International Gold Movements."
[316] Italics mine.
[317] _Loc. cit._, p. 165.
[318] The resemblance of the view here maintained to that of Professor
Laughlin is at many points close. I am indebted to his _Principles of
Money_ for many suggestions.
[319] _Loc. cit._, p. 165, n. The doctrine is reiterated on p. 168.
[320] This is strikingly true in the stock market--the place where more
trade takes place than in any other market. See the figures in the
preceding chapter with reference to stock transactions, and the chapter
on "Bank Assets and Bank Reserves."
[321] For a history of this debate, with bibliography, see Laughlin's
_Principles of Money_, ch. 7, on the "History and Literature of the
Quantity Theory," esp. pp. 260 and 263-264. Laughlin shows the
connection of the currency principle and the quantity theory.
[322] It may be that in the brief discussion of elastic bank-notes on p.
173 (_loc. cit._), Fisher means to given an explanation of the theory of
elasticity from a quantity theory standpoint. The statement there is
that money not only tends to flow away from _places_ where prices are
high, but also from _times_ when money is high. "If the price-level is
high in January as compared with the rest of the year, bank-notes will
not tend to be issued in large quantities then. On the contrary, people
will seek to avoid paying money at high prices and wait till prices are
lower. When that time comes they may need more currency; bank-notes and
deposits may then expand to meet the excessive demand for loans which
may ensue. Thus currency expands when prices are low and contracts when
prices are high, and such expansions and contractions tend to lower the
high prices and to raise the low prices, thus working toward mutual
equality."
If this be the quantity theory account of elasticity--and it would seem
to be about the only thing the quantity theory could say--it is about as
far from giving an account of the real facts as any theory could be!
Something of this sort is suggested, perhaps, by the behavior of
Canadian bank-notes, which do expand in the fall, when prices of wheat
are lowest, and contract in January, when wheat prices are higher. This
grows, however, out of the peculiarities of an agricultural country, and
does not at all illustrate the general doctrine maintained. First, wheat
prices in the fall are low because wheat is most abundant then. Wheat
prices in January, under the influence of speculation, commonly differ
from wheat prices in the fall by an amount about equal to the elevator
charges, rattage, insurance, interest, and other carrying charges
involved. Second, wheat prices are only one element in the general
price-level. Low wheat does not prove that the level is necessarily low.
A good wheat crop may mean increases in general prices, and often does.
Third, and more important, the real reason for an expansion in Canadian
notes at such a time is that the wheat _has to be moved_. The farmers do
not want to carry it; the speculators are ready to carry it; and it must
be sold. Expanding _trade_, at the season, is the cause of expanding
bank-notes. The influence of the _price_ of wheat is exactly the reverse
of that which Fisher assigns. If the price of wheat is low in the
crop-moving season, _less_ notes will be issued than if the price is
high. In other words, the greater the increase in PT, not P or T alone,
the greater will be the expansion of bank-notes. Decrease either P or T,
and less notes will be issued.
In general, the phenomenon of elastic bank-credit is the phenomenon of
an expanding bank-note or deposit issue accompanied by rising prices and
volume of trade, and a decrease when trade and prices decrease. This is
all commonplace, but I feel it best to refer to familiar sources to show
how old and well recognized my statement of the case is. The following
is from Mill's _Principles of Economics_, Bk. III, ch. 24, par. 1: "Not
only has this fixed idea of the currency as the prime agent in the
fluctuations of price made them shut their eyes to the multitude of
circumstances which, by influencing the expectations of supply, are the
true causes of almost all speculations and of almost all fluctuations of
price; but in order to bring about the chronological agreement required
by their theory, between the variations of bank issues and those of
prices, they have played such fantastic tricks with facts and dates as
would be thought incredible, if an eminent practical authority had not
taken the trouble of meeting them, on the ground of mere history, with
an elaborate exposure. I refer, as all conversant with the subject must
be aware, to Mr. Tooke's _History of Prices_. The result of Mr. Tooke's
investigations was thus stated by himself, in his examination before the
Commons Committee on the Bank Charter question in 1832; and the
evidences of it stand recorded in his book: 'In point of fact, and
historically, as far as my researches have gone, in every signal
instance of a rise or fall of prices, the rise or fall has preceded, and
therefore could not be the effect of, an enlargement or contraction of
the bank circulation.'"
I see nothing in Fisher's discussion of credit to differentiate it from
the position of the old Currency School. And the reason is a very simple
one: Fisher has followed the quantity theory to its logical conclusions!
[323] See our chapter on the "Volume of Money and the Volume of Credit."
[324] How close the relation between loans and deposits is may be seen
from Professor Mitchell's chart, _Business Cycles_, p. 344. The same
chart exhibits the variations in the reserve percentage, which is very
much greater. The New York Clearing House banks, which we have seen
(_supra_, "Volume of Money and Volume of Credit") have a spread of from
24.89% to 37.59% in the yearly average of percentage of reserves to
deposits--a spread of over 50%--show a variation in yearly average for
the percentage of loans to deposits of only 24.3%--the range being from
83% to 104%. _Ibid._, pp. 325 and 331. For a partially different series
of years, see the chart of J. P. Norton, _Statistical Studies in the New
York Money Market_, facing p. 104.
[325] Neither deposits nor loans vary _proportionately_ with trade. Very
active trade may merely increase the activity of loans and deposits,
causing both to be shifted more rapidly--larger outgo, larger income,
loans more frequently contracted and paid off, larger amounts
"deposited" on a given day, but balances, both of loans and deposits, at
the end of the day not increased proportionately with the activity. This
is strikingly illustrated in the business of the stockbroker.
[326] _Supra_, p. 47.
[327] Italics mine.
[328] "Miscellaneous Articles on German Banking," in _Report of Nat.
Mon. Commission_, p. 175. Art. by Max Wittner and Siegfried Wolff.
[329] The figures are not easily compared, as the figures for
giro-_transfers_ do not indicate the volume of giro-_accounts_, which is
doubtless much smaller. I know no estimates for the turnover either of
notes or of bills of exchange. To determine what _proportion_ of
business is done by each would, thus, not be easy. The volume of bills
of exchange for the year is three times as great, for 1907, as the
figures for note issue. The giro-system, as is well known, is relatively
unimportant as compared with notes. But I do not undertake to assign
figures showing proportions of business done.
[330] Inland bills of exchanges in connection with the grain trade are
still very important, especially at Chicago and Minneapolis. The writer
has met frequent reference to cotton bills at St. Louis. Wool bills are
frequent in Boston.
[331] _Vide_ my criticism of his statistical fallacy in this connection,
in the _Annalist_ of Feb. 7, 1916. He rules out foreign trade from his
"equation of exchange" by the device of assuming that imports and
exports cancel one another. This, however, to the extent that it is
true, makes the bill of exchange more, rather than less, important as a
substitute for money and deposits. Fisher, _loc. cit._, pp. 306, and
374-375. See appendix to chapter XIII of the present book.
[332] _Vide_ ch. 16 for a more precise statement of this part of
quantity theory doctrine.
[333] _Purchasing Power of Money_, pp. 169-170.
[334] _Ibid._, p. 170.
[335] _Ibid._, p. 171.
[336] _Ibid._, p. 172.
[337] _Ibid._, p. 172. Italics mine.
[338] _Ibid._, pp. 174-181.
[339] I call attention, in passing, to Fisher's confusion, in this
sentence, of "commodities" with "trade." This occurs frequently in his
argument. _Cf._ pp. 225-226, _supra_.
[340] The Capitalization theory is briefly outlined by Boehm-Bawerk, in
the critical and historical volume of his _Kapital und Kapitalzins_
(English title of the volume, _Capital and Interest_), in his criticisms
of the theories of Henry George and Turgot. It has subsequently been
elaborated, and much improved, by Fetter, in his _Principles of
Economics_, and, more recently, has been restated, with mathematical
formulae, by Fisher, in his _Rate of Interest_. A good brief statement
will be found in Seligman, _Principles of Economics_, ch. on "The
Capitalization of Value." Extensive use has been made of it by Veblen.
More recently, it has been elaborated in the controversy over the theory
of interest participated in by Seager, Fisher, Brown and Fetter, in the
_American Economic Review_, 1912-13-14, and the _Quarterly Journal of
Economics_, 1913.
[341] Italics mine.
[342] The criticisms I should make of the present formulations of the
time-preference theory of interest, as presented by Boehm-Bawerk, Fetter
and Fisher, rest on the individualistic method of approach, and are at
many points analogous to the criticisms I have made of the utility
theory of value. These criticisms need not affect the points at issue
here. On the particular point involved, I agree with Fisher that the
productivity theory gives a wrong answer.
[343] _E. g._, Fisher, _Purchasing Power of Money_, p. 179.
[344] This confusion is a companion of the confusion between volume of
_goods in existence_, or volume of _production_, and volume of goods
_exchanged_. The errors growing out of this confusion have been dealt
with in ch. 13, especially pp. 225-226. Virtually all quantity theorists
make both these mistakes.
[345] The fundamental causation is psychological, and calls for a theory
of _value_, as distinguished from exchange-relations.
[346] _Supra_, chapter on "Velocity of Circulation."
[347] This distinction is clearly made and developed by von Wieser, in
the two articles referred to in our chapter on "Marginal Utility." It is
used by him in criticisms of the quantity theory. "Der Geldwert und
seine geschichtlichen Veraenderungen," _Zeitsch. fuer Volkswirtschaft,
Sozialpolitik und Verwaltung_, XIII, 1904; discussions in _Schriften des
Vereins fuer Sozialpolitik_, 1009, no. 132. A similar distinction runs
through J. A. Hobson's _Gold, Prices and Wages_, London, 1913. The
present writer had worked out the line of argument here presented before
reading either of these discussions.
[348] I have chosen maid-servants, to avoid complications of costs of
production in the reasoning that might come if other labor, engaged in
producing goods for the market, were selected. To tighten the argument a
tittle further, I assume that the masters receive their monthly incomes
on the first day of the month; that they pay the maids on the same day;
that the rest of the expenditures, both of masters and maids, are strung
out through the rest of the month.
[349] _Op. cit._, p. 27.
[350] A possible alternative interpretation of Professor Fisher's
conception is suggested in two or three sentences in the passage of the
_Purchasing Power of Money_ I have been discussing. On p. 175 he makes a
distinction between individual prices _relatively to each other_ and the
price-level. But the distinction which he _discusses_ in the passage as
a whole is between the price-level and individual prices _not_
considered in relation to each other. Comparison, moreover, with his
original enunciation of the notion (Papers and Discussions, 23d Annual
Meeting of the American Economic Association, pp. 36-37), would serve to
justify the interpretation I give, as nothing at all is said there about
super-ratios between individual prices. But the internal evidence is
even more convincing. Demand and supply, and cost of production, find
their problem, not in the relation between the money price of aspirin
and the money price of caviar, but in the money-price of aspirin or the
money-price of caviar considered separately. Professor Fisher thus
conceives supply and demand in his _Elementary Principles_ (p. 260).
This interpretation is especially necessary, since Professor Fisher is
joining issue with writers who surely use demand and supply and cost of
production as means of explaining money-prices, and not super-ratios
between them. Further, the price-level is _not_, on Professor Fisher's
own scheme, a factor in determining the relations of the prices of sugar
and of wheat _inter se_. With a given price-level, wheat might be worth
a dollar and sugar nine cents, and the ratio of their money equivalents
would be 100:9; with a price-level twice as high, wheat would be worth
two dollars, and sugar eighteen cents, but the ratio between their money
equivalents would be still 100:9. The whole discussion is quite
meaningless unless the contrast be between concrete money-prices of
particular goods, and their average. On either interpretation, moreover,
my criticism of the exalting of the average into an entity would stand.
[351] _Purchasing Power of Money_, pp. 175-179.
[352] I am glad to find myself in agreement with Professors Laughlin and
Kemmerer in holding that this notion of Professor Fisher's is untenable.
"The distinction Professor Fisher draws between the prices of individual
commodities and the general price-level appears to me, as to Professor
Laughlin, to be untenable. It is, moreover, contradictory to his general
philosophy of money. His index numbers recognize no general price-level
distinct from individual prices.... Professor Fisher's illustration of
the ocean would be more apposite if he called it a lake whose level was
continually changing, and if he considered each particular wave as
extending to the bottom." Kemmerer, _Papers and Discussions_, 23d Annual
Meeting of the American Economic Association, p. 53. At the same time, I
agree with Professor Fisher that there must be something more
fundamental than the particular prices to make the scheme work. This
something I find in the absolute value of money.
[353] _Loc. cit._, p. 14.
[354] _Cf. Social Value_, chs. 2 and 11, and "The Concept of Value
Further Considered," _Quart. Jour. of Econ._, Aug., 1915. See also,
_supra_, the chs. on "Value," "Supply and Demand," "Cost of Production,"
and "Capitalization."
[355] This tendency may be more than offset by the increasing
significance of money as a "bearer of options" or "store of value" in
periods of panic and depression. See, _infra_, the chapter on "The
Functions of Money," and Davenport, _Economics of Enterprise_, pp.
301-03.
[356] "Agricultural Credit in the United States," _Quart. Jour. of
Econ._, Aug., 1914, p. 708, n.
[357] Iowa farm lands are exceedingly active, 18% of the farms being
sold annually. The Mississippi lands are much less active. I am indebted
to Dr. Pope for information regarding Iowa on this point.
[358] The Single Taxer could at least retort that this need not protect
landlords in countries, like England, which lend surplus capital abroad.
[359] _Cf._ Trosien, _Der landwirtschaftliche Kredit und seine
durchgreifende Verbesserung_, p. 29, cited by J. E. Pope, _loc. cit._,
p. 705, n.
[360] This was seen by Mill, (_Principles_, Bk. III, ch. viii, par. 4),
and has been especially emphasized by Laughlin, _Principles of Money_,
ch. 10. _Cf._ A. C. Whitaker's discussion in the _Quart. Jour. of
Econ._, Feb. 1904.
[361] _Supra_, p. 124, and ch. on "Dodo-Bones."
[362] Comptroller of the Currency estimates the State bank-notes in 1861
at 202 millions; in 1862, at 183 millions. _Report of the Comptroller of
the Currency_, 1915, vol. II, p. 37.
[363] W. C. Mitchell, _History of the Greenbacks_, ch. on "The
Circulating Medium," and _passim_.
[364] See Conant, _Modern Banks of Issue_, New York, 1896, p. 114. An
interesting analysis of the course of the gold premium and of prices
during the period of the Bank Restriction in England, and of the
controversies relating thereto, will be found in Knies, _Der Credit_
(vol. II of _Geld und Credit_), pp. 247 _et seq._ The same period is
studied in detail by Thos. Tooke in his _History of Prices_.
[365] _Money and Monetary Problems_, p. 105, and preceding.
[366] Nicholson, _loc. cit._, 84ff.
[367] _Ibid._, 76ff.
[368] _Cf._ Laughlin, J. L., _Principles of Money_, and Scott, W. A.,
_Money and Banking_.
[369] _Cf._ _infra_, our discussion of credit. It is not maintained that
credit needs to be based on _physical_ goods, but it is maintained that
credit is based on _values_, which are generally not the value of a sum
of gold.
[370] I have elaborated this notion in a hypothetical case in the
chapter on "Dodo-Bones," to which I would now refer. See also the
analysis of an "ideal credit economy" in the discussion of reserves in
the section on Credit, in Part III.
[371] _Infra_, the discussion of reserves in Part III.
[372] _Cf._ the chapter on "The Origin of Money," _infra_.
[373] See especially _History of the Greenbacks_, pp. 188ff.; 207-208;
275-279.
[374] Various efforts have been made by adherents of the quantity theory
to meet the facts developed by Mitchell with reference to the
Greenbacks. Thus, it has been suggested that the coming to par of the
Greenbacks shortly before the resumption of specie payments was an
accidental coincidence, due to the fact that the volume of trade in the
United States just happened to grow to the right amount to bring the
Greenbacks to par at that time. No statistical evidence has been offered
for this thesis, I believe. It is, indeed, the only logical thing which
a quantity theorist could say on the matter, except one alternative, (F.
R. Clow, _J. P. E._, vol. II, p. 597) namely, that if the Greenbacks
should exist in such quantity that, under the quantity theory, their
value ought to fall below the discounted future value of the gold in
which they were to be redeemed, speculators would take them out of
circulation, holding them for the interest, and so reduce their quantity
that the value would rise to that discounted future value. The first
thesis, that based on putative changes in the volume of trade, though
highly improbable in fact, is logically possible. The second thesis,
however (_Purchasing Power of Money_, p. 261) meets serious
difficulties. What motive would a speculator have for taking the
Greenbacks out of circulation, and hoarding them? The answer is, he gets
thereby the "interest," as the Greenbacks approach the date for
redemption in gold. If this were the only way in which he could get this
gain, the answer would be good. But there is another way in which he can
get it, and something more besides, namely, by _lending out_ his
Greenbacks. In that case, since the creditor gets the full benefit of an
appreciating standard of deferred payments, he would get all the
"interest" which he could get by hoarding, and, in addition, he would
get contract interest on his loan. Of course, if the principle of
"appreciation and interest" worked out with perfect smoothness, he would
find his contract interest reduced as the other rose, and one might even
expect, if the Greenbacks were very redundant, that contract interest
would disappear. There is no evidence that this did happen, however! And
so long as any contract interest existed, we have a thoroughly valid
reason why a holder of Greenbacks would lend them rather than hoard
them.
Another effort to harmonize the facts with the theory consists in the
contention that _anticipated_ future increases in the Greenbacks would
work in the same way as actual increases. But this is to shift the whole
basis of the quantity theory, which rests in the notion of a mechanical
and--in the mass--unconscious equilibration of quantity of money and
number of exchanges. The quantity of money is not increased until it is
increased! _Cf._ Mill, _Principles_, Bk. III, ch. 12, par. 2, and Jos.
F. Johnson, _Money and Currency_, Rev. ed., p. 235.
Professor Fisher has another way to meet the facts of the Greenback
regime, and that is by holding that they prove his case! I do not think
that anyone, however, who examines the figures he offers on p. 260
(_loc. cit._) will be impressed by the degree of concomitance between
money and prices which they exhibit, especially after Mitchell's careful
analysis of changes in detail.
At another point, Professor Fisher maintains (p. 263) that the rapid
changes in gold premium which came with news from the military
operations (_e. g._, the 4% drop in Greenbacks after Chickamauga), were
due to alterations in velocity of circulation and in volume of trade! As
the gold market usually got the news by wire, before the newspapers got
it, however, this thesis is not very convincing.
[375] Kemmerer, E. W., _Money and Credit Instruments in their Relation
to General Prices_, New York, 1907; Fisher, _Purchasing Power of Money_,
New York, 1911; subsequent yearly continuations of "The Equation of
Exchange" in the _American Economic Review_. The references here, as
throughout, are to the 1913 edition of Professor Fisher's book.
[376] _History of Prices._
[377] To this type would belong Professor Fisher's figures with
reference to the years, 1860-66 on p. 260 of his _Purchasing Power of
Money_.
[378] This relates particularly to Fisher's figures.
[379] _Loc. cit._, p. 298.
[380] _Ibid._, p. 297.
[381] _Cf._ our chapter, _supra_, on the "Equation of Exchange."
[382] These are the "finally adjusted" figures. _Loc. cit._, 304.
[383] _Ibid._, p. 277. Fisher's estimate for V, as corresponding more
closely to Kinley's figures for the proportions of money and checks in
trade, is to be preferred to Kemmerer's. _Cf._ our comments on this
point, _infra_, in this chapter. Even the figures for M' are not
correct, since they do not include deposits growing out of "morning
loans," cancelled during the day. _Infra_, ch. 24.
[384] _Report of the Comptroller_, 1896; _The Use of Credit Instruments
in Payments in the United States_, National Monetary Commission Report,
Washington, 1910.
[385] I am indebted to the _Annalist_ for permission to use here
materials first published in the _Annalist_ in articles by the present
writer: "Home vs. Foreign Trade," Feb. 6, 1916; "Tests of Home Trade
Volume--a Rejoinder," March 6, 1916; "Home Trade Volume," March 20,
1916, p. 377. To these articles Professor Fisher replied: "A
Multi-Billion Dollar Nation," _Annalist_ Feb. 21, 1916; and "Over and
Under Counting," _Ibid._, March 13, 1916.
[386] Except checks deposited by one bank in another. Kinley's figures
exclude these in 1909, but not in 1896.
[387] The methods and data employed by Professor Fisher are described at
length in his _Purchasing Power of Money_, ch. XII, and Appendix to ch.
XII.
[388] M' is the _average_ of bank deposits, as shown by the balance
sheets, for all banks in the country for the year. Throughout, the
reader must distinguish this from the "deposits" of Kinley's
figures--amounts "deposited" on March 16.
[389] It is easier, sometimes, to make an assumption regarding a set of
facts than to find out what they are! In this case, some work was
involved. Old newspapers had to be hunted up for various cities, and
letters had to be written, to find out, for various cities, (a)
clearings for March 17, 1909, and (b) the number of banking days in the
year 1909. This work was done by Mr. N. J. Silberling, who got figures
from 12 cities which had 69% of all clearings outside New York. These
cities are: Chicago, Philadelphia, Boston, St. Louis, Pittsburg, San
Francisco, Baltimore, New Orleans, Atlanta, Providence, St. Paul, and
Seattle. The daily average of clearings for these cities in 1909 was
$136,222,436; the actual clearings for March 17, 1909, was $132,961,273.
The ratio of average daily clearings to actual clearings on March 17 was
1.0245:1. The increase needed in the figure for deposits outside New
York, then, was only 2.45%. Mr. Silberling, wishing to be conservative
in view of the 31% of outside clearings not investigated, allows outside
clearings to be 3% below normal. On this basis, following Professor
Fisher's method of computation, he multiplies the deposits assigned by
Professor Fisher to New York by 1.28, and the deposits assigned to the
country outside by 1.03, getting total deposits for the day of 1.11
billions, as against Professor Fisher's figure of 1.20 billions, and a
total for the year of 333 billions, as against a total obtained by
Professor Fisher of 364 billions.
[390] To this 786 millions is added all that comes from the erroneous
assumption regarding outside clearings, when figures for the whole year
are obtained. Country deposits, for the year, are thus still further
exaggerated by 31 billions!
[391] _The Use of Credit Instruments_, etc., p. 152. There is abundant
evidence in Dean Kinley's figures that only a decidedly minor part of
the amount (373 millions) of checks allowed by Professor Weston for the
non-reporting banks could have been outside the larger cities. The
amount deposited in a day in a country bank is so small that a great
multitude of these banks would be required to show as much as a single
New York City institution. Thus, ninety banks (27 national banks, 58
State banks, 3 private banks, 1 stock savings bank, 1 trust company) in
Arkansas, report only $728,148 in checks, an average of $8,090 per bank.
If all the 13,000 non-reporting banks were country banks, and if this
ratio held, we should have 105 millions more for the day (instead of
Professor Weston's 373 millions), or 31 billions more for the year. This
average is based chiefly on State and national banks. The average is too
high for the private banks (whose daily average as reported is $4,010),
and for the mutual savings banks (whose daily average is $1,254). It is
well above the daily average of the stock savings banks, which are, in
many States, practically commercial banks ($6,405). In the non-reporting
banks there are comparatively few national banks, and about 5,000
private banks and savings banks, of these the great majority being
private banks. We cannot make up the 373 millions in the country
districts. Nor can we make up the 373 millions by taking in all the
reserve and central reserve cities, exclusive of New York. Chicago, in
the returns, shows 42.6 millions in checks; St. Louis, 14 millions;
Boston, 48.8 millions; Philadelphia, 28.6 millions; the other reserve
cities show 40.2 millions--a total of 174 millions. If we doubled the
returns for these cities, we should still be 200 millions short of the
373 millions added by Professor Weston to the total! Neither in the
country districts, nor in the major cities outside New York can we find
enough to make up that addition. Very much of the amount added for
non-reporting banks must be found in New York City itself.
[392] Dean Kinley's questionnaire asked the banks reporting their
deposits for the day to exclude deposits made by other banks. These
deposits were not excluded in the 1896 investigation.
[393] House Committee on "Money Trust." Feb. 28, 1913. Pp. 57, 78, 145.
[394] _Cf._ _supra_, and _infra_ our discussion of the volume of trade,
and _infra_, our discussion of credit, particularly the analysis of
bank-loans.
[395] _Vide_ the opinion expressed by an official of a New York trust
company, quoted below, on p. 346.
[396] _Cf._ Horace White, _Money and Banking_, 5th ed., p. 364.
[397] Kirkbride and Sterret, _The Modern Trust Co._, New York, 1905, pp.
59-60; Cannon, _Clearing Houses_, _Nat. Mon. Com. Report_, p. 178;
Conant, _Principles of Money and Banking_, II, p. 244.
[398] Inquiry was also made of Professor George E. Barnett, who had
cited the figures given by the New York Supt. of Banks at p. 133 of his
_State Banks and Trust Companies_. Professor Barnett writes, in part, as
follows: "I made no independent inquiry at the time, and accepted the
statement of the superintendent of banks without critical examination of
its basis. From what you say, it appears highly probable that he was
mistaken in his conclusions. The only question in which I was interested
was whether the reserves of the trust companies could be reasonably
lower than those of the national banks. I did not care so much about the
exact ratio of clearings and only quoted that incidentally." For the
purposes which both Professor Barnett and Mr. Williams had in view, the
exact ratio was unimportant. The higher figures which I have given above
would support the thesis in which both were interested, namely, that
trust company accounts are less active than bank accounts, and so lower
reserves may be safely held by trust companies than by national banks.
[399] Fisher, _loc. cit._, p. 444.
[400] P. 443. Other discussions of this investigation are in the
_Journal of the American Bankers' Association_, Jan. 1914, p. 487;
_Ibid._, Feb. 1915, p. 555; _National Banker_, March, 1915.
[401] None of the cities covered in the figures given in the _Annalist_
were in New York State. Kinley's figures show that the percentage of
checks received in deposits of March 16, 1909, in banks outside New York
State was 91%. _Loc. cit._, p. 180.
[402] Multiplying the 408 millions of checks deposited outside New York
on March 16, 1909 by 303, the assumed number of banking days, gives
123.6 billions. Probably, therefore, 124 billions is too small a figure.
But we should be slow in modifying a figure based on 17 months'
observations because of the figures from one day's observations.
[403] I have greater confidence in this conclusion, since seeing a
letter from Mr. Howard Wolfe, who made the investigation of outside
clearings and "total transactions" for the American Bankers'
Association, to Mr. Osmund Phillips, Editor of the _Annalist_. Mr. Wolfe
writes: "I do not believe that the experience of the New York banks
would differ from that of other institutions which now supply [these
figures]."
[404] My information on this point comes from Professor O. M. W.
Sprague. It is corroborated by an official of the Bankers Trust Company
in New York.
[405] _Vide_ Rodney Dean, of the Fifth Avenue Bank, New York, "The
Problem of Collecting Transit Items," _Journal of the American Bankers'
Association_, Jan. 1914, p. 537. Boston inaugurated the system in
1890-1900; Kansas City five years later. Since the above was written, I
have learned that New York, in recent months, has introduced the new
system. This does not affect our argument regarding the figures for
1909.
[406] Since the foregoing was written, my attention has been called by
Mr. Osmund Phillips, Financial Editor of the New York _Times_, and
Editor of the _Annalist_, to indirect ways in which items on out of town
banks sent to New York for collection will affect New York clearings.
Country correspondent banks to which New York banks send these items for
collection, may remit for them in four ways: (1) by sending cash; (2) by
sending items on out-of-town banks, which the New York bank will send on
to some other correspondent for collection; (3) by draft on the New York
bank which has sent the items to be collected; (4) by draft on some
other New York bank. In the last case, New York clearings are affected.
The first case is not, quantitatively, important. The second and third
cases would seem to be the normal types, assuming correspondent
relations between New York banks and country banks to be _reciprocal_,
since the New York bank would be disposed, as far as possible, to turn
over its collection business to its own depositors among the country
banks. Mr. Phillips says, however, that the fourth case is important. To
the extent that this is true, our conclusion that out of town collection
items do not affect New York clearings must be modified, and it becomes
a matter of importance whether these items are large or small. My
information, as stated above, is that Chicago exceeds New York City in
this.
If, however, the Kansas City and Boston arrangements held in New York,
these collection items would be represented _twice_ in New York
clearings. The fact that the items do not themselves get into the
clearings remains.
Direct information regarding New York clearings is very desirable. Our
indirect approach must be considered inconclusive until more detailed
figures for New York City are at hand. We need figures covering all
types of banks in New York, for a period of, say, a year (to allow for
seasonal changes), in which deposits made by one bank in another are
separated from other deposits. National banks alone would exaggerate the
item of deposits by one bank in another, especially as they are the
depositories of the great private banks.
[407] Or, in some cases, taking the place of cash dealings between banks
and a local clearing house. On the face of it, it is incredible that
_balances_ between cities, or _within_ cities, after the country
clearing houses have done their work, should be so great as to account
for a very great part of New York clearings. These balances between
cities other than New York, and balances within country clearing houses,
must be a minor fraction of _country_ clearings, and country clearings
are little more than half of New York clearings. Ordinary commerce, as
shown in chapter XIII, cannot give rise to great sums in the aggregate,
to say nothing of giving rise to great _balances_.
[408] The whole thing is summed up on p. 25 of the Comptroller's
_Report_ for 1892.
[409] _Cf._ Kemmerer, _Money and Credit Instruments_, p. 117.
[410] _Annalist_, July 6, 1914, p. 8. The editor of the _Annalist_ gives
me the following information: data for twenty banks, six in New York and
fourteen in Chicago, Philadelphia, Boston, and St. Louis, for the week,
Aug. 28-Sept. 2, 1916, show that clearings are 71% of "total
transactions" in New York, and about 40% in the other cities. These
figures are all for national banks, except for one bank in St. Louis.
[411] There is one further generalization developed in connection with
Mr. Wolfe's investigation of the ratio of clearings to "total
transactions" which seems to have relevance here, though I am not sure
how it should be interpreted. The average ratio, as stated, is about
40%. This varies, however, for different cities. "The rule seems to be
that the larger the proportion of bank deposits to individual deposits,
the smaller will be the figure representing this ratio. In Cincinnati,
for example, it is 31.4% while in Los Angeles it is 59.7%." (_Jour. of
American Bankers' Ass'n_, Jan. 1914, p. 487.) How safely based this
generalization is cannot be told from the context, as no further facts
are offered. Nor is its bearing on the question at issue, as to whether
or not New York clearings bear a higher ratio to New York deposits than
country clearings do to country deposits, entirely clear. It would seem
to indicate that deposits made by outside bankers in the banks of
reserve cities make smaller contributions to clearings than individual
deposits do, and this would fit in with the fact that checks on outside
banks, deposited for collection by one bank in another, do not get into
clearings. What further explanation or significance it has I leave to
the reader. It is possible that there are a number of important relevant
facts missing regarding New York clearings, and that the conclusions
here reached may require later revision.
[412] _Loc. cit._, p. 304.
[413] But not as a correct estimate of M'V' for the equation of
exchange! We do not know what part of these checks were used in "trade."
_Cf._ our discussion of the estimate of T, _infra_.
[414] Kemmerer does not do this, but takes total clearings for the
country as his index of variation. _Loc. cit._, 118-120. His figures for
"check circulation" are, thus, more variable than Fisher's. In this,
Kemmerer's results are much to be preferred.
[415] I have taken the figures for clearings from Professor Fisher's
table, _loc. cit._, p. 448.
[416] _Loc. cit._, p. 304. _Cf._ our chapter on "Velocity of
Circulation," _supra_.
[417] _Loc. cit._, pp. 477-478.
[418] There is, of course, the further point, to be emphasized in the
discussion of T, _infra_, that MV (and hence V), assuming the
calculation otherwise correct, is too large, to the extent that it
includes tax payments, loans and repayments, dealings between agent and
principal, etc. But this criticism does not so clearly apply to MV as it
does to M'V'.
[419] _Business Cycles_, p. 308.
[420] That volume of trade and volume of physical goods are virtually
interchangeable in Fisher's thought is strikingly illustrated on p. 195
of the _Purchasing Power of Money_: "A doubling in the quantities of all
commodities _sold_, or (_what is almost the same thing_) a doubling of
the quantities _consumed_." Italics are mine.
[421] This is strictly true only of the part of T which comes from the
figure for M'V', 353 billions. In calculating MV, Professor Fisher
introduces more complexities, into which we shall not enter, as the
absolute amount is small--only 34 billions!--and the possible error from
this source not great enough to affect a calculation where 20 billions
one way or the other is within the "margin of error."
[422] _Vide_ _Annalist_, Feb. 17, Feb. 21, March 6, March 13, and March
20, 1916, for a discussion of this point by Professor Fisher and the
present writer.
[423] _Op. cit._, pp. 112-113. It is interesting to note that Kemmerer's
argument takes the form of proving, not that bank transactions do not
overcount trade, but merely that they do not _undercount_ trade. With
this contention I am in hearty agreement! The overcounting is worse in
Kemmerer's figures for 1896 than for Fisher's in 1909, since the 1896
figures included deposits made by one bank in another, while the 1909
figures do not. _Cf._ Kemmerer, p. 105, and Kinley, in _Report of the
Comptroller_ for 1896 and in the 1909 monograph, _passim._
[424] _Vide_ the present writer's discussion in the _Annalist_, March 6,
1916, p. 313.
[425] I am informed by Mr. B. F. Smith, Treasurer of the Cambridge Trust
Company, that the practice of having separate dividend accounts is a
very widespread one, especially with the larger corporations.
[426] _Statistics of Railways_, 1909, p. 71.
[427] Professor Fisher, in his _Annalist_ article of Feb. 21, 1916,
quotes Dean Kinley (_The Use of Credit Instruments_, p. 151), as holding
that duplications have largely been eliminated from his 1909 figures.
Professor Fisher overlooks the fact that Dean Kinley is here referring,
not to money value of trade, but merely to volume of checks. Dean Kinley
merely indicates that by eliminating deposits made by one bank in
another, he has avoided having the same check counted in deposits made
in two or more banks on the same day. Even this is not wholly avoided.
(_Ibid._, pp. 158-159.) It was extensive in the 1896 figures. Dean
Kinley thinks, properly enough, that he has a sufficiently close
approximation to the volume of checks, for the reporting banks, but what
the checks were drawn for he does not undertake to say. His problem was
_payments_, not _trade_. From the angle of volume of trade, he finds
duplications even in the retail deposits (_Jour. of Polit. Econ._, vol.
5, p. 165).
[428] _Annalist_, March 13, 1916, p. 344.
[429] Chapter on "Volume of Money and Volume of Trade," pp. 241-248. We
really did not "find" nearly that much. The figures assigned to retail
and wholesale trade rest on figures for retail and wholesale bank
"deposits," and are, especially the wholesale figures, much too large.
[430] _Annalist_, Feb. 21 and March 13, 1916.
[431] _Loc. cit._, p. 180.
[432] _Ibid._, pp. 166-167; 187; 273.
[433] Pratt, _loc. cit._, p. 166.
[434] _Ibid._, p. 187.
[435] Emery, _Speculation on the Stock and Produce Exchanges_, pp. 89;
74-95. A Boston broker expresses the opinion that the magnitude of
artificial borrowing to make the clearance sheet misleading is not
great, so far as Boston is concerned. I have got no estimates for New
York.
[436] The banks, of course, are not borrowing stocks.
[437] Van Antwerp, _The Stock Exchange from Within_, New York, 1913, p.
290
[438] It recently happened that Alaska Gold was being "loaned flat" on
the Boston Stock Exchange, which was a prelude for a six point advance
in the next two or three days, as the bears were driven to cover.
[439] One factor complicates this. Are all the hundred share sales
recorded? In our chapter on "Volume of Money and Volume of Trade," we
called attention to a statement to the effect that brokers get together
before the market opens, and compare "stop loss" orders, matching these
with other orders, with the understanding that they automatically go
into effect if the "market" reaches the prices indicated. The statement
indicated that this substantially increases sales beyond the recorded
totals, as such sales do not get on the ticker. I think, however, that
this cannot throw our reckoning out greatly. The great majority of sales
are not on "stop loss" orders. None of the sales of "floor traders," who
average a third of the total trading (_Pujo Committee Report_, Feb. 28,
1913, p. 45), would be on "stop loss" orders. The bulk of the rest is
not. Moreover, not all stop loss orders, by any means, would be executed
in this manner. It is not easy to see how, under the rules and practices
of the Exchange, many other sales could go unrecorded, except on days of
greatest stress. On September 25, 1916, when over 2,300,000 shares were
sold, the daily paper spoke of sales missed by the ticker, which was
swamped with sales to be recorded, as an item of some magnitude. But the
Ticker is wonderfully efficient. It sometimes gets behind the market by
several minutes, but it rarely misses anything, under ordinary
conditions.
[440] _Ibid._, p. 166.
[441] This explains the estimates of Wall Street men that the Clearing
House reduces checks by two-thirds. For _their purposes_, the saving is
almost that much, of the items offered for clearings. _Cf._ Van Antwerp,
_The Stock Exchange from Within_, pp. 121-122.
[442] _Ibid._, p. 273. There is one billion difference between Pratt's
estimate and mine. I incline to the view that mine is correct, the more
as he puts his figure, 14 billions, as a safe lower limit. But a billion
one way or the other is trifling!
[443] An official of the Bankers Trust Company has secured for me from a
broker at the "Money Post" an estimate of 20 to 25 millions as an
average, with 50 millions as a maximum, for 1915. The Pujo Committee, in
its report in 1913, p. 34, gives a similar estimate.
[444] P. 34.
[445] _Annalist_, Aug. 14, 1916.
[446] N. J. Silberling, "The Mystery of Clearings," _Annalist_, Aug. 14,
1916, p. 223.
[447] There is one further piece of evidence which has been obtained
through the courtesy of a New York brokerage house. At the request of
the gentleman who has supplied the figures, I have altered them by a
constant percentage, to prevent possible identification, but the
proportions among them hold as they were given. The figures show the
business of the house for the month of March, 1916. The figures show:
Market value of stocks and bonds bought, 1,644,630
Total deposits made during month, 1,475,502
Average borrowed from banks, 952,000
For this house, then, for this month, the deposits were less than the
value of securities sold, by 11.5%. The month, however, was unusual. It
was a month of reduced activity, following large activity. This is
strikingly shown by the figure for the _average_ bank loans for the
month--over two-thirds of the _total_ deposits for the month. The house
had a large bull _clientele_, which was holding its stocks, and not
selling on a bear market. The turnover was very slow, as Wall Street
goes. It was a time of extraordinarily easy money when banks called few
if any loans. The broker, in explanation of his figures, says: "The most
of our checks were to other brokers. Checks to banks about equaled
checks to customers. Your assumption that we did not pay off many loans
in March is, I think, right." The same broker states in another letter
that he thinks that, in general, the bulk of checks to and from brokers
are in dealings with banks. In this month, then, with this factor
reduced to a minimum, we still have deposits undercounting sales by only
11.5%. The figures do not prove my thesis that brokers' deposits greatly
overcount their sales, but they at least show that they do not greatly
undercount them. In view of the peculiarities of the month chosen, with
transactions between banks and brokers cut to the minimum, they are
quite consistent with the contention that normally the brokers' deposits
will much exceed their sales.
[448] Kemmerer's main figures are merely _indicia_ of variation, rather
than absolute magnitudes, for trade. On p. 136, _d._ (_loc. cit._),
however, he indicates that his figures for "total monetary and check
circulation" is also a figure for "total business transactions"--and
counts 89% of it as wholesale trade.
[449] _Cf._ the discussion of the relation of P and T in the chapter on
"The Equation of Exchange."
[450] _Op. cit._, p. 136.
[451] _Ibid._, pp. 70-71.
[452] _Loc. cit._, p. 487.
[453] Kemmerer does not accept Kinley's estimate of 75% for checks as
compared with money in payments as a "sure minimum" for 1896, but rather
counts it as a "fair maximum." (_Loc. cit._, p. 106.) Using this as a
basis, he gets a monetary circulation for 1896 of 47.7 billions, and a
"velocity of money" (since the monetary stock in circulation in 1896 was
a little over 1 billion) of 47. (_Loc. cit._, p. 114.) Kinley's fuller
investigation in 1909 has made it clear that his 1896 conclusions
understated, rather than overstated, the proportion of checks to money.
His "sure minimum" was needlessly low. He concludes in 1909 that 80 to
85% for checks is safe. (_Op. cit._, p. 201.) _Cf._ Fisher's comments,
_loc. cit._, pp. 430; 460 _et seq._ Fisher's V is about half as great as
Kemmerer's, and varies to some extent. I think Fisher, since his results
are closer to Kinley's later figures, has made much the better estimate
here.
[454] Since I have already compressed the contents of a book of 200
pages into Chapter I of the present book, it seems undesirable to
attempt here a further compression of that chapter. These theses,
therefore, do not give the substance of the social value theory.
[455] Menger, "Geld," _Handwoerterbuch der Staatswissenschaften_;
Carlile, _Evolution of Modern Money_.
[456] We should make a slight and unimportant qualification as to
Kemmerer. _Cf._ our chapter on "Dodo-Bones," _supra_.
[457] It seems necessary to point out this essential lack of correlation
between value and exchangeability, since Mr. Horace White, in his _Money
and Banking_ (5th ed., p. 135), identifies value and exchangeability:
"Value is an ideal thing in the same sense that weight is. The former
means exchangeability; the latter means force of gravity. A dollar is a
definite amount of exchangeability." _Cf._ also Amasa Walker's
contention that "exchangeable value" is tautology, equivalent to
"exchangeable exchangeability!" _Science of Wealth_, 5th ed., p. 9.
_Cf._ my article "The Concept of Value Further Considered," _Quart.
Jour. of Econ._, Aug. 1915, pp. 696 _et seq._
[458] This is stated by Schumpeter, so far as land is concerned. _Vide
Quarterly Journal of Economics_, Aug. 1915, p. 704. It is due Menger to
point out that he does not make the distinction between value and
exchangeability which I have just made. His theory rests in an analysis
of the saleability or exchangeability of goods. But Menger's conception
of value is essentially different from my own. He commonly means by
"_Wert_" merely subjective value, or marginal utility. He objects to the
notion that one good measures the value of another, or that goods, when
exchanged, are equivalent in value, on the ground that there must be a
surplus in value (subjective value) for each exchanger, or exchange
would not take place. He has, as a primary concept, no absolute social
value. "_Tauschwert_" is for him a relative value, though he is finally
driven to constructing what is virtually an absolute value notion, by
distinguishing "_aeusserer Tauschwert_" from "_innerer Tauschwert_" in
the case of money, the latter being concerned exclusively with the
causes affecting prices _from the side_ of money, ignoring changes
in prices due to causes affecting goods. (_Cf._ art. "Geld," in
_Handwoerterbuch der Staatswissenschaften_, 3d ed., pp. 592-593. He does
not make this distinction in developing the theory of saleability of
goods, however. _Cf._ the chapter, _supra_, on "Marginal Utility and the
Value of Money." It is absolute social value which I am here
distinguishing from exchangeability. It is equally true, however, that
subjective value and exchangeability have no necessary correlation.)
[459] _Cf._ A. S. Johnson, "Davenport's Competitive Economics," _Quart.
Jour. of Econ._, May, 1914, p. 431.
[460] The man who wishes to "break" a twenty dollar bill may well have
to go through Menger's process, getting two tens from one man, breaking
one of these into two fives with another, and so on. Or he may have to
buy something which he does not want to get "change."
[461] Ridgeway, _Origin of Metallic Currency_, p. 327; Carlile,
_Evolution of Modern Money_, p. 233. Grain is said to have been used in
ancient China as money,--not as a standard of value, but as a medium of
exchange. Chen Huan Chang, _Economic Principles of Confucius and his
School_, vol. II, p. 437.
[462] Written in 1914.
[463] The Hindu law of inheritance is a factor here. The Hindu woman may
retain, after the death of her husband, father or brother, the ornaments
he has given her during his lifetime. But all of the rest of the family
property must go to male heirs, even remote male heirs coming in before
the closest female relatives.
[464] _Cf._ Carlile, _Monetary Economics_, introductory chapter. The
whole question may hinge on terminology, so far as Carlile is concerned.
It is not clear what he means by "value of gold."
[465] _Cf._ Conant, _Principles of Money and Banking_, I, ch. 7, esp. p.
102.
[466] I do not believe that we have sufficient agreement among the best
students of the statistics of the precious metals to justify any
statistical conclusions regarding the laws governing the industrial
consumption of gold and silver. Even the facts as to the proportions of
annual production of gold in recent years going to money and to the arts
are in dispute. Thus, DeLaunay (_The World's Gold_, New York, 1908, p.
176), divides the annual output as follows: Exportation to the East, and
loss, 16%; coinage, 44%; industry, 40%. The industrial employments are
divided as follows: jewelry, 24% (of total annual gold production);
watch cases, 10%; gold leaf, 2.25%; watch chains, 1.75%; plate, 0.75%;
various uses, as pens, dentistry, chemical works, etc., 1.25%.
DeLaunay's competence as an authority is attested by various writers,
among them W. C. Mitchell (_Business Cycles_, p. 281). Mitchell,
comparing DeLaunay's estimates with divergent estimates of other
authorities, concludes that there is not sufficient evidence to justify
definite conclusions. I do not think that anyone who has read the
criticisms which Touzet has brought together (_Emplois Industriels des
Metaux Precieux_, Paris, 1911, pp. 49-52) of the methods employed in the
investigations by the Director of the United States Mint in 1879, 1881,
1884, 1886, and 1900, will have large confidence in the exactness of the
results reached in those investigations. (See annual reports of the
Director of the Mint for the years in question.) Touzet's careful and
elaborate study employs the figures of these investigations as the best
available, but with substantial misgivings. There are many indeterminate
elements in the problem, as shown by both Touzet and DeLaunay, among
them, the extent to which coin is melted down for industrial purposes.
The Director of the Mint would assign a much higher proportion of the
annual output to coinage than would DeLaunay.
Earlier studies, by Soetbeer and Suess, seem quite out of harmony with
these conclusions. (Suess, Eduard, _The Future of Silver_, Washington,
Government Printing Office, 1893, pp. 51-53.) Suess thinks that
virtually as much gold was going into the arts uses as was being
produced, in 1892, and quotes Soetbeer (_Litteraturnachweis_, p. 285) as
admitting that such a contention may not be demonstrable, but at the
same time holding that it cannot be disproved.
In the face of what seems to be a really indeterminate statistical
problem, I content myself with the theoretical conclusions in the text.
Because I cannot find adequate grounds for confidence in the main source
from which he has drawn his statistics, I refrain from a criticism of
the theory and method underlying Professor J. M. Clark's ingenious
effort to derive statistical laws for the elasticity of the arts demand
for gold. (_American Economic Review_, Sept. 1913.)
[467] _Cf._ our chapter on "Economic Value," _supra_, and "Social
Value," _passim_.
[468] F. A. Walker, _International Bimet_.
[469] See DeLaunay, _The World's Gold_, New York, 1908, p. 176.
DeLaunay's figures indicate that the use of gold for gold leaf and plate
is quantitatively a minor factor in the industrial consumption of gold.
Jewelry and watch cases are the most important items.
[470] Capital prices of lands and securities might well be lower, if
interest rates are markedly higher, and if land rents and "quasi-rents"
suffer from higher wages and higher interest.
[471] _Cf._ chapter on "Dodo-Bones," _supra_.
[472] Among the writers who have treated this topic, I would mention
especially Menger, "Geld," in _Handwoerterbuch der Staatswissenschaften_;
Laughlin, _Principles of Money_; Scott, W. A., _Money and Banking_;
Knies, _Das Geld_; Walker, F. A., _Money and Political Economy_; Conant,
_Principles of Money and Banking_; Seligman, _Principles of Economics_;
Johnson, J. F., _Money and Currency_; von Mises, L., _Theorie des Geldes
und der Umlaufsmittel_; Helfferich, K., _Das Geld_; Simmel, _Philosophie
des Geldes_; Davenport, H. J., _Economics of Enterprise_. The difference
between the standard of value (common measure of values) function, and
the medium of exchange function is particularly well illustrated by
Scott, _loc. cit._, ch. 1. The legal functions of money are especially
treated by Knapp, _Staatliche Theorie des Geldes_.
[473] For discussions of the idea of measuring values, and the
dependence of this on the conception of value as an absolute quantity, a
common or generic quality of wealth, see Knies, _Das Geld_, I, 113ff.;
Kinley, _Money_, 61-62; Merriam, L. S., "Money as a Measure of Value,"
_Annals of the American Academy_, vol. IV; Carver, "The Concept of an
Economic Quantity," _Quart. Jour. of Econ._, 1907; Laughlin, _Principles
of Money_, 1903, pp. 14-16; Davenport, _Value and Distribution_, p. 181,
n.; Anderson, _Social Value_, chs. 2 and 11, and "The Concept of Value
Further Considered," _Quart. Journal of Econ._, 1915; Helfferich, _Das
Geld_, 1903 ed., pp. 470-478; Scott, _Money and Banking_, ch. 1.
[474] See Scott, _Money and Banking_, ch. 3.
[475] A further reason for preferring "common measure of values" is that
expression carries dearly the connotation of absolute values. "Relative
values" cannot be "measured," _Social Value_, pp. 26-27.
[476] Current text-books, following the Austrian doctrine, define
production as the creation of "utilities." This is incorrect. Production
is the creation of _values_. _Cf. Social Value_, pp. 119 and 189.
[477] This is the view of H. J. Davenport (_Economics of Enterprise_,
pp. 301-302).
[478] Kemmerer has shown this to be true of bank reserves. As we shall
see, the reserve function is merely a special case of the "bearer of
options" function. For Kemmerer's discussion of business distrust, see
_Money and Credit Instruments_, pp. 124-126, and 144.
[479] "In New York, for instance, loans by banks 'on call' are subject
to repayment within an hour or two after notice is given that repayment
is desired." Conant, _Principles of Money and Banking_, vol. II, p. 56.
In general, the banks are content if the loan is repaid by 3 o'clock on
the day it is called.
[480] _E. g._, Cairnes, J. E., _Leading Principles of Political
Economy_.
[481] _One_ "pure rate" is a myth, but the notion has some significance,
as setting off a body of causes distinct from the money-market factors
under consideration. _Cf. supra_, the ch. on "The Capitalization
Theory."
[482] See von Mises, "The Foreign Exchange Policy of the
Austro-Hungarian Bank," British _Economic Journal_, 1909, pp. 208-209.
An able Boston broker, in Feb. 1917, calls attention to the growing
difficulty of placing long-time bonds, without very high yield, in view
of the scarcity of real capital, despite the exceedingly low
"money-rates." I venture to predict an increasing "spread" between
"money-rates" and the yield on long-time investments, the longer the War
lasts. The view of Davenport and Schumpeter (_Annalist_, Feb. 28, 1916,
and _Theorie der wirtschaftlichen Entwicklung_), which would deny the
validity of the distinction between money-rates and interest rates, and
would make the money-market phenomena the primary cause of all interest
phenomena, seems to me indefensible, alike in theory and in fact.
[483] _Cf._ the analysis of bank-loans in the United States, _infra_.
[484] Mitchell, _Business Cycles_, p. 146.
[485] _Journal of Political Economy_, XVI, May, 1908, pp. 273-298.
[486] Leipzig, 1905. This book has had wide influence on German thinking
on money. It is typical of the tendency in German thought to make the
State the centre of everything. Recognizing the historical fact that
money has originated in a commodity, it holds that the commodity basis
is a phenomenon of historical significance only, that modern money is a
creature of the State. The money-unit is not definable as a quantity of
metal, of given fineness, but rather is a "nominal" thing, present
monetary standards being defined by legal proclamation in terms of past
standards. The necessity for this reference to past standards grows out
of the existence of past _debts_. The State must preserve the continuity
of juristic relations, between debtors and creditors as elsewhere. Knapp
holds that the _Zahlungsmittel_ (legal means of quittance, legal tender)
function is the primary function of money, and that it is not a concept
subordinate to _Tauschmittel_ (medium of exchange). It is not necessary
for our purposes to take account of Knapp's theory in detail. He really
has little to say about the value of money. Indeed, he confesses, in a
later discussion, that his theory is not concerned with that subject!
(_Schriften des Vereins fuer Sozialpolitik_, No. 132, 1909, pp. 559-563.)
The amount of economic analysis in the book is not great. It is a
striking illustration of the fact that legal thinking is largely
concerned with _qualitative distinctions_, rather than with quantitative
causal conceptions. (_Cf._ my discussion in the chapter on "The
Reconciliation of Statics and Dynamics," _infra_, of the "statics" of
the law.) Knapp's book has a forbidding appearance, because of the large
number of new terms, based on Greek roots, which he has coined. The
German language is inadequate to express his ideas! The Germans
themselves have complained much of this. Careful reading of the book
discloses, however, that the new terms are admirably adapted to express
the distinctions he draws. I think, too, that English readers of the
book, who remember enough of their Greek to recognize an occasional
Greek root as vaguely familiar, will find less difficulty in giving
fixed meanings to his new terms than would be the case with new German
compounds. One who takes the trouble to master Knapp's vocabulary will
find the effort worth while. Knapp has a high order of dialectical
acumen. But the main part of the book has little direct bearing on the
problem of the value of money, whether one understand by "value of
money" the absolute social value of money, or the reciprocal of the
price-level. The main points to be drawn from his discussion are (1) the
fact that past debts may tend to sustain the value of an otherwise
worthless money; and (2) that the State's willingness to accept money
for taxes, etc., may also contribute to its value. Knapp lays heaviest
stress on this last point. He seems to concede, however, that the role
of the State here is not different from that of any other big factor in
the market, and that the State's power in this particular is a function
of the magnitude of its fiscal operations. Both of these doctrines fit
readily into my social value theory. Knapp's discussion of methods of
regulating the international exchanges by methods other than gold
shipments is interesting, and might well be studied by those who are
concerned with the exchange situation in the present war. His thesis
that the value of silver depended on the course of the exchanges between
gold and silver countries, instead of the course of the exchanges
depending on the values of gold and silver, seems to me an absurd
exaggeration of a minor qualification into a main theory. His doctrine
that international relations alone make the purely legal money, without
commodity basis, unsatisfactory, I do not accept. I have discussed this
general topic in my chapter on "Dodo-Bones," however, and may content
myself with now referring to that chapter. It is not true, as a matter
of fact, moreover, that the money-unit is no longer defined as a
quantity of metal. Our own American practice is sufficient evidence on
this point. Knapp has sought to generalize his own interpretation of the
history of Austrian paper into universal laws of money! That his
interpretations meet authoritative dissent in Austria is sufficiently
evidenced by von Mises' discussion, in his _Theorie des Geldes_ (ch. on
"Das Geld und der Staat"), and in his English article on "The Foreign
Exchange Policy of the Austro-Hungarian Bank," British _Economic
Journal_, 1909. The notion that the legal tender function is prior to
the medium of exchange function I regard as quite indefensible. It is
doubtless true, in certain cases, that a government may debase its
money, defining the new debased money in terms of the old, and that
people who have debts to pay may, for a time, accept the debased money
as a medium of exchange. But the limit of this is reached when the old
debts have been paid. Unless other factors (not necessarily redemption),
then come in to sustain the value, the value will sink, to a level
commensurate with the debasement. The value would generally sink to a
considerable degree, in any case, if only the legal factors worked to
sustain it. I have gone over this in the chapter on "Dodo-Bones,"
_supra_. It was only by being a valuable object, and commonly only by
being a medium of exchange, that the money could have become a means of
legal quittance in the first place. Men would not have made contracts in
terms of it, otherwise. And men would cease making contracts in it as
soon as it (or other things tied to it in value) ceased to be an
acceptable medium of exchange.
Knapp finds a good many phenomena in the history of money for which the
quantity theory, and the metallist theory, can give no explanation. He
has an exceedingly poor opinion of both theories, and makes many telling
points against both. In so far as his doctrine asserts that the
phenomena of money are matters of social organization, psychological in
nature, I find myself in harmony with it. My dissent comes when he seeks
to erect the abstractions of the jurist into a complete social
philosophy! Law is only a part of the system of social control, and
economic values, while influenced by legal values, are far from being
explained when legal factors only are taken into account. Legal factors
often play a more direct part in connection with the value of money than
in connection with other values, but they do not dominate the value of
money.
Recent German literature on money (_e. g._, Fr. Bendixsen, _Geld und
Kapital_, Leipzig, 1912) has been a good deal influenced by Knapp, and
there is a fair chance that American students may have to read his book
if they wish to understand the next decade of German monetary history.
It will be well for Germany if this is not the case!
[487] _Economics of Enterprise_, p. 257.
[488] _Cf._ Boehm-Bawerk's _Capital and Interest_, _passim_, particularly
his discussion of Hermann, for an exposition and criticism of the "use"
theory of interest.
[489] _Cf._ Clark, J. B., _The Distribution of Wealth_, pp. 210-245.
[490] This is not necessarily true among Asiatics, or on the East Side
in New York City.
[491] The adherent of the Ricardian analysis who would deny this may
fight it out with Clark, Fetter, and A. S. Johnson!
[492] A friendly critic--with a radically different theoretical point of
view--feels that I am here playing fast and loose with the word,
"value," meaning sometimes "total utility," sometimes "marginal
utility," sometimes "relative marginal utility," and sometimes "price."
I _never_ mean any of these things by "value," when used without
qualification, in this book. I mean always _social economic value_,
conceived of as _absolute_.
[493] I have been unable to satisfy myself that anyone has made a
sufficiently thorough study of the course of the gold premium on the
Rupee, the agio of the Rupee over its bullion content, or the course of
prices in India, during the period from 1893 to 1898, to justify
confident statements as to the comparative strength of different
elements in the explanation of that history. Kemmerer states (_Money and
Credit Instruments_, p. 38) that he can find no evidence at all to
support Laughlin's view of the matter. (See Laughlin, _Principles of
Money_, pp. 524 et seq.) J. M. Keynes, however, in his _Indian Currency
and Finance_, p. 5, says: "The Committee of 1892 did not commit
themselves; but the system which their recommendations established was
_generally supposed_ [Italics mine.] to be transitional and a first step
toward the _introduction of gold_ [italics mine.]." In the arrangements
of 1893, moreover, a ratio between English gold and the Rupee was
established, of 16d. to the Rupee, even though provisions for holding
the Rupee to this ratio were left till the establishment of the "gold
exchange standard," several years later. Keynes, on p. 3, discusses the
arguments of the silver party against the introduction of gold, which is
further evidence that the action of the Committee was understood as
looking toward a gold standard. There is _some_ evidence at least for
Laughlin's view. That his view offers a complete explanation, I think
unlikely.
Kemmerer's admirable _Modern Currency Reforms_ (Macmillan, 1916), is at
hand while the proof sheets are being revised. It is interesting to note
that he finds the statistical evidence regarding Indian prices, trade,
etc., far too scanty to justify positive conclusions as to the causes
governing the course of the rupee. He prefers, rather, to rest the case
for the quantity theory on _a priori_ reasoning and statistics for the
United States. _Loc. cit._, pp. 70-71. In the chapter on "Dodo-Bones," I
have suggested that India might come nearer than other countries to
actualizing the assumptions of the quantity theory. On Kemmerer's
showing, however, it appears to be a liability, rather than an asset!
[494] This is a national bank. In the same community, the writer asked
the president of a State bank about his gold reserve, and was told that
light-weight gold coin could not be used, since the State bank examiner
made a practice of _weighing_ the gold of State banks.
[495] Legal tender can add to value of money only when it confers an
option on the _debtor_. In the case discussed, it is the _creditor_ who
has the option. But options are not necessarily valuable.
[496] As Davenport has pointed out, money is really moneys--there is a
hierarchy. _Cf. Economics of Enterprise_, pp. 256-259.
[497] The restricted legal tender of small coins, where the coins are
limited in amount to the needs of retail trade, is virtually an
unrestricted legal tender, in practice, and amounts, in fact, to
redemption. The coins are capable of being used where large coins, of
standard metal, would otherwise be used, or where checks, redeemable in
standard coin, would be used. Legal tender is vastly more effective with
reference to a small part of the money system than it would be with the
whole of the money supply. The same is true of the privilege of using a
particular form of money in paying taxes. _Cf._ W. C. Mitchell's
discussion of the "Demand Notes," _History of Greenbacks_, _passim_.
[498] _Cf._ Mitchell's account, (_Ibid._, pp. 166-173), of the premium
on minor currency, during the Civil War. Pennies were used in rolls of
25 as a substitute for silver quarters, which had left the country under
Gresham's Law. The premium was due primarily to the need for small
change, rather than to bullion content, though the latter was a factor
even for coins made of baser metals, in 1864.
[499] _Cf._ my article in the _Annalist_, Feb. 7, 1916, "The Ratio of
Foreign to Domestic Trade," and the chapter, _supra_, on "The Quantity
of Money and the Volume of Trade."
[500] Kinley's figures show a much lower percentage of money than this.
He is anxious not to overestimate the extent to which checks are used,
however, and so gives the figures of 50 to 60% of checks as a safe lower
limit.
[501] _Cf. Social Value_, 183-184.
[502] _Cf._ Carver's contention that "the demand for money is a demand
for value." "Concept of an Economic Quantity," _Quart. Jour. of Econ._,
1907.
[503] _Cf._ Laughlin's _Principles of Money_, p. 73.
[504] The main modern type of loan for non-business purposes is the
public loan for war purposes, or to meet fiscal deficits. In the case of
war loans, the emergencies are often so great that the rate of interest
makes little difference.
[505] No longer true of Europe, probably, since the huge war debts have
been incurred.
[506] The interest so defaulted is cumulative, like a preferred
dividend, for years after 1909. Wall Street speaks of this issue as a
"half-bond."
[507] _Supra_, chapter on "Origin of Money."
[508] "It is needless to say that Government bonds always rank as the
very highest class of collateral, and the banks require no margin on
such security." Pratt, _Work of Wall Street_, 1912 ed., p. 287. This, it
need not be said, is not always true!
[509] Veblen has elaborated the doctrine that stocks and bonds are much
the same. _Cf._ the discussion in Meade's _Corporation Finance_ of the
relation of junior bonds and preferred stocks in reorganizations.
[510] I do not accept the imputation theory, or the capitalization
theory, without qualification, except as static first approximations.
Values of "factors of production" may easily become, and do become, in
large part independent of their "presuppositions," _Cf._ the chapter on
"Dodo-Bones", _supra_, and the chapter on "Economic Value."
[511] This would seem to be Davenport's view. See his article in the
_Quarterly Journal of Economics_, Nov. 1910.
[512] To a high degree, "good will," trade-marks, etc., are bankable
assets.
[513] _Social Value_, 1911, _passim_, especially ch. XIII. Cooley, C.
H., "Institutional Character of Pecuniary Valuation," _Am. Jour. of
Sociology_, Jan. 1913.
[514] _Cf._ my article, "Schumpeter's Dynamic Economics," _Political
Science Quarterly_, Dec. 1915, and the chapter on "Marginal Utility,"
_supra_. That the new bank-credit, without the painful _preliminary_
"abstinence" which the classical economics has stressed, is enough to
provide capital for a new enterprise is, as Schumpeter insists, true.
Schumpeter has made an important contribution in his emphasis on this
too much neglected point. But it should be noted that this does not
dispense with curtailing of consumption, and "abstinence." It merely
shifts the necessity for curtailing consumption to some one else. The
new plan of the dynamic entrepreneur, by means of bank credit, draws
labor and capital away from the existing static enterprises. That
curtails their output. That leaves less goods of the old kinds for
people to consume. That means higher prices for consumption goods, in
the interval between the starting of the new enterprise and the time
when its finished products are added to the "real income" of the
community. Extensions of bank credit, there, shift the burden of
"abstinence" to the consumer, and to the static producer. "Saving" is
still the source of capital, but it is involuntary saving.
[515] In 1912, the First National Bank of New York owned 43 millions of
bonds, but no stocks. Report of Pujo Committee, Feb. 28, 1913, p. 66.
The National City Bank had 33 millions in bonds, but no stocks. _Ibid._,
p. 72. State banks own few stocks; trust companies own a good many.
[516] _Cf._ the chapter on "The Origin of Money," _supra_.
[517] In March, 1916, one of the largest banking houses in Boston
informed the writer that over one-fourth of its notes and discounts
(including all forms of loans) had been bought through note-brokers.
[518] _Cf._, _e. g._, pp. 135ff. of Scott's excellent _Money and
Banking_, Rev. ed., New York, 1910.
[519] The year 1909 is chosen, in order that comparison may be more
readily made with the figures of Dean Kinley's investigations based on
reported deposits made on March 16 of that year. The figures quoted are
taken from p. 39 of the Report of the Comptroller for 1913.
[520] Even excluding the item "due from other banks and bankers," as
representing duplications, the item "other loans and discounts" remains
approximately only one-fourth of total banking assets.
[521] Almost all agricultural processes require more than six months
from their inception to the marketing of the product.
[522] This view would seem to correspond with the view of Babson and May
(_Commercial Paper_, 1912), and of W. A. Scott ("Investment vs.
Commercial Banking," _Proceedings of Investment Bankers' Association of
America_, 1913, pp. 81-84). Both of these discussions appear in Moulton,
_Money and Banking_, Pt. II, pp. 70 and 75-77. Dr. J. E. Pope considers
the view correct. On the other hand, Professor O. M. W. Sprague thinks
the "other loans and discounts" of large city banks are more liquid than
my statement would indicate.
[523] _Principles of Money and Banking_, II, p. 52.
[524] _Report of the Comptroller of the Currency_, vol. II, pp. 145 _et
seq._
[525] Total collateral loans in New York City on that date were
$719,327,596. This is for national banks alone. _Report of Comptroller_,
1915, II, 144. There is every reason to suppose that if trust companies
and private banks were included, the _proportion_ of stock exchange
collateral loans would be very much higher.
[526] I am very fortunate in having the views of Dr. J. E. Pope on this
question. I know no one whose knowledge of agricultural credit, whether
of American or of European conditions, is so thorough and extensive.
[527] This table is constructed on the basis of data in the _Report of
the Comptroller_ for 1913, pp. 774-78.
[528] A single observation does not justify very confident conclusions,
and figures for subsequent years may alter this. There is reason for
supposing that commodity collateral was unusually large in proportion in
the Comptroller's figures for national banks in June, 1915, (1) because
the banks had been trying to reduce stock collateral loans, following
the collapse of the outbreak of the War, (2) because they were aiding
cotton owners to tide over a period of stress, and (3) because of great
grain speculation. Later: 1916 figures show this. Comptroller's
_Report_, I, p. 30. Stock loans increase from 66% to 71.2%, of
collateral loans.
[529] The preceding argument would indicate that it is much too high.
[530] The figures for 1909 are fairly typical of the proportions of
these items in the assets of the three classes of institutions for the
ten years from 1904 to 1914. Since 1900, there has been some increase in
the percentages of real estate loans and "all other loans," at the
expense of the percentage of securities owned, and collateral loans, as
these years have been years of reduced activity on the Stock Exchange.
The changes are not important enough, however, to modify any conclusions
which we shall base on the figures here given. All classes of loans have
grown, and investments in securities have grown, but real estate loans
and "all other loans," particularly the latter, have grown somewhat more
rapidly.
[531] These figures are taken from Conant, _Principles of Money and
Banking_, vol. II, p. 52.
[532] The term "commercial paper," as here used by Conant (whose source
is the _Comptroller's Report_ for 1904 and preceding years), doubtless
includes a good many items which we have decided not to count as
commercial paper. The item, "advances on securities," also includes some
items other than stock exchange loans, but not a high percentage in New
York City. In 1913 the figures for all reporting banks in New York City
were: collateral loans, 1,070; "other loans," 658. _Report of
Comptroller_, 1913, p. 779.
[533] Taken by Conant (_Ibid._, p. 51) from the _Economiste Europeen_
(April 29, 1904), XXV, p. 546.
[534] For the depositor who borrows from several banks, but deposits
only in one,--as a stockbroker--the items deposited will, of course,
substantially exceed the amounts borrowed at the bank where the deposits
are made. But this will not affect our argument for _classes_ of
depositors from _representative_ banks in the community as a whole.
[535] _Supra_, chapters on "Volume of Money and Volume of Trade," and
"Statistical Demonstrations of the Quantity Theory."
[536] The relevance of comparing wholesale and retail figures with
figures for "commercial paper" may well be questioned, since our
conception of commercial liquid loans would include manufacturers' paper
which represents raw materials, work in process, and bills receivable.
However, we have found reason to conclude that Kinley's wholesale
deposits include a large percentage of manufacturers' deposits.
(_Supra_, p. 245.) The comparison here is in any case rough. We do not
need precise figures for the argument.
[537] Pratt, _Work of Wall Street_, 1912 ed., p. 264.
[538] Returns from private banks in Kinley's investigation of 1909 are
virtually negligible, so far as absolute amounts are concerned, for the
whole country. For New York City, they are absolutely negligible. The
"all other deposits" reported by private banks in New York City for
March 16, 1909, are one thousand, nine hundred and eighty-four dollars,
in all! The grand total, "all other deposits" for all classes of banks
reporting in New York, is over a hundred and ninety-eight millions. The
great private banks are, thus, clearly not represented. They are not
represented in any form, since Kinley's figures exclude deposits made by
such banks in other banks. How important they would be, if included, one
cannot be sure, since they keep their affairs pretty secret. Some
information, however, is available. Thus, the Pujo Committee reports
(_Report_, Feb. 28, 1913, p. 145) that on Nov. 1, 1912, there was
$114,000,000 on deposit with J. P. Morgan and Company, exclusive of
$49,000,000 on deposit with their Philadelphia branch of Drexel and Co.
It is understood to be the practice of J. P. Morgan and Co. to keep no
cash on hand, and to deposit with other banks all their cash and checks.
On this date, they had on deposit with other banks $12,094,000, "which
presumably included all their own funds." It may be assumed, therefore,
that the remaining 102 millions was loaned out. There can be no doubt at
all, I suppose, that practically all they had lent out was on stock and
bond collateral. They are known to be one of the biggest lenders at the
"money post" on the Stock Exchange. They are not supposed to do much
business with ordinary merchants in the usual discount and deposit way.
I have found no figures for Kuhn-Loeb & Co., for total deposits made
with them, nor for their deposits in other banks. The Pujo Committee
(_Ibid._, p. 73) states that for the six years preceding 1913 this firm
held, on the average, deposits from interstate corporations amounting to
over 17 millions. For J. P. Morgan & Co., this class of deposits
amounted to about half of total deposits. (_Ibid._, p. 57.) There is, of
course, no assurance that this proportion holds with Kuhn-Loeb's
deposits.
These figures are very great, however. For the week ending April 3,
1915, for example, only three banks (the National City Bank, the
National Bank of Commerce, and the Chase National Bank), and only two
trust companies (the Bankers Trust Company and the Guarantee Trust
Company), held deposits exceeding those credited to J. P. Morgan and
Co., and only one of these, the National City Bank, very markedly
exceeded the Morgan deposits. The majority of the New York Clearing
House banks had less than the deposits of interstate corporations with
Kuhn-Loeb.
As all the big private bankers deal chiefly in stock exchange loans and
securities, and foreign exchange, and as this kind of business has been
shown to be exceedingly active and to call for large checks and
clearings, we may assume that Kinley's figures would be greatly
increased if they were included.
The trust company reports for New York in Kinley's figures are also very
incomplete. New York trust companies report less than twice as much as
Boston trust companies, and an absurdly small amount as compared with
banks. _Cf._, _supra_, the chapter on "Statistical Demonstrations of the
Quantity Theory."
[539] It has been supposed by many writers that New York clearings
exaggerate New York transactions as compared with the extent to which
outside clearings represent transactions. Such evidence as we have would
show that this is not true to a sufficient degree to modify the present
argument. Clearings are less than deposits in both New York and the
country outside, _Supra_, chapter on "Statistical Demonstrations of
Quantity Theory."
[540] "The Mystery of Clearings," _Annalist_, Aug. 14, 1916, p. 198.
_Supra_, chapter on "Volume of Money and Volume of Trade."
[541] See any Congressional debate on "the Money Trust."
[542] _Pujo Committee Report_, Feb. 28, 1913, p. 130. _Cf._ also p. 138
(statements of Messrs. Baker, Reynolds, Schiff, and Perkins), and p. 160
for Statements regarding the testimony of Messrs. Morgan and Baker.
[543] I know no responsible writer who has charged that there is a
monopoly, or a tendency toward monopoly, in this matter.
[544] I am not naive enough to suppose that this suggestion can be much
more than an illustration of the bearing of my theory! I should even
agree that the political difficulties are so great that we would do well
to try out our system in times of stress before seriously raising the
question of giving the Federal Reserve Banks the power to rediscount
loans on stock exchange collateral.
[545] Walker's version of the quantity theory, excluding credit
transactions, escapes much of this criticism. _Supra_, chapter on
"Equation of Exchange."
[546] It is nothing for Wall Street to "turn over" many times two
billion dollars worth of securities. In a big bull year, this will be
accomplished twelve or more times without effort--prices rising merrily,
so long as no new supply of stocks and bonds comes in to make trouble.
(See our estimate of New York security transactions, _supra_, chapter on
"Volume of Money and Volume of Trade.") But let there be a liquidation
by investors of anything like two billions, sold once, and the market
feels a tremendous drag. It seems universally agreed that foreign
selling of securities during the present War has been a great factor in
checking advances in security prices in New York. The actual amount of
liquidating by foreign investors, however, has been trifling as compared
with the volume of sales since the War began. The best estimate of
foreign liquidation is probably that of the National City Bank, which
has taken careful account of previous estimates, and which has unrivaled
sources of "inside information." The estimate of this institution is
that from a billion and a half to a billion six hundred million dollars
worth of foreign held securities have been liquidated in America since
the beginning of the War. (This does not include foreign loans placed
here.) This estimate is given in October of 1916. (Monthly circular of
the National City Bank on "Economic Conditions, etc.," Oct., 1916, p.
3.) It is safe to say that no amount of "churning" of securities already
in the market could have anything like the depressing effect on security
prices that an unusual amount of liquidation by investors has. It is not
increase in number of _exchanges_ that depresses prices. It is increase
in the floating _supply_. Activity in the floating supply makes it
easier, rather than harder, for speculators to get banking
accommodations which enable them to "hold" and "carry" securities, and
activity in sales therefore positively tends to _increase_ rather than
to decrease, security prices. The broadening of the range of securities
dealt in, moreover, instead of depressing the prices of those already
active, helps to sustain them. Thus, brokers and bankers welcomed the
recent revival of activity in the rails, following the bull market in
war stocks. It gave a broader basis for loans. Banks would lend more
liberally, and on narrower margins, if railroad stocks could be mixed
with the brokers' war stock collateral.
Here again we see the significance of the distinction between long-time
interest rates, connected with the volume of real capital, and the
"money-rates."
Again, periodic payments of interest and dividends, temporarily locking
up considerable sums of bank deposits which have to be built up in
anticipation of such payments, have a very much more serious effect on
the money market than do payments many times greater in connection with
stock sales. The tension in the London money market growing out of
periodic accumulations and disbursements of the British Government is
well known. The summer of 1916 witnessed a temporary tightening in Wall
Street (in what was, generally, the period of easiest money the Street
has ever known), from a similar cause--a bunching of dividend and
interest payments, with some other large financial transactions. Money
rates in New York regularly show the influence of such payments,
temporarily. Money rates also show the influence of active speculation,
as a rule, as shown by Mr. Silberling's investigations ("The Mystery of
Clearings," _Annalist_, Aug. 14, 1916), but it takes a very much greater
volume of stock sales than of dividend and interest payments to produce
a given effect on money rates.
[547] As May 9, 1901, when 3,336,695 shares were sold. Compare
Mitchell's stock barometer, 1890-1911, _Business Cycles_, p. 175, with
records of share sales for those years.
[548] _Purchasing Power of Money_, 1913 ed., p. 186. The same criticism
applies to Kemmerer, and Jevons. _Cf._ Kemmerer, _Money and Credit
Instruments_, pp. 70-71. It is applicable to most quantity theorists.
[549] _Ibid._, p. 185. It will be noted that at this point, Fisher
lapses from the doctrine that volume of trade is determined by "physical
capacities and technique." _Ibid._, p. 155.
[550] _Cf._ our discussion, _supra_, in the chapter on the "Functions of
Money," of money in retail trade.
[551] Our great private banks, bond houses, and investment bankers,
etc., of course do buy stocks of new enterprises on a huge scale. Many
of our big commercial banks have taken part in underwriting operations.
[552] See pp. 428-432, _supra_.
[553] _Wealth of Nations_, Bk. II, ch. 2, ed. Cannan, I, pp. 187 and
290-291.
[554] _Theorie der wirtschaftlichen Entwicklung_, chs. 2 and 3.
[555] _Supra_, chapter on "Volume of Money and Volume of Credit."
[556] _Interviews on the Banking and Currency Systems of England,
Scotland, etc._, Senate Document No. 405, 1910 (National Monetary
Commission Report), p. 25.
[557] This is clearly the opinion of European bankers, as indicated in
their statements to interviewers for the Monetary Commission. See, _e.
g._, statements by the _Deutsche Bank_, _Ibid._, pp. 374-375, and the
_Credit Lyonnais_, _Ibid._, pp. 224-226.
[558] The item, "Due from other banks and bankers" in our table of total
bank resources for 1909, is 2,563 millions--about 12% of the whole and
slightly more than the amount we assigned to "commercial paper." It is a
highly important factor making for liquidity. For State, and National
banks and trust companies it is almost as great--2,302 millions. The
first figure does not include many great private banks.
[559] _Vide_ Professor Taussig's history of the years, 1878-1890, in his
_Silver Situation_.
[560] _Cf._ Mitchell's _Business Cycles_, pp. 495-496; and _passim_.
[561] _Cf._ the chapter, _supra_, on "The Quantity Theory and
International Gold Movements."
[562] "The Prospects of Money," British _Economic Journal_, Dec. 1914.
[563] _Cf._ Conant's discussion, _Principles of Money and Banking_, I,
ch. 7.
[564] This would seem to be Mitchell's view. _Cf. Business Cycles_, p.
494.
[565] _Cf._ chapter XIII.
[566] _Cf._ the chapter on "The Functions of Money," _supra_.
[567] _Money and Credit Instruments_, p. 80.
[568] _Ibid._, p. 82. Italics mine.
[569] Kemmerer, in general, is less concerned, apparently, with
defending a causal quantity theory than with defending the "equation of
exchange." To the extent that this is true, I have little quarrel with
his doctrines. To "prove" the "equation of exchange," however, is,
first, a work of supererogation, and, second, in no sense a proof of the
quantity theory. _Vide_ the chapters, _supra_, on the equation of
exchange and on statistics of the quantity theory.
[570] Published by the National City Bank of New York. _Vide_ also
Bagehot. _Lombard Street_, introductory chapter, and Withers, _The
Meaning of Money_.
[571] This information is supplied me by an official of the New York
Coffee Exchange, through the courtesy of Mr. W. H. Aborn, of Aborn and
Cushman, Coffee Brokers, 77 Front St., New York.
[572] _Principles of Economics_, _passim_.
[573] _Theorie der wirtschaftlichen Entwicklung._
[574] The writer has ventured some tentative predictions as to
conditions following the present War in the New York _Times_ Sunday
magazine of Dec. 10, 1916, pp. 10-11.
[575] There are important dynamic and "frictional" considerations
opposed to protective tariffs, as well as static considerations. Very
many of the "intangibles" later to be discussed depend on free trade. A
high percentage of England's "capital" would be destroyed by protective
tariffs and trade restrictions, and to a less degree this is true of all
countries. _Vide_ N. Y. _Times_ Sunday magazine, Dec. 10, 1916, pp.
10-11.
[576] A case in point is the discussion of the effects of increment
taxes on the building trade, participated in by Professor R. M. Haig and
the present writer in the _Quarterly Journal of Economics_, Aug. 1914,
and Aug. 1915. The doctrines criticised in my article were static
theories, and my criticisms made the static assumptions. Professor Haig,
accepting the validity of my criticisms on the assumptions laid down,
for the most part, seeks to recast the argument on a dynamic basis,
emphasizing dynamic and "frictional" considerations from which my
argument had abstracted. I think that what difference of opinion remains
between us would probably be removed if the distinction between static
and dynamic were clearly drawn and rigidly adhered to.
[577] _Cf._ my review-article, "Schumpeter's Dynamic Economics," _Pol.
Sci. Quart._, Dec. 1915, p. 645.
[578] _Distribution of Wealth_; _Essentials of Economic Theory_.
[579] _Theorie der wirtschaftlichen Entwicklung_.
[580] _Cf._ my _Social Value_, pp. 139-140, n.
[581] _Purchasing Power of Money_, ch. 4.
[582] _Theory of Business Enterprise._
[583] _Vide_ my discussion of Professor Patten's _Reconstruction of
Economic Theory_ in the _Political Science Quarterly_ of March, 1913,
and the _American Economic Review_, Supplement to the March number,
1913, pp. 90-93.
[584] _Cf._ Schumpeter, _loc. cit._, pp. 1-101, and _passim_. That the
quantity theory is essentially "static" will appear strikingly if the
statements in the text be compared with Fisher's discussion in chs. 5-7
of _The Purchasing Power of Money_.
[585] It is only as a matter of highly abstract statics that the
capitalization theory (as presented in earlier chapters) can be
maintained with any strictness. In fact, capital values are not always
passive shadows, yielding freely to changes in anticipated income, and
to changes in the rate of discount. Very often capital values become
themselves substantial, become divorced from their presuppositions, can
no longer be explained by any imputation process. This is particularly
likely to be the case with lands in inactive markets. The income-bearer
is as much an object of value as is the income; is often _immediately_,
for its own sake, an object of value. The long-run tendency to
assimilate this value to a capitalization of prospective incomes may be
exceedingly slow in working out, if it ever works out. Indeed, a high
capital value may sometimes be a means of increasing the income, since
in the minds both of lessor and lessee the usual percentage return on
capital will be a factor in determining what is a "proper" rental. If a
capital value, no longer justified by prospective income, has behind it
the sanction of actual cost-outlay, there may easily be a reflex from it
on the size of the income itself. Such a capital value, unjustified by
prospective income, but still believed in by the market, may function
just as effectively as any other capital value. Book-values, not marked
down to correspond with changed income-prospects, even when they cannot
command purchasers, may still serve as a basis for _loans_--Veblen's
theory of crises rests, as we shall see, in part on this fact.
Considerations of this sort strengthen still further the case against
the marginal utility theory of value. To pass,--as Fetter and the
Austrians in general seek to do--from marginal individual consumption
values to market prices of consumption goods, then to prices of
production goods, or to magnitudes of distributive shares, then, simply,
by the capitalization theory, to capital values, with the notion that
the original marginal utilities supply the psychological explanation at
every stage of the process, the remoter values being merely built up of
the original marginal utilities, is quite invalid. At every stage there
is a hitch: the marginal utilities do not explain the prices or values
of the consumption goods, as has already been elaborately pointed out;
and the relation between the values of consumption goods and the capital
values is very much looser and less direct than the static theory
requires. Institutional, legal, and moral forces come in, not alone at
the first step, in giving social weight to the wants of special classes
and individuals, but also at the second, giving prestige to certain
enterprises, and so higher values to their securities, giving banking
support here and refusing it there, giving popular and patriotic support
here, and not there, giving direct action of law, custom and tradition
on certain _prices_ (whence, indirectly on values), and leaving prices
free to change readily in other cases. (_Cf._ my discussion in _Quart.
Jour, of Economics_, Aug. 1915, pp. 699-701.) The static theory of
capitalization describes an ideal logical relation, while capital values
are, in fact, built up by a psychological process which is logical only
in part. In large degree, especially when the market lacks perfect
fluidity, capital values are _immediate_, and not merely _derived_,
values. In this, I think, I am in accord with the view briefly stated by
A. S. Johnson in his recent review of Boehm-Bawerk (_Am. Econ. Rev._,
March, 1914, pp. 115-116).
[586] _Loc. cit._, ch. IV. _Vide_ Veblen's discussion of Fisher in the
_Pol. Sci. Quart._ of 1908, and his discussion of Clark in the _Quart.
Jour. of Econ._, Feb. 1908.
[587] Chapter on "Volume of Money and Volume of Trade."
[588] On Oct. 9 of 1916, I still venture the opinion that the stock
market has shown wonderful conservatism in the face of extraordinary
temptations. From Oct. 1915, to Aug. 1916, the "bears" dominated the
market, and prices fell pretty steadily. The "bull" movement of Sept.
1916, seems to have reached its crest without passing the level of a
year ago. The market may "run away," but it has not yet done so.
[589] _Psychologie Economique_, vol. I, pp. 77-78.
[590] Nor do I see any method for bringing into our equilibrium picture
the control which the environment retains over values by its power to
_eliminate_ those groups whose choices vary too widely from the norms of
"survival-necessities." Vide Giddings, _Principles of Sociology_, ed.
1905, p. 20; Carver, _Essays in Social Justice_, _passim_. I think that
the range of choices compatible with survival is very wide. Moreover,
"adaptation" is not a simple matter of adjustment to the physiographic
environment. It includes adjustment to the _social values_, both of the
group in question and of other groups.
[591] _Cf._ H. C. Emery's discussion of "manipulation" in his
_Speculation in the Stock and Produce Exchanges_, pp. 171ff.
[592] _Cf._ Dewey, _Essays in Logical Theory_; Bergson, _Time and Free
Will_, _passim_, and _Creative Evolution_; James, _Problems of
Philosophy_.
[593] _Cf._ Bagehot's discussion in _Lombard Street_ of the features of
English organization which prevented supremacy in the Eastern trade from
passing to Greece and Italy with the opening of the Suez Canal.
(Introductory chapter.) See also the discussion of the English money
market in ch. XXIV, _supra_.
[594] _Cf._ my article on "Schumpeter's Dynamic Economics" in _Political
Science Quarterly_, Dec. 1915, and ch. XXIII, _supra_.
[595] In my article on Schumpeter's theory above mentioned, I have
pointed out that his contrast between statics and dynamics is not by any
means a fixed one, and that in particular he shifts back and forth
between a hypothetical static state, primarily a methodological device,
which assumes perfect fluidity and mobility of the objects of exchange,
on the one hand, and a realistic static state, immobile, held in the
bonds of custom and tradition, illustrated by India and China, on the
other hand. The version of the distinction between statics and dynamics
here discussed is only one of several which he gives. It is, however,
the one which at present I wish to contrast with my own view. With many
of Schumpeter's doctrines I am in hearty accord, and I have learned much
from his book. I think that his book affords abundant evidence of the
usefulness of the static-dynamic contrast.
[596] Schumpeter's contrast between statics and dynamics is in most
essentials closely parallel to Veblen's contrast between the theory of
wealth and the theory of prosperity, and his main conclusions resemble
Veblen's, despite Schumpeter's optimism and Veblen's pessimism, and
despite temperamental and methodological differences. Most of my
criticisms of Veblen apply also to Schumpeter.
[597] _Cf._ our discussion, _supra_, of the relation of credit to
futurity.
* * * * *
TRANSCRIBER'S NOTES
1. Passages in italics are surrounded by _underscores_.
2. Footnotes have been moved from the middle of a paragraph to the end
of the e-text.
3. The original text includes Greek sigma character. For this e-text
version it has been replaced with its transliteration [Greek: S].
4. Fractions are indicated as in the example below:
6-1/4 indicates whole number 6 with fractional part of one-fourth.
5. The following misprints have been corrected:
"thing" corrected to "think" (page 124)
"theorrists" corrected to "theorists" (page 155)
"$75,00,000.00" corrected to "$75,000,000.00" (page 208)
"theory theory" corrected to "theory" (page 330)
"practive" corrected to "practice" (page 428)
"this held" corrected to "thus held" (page 442)
"in in" corrected to "in" (page 476)
"clasess" corrected to "classes" (page 509)
"legarthic" corrected to "lethargic" (page 573)
"enchancement" corrected to "enhancement" (page 591)
"74-71" corrected to "64-71" (ftn. 55)
"equilibbrium" corrected to "equilibrium" (ftn. 86)
"Instrnmeuts" corrected to "Instruments" (ftn. 163)
"reguularly" corrected to "regularly" (ftn. 545)
Missing text added in footnotes 412, 468, 595.
6. Some of the page references in the index have been corrected.
7. Other than the corrections listed above, printer's inconsistencies
in spelling and hyphenation have been retained.
End of Project Gutenberg's The Value of Money, by Benjamin M. Anderson, Jr.