The Value of Money.

by Benjamin M. Anderson, Jr.

PREFACE

The following pages have as their central problem the value of money.

But the value of money cannot be studied successfully as an isolated problem, and in order to reach conclusions upon this topic, it has been necessary to consider virtually the whole range of economic theory; the general theory of value; the role of money in economic theory and the functions of money in economic life; the theory of the values of stocks and bonds, of "good will," established trade connections, trade-marks, and other "intangibles"; the theory of credit; the causes governing the volume of trade, and particularly the place of speculation in the volume of trade; the relation of "static" economic theory to "dynamic" economic theory.

"Dynamic economics" is concerned with change and readjustment in economic life. A distinctive doctrine of the present book is that the great bulk of exchanging grows out of dynamic change, and that speculation, in particular, const.i.tutes by far the major part of all trade. From this it follows that the main work of money and credit, as instruments of exchange, is done in the process of dynamic readjustment, and, consequently, that the theory of money and credit _must be a dynamic theory_. It follows, further, that a theory like the "quant.i.ty theory of money," which rests in the notions of "static equilibrium" and "normal adjustment," abstracting from the "transitional process of readjustment," touches the real problems of money and credit not at all.

This thesis has seemed to require statistical verification, and the effort has been made to measure the elements in trade, to a.s.sign proportions for retail trade and for wholesale trade, to obtain _indicia_ of the extent and variation of speculation in securities, grain, and other things on the organized exchanges, and to indicate something of the extent of less organized speculation running through the whole of business. The ratio of foreign to domestic trade has been studied, for the years, 1890-1916.

The effort has also been made to determine the magnitudes of banking transactions, and the relation of banking transactions to the volume of trade. The conclusion has been reached that the overwhelming bulk of banking transactions occur in connection with speculation. The effort has been made to interpret bank clearings, both in New York and in the country outside, with a view to determining quant.i.tatively the major factors that give rise to them.

In general, the inductive study would show that modern business and banking centre about the stock market to a much greater degree than most students have recognized. The a.n.a.lysis of banking a.s.sets would go to show that the main function of modern bank credit is in the direct or indirect financing of corporate and unincorporated _industry_.

"Commercial paper" is no longer the chief banking a.s.set.

It is not concluded from this, however, that commerce in the ordinary sense is being robbed by modern tendencies of its proper banking accommodation, or that the banks are engaged in dangerous practices. On the contrary it is maintained that the ability of the banks to aid ordinary commerce is increased by the intimate connection of the banks with the stock market. The thesis is advanced--though with a recognition of the political difficulties involved--that the Federal Reserve Banks should not be forbidden to rediscount loans on stock exchange collateral, if they are to perform their best services for the country.

The quant.i.ty theory of money is examined in detail, in various formulations, and the conclusion is reached that the quant.i.ty theory is utterly invalid.

The theory of value set forth in Chapter I, and presupposed in the positive argument of the book, is that first set forth in an earlier book by the present writer, _Social Value_, published in 1911. That book grew out of earlier studies in the theory of money, in the course of which the writer reached the conclusion that the problem of money could not be solved until an adequate general theory of value should be developed. The present book thus represents investigations which run through a good many years, and to which the major part of the past six years has been given. On the basis of this general theory of value, and a dynamic theory of money and exchange, our positive conclusions regarding the value of money are reached. On the same basis, a psychological theory of credit is developed, in which the laws of credit are a.s.similated to the general laws of value.

In a final section, the constructive theory of the book is made the basis for a "reconciliation" of "statics" and "dynamics" in economic theory--an effort to bring together the abstract theory of price (_i. e._, "statics") which has. .h.i.therto chiefly busied economists, and the more realistic studies of economic change (_i. e._ "dynamics") to which a smaller number of economists have given their attention. These two bodies of doctrine have hitherto had little connection, and the science of economics has suffered as a consequence.

This book was not written with the college student primarily in mind.

None the less, I incline to the view that the book, with the exception of the chapter on "Marginal Utility," is suitable for use as a text with juniors and seniors in money and banking, if supplemented by some general descriptive and historical book on the subject, and that the whole book may very well be used with such students in advanced courses in economic theory. I think that bankers, brokers, and other business men who are interested in the general problems of money, trade, speculation and credit, will find the book of use. Naturally, however, it is my hope that the special student of money and banking, and the special student of economic theory will find the book of interest. The book may interest also certain students of philosophy and sociology, who are concerned with the applications of philosophy and social philosophy to concrete problems.

My obligations to others, running through a good many years, are very great. With Professor E. E. Agger, I talked over very many of the problems here discussed, in the course of two years of close a.s.sociation at Columbia University, and gained very much from his suggestions and criticisms. Professor E. R. A. Seligman has read portions of the ma.n.u.script, and given valuable advice. Professor H. J. Davenport has given the first draft an exceedingly careful reading, and his criticisms have been especially helpful. Professor Jesse E. Pope supervised my investigations in the quant.i.ty theory of money in 1904-5, in his seminar at the University of Missouri, and gave me invaluable guidance in the general theory of money and credit then. More recently, his intimate first hand knowledge of European and American conditions, both in agricultural credit and in general banking, has been of great service to me. Mr. N. J. Silberling, of the Department of Economics at Harvard University, has been helpful in various ways, particularly by making certain statistical investigations, to which reference will be made in the text, at my request. Various bankers, brokers, and others closely in touch with the subjects here discussed have been more than generous in supplying needed information. Among these may be especially mentioned Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the _Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H.

Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston, various gentlemen in the offices of Charles Head & Co., and Pearmain and Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr.

W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade, DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of the Bankers Trust Company, New York. My greatest obligations are to two colleagues at Harvard University. Professor F. W. Taussig has given the ma.n.u.script very careful consideration, from the standpoint of style as well as of doctrine, and has discussed many problems with me in detail.

Professor O. M. W. Sprague has placed freely at my service his rich store of practical knowledge of virtually every phase of modern money and banking, and has read critically every page of the ma.n.u.script. None of these gentlemen, of course, is to be held responsible for my mistakes. I also make grateful acknowledgment of the aid and sympathy of my wife.

In the course of the discussion, frequent criticisms are directed against the doctrines of Professors E. W. Kemmerer and Irving Fisher, particularly the latter, as the chief representatives of the present day formulation of the quant.i.ty theory. Both their theories and their statistics are fundamentally criticised. I find myself in radical dissent on all the main theses of Professor Fisher's _Purchasing Power of Money_, and at very many points of detail. To a less degree, I find myself unable to concur with Professor Kemmerer. But I should be sorry if the reader should feel that I fail to recognize the distinguished services which both of these writers have performed for the scientific study of money and banking, or should feel that dissent precludes admiration. I acknowledge my own indebtedness to both, not alone for the gain which comes from having an opposing view clearly defined and ably presented, but also for much information and many new ideas. My general doctrinal obligations in the theory of money and credit are far too numerous to mention in a preface. My greatest debt in general economic theory is to Professor J. B. Clark.

B. M. ANDERSON, JR.

HARVARD UNIVERSITY, March 31, 1917.

PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE

THE VALUE OF MONEY

CHAPTER I

ECONOMIC VALUE

The problem of the value of money is a special case of the general problem of economic value. The present chapter is concerned with the general theory of value, while the rest of the book will consider the numerous peculiarities and complications which make money a special case. The main proof of the theory here presented is to be found in a previous book[1] by the present writer. A number of periodical articles by several writers which have since appeared, in criticism or in further development of the theory, have at various points led to shifting emphasis and clearer understanding on the author's part, and the present exposition, without seeking explicitly to meet many of these criticisms, or to embody the new developments, will none the less be different because of them. To one writer in particular, Professor C. H. Cooley, the theory is indebted for restatement, amplification, and important additions.[2] On the whole, however, the theory presented in this chapter is substantially the theory presented in the earlier book. The theory is set forth in the present chapter with sufficient fullness to make the present volume independent of the earlier book.

Value has long been recognized as the fundamental economic concept.

There have been many and divergent definitions of value, and many different theories as to its origin. It is the belief of the present writer--not shared by all his critics!--that the definition of value which follows, and the conception of the function of value in economic theory involved in it, conform to the actual use of the term in the main body of economic literature. The theory of the _causes_ of value here advanced is new, but the definition of value, and the conception of the relation of value to wealth, to price, to exchange, and to other economic ideas, seem to the present writer to conform to what is implied, and often expressed, in the general usage of economists.[3]

It is important to separate sharply two questions: one, the theory of the causes of value, and the other, the definition of value, or the question of the formal and logical aspects of the value concept. The two questions cannot be wholly divorced, but clarity is promoted by considering them separately. We shall take up the formal and logical aspects of the matter first.

Value is the common quality of wealth. Wealth in most of its aspects is highly heterogeneous: hay and milk, iron and corn-land, cows and calico, human services and gold watches, dollars and doughnuts, pig-pens and pearls--all these things, diverse though they be in their physical attributes, have one quality in common: Economic Value.[4] By virtue of this common or generic quality, it is possible to add wealth together to get a sum, to compare items of wealth with one another, to see which is greater, to get ratios of exchange between items of wealth, to speak of one item of wealth, say a crop of wheat, as being a percentage of another, say the land which produced it, etc. This common quality, value, is also a _quant.i.ty_. It belongs to that cla.s.s of qualities which can be greater or less, can mount or descend a scale, without ceasing to be the same quality,--like heat or weight or length. Such qualities are _quant.i.ties_. There is nothing novel in the statement that a quality is also a quant.i.ty. It is implied in every day speech. We say that a man is tall, or heavy, or that the room is hot--qualitative statements; or we may say exactly how tall, or how heavy, or how hot--quant.i.tative statements. The distinction between qualitative a.n.a.lysis and quant.i.tative a.n.a.lysis in chemistry implies the same idea. Thus we may speak of a piece of wealth as having a definite quant.i.ty of value, or say that the value of the piece of wealth is a definite quant.i.ty. We may then work out mathematical relations among the different quant.i.ties of value, sums, ratios, percentages, etc.

Ratios of Exchange are ratios between two quant.i.ties of value, the values of the units of the two kinds of wealth exchanged.[5] A good many economists, particularly in their chapters on definition, have defined value as a ratio of exchange. This is inaccurate. The ratio of exchange presupposes _two_ values, which are the terms of the ratio. The ratio is not between milk and wheat in all their attributes. It is between milk and wheat with respect to one particular attribute. Compare them on the basis of weight, or cubic contents, and you would get ratios quite different from the ratio which actually is the ratio of exchange. The ratio is between their values.

[Ill.u.s.tration: Ratio of Exchange Milk ------------------------- Wheat / / Value Value / / / / / Social Mind ]

In the diagram above, something of what is to follow is antic.i.p.ated, since the cause of value is indicated. Wheat is shown to be exerting an influence on milk, and milk exerts an influence on wheat. The comparative strength of these two influences determines the ratio of exchange between them. But these two influences are not ultimate. The ratio of exchange is a relation, a _reciprocal_ relation. It works both ways. But behind this relativity, this scheme of relations between values, there lie two values which are absolute. These values rest in the pull exerted on wheat and on milk by the human factor which is fundamental, which in our diagram we have called the "social mind."

Values lie behind ratios of exchange, and causally determine them. The important thing for present purposes is merely to note that value is prior to exchange relations, that it is an absolute quant.i.ty, and not, as many economists have put it, purely relative. The ratio of exchange is relative, but there must be absolutes behind relations.

A _price_ is merely one particular kind of ratio of exchange, namely, a ratio of exchange in which one of the terms is the value of the money unit.[6] In modern life, prices are the chief form of ratio of exchange, but it is important for some purposes to remember that they are not the only form.

Values may simultaneously rise and fall. There may be an increase or decrease in the sum total of values. Ratios of exchange cannot all rise or fall. A rise in the ratio of the value of wheat to the value of milk means a fall in the ratio of the value of milk to the value of wheat.

Both may have fallen in absolute value, but both cannot simultaneously rise or fall with reference to one another. This is the truism regarding ratios of exchange which many economists have inaccurately applied to value itself in the doctrine that there cannot be a simultaneous rise or fall of values. There can be a simultaneous rise or fall of values, but not a simultaneous rise or fall of ratios of exchange.

There can be a general rise or fall of prices. Goods in general, other than money, may rise in value, while money remains constant in value.

This would mean a rise in prices. Or, money may fall in value while goods in general are stationary in value. This would also mean a rise in prices. In either case, more money would be given for other goods, and the ratio between the value of the money unit and the value of other goods would have altered adversely to money. There are writers to whom the term, value of money, means merely the average of prices (or the reciprocal of the average of prices). For them, a rise in the average of prices is, _ipso facto_, a fall in the value of money. This view will receive repeated attention in later chapters. The view maintained in the present book is that the value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters. Every price implies _two_ values, the value of the money-unit and the value of the unit of the good in question.

Value is prior to _exchange_. Value is not to be defined as "power in exchange." Certain writers[7] who see the need of a quant.i.tative value, which can be attributed to goods as a quality, still cling to the notion that value is relative, that two goods must exist before one value can exist, and that value is "power in exchange," or "purchasing power." The power is conceived of as something more than the fact of exchange, and as a cause of the exchange relations, but is, none the less, defined in terms of exchange. This position, however, does not really advance the a.n.a.lysis. It is a verbal solution of difficulties merely. To say that goods command a price because they have power in exchange is like saying that opium puts men to sleep because it has a dormitive power.

Physicians now recognize that this is no solution of difficulties, that it is merely a repet.i.tion of the problem in other words. If we wish to explain exchange, we must seek the explanation in something anterior to exchange. If value is to be distinguished from ratio of exchange at all, it cannot be defined as "power in exchange."

To seek to confine value to exchange relations, moreover, makes it impossible to speak of the value of such things as the Capitol at Washington City, or the value of an entailed estate, or of values as existing _between_ exchanges. Nor can we make the price which a good would command at a given moment the test of its value, except in the case of the highly organized, fluid market. Land, at forced sale, notoriously often brings prices which do not correctly express its value. Moreover, even for wheat in the grain pit, the exchange test is valid only on the a.s.sumption that a comparatively small amount is to be sold. If very much is put on the market, the situation is changed, and the value falls. In other words, if "bulls" cease to be "bulls," and shift to the other side of the market, the very elements which were sustaining the value of the wheat have been weakened, and of course its value falls. "Power in exchange" is a function of two factors, (1) value and (2) saleability. A copper cent has high saleability, with little value, while land has high value with little saleability.[8] Some things have value with no saleability at all. In a socialistic community, where all lands, houses, tools, machines, etc., are owned by the state, and where such "prices" as exist are authoritatively prescribed, value and exchange would have no necessary connection. Values would remain, however, guiding the economic activity of the socialistic community, directing labor now here, now there, determining the employment of lands now in this sort of production, now in that. Exchange is only one of the manifestations of value. More fundamental, and more general, including "power in exchange," but not exhausted by it, is the power which objects of value have over the economic activities of men. This is the fundamental function of values. The entailed estate, which cannot be sold, still has power over the actions of men. The care which is taken of it, the amount of insurance which an insurance company will write on it, etc., are manifestations and measures of its value. The same may be said of the Capitol at Washington.[9]

In the fluid market, prices correctly express values. a.s.suming that the money-unit is fixed in value, variations in prices in the fluid market correctly indicate variations in values. The great bulk of our economic theory, the laws of supply and demand, cost of production, the capitalization theory, etc., do a.s.sume the fluid market, and a fixed value of the dollar.[10] Our economic theory is static theory, in general, and abstracts from the time factor and from "friction." In fact, values change first, and then, more or less rapidly, and more or less completely, prices respond. In the active wholesale and speculative markets, where the overwhelming bulk of exchanging takes place, the prices respond quickly. Static theory is thus adequate for the explanation of these prices, for most practical purposes, so long as the changes in prices are due to changing values of goods, rather than to changing value of the money-unit. Moreover, the distinction between value and price is, in a fluid market, where the value of money is changing slowly, often not important. In the a.s.sumption of money, and of a fixed value of money, the absolute value concept is already a.s.sumed.

No harm is done, however, if the economist does not explicitly refer to this, but goes on merely talking about money-prices. Very many economic problems indeed may be solved that way. This is why the inadequate character of the conceptions of value as "ratio of exchange" or "purchasing power" has not prevented these notions from being serviceable tools in the hands of many writers. But there are many problems for which these conceptions are not adequate, because the implicit a.s.sumption of a fixed value of money cannot be made. Among these problems is the problem of the value of money itself, which const.i.tutes the subject of this book. For that problem, an absolute value concept is vital.

If, in our diagram above, we subst.i.tute for "social mind" the more general expression, "human factor," we should find that our value concept is the common property of many writers. We should find it fitting in with the absolute value notion of Adam Smith and of Ricardo.[11] The "human factor" which _explains_ the absolute value is, for them, labor. We should find it fitting in with the "socially necessary labor time" of Marx: the value of a bushel of wheat is the amount of labor time which, on the _average_, is required to produce a bushel of wheat. It is an absolute value. It is a causal coefficient with the absolute value, similarly explained, of the bushel of corn, in explaining the wheat-price of corn. Our concept will fit in exactly with the "social use-value" of Carl Knies, according to whom the economic value of a good in society is an _average_ of its varying use-values to different individuals in the market. This average is an absolute quant.i.ty. The absolute values of units of two goods, thus explained, causally fix the exchange ratio between the goods. Knies' value-theory, it may be noticed, is explicitly modeled on that of Marx, to whom he refers, the difference being that Knies takes an average of individual use-values, while Marx takes an average of individual labor-times, as the causal explanation.[12] Our value concept will fit perfectly with Professor J. B. Clark's "social marginal utility" theory of value.

Indeed, the present writer gratefully acknowledges that the concept is Professor Clark's rather than his own, and that all that is necessary for its explanation has been set forth by Professor Clark.[13]

Professor Clark's _causal_ theory of value, his explanation of this absolute quant.i.ty of value as a _sum_ of individual marginal utilities, we have elsewhere[14] criticised as involving circular reasoning, like all marginal utility theories, in so far as they offer causal explanations. But his statement of the logical character of value, of the relation of value to wealth, of value to price, of value to exchange, of the functions of the value concept in economic theory, and of the functions of value in economic life,--Clark's doctrines on these points we have accepted bodily, and in so far as the present writer has added anything to them it has been by way of elaboration and defence.

The concept of value here developed is explicitly adopted by T. S.

Adams, David Kinley, W. A. Scott, W. G. L. Taylor, L. S. Merriam, and A.