Chapter XXV: The Reconciliation of Statics and Dynamics (6)

[458] This is stated by Schumpeter, so far as land is concerned. _Vide Quarterly Journal of Economics_, Aug. 1915, p. 704. It is due Menger to point out that he does not make the distinction between value and exchangeability which I have just made. His theory rests in an analysis of the saleability or exchangeability of goods. But Menger's conception of value is essentially different from my own. He commonly means by "_Wert_" merely subjective value, or marginal utility. He objects to the notion that one good measures the value of another, or that goods, when exchanged, are equivalent in value, on the ground that there must be a surplus in value (subjective value) for each exchanger, or exchange would not take place. He has, as a primary concept, no absolute social value. "_Tauschwert_" is for him a relative value, though he is finally driven to constructing what is virtually an absolute value notion, by distinguishing "_aeusserer Tauschwert_" from "_innerer Tauschwert_" in the case of money, the latter being concerned exclusively with the causes affecting prices _from the side_ of money, ignoring changes in prices due to causes affecting goods. (_Cf._ art. "Geld," in _Handwoerterbuch der Staatswissenschaften_, 3d ed., pp. 592-593. He does not make this distinction in developing the theory of saleability of goods, however. _Cf._ the chapter, _supra_, on "Marginal Utility and the Value of Money." It is absolute social value which I am here distinguishing from exchangeability. It is equally true, however, that subjective value and exchangeability have no necessary correlation.)

[459] _Cf._ A. S. Johnson, "Davenport's Competitive Economics," _Quart. Jour. of Econ._, May, 1914, p. 431.

[460] The man who wishes to "break" a twenty dollar bill may well have to go through Menger's process, getting two tens from one man, breaking one of these into two fives with another, and so on. Or he may have to buy something which he does not want to get "change."

[461] Ridgeway, _Origin of Metallic Currency_, p. 327; Carlile, _Evolution of Modern Money_, p. 233. Grain is said to have been used in ancient China as money,--not as a standard of value, but as a medium of exchange. Chen Huan Chang, _Economic Principles of Confucius and his School_, vol. II, p. 437.

[462] Written in 1914.

[463] The Hindu law of inheritance is a factor here. The Hindu woman may retain, after the death of her husband, father or brother, the ornaments he has given her during his lifetime. But all of the rest of the family property must go to male heirs, even remote male heirs coming in before the closest female relatives.

[464] _Cf._ Carlile, _Monetary Economics_, introductory chapter. The whole question may hinge on terminology, so far as Carlile is concerned. It is not clear what he means by "value of gold."

[465] _Cf._ Conant, _Principles of Money and Banking_, I, ch. 7, esp. p. 102.

[466] I do not believe that we have sufficient agreement among the best students of the statistics of the precious metals to justify any statistical conclusions regarding the laws governing the industrial consumption of gold and silver. Even the facts as to the proportions of annual production of gold in recent years going to money and to the arts are in dispute. Thus, DeLaunay (_The World's Gold_, New York, 1908, p. 176), divides the annual output as follows: Exportation to the East, and loss, 16%; coinage, 44%; industry, 40%. The industrial employments are divided as follows: jewelry, 24% (of total annual gold production); watch cases, 10%; gold leaf, 2.25%; watch chains, 1.75%; plate, 0.75%; various uses, as pens, dentistry, chemical works, etc., 1.25%. DeLaunay's competence as an authority is attested by various writers, among them W. C. Mitchell (_Business Cycles_, p. 281). Mitchell, comparing DeLaunay's estimates with divergent estimates of other authorities, concludes that there is not sufficient evidence to justify definite conclusions. I do not think that anyone who has read the criticisms which Touzet has brought together (_Emplois Industriels des Metaux Precieux_, Paris, 1911, pp. 49-52) of the methods employed in the investigations by the Director of the United States Mint in 1879, 1881, 1884, 1886, and 1900, will have large confidence in the exactness of the results reached in those investigations. (See annual reports of the Director of the Mint for the years in question.) Touzet's careful and elaborate study employs the figures of these investigations as the best available, but with substantial misgivings. There are many indeterminate elements in the problem, as shown by both Touzet and DeLaunay, among them, the extent to which coin is melted down for industrial purposes.

The Director of the Mint would assign a much higher proportion of the annual output to coinage than would DeLaunay.

Earlier studies, by Soetbeer and Suess, seem quite out of harmony with these conclusions. (Suess, Eduard, _The Future of Silver_, Washington, Government Printing Office, 1893, pp. 51-53.) Suess thinks that virtually as much gold was going into the arts uses as was being produced, in 1892, and quotes Soetbeer (_Litteraturnachweis_, p. 285) as admitting that such a contention may not be demonstrable, but at the same time holding that it cannot be disproved.

In the face of what seems to be a really indeterminate statistical problem, I content myself with the theoretical conclusions in the text. Because I cannot find adequate grounds for confidence in the main source from which he has drawn his statistics, I refrain from a criticism of the theory and method underlying Professor J. M. Clark's ingenious effort to derive statistical laws for the elasticity of the arts demand for gold. (_American Economic Review_, Sept. 1913.)

[467] _Cf._ our chapter on "Economic Value," _supra_, and "Social Value," _passim_.

[468] F. A. Walker, _International Bimet_.

[469] See DeLaunay, _The World's Gold_, New York, 1908, p. 176. DeLaunay's figures indicate that the use of gold for gold leaf and plate is quantitatively a minor factor in the industrial consumption of gold. Jewelry and watch cases are the most important items.

[470] Capital prices of lands and securities might well be lower, if interest rates are markedly higher, and if land rents and "quasi-rents" suffer from higher wages and higher interest.

[471] _Cf._ chapter on "Dodo-Bones," _supra_.

[472] Among the writers who have treated this topic, I would mention especially Menger, "Geld," in _Handwoerterbuch der Staatswissenschaften_; Laughlin, _Principles of Money_; Scott, W. A., _Money and Banking_; Knies, _Das Geld_; Walker, F. A., _Money and Political Economy_; Conant, _Principles of Money and Banking_; Seligman, _Principles of Economics_; Johnson, J. F., _Money and Currency_; von Mises, L., _Theorie des Geldes und der Umlaufsmittel_; Helfferich, K., _Das Geld_; Simmel, _Philosophie des Geldes_; Davenport, H. J., _Economics of Enterprise_. The difference between the standard of value (common measure of values) function, and the medium of exchange function is particularly well illustrated by Scott, _loc. cit._, ch. 1. The legal functions of money are especially treated by Knapp, _Staatliche Theorie des Geldes_.

[473] For discussions of the idea of measuring values, and the dependence of this on the conception of value as an absolute quantity, a common or generic quality of wealth, see Knies, _Das Geld_, I, 113ff.; Kinley, _Money_, 61-62; Merriam, L. S., "Money as a Measure of Value," _Annals of the American Academy_, vol. IV; Carver, "The Concept of an Economic Quantity," _Quart. Jour. of Econ._, 1907; Laughlin, _Principles of Money_, 1903, pp. 14-16; Davenport, _Value and Distribution_, p. 181, n.; Anderson, _Social Value_, chs. 2 and 11, and "The Concept of Value Further Considered," _Quart. Journal of Econ._, 1915; Helfferich, _Das Geld_, 1903 ed., pp. 470-478; Scott, _Money and Banking_, ch. 1.

[474] See Scott, _Money and Banking_, ch. 3.

[475] A further reason for preferring "common measure of values" is that expression carries dearly the connotation of absolute values. "Relative values" cannot be "measured," _Social Value_, pp. 26-27.

[476] Current text-books, following the Austrian doctrine, define production as the creation of "utilities." This is incorrect. Production is the creation of _values_. _Cf. Social Value_, pp. 119 and 189.

[477] This is the view of H. J. Davenport (_Economics of Enterprise_, pp. 301-302).

[478] Kemmerer has shown this to be true of bank reserves. As we shall see, the reserve function is merely a special case of the "bearer of options" function. For Kemmerer's discussion of business distrust, see _Money and Credit Instruments_, pp. 124-126, and 144.

[479] "In New York, for instance, loans by banks 'on call' are subject to repayment within an hour or two after notice is given that repayment is desired." Conant, _Principles of Money and Banking_, vol. II, p. 56. In general, the banks are content if the loan is repaid by 3 o'clock on the day it is called.

[480] _E. g._, Cairnes, J. E., _Leading Principles of Political Economy_.

[481] _One_ "pure rate" is a myth, but the notion has some significance, as setting off a body of causes distinct from the money-market factors under consideration. _Cf. supra_, the ch. on "The Capitalization Theory."

[482] See von Mises, "The Foreign Exchange Policy of the Austro-Hungarian Bank," British _Economic Journal_, 1909, pp. 208-209. An able Boston broker, in Feb. 1917, calls attention to the growing difficulty of placing long-time bonds, without very high yield, in view of the scarcity of real capital, despite the exceedingly low "money-rates." I venture to predict an increasing "spread" between "money-rates" and the yield on long-time investments, the longer the War lasts. The view of Davenport and Schumpeter (_Annalist_, Feb. 28, 1916, and _Theorie der wirtschaftlichen Entwicklung_), which would deny the validity of the distinction between money-rates and interest rates, and would make the money-market phenomena the primary cause of all interest phenomena, seems to me indefensible, alike in theory and in fact.

[483] _Cf._ the analysis of bank-loans in the United States, _infra_.

[484] Mitchell, _Business Cycles_, p. 146.

[485] _Journal of Political Economy_, XVI, May, 1908, pp. 273-298.

[486] Leipzig, 1905. This book has had wide influence on German thinking on money. It is typical of the tendency in German thought to make the State the centre of everything. Recognizing the historical fact that money has originated in a commodity, it holds that the commodity basis is a phenomenon of historical significance only, that modern money is a creature of the State. The money-unit is not definable as a quantity of metal, of given fineness, but rather is a "nominal" thing, present monetary standards being defined by legal proclamation in terms of past standards. The necessity for this reference to past standards grows out of the existence of past _debts_. The State must preserve the continuity of juristic relations, between debtors and creditors as elsewhere. Knapp holds that the _Zahlungsmittel_ (legal means of quittance, legal tender) function is the primary function of money, and that it is not a concept subordinate to _Tauschmittel_ (medium of exchange). It is not necessary for our purposes to take account of Knapp's theory in detail. He really has little to say about the value of money. Indeed, he confesses, in a later discussion, that his theory is not concerned with that subject! (_Schriften des Vereins fuer Sozialpolitik_, No. 132, 1909, pp. 559-563.) The amount of economic analysis in the book is not great. It is a striking illustration of the fact that legal thinking is largely concerned with _qualitative distinctions_, rather than with quantitative causal conceptions. (_Cf._ my discussion in the chapter on "The Reconciliation of Statics and Dynamics," _infra_, of the "statics" of the law.) Knapp's book has a forbidding appearance, because of the large number of new terms, based on Greek roots, which he has coined. The German language is inadequate to express his ideas! The Germans themselves have complained much of this. Careful reading of the book discloses, however, that the new terms are admirably adapted to express the distinctions he draws. I think, too, that English readers of the book, who remember enough of their Greek to recognize an occasional Greek root as vaguely familiar, will find less difficulty in giving fixed meanings to his new terms than would be the case with new German compounds. One who takes the trouble to master Knapp's vocabulary will find the effort worth while. Knapp has a high order of dialectical acumen. But the main part of the book has little direct bearing on the problem of the value of money, whether one understand by "value of money" the absolute social value of money, or the reciprocal of the price-level. The main points to be drawn from his discussion are (1) the fact that past debts may tend to sustain the value of an otherwise worthless money; and (2) that the State's willingness to accept money for taxes, etc., may also contribute to its value. Knapp lays heaviest stress on this last point. He seems to concede, however, that the role of the State here is not different from that of any other big factor in the market, and that the State's power in this particular is a function of the magnitude of its fiscal operations. Both of these doctrines fit readily into my social value theory. Knapp's discussion of methods of regulating the international exchanges by methods other than gold shipments is interesting, and might well be studied by those who are concerned with the exchange situation in the present war. His thesis that the value of silver depended on the course of the exchanges between gold and silver countries, instead of the course of the exchanges depending on the values of gold and silver, seems to me an absurd exaggeration of a minor qualification into a main theory. His doctrine that international relations alone make the purely legal money, without commodity basis, unsatisfactory, I do not accept. I have discussed this general topic in my chapter on "Dodo-Bones," however, and may content myself with now referring to that chapter. It is not true, as a matter of fact, moreover, that the money-unit is no longer defined as a quantity of metal. Our own American practice is sufficient evidence on this point. Knapp has sought to generalize his own interpretation of the history of Austrian paper into universal laws of money! That his interpretations meet authoritative dissent in Austria is sufficiently evidenced by von Mises' discussion, in his _Theorie des Geldes_ (ch. on "Das Geld und der Staat"), and in his English article on "The Foreign Exchange Policy of the Austro-Hungarian Bank," British _Economic Journal_, 1909. The notion that the legal tender function is prior to the medium of exchange function I regard as quite indefensible. It is doubtless true, in certain cases, that a government may debase its money, defining the new debased money in terms of the old, and that people who have debts to pay may, for a time, accept the debased money as a medium of exchange. But the limit of this is reached when the old debts have been paid. Unless other factors (not necessarily redemption), then come in to sustain the value, the value will sink, to a level commensurate with the debasement. The value would generally sink to a considerable degree, in any case, if only the legal factors worked to sustain it. I have gone over this in the chapter on "Dodo-Bones," _supra_. It was only by being a valuable object, and commonly only by being a medium of exchange, that the money could have become a means of legal quittance in the first place. Men would not have made contracts in terms of it, otherwise. And men would cease making contracts in it as soon as it (or other things tied to it in value) ceased to be an acceptable medium of exchange.

Knapp finds a good many phenomena in the history of money for which the quantity theory, and the metallist theory, can give no explanation. He has an exceedingly poor opinion of both theories, and makes many telling points against both. In so far as his doctrine asserts that the phenomena of money are matters of social organization, psychological in nature, I find myself in harmony with it. My dissent comes when he seeks to erect the abstractions of the jurist into a complete social philosophy! Law is only a part of the system of social control, and economic values, while influenced by legal values, are far from being explained when legal factors only are taken into account. Legal factors often play a more direct part in connection with the value of money than in connection with other values, but they do not dominate the value of money.

Recent German literature on money (_e. g._, Fr. Bendixsen, _Geld und Kapital_, Leipzig, 1912) has been a good deal influenced by Knapp, and there is a fair chance that American students may have to read his book if they wish to understand the next decade of German monetary history. It will be well for Germany if this is not the case!

[487] _Economics of Enterprise_, p. 257.

[488] _Cf._ Boehm-Bawerk's _Capital and Interest_, _passim_, particularly his discussion of Hermann, for an exposition and criticism of the "use" theory of interest.

[489] _Cf._ Clark, J. B., _The Distribution of Wealth_, pp. 210-245.

[490] This is not necessarily true among Asiatics, or on the East Side in New York City.

[491] The adherent of the Ricardian analysis who would deny this may fight it out with Clark, Fetter, and A. S. Johnson!

[492] A friendly critic--with a radically different theoretical point of view--feels that I am here playing fast and loose with the word, "value," meaning sometimes "total utility," sometimes "marginal utility," sometimes "relative marginal utility," and sometimes "price." I _never_ mean any of these things by "value," when used without qualification, in this book. I mean always _social economic value_, conceived of as _absolute_.

[493] I have been unable to satisfy myself that anyone has made a sufficiently thorough study of the course of the gold premium on the Rupee, the agio of the Rupee over its bullion content, or the course of prices in India, during the period from 1893 to 1898, to justify confident statements as to the comparative strength of different elements in the explanation of that history. Kemmerer states (_Money and Credit Instruments_, p. 38) that he can find no evidence at all to support Laughlin's view of the matter. (See Laughlin, _Principles of Money_, pp. 524 et seq.) J. M. Keynes, however, in his _Indian Currency and Finance_, p. 5, says: "The Committee of 1892 did not commit themselves; but the system which their recommendations established was _generally supposed_ [Italics mine.] to be transitional and a first step toward the _introduction of gold_ [italics mine.]." In the arrangements of 1893, moreover, a ratio between English gold and the Rupee was established, of 16d. to the Rupee, even though provisions for holding the Rupee to this ratio were left till the establishment of the "gold exchange standard," several years later. Keynes, on p. 3, discusses the arguments of the silver party against the introduction of gold, which is further evidence that the action of the Committee was understood as looking toward a gold standard. There is _some_ evidence at least for Laughlin's view. That his view offers a complete explanation, I think unlikely.

Kemmerer's admirable _Modern Currency Reforms_ (Macmillan, 1916), is at hand while the proof sheets are being revised. It is interesting to note that he finds the statistical evidence regarding Indian prices, trade, etc., far too scanty to justify positive conclusions as to the causes governing the course of the rupee. He prefers, rather, to rest the case for the quantity theory on _a priori_ reasoning and statistics for the United States. _Loc. cit._, pp. 70-71. In the chapter on "Dodo-Bones," I have suggested that India might come nearer than other countries to actualizing the assumptions of the quantity theory. On Kemmerer's showing, however, it appears to be a liability, rather than an asset!

[494] This is a national bank. In the same community, the writer asked the president of a State bank about his gold reserve, and was told that light-weight gold coin could not be used, since the State bank examiner made a practice of _weighing_ the gold of State banks.

[495] Legal tender can add to value of money only when it confers an option on the _debtor_. In the case discussed, it is the _creditor_ who has the option. But options are not necessarily valuable.

[496] As Davenport has pointed out, money is really moneys--there is a hierarchy. _Cf. Economics of Enterprise_, pp. 256-259.

[497] The restricted legal tender of small coins, where the coins are limited in amount to the needs of retail trade, is virtually an unrestricted legal tender, in practice, and amounts, in fact, to redemption. The coins are capable of being used where large coins, of standard metal, would otherwise be used, or where checks, redeemable in standard coin, would be used. Legal tender is vastly more effective with reference to a small part of the money system than it would be with the whole of the money supply. The same is true of the privilege of using a particular form of money in paying taxes. _Cf._ W. C. Mitchell's discussion of the "Demand Notes," _History of Greenbacks_, _passim_.

[498] _Cf._ Mitchell's account, (_Ibid._, pp. 166-173), of the premium on minor currency, during the Civil War. Pennies were used in rolls of 25 as a substitute for silver quarters, which had left the country under Gresham's Law. The premium was due primarily to the need for small change, rather than to bullion content, though the latter was a factor even for coins made of baser metals, in 1864.

[499] _Cf._ my article in the _Annalist_, Feb. 7, 1916, "The Ratio of Foreign to Domestic Trade," and the chapter, _supra_, on "The Quantity of Money and the Volume of Trade."

[500] Kinley's figures show a much lower percentage of money than this. He is anxious not to overestimate the extent to which checks are used, however, and so gives the figures of 50 to 60% of checks as a safe lower limit.

[501] _Cf. Social Value_, 183-184.

[502] _Cf._ Carver's contention that "the demand for money is a demand for value." "Concept of an Economic Quantity," _Quart. Jour. of Econ._, 1907.

[503] _Cf._ Laughlin's _Principles of Money_, p. 73.

[504] The main modern type of loan for non-business purposes is the public loan for war purposes, or to meet fiscal deficits. In the case of war loans, the emergencies are often so great that the rate of interest makes little difference.

[505] No longer true of Europe, probably, since the huge war debts have been incurred.

[506] The interest so defaulted is cumulative, like a preferred dividend, for years after 1909. Wall Street speaks of this issue as a "half-bond."

[507] _Supra_, chapter on "Origin of Money."

[508] "It is needless to say that Government bonds always rank as the very highest class of collateral, and the banks require no margin on such security." Pratt, _Work of Wall Street_, 1912 ed., p. 287. This, it need not be said, is not always true!

[509] Veblen has elaborated the doctrine that stocks and bonds are much the same. _Cf._ the discussion in Meade's _Corporation Finance_ of the relation of junior bonds and preferred stocks in reorganizations.

[510] I do not accept the imputation theory, or the capitalization theory, without qualification, except as static first approximations. Values of "factors of production" may easily become, and do become, in large part independent of their "presuppositions," _Cf._ the chapter on "Dodo-Bones", _supra_, and the chapter on "Economic Value."

[511] This would seem to be Davenport's view. See his article in the _Quarterly Journal of Economics_, Nov. 1910.

[512] To a high degree, "good will," trade-marks, etc., are bankable assets.

[513] _Social Value_, 1911, _passim_, especially ch. XIII. Cooley, C. H., "Institutional Character of Pecuniary Valuation," _Am. Jour. of Sociology_, Jan. 1913.

[514] _Cf._ my article, "Schumpeter's Dynamic Economics," _Political Science Quarterly_, Dec. 1915, and the chapter on "Marginal Utility," _supra_. That the new bank-credit, without the painful _preliminary_ "abstinence" which the classical economics has stressed, is enough to provide capital for a new enterprise is, as Schumpeter insists, true. Schumpeter has made an important contribution in his emphasis on this too much neglected point. But it should be noted that this does not dispense with curtailing of consumption, and "abstinence." It merely shifts the necessity for curtailing consumption to some one else. The new plan of the dynamic entrepreneur, by means of bank credit, draws labor and capital away from the existing static enterprises. That curtails their output. That leaves less goods of the old kinds for people to consume. That means higher prices for consumption goods, in the interval between the starting of the new enterprise and the time when its finished products are added to the "real income" of the community. Extensions of bank credit, there, shift the burden of "abstinence" to the consumer, and to the static producer. "Saving" is still the source of capital, but it is involuntary saving.

[515] In 1912, the First National Bank of New York owned 43 millions of bonds, but no stocks. Report of Pujo Committee, Feb. 28, 1913, p. 66. The National City Bank had 33 millions in bonds, but no stocks. _Ibid._, p. 72. State banks own few stocks; trust companies own a good many.

[516] _Cf._ the chapter on "The Origin of Money," _supra_.

[517] In March, 1916, one of the largest banking houses in Boston informed the writer that over one-fourth of its notes and discounts (including all forms of loans) had been bought through note-brokers.

[518] _Cf._, _e. g._, pp. 135ff. of Scott's excellent _Money and Banking_, Rev. ed., New York, 1910.

[519] The year 1909 is chosen, in order that comparison may be more readily made with the figures of Dean Kinley's investigations based on reported deposits made on March 16 of that year. The figures quoted are taken from p. 39 of the Report of the Comptroller for 1913.

[520] Even excluding the item "due from other banks and bankers," as representing duplications, the item "other loans and discounts" remains approximately only one-fourth of total banking assets.

[521] Almost all agricultural processes require more than six months from their inception to the marketing of the product.

[522] This view would seem to correspond with the view of Babson and May (_Commercial Paper_, 1912), and of W. A. Scott ("Investment vs. Commercial Banking," _Proceedings of Investment Bankers' Association of America_, 1913, pp. 81-84). Both of these discussions appear in Moulton, _Money and Banking_, Pt. II, pp. 70 and 75-77. Dr. J. E. Pope considers the view correct. On the other hand, Professor O. M. W. Sprague thinks the "other loans and discounts" of large city banks are more liquid than my statement would indicate.

[523] _Principles of Money and Banking_, II, p. 52.

[524] _Report of the Comptroller of the Currency_, vol. II, pp. 145 _et seq._

[525] Total collateral loans in New York City on that date were $719,327,596. This is for national banks alone. _Report of Comptroller_, 1915, II, 144. There is every reason to suppose that if trust companies and private banks were included, the _proportion_ of stock exchange collateral loans would be very much higher.

[526] I am very fortunate in having the views of Dr. J. E. Pope on this question. I know no one whose knowledge of agricultural credit, whether of American or of European conditions, is so thorough and extensive.

[527] This table is constructed on the basis of data in the _Report of the Comptroller_ for 1913, pp. 774-78.

[528] A single observation does not justify very confident conclusions, and figures for subsequent years may alter this. There is reason for supposing that commodity collateral was unusually large in proportion in the Comptroller's figures for national banks in June, 1915, (1) because the banks had been trying to reduce stock collateral loans, following the collapse of the outbreak of the War, (2) because they were aiding cotton owners to tide over a period of stress, and (3) because of great grain speculation. Later: 1916 figures show this. Comptroller's _Report_, I, p. 30. Stock loans increase from 66% to 71.2%, of collateral loans.

[529] The preceding argument would indicate that it is much too high.

[530] The figures for 1909 are fairly typical of the proportions of these items in the assets of the three classes of institutions for the ten years from 1904 to 1914. Since 1900, there has been some increase in the percentages of real estate loans and "all other loans," at the expense of the percentage of securities owned, and collateral loans, as these years have been years of reduced activity on the Stock Exchange. The changes are not important enough, however, to modify any conclusions which we shall base on the figures here given. All classes of loans have grown, and investments in securities have grown, but real estate loans and "all other loans," particularly the latter, have grown somewhat more rapidly.

[531] These figures are taken from Conant, _Principles of Money and Banking_, vol. II, p. 52.

[532] The term "commercial paper," as here used by Conant (whose source is the _Comptroller's Report_ for 1904 and preceding years), doubtless includes a good many items which we have decided not to count as commercial paper. The item, "advances on securities," also includes some items other than stock exchange loans, but not a high percentage in New York City. In 1913 the figures for all reporting banks in New York City were: collateral loans, 1,070; "other loans," 658. _Report of Comptroller_, 1913, p. 779.

[533] Taken by Conant (_Ibid._, p. 51) from the _Economiste Europeen_ (April 29, 1904), XXV, p. 546.

[534] For the depositor who borrows from several banks, but deposits only in one,--as a stockbroker--the items deposited will, of course, substantially exceed the amounts borrowed at the bank where the deposits are made. But this will not affect our argument for _classes_ of depositors from _representative_ banks in the community as a whole.

[535] _Supra_, chapters on "Volume of Money and Volume of Trade," and "Statistical Demonstrations of the Quantity Theory."

[536] The relevance of comparing wholesale and retail figures with figures for "commercial paper" may well be questioned, since our conception of commercial liquid loans would include manufacturers' paper which represents raw materials, work in process, and bills receivable. However, we have found reason to conclude that Kinley's wholesale deposits include a large percentage of manufacturers' deposits. (_Supra_, p. 245.) The comparison here is in any case rough. We do not need precise figures for the argument.

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

[538] Returns from private banks in Kinley's investigation of 1909 are virtually negligible, so far as absolute amounts are concerned, for the whole country. For New York City, they are absolutely negligible. The "all other deposits" reported by private banks in New York City for March 16, 1909, are one thousand, nine hundred and eighty-four dollars, in all! The grand total, "all other deposits" for all classes of banks reporting in New York, is over a hundred and ninety-eight millions. The great private banks are, thus, clearly not represented. They are not represented in any form, since Kinley's figures exclude deposits made by such banks in other banks. How important they would be, if included, one cannot be sure, since they keep their affairs pretty secret. Some information, however, is available. Thus, the Pujo Committee reports (_Report_, Feb. 28, 1913, p. 145) that on Nov. 1, 1912, there was $114,000,000 on deposit with J. P. Morgan and Company, exclusive of $49,000,000 on deposit with their Philadelphia branch of Drexel and Co. It is understood to be the practice of J. P. Morgan and Co. to keep no cash on hand, and to deposit with other banks all their cash and checks. On this date, they had on deposit with other banks $12,094,000, "which presumably included all their own funds." It may be assumed, therefore, that the remaining 102 millions was loaned out. There can be no doubt at all, I suppose, that practically all they had lent out was on stock and bond collateral. They are known to be one of the biggest lenders at the "money post" on the Stock Exchange. They are not supposed to do much business with ordinary merchants in the usual discount and deposit way.

I have found no figures for Kuhn-Loeb & Co., for total deposits made with them, nor for their deposits in other banks. The Pujo Committee (_Ibid._, p. 73) states that for the six years preceding 1913 this firm held, on the average, deposits from interstate corporations amounting to over 17 millions. For J. P. Morgan & Co., this class of deposits amounted to about half of total deposits. (_Ibid._, p. 57.) There is, of course, no assurance that this proportion holds with Kuhn-Loeb's deposits.

These figures are very great, however. For the week ending April 3, 1915, for example, only three banks (the National City Bank, the National Bank of Commerce, and the Chase National Bank), and only two trust companies (the Bankers Trust Company and the Guarantee Trust Company), held deposits exceeding those credited to J. P. Morgan and Co., and only one of these, the National City Bank, very markedly exceeded the Morgan deposits. The majority of the New York Clearing House banks had less than the deposits of interstate corporations with Kuhn-Loeb.

As all the big private bankers deal chiefly in stock exchange loans and securities, and foreign exchange, and as this kind of business has been shown to be exceedingly active and to call for large checks and clearings, we may assume that Kinley's figures would be greatly increased if they were included.

The trust company reports for New York in Kinley's figures are also very incomplete. New York trust companies report less than twice as much as Boston trust companies, and an absurdly small amount as compared with banks. _Cf._, _supra_, the chapter on "Statistical Demonstrations of the Quantity Theory."

[539] It has been supposed by many writers that New York clearings exaggerate New York transactions as compared with the extent to which outside clearings represent transactions. Such evidence as we have would show that this is not true to a sufficient degree to modify the present argument. Clearings are less than deposits in both New York and the country outside, _Supra_, chapter on "Statistical Demonstrations of Quantity Theory."

[540] "The Mystery of Clearings," _Annalist_, Aug. 14, 1916, p. 198. _Supra_, chapter on "Volume of Money and Volume of Trade."

[541] See any Congressional debate on "the Money Trust."

[542] _Pujo Committee Report_, Feb. 28, 1913, p. 130. _Cf._ also p. 138 (statements of Messrs. Baker, Reynolds, Schiff, and Perkins), and p. 160 for Statements regarding the testimony of Messrs. Morgan and Baker.

[543] I know no responsible writer who has charged that there is a monopoly, or a tendency toward monopoly, in this matter.

[544] I am not naive enough to suppose that this suggestion can be much more than an illustration of the bearing of my theory! I should even agree that the political difficulties are so great that we would do well to try out our system in times of stress before seriously raising the question of giving the Federal Reserve Banks the power to rediscount loans on stock exchange collateral.

[545] Walker's version of the quantity theory, excluding credit transactions, escapes much of this criticism. _Supra_, chapter on "Equation of Exchange."

[546] It is nothing for Wall Street to "turn over" many times two billion dollars worth of securities. In a big bull year, this will be accomplished twelve or more times without effort--prices rising merrily, so long as no new supply of stocks and bonds comes in to make trouble. (See our estimate of New York security transactions, _supra_, chapter on "Volume of Money and Volume of Trade.") But let there be a liquidation by investors of anything like two billions, sold once, and the market feels a tremendous drag. It seems universally agreed that foreign selling of securities during the present War has been a great factor in checking advances in security prices in New York. The actual amount of liquidating by foreign investors, however, has been trifling as compared with the volume of sales since the War began. The best estimate of foreign liquidation is probably that of the National City Bank, which has taken careful account of previous estimates, and which has unrivaled sources of "inside information." The estimate of this institution is that from a billion and a half to a billion six hundred million dollars worth of foreign held securities have been liquidated in America since the beginning of the War. (This does not include foreign loans placed here.) This estimate is given in October of 1916. (Monthly circular of the National City Bank on "Economic Conditions, etc.," Oct., 1916, p. 3.) It is safe to say that no amount of "churning" of securities already in the market could have anything like the depressing effect on security prices that an unusual amount of liquidation by investors has. It is not increase in number of _exchanges_ that depresses prices. It is increase in the floating _supply_. Activity in the floating supply makes it easier, rather than harder, for speculators to get banking accommodations which enable them to "hold" and "carry" securities, and activity in sales therefore positively tends to _increase_ rather than to decrease, security prices. The broadening of the range of securities dealt in, moreover, instead of depressing the prices of those already active, helps to sustain them. Thus, brokers and bankers welcomed the recent revival of activity in the rails, following the bull market in war stocks. It gave a broader basis for loans. Banks would lend more liberally, and on narrower margins, if railroad stocks could be mixed with the brokers' war stock collateral.

Here again we see the significance of the distinction between long-time interest rates, connected with the volume of real capital, and the "money-rates."

Again, periodic payments of interest and dividends, temporarily locking up considerable sums of bank deposits which have to be built up in anticipation of such payments, have a very much more serious effect on the money market than do payments many times greater in connection with stock sales. The tension in the London money market growing out of periodic accumulations and disbursements of the British Government is well known. The summer of 1916 witnessed a temporary tightening in Wall Street (in what was, generally, the period of easiest money the Street has ever known), from a similar cause--a bunching of dividend and interest payments, with some other large financial transactions. Money rates in New York regularly show the influence of such payments, temporarily. Money rates also show the influence of active speculation, as a rule, as shown by Mr. Silberling's investigations ("The Mystery of Clearings," _Annalist_, Aug. 14, 1916), but it takes a very much greater volume of stock sales than of dividend and interest payments to produce a given effect on money rates.

[547] As May 9, 1901, when 3,336,695 shares were sold. Compare Mitchell's stock barometer, 1890-1911, _Business Cycles_, p. 175, with records of share sales for those years.

[548] _Purchasing Power of Money_, 1913 ed., p. 186. The same criticism applies to Kemmerer, and Jevons. _Cf._ Kemmerer, _Money and Credit Instruments_, pp. 70-71. It is applicable to most quantity theorists.

[549] _Ibid._, p. 185. It will be noted that at this point, Fisher lapses from the doctrine that volume of trade is determined by "physical capacities and technique." _Ibid._, p. 155.

[550] _Cf._ our discussion, _supra_, in the chapter on the "Functions of Money," of money in retail trade.

[551] Our great private banks, bond houses, and investment bankers, etc., of course do buy stocks of new enterprises on a huge scale. Many of our big commercial banks have taken part in underwriting operations.

[552] See pp. 428-432, _supra_.

[553] _Wealth of Nations_, Bk. II, ch. 2, ed. Cannan, I, pp. 187 and 290-291.

[554] _Theorie der wirtschaftlichen Entwicklung_, chs. 2 and 3.

[555] _Supra_, chapter on "Volume of Money and Volume of Credit."

[556] _Interviews on the Banking and Currency Systems of England, Scotland, etc._, Senate Document No. 405, 1910 (National Monetary Commission Report), p. 25.

[557] This is clearly the opinion of European bankers, as indicated in their statements to interviewers for the Monetary Commission. See, _e. g._, statements by the _Deutsche Bank_, _Ibid._, pp. 374-375, and the _Credit Lyonnais_, _Ibid._, pp. 224-226.

[558] The item, "Due from other banks and bankers" in our table of total bank resources for 1909, is 2,563 millions--about 12% of the whole and slightly more than the amount we assigned to "commercial paper." It is a highly important factor making for liquidity. For State, and National banks and trust companies it is almost as great--2,302 millions. The first figure does not include many great private banks.

[559] _Vide_ Professor Taussig's history of the years, 1878-1890, in his _Silver Situation_.

[560] _Cf._ Mitchell's _Business Cycles_, pp. 495-496; and _passim_.

[561] _Cf._ the chapter, _supra_, on "The Quantity Theory and International Gold Movements."

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

[563] _Cf._ Conant's discussion, _Principles of Money and Banking_, I, ch. 7.

[564] This would seem to be Mitchell's view. _Cf. Business Cycles_, p. 494.

[565] _Cf._ chapter XIII.

[566] _Cf._ the chapter on "The Functions of Money," _supra_.

[567] _Money and Credit Instruments_, p. 80.

[568] _Ibid._, p. 82. Italics mine.

[569] Kemmerer, in general, is less concerned, apparently, with defending a causal quantity theory than with defending the "equation of exchange." To the extent that this is true, I have little quarrel with his doctrines. To "prove" the "equation of exchange," however, is, first, a work of supererogation, and, second, in no sense a proof of the quantity theory. _Vide_ the chapters, _supra_, on the equation of exchange and on statistics of the quantity theory.

[570] Published by the National City Bank of New York. _Vide_ also Bagehot. _Lombard Street_, introductory chapter, and Withers, _The Meaning of Money_.

[571] This information is supplied me by an official of the New York Coffee Exchange, through the courtesy of Mr. W. H. Aborn, of Aborn and Cushman, Coffee Brokers, 77 Front St., New York.

[572] _Principles of Economics_, _passim_.

[573] _Theorie der wirtschaftlichen Entwicklung._

[574] The writer has ventured some tentative predictions as to conditions following the present War in the New York _Times_ Sunday magazine of Dec. 10, 1916, pp. 10-11.

[575] There are important dynamic and "frictional" considerations opposed to protective tariffs, as well as static considerations. Very many of the "intangibles" later to be discussed depend on free trade. A high percentage of England's "capital" would be destroyed by protective tariffs and trade restrictions, and to a less degree this is true of all countries. _Vide_ N. Y. _Times_ Sunday magazine, Dec. 10, 1916, pp. 10-11.

[576] A case in point is the discussion of the effects of increment taxes on the building trade, participated in by Professor R. M. Haig and the present writer in the _Quarterly Journal of Economics_, Aug. 1914, and Aug. 1915. The doctrines criticised in my article were static theories, and my criticisms made the static assumptions. Professor Haig, accepting the validity of my criticisms on the assumptions laid down, for the most part, seeks to recast the argument on a dynamic basis, emphasizing dynamic and "frictional" considerations from which my argument had abstracted. I think that what difference of opinion remains between us would probably be removed if the distinction between static and dynamic were clearly drawn and rigidly adhered to.

[577] _Cf._ my review-article, "Schumpeter's Dynamic Economics," _Pol. Sci. Quart._, Dec. 1915, p. 645.

[578] _Distribution of Wealth_; _Essentials of Economic Theory_.

[579] _Theorie der wirtschaftlichen Entwicklung_.

[580] _Cf._ my _Social Value_, pp. 139-140, n.

[581] _Purchasing Power of Money_, ch. 4.

[582] _Theory of Business Enterprise._

[583] _Vide_ my discussion of Professor Patten's _Reconstruction of Economic Theory_ in the _Political Science Quarterly_ of March, 1913, and the _American Economic Review_, Supplement to the March number, 1913, pp. 90-93.

[584] _Cf._ Schumpeter, _loc. cit._, pp. 1-101, and _passim_. That the quantity theory is essentially "static" will appear strikingly if the statements in the text be compared with Fisher's discussion in chs. 5-7 of _The Purchasing Power of Money_.

[585] It is only as a matter of highly abstract statics that the capitalization theory (as presented in earlier chapters) can be maintained with any strictness. In fact, capital values are not always passive shadows, yielding freely to changes in anticipated income, and to changes in the rate of discount. Very often capital values become themselves substantial, become divorced from their presuppositions, can no longer be explained by any imputation process. This is particularly likely to be the case with lands in inactive markets. The income-bearer is as much an object of value as is the income; is often _immediately_, for its own sake, an object of value. The long-run tendency to assimilate this value to a capitalization of prospective incomes may be exceedingly slow in working out, if it ever works out. Indeed, a high capital value may sometimes be a means of increasing the income, since in the minds both of lessor and lessee the usual percentage return on capital will be a factor in determining what is a "proper" rental. If a capital value, no longer justified by prospective income, has behind it the sanction of actual cost-outlay, there may easily be a reflex from it on the size of the income itself. Such a capital value, unjustified by prospective income, but still believed in by the market, may function just as effectively as any other capital value. Book-values, not marked down to correspond with changed income-prospects, even when they cannot command purchasers, may still serve as a basis for _loans_--Veblen's theory of crises rests, as we shall see, in part on this fact.

Considerations of this sort strengthen still further the case against the marginal utility theory of value. To pass,--as Fetter and the Austrians in general seek to do--from marginal individual consumption values to market prices of consumption goods, then to prices of production goods, or to magnitudes of distributive shares, then, simply, by the capitalization theory, to capital values, with the notion that the original marginal utilities supply the psychological explanation at every stage of the process, the remoter values being merely built up of the original marginal utilities, is quite invalid. At every stage there is a hitch: the marginal utilities do not explain the prices or values of the consumption goods, as has already been elaborately pointed out; and the relation between the values of consumption goods and the capital values is very much looser and less direct than the static theory requires. Institutional, legal, and moral forces come in, not alone at the first step, in giving social weight to the wants of special classes and individuals, but also at the second, giving prestige to certain enterprises, and so higher values to their securities, giving banking support here and refusing it there, giving popular and patriotic support here, and not there, giving direct action of law, custom and tradition on certain _prices_ (whence, indirectly on values), and leaving prices free to change readily in other cases. (_Cf._ my discussion in _Quart. Jour, of Economics_, Aug. 1915, pp. 699-701.) The static theory of capitalization describes an ideal logical relation, while capital values are, in fact, built up by a psychological process which is logical only in part. In large degree, especially when the market lacks perfect fluidity, capital values are _immediate_, and not merely _derived_, values. In this, I think, I am in accord with the view briefly stated by A. S. Johnson in his recent review of Boehm-Bawerk (_Am. Econ. Rev._, March, 1914, pp. 115-116).

[586] _Loc. cit._, ch. IV. _Vide_ Veblen's discussion of Fisher in the _Pol. Sci. Quart._ of 1908, and his discussion of Clark in the _Quart. Jour. of Econ._, Feb. 1908.

[587] Chapter on "Volume of Money and Volume of Trade."

[588] On Oct. 9 of 1916, I still venture the opinion that the stock market has shown wonderful conservatism in the face of extraordinary temptations. From Oct. 1915, to Aug. 1916, the "bears" dominated the market, and prices fell pretty steadily. The "bull" movement of Sept. 1916, seems to have reached its crest without passing the level of a year ago. The market may "run away," but it has not yet done so.

[589] _Psychologie Economique_, vol. I, pp. 77-78.

[590] Nor do I see any method for bringing into our equilibrium picture the control which the environment retains over values by its power to _eliminate_ those groups whose choices vary too widely from the norms of "survival-necessities." Vide Giddings, _Principles of Sociology_, ed. 1905, p. 20; Carver, _Essays in Social Justice_, _passim_. I think that the range of choices compatible with survival is very wide. Moreover, "adaptation" is not a simple matter of adjustment to the physiographic environment. It includes adjustment to the _social values_, both of the group in question and of other groups.

[591] _Cf._ H. C. Emery's discussion of "manipulation" in his _Speculation in the Stock and Produce Exchanges_, pp. 171ff.

[592] _Cf._ Dewey, _Essays in Logical Theory_; Bergson, _Time and Free Will_, _passim_, and _Creative Evolution_; James, _Problems of Philosophy_.

[593] _Cf._ Bagehot's discussion in _Lombard Street_ of the features of English organization which prevented supremacy in the Eastern trade from passing to Greece and Italy with the opening of the Suez Canal. (Introductory chapter.) See also the discussion of the English money market in ch. XXIV, _supra_.

[594] _Cf._ my article on "Schumpeter's Dynamic Economics" in _Political Science Quarterly_, Dec. 1915, and ch. XXIII, _supra_.

[595] In my article on Schumpeter's theory above mentioned, I have pointed out that his contrast between statics and dynamics is not by any means a fixed one, and that in particular he shifts back and forth between a hypothetical static state, primarily a methodological device, which assumes perfect fluidity and mobility of the objects of exchange, on the one hand, and a realistic static state, immobile, held in the bonds of custom and tradition, illustrated by India and China, on the other hand. The version of the distinction between statics and dynamics here discussed is only one of several which he gives. It is, however, the one which at present I wish to contrast with my own view. With many of Schumpeter's doctrines I am in hearty accord, and I have learned much from his book. I think that his book affords abundant evidence of the usefulness of the static-dynamic contrast.

[596] Schumpeter's contrast between statics and dynamics is in most essentials closely parallel to Veblen's contrast between the theory of wealth and the theory of prosperity, and his main conclusions resemble Veblen's, despite Schumpeter's optimism and Veblen's pessimism, and despite temperamental and methodological differences. Most of my criticisms of Veblen apply also to Schumpeter.

[597] _Cf._ our discussion, _supra_, of the relation of credit to futurity.

* * * * *

TRANSCRIBER'S NOTES

1. Passages in italics are surrounded by _underscores_.

2. Footnotes have been moved from the middle of a paragraph to the end of the e-text.

3. The original text includes Greek sigma character. For this e-text version it has been replaced with its transliteration [Greek: S].

4. Fractions are indicated as in the example below:
6-1/4 indicates whole number 6 with fractional part of one-fourth.

5. The following misprints have been corrected:
"thing" corrected to "think" (page 124)
"theorrists" corrected to "theorists" (page 155)
"$75,00,000.00" corrected to "$75,000,000.00" (page 208)
"theory theory" corrected to "theory" (page 330)
"practive" corrected to "practice" (page 428)
"this held" corrected to "thus held" (page 442)
"in in" corrected to "in" (page 476)
"clasess" corrected to "classes" (page 509)
"legarthic" corrected to "lethargic" (page 573)
"enchancement" corrected to "enhancement" (page 591)
"74-71" corrected to "64-71" (ftn. 55)
"equilibbrium" corrected to "equilibrium" (ftn. 86)
"Instrnmeuts" corrected to "Instruments" (ftn. 163)
"reguularly" corrected to "regularly" (ftn. 545)
Missing text added in footnotes 412, 468, 595.

6. Some of the page references in the index have been corrected.

7. Other than the corrections listed above, printer's inconsistencies in spelling and hyphenation have been retained.

End of Project Gutenberg's The Value of Money, by Benjamin M. Anderson, Jr.

<pre id="pg-footer">