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.