Chapter XXV: The Reconciliation of Statics and Dynamics (5)

[305] The figures for railway gross receipts are taken from the _Commercial and Financial Chronicle_, rather than from Government reports, in order to get figures for calendar rather than fiscal years, and in order to get the latest possible figures. As the absolute figures are not strictly comparable throughout, the method employed has been to calculate _percentage_ gains or losses for the _same roads_ for successive years. This would lead to a cumulative error, if large new roads had been built during the period, and had retained their independence. In point of fact, however, the curves for the absolute figures and for the percentage changes run pretty closely parallel down to 1909, at which time a large number of small roads, not previously counted, are brought into the figures. As the number of roads reported varies, the percentage changes on the same roads give us the more accurate measure of year by year variation. It is, at the date of writing (December, 1916), the only possible method for 1916, since the _Chronicle_ figures which come to the end of November are based on only 37 roads, with a mileage of 84,452 out of over 240,000 miles usually reported. For these roads, a gain of 19.63%, for the first eleven months of 1916 over the same months in 1915, is reported, and our figures for 1916 rest on the assumption that the gain for the whole year over 1915 is 17.27%. (The greatest gains are for the earlier months, as the end of 1915 was a period of great activity.) Much fuller figures supplied me by Mr. Osmund Phillips, of the _New York Times_, for the first _ten_ months of 1915 and 1916 serve to justify this estimate for the gain of 1916 over 1915. For the _Chronicle_ data, see vol. 102, p. 930, vol. 103, p. 2112, and _passim_.

The index of prices chosen is Dun's. (See especially _Dun's Review_ of May 11, 1907, Jan. 9, 1915, and later months, and the discussion of Dun's index number in the _Bulletin of the United States Bureau of Labor Statistics_, Whole Number 173, July, 1915, pp. 148 _et seq._) Dun's index number is chosen partly because it is complete for 1916, and partly because it is weighted in accordance with the consumption of different classes of goods, and so particularly suited to this inquiry. I venture to express strong preference for rationally weighted index numbers, and for the use of different index numbers for different purposes. (_Vide_ the discussion of index numbers in ch. 19.) Our price index for each year is an average of the twelve monthly figures given by Dun from 1894 to 1916. For the years 1890-94, our price index is an average of the figures for January and July. This average is lower, in most years, than the average for the whole year, and may well be lower than the average for these years, but no attempt has been made to rectify this possible source of error. The index is recalculated from Dun's figures (where it is not a percentage, but a sum of prices), and made a true percentage index, with a base in 1910.

The figures for exports and imports are for _calendar_ years. They were obtained, for the years 1890-1909, from _Statistics of the United States, 1867-1909_ (National Monetary Commission Report), and, for the years since 1909 from the _Commercial and Financial Chronicle_. For 1916, November and December are estimated.

[306] Their indicia of variation for "trade," though failing to meet the problems for which they were designed, as shown in chs. 13 and 19, are good indicia of variation for physical production and consumption.

[307] That this should have been seriously denied during the recent Presidential campaign, on the basis of the estimate that foreign trade is minute as compared with domestic trade, gives special point to the present discussion.

[308] King's figures, for which he estimates a margin of error of 25% are used for these years. (_Loc. cit._, p. 129.) The export and import figures used are for fiscal years.

[309] Probably the apparent moderate increase in imports is due wholly to higher prices. The actual physical volume has possibly been reduced, as compared with the period before the War.

[310] I am indebted to several colleagues for advice and criticism in connection with these tables, particularly Professors Taussig and W. M. Persons. Mr. N. J. Silberling has been particularly helpful, aiding in the choice of the statistical sources, suggesting methods of handling and interpreting them, and making virtually all the computations in the tables.

[311] Retail prices of exports and imports are obtained by adding 50% to the wholesale figures reported, on the assumption that wholesale prices are two-thirds of retail prices. The percentages in the final column are obtained by dividing the figures for foreign trade by the figures for domestic trade. The percentage would reach 100 when foreign trade becomes equal to domestic trade.

[312] The figures in column 4 are obtained for any year, say 1905, by taking the index in column 3 for 1905, the index in column 3 for 1910, and the absolute figure in column 4 for 1910, and solving by the "rule of three."

[313] The notion of interdependence need not involve circular reasoning, if the facts really justify it. The whole cosmos is, doubtless, interdependent. Often certain systems within the cosmos manifest enough _in_dependence of the rest of the universe to justify us, for some purposes, in thinking only of _inter_relations within the systems. The important thing is to make the circle in theory as big as the circle in fact. _Cf. Social Value_, p. 152, n.

[314] In chapter XVI.

[315] _Cf._ our chapter, _infra_, on "The Quantity Theory and International Gold Movements."

[316] Italics mine.

[317] _Loc. cit._, p. 165.

[318] The resemblance of the view here maintained to that of Professor Laughlin is at many points close. I am indebted to his _Principles of Money_ for many suggestions.

[319] _Loc. cit._, p. 165, n. The doctrine is reiterated on p. 168.

[320] This is strikingly true in the stock market--the place where more trade takes place than in any other market. See the figures in the preceding chapter with reference to stock transactions, and the chapter on "Bank Assets and Bank Reserves."

[321] For a history of this debate, with bibliography, see Laughlin's _Principles of Money_, ch. 7, on the "History and Literature of the Quantity Theory," esp. pp. 260 and 263-264. Laughlin shows the connection of the currency principle and the quantity theory.

[322] It may be that in the brief discussion of elastic bank-notes on p. 173 (_loc. cit._), Fisher means to given an explanation of the theory of elasticity from a quantity theory standpoint. The statement there is that money not only tends to flow away from _places_ where prices are high, but also from _times_ when money is high. "If the price-level is high in January as compared with the rest of the year, bank-notes will not tend to be issued in large quantities then. On the contrary, people will seek to avoid paying money at high prices and wait till prices are lower. When that time comes they may need more currency; bank-notes and deposits may then expand to meet the excessive demand for loans which may ensue. Thus currency expands when prices are low and contracts when prices are high, and such expansions and contractions tend to lower the high prices and to raise the low prices, thus working toward mutual equality."

If this be the quantity theory account of elasticity--and it would seem to be about the only thing the quantity theory could say--it is about as far from giving an account of the real facts as any theory could be! Something of this sort is suggested, perhaps, by the behavior of Canadian bank-notes, which do expand in the fall, when prices of wheat are lowest, and contract in January, when wheat prices are higher. This grows, however, out of the peculiarities of an agricultural country, and does not at all illustrate the general doctrine maintained. First, wheat prices in the fall are low because wheat is most abundant then. Wheat prices in January, under the influence of speculation, commonly differ from wheat prices in the fall by an amount about equal to the elevator charges, rattage, insurance, interest, and other carrying charges involved. Second, wheat prices are only one element in the general price-level. Low wheat does not prove that the level is necessarily low. A good wheat crop may mean increases in general prices, and often does. Third, and more important, the real reason for an expansion in Canadian notes at such a time is that the wheat _has to be moved_. The farmers do not want to carry it; the speculators are ready to carry it; and it must be sold. Expanding _trade_, at the season, is the cause of expanding bank-notes. The influence of the _price_ of wheat is exactly the reverse of that which Fisher assigns. If the price of wheat is low in the crop-moving season, _less_ notes will be issued than if the price is high. In other words, the greater the increase in PT, not P or T alone, the greater will be the expansion of bank-notes. Decrease either P or T, and less notes will be issued.

In general, the phenomenon of elastic bank-credit is the phenomenon of an expanding bank-note or deposit issue accompanied by rising prices and volume of trade, and a decrease when trade and prices decrease. This is all commonplace, but I feel it best to refer to familiar sources to show how old and well recognized my statement of the case is. The following is from Mill's _Principles of Economics_, Bk. III, ch. 24, par. 1: "Not only has this fixed idea of the currency as the prime agent in the fluctuations of price made them shut their eyes to the multitude of circumstances which, by influencing the expectations of supply, are the true causes of almost all speculations and of almost all fluctuations of price; but in order to bring about the chronological agreement required by their theory, between the variations of bank issues and those of prices, they have played such fantastic tricks with facts and dates as would be thought incredible, if an eminent practical authority had not taken the trouble of meeting them, on the ground of mere history, with an elaborate exposure. I refer, as all conversant with the subject must be aware, to Mr. Tooke's _History of Prices_. The result of Mr. Tooke's investigations was thus stated by himself, in his examination before the Commons Committee on the Bank Charter question in 1832; and the evidences of it stand recorded in his book: 'In point of fact, and historically, as far as my researches have gone, in every signal instance of a rise or fall of prices, the rise or fall has preceded, and therefore could not be the effect of, an enlargement or contraction of the bank circulation.'"

I see nothing in Fisher's discussion of credit to differentiate it from the position of the old Currency School. And the reason is a very simple one: Fisher has followed the quantity theory to its logical conclusions!

[323] See our chapter on the "Volume of Money and the Volume of Credit."

[324] How close the relation between loans and deposits is may be seen from Professor Mitchell's chart, _Business Cycles_, p. 344. The same chart exhibits the variations in the reserve percentage, which is very much greater. The New York Clearing House banks, which we have seen (_supra_, "Volume of Money and Volume of Credit") have a spread of from 24.89% to 37.59% in the yearly average of percentage of reserves to deposits--a spread of over 50%--show a variation in yearly average for the percentage of loans to deposits of only 24.3%--the range being from 83% to 104%. _Ibid._, pp. 325 and 331. For a partially different series of years, see the chart of J. P. Norton, _Statistical Studies in the New York Money Market_, facing p. 104.

[325] Neither deposits nor loans vary _proportionately_ with trade. Very active trade may merely increase the activity of loans and deposits, causing both to be shifted more rapidly--larger outgo, larger income, loans more frequently contracted and paid off, larger amounts "deposited" on a given day, but balances, both of loans and deposits, at the end of the day not increased proportionately with the activity. This is strikingly illustrated in the business of the stockbroker.

[326] _Supra_, p. 47.

[327] Italics mine.

[328] "Miscellaneous Articles on German Banking," in _Report of Nat. Mon. Commission_, p. 175. Art. by Max Wittner and Siegfried Wolff.

[329] The figures are not easily compared, as the figures for giro-_transfers_ do not indicate the volume of giro-_accounts_, which is doubtless much smaller. I know no estimates for the turnover either of notes or of bills of exchange. To determine what _proportion_ of business is done by each would, thus, not be easy. The volume of bills of exchange for the year is three times as great, for 1907, as the figures for note issue. The giro-system, as is well known, is relatively unimportant as compared with notes. But I do not undertake to assign figures showing proportions of business done.

[330] Inland bills of exchanges in connection with the grain trade are still very important, especially at Chicago and Minneapolis. The writer has met frequent reference to cotton bills at St. Louis. Wool bills are frequent in Boston.

[331] _Vide_ my criticism of his statistical fallacy in this connection, in the _Annalist_ of Feb. 7, 1916. He rules out foreign trade from his "equation of exchange" by the device of assuming that imports and exports cancel one another. This, however, to the extent that it is true, makes the bill of exchange more, rather than less, important as a substitute for money and deposits. Fisher, _loc. cit._, pp. 306, and 374-375. See appendix to chapter XIII of the present book.

[332] _Vide_ ch. 16 for a more precise statement of this part of quantity theory doctrine.

[333] _Purchasing Power of Money_, pp. 169-170.

[334] _Ibid._, p. 170.

[335] _Ibid._, p. 171.

[336] _Ibid._, p. 172.

[337] _Ibid._, p. 172. Italics mine.

[338] _Ibid._, pp. 174-181.

[339] I call attention, in passing, to Fisher's confusion, in this sentence, of "commodities" with "trade." This occurs frequently in his argument. _Cf._ pp. 225-226, _supra_.

[340] The Capitalization theory is briefly outlined by Boehm-Bawerk, in the critical and historical volume of his _Kapital und Kapitalzins_ (English title of the volume, _Capital and Interest_), in his criticisms of the theories of Henry George and Turgot. It has subsequently been elaborated, and much improved, by Fetter, in his _Principles of Economics_, and, more recently, has been restated, with mathematical formulae, by Fisher, in his _Rate of Interest_. A good brief statement will be found in Seligman, _Principles of Economics_, ch. on "The Capitalization of Value." Extensive use has been made of it by Veblen. More recently, it has been elaborated in the controversy over the theory of interest participated in by Seager, Fisher, Brown and Fetter, in the _American Economic Review_, 1912-13-14, and the _Quarterly Journal of Economics_, 1913.

[341] Italics mine.

[342] The criticisms I should make of the present formulations of the time-preference theory of interest, as presented by Boehm-Bawerk, Fetter and Fisher, rest on the individualistic method of approach, and are at many points analogous to the criticisms I have made of the utility theory of value. These criticisms need not affect the points at issue here. On the particular point involved, I agree with Fisher that the productivity theory gives a wrong answer.

[343] _E. g._, Fisher, _Purchasing Power of Money_, p. 179.

[344] This confusion is a companion of the confusion between volume of _goods in existence_, or volume of _production_, and volume of goods _exchanged_. The errors growing out of this confusion have been dealt with in ch. 13, especially pp. 225-226. Virtually all quantity theorists make both these mistakes.

[345] The fundamental causation is psychological, and calls for a theory of _value_, as distinguished from exchange-relations.

[346] _Supra_, chapter on "Velocity of Circulation."

[347] This distinction is clearly made and developed by von Wieser, in the two articles referred to in our chapter on "Marginal Utility." It is used by him in criticisms of the quantity theory. "Der Geldwert und seine geschichtlichen Veraenderungen," _Zeitsch. fuer Volkswirtschaft, Sozialpolitik und Verwaltung_, XIII, 1904; discussions in _Schriften des Vereins fuer Sozialpolitik_, 1009, no. 132. A similar distinction runs through J. A. Hobson's _Gold, Prices and Wages_, London, 1913. The present writer had worked out the line of argument here presented before reading either of these discussions.

[348] I have chosen maid-servants, to avoid complications of costs of production in the reasoning that might come if other labor, engaged in producing goods for the market, were selected. To tighten the argument a tittle further, I assume that the masters receive their monthly incomes on the first day of the month; that they pay the maids on the same day; that the rest of the expenditures, both of masters and maids, are strung out through the rest of the month.

[349] _Op. cit._, p. 27.

[350] A possible alternative interpretation of Professor Fisher's conception is suggested in two or three sentences in the passage of the _Purchasing Power of Money_ I have been discussing. On p. 175 he makes a distinction between individual prices _relatively to each other_ and the price-level. But the distinction which he _discusses_ in the passage as a whole is between the price-level and individual prices _not_ considered in relation to each other. Comparison, moreover, with his original enunciation of the notion (Papers and Discussions, 23d Annual Meeting of the American Economic Association, pp. 36-37), would serve to justify the interpretation I give, as nothing at all is said there about super-ratios between individual prices. But the internal evidence is even more convincing. Demand and supply, and cost of production, find their problem, not in the relation between the money price of aspirin and the money price of caviar, but in the money-price of aspirin or the money-price of caviar considered separately. Professor Fisher thus conceives supply and demand in his _Elementary Principles_ (p. 260). This interpretation is especially necessary, since Professor Fisher is joining issue with writers who surely use demand and supply and cost of production as means of explaining money-prices, and not super-ratios between them. Further, the price-level is _not_, on Professor Fisher's own scheme, a factor in determining the relations of the prices of sugar and of wheat _inter se_. With a given price-level, wheat might be worth a dollar and sugar nine cents, and the ratio of their money equivalents would be 100:9; with a price-level twice as high, wheat would be worth two dollars, and sugar eighteen cents, but the ratio between their money equivalents would be still 100:9. The whole discussion is quite meaningless unless the contrast be between concrete money-prices of particular goods, and their average. On either interpretation, moreover, my criticism of the exalting of the average into an entity would stand.

[351] _Purchasing Power of Money_, pp. 175-179.

[352] I am glad to find myself in agreement with Professors Laughlin and Kemmerer in holding that this notion of Professor Fisher's is untenable. "The distinction Professor Fisher draws between the prices of individual commodities and the general price-level appears to me, as to Professor Laughlin, to be untenable. It is, moreover, contradictory to his general philosophy of money. His index numbers recognize no general price-level distinct from individual prices.... Professor Fisher's illustration of the ocean would be more apposite if he called it a lake whose level was continually changing, and if he considered each particular wave as extending to the bottom." Kemmerer, _Papers and Discussions_, 23d Annual Meeting of the American Economic Association, p. 53. At the same time, I agree with Professor Fisher that there must be something more fundamental than the particular prices to make the scheme work. This something I find in the absolute value of money.

[353] _Loc. cit._, p. 14.

[354] _Cf. Social Value_, chs. 2 and 11, and "The Concept of Value Further Considered," _Quart. Jour. of Econ._, Aug., 1915. See also, _supra_, the chs. on "Value," "Supply and Demand," "Cost of Production," and "Capitalization."

[355] This tendency may be more than offset by the increasing significance of money as a "bearer of options" or "store of value" in periods of panic and depression. See, _infra_, the chapter on "The Functions of Money," and Davenport, _Economics of Enterprise_, pp. 301-03.

[356] "Agricultural Credit in the United States," _Quart. Jour. of Econ._, Aug., 1914, p. 708, n.

[357] Iowa farm lands are exceedingly active, 18% of the farms being sold annually. The Mississippi lands are much less active. I am indebted to Dr. Pope for information regarding Iowa on this point.

[358] The Single Taxer could at least retort that this need not protect landlords in countries, like England, which lend surplus capital abroad.

[359] _Cf._ Trosien, _Der landwirtschaftliche Kredit und seine durchgreifende Verbesserung_, p. 29, cited by J. E. Pope, _loc. cit._, p. 705, n.

[360] This was seen by Mill, (_Principles_, Bk. III, ch. viii, par. 4), and has been especially emphasized by Laughlin, _Principles of Money_, ch. 10. _Cf._ A. C. Whitaker's discussion in the _Quart. Jour. of Econ._, Feb. 1904.

[361] _Supra_, p. 124, and ch. on "Dodo-Bones."

[362] Comptroller of the Currency estimates the State bank-notes in 1861 at 202 millions; in 1862, at 183 millions. _Report of the Comptroller of the Currency_, 1915, vol. II, p. 37.

[363] W. C. Mitchell, _History of the Greenbacks_, ch. on "The Circulating Medium," and _passim_.

[364] See Conant, _Modern Banks of Issue_, New York, 1896, p. 114. An interesting analysis of the course of the gold premium and of prices during the period of the Bank Restriction in England, and of the controversies relating thereto, will be found in Knies, _Der Credit_ (vol. II of _Geld und Credit_), pp. 247 _et seq._ The same period is studied in detail by Thos. Tooke in his _History of Prices_.

[365] _Money and Monetary Problems_, p. 105, and preceding.

[366] Nicholson, _loc. cit._, 84ff.

[367] _Ibid._, 76ff.

[368] _Cf._ Laughlin, J. L., _Principles of Money_, and Scott, W. A., _Money and Banking_.

[369] _Cf._ _infra_, our discussion of credit. It is not maintained that credit needs to be based on _physical_ goods, but it is maintained that credit is based on _values_, which are generally not the value of a sum of gold.

[370] I have elaborated this notion in a hypothetical case in the chapter on "Dodo-Bones," to which I would now refer. See also the analysis of an "ideal credit economy" in the discussion of reserves in the section on Credit, in Part III.

[371] _Infra_, the discussion of reserves in Part III.

[372] _Cf._ the chapter on "The Origin of Money," _infra_.

[373] See especially _History of the Greenbacks_, pp. 188ff.; 207-208; 275-279.

[374] Various efforts have been made by adherents of the quantity theory to meet the facts developed by Mitchell with reference to the Greenbacks. Thus, it has been suggested that the coming to par of the Greenbacks shortly before the resumption of specie payments was an accidental coincidence, due to the fact that the volume of trade in the United States just happened to grow to the right amount to bring the Greenbacks to par at that time. No statistical evidence has been offered for this thesis, I believe. It is, indeed, the only logical thing which a quantity theorist could say on the matter, except one alternative, (F. R. Clow, _J. P. E._, vol. II, p. 597) namely, that if the Greenbacks should exist in such quantity that, under the quantity theory, their value ought to fall below the discounted future value of the gold in which they were to be redeemed, speculators would take them out of circulation, holding them for the interest, and so reduce their quantity that the value would rise to that discounted future value. The first thesis, that based on putative changes in the volume of trade, though highly improbable in fact, is logically possible. The second thesis, however (_Purchasing Power of Money_, p. 261) meets serious difficulties. What motive would a speculator have for taking the Greenbacks out of circulation, and hoarding them? The answer is, he gets thereby the "interest," as the Greenbacks approach the date for redemption in gold. If this were the only way in which he could get this gain, the answer would be good. But there is another way in which he can get it, and something more besides, namely, by _lending out_ his Greenbacks. In that case, since the creditor gets the full benefit of an appreciating standard of deferred payments, he would get all the "interest" which he could get by hoarding, and, in addition, he would get contract interest on his loan. Of course, if the principle of "appreciation and interest" worked out with perfect smoothness, he would find his contract interest reduced as the other rose, and one might even expect, if the Greenbacks were very redundant, that contract interest would disappear. There is no evidence that this did happen, however! And so long as any contract interest existed, we have a thoroughly valid reason why a holder of Greenbacks would lend them rather than hoard them.

Another effort to harmonize the facts with the theory consists in the contention that _anticipated_ future increases in the Greenbacks would work in the same way as actual increases. But this is to shift the whole basis of the quantity theory, which rests in the notion of a mechanical and--in the mass--unconscious equilibration of quantity of money and number of exchanges. The quantity of money is not increased until it is increased! _Cf._ Mill, _Principles_, Bk. III, ch. 12, par. 2, and Jos. F. Johnson, _Money and Currency_, Rev. ed., p. 235.

Professor Fisher has another way to meet the facts of the Greenback regime, and that is by holding that they prove his case! I do not think that anyone, however, who examines the figures he offers on p. 260 (_loc. cit._) will be impressed by the degree of concomitance between money and prices which they exhibit, especially after Mitchell's careful analysis of changes in detail.

At another point, Professor Fisher maintains (p. 263) that the rapid changes in gold premium which came with news from the military operations (_e. g._, the 4% drop in Greenbacks after Chickamauga), were due to alterations in velocity of circulation and in volume of trade! As the gold market usually got the news by wire, before the newspapers got it, however, this thesis is not very convincing.

[375] Kemmerer, E. W., _Money and Credit Instruments in their Relation to General Prices_, New York, 1907; Fisher, _Purchasing Power of Money_, New York, 1911; subsequent yearly continuations of "The Equation of Exchange" in the _American Economic Review_. The references here, as throughout, are to the 1913 edition of Professor Fisher's book.

[376] _History of Prices._

[377] To this type would belong Professor Fisher's figures with reference to the years, 1860-66 on p. 260 of his _Purchasing Power of Money_.

[378] This relates particularly to Fisher's figures.

[379] _Loc. cit._, p. 298.

[380] _Ibid._, p. 297.

[381] _Cf._ our chapter, _supra_, on the "Equation of Exchange."

[382] These are the "finally adjusted" figures. _Loc. cit._, 304.

[383] _Ibid._, p. 277. Fisher's estimate for V, as corresponding more closely to Kinley's figures for the proportions of money and checks in trade, is to be preferred to Kemmerer's. _Cf._ our comments on this point, _infra_, in this chapter. Even the figures for M' are not correct, since they do not include deposits growing out of "morning loans," cancelled during the day. _Infra_, ch. 24.

[384] _Report of the Comptroller_, 1896; _The Use of Credit Instruments in Payments in the United States_, National Monetary Commission Report, Washington, 1910.

[385] I am indebted to the _Annalist_ for permission to use here materials first published in the _Annalist_ in articles by the present writer: "Home vs. Foreign Trade," Feb. 6, 1916; "Tests of Home Trade Volume--a Rejoinder," March 6, 1916; "Home Trade Volume," March 20, 1916, p. 377. To these articles Professor Fisher replied: "A Multi-Billion Dollar Nation," _Annalist_ Feb. 21, 1916; and "Over and Under Counting," _Ibid._, March 13, 1916.

[386] Except checks deposited by one bank in another. Kinley's figures exclude these in 1909, but not in 1896.

[387] The methods and data employed by Professor Fisher are described at length in his _Purchasing Power of Money_, ch. XII, and Appendix to ch. XII.

[388] M' is the _average_ of bank deposits, as shown by the balance sheets, for all banks in the country for the year. Throughout, the reader must distinguish this from the "deposits" of Kinley's figures--amounts "deposited" on March 16.

[389] It is easier, sometimes, to make an assumption regarding a set of facts than to find out what they are! In this case, some work was involved. Old newspapers had to be hunted up for various cities, and letters had to be written, to find out, for various cities, (a) clearings for March 17, 1909, and (b) the number of banking days in the year 1909. This work was done by Mr. N. J. Silberling, who got figures from 12 cities which had 69% of all clearings outside New York. These cities are: Chicago, Philadelphia, Boston, St. Louis, Pittsburg, San Francisco, Baltimore, New Orleans, Atlanta, Providence, St. Paul, and Seattle. The daily average of clearings for these cities in 1909 was $136,222,436; the actual clearings for March 17, 1909, was $132,961,273. The ratio of average daily clearings to actual clearings on March 17 was 1.0245:1. The increase needed in the figure for deposits outside New York, then, was only 2.45%. Mr. Silberling, wishing to be conservative in view of the 31% of outside clearings not investigated, allows outside clearings to be 3% below normal. On this basis, following Professor Fisher's method of computation, he multiplies the deposits assigned by Professor Fisher to New York by 1.28, and the deposits assigned to the country outside by 1.03, getting total deposits for the day of 1.11 billions, as against Professor Fisher's figure of 1.20 billions, and a total for the year of 333 billions, as against a total obtained by Professor Fisher of 364 billions.

[390] To this 786 millions is added all that comes from the erroneous assumption regarding outside clearings, when figures for the whole year are obtained. Country deposits, for the year, are thus still further exaggerated by 31 billions!

[391] _The Use of Credit Instruments_, etc., p. 152. There is abundant evidence in Dean Kinley's figures that only a decidedly minor part of the amount (373 millions) of checks allowed by Professor Weston for the non-reporting banks could have been outside the larger cities. The amount deposited in a day in a country bank is so small that a great multitude of these banks would be required to show as much as a single New York City institution. Thus, ninety banks (27 national banks, 58 State banks, 3 private banks, 1 stock savings bank, 1 trust company) in Arkansas, report only $728,148 in checks, an average of $8,090 per bank. If all the 13,000 non-reporting banks were country banks, and if this ratio held, we should have 105 millions more for the day (instead of Professor Weston's 373 millions), or 31 billions more for the year. This average is based chiefly on State and national banks. The average is too high for the private banks (whose daily average as reported is $4,010), and for the mutual savings banks (whose daily average is $1,254). It is well above the daily average of the stock savings banks, which are, in many States, practically commercial banks ($6,405). In the non-reporting banks there are comparatively few national banks, and about 5,000 private banks and savings banks, of these the great majority being private banks. We cannot make up the 373 millions in the country districts. Nor can we make up the 373 millions by taking in all the reserve and central reserve cities, exclusive of New York. Chicago, in the returns, shows 42.6 millions in checks; St. Louis, 14 millions; Boston, 48.8 millions; Philadelphia, 28.6 millions; the other reserve cities show 40.2 millions--a total of 174 millions. If we doubled the returns for these cities, we should still be 200 millions short of the 373 millions added by Professor Weston to the total! Neither in the country districts, nor in the major cities outside New York can we find enough to make up that addition. Very much of the amount added for non-reporting banks must be found in New York City itself.

[392] Dean Kinley's questionnaire asked the banks reporting their deposits for the day to exclude deposits made by other banks. These deposits were not excluded in the 1896 investigation.

[393] House Committee on "Money Trust." Feb. 28, 1913. Pp. 57, 78, 145.

[394] _Cf._ _supra_, and _infra_ our discussion of the volume of trade, and _infra_, our discussion of credit, particularly the analysis of bank-loans.

[395] _Vide_ the opinion expressed by an official of a New York trust company, quoted below, on p. 346.

[396] _Cf._ Horace White, _Money and Banking_, 5th ed., p. 364.

[397] Kirkbride and Sterret, _The Modern Trust Co._, New York, 1905, pp. 59-60; Cannon, _Clearing Houses_, _Nat. Mon. Com. Report_, p. 178; Conant, _Principles of Money and Banking_, II, p. 244.

[398] Inquiry was also made of Professor George E. Barnett, who had cited the figures given by the New York Supt. of Banks at p. 133 of his _State Banks and Trust Companies_. Professor Barnett writes, in part, as follows: "I made no independent inquiry at the time, and accepted the statement of the superintendent of banks without critical examination of its basis. From what you say, it appears highly probable that he was mistaken in his conclusions. The only question in which I was interested was whether the reserves of the trust companies could be reasonably lower than those of the national banks. I did not care so much about the exact ratio of clearings and only quoted that incidentally." For the purposes which both Professor Barnett and Mr. Williams had in view, the exact ratio was unimportant. The higher figures which I have given above would support the thesis in which both were interested, namely, that trust company accounts are less active than bank accounts, and so lower reserves may be safely held by trust companies than by national banks.

[399] Fisher, _loc. cit._, p. 444.

[400] P. 443. Other discussions of this investigation are in the _Journal of the American Bankers' Association_, Jan. 1914, p. 487; _Ibid._, Feb. 1915, p. 555; _National Banker_, March, 1915.

[401] None of the cities covered in the figures given in the _Annalist_ were in New York State. Kinley's figures show that the percentage of checks received in deposits of March 16, 1909, in banks outside New York State was 91%. _Loc. cit._, p. 180.

[402] Multiplying the 408 millions of checks deposited outside New York on March 16, 1909 by 303, the assumed number of banking days, gives 123.6 billions. Probably, therefore, 124 billions is too small a figure. But we should be slow in modifying a figure based on 17 months' observations because of the figures from one day's observations.

[403] I have greater confidence in this conclusion, since seeing a letter from Mr. Howard Wolfe, who made the investigation of outside clearings and "total transactions" for the American Bankers' Association, to Mr. Osmund Phillips, Editor of the _Annalist_. Mr. Wolfe writes: "I do not believe that the experience of the New York banks would differ from that of other institutions which now supply [these figures]."

[404] My information on this point comes from Professor O. M. W. Sprague. It is corroborated by an official of the Bankers Trust Company in New York.

[405] _Vide_ Rodney Dean, of the Fifth Avenue Bank, New York, "The Problem of Collecting Transit Items," _Journal of the American Bankers' Association_, Jan. 1914, p. 537. Boston inaugurated the system in 1890-1900; Kansas City five years later. Since the above was written, I have learned that New York, in recent months, has introduced the new system. This does not affect our argument regarding the figures for 1909.

[406] Since the foregoing was written, my attention has been called by Mr. Osmund Phillips, Financial Editor of the New York _Times_, and Editor of the _Annalist_, to indirect ways in which items on out of town banks sent to New York for collection will affect New York clearings. Country correspondent banks to which New York banks send these items for collection, may remit for them in four ways: (1) by sending cash; (2) by sending items on out-of-town banks, which the New York bank will send on to some other correspondent for collection; (3) by draft on the New York bank which has sent the items to be collected; (4) by draft on some other New York bank. In the last case, New York clearings are affected. The first case is not, quantitatively, important. The second and third cases would seem to be the normal types, assuming correspondent relations between New York banks and country banks to be _reciprocal_, since the New York bank would be disposed, as far as possible, to turn over its collection business to its own depositors among the country banks. Mr. Phillips says, however, that the fourth case is important. To the extent that this is true, our conclusion that out of town collection items do not affect New York clearings must be modified, and it becomes a matter of importance whether these items are large or small. My information, as stated above, is that Chicago exceeds New York City in this.

If, however, the Kansas City and Boston arrangements held in New York, these collection items would be represented _twice_ in New York clearings. The fact that the items do not themselves get into the clearings remains.

Direct information regarding New York clearings is very desirable. Our indirect approach must be considered inconclusive until more detailed figures for New York City are at hand. We need figures covering all types of banks in New York, for a period of, say, a year (to allow for seasonal changes), in which deposits made by one bank in another are separated from other deposits. National banks alone would exaggerate the item of deposits by one bank in another, especially as they are the depositories of the great private banks.

[407] Or, in some cases, taking the place of cash dealings between banks and a local clearing house. On the face of it, it is incredible that _balances_ between cities, or _within_ cities, after the country clearing houses have done their work, should be so great as to account for a very great part of New York clearings. These balances between cities other than New York, and balances within country clearing houses, must be a minor fraction of _country_ clearings, and country clearings are little more than half of New York clearings. Ordinary commerce, as shown in chapter XIII, cannot give rise to great sums in the aggregate, to say nothing of giving rise to great _balances_.

[408] The whole thing is summed up on p. 25 of the Comptroller's _Report_ for 1892.

[409] _Cf._ Kemmerer, _Money and Credit Instruments_, p. 117.

[410] _Annalist_, July 6, 1914, p. 8. The editor of the _Annalist_ gives me the following information: data for twenty banks, six in New York and fourteen in Chicago, Philadelphia, Boston, and St. Louis, for the week, Aug. 28-Sept. 2, 1916, show that clearings are 71% of "total transactions" in New York, and about 40% in the other cities. These figures are all for national banks, except for one bank in St. Louis.

[411] There is one further generalization developed in connection with Mr. Wolfe's investigation of the ratio of clearings to "total transactions" which seems to have relevance here, though I am not sure how it should be interpreted. The average ratio, as stated, is about 40%. This varies, however, for different cities. "The rule seems to be that the larger the proportion of bank deposits to individual deposits, the smaller will be the figure representing this ratio. In Cincinnati, for example, it is 31.4% while in Los Angeles it is 59.7%." (_Jour. of American Bankers' Ass'n_, Jan. 1914, p. 487.) How safely based this generalization is cannot be told from the context, as no further facts are offered. Nor is its bearing on the question at issue, as to whether or not New York clearings bear a higher ratio to New York deposits than country clearings do to country deposits, entirely clear. It would seem to indicate that deposits made by outside bankers in the banks of reserve cities make smaller contributions to clearings than individual deposits do, and this would fit in with the fact that checks on outside banks, deposited for collection by one bank in another, do not get into clearings. What further explanation or significance it has I leave to the reader. It is possible that there are a number of important relevant facts missing regarding New York clearings, and that the conclusions here reached may require later revision.

[412] _Loc. cit._, p. 304.

[413] But not as a correct estimate of M'V' for the equation of exchange! We do not know what part of these checks were used in "trade." _Cf._ our discussion of the estimate of T, _infra_.

[414] Kemmerer does not do this, but takes total clearings for the country as his index of variation. _Loc. cit._, 118-120. His figures for "check circulation" are, thus, more variable than Fisher's. In this, Kemmerer's results are much to be preferred.

[415] I have taken the figures for clearings from Professor Fisher's table, _loc. cit._, p. 448.

[416] _Loc. cit._, p. 304. _Cf._ our chapter on "Velocity of Circulation," _supra_.

[417] _Loc. cit._, pp. 477-478.

[418] There is, of course, the further point, to be emphasized in the discussion of T, _infra_, that MV (and hence V), assuming the calculation otherwise correct, is too large, to the extent that it includes tax payments, loans and repayments, dealings between agent and principal, etc. But this criticism does not so clearly apply to MV as it does to M'V'.

[419] _Business Cycles_, p. 308.

[420] That volume of trade and volume of physical goods are virtually interchangeable in Fisher's thought is strikingly illustrated on p. 195 of the _Purchasing Power of Money_: "A doubling in the quantities of all commodities _sold_, or (_what is almost the same thing_) a doubling of the quantities _consumed_." Italics are mine.

[421] This is strictly true only of the part of T which comes from the figure for M'V', 353 billions. In calculating MV, Professor Fisher introduces more complexities, into which we shall not enter, as the absolute amount is small--only 34 billions!--and the possible error from this source not great enough to affect a calculation where 20 billions one way or the other is within the "margin of error."

[422] _Vide_ _Annalist_, Feb. 17, Feb. 21, March 6, March 13, and March 20, 1916, for a discussion of this point by Professor Fisher and the present writer.

[423] _Op. cit._, pp. 112-113. It is interesting to note that Kemmerer's argument takes the form of proving, not that bank transactions do not overcount trade, but merely that they do not _undercount_ trade. With this contention I am in hearty agreement! The overcounting is worse in Kemmerer's figures for 1896 than for Fisher's in 1909, since the 1896 figures included deposits made by one bank in another, while the 1909 figures do not. _Cf._ Kemmerer, p. 105, and Kinley, in _Report of the Comptroller_ for 1896 and in the 1909 monograph, _passim._

[424] _Vide_ the present writer's discussion in the _Annalist_, March 6, 1916, p. 313.

[425] I am informed by Mr. B. F. Smith, Treasurer of the Cambridge Trust Company, that the practice of having separate dividend accounts is a very widespread one, especially with the larger corporations.

[426] _Statistics of Railways_, 1909, p. 71.

[427] Professor Fisher, in his _Annalist_ article of Feb. 21, 1916, quotes Dean Kinley (_The Use of Credit Instruments_, p. 151), as holding that duplications have largely been eliminated from his 1909 figures. Professor Fisher overlooks the fact that Dean Kinley is here referring, not to money value of trade, but merely to volume of checks. Dean Kinley merely indicates that by eliminating deposits made by one bank in another, he has avoided having the same check counted in deposits made in two or more banks on the same day. Even this is not wholly avoided. (_Ibid._, pp. 158-159.) It was extensive in the 1896 figures. Dean Kinley thinks, properly enough, that he has a sufficiently close approximation to the volume of checks, for the reporting banks, but what the checks were drawn for he does not undertake to say. His problem was _payments_, not _trade_. From the angle of volume of trade, he finds duplications even in the retail deposits (_Jour. of Polit. Econ._, vol. 5, p. 165).

[428] _Annalist_, March 13, 1916, p. 344.

[429] Chapter on "Volume of Money and Volume of Trade," pp. 241-248. We really did not "find" nearly that much. The figures assigned to retail and wholesale trade rest on figures for retail and wholesale bank "deposits," and are, especially the wholesale figures, much too large.

[430] _Annalist_, Feb. 21 and March 13, 1916.

[431] _Loc. cit._, p. 180.

[432] _Ibid._, pp. 166-167; 187; 273.

[433] Pratt, _loc. cit._, p. 166.

[434] _Ibid._, p. 187.

[435] Emery, _Speculation on the Stock and Produce Exchanges_, pp. 89; 74-95. A Boston broker expresses the opinion that the magnitude of artificial borrowing to make the clearance sheet misleading is not great, so far as Boston is concerned. I have got no estimates for New York.

[436] The banks, of course, are not borrowing stocks.

[437] Van Antwerp, _The Stock Exchange from Within_, New York, 1913, p. 290

[438] It recently happened that Alaska Gold was being "loaned flat" on the Boston Stock Exchange, which was a prelude for a six point advance in the next two or three days, as the bears were driven to cover.

[439] One factor complicates this. Are all the hundred share sales recorded? In our chapter on "Volume of Money and Volume of Trade," we called attention to a statement to the effect that brokers get together before the market opens, and compare "stop loss" orders, matching these with other orders, with the understanding that they automatically go into effect if the "market" reaches the prices indicated. The statement indicated that this substantially increases sales beyond the recorded totals, as such sales do not get on the ticker. I think, however, that this cannot throw our reckoning out greatly. The great majority of sales are not on "stop loss" orders. None of the sales of "floor traders," who average a third of the total trading (_Pujo Committee Report_, Feb. 28, 1913, p. 45), would be on "stop loss" orders. The bulk of the rest is not. Moreover, not all stop loss orders, by any means, would be executed in this manner. It is not easy to see how, under the rules and practices of the Exchange, many other sales could go unrecorded, except on days of greatest stress. On September 25, 1916, when over 2,300,000 shares were sold, the daily paper spoke of sales missed by the ticker, which was swamped with sales to be recorded, as an item of some magnitude. But the Ticker is wonderfully efficient. It sometimes gets behind the market by several minutes, but it rarely misses anything, under ordinary conditions.

[440] _Ibid._, p. 166.

[441] This explains the estimates of Wall Street men that the Clearing House reduces checks by two-thirds. For _their purposes_, the saving is almost that much, of the items offered for clearings. _Cf._ Van Antwerp, _The Stock Exchange from Within_, pp. 121-122.

[442] _Ibid._, p. 273. There is one billion difference between Pratt's estimate and mine. I incline to the view that mine is correct, the more as he puts his figure, 14 billions, as a safe lower limit. But a billion one way or the other is trifling!

[443] An official of the Bankers Trust Company has secured for me from a broker at the "Money Post" an estimate of 20 to 25 millions as an average, with 50 millions as a maximum, for 1915. The Pujo Committee, in its report in 1913, p. 34, gives a similar estimate.

[444] P. 34.

[445] _Annalist_, Aug. 14, 1916.

[446] N. J. Silberling, "The Mystery of Clearings," _Annalist_, Aug. 14, 1916, p. 223.

[447] There is one further piece of evidence which has been obtained through the courtesy of a New York brokerage house. At the request of the gentleman who has supplied the figures, I have altered them by a constant percentage, to prevent possible identification, but the proportions among them hold as they were given. The figures show the business of the house for the month of March, 1916. The figures show:

Market value of stocks and bonds bought, 1,644,630
Total deposits made during month, 1,475,502
Average borrowed from banks, 952,000

For this house, then, for this month, the deposits were less than the value of securities sold, by 11.5%. The month, however, was unusual. It was a month of reduced activity, following large activity. This is strikingly shown by the figure for the _average_ bank loans for the month--over two-thirds of the _total_ deposits for the month. The house had a large bull _clientele_, which was holding its stocks, and not selling on a bear market. The turnover was very slow, as Wall Street goes. It was a time of extraordinarily easy money when banks called few if any loans. The broker, in explanation of his figures, says: "The most of our checks were to other brokers. Checks to banks about equaled checks to customers. Your assumption that we did not pay off many loans in March is, I think, right." The same broker states in another letter that he thinks that, in general, the bulk of checks to and from brokers are in dealings with banks. In this month, then, with this factor reduced to a minimum, we still have deposits undercounting sales by only 11.5%. The figures do not prove my thesis that brokers' deposits greatly overcount their sales, but they at least show that they do not greatly undercount them. In view of the peculiarities of the month chosen, with transactions between banks and brokers cut to the minimum, they are quite consistent with the contention that normally the brokers' deposits will much exceed their sales.

[448] Kemmerer's main figures are merely _indicia_ of variation, rather than absolute magnitudes, for trade. On p. 136, _d._ (_loc. cit._), however, he indicates that his figures for "total monetary and check circulation" is also a figure for "total business transactions"--and counts 89% of it as wholesale trade.

[449] _Cf._ the discussion of the relation of P and T in the chapter on "The Equation of Exchange."

[450] _Op. cit._, p. 136.

[451] _Ibid._, pp. 70-71.

[452] _Loc. cit._, p. 487.

[453] Kemmerer does not accept Kinley's estimate of 75% for checks as compared with money in payments as a "sure minimum" for 1896, but rather counts it as a "fair maximum." (_Loc. cit._, p. 106.) Using this as a basis, he gets a monetary circulation for 1896 of 47.7 billions, and a "velocity of money" (since the monetary stock in circulation in 1896 was a little over 1 billion) of 47. (_Loc. cit._, p. 114.) Kinley's fuller investigation in 1909 has made it clear that his 1896 conclusions understated, rather than overstated, the proportion of checks to money. His "sure minimum" was needlessly low. He concludes in 1909 that 80 to 85% for checks is safe. (_Op. cit._, p. 201.) _Cf._ Fisher's comments, _loc. cit._, pp. 430; 460 _et seq._ Fisher's V is about half as great as Kemmerer's, and varies to some extent. I think Fisher, since his results are closer to Kinley's later figures, has made much the better estimate here.

[454] Since I have already compressed the contents of a book of 200 pages into Chapter I of the present book, it seems undesirable to attempt here a further compression of that chapter. These theses, therefore, do not give the substance of the social value theory.

[455] Menger, "Geld," _Handwoerterbuch der Staatswissenschaften_; Carlile, _Evolution of Modern Money_.

[456] We should make a slight and unimportant qualification as to Kemmerer. _Cf._ our chapter on "Dodo-Bones," _supra_.

[457] It seems necessary to point out this essential lack of correlation between value and exchangeability, since Mr. Horace White, in his _Money and Banking_ (5th ed., p. 135), identifies value and exchangeability: "Value is an ideal thing in the same sense that weight is. The former means exchangeability; the latter means force of gravity. A dollar is a definite amount of exchangeability." _Cf._ also Amasa Walker's contention that "exchangeable value" is tautology, equivalent to "exchangeable exchangeability!" _Science of Wealth_, 5th ed., p. 9. _Cf._ my article "The Concept of Value Further Considered," _Quart. Jour. of Econ._, Aug. 1915, pp. 696 _et seq._