that all instruments of exchange derive their value from the volume of standard money which supports them, and that if this basis were cut away the whole structure would fall. Nicholson recognizes, further, that gold has value independent of its use as money.[367]

In evaluating Nicholson's doctrine, I wish to point out, first, the inaccuracy of the statement that all credit rests on a gold basis. It is true that credit instruments are commonly drawn in terms of standard money, which is commonly gold. International credit instruments may even specify gold, and the same thing happens at times within a country. But commonly, in this connection, gold functions, not as the value basis lying behind the credit instrument, the existence of which justifies the extension of the credit, but rather as the _standard of deferred payments_, by means of which the credit instrument may be made definite.

The real basis of the value of a mortgage is not a particular sum of gold, but rather the value of the farm, expressed in terms of gold. The basis of a bill of exchange is not a particular sum of gold, but rather is the value of the goods which changed hands when the bill of exchange was drawn,[368] supplemented by the other possessions of drawer, drawee, and the endorsers through whose hands it has gone. Even a note unsecured by a mortgage, or not given in payment for a particular purchase, is based, in general, on the value of the general property of the man who gives it, and on the value of his antic.i.p.ated income.[369] So throughout. Credit transactions, for the most part, originate in exchanges, and carry their own basis of security in the goods and securities which change hands, not in that small fraction of the world's wealth, the stock of gold, which could, Coin Harvey a.s.serted in the middle '90's, be put in the Chicago grain-pit! And now let me extend this idea. Although coin made from the standard of value is a great convenience, there is yet no vital need, in theory, for a single dollar, pound or franc made from the standard of value. If gold should cease entirely to be used as a medium of exchange, or in bank or government reserves, if the gold dollar should become a mere formula, so many grains of gold, without there being any coins made of it, still, so long as that number of grains had a definite, ascertainable value, commensurate with the value of some other commodity which could be used as a means of paying balances and redeeming representative money, the gold dollar could still serve as a measure and standard of values. In the situation I have a.s.sumed, silver bullion, at the market ratio, could perform all the exchange and reserve functions now performed by gold, even though not so conveniently.[370] Nicholson's description of the use of gold as a reserve, while calling attention to an important fact, has led him into the error of supposing that what may be true of gold, the _medium of exchange_, and _reserve for credit operations_ is necessarily true of the _standard of value as such_.

Nicholson is correct, however, in looking to the standard of value for part of the explanation of changes in prices. And, _since it so happens_ that a considerable part of the value of the standard of value comes from its employment as medium of exchange and reserve, he is correct in looking to its use as money as part of the explanation of its value. His error comes, however, in failing to see that independent changes in the values of goods may also change the price-level, and that variations in the demand for gold as a commodity may also change the value of gold, and so change the price-level.

Further, in so far as Nicholson clings to the notion of prices as depending on a mechanical equilibration of physical quant.i.ties, he is subject to the criticisms given before of the general quant.i.ty theory, and in so far as he clings to the ident.i.ty of the value of gold with the reciprocal of the price-level,--the relative conception of value--he is subject to the criticisms already urged.

Again, even for a single country, the connection between volume of reserves and volume of credit is very loose and shifting. A thousand factors besides volume of standard money in a country determine the expansions and contractions of credit, and the long run average of credit. For the whole world, this connection is even looser. To a.s.sume a fixed ratio between them for the whole world, one would have to a.s.sume that all the world was simultaneously, and normally, straining its possibility of credit expansion to the utmost, so that the minimum ratio--a notion which is far from precise[371]--should also be the normal maximum, and so that no country, in expanding its credit, could draw in new reserves from other countries which had more quiescent business conditions.

Nicholson's notion of the world price-level, moreover, is subject to the criticisms I have made in the chapter on "The Quant.i.ty Theory and International Gold Movements." How can the world level have a close connection with the volume of gold, if different elements in the world price-level, the price-levels of different countries, can vary so widely and divergently as compared with one another? Even granting--which I do not grant, and which I maintain I have disproved--that the price-level in one country has a close connection with its stock of gold, would it not be true that the average price-level for the world would vary greatly, with the same world stock of gold, depending on which countries had the gold?

There is nothing in Nicholson's doctrine which seems to me to justify in any degree the doctrine that prices, in a single country, or in the world at large, show any tendency to _proportional_ variation with the quant.i.ty of money, or with the world's stock of gold.

Is it not true, then, that there is _some_ sort of relation between gold production and world prices? It is. Gold is like other commodities. Its value tends to sink as its quant.i.ty is increased. As its value sinks, prices tend to rise. As to the elasticity in the value-curve for gold, I think it will be best to reserve discussion till a later chapter,[372]

in Part III. We shall there find reason for thinking that gold has much greater elasticity in this respect than most other commodities. That its value should fall _proportionately_ with an increase in its quant.i.ty, I should not at all conclude. Even if its value did sink proportionately with an increase, prices would rise proportionately only if the values of goods remained unchanged.

But why do we need a _quant.i.ty theory_ of _money_, with all its artificial a.s.sumptions, and its law of strict proportionality, to enable us to a.s.sert the simple fact that gold, like other commodities, has a value not independent of its quant.i.ty? What theory of money would deny it? Surely not the commodity or bullionist theory. For that theory, which seeks the explanation of the value of money in the value of gold in the arts, it would go without saying that an increase in the supply of gold for the arts would lower its value there and consequently, its value as money. Surely the theory which I shall maintain in Part III of this book will not deny that increased gold production tends to lower the value of money, and consequently to raise prices. With the "quant.i.ty theorist" who is content with this conclusion, I have no quarrel--unless he claims this obvious truth as the unique possession of the quant.i.ty theory!

CHAPTER XIX

STATISTICAL DEMONSTRATIONS OF THE QUANt.i.tY THEORY--THE REDISCOVERY OF A BURIED CITY

In the following chapter, as in most of the preceding chapters, constructive doctrine is aimed at, even though the discussion takes, in considerable part, the form of critical a.n.a.lysis of opposing views. We shall seek to set forth the facts, as far as may be, regarding the relations of banking transactions to trade, the relations of clearings to amounts deposited in banks, the relation of New York City clearings to country clearings, and of New York bank transactions to bank transactions in the rest of the country. We shall seek to ascertain the extent of variability in that highly elusive magnitude, "velocity of circulation," particularly "V'." We shall indicate something of the bearing of index numbers of prices on the theory of the value of money as here presented. In reaching conclusions on these and related matters, we shall build on the investigations of Dean Kinley, on the very interesting statistical studies of Kemmerer and Fisher based on Kinley's figures, on investigations more recently made by the American Bankers'

a.s.sociation regarding the relation of bank transactions and bank clearings, on figures from reports by the Comptroller of the Currency, as well as on other sources. One purpose of the chapter is to criticise the statistics which purport to prove the quant.i.ty theory. The bulk of the chapter is given to this. But the work of Fisher and Kemmerer thus criticised yields rich rewards for the study. The conclusions they have drawn from their figures are, in the judgment of the writer, untenable, but the figures themselves are of immense interest and importance.

The controversy over the quant.i.ty theory has been waged with many weapons. Theory, history, and statistics--to say nothing of invective!--have been freely employed. In large measure, the statistical studies have been concerned with the direct comparison of quant.i.ty of money and prices, in their variations from year to year. One of the best of these studies, that of Professor Wesley C. Mitch.e.l.l, in his _History of the Greenbacks_ (followed by his _Gold, Prices and Wages under the Greenback Standard_), has, to the minds of many students, including the present writer, put it beyond the pale of controversy that the fluctuations in the gold premium, and in the level of prices, in the United States during the Greenback period, both for long periods and for daily changes, were not occasioned by changes in the quant.i.ty of money,[373] but rather, primarily, by military and political events, and other things affecting the credit of the Federal Government, together with changes affecting the values of gold and of goods. Professor Mitch.e.l.l's discussion is so detailed and thorough, that what controversy remains relates, not to his facts, but rather to the possibility of interpreting those facts in harmony with the quant.i.ty theory, by repudiating the notion that the direct comparison of gold premiums or of prices with quant.i.ty of money gives a valid test.[374]

Recent defenders of the quant.i.ty theory have undertaken the examination of more complex statistics than those concerned with the simple concomitance of quant.i.ty of money and prices. Two of these studies, the first by Professor Kemmerer[375] and the second by Professor Fisher, are so elaborate, have commanded such general attention, and have been accepted by so many students as conclusive demonstrations, that I feel it proper to give them detailed examination. I do this especially because highly important facts for our construction argument emerge from this critical examination. Kemmerer's and Fisher's studies reach high-water mark in the effort to give statistical demonstrations of the quant.i.ty theory. If they are invalid, then I know no other attempts which many students would suppose to be possible subst.i.tutes. The theory involved in both these studies is clearly stated by Professor Kemmerer: "A study of this kind, to be of any value, must cover the monetary demand as well as the monetary supply. Any test of the validity of the quant.i.ty theory consisting merely of a comparison of the amount of money in circulation with the general price-level is as worthless as would be a test of the power of a locomotive by a simple reference to its speed without taking into account the load it was carrying or the grade it was moving over." This criticism of many previous studies is, in general, I think, valid, though I should except from this list such detailed studies as that of W. C. Mitch.e.l.l, who takes account, as far as may be, of all the variables involved, and who considers day by day and week by week changes. I think the older studies of Tooke,[376] may also be excepted. In point of fact, if one wishes to know how much reliance may be placed in the quant.i.ty theory as a basis for prediction, when one knows that money is increasing, the simple comparison of money and prices is a fair test. If the "other things" which must be "equal" are so numerous and complex that the quant.i.ty theory cannot manifest itself in a direct comparison, much of its significance _as a basis of prediction_ is gone.

It is perfectly true, however, that studies running through long periods, which give simply figures for general prices and figures for quant.i.ty of money, omitting volume of trade, are not very relevant either for proof or disproof.[377] And the conception underlying the studies of Kemmerer and Fisher, that not merely money and prices, but also volume of bank-credit, volume of trade, velocity of monetary circulation, and velocity of bank-credit, must be measured, undoubtedly represents a big advance in the conception of the statistical problem involved. The mere stating of the problem is an intellectual achievement of no mean order, and the ingenuity and scholarship involved in seeking data for concrete measurement of these highly elusive elements must command the admiration of every student of monetary problems. Volume of trade, velocity of money and velocity of bank-credit had been generally supposed, until these studies were undertaken, to be beyond the reach of the statistician. There can be no doubt at all that the efforts to measure them, or to measure variations in them, by Kemmerer and Fisher, have greatly advanced our general knowledge of the phenomena of money and credit.

With great admiration for the magnificence of the problem undertaken, and for the industry, ingenuity and scholarship which have been devoted to its solution, I have nevertheless reached the conclusion that the figures a.s.signed by these writers to the magnitudes of their "equations of exchange" are, with the exceptions of the figures for money and deposits, widely at variance from the real facts in the case, and second, that if they were correct, they could in no sense be said to const.i.tute proof of the quant.i.ty theory.

In the critical a.n.a.lysis which follows, chief attention will be devoted to Fisher's statistics. His is the later study, and it follows, in main outlines, the methods laid down by Kemmerer. He has employed Kemmerer's statistics in considerable part, amplifying them for later years, using some data not available when Kemmerer wrote, and undertaking a fuller solution of certain problems than Kemmerer did. I shall, however, from time to time make reference to Kemmerer's figures, and show points of difference between the two studies.

Let me first briefly state the second point of my criticism of these studies: namely, that even if the statistics are correct, they do not const.i.tute proof of the quant.i.ty theory. The statistics purport to be concrete data filling out for different years the equation of exchange.[378] But the equation of exchange, as we have seen, does not prove the quant.i.ty theory. The quant.i.ty theory is a _causal_ theory, and causation involves an order _in time_. The concrete figures for the equation do not prove that. Even Kemmerer's concluding chart on p. 148, showing a rough concomitance between "relative circulation" and general prices does not show that changes in relative circulation are _causes_ of changes in general prices. The causation might be the reverse for anything his figures tell us. Fisher himself recognizes this, in considerable degree: "As previously remarked, to establish the equation of exchange is not completely to establish the quant.i.ty theory of money, for the equation does not reveal which factors are causes and which are effects."[379] Again: "But, to a candid mind, the quant.i.ty theory, in the sense in which we have taken it, ought to appear sufficiently secure without such checking. Its best proof must be _a priori_."[380]

The main criticism here, however, relates to the figures themselves, rather than to their meaning. The figures given by Professor Fisher are concrete magnitudes to fill out his equation of exchange, MV + M'V' = PT[381] for the years since 1896. Thus, for 1909, the figures are: M = 1.61 billions; M' = 6.68 billions; V = 21.1; V' = 52.8; P = $1; T = 387 billions.[382]

Now in what follows, I shall challenge all these estimates except P for 1909, V for 1896 and 1909, and M and M' for all years. The figures for M and M', being the results of fairly simple computations based on Governmental statistics, need not be questioned. P for 1909 is arbitrarily placed at $1.00. V for 1896 and 1909, for reasons which will later appear, is better based than for other years, though Kemmerer and Fisher have differed greatly in their estimates for V, the former placing it at 47 and the latter at 18 or 20.[383] My criticisms with reference to V, however, will relate to the years other than 1909 and 1896.

The sources from which these absolute magnitudes are drawn are, primarily, two investigations by Dean David Kinley, one in 1896 and the other in 1909, in cooperation with the Comptroller of the Currency.[384]

The purpose of these investigations was to ascertain the proportions of checks and money in payments in the United States. Banks of all kinds, national and State banks, trust companies, private banks, etc., were requested by the Comptroller to supply data for a given day (March 16 in 1909) showing what their customers deposited on that day. They were asked to cla.s.sify these deposits as cash, on the one hand, and as checks, drafts, etc. on the other. They were also asked to give a cross cla.s.sification of the same deposits, as "retail deposits," "wholesale deposits," and "all other deposits." In 1909, over 12,000 banks of all kinds, out of about 25,000 banks, replied, and of these replies 11,492 were in available form. These replies showed a total of deposits of over 688 millions of dollars. Of this total, 647 millions were in checks, so that checks made up 94.1% of the whole. About 60 millions of this total were retail deposits, about 125 millions were wholesale deposits, and the rest, about 503 millions, were cla.s.sed in the "all other" category.

Kinley's use of these figures, _for his purpose_, seems to me in every way conclusive and safe. He was interested merely in the question of the _proportions_ of checks and money in _payments_, retail, wholesale, and "_all other_." The absolute magnitudes of the elements in the equation of exchange he was not trying to measure. Professor Fisher's use of the figures presents a different problem.[385]

Let us consider, first, Professor Fisher's estimate of M'V', taken together. M'V' is considered to be equal to the total amount (in dollars) of checks deposited during the year.[386] To get this, for 1909, Kinley's figure, above, for checks deposited in 11,492 banks on March 16, 1909, is used. This figure is 647 millions. As half the banks had not reported, an estimate for the non-reporting banks was obtained from Professor Weston, who had aided Dean Kinley in the investigation, and who had access to the original data. Professor Weston estimated the total checks deposited during the day at 1.02 billions.[387] The question then arose as to whether this day was typical for the year.

Professor Fisher found New York City bank clearings of March 17 (the day after, on which these checks would get into the clearings) to be 28% below the average for the year. He a.s.sumed the rest of the country to be half as abnormal as New York City, and increased the 1.02 billions to 1.20 billions, getting what he conceived to be the daily average of checks deposited in the United States in 1909. Multiplying this figure by 303, the number of banking days in New York City (and so, presumably, a fair average for the number of banking days in the country), he obtained 364 billions for the checks deposited in 1909. This figure he considered to be M'V', the volume of bank deposits,[388] multiplied by its velocity of circulation. To obtain V', therefore, his problem was simple: he divided the figure for M'V' by the figure for M' previously obtained from government statistics, and obtained V'.

Now I wish to call attention to three important errors involved in this calculation of M'V' for 1909. (1) The a.s.sumption that the total check circulation is the same as the volume of checks actually used in _trade_ is a violent one. _Payments_ may be tax payments, loans and repayments, gifts, what not. Many checks may be used in a single transaction. Surely not all of this is properly to be counted in the M'V' of the equation of exchange. But this topic is better discussed in connection with the estimate for T, and I reserve its fuller discussion till then. (2) The a.s.sumption that the rest of the country was abnormal in its clearings on March 17, 1909, is a pure a.s.sumption, which investigation does not verify. The rest of the country was, in fact, nearly normal! The error that comes for the year from increasing the total on this a.s.sumption amounts to at least 31 billions! The total for the year, on Professor Fisher's method of computation, with the correction to make the a.s.sumption regarding outside clearings correspond with the facts, is 333 billions, instead of 364 billions! As the figure for 1909 is a basic figure, on which figures for other years are calculated, this error is extremely significant.[389]

(3) A yet more serious error in this computation is the a.s.sumption that New York City was complete in Kinley's figures, while the rest of the country was incomplete. This error, as we shall see, largely neutralizes the error above, so far as the "finally adjusted" figure for 1909 is concerned, but it makes a vital difference in the figures for other years, as will appear, since it affects the "weighting" of New York clearings and outside clearings in the index of variation by means of which M'V' for years other than 1909 is determined. The a.s.sumption that New York is complete, in Kinley's figures, and that all of the extra hundreds of millions added by Professor Weston in his estimate for the non-reporting banks belongs to the country outside New York, is made by Professor Fisher both on pp. 444-445, in estimating M'V' for 1909, and on p. 446, in finding an index of variation for M'V'. The only reason given, so far as I can find, is the following: "This figure, _being for New York_, [Italics mine], is probably nearly complete." (_Loc. cit._, p. 446.) With this as a basis, Professor Fisher proceeds in his calculations to treat the figure for New York, 239 millions, as absolutely complete, and gives the rest of Professor Weston's 1.02 billions for the day, or 786 millions, to the country outside. The error above mentioned, of a.s.suming the rest of the country to be abnormally low on March 17 in its clearings, still further increases the amount a.s.signed to the rest of the country in the total figures for the year.[390] The conclusion finally is that New York had deposits of 93 billions in checks for the year, while the rest of the country had deposits of 271 billions in checks. As New York clearings for the year were 104 billions, while clearings for the rest of the country were only 62 billions, Professor Fisher concludes that New York clearings overcount New York check deposits, and outside clearings greatly undercount outside check deposits, so that, in the index of variation of check deposits, for years other than 1909 and 1896, New York clearings should be given a weight of only 1, while outside clearings should be weighted by 5. "That is, on the basis of 1909 figures, five times the outside clearings plus once the New York clearings should be a good barometer of check transactions." (P. 447.) All this rests on the a.s.sumption that New York figures for March 16, 1909, were complete, and the only reason a.s.signed is, "being from New York!"

Now the figures from New York were not complete. And New York clearings do not overcount New York check deposits. Outside clearings do not undercount outside check deposits nearly to the extent that Professor Fisher a.s.sumes. For each of these three statements I shall offer what would seem to be conclusive evidence, and I shall attempt to get an estimate of the real relation between New York check transactions and check transactions for the rest of the country.

First, the figures for New York were far from complete. It may be noted that Dean Kinley, in his volume for 1909,[391] is very careful to repudiate the a.s.sumption that the cities were complete more than the country: "Moreover, it is a mere a.s.sumption that the non-reporting banks are mainly the small banks in the country districts. _A great many city banks also did not report._" (Italics mine.) That this is true for New York is abundantly evident from figures there given for the private banks and the trust companies, not to consider at all the State and national banks. New York shows only $1,751 in checks deposited in the "all other deposits" in private banks! This is a city which includes among its private bankers J. P. Morgan & Co., Kuhn, Loeb and Co., J. & W. Seligman & Co., and others! Figures from these banks appear nowhere in Kinley's totals, since deposits made _by_ these banks in other banks are also excluded from Kinley's figures.[392] Of course, exact figures cannot be given to show how much New York would be increased had the private banks made full reports. We have no reports of any kind from these inst.i.tutions. Every feature of their business is kept from the lime light, as far as possible--a practice which is much to be regretted, since it arouses hostility and suspicion, where a statement of the facts in the case would frequently entirely dispel them. We have, however, some information regarding the magnitude of their deposits, meaning by deposits, not what Kinley means in this investigation, namely, checks, etc., _deposited_ on a given day, but rather, deposits in the balance sheet sense of demand obligations to depositors. In Nov.

1912, J. P. Morgan and Co. held deposits of $114,000,000, exclusive of 49 millions on deposit with their Philadelphia branch of Drexel & Co.

About half of these were deposits of interstate corporations. Kuhn-Loeb held, on the average, for the six years preceding 1913 over 17 millions of deposits of interstate corporations. What their aggregate deposits were, we do not know. These figures are obtained from the report of the Pujo Committee.[393] Morgan's deposits were equalled by only three banks and two trust companies in New York (as of April 3, 1915), and Kuhn-Loeb's deposits for interstate corporations alone exceeded the total deposits of any one of the great majority of the New York Clearing House banks and trust companies. Of course, large deposits in the balance sheet sense need not mean large deposits made on a given day.

Private bankers' deposits may be inactive. But we know, first, that half of these figures for Morgan, and the whole of the figures given for Kuhn-Loeb, represent the deposits of active business corporations, engaged in interstate business. They are not mere trust funds lying idle, or awaiting investment in securities. What the rest are we can only conjecture. That they are deposits of men and firms connected with the Stock Exchange in some way is highly probable. The whole drift of the statistics presented in this book, and of the argument developed in this book, would serve to show that such deposits are likely to be more than ordinarily active.[394] I refrain from a.s.signing any figures as to the amount of checks deposited in private banks in New York on March 16, 1909. It must have run high into the millions.[395] It certainly exceeded the two thousands, or less, reported to Kinley! The figures for New York were, thus, incomplete.

But the trust companies were also incomplete. The national banks in New York reported checks totaling 186.5 millions, for all three cla.s.ses of deposits; the State banks reported only 38.1 millions; the trust companies only 14.2 millions. With aggregate deposits, as shown by their balance sheets, exceeding the deposits of national banks[396] the New York City trust companies reported, as deposited on March 16, 1909, less than half as much as the State banks, less than a tenth as much as the national banks, and only 6.8% of the two combined--5.9% of the total from all three cla.s.ses of inst.i.tutions!

These figures are hard to reconcile with the a.s.sumption that the trust companies in New York were complete on that date.

It is, of course, possible that the trust companies, though having large deposits, have inactive deposits. This is sometimes held to be the case.

But that the difference is so great in activity of deposit accounts between banks and trust companies is hardly credible. I have looked into this matter with considerable care, and have secured information and opinions from men intimately acquainted with the trust companies of New York from the inside. The only available quant.i.tative measure of the activity of deposits would seem to be the volume of a bank's clearings.

This is not perfectly accurate, by any means, but it is the best available test. Through the courtesy of a Vice President of one of the largest New York trust companies, I have obtained figures from an official of the Clearing House, which show that in New York trust company clearings run from 20 to 25% of the whole. On this basis, the trust company figures for 1909 were incomplete to the extent of from 33 millions to 46 millions, on the day in question. These clearings figures, however, are for the year, 1915, and not for the period before May, 1911, when the trust companies were admitted to the Clearing House.

Prior to that time they did not deal directly with the Clearing House, but _through_ the member banks. Do these figures, therefore, represent the situation as it existed in 1909? The possibility was entertained that entering the Clearing House had made a difference in the reserve policy of the trust companies, and so had made them change the character of their business, in such a way as to bring about greater activity of accounts. This question was put to the official of the trust company before mentioned, and his reply is that the State law regarding reserves (pa.s.sed after the Panic of 1907) had already brought about this change in reserve policy, and so no difference was made upon entering the Clearing House.

The same gentleman, by the way, replying to a question regarding the deposits in private banks in New York, and the influence of such deposits on clearings, writes: "The actual figures could not be obtained from the Clearing House..., consequently can only say that deposits made with these houses add to the Clearing House totals very large sums."

There is one piece of evidence which would seem to negative these conclusions regarding the trust companies. In the Report of the New York State Superintendent of Banks, for Dec. 31, 1907, p. x.x.xv, is a statement that during the two years, 1903-05, the trust companies of New York cleared only 7% as much as the banks. The statement relates, however, to a period during which the trust companies not only had no Clearing House membership, which of course was true up to 1911, but also had largely withdrawn from the privilege of clearing _through_ member banks.[397] Under these circ.u.mstances, even 7% would seem quite high.

Inquiry was made of the Honorable Clark Williams, who was State Superintendent of Banks at the time the report was made, as to the source of the figures.[398] Mr. Williams, in reply, defends the figures as correct for that period, but authorizes the writer to quote him as in no way surprised at the percentages given above, 20 to 25% of the total clearings, in view of developments and changes in trust company business.

I conclude that the trust company figures for March 16, 1909, were exceedingly incomplete. The national bank figures were probably more nearly complete than any others, first because they are large, and second, because national banks would feel more obligation than other banks to reply to questions from the Comptroller. The State bank figures, 38.1 millions, as against national bank figures of 186.5 millions, were probably incomplete also, to a considerable extent, though State banks are not dominating factors in New York City. That they should exceed the figures for trust companies is surely evidence of the incompleteness of the trust company figures. The private banks are incomplete, with absolute certainty, since they are virtually not represented at all.

Further evidence that the New York figures were incomplete, however, will appear in the data regarding our second thesis, namely, that New York clearings do not overcount New York check deposits. The aggregate check deposits reported from New York, on the date in question, is 239 millions. Clearings for that day were 268 millions,[399] substantially exceeding the reported check deposits. Now do clearings exceed check deposits in New York City?

Evidence with reference to outside clearings, in connection with bank transactions, we now have in very definite and abundant form, and it will be convenient to approach the question of New York clearings, first, indirectly, _via_ country clearings. We shall, therefore, take up first the thesis that clearings outside New York do not undercount bank deposits outside New York nearly as much as Professor Fisher thinks.

According to his estimate, checks deposited during the year in banks outside New York (exclusive of checks deposited by one bank in another) were 271 billions. (_Loc. cit._, 446.) Outside clearings were only 62 billions, and his conclusion is that the ratio of deposits to clearings is 4.4 to 1, or, in other words, that outside clearings amount to less than 22.8% of outside check deposits.

Now an extensive investigation, covering the period from June, 1913, to Oct. 1914, inclusive, has been made by the American Bankers'

a.s.sociation, through Mr. O. Howard Wolfe, Secretary of the Clearing House Section. This investigation covered cities of various sizes, in various parts of the country. Its results are immensely more trustworthy than any results based on a single day, as Professor Fisher's results are, could be, even had Professor Fisher's method been otherwise correct. An account of this investigation is to be found in the _Annalist_ of Dec. 7, 1914.[400] This investigation involves, for the period in question, a comparison of "total bank transactions" in each city with the clearings of that city, together with a summary covering all the cities. "Total bank transactions" consist of all debits against deposit liabilities of each member of the Clearing House, whether they come through the Clearing House or over the counter. They include payrolls, for example, which, of course, never get into clearings. They include drafts on deposits of one bank in another. In a letter to the Editor of the _Annalist_, Mr. Wolfe states that "total bank transactions include all debits against deposit liabilities, whether by check, draft or charge ticket. The only exceptions are certified checks and certain cashier's checks, both of which to an extent represent a duplication."

For the period in question, clearings amounted, on the average, for all cities, to 40% of "total transactions." The cities did not include New York City, as stated.

Now we cannot apply this 40% at once to the question in hand. Professor Fisher's 22.8% relates to the relation between clearings and checks and drafts _deposited_, _excluding_ items deposited by banks, and excluding, of course, cash deposited. What is the relation between Kinley's "deposits" and Wolfe's "total transactions"?

It is clear that "total transactions" must, in a period of time, _exceed_ Kinley's "deposits" very considerably. In a general way, what goes out of a bank, and what comes into a bank, must approximately equal one another in a period of time. In a general way, a depositor finds his income and his outgo balancing. Of course, some acc.u.mulate, paying in more than they withdrew, but in general such accounts are made with savings banks. The business man borrows from his bank, getting a "deposit credit" (without "depositing" in Kinley's sense), then checks against his "deposit," then receives checks in payments to himself, "deposits" them, building up his deposit balance again, and then checks against his deposit balance, in favor of the bank, to pay off his loan.

What comes in and what goes out--abstracting from the growth of a rapidly expanding bank--balance. But notice, in the case cited above, that "total transactions" include more items than Kinley's "deposits"

show. When the bank makes a loan, and gives a deposit credit, this does not, usually, show in Kinley's deposits. When, however, the loan is paid off by a check to the bank, it does show in "total transactions."

Moreover, when a man deposits cash in the bank, it does not show in Kinley's figures for checks deposited. When, however, he withdraws cash from the bank, or his check to another is "cashed," it does appear in "total transactions." Further, checks deposited to the credit of one bank in another do not appear in Kinley's figures. Checks drawn, however, by one bank on another do appear in total transactions. How great the difference is between "total transactions" and "deposits" in the banks outside New York we cannot say precisely. The cash items alone, on the basis of Kinley's figures, would make a difference of about 9%.[401] To allow 11% excess to "total transactions" over "deposits" for the other reasons listed, is surely not to make an exaggerated allowance. We thus count "deposits" in Kinley's sense, for the banks outside New York City, as 80% of "total transactions." Since, then, clearings are 40% of "total transactions," they will be 50% of "deposits." This figure is more than twice as great as Professor Fisher's figure of 22.8%. Even if we counted deposits as equalling total transactions, Professor Fisher's estimate would be clearly very much too low.

How, then, do we stand? On Professor Fisher's showing, the overwhelming bulk of checks deposited were in the country outside New York--271 billions for the year, outside, as against 93 billions in New York City.

If the ratio (50%) for outside clearings to deposits was the same for 1909 that it was in 1913-14 for the outside banks, we shall have to revise this radically. We have 62 billions of country clearings in 1909; we would have, then, 124 billions[402] of country check deposits! If Fisher's total figure for the country is correct, 353 billions as "finally adjusted," the balance, or 229 billions, would belong to New York! New York clearings, 104 billions, would thus be less than half of New York deposits! If we count outside clearings for 1909 as only 40% of outside check deposits, outside deposits would be, for 1909, only 155 billions, as against Professor Fisher's 271 billions, _a difference of 116 billions_! I am sure that his error in estimating outside check deposits is at least as great as that, and that we cannot a.s.sign to New York City less than a major part of the total check deposits of the whole country.