It is here, I think, in loan transactions between banks and brokers and between brokers, that we have a major part of the explanation of the huge deposit figures for New York City, and for the tremendous influence of stock sales on clearings, which Mr. Silberling's[445] figures show.

This is the opinion of Professor O. M. W. Sprague, who first called my attention to the volume of call loans, and rapid shifting of call loans, in New York, and it is the opinion of every Wall Street man with whom I have discussed the matter. The actual pecuniary magnitude of the share sales and bond sales is not enough to do it. The ma.s.s of connected loan transactions, however, substantially greater in volume than the actual sales of securities, is, with the security sales, enough to do it.

When the call rate is high, which will particularly happen when bank reserves are low, the shifting in loans will be much increased. One bank will have money to lend one day, but the next day will have to call it, to meet heavy demands at the Clearing House, while some other bank will have the surplus funds to lend. The brokers, by bidding up the rate, will tempt the temporary lending even of small surpluses, if their necessities are great. The volume of "all other deposits" and of bank clearings will be swelled by this much beyond ordinary. That this should not be revealed to ordinary statistical tests is due to the fact that speculation tends to fall off at such a time, so that the other factors in the stock exchange operations tend to reduce daily deposits and bank clearings. Mr. Silberling has applied to this problem the technique of a refinement of the correlation method, the method of partial correlation, with the result of confirming this view.[446]

I conclude, therefore, that stock exchange transactions, instead of being undercounted in bank deposits, are very greatly overcounted.[447]

The big item that does it is loan transactions between brokers and brokers and between brokers and banks.

The evidence from the Chicago Board of Trade, with reference to the extent of clearings within the exchange there, comes in a letter from the Secretary of the Board of Trade to Professor Taussig. The only clearing house transactions are in connection with "futures." All "spot" transactions are paid in full by check. All futures other than those offset by clearing are paid in full by check. The total amount put through the Clearing House in 1915 was 118 millions, of which the balances paid were 41 millions (saving checks to the extent of 77 millions). This 77 millions is a trifle indeed as compared with the gap of 245 billions we are trying to fill! It is a trifle also as compared with the business done on the Board of Trade. The Secretary estimates that commodities to the value of $375,000,000 actually arrived on the exchange in 1915. On the average, the figure would be $350,000,000. For the Stock Yards "it is approximately the same--last year was $375,000,000. Of fruits, vegetables, poultry, b.u.t.ter, eggs, etc., sold in South Water Street, it is claimed by their statisticians, the value is $350,000,000, or a total of about eleven hundred millions _arriving_ [Italics mine] yearly at this great market place, all of which is paid for by checks, and when the ownership changes, the change of ownership is always paid by check." How many times the goods change hands, cannot be stated on the basis of records of the Board of Trade. The Secretary contents himself with saying that they are "sold and resold many times."

We have discussed this, on the basis of reputed figures of the Federal tax on grain futures in 1915, in our chapter on "Volume of Money and Volume of Trade." In any case, it is clear that the 77 millions of checks economized, though absolutely great, is relatively a bagatelle.

It is, moreover, more than compensated for by loan transactions. The Secretary estimates that for a sixty-day period, when grain is coming in, from two to four millions will be lent by the banks daily on _arriving_ grain. How great the loan transactions on subsequent sales will be we can only conjecture.

While able to find, then, important cases of trade and speculation which dispense with the use of checks, I cannot find anything of magnitude sufficient to aid Professor Fisher's case, and I find, on the other hand, enormous overcounting in every field where business and banks meet, as well as in the relations of banks to non-commercial depositors.

I conclude, therefore, with reference to the figures of Fisher and Kemmerer[448] for volume of trade, that they are much exaggerated for the base year, and that for every other year they are wholly wrong, both because of their excessive magnitude, and because the index of variation has been wrongly chosen.

The discussion of P, the price-level, in the statistics of Kemmerer and Fisher need not be extended. P, for the equation of exchange, and for the quant.i.ty theory, is a _weighted_ average, each price that goes into it being weighted by the number of exchanges involving the commodity of which it is the price. The weighting of P should correspond to the elements in T, the volume of trade, and should vary from year to year, as the elements in T change.[449] Now Kemmerer's P is weighted as follows: wages, 3, security prices, 8, wholesale prices, 89.[450] If our conclusions with reference to the composition of the volume of trade, as developed in the chapter on "Volume of Money and Volume of Trade," are valid, this weighting gives us a P which has no relevance to the equation of exchange. The wholesale items should have a weight of not more than one-sixth of the total for 1909. Certain commodities, as wheat and cotton, in which there is heavy speculation, should be given great weight, and securities should have, probably, the greatest weight of all. If "trade" is to be extended to cover transactions in bills of exchange and loan transactions (as it is by Kemmerer),[451] then P should contain these things, weighted more than all else put together, particularly if call loans are included. The weights should be radically altered from year to year. We should then get a P which would fit the "equation of exchange"--though what else it would be good for is hard to say! The same criticism applies to Fisher's P. It is dominated by wholesale prices.[452] It therefore has no relevance to an equation of exchange in which only one-sixth at the very most of the items are wholesale items. Neither Fisher nor Kemmerer alter their weights in P at all, to correspond to yearly alterations in the composition of T.

As _indicia_ of changes in the _absolute value_ of money, Kemmerer's and Fisher's index numbers, or other index numbers of numerous wholesale prices, with a substantial weighting of wages, are probably better than an index dominated by stocks. Stocks fluctuate more widely than wholesale prices and wages, their values are more affected by variations in business confidence, and by variations in the rate of interest. For measuring _the value of money_, the index numbers here criticised are very good. But for the purpose for which they are chosen, namely, to fill the equation of exchange, and to measure variations in a _price-level_ of the sort the quant.i.ty theory and the equation of exchange are concerned with, they are simply irrelevant. If it were really true that such an index number varied with the quant.i.ty of money, then the quant.i.ty theory would be effectively disproved!

Now, in general summary of our criticisms of the figures of Kemmerer and Fisher: they have systematically buried New York City, and systematically covered up speculation. All the errors converge in this direction. The _indicia_ of trade cover up speculation and the other things that go on in New York, and other financial centers. The _indicia_ of prices do likewise. Fisher weights New York clearings only 1, while weighting country clearings 5, in his index of variation of check transactions. He also counts New York returns for March 16, 1909, as complete, and gives all of his estimate for non-reporting banks to the country. Kemmerer does not do this, but he does exaggerate the importance of money, as compared with checks, and does not allow the velocity of money to vary at all in his figures, thus getting a much greater constancy in the figure for total circulation of money and checks than is proper, and covering up the flexibility and variability which New York gives to our system.[453] In general, our task in this chapter has been an archaeological excavation--we have rediscovered a buried city.

PART III. THE VALUE OF MONEY

CHAPTER XX

RECAPITULATION OF POSITIVE DOCTRINE

The chapters which have gone before have been, in considerable degree, concerned with the a.n.a.lysis of unsuccessful efforts to solve the problem of the value of money, as the quant.i.ty theory, or the attempts to apply the notions of supply and demand, marginal utility, and cost of production, to the problem. Not all that has gone before has been, even in form, primarily critical. The chapter on "Economic Value" lays the foundation for the main constructive theory of the book, and in virtually every chapter some portion of our positive doctrine has been developed. In the doctrines criticised, elements of truth have been noted, and in showing the errors of the doctrines considered, constructive doctrine has been presented by way of contrast. The theories criticised, moreover, even where they have gone astray in solving problems, have at least the merit of _stating_ problems, and so have aided in clearing the way for theories better based.

It is the task of the present chapter to present, in a series of theses, the main constructive results so far attained. No effort will be made to follow the order of the exposition which has preceded. A summary of that will be found in the detailed a.n.a.lytical table of contents. Rather, we shall seek to draw from what has preceded the positive doctrine which is scattered through the preceding chapters, and to present it by itself, as a basis for the more systematic formulation of constructive theory which the following chapters are to contain.

1. The theory of the value of money is a special case of the general theory of value.

2. Value is a phenomenon of psychological nature. Not physical quant.i.ties, but psychological significances, are relevant when the problem of value and price causation is involved.

3. Value is not a ratio of exchange, or "purchasing power," but is an absolute quant.i.ty, prior to exchange. It is the fundamental and essential attribute or quality of wealth, the common or h.o.m.ogeneous element present amidst the diversities of the physical forms of wealth, by virtue of which comparisons may be inst.i.tuted among different kinds of wealth, and different items of wealth may be added to make a sum, put into ratios of exchange, and so on.

4. Economic value is a _species_ of the _genus_, _social value_, coordinate with legal value, and moral value. It is part of a system of social motivation and control.[454] Psychological in character, it none the less presents itself to an individual as an objective, external force, to which he must adapt himself.

5. Individual prices have two cooperating causes: (a) the social economic value of the money-unit, and (b) the social economic value of the unit of the good in question.

6. The average of prices, or the "price-level," is a mere mathematical summary of the particular prices. The causation involved in the average of prices is nothing more than the causation involved in the particular prices.

7. The value of money is to be distinguished from the "reciprocal of the price-level," or the "purchasing power of money." The value of money is an absolute quant.i.ty, one of the factors, determining each particular price. Particular prices and general prices may change because of changes in the values of goods, with no change in the value of money.

Or, particular prices and general prices may change because of changes in the value of money, with goods remaining constant in value.

8. The absolute value of money, a.s.sumed constant, is presupposed by the great body of present day price theory, as supply and demand, cost of production, and the capitalization theory. These theories are, therefore, inapplicable to the problem of the value of money.

9. But supply and demand, cost of production, the capitalization theory, and other laws concerned with the concatenation and interrelations of prices, being applicable to the problem of particular prices, are also applicable to the problem of general prices. (Chapter on "The Pa.s.siveness of Prices.")

10. The general price-level, as a consequence of changes in particular prices, growing out of changes in the values of goods, may rise or fall, without antecedent changes in the value of money, or the quant.i.ty of money, or the volume of credit, or the volume of trade, or in the "velocities of circulation" of money or credit. (Chapter on "The Pa.s.siveness of Prices.")

11. The general laws of prices, supply and demand, cost of production, the capitalization doctrine, the imputation doctrine, etc., conflict with the quant.i.ty theory. In the cases where they conflict, the first named doctrines are correct, and the quant.i.ty theory is wrong. (Chapter on "The Pa.s.siveness of Prices.")

12. The value of money, being a special case of economic value, is subject to the same general laws. This means, from the standpoint of my theory, that the theory of social value is applicable to the problem of the value of money.

13. This is not the same as saying that the whole value of money is to be explained by the social value of gold bullion, conceived of as a mere commodity. A hypothetical case was constructed in the chapter on "Dodo-Bones," in which gold is the standard of value, but is not employed as a medium of exchange or in reserves, where the whole value of money is to be explained by the value of gold bullion, conceived of as a commodity.

14. But, in general, money gets part of its value from its monetary employments. (Chapter on "Dodo-Bones.")

15. The additional value which comes to gold bullion as a consequence of its employment as money, is itself to be explained on social value principles. It grows out of the social value of the services which money performs.

16. The functions of money remain to be examined in detail. And the relation between the value of particular services of money and the capital value of money, has not yet been a.n.a.lyzed. There is a relation between the two--a relation which varies under different conditions--even though it has been shown in the chapter on the "Capitalization Theory" that the relation is not the simple one which holds between the values of services and the capital value of ordinary income-bearers. There must be an increment to the value of gold bullion as a consequence of its being coined, however, since otherwise there would be no force leading it to be coined.

17. This increment in value to bullion, as a consequence of coinage, becomes evident when free coinage is suspended. An agio of coin over uncoined bullion may easily appear.

18. But this is not to a.s.sert the doctrine of the quant.i.ty theory.

Because

19. The money service presupposes the existence of value for money from some source other than the monetary employment (chapter on "Dodo-Bones"); and

20. Hence the monetary employment can explain only a differential portion of the value of money.

21. The proposition that money must have value from some source other than the monetary employment does not mean, necessarily, that money must be made of precious metals, or be convertible into precious metals. The value of money is, indeed, most stable and best sustained when such is the case. But it is possible for money made of paper to have value apart from the prospect of redemption--though no clear case has been made, in the writer's opinion, for the view that this has historically occurred.

But as a hypothetical possibility, my theory holds that paper money may attain a value of its own, growing out of various factors which a social psychology can explain, including law, patriotism, and custom. Social values in every sphere are imperfectly rationalized. Values which in their origin are secondary and derived may become substantial and independent of their "presuppositions." This is true of legal and moral values. It is true of the capital value of land. It may be true of paper money. This matter has been discussed in the chapters on "Economic Value" and on "Dodo-Bones." The social value theory has not the limitations of the utility theory in dealing with such cases, nor is it tied to a metallist or bullionist interpretation. Legal, moral, and patriotic factors, and the influence of social custom, all fall readily into the social value doctrine.

22. The "measure of values" function, and the "standard of deferred payments" function, need not require the actual use of money, and need not add to the value of money. The function of "medium of exchange," and other functions to be a.n.a.lyzed in a later chapter on that topic, do involve the actual employment of money, and are sources of value for money.

23. The quant.i.ty of money and credit are matters of high importance in economic life. They affect vitally the smooth functioning of production and exchange. While not accepting the extreme view of those writers who see in scarcity or abundance of money the primary cause of the ebb and flow of civilization, I maintain that the quant.i.ty of money and credit does make a vast difference, and that the quant.i.ty theory contention that, after a transition is effected, the only consequence of a change in the quant.i.ty of money is a proportional change in the price-level, is wholly indefensible. (Chapter on "Volume of Money and Volume of Trade.")

24. Very much of economic theory has been developed in abstraction from money. For economic statics, with its delicate marginal adjustments, on the a.s.sumption that friction is banished, that the market is fluid, that labor and capital and goods are mobile, etc., money does appear a needless complication. But the static a.s.sumptions are only possible because money and credit have smoothed the way. It is the business, the function, of money and credit to overcome "friction," to effect "transitions," to make it possible for "normal" tendencies to manifest themselves. (Chapter on "Volume of Money and Volume of Trade.")

25. The main work of money and credit is in effecting "transitions,"

bringing about readjustments, enabling society, with little shock, to adapt itself to dynamic change. The great bulk of the actual exchanging that takes place is speculation, and would not occur if economic life were in static equilibrium. This is true both as a matter of theory and as a matter of statistics. More than half of the checks deposited in the United States are deposited in New York City, where "wholesale" and "retail" deposits are a small factor. Bank clearings fluctuate in close conformity with stock exchange transactions. Great banks, and the bulk of banking transactions, are everywhere found in the speculative centres. (Chapters on "Volume of Money and Volume of Trade," and "The Rediscovery of a Buried City.")

26. Hence a functional theory of money must be essentially a dynamic theory: must rest in a study of "friction," "transitions," and the like.

And,

27. Hence a theory of money like the quant.i.ty theory, concerned with "long run tendencies" and "normal equilibria" and "static adjustments"

touches the real problem of the value of money not at all.

28. An increase of money tends to increase trade. (Chapter on "Volume of Money and Volume of Trade.")