Chapter XXV: The Reconciliation of Statics and Dynamics (4)

This seems to forecast Schumpeter's doctrine, but in the development which follows, we do not find it. The heart of his analysis of the causation of prices is in ch. vi, on "Markets." The "summary" which precedes that chapter again suggests Schumpeter's analysis--the notion of an all-embracing equilibrium. But when we get into the detailed analyses of the chapter we find nothing more than an exceedingly good account of the process by which supply and demand of particular goods, considered separately, become equated, through two-sided competition, and under conditions of monopoly. Instead of "relative marginal utilities," we see customers coming into the market with various money-prices in mind, and sellers trying out various money-prices--not marginal utilities, nor yet two or more marginal utilities in comparison with one another, but rather, money-prices, which, in the minds of the buyers may be supposed to represent "subjective values in exchange," based on both marginal utilities _and_ objective prices of other things that enter into the budget, and which, in the minds of sellers, represent estimates of the prices which buyers may be induced to pay. Wicksteed does not transcend the circle. Finally, despite his caution to avoid the more glaring forms of the circle, and the confounding of demand-curves with utility-curves, and of utility with value, he does lapse into it in its completest form in expounding the Austrian doctrine of cost of production. "The only sense, then, in which cost of production can affect the value of one thing is the sense in which it is itself the value of another thing. Thus what has been variously termed utility, ophelemity, or desiredness, is the sole and ultimate determinant of all exchange values." (P. 391.) Here is the illicit leap from marginal demand price to marginal utility which all utility theorists make, sooner or later! It is true that costs in one place are reflections of _demand_ elsewhere. But it is not true that costs in one place have any definite quantitative relation to _utilities_ in another place!

When Wicksteed comes to discuss the value of money, he makes slight use of the notion of abstract ratios among relative utilities, and employs a concept which he has nowhere vindicated or explained: the _value_ of money, as distinct from the reciprocal of the price-level, treating the value of money as something which can be directly influenced by sinister rumors affecting the credit of the Government, and which can be an independent cause affecting velocity of circulation, and the amount of trade done by means of money. _Loc. cit._, p. 623. See _infra_, our chapter on "Velocity of Circulation."

The only writers I know at first hand who have really thought the thing through, and avoided the circle in form, are Schumpeter and Irving Fisher. (_Mathematical Investigations in the Theory of Value and Prices_, _Trans. Conn. Acad. of Arts and Sciences_, 1892. See bibliographical note, _supra_, in this chapter.) I have given an exposition of Schumpeter, rather than Fisher, because the former has put the doctrine in non-mathematical form. In the text I have indicated the limitations of their doctrine. Fisher definitely avows the impossibility of applying the doctrine to the problem of the value of money. _Purchasing Power of Money_, p. 174. Schumpeter doesn't apply it to money, and when he tries to work out a utility doctrine of money, he lapses into the Austrian circle in a very obvious form. In later writings, Fisher also seems to forget the limitations imposed on utility theory in his earlier essay. In his _Elementary Principles_, ed. 1912, Fisher lists (pp. 408-409) a great multitude of factors that might affect the price of pig iron, and then says: "Back of these causes lie other causes, multiplying endlessly as we proceed backward. But if we trace back all these causes to their utmost limits, they will all resolve themselves into changes in the marginal desirability or undesirability of satisfactions and of efforts, respectively, at different points of time, and in the marginal rate of impatience as between any one year and the next." Here these marginal psychic magnitudes, which in the earlier essay appeared merely as surface phenomena, resultants of a total situation, proportional to prices, causes of nothing, merely symptoms of a completed equilibrium, are erected into atomic _verae causae_, the ultimate ultimates!

It is interesting to contrast this with a yet more recent statement by a philosopher who has undertaken a defence of the utility theory of economic value, Professor R. B. Perry, in the _Quarterly Journal of Economics_, for May, 1916. Considering the contentions of the present writer that many general social causes, in addition to the individual utilities concerned with consumption, are needed to explain changes in the values of goods, such as changes in fashion, mode, in general business confidence, in moral attitude toward different sorts of consumption, in the distribution of wealth, in taxes and other laws, Professor Perry says: "If the Austrian School has neglected this, then it needs to be corrected. But the essential contention of that school remains, so far as I can see, unaltered; _in that these changes work through individuals_ and have their _point of application_ in a more or less rational _comparison of needs_ made by the _individual buyer or seller_. Whatever affects these _individual schedules_ on a sufficiently large scale will affect prices. But to ignore the individual channels through which these forces pass, is elliptical." (Pp. 469-470. Italics mine.) Now I call attention to several points in the foregoing. First, I would contrast it with the doctrine quoted from Professor Fisher's _Elementary Principles_. Where Fisher puts the utilities far back in the realm of ultimate causation, making them the source from which spring all the proximate social causes which might affect the price of pig iron (such as "a trade war," "a change in fashion," a "change in incomes," "decreasing foresight," etc., _loc. cit._, p. 409), Professor Perry would make individual utility schedules the final focal point, toward which converge, and through which pass, all the causal forces, however richly explained by antecedent social factors, which affect prices. The utility theory of value means all things to all men!

But a second point with reference to Professor Perry's doctrine. It is perfectly true that _all_ social activities are the work of _individuals_. Society is nothing apart from the individuals who make it up. To think of society and the individual as separate and antithetical is a fallacy which I have criticised in detail in Part III of _Social Value_. The social value theory does not mean that there are social forces which do not run through individual channels. This is not to accept the notion that individuals are really, in their psychical nature, isolated monads, however. There is a functional unity of individual minds, and no individual can be understood in abstraction from society. But this view is as old as Aristotle. I have not contended that prices can change apart from the mental activities of individual men, working upon one another. So far there _may_ be no issue with Professor Perry.

But there is a big issue when he contends that all the causation is focussed in _individual utility schedules_, and in a more or less rational comparison of needs made by the _individual buyer and seller_. This is _demonstrably erroneous_. Let us assume, for example, that utility schedules of every individual New Yorker remain unchanged, but that, through a change in the law (the work of individual men, under the influence of their own individual emotions and ideas, of, say, ethical character), incomes in New York City are _equalized_. Hold rigidly to the assumption that there are no changes in utility schedules. Will there not be, none the less, a radical readjustment of prices? Will not the prices of Riverside palaces and steam yachts sink and the prices of things which the poor esteem rise? The utility-curves of the erstwhile rich, assumed to remain unchanged, no longer count for so much as before in the market. The rich cannot go so far down their curves in the consumption process as before. The poor, or those who had been poorest, now count for more in the market. They can lower their margins. In other words, the forces affecting the distribution of wealth, in so far as they are legal and moral in character, at least, may affect the price-situation, _without_ altering _utility schedules_. Some social factors, as changes in mode and fashion, will work _through_ the utility schedules, but others will not. One big _variable_ affecting prices which need not, in idea, at least, affect utility schedules at all, and whose main influence is anyhow not directed through them, is the volume of business confidence. This factor we shall analyze in our discussion of credit, _infra_. Professor Perry thus escapes only part of the criticism which we have made (_Social Value_, pp. 45 and 56) of the Austrian theory: (1) that it abstracts the individual from his vital contacts with other individuals, and (2) that, within the individual mind thus abstracted, the Austrians make a further abstraction, taking as relevant only the interests concerned with _consumption of economic goods_, summed up in the utility schedules. The second criticism applies to Professor Perry as well. Men's total interests are not summed up in utility schedules, and do not affect prices exclusively _via_ utility schedules.

It may be noticed, also, with reference to Professor Perry's discussion that he has misconstrued the Austrian theory in conceiving it as an analysis of an historical _process_, with a beginning and an end, instead of a static picture, in which preexisting individual factors come into equilibrium. (_Loc. cit._, 475.) He seeks thus to avoid the Austrian circle, but as we have shown in the discussion of von Mises in the text, this way is not open to the Austrians.

Able and penetrating though Professor Perry's discussion is, on the psychological side, it fails, I think, to take adequate account of the complexities with which the economist and sociologist must deal.

In general, I find no version of the utility theory of value which is defensible, and, above all, no effort to apply it to the value of money which has met with success.

[105] _Vide_ Taussig, _Principles_, I, 432.

[106] "Der Bankzins als Regulator der Waarenpreise," Conrad's _Jahrbuecher_, 1897.

[107] _Loc. cit._, ch. 8.

[108] _Cf._ ch. on "Economic Value."

[109] Nicholson, J. S., _Money and Monetary Problems_, pp. 64-66; 71-73.

[110] _Works_, McCulloch ed. 1852, p. 213.

[111] _Cf._ the criticism of Nicholson by W. A. Scott, _Money and Banking_, 1903 ed., ch. 4.

[112] _Cf._ Mill, _Principles_, Bk. III, ch. xiii, par. 1. "Nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others." It is not quite fair to identify Mill's doctrine with the circle stated above, however, since Mill couples it with a reference to convention, resting on the influence of government--a mention, without analysis, of some of the factors to be discussed shortly.

[113] _Cf._ Knies, _Das Geld_, I, p. 140.

[114] _Cf. Social Value_, ch. 2. _Infra_, our chapter on "The Functions of Money."

[115] _Das Geld_, Leipzig, 1903, p. 477.

[116] Laughlin, rejoinder to Clow, "The Quantity Theory and its Critics," in _Jour. of Pol. Econ._, 1902.

[117] _Principles of Money_, _passim_.

[118] _Cf. Social Value_, pp. 132-136, and _supra_, ch. on "Marginal Utility and Value of Money."

[119] Strictly speaking, there is no marginal utility, but only a "subjective value in exchange," for money of the sort here discussed. See _supra_, the chapter on "Marginal Utility."

[120] The psychological reactions of the people in times of stress and uncertainty toward different kinds of money cannot be predicted with any certainty, and there seems to be absolutely no definite or universal law governing the matter. The present writer collected a lot of newspaper clippings at the outbreak of the present World War. From these it appears that in both Paris and Berlin there was a very great distrust of bank-notes, and an insistence by retailers, restaurants, landladies, etc., on _coin_. But _silver_, which was not standard money, seems to have been accepted without question. When hoarding is referred to in these clippings, it is invariably gold that is mentioned. A similar hoarding of gold took place during the Balkan crisis at the time of the outbreak of the war between the Balkan Allies and Turkey. Professor E. E. Agger informs me, however, that he has found some evidence that bank-notes as well as gold were hoarded in Austria, at this time.

Sometimes we have a suspension of Gresham's law, and an acceptance of all kinds of money at varying ratios. The following clipping from the _Boston Herald_ of March 17, 1914, illustrates this: "Douglas, Ariz., March 16.--Four kinds of money are now circulating in the Mexican territory controlled by the Constitutionalists. These are United States currency, the first issues of the Constitutionalist government and of Sonora state, and 'Villa money,' or that issued by Chihuahua at the instance of the rebel military commander. United States takes precedence. Merchants in Sonora, in order to protect themselves and at the same time observe the laws requiring acceptance of the rebel currency issues, have established a sliding scale of prices. This was discovered when five merchants were arrested at Cananea by Constitutionalist secret service men, who found that for American money they could buy goods for less than half the amount exacted when payment was offered in Mexican currency. The uncertainty of the rebel campaign against Torreon is reflected in the money market. To-day Constitutionalist sold for 22 and 28 cents American on the peso. Mexican federal currency commanded from 30 to 32 cents." In the experience of travellers who have discussed the matter with the writer, there was little of this flexibility of relation between paper money and coin in Berlin, or Paris at the outbreak of the present War. Where paper was refused, it was absolutely refused, and where it was accepted, it seems to have been accepted without discount. No doubt, a fuller investigation would reveal all manner of variation in the behavior of different people in different centres, and at the same centres, at the outbreak of the War.

[121] _Money and Banking_, 1903 ed., pp. 58-60; 101-104.

[122] _Principles of Money_, p. 530.

[123] Written in December, 1914.

[124] _Cf._ Clow, F. R., "The Quantity Theory and its Critics," _Jour. of Pol. Econ._, 1902, p. 602.

[125] _Cf._ Emery, _Speculation_, pp. 90-91.

[126] _Cf._ Boehm-Bawerk's criticisms of the "use" theory of interest. (_Capital and Interest_, _passim_.) Both use theories and productivity theories are probably suggested, in part, by peculiarities which money possesses in pre-eminent degree. See _infra_, the chapter on the "Functions of Money."

[127] A more precise analysis of all these points will be given in the chapter on "The Functions of Money."

[128] _Cf._ Professor Taussig's account of expansions and contractions of the silver currency in his _Silver Situation_, _passim_.

[129] For bibliography, see _Am. Econ. Rev._, Dec., 1914, pp. 838-839.

[130] New York, 1911. All references to this book in the present volume are to the 1913 edition, which contains some new matter.

[131] _Standard of Value_, London, 1912, p. 48, n.

[132] _Papers and Proceedings_, Supplement to March, 1913, number of _American Econ. Review_, p. 131.

[133] _American Econ. Rev._, Supplement to March, 1916, number, p. 138.

[134] _Loc. cit._, pp. 31-32.

[135] _Loc. cit._, pp. 175ff.

[136] "The Passiveness of Prices," _infra_.

[137] Particularly in view of the elaborate statistics, to be considered below, with which it is sought to make the equation realistic.

[138] _Loc. cit._, p. 16ff.

[139] _Loc. cit._ p. 25.

[140] _Ibid._, p. 26.

[141] _Ibid._, p. 27.

[142] Where it is not meaningless, as at various points in the theory of mechanics, the product is always of a different denomination from either factor.

[143] _Vide_ our ch. on "Supply and Demand," _supra_, for a discussion of Mill's doctrine as to the "demand" for money.

[144] What is here said of Fisher's equation of exchange applies, for the most part, to all versions of it.

[145] _Loc. cit._, p. 298. _Cf._ our chapter, _infra_, on "Statistical Demonstrations of the Quantity Theory."

[146] _Purchasing Power of Money_, p. 290.

[147] The amplified equation is MV + M'V' = PT, which takes account of bank-credit. This is explained, _infra_.

[148] _Loc. cit._, p. 487. I recur to this point in discussing the statistics of the "equation of exchange" in ch. 19.

[149] _Infra_, ch. on "Quantity Theory and World Prices."

[150] _Loc. cit._, p. 48.

[151] _Loc. cit._, p. 370. The same position is taken by Kemmerer, _Money and Credit Instruments_, pp. 68 _et seq._ Mill denies the validity of these distinctions. See _Principles_, Bk. III, ch. 12, Par. 8.

[152] The above was written before the discussion in the _Annalist_ (Feb. 7, Feb. 21, March 6, March 13, March 20, 1916) in which the present writer urged that Professor Fisher had greatly exaggerated the volume of trade in the United States by taking banking transactions as representative of trade. In reply (see especially the number for Feb. 21, pp. 245 _et seq._) Professor Fisher maintains that the overcounting to which I call attention is offset by undercounting, and considers offsetting book-credits, which actually dispense with the use of money and checks, an important element in the undercounting. I am unable to reconcile this position with the reasons given for excluding book-credits from the "equation of exchange." A detailed discussion of the points at issue appears in later chapters, particularly in the chapter on "Statistical Demonstrations of the Quantity Theory."

[153] _Quarterly Journal of Economics_, vols. 8 and 9; _Political Economy_, pp. 169-175; _Money_, chs. 3-8.

[154] In our analysis of bank-loans, _infra_, we shall find reason to hold that Walker, though false to the logic of the quantity theory, comes nearer to a tenable doctrine than do Kemmerer, Fisher, Andrew, and most other quantity theorists.

[155] _Principles_, Bk. III, chs. 11 and 12.

[156] _Purchasing Power of Money._

[157] _Loc. cit._, pp. 50-51.

[158] _Loc. cit._, p. 280.

[159] A. W. Atwood, "Hoarded Gold," _Saturday Evening Post_, Dec. 12, 1914, p. 26.

[160] _Cf._ Kinley, D., _The Use of Credit Instruments_, Senate Document 399, 1910, pp. 192-194.

[161] _Ibid._, pp. 102-103. In the same volume, on p. 200, the figures are given _incorrectly_, as 70% checks and 30% cash. C. A. Phillips, _Readings in Money and Banking_, 1916, p. 151, repeats this erroneous statement.

[162] _Cf._ Sprague, _Crises under the National Banking System_, Nat. Monetary Commission Report, pp. 71-75; 200, 202.

[163] _Cf._ also p. 280 of Fisher's _Purchasing Power of Money_.

[164] Kemmerer (_Money and Credit Instruments_, p. 80) maintains that, "under perfectly static conditions," money in circulation and money in bank reserves will keep a fixed relation to one another. He offers no argument to support this view. Of course, "under perfectly static conditions," everything keeps in fixed relation to everything else. The volume of credit will keep a fixed relation to the number of laborers and to the supply of clocks. But this would hardly establish causal connections! Fisher multiplies "fixed relations" of various kinds, without, so far as very diligent search can tell, offering any argument to support them. Thus, we have on p. 105 the statement, "We have seen that normally the quantities of other currency are proportional to the quantity of primary money, which we are supposing to be gold." Where this thesis has been demonstrated, he does not indicate. In view of the fact that gold has been the one really flexible element in our money supply, the thesis is hardly credible. On pp. 146-147, facing this difficulty, Fisher says: "Since, however, almost all the money can be used as bank reserves, even national bank-notes being so used by state banks and trust companies, the proportionate relations between money in circulation, money in reserves, and bank-deposits will hold approximately true as the normal condition of affairs. The legal requirements as to reserves strengthen the tendency." Here is a very substantial growth in the doctrine, with only one new argument, namely, that concerning legal reserve requirements--which gives minimal ratios, not _fixed_ ratios. In what way the fact that most kinds of money can serve as legal reserves gives reason for the doctrine of fixed proportions is not made clear. For Professor Fisher, however, it seems quite enough, for on p. 162, in the heart of his causal theory, he boldly announces: "There must be some relation between the amount of money in circulation, the amount of reserves, and the amount of deposits. Normally _we have seen_ that the three remain in given ratios to each other." (Italics mine.) It is doubtless somewhat dangerous to make a confident negative statement concerning a book which has no index. But careful reading of all that has preceded this statement reveals no references to this topic except those quoted above. "We have seen" is not a legitimate premise when so important an issue is involved. In our discussion of reserves in the section on credit, as well as in the discussion of the volume of trade, it will appear that no "normal" or "static" relations of this kind are possible.

[165] "The price-level outside of New York City, for instance, affects the price-level in New York City only _via_ changes in the money in New York City. Within New York City it is the money which influences the price-level, and not the price-level which influences the money. The price-level is effect and not cause." (_Loc. cit._, p. 172.)

[166] _Loc. cit._, p. 50.

[167] W. C. Mitchell, _Business Cycles_, p. 306.

[168] _Ibid._, p. 325.

[169] J. P. Norton, _Statistical Studies in the New York Money Market_, p. 71, and chart opposite p. 72.

[170] _Ibid._, chart facing p. 72.

[171] _Cf._ Mitchell, _loc. cit._, chart, p. 298, and text, p. 295. As the ratio of _reserves_ to _money in circulation_ was greater in 1911 than in 1894, and as the ratio of _deposits to reserves_ was also higher, we have a still wider variation in the ratio of money in _circulation to deposits_--M:M'.

[172] See the striking figures collected by A. P. Andrew for 1907. _Quart. Jour. of Econ._, Feb. 1908, p. 297.

[173] _Infra_, our discussions of the relations of volume of money and credit to volume of trade, and our discussion of credit in the constructive part of the book. The theory of money and credit must be a dynamic theory.

[174] Senate Document, No. 405, 1910. For the Bank of England, see p. 25; for the Credit Lyonnais, pp. 224-226; for the Deutsche Bank, pp. 374-375.

[175] _Statist_, 1912, p. 577.

[176] "The Prospects of Money," British _Economic Journal_, Dec. 1914.

[177] _Cf._ Ashley, W. J., _Gold and Prices_, N. Y., 1912, pp. 21 _et seq._

[178] _Cf._ von Mises, "The Foreign Exchange Policy of the Austro-Hungarian Bank," British _Econ. Jour._, 1909, vol. 19. _Cf._ Keynes, _Indian Currency and Finance_.

[179] Conant, _Principles of Money and Banking_, vol. II, p. 50. In 1899, the reserve of the Bank of Belgium consisted of 107 millions (francs) in specie, and 108 millions in foreign bills.

[180] _Principles of Economics_, vol. I, pp. 432 _et seq._

[181] In the chapter on "Quantity Theory and International Gold Movements," _infra_.

[182] The Joint Stock Banks in England keep "till money" in cash, even though their "reserves" are chiefly deposits at the Bank of England.

[183] Fisher, _loc. cit. passim_. _Vide_ especially ch. 8.

[184] _Purchasing Power of Money_.

[185] _Business Cycles_, pp. 580, 595-596.

[186] _Cf._ C. M. Walsh, _The Measurement of General Exchange Value_, pp. 480-481.

[187] On pp. 314-315, and elsewhere, Fisher indicates that _all_ the causes affecting prices operate _through_ the factors in the equation of exchange. _Cf._ p. 74. This would require a concrete equation of exchange throughout.

[188] Chapter on "Passiveness of Prices."

[189] _Loc. cit._, p. 169.

[190] _Cf._ his _Silver Situation_. 1878 to 1891 do not give time enough for quantity of money to dominate volume of credit, in his exposition!

[191] Mill, _Principles_, Bk. III, ch. 12, par. 1.

[192] Fisher, _loc. cit._, p. 62.

[193] "A Compensated Dollar," _Quart. Jour. of Econ._, Feb. 1913.

[194] The chapter on "Dodo-Bones," _supra_, and the chapter on "The Quantity Theory and World Prices," _infra_.

[195] _Loc. cit._, p. 156.

[196] _Ibid._, p. 160.

[197] Or organs for pianos, etc. A common practice--less common in the North than formerly--is the payment of bills at country stores in produce. There is not a little barter at secondhand stores in New York City.

[198] Mr. Burton Thompson, of No. 7 Wall St., who knows the real estate situation there intimately, states that while dealers do not like to "swap" real estate, and do little of it when business is good, they are forced to do it extensively when business is sluggish, "as has been the case for the past four or five years."

[199] _Cf._ E. S. Meade, _Corporation Finance_, p. 376, and _passim_.

[200] The same thing often happens when a bond issue is paid off--bond-holders may take their pay in new bonds. "Conversions" of bonds into stocks, or of preferred into common stock, are also barter transactions. $220,000,000 of the $420,000,000 which Mr. Carnegie and his associates received from the Steel Trust for their plants, etc., was paid, not with money and checks, but with bonds. _Vide_ Stevens, _Industrial Combinations and Trusts_, p. 101.

[201] The foregoing had been written before the discussion in the _Annalist_ of Feb. and March, 1916 (pp. 183-184, 245-272, 313-317, 344, 377), in which Professor Fisher and the present writer joined issue with reference to Professor Fisher's estimate, 387 billions, for the volume of trade in the United States in 1909. The present writer contended that the banking transactions which Professor Fisher took as representative of trade greatly overcounted trade, since they included loans and repayments, taxes, several checks in one transaction, gifts, etc., etc. Professor Fisher contended that the overcounting was offset by undercounting, and instanced particularly the clearing-house arrangements in the speculative exchanges, where checks are in part dispensed with, and the offsetting in "running accounts" through book-credit. This indicates a substantial change in Professor Fisher's view as compared with that set forth in the _Purchasing Power of Money_, where he maintains, as shown above, that barter is virtually non-existent, that money and checks are "for all practical purposes and all normal cases," "necessities of modern trade," (p. 160), and that book-credit merely postpones, and does not dispense with, the use of money and checks (p. 370).

The extent of the offsetting by barter, clearing-houses in the exchanges, and book-credit, though very great, is quite small as compared with Professor Fisher's 387 billions, and does not nearly offset the overcounting. The writer has obtained some fairly definite data on this point, which will be presented in the chapter on "Statistical Demonstrations of the Quantity Theory," in discussing the volume of trade.

[202] _Miscellaneous Articles on German Banking_, Report of National Monetary Commission, p. 175. _Cf. infra_, pp. 288-290.

[203] _Cf._ our chapter on "The Functions of Money," _infra_.

[204] One familiar feature of corporation finance makes barter much preferable to money transactions, in one connection, which involves very many corporations indeed, at their inception. Stock, in order to be marketable, must be "full-paid and non-assessable." If the corporation sells its stock to the first stockholders, this means that money must be paid for it to the full par value, dollar for dollar. This is usually not easy. An especial difficulty would then present itself that the promotor would have trouble in getting any pay for his work. (Meade, _Corporation Finance_, _passim_; Sullivan, _American Corporations_, _passim_.) If, however, the stocks are paid for in _goods and services_, the courts are much less exacting in looking to see if full value has been received. Barring obvious fraud, the courts will usually count the stock full paid and non-assessable even though the value of the goods and services received is not very great. The first sale of the stocks of a new corporation, therefore (if it is important enough to wish to have a public market for its stocks), is a _barter_ transaction, as a rule.

[205] _Purchasing Power of Money_, p. 152.

[206] _Ibid._, pp. 352 _et seq._

[207] _Infra_, ch. on "Passiveness of Prices." _Weighted_ averages of "person-turnovers" will not save the situation here, if incomes stop entirely, since the persons involved then drop out altogether. Moreover, _weighted_ averages would clearly depend on _incomes_, and hence on _prices_, and hence could not depend on _habits_ exclusively, or _causally explain_ prices.

[208] _Loc. cit._, pp. 152-153.

[209] _Ibid._, p. 154. Italics mine.

[210] _Supra_, ch. on "Volume of Money and Volume of Credit." _Infra_, ch. on "Bank Assets and Bank Reserves."

[211] _Cf._ Kinley, _Money_, pp. 145 and 205-206, for the discussion of various moveable margins of this sort.

[212] Van Hise, _Concentration and Control_, p. 16. The tendency to accumulate hoards when money is plentiful is notoriously strong in countries like India.

[213] _Loc. cit._, pp. 167-168.

[214] _Ibid._, p. 164.

[215] _Cf._ Davenport's analysis of the causes governing volume of trade, _Economics of Enterprise_, p. 272.

[216] _Loc. cit._, p. 110.

[217] Perhaps not quite correct, since he does recognize differences in degree as between different places, though, perhaps properly, from the standpoint of his normal theory, saying nothing about differences in degree as between different times in the same place.

[218] _Cf._ also p. 315, _loc. cit._, where this is placed as one of three main causes of the historical rise in prices.

[219] That the overwhelming bulk of trade is in the cities will appear in our chapter, _infra_, on "Volume of Money and Volume of Trades."

[220] On the average, in the United States, the banks have less money than the people have. _Vide_ Mitchell, _Business Cycles_, pp. 295 and 298.

[221] Based on arbitrary assumptions as to variability. _Cf._ his p. 477. _Cf._ our chapter, _infra_, on "Statistics of the Quantity Theory."

[222] Other passages might be cited to show that Fisher thinks that T and the V's are fundamentally governed by different causes. For example, he says "an increased trade in the Southern States, where the velocity of circulation of money is presumably slow, would tend to lower the average velocity in the United States, simply by giving more weight to the velocity in the slower portions of the country." _Loc. cit._, p. 166.

[223] _Cf._, _infra_, our chapter on "Statistical Demonstrations of the Quantity Theory."

[224] _Common Sense of Political Economy_, p. 623.

[225] _Principles_, I, 432.

[226] _Loc. cit._, pp. 432, 438-439.

[227] _Ibid._, p. 439. _Cf._ our chapter, _supra_, on "Volume of Money and Volume of Credit," where Taussig's view as to the relation of money and bank-credit is analyzed.

[228] _Loc. cit._

[229] Virtually the same expression is to be found in Barbour, David, _The Standard of Value_, London, 1912, p. 43. Barbour denies vigorously that more money can increase business, since it cannot increase the number of laborers, or of machines, or the amount of food, etc. The doctrine that volume of trade is fixed by (1) volume of products, and (2) degree of specialization of production, and hence is independent of volume of money, appears in Davenport, _Econ. of Enterprise_, 271-273.

[230] In this view, Fisher typifies the general position of the quantity theory, and, indeed, in part even of those who do not agree with the quantity theory, but who, with the quantity theorists, view the problems of money and banking as matters of static theory. High or low prices, once the transition is made, exhaust the effects of increasing or decreasing the money supply. During the period of transition, certain readjustments in relations between creditors and debtors arise, which lead to either temporary prosperity or temporary distress, but after the transition, it is a matter of indifference whether or not money is abundant. Though the view is, logically, an essential part of quantity theory reasoning, we find much of it vigorously maintained by Laughlin, _Principles of Money_, ch. on "Amount of Money Needed by a Country." Laughlin and Fisher would seem to be at one in maintaining that the quantity of money in a country is a matter of indifference, and from the views of both would follow a condemnation of the idea that any long run consequences for volume of trade, efficiency of production, etc., could follow from increasing or decreasing the volume of money.

It may be just as well here to indicate the conviction of the present writer that the relation between the quantity theory and the bimetallic movement is historical rather than logical. Indeed, in laying the stress they did on the importance of an inadequate stock of money in accounting for the depression of the latter part of the 19th Century, the bimetallists were out of harmony with the quantity theory.

[231] P. 50.

[232] Pp. 358-372, vol. I.

[233] _Loc. cit._, p. 160. _Cf._ our chapter on "Barter."

[234] The fact that prices are often high in gold mining regions, as compared with prices in the general world markets, has been taken by many writers as proof of the quantity theory. _Cf._ Kemmerer, _Money and Credit Instruments_, pp. 50-51, 58; Cairnes, J. E., _Essays in Political Economy_, particularly the discussion of the Australian episode. It seems to me that this is particularly inconclusive. High prices characterize remote mining regions of all kinds, whether gold, silver, copper, diamonds, tin or what not be the quest. Prices are not lower in the tin and copper region in the northern part of the Seward Peninsula in Alaska than they are in the gold region about Nome in the southern part of that peninsula. They are high in both places, not because of the abundance of gold or of money, but because of the great value of goods, which have to be brought with great trouble and expense from the United States. They are higher in the region of the Saw Tooth Mountains, in the centre of this peninsula, where hydro-electric power for the use of the gold miners about Nome, and for the copper and tin mines further north, is being developed, than they are at Nome itself, on the coast, where the gold is being mined. They were high in Australia because the discovery of gold led everybody to abandon everything but gold mining, and to bring in virtually everything from a distance. Wooden beams were imported to Australia from Sweden! (Pierson, N. G., _Principles of Economics_, I, p. 389.) One would expect prices in gold money to be higher in a silver or copper mining region, which is prospering, than in a gold mining region, equally remote, where a great deal of gold is being mined, but at a cost too great to make the region prosperous.

[235] _Loc. cit._, p. 51.

[236] _Meaning of Money_, p. 18.

[237] Price's address before Western Econ. Asso'n, Nov. 26, 1915; Holt's letter; Dec. 2.

[238] _Loc. cit._, p. 172.

[239] See our discussion of "money rates" and "interest rates," _supra_, in the chapter on "Capitalization," and _infra_, in the chapters on "The Functions of Money," and on "Credit."

[240] _Infra_, chapter on "Functions of Money," and _supra_, chapters on "Capitalization" and "Dodo-Bones."

[241] _Cf._ our chapters on "Supply and Demand," and "The Origin of Money."

[242] New York City can always use idle funds, "at a price."

[243] Kemmerer, as well as Fisher, allows physical production and consumption to dominate his "index" of trade variation. _Loc. cit._, pp. 130-131; Fisher, _loc. cit._, p. 479. _Cf._ our discussion of their statistics, _infra_.

[244] This confusion of volume of trade and volume of production is a companion of the confusion discussed on p. 307, _infra_, of quantity of money with volume of money-_income_. The two confusions, found in virtually all expositions of the quantity theory, give it most of its plausibility.

[245] _Loc. cit._, ch. 12, and appendix to ch. 12.

[246] _Supra_, ch. on "Equation of Exchange."

[247] In a letter to the writer, Professor Fisher states that the figures for the physical receipts at the cities, which dominate his index for T, have not been available for recent years, and that since they were discontinued, he has relied chiefly on the indirect calculation of T _via_ the other factors in the equation. These figures were discontinued in 1912. In the _American Economic Review_ for June, 1916 (p. 457, n.) Professor Fisher states that the indirect calculation of T has always had more weight in his figures than the direct calculation. This would serve in some degree to lessen the errors of his index of variation. The extent to which he has allowed his T as directly calculated on the basis of the index to be modified by the indirect calculation, is indicated on p. 302 of the _Purchasing Power of Money_, as follows: "The alterations in T, as shown in Figure 16, though still greater than the preceding, are nevertheless so small and uniform as to preserve an almost perfect parallelism between the original and the altered curve. The differences rarely exceed 10%." Even an indirect calculation of T, however, would not avoid the criticisms here urged, since the other factors, MV, M'V', and P are all, as we shall see in the chapter on "Statistical Demonstrations of the Quantity Theory," calculated by methods which give very excessive weight to trade outside New York City and to non-speculative transactions.

[248] _Loc. cit._, p. 485.

[249] _The Use of Credit Instruments in Payments_, Senate Document No. 399, 61st Congress, 2nd Session.

[250] This brief account will be amplified for critical discussion in the statistical chapter below. Fisher in fact calculated MV and M'V' separately. The account above given is strictly accurate only for that part of T, 353 billions, which is carried on by means of checks. The calculation of MV, however, is also based on Kinley's figures. My account here is adequate for the question at issue, which is, not as to the absolute magnitude of trade, but rather, as to the _proportions_ of speculation and other elements in trade.

[251] The substance of the argument here presented first appeared in articles in the _Annalist_, to which I am indebted for permission to use it here. See the numbers of Feb. 7, March 6, and March 20, 1916. Professor Fisher's replies, directed wholly against the charge of double counting, appeared in the _Annalist_ of Feb. 21 and March 13, 1916. Professor Fisher does not question my contention that speculation makes up the overwhelming bulk of trade, in these replies. He rather seeks to meet the charge of overcounting by holding that bank-transactions do not fully count speculation! This he thinks particularly true of stock exchange transactions. _Cf._ his article of Feb. 21, 1916.

[252] The Census Bureau figures have been subject to a good deal of criticism, and I therefore refrain from trying to draw precise conclusions from them.

[253] The figures showing the number of banks reporting from each State, together with the number of reports rejected, will be found on pp. 47-49 of his monograph. The figures above are combinations of figures from his various tables. These tables are so carefully indexed in Dean Kinley's monograph that detailed page references are unnecessary here.

[254] _Cf._ our discussion of this topic in the statistical chapter, _infra_.

[255] _Loc. cit._, pp. 153-154.

[256] _Discussions in Economics and Statistics_, I, 204. Quoted by Kinley, _loc. cit._, 152.

[257] The coefficient of correlation has been developed by the biologists, chiefly Karl Pearson, but has been applied to problems in many fields, especially economics, sociology, psychology, and education. A good source is Yule's _Introduction to the Theory of Statistics_. Professor H. L. Moore has made extensive use of the method in his _Laws of Wages_, and his _Economic Cycles_.

Connected with the coefficient of correlation, usually, is a figure for "probable error," which depends, primarily, on the square root of the number of observations. When the probable error is low, and the coefficient of correlation high (as .8), it is commonly supposed that a very high degree of causal connection is established. I shall not go into detail in discussion of the method. My personal judgment is that it is overrated, that "spurious" correlations, leading to quite erroneous conclusions, have frequently resulted from it, and that the labor involved in calculating coefficients of correlation is frequently too great for the results obtained. I should never be disposed to accept conclusions based on a "correlation coefficient" unless there were other converging evidence to support it. In effect we have, in the coefficient of correlation, nothing more than a refinement of the method of comparing two curves on a graph. The curves tell the story, in a general way, whereas the coefficient of correlation sums up all the comcomitant variations (and disagreements) in one figure. The eye does not readily compare the degree of relation between two curves with the degree of relation between two others. When it is desired to know which, of several relationships, is closest, the graphic method, or the method of comparing series of figures, burdens the attention. The coefficient of correlation condenses the information to such a degree as to make comparison easy. It is, then, merely a refinement of familiar statistical methods. Used wisely, guided by sound theory, it aids in presenting facts. It enables us to state quantitatively things we already know qualitatively. But there is no magic in it! As I have mentioned both Mr. Silberling and Professor Moore in this connection, it is proper to say that both of them are fully alive to the dangers and limitations of the method, and that Professor Moore emphasises strongly the need for sound _a priori_ testing of hypotheses before submitting them to the test of correlation. One danger, that of getting a high correlation merely because both of the variables compared are _growing rapidly_, has been avoided by Mr. Silberling by the use of successive _percentage_ deviations, instead of absolute figures. For reasons explained by Mr. Silberling in a footnote, he uses, instead of the "probable error," a statement of the number of observations. Thus, "r = .78 (46)" means that the coefficient of correlation is .78, and that there are 46 observations for each of the two variables compared.

[258] They get into clearings, however, _two_ days after.

[259] Professor Kemmerer, also. See his index of variation of trade, _op. cit._, pp. 130-131.

[260] It is unfortunate that weekly figures from railways do not exist in such number, or for roads of sufficient importance, to justify correlations of the weekly figures with clearings.

[261] Professor W. M. Persons informs me that Mr. Silberling's results are in accord with calculations which he has made. _Vide_ his article in the _Am. Econ. Rev._ of Dec. 1916.

[262] _The Wealth and Income of the People of the United States_, New York, 1915.

[263] See our chapter, "Statistical Demonstrations of the Quantity Theory."

[264] _Loc. cit._, pp. 78-79.

[265] _Jour. of Polit. Econ._, vol. v, p. 165.

[266] Even this is too high, for 1909, on the basis of our estimate for net income in 1909, in the Appendix to this chapter.

[267] The extent of speculation in wholesale trade is discussed in this chapter, _infra_. "Double counting" is discussed in the chapter on "Statistical Demonstrations of the Quantity Theory."

[268] _The Use of Credit Instruments_, p. 151.

[269] The figures for rent and wages are from W. I. King, _op. cit._ The other figures are from the _Statistical Abstract of the United States_, unless otherwise stated. King's estimates are for 1910. The other figures are for 1909. Compare this list with my discussion in the _Annalist_, March 6, 1916, p. 317, where I made computations purposely much too large. In that computation I clearly greatly exaggerated salaries and professional incomes, and rent as well as retail and wholesale trade. My figure there included the rent of houses as well as the rent of land. King's figure is only for land rent. However, in view of the fact that a high percentage of real estate is used by the owner, with the result that no rent-payments are required, I think King's figure high enough for the whole item.

[270] Professor Fisher has estimated total real estate exchanges in the country at less than 1% of the total 387 billions (_op. cit._, p. 226), and a colleague of the Harvard Business School has given me an estimate of $1,300,000,000 for total advertising in the United States. Neither of these items is properly counted part of the "static" trade that would occur were things in "normal equilibrium." If, however, we counted them, we should add only 1%, say, of the total. When it is seen how insignificant, in comparison with the 387 billions indicated by deposits, the figures for total manufactures, total farm products, and total wages, are, there really is little need to argue the case. It is impossible to find, in the "ordinary trade" we have not mentioned, items whose total will equal the least of these three. Moreover, we have allowed for a multitude of these items in permitting the figure for retail trade to be as high as it is, and have left large leeway in making no deduction for the speculation in wholesale trade, and in counting farm products in full. Interest and dividends I have not counted. They are not "trade." When we have counted stock sales, we have already counted the exchanges in which dividends were sold. The man who buys the stocks has already bought the dividends. To count the dividends in addition would be a case of that double counting of capital and income against which Professor Fisher has warned us in his _Nature of Capital and Income_. Rents and wages represent payment for current services, and are properly items of trade. Interest and dividends are one-sided money payments, completing transactions for which money has already passed, and in which a man is merely getting a delivery of something he has already bought. In general, loans and repayments are not properly counted as part of ordinary, or physical trade. If, however, we counted total corporate dividends and interest we should get only $4,781,000,000 (King's estimate, _loc. cit._, p. 262). This is a little over 1%. What else is there? In his article of March 13, 1916, in the _Annalist_, Professor Fisher failed to meet my suggestion that a bill of particulars was called for!

[271] See the table of shares and approximate values in Pratt's _Work of Wall Street_, 1912 ed., p. 187. This table covers the years, 1890-1911.

[272] Boston _Transcript_, "Tape Record of Sales Incomplete," May 6, 1916, Pt. I, p. 12. The _Transcript_ quotes as authority the New York _Commercial_. Following the extraordinary market of Sept. 25, 1916, when the ticker recorded 2,317,000 shares sold on the New York Stock Exchange, the newspapers estimated that missed sales, odd lots, and unrecorded sales on stop loss orders, would bring the total above 3,000,000 shares. There was an unusual number of stop orders caught that day. There will be very few other sales of 100 shares missed by the ticker, except in times of extraordinary pressure. See _Boston Herald_, Sept. 26, 1916, p. 1.

[273] Hollander, J. H., _Bank Loans and Stock Exchange Speculation_, Senate Document 589, 61st Congress, 2nd Session, p. 23.

[274] Pratt, _Work of Wall Street_, 1912 ed., p. 264.

[275] _Annalist_, Dec. 27, 1915, p. 719--"Selling Phantom Grain."

[276] My information regarding the Coffee Exchange in New York comes from the Treasurer of the Exchange, Mr. Jas. H. Taylor, through the courtesy of Mr. W. H. Aborn, of Aborn and Cushman, New York.

[277] Report of the Hughes Commission, in appendix to Pratt's _Work of Wall Street_, Rev. ed., p. 417. This report gives information regarding all the organized exchanges in New York.

[278] L. Conant, Jr., "The United States Cotton Futures Act," _American Economic Review_, March, 1915, p. 1.

[279] Hughes Commission, _loc. cit._, p. 418.

[280] Taussig, _Principles of Economics_, I, p. 405; Kinley, _Report of the Comptroller_ for 1896, p. 89.

[281] This is probably more extensive in London than in the United States.

[282] _Loc. cit._, p. 47.

[283] _Loc. cit._, pp. 130-131. The very title, "_growth_ of business," suggests the fallacy to which we refer in the text, namely, that we have a steady upward movement, with little variation. This is largely true of production and consumption. It is in no sense true of "trade," as distinguished from production.

[284] Kemmerer relied on the investigation of 1896, whereas Fisher used more the figures of 1909. Kemmerer does not, in general, assign an absolute magnitude for "trade," but for 1890 he gives a figure. _Loc. cit._, p. 136. _d._

[285] _Loc. cit._, p. 136, _d._

[286] A recent discussion of these problems is to be found in Shaw, A. W., _Some Problems in Market Distribution_, Harvard Univ. Press, 1915.

[287] _Op. cit._, pp. 51-52.

[288] London, Paris, and New York all do a great deal of manufacturing, particularly of finer things, whose value is high, and which require a high proportion of labor, as compared with machinery. _Cf._ our discussion of the London "Money Market," _infra_, in Part III.

[289] _Ibid._, p. 47.

[290] _Cf._ Jenks, _The Trust Problem_, Rev. ed., p. 29. The doctrine that these costs are net social loss is challenged by the present writer in an article, "Competition _vs._ Monopoly," in the New York _Independent_, of Oct., 1912.

[291] "Royal" has been estimated at $5,000,000; "Spearmint" at $100,000,000. Mr. Guy C. Hubbard, of the _Dry Goods Economist_, New York, has given the writer some exceedingly interesting data regarding the value, as bankable collateral, of various trade-marks and firm names.

[292] _Cf._ our discussion of "The Reconciliation of Statics and Dynamics," _infra._

[293] Significant in this connection, is the contention of recent students of American agriculture, that the great need is better organization and credit, facilities for _marketing_.

[294] _Loc. cit._, p. 89. Though Fisher does not conclude that banking is bad, he does conclude that gold mining is a parasitic and socially injurious industry, like the making of burglars' "jimmies." See his _Elementary Principles of Economics_, N. Y., 1912, pp. 499-500.

[295] Fisher does admit that the _character_ of the banking system, and of the money system, will affect the volume of trade. "There have been times in the history of the world when money was in so uncertain a state that people hesitated to make many contracts because of the lack of knowledge of what would be required of them when the contract should be fulfilled. In the same way, when people cannot depend on the good faith or stability of banks, they will hesitate to use deposits and checks" (78). But there is nowhere an admission that the _amount_ of bank-credit has any influence on the volume of trade, and there are repeated assertions, as already instanced in the text, that the volume of trade is quite independent of the volume of money and bank-credit.

[296] Part IV of this book gives a detailed analysis to the problems involved in these contrasts.

[297] This thesis was set forth by the present writer at the 1915 meeting of the American Economic Association. See _Papers and Proceedings_, Supplement to March, 1916, _Amer. Econ. Rev._, pp. 168-169.

[298] _Cf._ J. B. Clark, _Distribution of Wealth_, _passim_, and J. Schumpeter, _Theorie der wirtschaftlichen Entwicklung_, pp. 1-101. See also the present writer's "Schumpeter's Dynamic Economics," _Pol. Sci. Quart._, Dec, 1915, and A. S. Johnson, in _Quart. Jour. of Econ._, May, 1914.

[299] _Principles_, Bk. III, ch. xviii, par. 1.

[300] _Theorie der wirtschaftlichen Entwicklung_, p. 77. Since the foregoing was written, Professor W. C. Mitchell has presented an admirable historical paper on "The Role of Money in Economic Theory," in which he has multiplied instances, in the history of the science, of this contempt for money, or abstraction from money, in economic theory. He finds that Marshall, and some other later writers, have given much fuller recognition to the role of money, which he conceives of primarily as an institution which has rationalized economic behavior, by forcing upon the individual bookkeeping habits of thought. This still leaves it legitimate to abstract from money, however, for "pure theory." Highly important as is the "measure of values" function, it does not explain the main work which money, as money, actually _does_ in economic life, nor need it be a source of value for money. _Cf._, _infra_, our chapter on "The Functions of Money." Professor Mitchell's paper will be found in "Papers and Proceedings," Supplement to the March, 1916, number of the _Am. Econ. Rev._

[301] The materials in this appendix are taken from an article published in the _Annalist_ of Jan. 8, 1917, pp. 39, 53-54, and the New York _Times_ Annual Financial Review of Dec. 31, 1916, and are reprinted by the courtesy of the New York Times Company.

[302] _Vide Annalist_, Feb. 7, 1916, pp. 183-184, and Feb. 21, 1916, p. 246.

[303] _Wealth and Income of the People of the United States_, p. 129.

[304] The justification of this procedure is argued more fully in my article in the _Annalist_ of Feb. 7, 1916, above referred to.