916, the "bears" dominated the +market, and prices fell pretty steadily. The "bull" movement of Sept. +1916, seems to have reached its crest without passing the level of a +year ago. The market may "run away," but it has not yet done so. + +[589] _Psychologie Economique_, vol. I, pp. 77-78. + +[590] Nor do I see any method for bringing into our equilibrium picture +the control which the environment retains over values by its power to +_eliminate_ those groups whose choices vary too widely from the norms of +"survival-necessities." Vide Giddings, _Principles of Sociology_, ed. +1905, p. 20; Carver, _Essays in Social Justice_, _passim_. I think that +the range of choices compatible with survival is very wide. Moreover, +"adaptation" is not a simple matter of adjustment to the physiographic +environment. It includes adjustment to the _social values_, both of the +group in question and of other groups. + +[591] _Cf._ H. C. Emery's discussion of "manipulation" in his +_Speculation in the Stock and Produce Exchanges_, pp. 171ff. + +[592] _Cf._ Dewey, _Essays in Logical Theory_; Bergson, _Time and Free +Will_, _passim_, and _Creative Evolution_; James, _Problems of +Philosophy_. + +[593] _Cf._ Bagehot's discussion in _Lombard Street_ of the features of +English organization which prevented supremacy in the Eastern trade from +passing to Greece and Italy with the opening of the Suez Canal. +(Introductory chapter.) See also the discussion of the English money +market in ch. XXIV, _supra_. + +[594] _Cf._ my article on "Schumpeter's Dynamic Economics" in _Political +Science Quarterly_, Dec. 1915, and ch. XXIII, _supra_. + +[595] In my article on Schumpeter's theory above mentioned, I have +pointed out that his contrast between statics and dynamics is not by any +means a fixed one, and that in particular he shifts back and forth +between a hypothetical static state, primarily a methodological device, +which assumes perfect fluidity and mobility of the objects of exchange, +on the one hand, and a realistic static state, immobile, held in the +bonds of custom and tradition, illustrated by India and China, on the +other hand. The version of the distinction between statics and dynamics +here discussed is only one of several which he gives. It is, however, +the one which at present I wish to contrast with my own view. With many +of Schumpeter's doctrines I am in hearty accord, and I have learned much +from his book. I think that his book affords abundant evidence of the +usefulness of the static-dynamic contrast. + +[596] Schumpeter's contrast between statics and dynamics is in most +essentials closely parallel to Veblen's contrast between the theory of +wealth and the theory of prosperity, and his main conclusions resemble +Veblen's, despite Schumpeter's optimism and Veblen's pessimism, and +despite temperamental and methodological differences. Most of my +criticisms of Veblen apply also to Schumpeter. + +[597] _Cf._ our discussion, _supra_, of the relation of credit to +futurity. + + * * * * * + + + + +TRANSCRIBER'S NOTES + + +1. Passages in italics are surrounded by _underscores_. + +2. Footnotes have been moved from the middle of a paragraph to the end +of the e-text. + +3. The original text includes Greek sigma character. For this e-text +version it has been replaced with its transliteration [Greek: S]. + +4. Fractions are indicated as in the example below: + 6-1/4 indicates whole number 6 with fractional part of one-fourth. + +5. The following misprints have been corrected: + "thing" corrected to "think" (page 124) + "theorrists" corrected to "theorists" (page 155) + "$75,00,000.00" corrected to "$75,000,000.00" (page 208) + "theory theory" corrected to "theory" (page 330) + "practive" corrected to "practice" (page 428) + "this held" corrected to "thus held" (page 442) + "in in" corrected to "in" (page 476) + "clasess" corrected to "classes" (page 509) + "legarthic" corrected to "lethargic" (page 573) + "enchancement" corrected to "enhancement" (page 591) + "74-71" corrected to "64-71" (ftn. 55) + "equilibbrium" corrected to "equilibrium" (ftn. 86) + "Instrnmeuts" corrected to "Instruments" (ftn. 163) + "reguularly" corrected to "regularly" (ftn. 545) + Missing text added in footnotes 412, 468, 595. + +6. Some of the page references in the index have been corrected. + +7. 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