The Value of Money :: PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS

PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS

CHAPTER XXV

THE RECONCILIATION OF STATICS AND DYNAMICS

In the foregoing discussion of the value of money it has appeared that the value of money is not an isolated problem! Not only have we found it necessary to consider it as part of the general theory of value, but it has been advisable to bring it into relation with a large number of the special theorems of economics, including the law of supply and demand, cost of production, the capitalization theory, the doctrine of appreciation and interest, the theory of international gold movements, Gresham's Law, the theory of elastic bank-credit, and the general theory of prosperity. The book has thus become a book on general economic theory, viewed from the standpoint of the theory of money. It has been as contributing to the problem of the value of money that these other doctrines have been discussed, but I trust that they, too, have gained something of clarification from being considered in this relation, and that the emphasis on the rÔle of money in general economic theory has helped in bringing the various elements in our current theory into a closer-knit interdependence.

The present chapter seeks to carry the conclusions so far reached toward a further unification of economic doctrine, by finding for certain contrasts, like that between statics and dynamics, a higher synthesis, so that it may be possible for students of dynamics and students of statics to speak a common language, to use common measures, to find that their phenomena are not, after all, of essentially different nature, and to come to agreement as to the relative importance of "static" and "dynamic" tendencies. It will appear that the theory of money and exchange plays an important rÔle in effecting that higher synthesis, and is itself clarified by it.

The "theory of goods vs. the theory of prosperity," "statics vs. dynamics," "normal vs. transitional tendencies," "long run vs. short run" laws, "market vs. normal price," "abstract theory vs. concrete description," "historical or evolutionary study vs. cross-section analysis," "temporal vs. logical priority," "causation as a temporal sequence vs. causation as timeless logical relationships"—these, and similar contrasts have appeared frequently in the history of social thought, and have been especially refined and elaborated in the history of economics. We have even compounding of the notions into more complicated distinctions, as by Seligman,[572] in his two statements of the law of costs: in the short run, normal price tends to be the maximum cost of production; in the long run, normal price tends to be minimum cost of production. Seligman has illustrated his notion by an adaptation of the familiar figure of the sea-level and the waves: for short-run purposes, we may contrast the surface waves, the market prices, with the sea-level, the normal price; for longer run purposes we may see the level of the sea itself changing, under the influence of the tide, and may have a dynamic normal, which is still to be distinguished from the fluctuations due to the play of winds on the surface.

We have further an increasing recognition of the up and down play of forces accelerating and retarding the processes of industry and trade. For earlier writers, panics and crises were anomalies; since Mill's Principles of Economics, to go back no further, we have had increasing recognition of such occurrences as more or less periodic and inevitable, bound up in the very nature of economic life itself, and of late there has been a fairly general acceptance of the notion of the business cycle, of an alternating rhythm of prosperity and depression. The explanation of this alternation has been attempted by numerous theories, one of which, that of Joseph Schumpeter,[573] rests the whole case definitely in the distinction between static and dynamic tendencies, and in the conflict between the opposing sets of forces which statics and dynamics undertake to describe.

We are told by the orthodox economist that war is wasteful, destroying laborers and goods, and lessening the wealth and productive power of society. We are told that it diverts labor from productive employments, that it turns huge masses of capital and labor to the production of goods which men cannot enjoy, that it burdens the people with taxes, etc. Static theory can see nothing but evil in war, from the standpoint of minimizing human sacrifices, and maximizing human enjoyments. None the less we see many war periods—notably that of our Spanish-American War, and the present World War, so far as the United States are concerned—periods of marked prosperity, growing out of the new expenditures which war itself involves. Mules and other farm products rose in price with the Spanish-American War, as the Federal Government bought them for the army; various factories concerned particularly with war munitions increased their activity, the gains of factory owners and farmers led them to increase their purchases, wages rose, and rose in part because part of the labor force was in the army. The Civil War did spell demoralization and economic ruin for the South, but for the North it gave a great dynamic impetus to trade, transportation and industry—an impetus, strangely enough, that was so great that the new industries and enterprises which had grown up were able to absorb with little shock the million men set free from the Northern armies when the great struggle was over.[574]

For static theory, scarcity is an evil. A general overproduction is impossible. For the practical business man, confronted with the momentous problem of marketing his output, overproduction is a vital reality, and there are few times indeed when much more could not be produced if only a satisfactory market could be found for it. Static theory would see the whole explanation of this in maladjustment, too much of some things being produced, too little of others. This simple statement does explain much of the phenomenon, but it is far from telling the whole story, and even if it were a complete explanation, it would by no means dispose of the reality of overproduction as a constant menace, even when not a dire reality, facing almost every business man. Static theory at best tells what a completed adjustment would be; it does not touch the problem of how adjustment is brought about, and maladjustment overcome. Yet just that problem is the vital concern of the business man.

For static theory, high or low prices are matters of no concern. And abundance or scarcity of money and credit make no real difference in the economic process. Abundant money and credit exhaust themselves in raising prices, and the rest of economic life goes on unchanged. This doctrine of the quantity theory is, as I have undertaken to show in Part II, bad even as a matter of static theory. But it is only as a matter of static theory that it is even thinkable.

The economic theory of the 19th Century, following the lead of Adam Smith and Ricardo, has been accustomed to dismiss as utter folly the notions of the Mercantilists as to the balance of trade, and the importance of an inflow of gold, and has conclusively proved that protective tariffs tend to divert the labor, capital and land of a country from those lines of production they are best adapted to to lines for which they are less well suited. Critics have pointed out, as in the "infant industries" argument, that we cannot treat the labor capacity and technical knowledge of a country as constants, that the temporary encouragement of one line of industry by a tariff may so modify the data of the situation that the country may in time become better adapted to the protected industry than to other lines. And I think that we may well go further, and make substantial concessions to the doctrines of the Mercantilists as they themselves stated them, seeing in a favorable balance of trade, and in expanding exports and diminishing imports sources of impetus which are not subsequently neutralized by the static process of equilibration. I do not conclude from this that protective tariffs are commendable, any more than I conclude that war is commendable. Both may give dynamic impetus, and lead to economic development. Both may lead to political corruption, to iniquities in the distribution of wealth, to waste and suffering of various kinds, in which honest and patriotic men suffer, and cunning and unworthy men gain. The point here is simply that static theory does not tell the whole story regarding either tariffs or wars. It may well be true—I think it is true—that static theory offers the more important principles for judging the results of wars and tariffs.[575] It is the central problem which I have set myself at the outset of this discussion to find a way to bring static and dynamic considerations under a common measure, to reduce them to homogeneity so that comparisons may be instituted, and so that the student of statics and the student of dynamics need not talk merely at cross-purposes. But we do not achieve this result by ignoring considerations in either sphere.

Bastiat, with a fine show of logic, has sought to rule out of court the doctrines that extravagance and tariffs, etc., are sources of prosperity by his emphasis on the "Unseen," as opposed to the "Seen." The prosperity growing out of the extravagant expenditures of one brother is open to all eyes. The consequences of the savings of the frugal brother men do not see so easily, and do not attribute to his frugality. Doubtless Bastiat is right in his main theses. But one point needs emphasis: that which is "Seen" stirs the imagination of men. And imagination energizes human activity. The motivation of economic life is a psychological matter.

And so at a host of points the contrast may be drawn, in one or another form. The pure, abstract, static theory gives one conclusion; the other approach suggests one different.[576]

How is it possible to give proper weight to considerations drawn from such divergent spheres of thought? Indeed, how shall we weigh the dynamic considerations at all? Static theory presents itself in quasi-mathematical form. At times, it parades itself in equations, and it readily enough, without arousing a feeling of incongruity, expresses itself in mathematical curves, with ordinates and abscissÆ. One static tendency finds itself in marginal equilibrium with another, and the margin is expressed in quantitative units, commonly sums of money. Static doctrine does, indeed, lay claim to precision and exactness, and static tendencies may be weighed against one another. But how shall one undertake to give quantitative measure to such a thing as the educational influence of a tariff on silk manufacture? How measure the dynamic impetus of a new chain of banks on the industry and trade of the region affected? How gauge the importance of a new advertising scheme, or a new invention? Dynamic considerations are commonly presented in vaguer, looser form than static theories. Usually we have merely a statement of a qualitative tendency, without effort to make the importance of the tendency quantitative. Indeed, I think it safe to say that one chief difference between statics and dynamics is that those tendencies which can be most easily formulated have been recognized by statics, while those which are less understood, and less precisely formulated, are left to dynamics! A big part of the difference is methodological, rather than inherent in the nature of the phenomena themselves.

I think that it needs little argument to show that all the contrasts listed at the beginning of this chapter do not run on all fours. Compare, let us say, the contrast between "statics and dynamics" with that between "historical and cross-section" study. Concrete, realistic history is not dynamic theory. A realistic description of society viewed at a given short period of time is not static theory. Both statics and dynamics are abstract. Laws are not the same thing as description and narration. The assertions of both statics and dynamics are commonly made on the assumption, "cÆteris paribus." A new bank will stimulate business in a western town if bank-robberies do not come into fashion! A tariff on wool will tend to educate the farmers in sheep-raising if the habit of relying on governmental assistance does not develop, and make them more, rather than less, inert,—or sharpen their political rather than their economic acumen. Concrete history need not always verify dynamic laws![577] It is, above all, important to insist that the distinction between statics and dynamics is not the same as the distinction between theory and description, or between the abstract and the concrete. Evolutionary study may result either in concrete history, or generalized laws; cross-section study may be either concrete description or abstract formulÆ concerning forces in equilibrium. And there may be varying degrees of abstractness in both cases.

The contrast between long-run and short-run tendencies is not necessarily the same as that between statics and dynamics. This former distinction does recognize one factor which is sometimes classed as "dynamic," namely, "friction."—"Friction," by the way, is a blanket term which covers a multitude of sins of imperfect analysis and lazy thinking! It is far from a simple, unitary thing. Sometimes it seems to mean the action of the whole social order, other than the economic values!—But dynamic, as used by the two writers who have used the term most precisely, J. B. Clark[578] and J. Schumpeter,[579] is reserved for those factors in economic life which make for constructive change. Neither writer would call mere habit and inertia, which make readjustments slow, or the necessities of physical nature, which retard readjustment, by the name, "dynamic." It may be noted, in passing, that both writers limit the term quite strictly to changes in economic life growing out of[580] economic causes. Schumpeter narrows the dynamic factors to one, namely, enterprise, while Clark gives five general classes of dynamic factors, all of which are primarily economic in character. Neither extends his study to cover forces which are not primarily economic in character, but which none the less lead to economic changes.

Again, the "theory of prosperity" is not identical with "economic dynamics," though the two in large measure overlap. For one thing, while some writers, as Schumpeter, find the business cycle to be a necessary consequence of dynamic changes, and would maintain that no business cycle, no up and down of tempo in production, no panics or crises, are necessary if changed methods of industry, etc., did not come in, not all writers would so explain the business cycle. Some writers would find the explanation in the inherent instability of a money and credit economy, some in the inherent weakness of a capitalistic system, quite apart from necessary dynamic change. Irving Fisher makes no use of changed methods of production in his explanation of business cycles, though he does mention invention as one possible cause of a disturbance in normal equilibrium.[581] But further, dynamics is largely concerned with problems, like invention, changes in the economic habits of a people, methods of organizing industry, etc., which, while they may well bear on the problems of prosperity and depression, yet have interest for their own sake, and would be studied if there were no business cycles. Further, the notion of statics, the other term in the static-dynamic contrast, is not identical with the "theory of wealth," or "theory of goods," or "theory of the wealth of nations" which such a writer as Veblen[582] would put in contrast with his "theory of prosperity." There is a normative, or practical, and polemical coloring in the body of doctrine growing out of Adam Smith, which Veblen would term, the "theory of the wealth of nations," which is lacking in the more colorless "statics" of to-day.

I do not find any of the contrasts thus far discussed quite satisfactory. I have been using the terms, statics and dynamics, as general terms to cover all these contrasts. I shall try to formulate a general contrast which includes most of the ideas passed in review, from a somewhat different angle, and then try to show that the contrast, while useful, is not absolute, and that it is possible to measure considerations drawn from one viewpoint in terms of considerations drawn from the other.

Let us take as our starting point the notion of a cross-section picture of society. I have set forth this notion in ch. 13 of my Social Value, and have elaborated it in the discussion of von Mises' theory in the chapter on "Marginal Utility" in this book. A cross-section picture may be made more or less concrete and descriptive, or abstract and analytical. If one looks at the picture of society in cross-section as given by Giddings in his Principles of Sociology (Bk. II, chapters on "The Social Population," "The Social Mind," "The Social Composition," and "The Social Constitution"), one finds a picture in which organization and system are made clear, but in which vivid description of concrete social facts is the primary concern. The account given is largely qualitative rather than quantitative. It is a picture of flesh and blood, as well as an account of functioning. It is, perhaps, not easy to realize that Giddings is doing the same general sort of thing that the pure economic theorist is doing, with his picture of a static equilibrium of economic values. But what economic theory is concerned with is, after all, to be found in Giddings' scheme. The pure theorist takes for granted the physiographic environment, whose influence Giddings takes into account. The theorist abstracts from biological and racial factors. He assumes a social population, a social order, a political system. He has not taken into his purview the social mind as a whole, in his static theory. Rather, he has been concerned with only one part of the social mind, namely, the economic values. Economic values, and the objects of economic value, have been the data of the static theorist. Given scales of economic value, such that for one quantity of goods of a given kind, a given value per unit will obtain, given all of these value-scales, and given the quantities of goods and services whose values are in question, and static theory will furnish an equilibrium picture, in which the price relations of different kinds of goods are made clear, and their values are measured. The value-scales, and the absolute magnitudes of value at different points on the scale, are assumed, are data. Further, in order that the notions may be made mathematically precise, a unit of value is needed, and this is commonly the value of the money-unit, which is assumed to be constant. The picture then becomes systematic. There is a system of values, expressed in prices, which is stable, so long as the data do not change. It is mechanically conceived, and illustrated by various mechanical symbols, as balls in a bowl, or connecting reservoirs, or, best of all, by intersecting curves. It is an abstraction from the living, pulsing, organic whole of the social mind—the inter-mental life of men in society. It squeezes much of the life out of the phenomena it describes. It makes them exact, only by making them mechanical. It thus becomes exact by becoming, in considerable degree, superficial and abstract.[583] This is not to condemn static theory. Static theory has proved its usefulness by solving too many problems for such a statement of its limitations to involve a condemnation. But the statement of its limitations will aid us in seeing its relation to that vaguer body of doctrine which we call dynamics, or the theory of prosperity, etc.

Now this means that static theory is not value theory. It assumes a theory of value. It assumes the value-scales as data. It assumes the value of money as a datum. Static theories of supply and demand, cost of production, capitalization, etc., assume the value of money, as has been shown in Part I, and static theory, resting in the notion of accomplished transition, normal equilibrium, abstracting from the difficulties of readjustment, abstracting from friction, etc., misses the whole point as to the functions of money, as shown in Part II. Static theory proceeds by assuming a change in one of the elements of its situation, say one of the value-scales, and then tells what the new equilibrium will be after readjustment takes place, assuming that other value-scales remain constant, and that quantities of the objects of value do not change. Or, it assumes a change in the quantity of one of the objects of value, and then predicts the new equilibrium. The new equilibrium will often involve changed values and prices all around, and will often involve altered quantities of other objects of value. But the initial change comes from an alteration from outside the system in one or more of the data of the system.[584]Now dynamics, theory of prosperity, etc., are concerned with the causes of changes in the data with which statics works, in large measure. Among the problems with which statics has not adequately dealt, and in large measure cannot deal, are (1) the nature of value itself, and the laws governing changes in the value-scales; (2) the problems of readjustment, including the problems of money, credit and exchange; (3) the psychology of invention, of enterprise, and the like. (4) The reactions of economic values and economic organization on the non-economic phases of social life. (5) The reaction of the non-economic factors, as law, morals, art, religion, etc., on economic life. (6) The problem of prosperity and depression. I say that statics has not dealt adequately with these problems. Statics in its present narrow form cannot deal with them. But in considerable degree, I am convinced, statics can be made to deal more adequately with them, if its scope be broadened, and its limitations be made less rigid. Schematically, at least, the central ideas of statics can be applied to a large part of these problems. I may add that my list of six classes of problems with which statics has not adequately dealt is not meant as a system of categories. The list is incomplete, and the classes are not mutually exclusive. Rather, they overlap in large measure. In a large way, it might be said that statics is concerned with the laws of the equilibration of values, and that dynamics, theory of prosperity, etc., are concerned with the nature and causes of variations in the values themselves. The contrast may be put, in general, as the contrast between the theory of value, and the theory of price, statics being price-theory, and dynamics being value-theory. But this is a thesis which calls for much elaboration and qualification before its significance is made clear, to say nothing of its justification being established.

We may approach the problem of bringing the two terms of the contrast together from either of two angles: (1) we may show that dynamic factors tend, in large degree, to submit themselves to measurement in terms of money-prices, which obey the laws of static marginal equilibrium. (2) We may show that all static prices presuppose values whose explanation is in terms of the same phenomena with which dynamics, the theory of prosperity, etc., have busied themselves, namely, considerations drawn from the study of social psychology, including the psychology of suggestion, imitation, mob-mind, the functional organization of minds into a social mind, social beliefs, social values of other than economic nature, and social institutions. (1) The evidence on the first point is already in considerable measure worked out, particularly by Veblen, in his Theory of Business Enterprise, and in his other writings on the nature of capital, etc. Something more in this direction I have done in my Social Value, and other writers have elaborated the notion. (2) The case for the second contention has been made in detail in my Social Value, and in what follows I shall rely chiefly on the discussion presented there, and in the chapter on "Value" in this book.

I take up first the thesis that dynamic factors may come under the static measure. Veblen has made much of the contention that modern "capital" is not, as Smith thought, and as orthodox economists in general have contended, a matter of physical accumulations of goods. The volume of business capital is a pecuniary concept, and may wax and wane with little variation in the physical stocks. "Under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." (Theory of Business Enterprise, p. 149.) And in large measure Veblen's work is given to showing how factors of legal and social psychological nature get a money-measure. The actual capital of a business enterprise does not rest chiefly on the physical equipment, stocks of raw materials, etc., etc., which it possesses. To be added is "good will," and this includes (p. 139) established customary business relations, reputation for fair dealing, franchises, privileges, trade-marks, brands, patent rights, copyrights, exclusive use of processes guarded by law or secrecy, exclusive control of particular sources of materials, etc. Veblen contrasts things of this nature sharply with the concrete equipment, saying that the former are serviceable only to the owners, while the latter are serviceable to the community at large as well. The physical, tangible, and ethically commendable character of the physical equipment is everywhere stressed, while the pathological, anomolous, and sinister character of the less tangible and more recent "capital items" is always set before us—all the more effectively because Veblen maintains a satirical attitude of moral indifference, and presents the case with Olympian aloofness. I am not here concerned with the social welfare aspect of the matter, though I shall later speak of that. My present purpose is to make clear two points in Veblen's doctrine: (1) that he does bring these intangible things, which are the variables involved in his theory of prosperity, under the price measure; and (2) that he considers these prices as anomalies from the standpoint of the general laws governing the values and prices of concrete goods. To this last point I shall later take sharp exception. For the present, I wish to develop further the extent to which such factors may be brought under the general static measure.

The feature of static theory which Veblen chiefly employs in giving a money-measure to his "intangible capital" is the capitalization theory.[585] The capital magnitude of the items of good will previously mentioned is a capitalization of the income which they are expected to bring in. And it may be said that a large part of Veblen's doctrine of the causes of the ups and downs of business rests on the complaint that this capitalization process is not rationally carried through—that incomes are overestimated, and that business men are tenacious of capital magnitudes once built up, and refuse to mark them down properly when the facts in the situation have changed. His theory of prosperity thus rests on non-rational enthusiasm on the one hand, and a certain kind of "friction" on the other hand, and apparently the difficulties in the situation as he sees it would largely disappear if these two elements could be rationalized, and the static theory work more perfectly. The elements involved in the capitalization theory, as shown in the chapter on that topic, are three: the anticipated income, the prevailing rate of discount, and the capital value, the last named being the child of the first two. The capital magnitude is a shadow, where the income is the substance. Veblen seems to find the trouble arising in that the capital magnitude takes on a substantial character, and refuses to play the passive rÔle of shadow. It is interesting, in passing, to compare this theory of Veblen's with the theory of crises developed by Irving Fisher, from the standpoint of a body of doctrine which is purely static, and which Veblen has criticised as "taxonomic" in a high degree. For Fisher[586] the trouble arises from friction in connection with another element in the capitalization problem, namely, the interest rate. Business men think that "a dollar's a dollar," and refuse to let the interest rate be marked up in accordance with the doctrine of "appreciation and interest." This, likewise, leads to overcapitalization, leaves the passive shadow too big. I must confess that it seems to me that one theory is about as "taxonomic" as the other—that both rest on pointing out divergences from a static, "taxonomic" norm. In general, Veblen's work in this field consists in assimilating the "intangible" capital to the class of land, and other long time concrete income-bearers, but that is after all classification, systematization, "taxonomy." In saying all this, I am as far as possible from questioning the value of Veblen's work. Rather I rate it as of extreme significance. "Taxonomy" does not appear to me so dreadful a word as it does to Veblen. I should rather say that some taxonomy is good and some is bad, depending on whether or not it leads to fruitful generalizations, and deeper insights.

It is, as I have said, chiefly the capitalization theory which Veblen applies to these newly important intangible "capital-items." The phenomena of the stock-market, where such things are most actively bought and sold, and where they appear as differential portions of the capital values of securities, doubtless first called attention to them—though the item of "good will" as a business asset, for which a money-price is paid when businesses change hands, is doubtless older and wider than modern corporation finance. The capitalization theory applies to them most readily and obviously, as compared with other elements in the static theory of prices.

But as we become better used to the large rÔle which these phenomena play,—not that the phenomena are new, but that their present importance is new, and hence our serious study of them is new—we are increasingly able to see that other elements of static theory also apply. Static theory applies increasingly as understanding increases! The vaguely discerned, the novel, the imperfectly analyzed, can be stated only in qualitative terms. As things are better understood, the mind seeks system, taxonomy, quantitative measurement. Business men to-day are well accustomed to applying cost concepts to many of these intangible magnitudes. Advertising, for example, is being worked out with increasing exactness, and business men are increasingly applying accounting processes to the determination of the question of how much advertising "pays." Well-known brands are capital items. Well-known brands have cost money! Business men contemplating the marketing problem may well balance the cost of creating a new brand against the cost of buying an old one, and may balance the cost of creating a new brand against the profit to be made from allowing an old one to deteriorate, through cheapening its process of manufacture. Trade-connections are capital items. They are also items which have been created by patient thought and labor and expense. Franchises, since the days when the public awoke to their value, have cost money to the corporations that possess them, and figure in corporate bookkeeping often. Even in the old days, they often had a cost, which commonly stayed out of the corporations' books, at least in that form,—bribes, entertainments to legislators and members of councils, and so on. In Part II of this book,[587] I have discussed "selling costs" as contrasted with costs of production in the narrow sense, and have pointed out how high a proportion of total costs these selling costs are. I have also indicated how many of these costs tend to be "capitalized." These selling costs are static measures of the elements of "friction" which interfere with the smooth working of static laws! An extension of statics, however, can in considerable degree take account of them. It is, of course, far from true that cost doctrine will explain all of these intangible capital magnitudes. But this is likewise true of the prices of many tangible items. Cost doctrine does not hold universal sway even in the confines of the strictest static theory.

I have said that dynamic factors tend to come under the rules of static taxonomy to the extent that they become more accurately understood. The understanding here referred to is not merely on the part of the scientific theorist! The subject-matter of economic science is itself psychological. It includes the psychology of the business man, as well as the psychology of purchasers and laborers, and the general field of social-mental life that bears on economic processes. It includes the theories of the business men, as well as their aspirations and "motives." It includes their methods of computation, and the accuracy or inaccuracy of their prognostications. It has been pointed out recently that at the current price of copper (22c. per pound in Jan. 1916) the prices of copper stocks are very much lower than they were when copper reached the same price some years ago. Calumet and Hecla stands some two or three hundred points lower than it did then, and the same percentage difference is manifest in the case of many other stocks. But the explanation which the broker and market writer offer is that people have awakened to the fact that mining stocks are stocks with wasting assets, that the incomes from copper stocks cannot, therefore, be capitalized on so high a basis as similar incomes from other securities; that people to-day realize this fact as they did not some years ago; that the earlier capital-prices of copper stocks were vastly exaggerated on the basis of a careful estimate of probable total future income, etc. Japan, little used to the great prosperity growing out of sudden great increases of special kinds of business, found herself in such an orgy of war stock speculation that it was necessary to close the stock exchange in 1915. The United States, better familiar with the phenomena of boom and depression, seasoned by many experiences of similar nature, have found that on the whole,—at least in the opinion of many competent judges in January of 1916,—war stock speculation has been kept in reasonable bounds, thanks in large part to the conservatism and caution of bankers and brokers, and that the general economic situation is in fairly stable equilibrium, with most of the probable sources of disaster foreseen and "discounted." To "discount" is to make "static"![588] Whatever the business man can reduce to bookkeeping terms, and whatever he can measure by money in the market, the economist should be able to bring within the "orderly sequences of economic law."

In Social Value, I have pointed out how wide is the scope of the money measure. Waves of public opinion, of waning or waxing hope and belief, of patriotic fervor, of religious exaltation, of political movements of one or another kind—all these find some sort of money measure in the market. In the gold market in the early '60's in New York, the "bulls" sang "Dixie," and the bears sang "John Brown's Body"! It was patriotic to be a bear, and unpatriotic to be a bull. These considerations affected the prices very appreciably, at times, especially at the beginning of the speculation in Greenbacks. Waning and waxing belief in the triumph of the Northern armies manifested itself very strikingly in the prices in the gold market, as W. C. Mitchell has conclusively proved, with a wealth of detailed evidence, in his History of the Greenbacks. But in less systematic markets, in less organized and regular ways, many things besides are given a money measure: "Against what, indeed, shall wealth be measured? Where are the markets which measure its fluctuations?

"But such markets exist, always have existed. Are there not streets where woman's virtue is sold? Are there not commonwealths where there is a ruling price for votes? Do not the comparative rewards of occupations indicate what inducements will overcome the love of independence, of safety, of good repute? We see men sacrificing health, or leisure, or family life, or offspring, or friends, or liberty, or honor, or truth, for gain. The volume of such spiritual goods Mammon can lure into the market measures the power of money.... When gold cannot shake the nobleman's pride of caste, the statesman's patriotism, the soldier's honor, the wife's fidelity, the official's sense of duty, or the artist's devotion to his ideal, wealth is cheap. But when maidens yield themselves to senile moneybags, youths swarm about the unattractive heiress, judges take bribes, experts sell their opinions to the highest bidder, and genius champions the cause it does not believe in, wealth is rated high." (Ross, Foundations of Sociology, pp. 171-172.) Ross is here interested chiefly in the problem of measuring the varying significance of wealth, symbolized by money, in terms of other and non-economic, goods. But it is equally true that money measures these goods. The range of the money measure is very wide. Nor is it confined to the exchanging process. Gabriel Tarde[589] has pointed out that money may function as a measure of non-material goods through gifts, public subscriptions, etc.

It is surely no extravagant claim to make that the methods of static economics may be extended at least as far as the money measure goes! We shall later see reason for believing that fruitful results may come from an even wider extension of the static notion, at least as a schematic device.

In reducing static and dynamic considerations to common terms, we have now gone far. We have shown that a wide range indeed of the phenomena deemed dynamic, and largely ignored by current static theory, left to the discussion of such innovating students of the "theory of prosperity" as Veblen, are really in the actual practice of the business world treated in the same way as are the "static" phenomena of the values of physical goods and concrete services. And we have further shown how wide indeed is the scope of the static yardstick, the dollar. But this is only a part of the story. We have generalized statics. Can we similarly generalize dynamics? Or has our generalization of statics merely narrowed the field of dynamic considerations?

To this I reply that we may view the whole field likewise from the angle of what we have called dynamics, or theory of prosperity, or similar name. These terms are not satisfactory, in my view, and I have already used terms that appear to me better. My exposition on this point will be briefer than in the generalization of statics, since I may refer to what I have said elsewhere. In stating Veblen's contrast between "business capital" and "the wealth of nations," I quoted him as follows: "Under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." The capital, or the wealth in general, of older and simpler days was a material matter, concrete goods and services, in his view. The newer items of capital are anomalies, presenting something strange and novel, and sinister. I should maintain that, whether sinister or no, they are in principle at least not novel or anomalous. All economic values are matters of folk-psychology! All economic values are social values. All are to be explained on the same general principles that explain the values of the most complicated stock-market phenomena—except of course, that the application of the principles involves less complication in the case of such values as that of a loaf of bread. But value is always a matter of psychological significance, and never a matter of mere material fact. And these psychological significances are not explained by such simple individual phenomena as labor-pain, or marginal utility, but always by reference to the total social-mental system, including its laws, its mores, its institutions, its centres of power and prestige, its modes and fashions, etc. If Veblen has in mind the contrast between goods whose values rest in labor-pain or marginal utility, on the one hand, and values which rest in a folk-psychology on the other hand, the contrast is a false one. The first class does not exist. I shall not elaborate this point. I have developed it at length in Social Value, and in the chapter on "Economic Value" in this book. I should make the contrast, then, which seems to me to gather up the central significance of most of the contrasts we have been discussing, as follows: on the one hand, we may view the matter mechanically and abstractly, in terms of the equilibration of values conceived of like physical forces, expressed in prices; on the other hand, we may view the economic situation more fundamentally and realistically, seeing the interplay of men's minds, viewing economic values as parts of a social mind, a functional unity of many minds. We may treat society as a mechanism, or we may treat it as a living, pulsing, psychological organization. In short terms, our contrast may be between the theory of value, and the theory of price. And here we are back to our thesis set forth on p. 559 of this chapter.

The theory of value, as thus marked out, is still an abstraction from the totality of our cross-section picture of social, or even of economic, life. The essence of society is indeed psychological. But men have bodies, and live in a material world, and have an elaborate technology. Many of the factors which students of dynamics are concerned with grow out of biological and technological relationships, and are connected with physiographic influences. Can we bring all these into our scheme? Giddings and Spencer would answer affirmatively. For Giddings (Principles of Sociology, ed. 1905, p. 363): "All social energy is transmuted physical energy." Giddings guards himself (pp. 365-366) against a thoroughgoing monism, which would leave no distinction between mind and matter, but in general he would hold to the scientific goal of reducing the physical and psychical phenomena in society to a parallelism, so that concomitant percentage variation could be predicated of them, and so that considerations in one sphere could be expressed by considerations in the other. In the hands of Giddings and Spencer, such notions are handled with caution and discrimination, and command respectful consideration. One feels, however, that the starting point is a monistic metaphysics, and that the philosophical doctrine does not justify itself in its scientific application. In the hands of such a writer as Winiarski, however (Rev. Philosophique, vol. XLV, pp. 351-386; vol. XLIX, pp. 113-134; summarized by Ross, Foundations of Sociology, pp. 156-157), who makes all mental states mere forms of physical energy, and applies to mental processes the laws of mechanics, the doctrine becomes merely bad poetry! From the standpoint of the needs of social science, and from the standpoint of our present knowledge of social facts—to say nothing of general philosophical considerations—it seems clearly best to me to assume the common-sense doctrine of dualism as a premise: mind and matter are two different things; mind acts on matter, and matter acts on mind. We are then at this position, when it comes to bringing technological and physiographic factors into our scheme: on the one hand, the values control technological applications, and control the course of industry. New technological devices will be employed when the present worth of their anticipated products is great enough to overcome the values that compete with them. Land will be employed on that crop which gives the largest rent, etc. Men's physical activities, and their employment of their physical resources, are motivated by values. That is the function of values. On the other hand, physiographic and technological factors modify the lives and characters of men and peoples. Values are in part controlled by physiographic and technological conditions of life. But these technological and physiographic factors, in order to influence economic conduct, must first influence the value system. This they do, (1) by affecting the quantities of objects of value, and so modifying the marginal relations among the value-scales and the marginal values; (2) by affecting the lives of the people directly, and so modifying the value-scales themselves. Similarly I see no way of bringing the vitally important factor of heredity into our scheme in a direct manner, in propriore persona, but only mediately, as it (1) affects the character of the society, and so changes its value-system or its technological activity and volume of products, or (2) as heredity becomes a matter of concern to the society, and so an object of value, with its own place in the value-system.

There remains, therefore, in the field of technological, biological, and physiographic features affecting economic life a considerable residuum of economic problems for which, so far as I can see, no extension of the static method can be devised. I propose no scheme of static price analysis for balancing the effects of poor land and good heredity on the character of a society.[590] The problem must be approached by other methods specially suited to it, which we need not here discuss. But, given the values that rule in that society, we may be sure that our static picture of that value system will sum up much of the influence of the bad land and the good heredity, mingled with the other factors which have determined that set of values.

Once a factor has been introduced into the value system, once it has modified the value-scales, we may treat it by the methods of static price theory. The analysis of the factors controlling the value-scales is the problem of value theory. And here is, indeed, the central problem of the "theory of prosperity." What are the causes controlling the mutations of values? What factors cause values to rise, intensifying economic activity, stimulating trade, spreading prosperity? What brings about the crash in economic values (and consequently in prices), in panics and crises? Why the low values of the period of depression, giving slight stimulus to industry and trade, leaving economic life lethargic, inert? Increasingly it is recognized that the problems are problems of values and prices. It is no part of my plan to give answers in specific terms to these questions. That were the task of a large book! And very much of it has already been done. It is my purpose here, simply, to show that price theory, as developed on the basis of static notions, may be extended, and has in considerable measure been extended, to cover these problems, and that for the same reason that price theory is unable to give really fundamental answers to them, often, it is likewise unable to give fundamental answers to the value problem anywhere—that the phenomena of value are of the same stuff and substance as the phenomena treated by "dynamics" and "the theory of prosperity," and that static theory has been busied chiefly with a limited portion of the field only because the problems were easier there. Much has been made, especially in such a book as W. C. Mitchell's Business Cycles, of technological factors, and of factors in the psychology of the business man and of the laborer in the ups and downs of business, and particularly of certain elements of scarcity or overabundance of productive resources at critical parts of the economic system, which raise values and prices unduly at certain points, compelling radical readjustments of values and prices elsewhere. Virtually all of these considerations will fit into the scheme here outlined. They work through modifications of the system of values and prices. H. L. Moore's recent Economic Cycles lays heavy emphasis on physiographic factors, particularly variations in rainfall. But these, too, act on the economic situation through affecting the quantities of objects of value, and so through modification of the marginal values of goods. The psychological theory of economic value by no means excludes any amount of influence one can find in physiographic or technological factors.

One of the most important factors in the minds of many writers who would treat business cycles, and a factor to which virtually all writers give attention, is the waxing and waning of business confidence, and of the volume of credit. I have given an extended analysis of the psychology of confidence, and of the psychological nature of credit, in my chapters on that topic. It is enough to say here that we have in credit phenomena things which are of the very stuff of economic values in general. Beliefs and hopes are factors in economic values, and values wax and wane with them. There is little indeed in the psychological and institutional aspects of the theory of prosperity which an adequate theory of value would not contain.

The theory of prices, as an abstract formula of description, is of primary interest to the scientist, who has nothing to do with the manipulation of concrete values, and who has no interests at stake in the behavior of particular values at a particular time. His purposes are ultimately practical, no doubt, but the practical ends he has in view are, after all, only to lay down general rules of public policy, of a high degree of generality, and he consequently may abstract from a great deal of the concrete causal process. The theory of value, in its concrete fulness, is the special interest of the active business man, and especially of the business man who wishes, not merely to adapt himself to changes in values, but also in part, to control and manipulate those values. He must study every factor which does, in fact, bring about changes in the value system. We do not find the market-letter of a brokerage house, or the calculations of a captain of industry, or trust promoter, troubling themselves about marginal utilities or labor-pains! Notions of supply and demand, and the relations of the prevailing interest rate to the capital values of securities, they do employ. Notions of money-costs of production they make use of. But they also give very close attention to questions of governmental policy, to court decisions, to movements in the field of labor organization, to money-market phenomena, and particularly to gold movements and the state of the exchanges, to political campaigns, to the strength of the prohibition movement, to changing fashions and modes, and, above all, to the general tone, the consensus, so far as it is ascertainable, as to whether business is good or bad, whether men are buoyant or depressed, to the ups and downs of business confidence. They pay marked attention to the opinions expressed by certain men, great bankers or industrial leaders, not merely because they think these men good judges, but also, and in part primarily, because these men are centres of power, "radiant points of social control," whose opinions make the opinions of others, and whose statements that times are good tend to make them good, and that times are bad tend to make them bad. For static theory, nothing is more contemptible than the view which "demagogues" often express in Congress that great men in Wall Street make and unmake prosperity, bring about and check panics. For static theory, the only way that big men can lower prices is by selling, and the only way they can raise prices is by buying.[591] Their power to raise and lower prices is thus limited by the amount of their wealth which they are willing to employ in this way. As it is not likely to be profitable to be a bull when the general condition of the "fundamentals" calls for falling prices, and as bear operations, contrary to the fundamentals, are likewise usually costly, the inference would be that the big men will not, even if they could, alter the course of the market. Their wealth is, after all, not so tremendous, as compared with the aggregate wealth of the rest of the community. But the market takes the big men more seriously! When they are selling heavily, other men are often afraid to buy, such is their prestige. When they give out opinions, these opinions become the opinions of a host of others, almost automatically. When Morgan stepped into the breach in the Panic of 1907 with $25,000,000, it was quite as much the fact that Morgan had acted, as it was the millions themselves, which relieved the situation. Indeed, it was in no small degree the prestige of Morgan which relieved the disorganization, which restored the discipline, and made it possible for the elements in the market to work in harmony and coÖperation again. Society is a functional unity, and the "tone of business," the ups and downs of prosperity, depend in large measure indeed on the degree to which the lines of communication between the different parts are kept open, on the question of whether each part does its expected task at the right time and in the right way, on the all-together-functioning, the integration, of the elements. These are phases of the matter from which static theory abstracts. They are organic problems, not mechanistic problems. Of course, mechanisms get out of order too. But tightening a bolt is a very different thing from restoring confidence and discipline to a market!

Those who wish to control values have their own technology. There is a technology of industry, a mechanical technology, running in terms of pistons and levers and soil-fertility-equivalents, and butter-fat-content, and ton-miles, which is governed by the values. But there is also a technology of controlling values which involves advertising, making sentiment, keeping up social discipline, effecting the equilibration of values by exchange, keeping "interstitial" adjustments smooth, which involves a different kind of activity, thought, and ability, and which employs different instrumentalities. Its problems are problems of human nature and social relationships, its laws are psychological laws, particularly the laws of suggestion, imitation, and the like, its tools are the newspaper, the sign-board, the whispered word, the cigar and the dinner with wine, sound logic, money and credit instruments, the prestiges of men and institutions. For men whose work lies in controlling and making values, rather than in making passive technical adjustments to existing values, the theory of value, as I have defined it, is of supreme importance.

This, I may say for the critic who may consider the social value theory a highly speculative and theoretical notion, does not mean that the active business man or the advertising writer, has formulated the social value theory in terms of a social mind, conceived of, in the light of modern functional psychology, as a functional unity of individual minds! The advertising writer is a student of modern psychology, and reads books on the psychology of advertising, which discuss the psychology of suggestion, and the like. But long before such books were written for him, he studied the phenomena involved in his own way. It is not his business to construct a theoretical economics! It is his business to make a market for his wares. He is interested in the scientific theories of modern social psychology only in so far as they help him in that task. He has no occasion to construct a vast conspectus, which shall summarize the whole economic situation, in its social setting. But my point is, simply, that the kind of phenomena which he does study are indicated and stressed and brought into a system in the theory of social value which I have tried to elaborate. As his purposes are different from those of the economist, his method of approach, and his range of investigation, will necessarily be different.

The notion of dynamics has been in a way connected with the idea of evolution, of historical process in time, while the notion of statics has been essentially connected with the notion of a cross-section, a stage, an equilibrium of contemporary forces. How, then, bring the two together? Of course, we may conceive the evolutionary process itself as a series of stages, and the mind does tend almost inevitably to do that. The fact is, of course, a perpetual flow, with unceasing change. The mind grasps such a notion with difficulty, if at all. Logic is mechanical and mathematical, and mathematics and mechanics are static.[592] But further, we may in large measure bring the historical considerations into a cross-section picture, when it is a value system that is involved. Past facts exert their influence through present values; and future facts, which may be expected to modify future values, come into the present equilibrium as discounted present worths.

When we view the situation realistically, moreover,—which means, when we view it as a living organic, psychological process,—our cross-section does not need to be narrowed to a moment of time. We may see the values not yet in stable equilibrium, but in process of equilibration, with marginal values and prices fluctuating, tending toward a static goal, but hindered by various cross-currents, of "friction," of uncertainty, of momentary values which rest on beliefs regarding the process of transition itself—as when a "bull" on the war-stocks turns bear temporarily, because he thinks that prices may fall before recovering themselves, and going higher. We may see obstacles in the way of readjustment whose importance is itself subject to static measure—labor temporarily out of work, and labor-time lost, at so much per day; uncertainties which give rise to speculation, which calls for the employment of extra banking credit, at such and such per cent; capital-instruments which have to be "scrapped," representing the loss of so many dollars. We may see the process of building up new trade connections, at such and such a cost, to replace others which formerly functioned, but which no longer serve, which were once worth so much, and which now are valueless. Watching the realistic process of transition, through a period of time, we may still apply our static yardstick to many of its features.

Above all, do we get in this connection a realization of the fact that the "immaterial capital" of which Veblen speaks is true social wealth.[593] Whatever is necessary for the carrying on of economic life, whatever, if destroyed, must be replaced, before the economic process can go on, and will be replaced by the expenditure of labor and thought and money, is capital. The sales-force is as truly a part of the labor-force of a corporation as are the mechanics. The trade connections which the sales-force has built up is as truly a part of the capital of the business as the machines which the mechanics have made. The static theory which abstracts from this easily leads to dangerous conclusions. Removing a tariff may well, after the transition is completed, give a greater productive efficiency to a country. But what of the cost of transition? May not the values destroyed, and to be recreated, in the form of trade connections, social organization, accomplished adjustments, and the like, be greater than the new values to be gained by better adaptation of industry to the physical resources or the capacities of the labor supply, of the country? In large measure, this question, in a given case, is susceptible to a quantitative answer. The statesman who reckons only the gains which the final static adjustment will bring, and neglects the costs of reaching it, costs not alone in "scrapped" machines, but also, in "scrapped" social organization, has missed a substantial part of his problem.

The theory of prosperity, and the theory of value, are largely concerned with just this system of social control, by means of which value scales are altered, and by means of which altered values are brought into a new equilibrium. It is a complicated fabric of psychological relationships, partly institutionalized, partly non-institutional. The institutions—as banks, big corporations, speculative exchanges, and the like, are the nuclei, about which centre much that is temporary, shifting, and flexible. Given time, the whole system is highly flexible—it is organic, and not mechanical.

The serious injury of this system in a country may well be a greater disaster than the destruction of physical items. Let unscrupulous men—or misguided men—bring about a legal repudiation of debts, and the disaster may be greater than the destruction of a city by an earthquake. That creditors have been robbed is a minor matter, but that credit has been shaken, so that men will fear to lend again or to sell except for cash, may well mean industrial paralysis.

Considerations like these enable us, in substantial degree, to reduce "transitional" considerations to common terms with "normal" considerations. We can apply the static measure to the "transitional considerations," and we find the values which come into equilibrium in the "normal" period to be generically like those whose variations interest us in the period of transition. Indeed, the "normal equilibrium," if it were ever reached, would also contain these intangible capital items, though many of them would be much reduced, since the work that they have to do would be largely gone, if the normal equilibrium were persistent.

It does not follow from the foregoing that many of the elements in "modern business capital" are not, as Veblen's analysis suggests, sinister and anti-social. To say that their values are true social economic values, generically the same as the values of wheat or corn or whiskey or opium or Sanatogen or milk or tickets to burlesque shows, or silver sacramental sets, or Ford automobiles, is not necessarily to give them a good moral character! Some of these intangible capital goods are thoroughly anti-social, and should be destroyed. This is particularly true of monopoly power, and of popular brands whose value rests in popular delusion. But even here, caution is needed. Is it socially wise to destroy a wine cellar, containing an hundred thousand dollars worth of fine wines, even assuming that Demon Rum is as black as he is painted, and that Veuve Cliquot is his favorite daughter? Will not the economic values which have been destroyed in this moral fervor be recreated? And will not this tend to divert labor and capital from the creation of a corresponding amount of more wholesome economic goods? Might it not be wiser from the standpoint of the temperance movement itself, to sell the wine cellar—at private sale, of course!—and use the proceeds in the campaign fund of the prohibition party? Of course, there is more still to the story. The destruction of the wine cellar may be done so dramatically, and may be so well advertised, that it will arrest public attention, and tend to create new social values, of a moral and legal sort, which will prevent the recreating of that wine, by changing the direction of demand, and by lessening the sources of supply. Similarly with trade connections, and other intangible capital items. If destroying one means merely that labor and capital will be employed in making others no better, the social gain is very doubtful. And some sort of system of control of interstitial adjustment, of overcoming friction, etc., there must be.

I wish to contrast the view I have been here presenting with that developed by Schumpeter, in his Theorie der Wirtschaftlichen Entwicklung. In Schumpeter's view, the division between statics and dynamics is much more than methodological. The phenomena of statics and dynamics are different phenomena. Statics is concerned with the influence of individual utility-scales, or utility-scales and psychic cost-scales, hedonistic phenomena. Dynamics is concerned with the influence of "energisch" (as distinguished from "hedonisch") factors. (Loc. cit., 128.) Most men are moved by hedonic considerations. Their economic activity tends toward the equilibrium described in static theory. Seeking to maximize satisfactions, and to minimize pains, they tend to get into the "best-possible" situation ("best-possible" under the "given conditions") and stay there. The "energetic" type of men, moved by motives like love of activity for its own sake, love of creative activity, love of distinction, love of victory over others, love of the game, etc., undertake activities which tend to alter the "given conditions" themselves, to alter the structure and technique of economic society, to introduce new ways of doing things, and so to break the static equilibrium. This last type of men is small in number, but tremendously important. Schumpeter's theory of value rests solely in an analysis of the hedonic factors mentioned, conceived of as individual psychological magnitudes. I have discussed his theory of value in the chapter on "Marginal Utility" in this book, and would refer to that discussion here. He makes virtually no use of the value concept there developed in explaining the causation of dynamic change, but instead, as I have pointed out in that chapter, invents new concepts, which do the work of the value concept, which he calls "Kaufkraft," "Kapital," and "Kredit," which do not rest on marginal utility, but rather on the activities of certain centres of economic power, particularly of banks.[594] His picture of economic evolution is that of a conflict between these static and dynamic forces, between "utility-curves" and the psychological factors of the "energetic" type, the former represented in a set of static price-ratios, the latter in a set of dynamic "powers," conceived of, not as sums of money (even though expressed in money-terms), but as "abstract power," which grows, not merely out of the individual psychologies of the entrepreneurs, but also, and primarily, out of the social influence centered in the banker. This power which the banker to-day supplies was in earlier periods supplied by the political power of the despot, and is distinctly a matter of social organization, and social control, an over-individual, social phenomenon, analogous to the "social value" which I have sought to put behind all prices, whether "static" or "dynamic." The dynamic man needs "power," either political or financial, to "force" the "static" men out of their accustomed ways of activity. They fear and resist him. He must coerce them. The contrast is thus sharply made between abstract price-ratios, resting on individual feeling-scales, and quantitative "powers," measured in money, resting on a social basis. Between the factors underlying static prices, and those underlying dynamic prices there is, thus, nothing in common. Statics and dynamics are concerned with fundamentally different phenomena.[595]If my criticisms of the utility theory of value are sound, and if what has gone before in this chapter holds good, we must restate Schumpeter's contrast.[596] The static tendencies do not rest on any peculiarities of the psychological "stuff" from which static values are derived. They rest rather in the universal tendencies of all values, whatever the psychological factors behind them, to come to an equilibrium. The reason that values, whether they be the values of new and novel things, or the values of old and familiar things, tend to come to an equilibrium is that gains come from equilibrating them. When some values are too low, and some are too high, the opportunities for speculative gain are evident. Arbitraging transactions, as between different places, time-speculation, transferring labor and capital from one enterprise to another, increasing the supplies of some goods and reducing the supplies of other, changing land from wheat to corn, etc., etc.,—all these things are sources of gain, and they will be done, whatever the origin of the values involved. The new, dynamic enterprise, before it becomes actualized in concrete machinery, factory building, etc., and long before its income is actualized in money-receipts from the goods it is destined to produce, becomes an object of value. The value is a future value. But it comes into the present as a discounted present worth. As such it functions like any other value, tending to attract in its own direction the land, labor and capital necessary for its realization. It does not differ in its functioning from the present worths of future goods of familiar sorts.[597] It tends, after a process of reËquilibration—which Schumpeter, with his theory of crises, has done much to elucidate—to come into equilibrium with the older, "static" values, becomes itself a static value. Indeed, from its inception, it comes under the static, money measure. It enters at once into the scheme of static values and prices, even though it causes readjustment there.

The preËxisting static values are themselves to be explained, not as growing out of individual feeling-scales, but as growing out of a complex social psychology, in which some men and groups of men have vastly greater social "power" than others. The preËxisting static values are of the same stuff as the dynamic values. But this has already been made clear.

The possibility of presenting an equilibrium picture of social forces, to the extent that those social forces submit themselves to the money measure, the possibility of applying the methods of static price-theory wherever pecuniary concepts may be carried, does not exhaust the possibilities of the static notion, at least as a schematic device. There are many social values, particularly in the legal and moral sphere, which do not readily come under the money measure, and where such measurements as may be made in money terms seem obviously inadequate. Of these values, as of all values, however, the law of equilibration holds. All tend to come into adjustment of a sort that will allow the maximum of values to be realized. Something of the exactness of the static method has recently appeared in a decision by a famous jurist, confronted with the fact of the conflict of two legal principles. Most judges would go on the legal theory that there can be no conflict in the laws of a single sovereign. Of course, we have courses in "Conflicts of Laws" in our law schools, but the subjects treated in such courses relate to conflicts, say, between the laws of New York and the laws of New Jersey. When a judge is presented with a case of conflict between two laws of New York, he will commonly feel it to be his duty to "remove" the conflict, by making distinctions, till the conflict is whittled away. Not a little bad law has thus originated! The law is "absolute." It knows no exceptions. It does not obey the law of diminishing significance. Of course, "de minimis non curat lex," but that means, not that there is a delicate margin, where the law ceases to apply, but merely that the law disregards trifles too insignificant to attract its attention at all. They are, in mathematical phrase, "infinitesimals of the second order," discontinuous with the interests of magnitude great enough to attract the attention of the law. There is little room in such a legal theory for notions of the sort discussed in this chapter to find place! But a different theory of the law is implied, and partly expressed, in a recent decision by Mr. Justice Holmes: "All rights tend to declare themselves absolute to their logical extreme. Yet all in fact are limited by the neighborhood of principles of policy which are other than those on which the particular right is founded, and which become strong enough to hold their own when a certain point is reached. The limits set to property by other public interests present themselves as a branch of what is called the police power of the State. The boundary at which the conflicting interests balance cannot be determined by any general formula in advance, but points along the line, or helping to establish it, are fixed by decisions that this or that concrete case falls on the nearer or farther side.... It constantly is necessary to reconcile and adjust different constitutional principles, each of which would be entitled to possession of the disputed ground but for the presence of the others." (Hudson County Water Co. vs. McCarter, 209 U. S., 349, 1908.) Here we have a scheme very like that of static economic theory! "The boundary at which the conflicting interests balance"—the margin where the curves of diminishing value of the two legal principles intersect! A plurality of legal values, in marginal equilibrium! Lacking a tool of thought so convenient as money has proved for the economist, the jurist finds trouble in making his margins precise. He is dealing with quantities for which he has found no common measure. There is no "standard or common measure" of legal values. Hence, most lawyers content themselves with qualitative reasoning, seeking to avoid the necessity of quantitative weighing and comparison of the factors in their problem by making distinctions of kind. Mr. Justice Holmes recognizes the necessity and the existence of legal quantities, and of making quantitative distinctions, i. e., distinctions of degree. He sees a generic essence common to the whole body of laws, such that marginal equilibria are possible and actual.

So far we have a static system of laws. But the same writer, in a later decision, has said: "And yet again the extent to which legislation may modify and restrict the uses of property consistently with the constitution is not a question for pure abstract theory alone. Tradition and the habits of a community count for more than logic." (Laurel Hill Cemetery vs. San Francisco, 216 U. S. 358, 1910.) As these traditions and habits of a community may change, so may the legal values change, and new equilibria need to be reached in a process of readjustment.

But further, in this view, and in the view of the best students of jurisprudence in general, the legal values are not an insulated, self-contained system. In the sentence last quoted, Justice Holmes sees their root in a total social situation. And it is easy to show that economic values, in particular, are part of that social situation out of which legal values derive their power. Legal values enter into economic values. Economic values enter into legal values. And between legal values and economic values are marginal equilibria. There is a vast social system of values, legal, economic, moral, religious, etc., in constant dynamic change, but tending also to static equilibrium. Changes at any part of the system compel readjustments throughout. The process of equilibration is often slow, but slow or rapid, smooth or violent, it is in constant process. For the further elaboration of notions like these, I refer again to my Social Value. Here, as in the narrower economic sphere, we have men and institutions whose chief activity is concerned with the manipulation and control of these values, with effecting the readjustments, and bringing about the reËquilibrations. They have their appropriate tools and technology. Money and credit are merely part of a much wider system concerned with social control and social adjustment!

To summarize: The problem of this chapter has been to harmonize statics and dynamics, the "theory of wealth" and the "theory of prosperity," "normal" and "transitional," and similar notions, commonly held to belong to different spheres, and to be incapable of reduction to common terms. A number of such contrasts have been passed in review, and numerous illustrations of the various types of contrast have been given. It is the contention of the present chapter that the most fundamental of these contrasts, and the one which gathers up the meaning of most of them, is that between the theory of value, and the theory of price. The theory of value is dynamic, is concerned with the phenomena of prosperity and depression, is realistic enough to deal with transitions and readjustments; the theory of price is static, and rests in the notion of accomplished equilibrium, abstracting from the problems of friction and transition. The reconciliation comes from two angles: on the one hand we have generalized price theory, showing that in large measure the phenomena with which value theory, theory of prosperity, dynamics, deal come under the money measure, are made "static" by "discounting," and by the application of accounting principles; that this tends to be more and more true as knowledge grows more accurate; that "statics" means especially quantitative, as opposed to merely qualitative, thinking. We have shown further that the static schema is applicable even where the money measure is inapplicable, and even beyond the economic sphere, as illustrated by a recent decision of Justice Holmes. The other angle of approach was to universalize value theory, dynamics, theory of prosperity, by showing that all prices, whether "static" or "dynamic" have the same fundamental sort of explanation, that value is always a matter of social psychology, and never a matter of mere individual psychical magnitudes, or of "material fact." This is not to deny that physical facts have their bearing in the scheme: (a) they are among the objects of value, even though not the only objects, and (b) material facts, technological, physiographic, and biological, are the basis on which human nature rests, out of which it has developed, even though human culture including social values has increasingly emancipated itself from immediate dependence on them, and has acquired a partially independent movement of its own. The effort was not made to reduce mind and matter to common terms, but the case was rested in an irreducible dualism, and the causal influence of non-mental factors on the value-scales themselves cannot be measured by the static scheme. The static scheme, assuming the value-scales, gives a precise answer as to the influence of the quantities of physical objects on the marginal values. The significant fact about the values with which dynamics, theory of prosperity, etc., deal is that they are the values of immaterial social relationships and institutions, in large part, which are concerned with the problems of social adjustment and control, with affecting equilibria in the economic sphere, with overcoming the friction and effecting the transitions from which static theory abstracts. This is a phase of production quite as important as the physical activities of laborers or machines. It has its own technology, appropriate to its problems. In particular, money and credit are part of its tools. Since its problems are to control men's minds, it uses psychological forces. Where the mechanic uses a storage battery, charged with electricity, to move material things, the technologist of economic readjustment employs a dollar, charged with social value, which is power over the action of men. It is as a bearer of value, in form adapted to the problem, that is in highly saleable form, that the dollar functions. It is the psychological significance of the dollar, and not its physical qualities per se, that enables it to do its work. The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.

A
Aborn, W. H., 252, n.
Absolute vs. relative conceptions of value.
See Value, Absolute vs. Relative.
Abstinence, 67ff., 484-85.
See Cost of Production, Interest.
Abstraction, legitimate and illegitimate, 189-90, 553-54.
Acceptance house, 497, 542.
Acquisition vs. production, 482.
Adams, Brooks, 219.
Adams, T. S., 13.
"Adaptation," 573, n.
Advertising, 257-58, 367, 565.
Agger, E. E., 140, n.
Agio, 148-50, 390, 442-50.
See Premium.
Agricultural credit, 262, 318-19, 430, 492, 504-05, 528-29.
"All other deposits," see "Deposits" in Kinley's figures.
Americas, The, 540.
Analytical vs. historical theories, 397-400.
See also Historical vs. Cross-section Viewpoints, Statics, Dynamics, etc.
Andrew, A. P., 170, n., 179, n., 537.
Animism, social explanation of, 16-17.
Ansiaux, M., 4, n.
"Appreciation and interest," 76ff., 333, n.
See Interest.
Aquinas, Thomas, 30.
Arbitrage, 268, 585.
Aristotle, 118, n.
Ashley, W. J., 181, n.
Assets of banks, 285, 489-97, Ch. XXIV;
bonds in, 250, 488, 498, 506, 508, 523;
stocks in, 491-93, 498, 506, 523;
stock exchange items chief factor in, Ch. XXIV, especially 523ff.
See Loans, "Commercial Paper," Collateral Loans, Reserves, etc.
Atwood, A. W., 173, n.
Auspitz and Lieben, 91, n.
Austrian School, 56, 70, 94, 300, 486, 562, n.
Austria, paper money in, 140, 434, n.;
foreign exchange policy of, 181-82, 434, n., 444, 530;
money rates and interest rates in, 429.
Averages, meaning of, 178, 292, 312-13, 315.
See Causation.
Weighted. See Weighting.
B
Babson and May, 501, n.
Backwardation, 146.
Bagehot, W., 18, 37, 540, n., 580.
Baker, G. F., 518, 519, n.
Balances, required by banks, 173, 377.
Balance of trade, 320, 551.
Baldwin, J. M., 18, 37.
Balkan Crisis, hoarding of bank-notes in Austria in, 140, n.
Banks. See England, Bank of, State Banks, Private Banks, etc.
As book-keepers for business, 365;
correspondent relations of, 355, n.;
bank capital, 489, 491, 524;
bank-credit, Ch. IX, 261, 484ff., 489-97, Ch. XXIV;
elasticity of, 129, 183, 216, 281-88, 299, 320;
relation of, to trade, 260ff., 281.
See Trade. Functions of, 484-89, 492-95.
See Credit, Functions of.
Technique of, 489-97, Ch. XXIV;
bank-drafts, 355-58, 367;
on New York and other centers, 356-58;
bank-notes, 129, 139, n., 289, 322-23, 447, 448, 472, 473, 487, 495, 496, 511, 530, 539;
as "capital," 261, 484-88;
elasticity of, 129, 298, 448.
Banking School, 283ff., 395.
See Currency School.
Banker as centre of power, 32, 466, 484ff., 577, 583.
Banker's psychology, 141, 304.
Barbour, David, 154, 218, n.
Barnett, G. E., 347, n.
Barter, 99, 100, 130, 133, Ch. XI, 220, 226, 265, 369, 394, 404-07, 419-21, 493, 536;
highly important in modern life, Ch. XI, 394;
made easier by money as a measure of values, 201, 394, 421;
intellectual difficulties of, 418-20;
physical difficulties of, 423.
Bastiat, F., 552.
Bears. See Bulls and Bears.
"Bearer of options" function of money, 148, 201, 314, n., 418, 424-32, 436, 442, 451, 495, 536, 543;
distinguished from store of value, 425;
dynamic function of money par excellence, 426, 495, 536;
reserve function a special case of, 426, n., 536ff.
Belgium, National Bank of, 182.
Belief, as element in values, 40, 136, 462-68, 486ff., 574-75;
relation of, to credit, 262, n., 462-68, 486ff., 581.
See Credit.
Bendixen, F., 435, n.
Bergson, H., 579, n.
Bilgram, H., 3, n.
Bills of exchange, 167, 181-82, 201, 254-55, 288-90, 369, 444, 490-91, 530;
speculation in, 254-55, 514, 515, n.;
as reserves, 181-82, 444, 530.
See also Foreign Bills, and Gold Movements, International.
Bimetallism, 219, n., 221;
not logically related to quantity theory, 219, n.
Biological factors in social life, 571-73, 590.
BÖhm-Bawerk, E. von, 9, n., 44, 48, 51, 70, 78, n., 91, 94, 96, n., 113, n., 146, n., 301, n., 303, n., 437, 563, n.
Bonds, as bearers of options, 147-48, 425, 428;
listed, sold "over the counter," 250, 514;
bonds sold on Stock Exchange, not "cleared," 370;
held by banks.
See Assets of Banks.
"One house bond," 147.
Book-credit See Credit.
"Borrowing and carrying," See Stocks.
Bosanquet, B., 18, n.
Boston, 289, n., 354, 368, 429 n., 503.
Brassage, 450.
Brokers, 168, 199, 235, 287, n., 367-68, 371, 372, 374-79, 409, 496-97, 429, n., 521, n., 531, 575.
Brown, H. G., 301, n.
Business, speculation in, 252ff.
"Business capital" vs. capital-goods, 482, 484ff., 560-61, 569, 580-82.
See also "Good Will," Statics, Dynamics, Friction, etc.
Business confidence, 40-41, 97, 118, 185, 210-11, 214, 463-68, 530-31, 536, 574-75, 577.
Business cycle, 187-89, 254, 548-49, 555, 573-75.
"Business distrust," 426, 427, n.
Business man vs. economist, as value theorist, 573-78.
Bulls and bears, 145, 371-73, 406, 471-72, 522, 576, 579.
"Buying price" vs. "selling price," 402-04, 406-07, 476.
C
Cairnes, J. E., 47, 50, 55, n., 57-59, 3, n., 11, n., 523-26;
percentages of, on stocks and bonds, and on "other collateral security," 502-09;
on "other collateral security" analyzed, 502ff.

Collection of out of town checks, 354-55.
See Checks.
Commerce. See Trade.
Commercial banks, 357, 488, 490, 498-99, 519-20, 523-29;
financing commerce no longer the chief function of, Ch. XXIV, esp. 523ff.
Commercial cities, outgrow manufacturing cities, 259.
"Commercial paper," 431, 457, 490, 496-97, 498-520.
Commercial and Financial Chronicle, 272.
Commodity theory (Metallist theory, Bullionist theory), 81, 85, 129, 135, 144, 151-53, 330, 390, 391, 435, n.;
hypothetical case illustrating, 151-53, 327-28, 390, 421;
contrasted with quantity theory, 151-53.
Competitive display, relation of, to value, 410-11, 438-42, 452.
Conant, C. A., 73, n., 182, n., 323, n., 347, n., 412, n., 418, n., 428, n., 502, 510, n., 511, n., 535, n.
Conant, L. Jr., 252, n.
Concatenation of values and prices.
See Values, Prices.
Consols, 470.
Contango, 145.
Cooley, C. H., 3, 4, n., 19, 21, n., 30, 37, 484, n.
Corporations. See Stocks, Bonds, Stock Exchange.
Consolidations of, 198-258, 366-67;
lead to duplications of "deposits," 366-67;
corporation finance, 198-99, 201, n. 3, 432, 460-61, 476-77;
corporation securities as credit instruments, 460-61, 476-77, 492-93, 527.
Correlation, coefficient of, 237, 237, n.
Cost of production, Ch. III, 193, 221, n., 257ff., 295, 300, 306-07, 309, n., 389, 562, n., 565-66;
inapplicable to value of money, Ch. III, 389, 451;
relation of, to supply and demand, 50, Ch. III;
not related to quantity theory, 46ff.;
conflicts with quantity theory, 300, 306-07, 310-11, 389;
assumes fixed absolute value of money, Ch. III, 313-14, 389, 451;
"real costs," 44-45, 64ff., 96, 117, n. See Labor Theory of Value.
Money costs, Ch. III, 90, 95;
Austrian cost theory, 56, Ch. III, 90, 95, 116, n.
See also Selling Costs.
Cotton speculation. See New York Cotton Exchange, and Speculation.
Credit, 42, 98-99, 130, 143-44, 166ff., Ch. IX, Ch. XIII, Ch. XIV, 318, Ch. XVIII, 392-393, 395, 427, 441, 447, Ch. XXIII, Ch. XXIV, 581;
not based on money, 326-27;
based on values, 326-27, 478-86, 485-86, 528-29;
part of general system of values, 40-41, 460, 462-68, 480, 486ff., 574-75;
definition of, 459-60, 472-74, 489;
distinguished from credit transaction, 473;
juridical aspects of, 395, 460-61, 468-73; relation of, to belief. See Belief.
Functions of, 263-66, 391-92, 395, 407, 441, 475-78, 484ff., 511-12, 523-29;
relation of, to money, Ch. IX, Ch. XVIII, 393, 395. See also Reserves.
Relation of, to trade, Ch. XIII, Ch. XIV, 391-92, 393;
volume of, a function of dynamic change, 474;
elastic. See Bank Credit.
As "capital," 261, 461, 484ff.;
in "equation of exchange," 166ff.;
book-credit, 167ff., 226, 369; time-credit, 168.
See Loans, Interest.
See also Bank-Credit, Deposits, Loans, Collateral Loans, Call Loans, Assets of Banks, Belief, Business Confidence, etc.
CrÉdit Lyonnais, 530, n.
Credit theory of paper money. See Paper Money and Greenbacks.

Crises, 213, 254, 520, 548-49, 555.
See Panics, Business Cycles, Business Confidence, Theory of Prosperity.
Cross-section analysis. See Historical vs. Cross-section Viewpoints.
Curb, 250.
Currency School, 283ff., 395;
"currency theory of deposits," 283.
Curves applied to money, 451-53.
See Marginal Analysis.
Custom, 36, 109, 135, 136, 183-84, 205ff., 391, 405, 562, n., 589.
See Habit.
D
Davenport, H. J., 12, n., 14, n., 21, n., 25, 65, n., 67, 78, n., 80, 91, n., 94, 103, n., 113-15, n., 218, n., 314, 418, n., 419, n., 426, n., 429, n., 434, 447, n., 482, n.
Davidson, T., 18, n.
Dean, Rodney, 354, n.
Debtor Class, 139.
Debts, 433, n. ff., 472-75, 489;
repudiation of, 581.
DeCoppet and Doremus, 249, 370.
Definition, a, as cause for the circulation of money, 143, 400-01.
DeLaunay, L., 412, n., 415, n.
Demand. See Supply and Demand.
Increase of, 53;
nominal increase of, 54;
elasticity of, 55, 224-27, 411-13;
for mone tml#Page_145" class="pginternal">145, 423-24, 424, n.;
in static state, 262-66, 401-02;
relation of, to value, 9-11, 401ff., 468-69.
See Trade, Gold Movements, International, etc.
Exchangeability. See Saleability.
F
Fashion. See Suggestion.
Federal Government, 147, 322, 332, 368, 432, 476, 549;
Federal war tax as index of grain speculation, 251.
Federal Reserve System, 299, 490, 499, 518-20;
should rediscount stock collateral loans, 518-20;
"money trust" and, 518-20.
Fetter, F. A., 7, n., 48, 78, n., 301, n., 303, n., 437, 440, n., 562, n.
Fiat theory, 136, 142.
See also Legal Theory, Staatliche Theorie.
Fichte, J. G., 22, 137.
Fisher, I., 47, 56, 81, 91, n., 99, 117, n., 124, 128, 130, 143, 152, 154ff., 172ff., 186ff., 196, 200, n., 203ff., 209ff., 216ff., 222, 226-29, 231, 240, 247, 248, n., 254, 256, 261, 262, 274, 281ff., 291ff., 301, n., 333, n., 335ff., 348-49, 351-52, 360ff., 371, 376, 381-83, 400, 437, 455, 522, 537, 555, 559, 563.
Fite, W., 21, n.
Fluidity, 143, 403, 456, 476, 542, 563, n.
See also Liquidity, Saleability, Static Theory, etc.
Flux, W. A., 49.
Foreign bills of exchange, in reserves, 181-82.
See Bills of Exchange and Gold Movements, International.
Foreign trade, 261, 265, 503;
ratio of, to "domestic trade," appendix to Ch. XIII.
See Trade, Bills of Exchange, Gold Movements, International.
France, 136, 139, n., 450, 530, n., 533;
Banque de, 136, 183, 425, 538-39.
Friction, 11, 94, 262-66, 392, 426, 543-44, 554-55, 563.
See also Statics, Dynamics, Saleability.
Functions of money, 76, 81, 83, 93-94, 110-11, 144-48, 151-53, 201, 263-66, 313-14, 327-28, 390-91, 394, 399, Ch. XXII, 536ff., 543;
in relation to value of money, 144ff., 390-91, 309-400, Ch. XXII.
Functions of value. See Value, Functions of.
"Futures," 243, 251.
See Stocks, "Borrowing and Carrying" of.
Future values, 40, 107, 459-60, 480, 486, 585.
See Credit, Part of General System of Values.
Futurity, not peculiar to credit, 459-60, 475.
G
George, Henry, 78, n., 301, n.
Germany, 136, 139, n., 145-46, 167, 425, 433, n., 435, n., 527, 530, n.;
giro-system in, 150, 167, 289;
great use of domestic bills of exchange in, 288-89;
limited division of labor in banking in, 527;
Reichsbank, 182, 183.
Giddings, F. H., 87, n., 556-57, 571, 573, n.
Giro-system. See Germany.
Gold, 84, 143, Ch. XXI, 422, 432, 436, 441-43, 443-44, n., 530, 535-56, 538-39, 567, 591;
in arts, 84, 135, 151-53, 224, 314, 330, 390, 400, Ch. XXI, 451-57;
as money, 84, 135, 141, 146, 224, 304, 322-23, 390, 408-16, 441-43, 445, 451-57, 495-96, 530, 535-56, 538-39;
value of, 84, Ch. XXI, esp. 408-16, 451-57;
in reserves, 147, 180-81, 324-28.
Gold mining camps, high prices in, 220, n.
Gold movements, international, 60-61, 129, 142, 181-82, 183, 261, 280, 292, Ch. XVI, 434, n., 531, 533-34.
Gold production and prices, Ch. XVIII, 535-36;
new world discoveries, 219ff.;
Californian and Australian discoveries, 220-21, 221, n.
Goods, consumers', 34ff., 82, 96, 481;
ranks or orders of. See Ranks.
Instrumental, 38, 81, 297, 482, 484, 500, 569, 579.
"Goods side" of "equation of exchange," no, 159.
"Good will," 260, 482-83, 561, 564.
See Business Capital, Intangible Capital, Selling Costs, etc.
Grain speculation. See Speculation, Commodity.
Greenbacks, 141, 146, 147, 194, 304, 322-23, 332-33, 422, 432, 435, 436, 567-68.
Gresham's Law, 129, 140, n., Ch. XVII;
conflicts with quantity theory, Ch. XVII;
quantity theory version of, 321-22.
H
Habit, 104, 109, 138, 225, 554-55, 589.
See also Custom.
Hadley, A. T., 157.
Haig, R. M., 552, n.

Hamburg, coffee speculation in, 252;
Giro-Bank, 150.
Haney, L. H., 3, n.
Harvey, "Coin," 327.
Havre, coffee speculation in, 252.
"Hedging," 243, 253, 264.
Hegel, G. W. F., 18, n.
Helfferich, Karl, 14, 82, n., 110, n., 134, 418, n., 419, n.
Heredity, 571-73.
Hermann, F. B. W. von, 438, n.
History, economic interpretation of, 33.
Historical vs. cross-section viewpoints, 101ff., 119-20, 135-39, 397-400, 548, 553-54, 578-81.
See also Statics, Dynamics.
Hoarding, 140, n., 174, 207, 208, 211, 333, n.
Hobson, J. A., 73, n., 308, n.
Hollander, J. H., 154, 250, n.
Holmes, Justice O. W., 24, 587-90.
Holt, Byron W., 222, 249, 370.
Hubbard, Guy C., 260, n.
Hughes Commission, 252, n.
Hume, David, 21, 47.
I
Ideal credit economy, 543.
Ideal values, 467, 480.
Imitation. See Suggestion.
Imputation theory, 28, 38-40, 99, 300, 389, 424, 481;
conflicts with quantity theory, 300, 303-04, 310-11, 389.
Income, money. See Money Income.
Income, net, of the United States, appendix to Ch. XIII.
Index numbers, of check circulation, 361-62, 383;
of net income of the United States, 278;
of prices, 278, 381-82, 383, 436;
of railway gross receipts, 278;
of trade, 227-29, 255-56, 278, 363, 381, 383.
See Statistics.
India, 140, 143, 149, 181, 443, 444, n., 449;
a liability, rather than an asset, to quantity theory, 444, n.
Individual interest and social advantage, 397-99.
Individual values, 19, 43-45.
See also Value, Subjective, Personal, Subjective Exchange.
Individualistic theories, 14-16, 20, 21, 22ff.
Individuality, a social product, 16-19.
Industry, rather than commerce, chiefly financed by modern banks, Ch. XXIV, esp. 523-29.
See Assets of Banks, Bank Credit, Functions of.
Inertia. See Habit, Custom.
Institutional values, 29-30, 413, 484.
Institutions, 19, 27, 484, 487, 562, n., 141, 144, 146, 177, 219, n., 281, 282, n., 283, n., 284, 312, n., 319, n., 327, n., 418, n., 419, n., 443, n., 444, n., 459.
Law, theories of, 23ff., 586-89;
statics and dynamics of, 586-88.
LeBon, G., 37.
Legal tender, 147, 418, 422, 432-36, 442, 445-47, 448, n.
See Functions of Money.
Legal theory of money, 134, 136, 405, 433n., ff.
See Staatliche Theorie.
Legal thinking. See Juristic Thinking.
Legal values, 23-29, 40, 138-39, 413, 414, 435, n., 562, n., 586-89.
Lewes, G. H., 87, n.
Liabilities of banks, 285;
relation of, to loans, 286.
See Deposits, Bank-notes, etc.
Liquid paper, 455, 489-91, 499ff., 513-18.
Liquidity, 455, 475, 489, 495, 499ff., 508, 513-18, 526-27, 529-44.
See Saleability, Statics, Friction.

Liverpool, 252, 259.
Loans, on call. See Call Loans.
On cotton, 481, 504, 508, n.;
on grain, 380, 503, 508, n.;
to stock market, 375ff., 379, n., 430, 488, 502-03, 507-12, 518-20, 523-28;
to wholesalers and retailers, 504-05;
consumption, 463;
war, see War Loans.
Collateral, see Collateral Loans.
Activity of, 512-14;
relation of, to deposits, 285ff.;
relation of to "deposits," 375-81, 512-14;
relation of, to trade, 287, 287, n.;
relation of, to international gold movements, 318-19;
short loans as bearers of options, 425, 428-32.
See also Assets of Banks, "Commercial Paper," "Morning Loans," "Overcertifications."
Locke, John, 47.
London, 145, 251, 259, 259, n., 497, 522, n., 539ff.;
stock exchange, 451;
money market, illustrates assumptions of static theory, 539ff.
M
"Manipulation," of values and prices, 575ff., 589.
Manufacturers' "paper," 454, 457, 500, 513, n.
"Margins," 372, 488, 489, 493, 521, n., 523-26, 528;
"margin operator" as "banker," 524-26.
Marginal analysis, 24, 51, 440, Ch. XXV;
applied to law, 586-89;
applied to money, 152-53, 199, 208, 225, 227, 451-57, 534.
Marginal utility, 13, 14-15, 30, 34-35, 38, 40, 42, 44, 46, 49, Ch. V, 137, 440, n., 562, n., 570, 583-86;
applied to value of money, Ch. V, 137;
essentially static theory, 106ff.;
Schumpeter's version of, 44, 90ff., 113, n., ff., 583-86;
limitations of, 92ff.;
"relative marginal utility," 113-114, n., 115, n., 440, n.;
quantity theory and, 46.
"Market letter," 222, 575.
Marshall, A., 48, 105, 265, n.
Marx, Karl, 12.
Mathematical economics, 91, n., 117, 139, 142, Ch. VIII, 310, 438, 553.
McCulloch, J. R., 66.
Mead, G. H., 4, n.
Meade, E. S., 198, n., 202, n., 477, n.
Measure of values, 133, 150-53, 201, 265, n., 325, 327-28, 391, 417, 418-23, 436, 451, 543, 567-69, 538;
must have value, 133, 326;
relation of, to commodity theory, 151-53;
applied to non-economic values, 567-69.
See also Functions of Money.
Medium of exchange, 133, 201, 327-28, 391, 404, 418, 420-24, 425-26, 433, n., 434, n., 436, 442, 543;
must have value, 133.
See Functions of Money.
Meinong, A., 467.
Menger, Karl, 14, 48, 82, n., 88, 96, n., 110, 397, 398, 400, 401, n., 402-04, 406, 407, n., 418, 476, 493.
Mercantilism, 225, 551.
Merriam, L. S., 13, 419, n.
Metallist theory. See Commodity Theory.
Middlemen, effect of eliminating, on price level, 306-07.
Mill, James, 66.
Mill, J. S., 46, 47, 50-52, 55, n., 58, 59, 61, 67, 69, 94, 129, 132, 161, n., 172, 192, 193, n., 265, 285, n., 319, n., 333, n., 548.
Minneapolis, bills of exchange in, 289, n.
Mises, L. von, 14, 48, 49, 80, 83, 88, 100, 109-11, 120, n., 182, n., 418, n., 429, n., 434, n., 556.
Mitchell, W. C., 91, n., 179, n., 188, 213, n., 265, n., 286, n., 323, n., 329, n., 332-34, 363, 412, n., 430, n., 448, n., 449, n., 522, n., 533, 536, 568, 574.
Mode. See Suggestion.
Money, abstracted from by static theory, 99, 265-66, 392;
definitions of, 167, 169, 325-26, 495-96;
functions of, see Functions of Money;
must have value from non-pecuniary source, Ch. VII, 326, 390-91, 417, 440, 449, 591;
origin of, 394, Ch. XXI;
money not unique, 82-83, 85, 137, 145, 147, 148, 325, 329-30, 389, 406-07, 417, 425, 437-50, 477-78, 535, 542, 544;
peculiarities of, 3, 57-58, 64, 69, 71, 74ff., 78-79, 81-83, 85, 88, 91, 101, 124, Ch. VII, 132, n., 134, 144-45, 153, 392-93, Ch. XXI, Ch. XXII, 406, 437ff.;
tool or instrumental good, Ch. IV, 82-83, 224, Ch. XXII, 591;
theory of, developed in isolation, 46ff.;
theory of, must be dynamic, 262-66, 393.
See also Statics, Dynamics.
Value of, vs. "reciprocal of price-level," 8, 56-57, 77, 100, 123, 128-29, 155-56, 312-13, 382, 388-89, 433, n., 449.
See Value, Absolute vs. Relative.
Relation of, to credit. See Credit, Reserves, Ratio, Fixed, M:M´.
Relation of, to trade, Ch. XIII, Ch. XIV.
See Trade.
See Analytical Table of Contents.
"Money in circulation," Ch. VIII, 173, 175, n., 179, 185.
Money economy, 90, 220, 225, 265, n., 397, 399, Ch. XXI, Ch. XXII, 555.
"Money-funds," distinguished from money, 63, 273, 435, 446, 448, 520, 548-49, 555.
See Crises, Business Cycles.
Paper money, 143, 150, 151, 418, 421, 473, 495, 496, 538;
inconvertible, 57, 84, 108, 132, 134, 136, 140, n., 141, 321-23, 391;
credit theory of, 141, 146.
See Greenbacks, Austria.
Parasitic occupations, 482;
gold mining as, 262, n.;
American banking as, 527.
Patten, S. N., 558, n.
Paulsen, F., 22.
Payments, 177-78, 338, 367, n.;
proportions of money and checks in, 174, 338, 383, 447, 449, 463;
wage, 174, 531;
relation of, to volume of trade.
See Overcounting, Undercounting, Barter.
Pay rolls, money for, 174, 349.
Pearson, Karl, 237, n.
Perry, R. B., 3, n., 16, n., 21, n., 25, n., 97, n., 117, n., 118, n., 119, n.
Persons, W. M., 241, n., 276, n.
Phillips, C. A., 174, n.
Phillips, Osmund, 272, n., 353, n., 354, n.
Physiographic factors in social life, 571-73, 574, 590.
Pierson, N. G., 221, n.
Pittsburg, "deposits" in, 245-46.
"Platform" of quantity theorists, 155.
Poker chips, 504, n., 505.
Populists, and quantity theory, 141.
Positive doctrine, in Parts I and II, summarized, Ch. XX.
"Power in exchange," 9-10, 388.
Pragmatism in economic theory, 41-42, 93, 96-97, 98-99, 553, 571-72.
Pratt, S. S., 248, n., 251, n., 252, n., 369, 370, 374, 476, n.
Premium, 146, 194, 322, 332, 390, 442-50, 471. See Agio.
Gold, vs. general price level as index of value of money, 194.
Prestige as economic power, 33, 37, 41, 405, 409, 411, 438-42, 463, 465-66, 487, 489, 570;
prestige values.
See Values.
Price, Theodore, 222.
Price, 7ff., 388, 440, n.;
and value, 8ff., 298. See Value.
"Buying price" vs. "selling price," 402-04, 406-07, 476;
"just price," 24.
Price level, 56, 86, 87, Ch. VI, Ch. VIII, 188-89, Ch. XV, 315-17, 328, 381-82, 388-89, 416, 416, n., 456, 520-23;
relation of, to particular prices, 156, 183, 295, 311-12, 315-17, 388-89;
weighted average, tied to T, 163ff., 363, 381-82;
supposed "passiveness" of, 126, 186, 187, 192, 290, Ch. XV, 389;
"reciprocal of," vs. value of money. See Money, Value of.
Price-theory vs. value-theory, 49, 78, 389, 558-59, 570-77, 589-90.
See Supply and Demand, Cost of Production, Capitalization Theory, Imputation Theory.
Prices, concatenations of, 112-13, 300, 310, 313-14;
customary, 144;
fluid, 143;
world prices, and gold production, Ch. XVIII.
Private banks, 338, 343-45, 348, 355, n., 357, 488, 498-99, 514-16, 527-28, 531;
deposits in, in New York City, 344, 515;
"deposits" in, in New York City, 343-45, 515-16.
Produce exchanges, 200, 251ff., 406, 541.
See Speculation, Commodity, Chicago Board of Trade, London Money Market, New York Cotton Exchange, etc.
Production, confused with trade. See Trade.
Relation of, to trade, 257ff., 269, 393;
exchange as. See Exchange.
Factors of, 268, 481-82;
index of, 278;
money as instrument of. See Money.
"Productive," meaning of, 257, 591.
Prosperity, theory of, 262, 395, 548, 555, 556, 569, 573ff.
See Statics, Dynamics.
Protective tariffs, 550-52, 553, 580-81.
Pujo Committee, 344, 373, n., 375, 491, n., 515, n., 518-19.
"Purchasing power," 9-10, 88, 98-99, 484;
of money, 86, 88, 155-56, 388, 583-86.
Q
Qualitative vs. quantitative thinking, 191-92, 195, 324, 433, n., 553, 586-88, 590.
See Juristic vs. Economic Thinking.
Quantity theory, 42, 79, 81, 99, 110, Pt. II, esp. Ch. XV, 435, n., 444, n., 448-49, 478, 520-23, 537ff., 550, 558, n.;
modicum of truth in, 195, 330, 448-49;
as basis of prediction, 334-35;
doctrine of, that quantity of money is of no importance, 219, 219, n., Ch. XIII, passim, 265, 391-92;
conflicts with other theories, see Supply and Demand, Cost of Production, Capitalization Theory, Imputation Theory, Gresham's Law.
"Long run" vs. "short run" versions of, 170-71, 188-89, 192ff., 262, 393;
not a functional theory, 262-66, 400-401;
not logically related to bimetallism, 219, n.;
applied to international trade, 61, 129, 183, 280-81, 292, Ch. XVI;
not related to general theory of value, 46ff., 305;
psychological assumptions of, 143-44, 305, 444;
relation to medium of exchange function, 152, 266;
contrasted with commodity theory, Ch. VII, esp. 151-53;
types of, Ch. VII, Ch. VIII, 172, 177, n., 182-85, 192-94, 210, n., 216-17, 218, n., 219, n., 220, Ch. XVIII, 521, n., 522, n., 537, 538, n.
See Ricardo, Mill, J. S., Taussig, Nicholson, Fisher, Walker, F. A., Johnson, J. F., Jevons, Barbour, Andrew, Davenport (p. 218, n.), Kemmerer.
R
Railway gross receipts, 240-41, 278, 516;
relation of, to clearings, 240-41.
"Ranks" or "orders" of goods, 34, 38, 96, 481, 562, n.
See Imputation Theory, Austrian School, Capitalization Theory.
Ratio of exchange, 6ff., 25, 92, 388, 584;
abstract, as value, 25, 92.
See Value, Absolute vs. Relative, Price, "Purchasing Power."
Ratio, fixed, M:M´, Ch. IX, 187, 206, 281, 288, 290, 294, 328-29, 529-44.
See Reserves, Deposits, "Money in Circulation."
Real estate trade. See Trade.
Rediscounting, 490, 494, 518-20.
Reichsbank. See Germany.
Religious values, 414.
Rent, 316, 439-41;
as cost, 70;
of money, as "money rates," Ch. IV, 145, 149, 424, 438-42, 451-57;
capitalization of. See Capitalization.
Reserve cities, 233, 343, n., 357, 359, n.
Reserve function of money, Ch. XVIII, 418, 421, 424, 436, 536-44;
special case of "bearer of options" function, 426, n., 536ff.
See Functions of Money.
Reserves, Ch. IX, Ch. XVIII, 393, 395, 447, 451, 491, 517, 529-44;
bills of exchange as, 181-82, 444;
legal reserve requirements, 175, n., 184, 447, 448, 449;
ratio of, to deposits, 175, n., 179, 286-87, 298, 324ff., 529-44;
ratio of, to "money in circulation," 175, n.;
relation of, to money rates, 378;
"secondary reserves," 530.
Resumption of specie payments, 146, 323.
Retail "deposits," see "Deposits."
Retail trade. See Trade.
Ricardo, David, 47, 50, social objectivity, theories of, 20ff.;
social organism, 16, 577;
social "oversoul," 16;
"social use-value," 12;
social vs. individual values, 43-45.
"Socially necessary labor-time," 12, 15.
Society and individual, 16-26, 118.
Soetbeer, A., 413, n.
Sombart, W., 220.
South Atlantic States, "deposits" in, 233, 246.
Spahr, C. B., 274.
Specie, 182.
Speculation, 60, n., 85, 143, Ch. XIII, 221, 225, 231, 233-41, 248ff., 267, 298, 363-64, 382, 392, 503, 514-28, 540ff., 566-67, 579, 585;
by manufacturers, wholesalers, and retailers, 243-44, 252-54;
commodity, 251ff., 379-80, 406, 503, 540-42;
influence of, on bank clearings, 237-41;
land, 254;
in London, 540ff.;
"odd lot," 249, 370.
Speculators, 31, 249, 263, 322, 488, 499, 523-27, 529, 544;
vs. investors. See Investment.
Spencer, Herbert, 571.
"Spot" transactions, 251.
Sprague, O. M. W., 174, n., 200, 354, n., 378, 502, n.
Staatliche Theorie, 433, n., ff.

Stabilizing the value of money, 152, 194.
Standard, of deferred payments, 326, 391, 418, 436;
of value, 133, 201, 390, 418-23. See Measure of Values.
Money, 135, 325-26, 421, 445;
"primary" and "secondary," 422;
tabular, 152, 436.
State banks, 234, 322, 338, 342, n., 343, 345, 347, 498-99, 505-09;
collateral loans in, 505-06, 507.
Static theory, 11, 42, 93, 106ff., 176, n., 177, n., Ch. X, 219, n., 223, 254, 262-66, 292-93, 395-96, 403, 426, 433, n., 474, 481, n., 485, 487, 488, 536-44, Ch. XXV;
abstracts from money, 99, 265-66, 392;
relation of, to speculation, 263ff., 392, 474;
dynamics and, reconciliation of, Ch. XXV.
See also, Saleability, Liquidity, Fluidity, "Normal Tendency," Equilibrium, "Wealth of Nations, Theory of," Dynamics, Transition Period, Prosperity, Theory of, Good Will, "Business Capital," Friction, Historical vs. Cross-section Viewpoints.
Statistics, 237, n., 272, n., Ch. XIX;
of banking assets, 498, 503-04, 506, 509-11;
of bank-drafts on New York and other centres, 357;
of "equation of exchange," 191, 213, Ch. XIX;
of foreign and domestic trade, appendix to Ch. XIII;
of gold consumption, 412, n.;
of money in banks, vs. money in circulation, 179;
of money-rates, 430-31;
of net income of the United States, 246, 247, n., 278;
of prices, 278;
of quantity theory, 285, n., Ch. XIX;
ratio, loans to deposits, 286-87, n.;
reserves, 178-79, 286-87, n.;
of speculation, 248ff.;
of trade, 227ff., Ch. XIII, 363-81;
"ordinary trade," 240-47;
of velocity, 339, 361-63.
See Weighting in Statistics.
Stevens, W. S., 199, n.
St. Louis, 246, 252, 289, n., 503;
Merchants' Exchange, 253.
Stock exchange, 31, 145, 254, 282, n., 369ff., 406, 458, 491, 520, 521-23, 527, 541, 564;
New York Stock Exchange, 242, 248ff., 268, 344, 430-31, 514, 521-23, 541;
clearing house in, 199-200, 369-75;
share sales on, volume of, 248ff., 521, n., 522, n., 541;
share sales on, correlated with bank clearings, 237ff., 516;
bond sales on, 249, 370;
"odd lot" dealings on, 249, 370, 374;
security dealings outside, 250-51, 514;
compared with other exchanges, 250, 541.
Stocks and bonds, essential identity of, 460-61, 476-77;
"borrowing" of, 145-46, 371-74, 471-72;
value of. See Value.
"Stop loss" orders, 249, 373, n.
Store of value, 314, n., 408, 418, 424, 426, 451. See Functions of Money.
Substitutes for money. See Money, not Unique.
Suess, Eduard, 413, n.
Suggestion, 18, 36-37, 97, 118, 405, 410, 411, 464-66, 560, 570, 577-78.
Supply and demand, Ch. II, 80, 295, 299-300, 311, n., 389, 453;
applicable to general price level, 299-300, 389;
assumes fixed absolute value of money, 52ff., 313-14, 389;
conflicts with quantity theory, 299-300, 310-11, 389;
not related to quantity theory, 46-47, 59-61, 295;
inapplicable to money, Ch. II, 389;
applied to money, 59-62, 325, 453, n.;
in "money market," 62-63, 224, 453;
relation of, to cost of production, 50, 69-70;
relation of, to marginal utility, Ch. II, Ch. V, esp. 94-95, and 114, n.
T
Tabular standard, 152, 436, 451.
Tarde, G., 18, 37, 466, 568.
Tariff. See Protective Tariff.
Taussig, F. W., 48, 49, 107, 123, n., 129, 151, n., 155, 182-85, 192, 216, 254, 276, n., 379, 532, n., 537.
"Taxonomy" in economic theory, 563-64, 565, 566.
Taylor, Jas. H., 252, n.
Taylor, W. G. L., 13.
Technology, 571-74, 576, 590-91;
"technology of social control." See Social Control.
Temporal regressus. See Historical vs. Cross-section Viewpoints.
Thompson, Burton, on barter in New York City real estate dealings, 198, n.
Ticker, 248-49, 373, n.
"Till money," 183, 530, 539.
Time credit. See Credit, Futurity, Book-credit, Bills of Exchange.
Time discount, Ch. IV, 92, 93, 224. See Interest, Capitalization.
Time, influence of, of money-rates, 428-32.
Timeless-logical vs. causal-temporal, relationships, 403, 548. See Causation, Statics.
Token money, 325, 326.
Touzet, A., 412, n.
Trade, various meanings of, 267ff.;
"domestic" vs. foreign, appendix to Ch. XIII;
"ordinary," volume of, 241-47, 369.
Trade, volume of, 59-61, 117, Ch. VI, 144, 149, 159ff., 194, 215, Ch. XIII, 332, n., 339-40, 363-81, 521-23;
an abstract number, distinguished from concrete goods, 161;
a pecuniary magnitude, 16-64, 271, 277-78;
confusions of, with production, or with stock, 225ff., 281, 296, n., 306-07, 363, n., 521, n.;
governed by dynamic causes, 262-66, 392, 474;
quantity theory doctrine of causes governing, 217-18, 218, n., 240, 255, 256, 257, 294, 522, n.;
real estate trade in, 198, 254, 264, 317;
relation of, to money and credit, Ch. XII, Ch. XIV, 391-92, 532-36;
relation of, to price level, 160-66, 363, 381-82, 536;
retail trade in, 173, 184, 232, 242-44, 369, n., 444-45, 447, 448-49, 463, 489, 531;
speculation chief factor in, Ch. XIII. See Speculation.
Wholesale trade in, 232, 243, 244-46, 253-54, 369, n., < C. R., 208, n.
Variables and constants, 97, 119, 143-44, 204-05, 256-57.
Veblen, T. B., 37, n., 411, 439, 477, n., 556, 560-64, 569, 570, 580, 582, 585.
Velocity of circulation, 85, Ch. VI, 117, 131, 143, 194, Ch. XII, 290, 292, 298, 309, 310, 333, n., 339, 361-63, 394;
"coin transfer" vs. "person-turnover" concepts of, 203-04, 308;
as causal entity, 204, 209, 213-13, 214;
quantity theory analysis of causes governing, 143, 203, 205ff., 309;
most highly flexible factor in "equation of exchange," 205;
varies with trade, 209ff., 306-08, 394;
varies with prices, 308-10, 394;
varies with value of money, 215;
meaningless abstract number, 204.
W
Wagner, A., 25, n.
Walker, Amasa, 401, n.
Walker, F. A., 46, 62, 169, 170, n., 219, 220, n., 237, 414, n., 419, n., 521, n.
Wall Street. See New York City, Stock Exchange, New York City Clearing House, Speculation, Money Market, "Money Trust," etc.
Walras, L., 91, n.
Walsh, C. M., 188, n.
Wants, social nature of, 35ff.;
competitive. See 395, 556, 569.
Weighting, in statistics, 163ff., 229, 229, n., 272, n., 341, 361, 383.
Weston, N. A., 339, 341, 342, n., 360.
Wheat as money, 407.
Whitaker, A. C., 65, 154, 319, n.
White, Horace, 209, 211, 345, n., 401, n.
Wholesale "deposits." See "Deposits."
Trade. See Trade, Volume of.
Wicksell, Knut, 128.
Wicksteed, P. A., 91, n., 115, n., 116, 117, 214.
Wieser, F. von, 14, 48, 49, 70, 80, 83-90, 99, 100, 101, 102, 106, 109, 111, 308, n.
Williams, A., 152.
Williams, Clark, 347.
Willoughby, W. W., 18, n.
Wilson, E. B., 164, 165.
Withers, Hartley, 221, 222, 540, n.
Wittner, Max, 289, n.
Wolfe, O. Howard, 349, 353, n., 359, n.
Wolff, S., 289, n.
X
xy = c, 149.
Y
Yule, G. U., 237, n.

[1] Social Value, Houghton Mifflin, Boston, 1911.

[2] Cooley, C. H., "Valuation as a Social Process," Psych. Bull., Dec. 15, 1912; "The Institutional Character of Pecuniary Valuation," American Journal of Sociology, Jan. 1913; "The Sphere of Pecuniary Valuation," Ibid., Sept. 1913; "The Progress of Pecuniary Valuation," Quart. Jour. of Econ., Nov. 1915. Clark, J. M., "The Concept of Value," and "A Rejoinder," Quart. Jour. of Econ., Aug. 1915. Anderson, B. M., Jr., "The Concept of Value Further Considered," Ibid.; "Schumpeter's Dynamic Economics," Pol. Sci. Quart., Dec. 1915. Perry, R. B., "Economic Value and Moral Value," Quart. Jour. of Econ., May, 1916. Bilgram, Hugo, "The Equivalent Concept of Value," Ibid., Nov. 1915. Haney, L. H., "The Social Point of View in Economics," Ibid., Nov. 1913 and Feb. 1914. Johnson, A. S., in American Economic Review, June, 1912, pp. 320 et seq. Carver, T. N., in Jour. of Pol. Econ., June, 1912. Mead, G. H., in Psych. Bull., Dec. 1911. Ellwood, C. A., in American Jour. of Sociology, 1913. Ansiaux, M., in Archives Sociologiques, Bulletin de l'Institut de Sociologie Solvay, May 25, 1912, pp. 949-55.

Professor Cooley's articles, which I have listed first in this note, have in certain important particulars shifted the emphasis and changed the method of approach. He is more interested in the general sociological aspects of the value problem than in the technical economic aspects. In considering economic value, he is more interested in its general social functions than in its function as a tool of thought for the economic theorist. He has, therefore, been less bound by schemata than I have in the discussion. This different method of approach, coupled with a singular charm in exposition which characterizes everything Professor Cooley writes, makes it seem probable to me that readers who may find the doctrine as I set it forth unconvincing, will be convinced by Professor Cooley's exposition. I hope, too, that Professor Cooley's articles, which have been scattered among three periodicals, may soon appear together under one cover.

[3] Including many whose formal definitions are quite different, and who would repudiate the contentions here advanced! Cf. my article, "The Concept of Value Further Considered," Quarterly Journal of Economics, Aug. 1915, and Social Value, chs. 2 and 11.

[4] Definitions of wealth differ, and there are few if any definitions of wealth broad enough to make it true that only items of wealth have value. All wealth has value, but not all value is embodied in wealth. Thus, stocks and bonds, and "good will" have value. Few writers would classify them as wealth. The distinction between wealth and property is employed by many writers to meet the difficulty here presented, and it is held that these intangibles have only the value of the wealth to which they give title. In a logical schema, on the assumption of a fluid, static equilibrium, this may serve. It is true in fact, however, that many of these intangibles have value apart from the wealth to which they give title. But these are complications which I reserve for a later part of this chapter, for the chapter on "Statics and Dynamics," and (in the case of irredeemable paper money) for the chapter on "Dodo Bones."

[5] The notion of ratio of exchange as a ratio between values is strictly accurate only under static assumptions. Goods, in actual life, are not always exchanged strictly in accordance with their values. Cf. my article, "The Concept of Value Further Considered," Q. J. E., Aug. 1915, pp. 698-702. In cases where prices, or exchange relations, are not in accord with values, the term "ratio of exchange" is inapplicable, since there are no quantities to be terms of the ratio—except the pure abstract numbers of the commodities, each measured in its own unit, exchanged.

[6] In chapter 17 of Social Value, I have followed the German usage in broadening the term, price, to cover all exchange relations. This has led to misunderstanding on the part of some readers, and it has seemed best to me to return to what appears to be the more familiar usage. It is purely a question of convenience. Practically, ratios of exchange which are not money-prices rarely come in for discussion, outside the preliminary chapter on definition! Professor Fetter, in his article on the "Definition of Price," in the American Economic Review, Dec. 1912, proposes to broaden the term price in the manner which I am here abandoning, and his count of economists would seem to leave usage about equally divided between the broader and narrower uses of the term. It does not seem to me to be a point worth arguing about, however, and since I am practically convinced that cause of misunderstanding will be removed by using price to mean "money-price," I shall so use the term in this book, using ratio of exchange, or exchange relation, to express the broader concept.

[7] E. g., BÖhm-Bawerk, GrundzÜge der Theorie des wirtschaftlichen GÜterwerts, Conrad's JahrbÜcher, 1886, p. 478, n.; Carver, "Concept of an Economic Quantity," Quarterly Journal of Economics, 1907.

[8] This distinction is elaborated infra, in the chapter on the "Origin of Money."

[9] It is a matter of high importance that the value notion should be extended beyond exchange, if the economist is to be able to apply his theory to such highly important economic problems as socialism. Cf. SchÄffle, Quintessence of Socialism, and Clark, J. M., Quart. Jour. of Econ., Aug. 1915, p. 710.

[10] As shown, infra, in the chapters on "Supply and Demand," "Cost of Production," "Capitalization Theory," etc.

[11] Vide Social Value, p. 176, n. Cf. Davenport, Value and Distribution, chapter on "Ricardo."

[12] Knies, Das Geld, vol. I of Geld und Credit, Berlin, 1873, pp. 113-125, esp. 124.

[13] Chapter on "Value" in the Philosophy of Wealth, and ch. 24 of the Distribution of Wealth.

[14] Social Value, ch. 7.

[15] T. S. Adams, "Index Numbers and the Standard of Value," Jour. of Pol. Econ., vol. x, 1901-02, pp. 11 and 18-19; Kinley, "Money", p. 62; W. G. L. Taylor, "Values, Relative and Positive," Annals of the Amer. Acad., vol. ix; Merriam, L. S., "The Theory of Final Utility in its Relation to Money and the Standard of Deferred Payments," Annals of the American Acad., vol. iii. and "Money as a Measure of Value," Ibid., vol. iv; Scott, W. A., "Money and Banking", 1903 ed., ch. III. Professor Scott, in a letter to the writer, expresses the opinion that a value concept which makes the value of a good a quantity, socially valid, regardless of the particular holder of the coin or commodity in question, and regardless of the particular exchange ratio into which the value quantity enters as a term, "is absolutely essential to the working out of economic problems." Johnson, A. S., "Davenport's Economics and the Present Problems of Theory," Quarterly Journal of Economics, May, 1914, and American Econ. Rev., June, 1912, p. 320.

[16] Cf. also Wieser's Natural Value, p. 53, n. Senior's "intrinsic causes of value" comes to the same thing.

[17] Cf. Quarterly Journal of Economics, Aug. 1915, pp. 681-82, esp. 681, n.

[18] Among the leading figures in economics to whom this doctrine is unacceptable, I would mention especially Professor H. J. Davenport, Value and Distribution and The Economics of Enterprise. A writer who seeks to minimize the importance of the issue between the relative and the absolute conceptions of value is Professor J. M. Clark, in Quarterly Journal of Economics, Aug. 1915. Professor Clark seems to agree with much of what has been said here, and the present writer would agree with Professor Clark, as indicated above, that for many purposes we do not need to look behind prices—entering a caveat that this is true only so long as we can assume a fixed absolute value of money.

[19] The psychology of this statement, which involves hedonism, needs improvement, but the issue need not be discussed here. Cf. Social Value, ch. 10.

[20] As Professor R. B. Perry, Quart. Jour. of Econ., May, 1916.

[21] In this I am following a line of thought developed by Professor John Dewey in a lecture delivered before the Harvard Philosophical Club in 1913-14.

[22] For the elaboration of these ideas, cf. Hegel, Philosophy of History, passim; Willoughby, The Nature of the State, passim; Davidson, T., History of Education, New York, 1900, passim; Bosanquet, B., Philosophical Theory of the State; Royce, J., The World and the Individual.

[23] Tarde, Laws of Imitation; Baldwin, Social and Ethical Interpretations.

[24] Human Nature and the Social Order.

[25] Cf. Ellwood, C. H., Some Prolegomena to Social Psychology, Chicago, 1901, and Cooley, C. H., Social Organization, New York, 1909. See also Social Value, ch. 9.

[26] Cf. Social Value, ch. 8. H. J. Davenport is the best modern representative of this extreme individualism in economics. Individualism is nearly dead in modern political, ethical, and sociological theory. Revivals of it appear, however, in W. Fite, Individualism, and in a recent article by R. B. Perry, "Economic Value and Moral Value," Quart. Journal of Economics, May, 1916. (I have discussed Professor Fite's views in the Pol. Sci. Quart. of June, 1912.) Professor Perry would there appear to reduce ethical value to a purely individual phenomenon. But he really brings in a "categorical imperative," not derived from the values of the individual, by the "back door." "Now our general moral law prescribes that an agent shall take account of all the interests which his conduct affects, or shall judge his conduct by its consequences all round." (Loc. cit., p. 481.) Just how this "general moral law" is to be derived from individual values, is not made clear. That the wants of every man should count equally with the wants of the agent is a principle which one would expect from Kant or Fichte, but hardly one which individualism can expect to maintain.

[27] I use "volition" here in that wide sense which makes it cover both the motor and the affective phases of mind. Munroe Smith would emphasize the motor aspect, where Savigny stresses feeling and sentiment.

[28] "Jurisprudence," a lecture delivered before the faculty of Columbia University, Feb. 1908, New York, The Columbia University Press, 1909, p. 14.

[29] I ran across this in Wagner's Grundlegung. Wagner had found it in Raul. It is from Troilus and Cressida, Act II, Scene II.

[30] Davenport, Value and Distribution, pp. 184, n., and 330-31, n.; Jevons, Theory of Political Economy, pp. 14, 78-84, esp. 83. Cf. Social Value, ch. 4. This seems to be the position of Professor R. B. Perry, also, though he is not so extreme as Davenport. Loc. cit.

[31] This term carries no connotation of teleology, as here used. I am merely trying to state what the different kinds of value do, as a matter of fact.

[32] The extent to which the values of consumption goods and services are reflected in other economic values will receive attention below, in the present chapter.

[33] Cf. Social Value, p. 125, and Urban, Valuation, passim. Urban's idea of "participation values" is better expressed by Cooley's phrase, "human nature values," while Cooley's excellent phrase, "institutional values" characterizes the more complex values in which classes and institutions are specially weighted. Cf. Cooley's articles referred to above, and Social Value, chs. 11-15, inclusive.

[34] "The Institutional Character of Pecuniary Valuation," American Journal of Sociology, Jan. 1913, p. 546.

[35] This, unfortunately, is not high praise, as the Federal Judiciary in general sets a lamentably low standard in these matters.

[36] Neither "desire" nor "satisfaction" is really accurate here, but I do not wish to digress for a discussion of the psychology of value in the individual mind. The present argument can be developed without it. The matter is discussed in detail in ch. 10 of Social Value.

[37] Ross, E. A., Social Psychology, passim.

[38] Cf. Veblen, T. B., Theory of the Leisure Class, and Carlile, W. W., Evolution of Modern Money.

[39] Social Value, chs. 3-7, esp. ch. 5.

[40] But land does often have value which it is impossible to explain on the basis of any income which may reasonably be expected from it, even in the remote future.

[41] P. 174.

[42] Cf. the discussion of Wieser, Schumpeter and von Mises in the chapter on "Marginal Utility," infra.

[43] Flux, W. A., Economic Principles, London, 1904, pp. 4, 27, 29; Taussig, F. W., Principles of Economics, New York, 1911, vol. I, pp. 141-143. Cf. my Social Value, ch. 5.

[44] Cf. the present writer's Social Value, chs. 3-6, inclusive.

[45] I am here abstracting from an important factor, namely, that not all prices are affected equally by changes in the value of money. Some prices are fixed by law and custom, and some incomes are tied by long time contracts. Thus, it will happen, in many cases, that supply and demand for a given good will be unequally affected by a change in the value of money. This means that certain values are tied to the value of money, rising and falling with it, so that the amount of power which some elements in the economic situation are able to exert through supply-price-offer and demand-price-offer are at the mercy of changes in the value of money. But this is an element which is incalculable, on the basis of the supply and demand concepts, and must be abstracted from if we are to make any definite assertions as to the effect of increase or decrease of demand in the active sense on supply in the passive sense, or vice versa. Unless we make this abstraction, and unless we assume a fixed value of money, we might find increase of demand in the active sense (nominal) leading sometimes to an increase, and sometimes to a decrease of supply in the passive sense, or rather, being accompanied by either increase or decrease of supply in the passive sense. No law would be possible. In practice, both of these abstractions are more or less consciously assumed.

[46] I think that it is a feeling that Mill has left out the psychological factors in supply and demand which led Cairnes to the effort to give definiteness to other and vaguer notions on the subject.

[47] Cf. Social Value, ch. 2; "The Concept of Value Further Considered," Quart. Jour. of Economics, Aug. 1915. For the doctrine that supply and demand, and other elements of current price theory, assume a fixed absolute value of money, see Social Value, p. 166, n., and ch. 17.

[48] Leading Principles, ch. on "Supply and Demand."

[49] Cf. Social Value, pp. 29-30, and 64-71.

[50] Cf. the discussion, infra, of "T" in the "equation of exchange."

[51] Cotton is chosen for this illustration because it has actually happened, more than once, that a large crop has sold for a smaller aggregate price than a smaller one. Thus, not to take an extreme illustration, the crop of 1910-11 was 11,568,334 bales. That of 1911-12 was 15,553,073 bales. The average price of spot cotton at New York from Oct. 1910 to June, 1911, inclusive, was almost 15c. per lb.; the average price of spot cotton in New York during the same months in 1911-12 was not quite 10 cents per lb. On this basis, the eleven million odd bales of 1910-11 sold for substantially more than the fifteen million odd bales of 1911-12.

[52] Nor is there anything in the hypothesis to reduce the number of times any good needs to be exchanged against money. Rather there would be an increase of exchanging, as speculation took place to bring about the needed readjustments. For the present, I abstract from this. Cf. infra, the chapter on "Volume of Money and Volume of Trade."

[53] I shall recur to this point in the chapter on "The Quantity Theory and International Gold Movements."

[54] Quart. Jour. of Economics, 1894-95, p. 372.

[55] Cf. Davenport, Value and Distribution, and Whitaker, Labor Theory of Value.

[56] Cf. Social Value, pp. 29-30; 64-71.

[57] I incline to the view that the explanation of costs by foregone positive values needs supplementing by a recognition of the rÔle of negative social values, and that thus interpreted, "real costs" have a minor part to play. But I have not thought the matter through satisfactorily, and shall find no occasion to use the doctrine in the present volume.

[58] This doctrine as applied to rates on call loans appears in Seligman's Principles of Economics, 1912 ed., p. 395. The peculiarities of call loans have also been discussed by C. A. Conant, Principles of Money and Banking, I, p. 171. Conant there refers to a discussion by Joseph F. Johnson, in Pol. Sci. Quarterly, Sept. 1900, p. 500. There are some very interesting distinctions between the "hire price" and the "purchase price" of money developed by J. A. Hobson, in his Gold, Prices and Wages, pp. 153 et. seq.

[59] One "pure rate" of interest, for loans of all periods over, say, three years, is doubtless, a myth, or better, a methodological device for simplifying thinking in connection with the theory of interest, and the capitalization theory. It is not necessary for our purposes, however, to give detailed analysis to the notion. We shall discuss the capitalization theory as we find it, assuming that, as a matter of fact, the difference between loans of 20 years and loans of 35 years, or in perpetuity, of equal quality in other respects, may be abstracted from, with safety.

[60] The price-level is a weighted average. These elements dominate it. Cf. our discussion, in the chapter on the "Volume of Money and the Volume of Trade," infra, of the elements entering into trade. We shall make use of the capitalization theory at various points in our discussion of general prices. Cf. the chapter on "The Passiveness of Prices," where it is shown that the capitalization theory and the quantity theory are irreconcilable.

[61] There is an extensive body of controversial literature connected with the capitalization theory, which it is unnecessary, for present purposes, to consider. One interesting line of doctrine is that developed by DR Scott (Jour. of Pol. Econ., Mar. 1910) and H. J. Davenport (Yale Review, Aug. 1910), in which ordinary formulations are criticised as assuming a "social rate" of interest, and in which the effort is made to work the thing out on the basis of extreme individualization, each man having a rate of discount of his own. I have accepted the doctrine in the general form in which it has been developed by BÖhm-Bawerk (in criticism of Turgot and Henry George in his Capital and Interest), by Fetter, in his Principles of Economics, and by Fisher in his Rate of Interest, abstracting from points on which these writers disagree. My criticism of their doctrines, were it necessary here to develop it, would rest on the ground that their treatment of the general interest problem is too individualistic, and I should side with them as against Scott and Davenport. But these matters are aside from our present problem.

In our chapter on "Marginal Utility" we shall meet the capitalization theory again, as applied to the value of money by David Kinley. We shall also take it up in the chapters on "Dodo Bones," and "The Functions of Money."

[62] Social Value, chs. 3-7. The point is discussed infra in the present chapter.

[63] Fisher, I, Purchasing Power of Money, p. 32.

[64] Edition of 1903.

[65] Cf. the chapter on "Dodo Bones," infra.

[66] Cf. Menger's art. "Geld," Conrad's HandwÖrterbuch, 328, 3rd ed., vol iv, p. 566.

[67] Cf. Helfferich, Das Geld, ed. 1903, p. 480.

[68] Discussed more fully infra, chapter on "Dodo Bones."

[69] I make virtually no reference to the "spoken" part, which is chiefly concerned with index numbers.

[70] Chapter on "Dodo Bones."

[71] Chapter on "Barter."

[72] In its psychological explanation, this bears somewhat the same relation to the social value concept of the present writer that the social mind concept of Giddings and Lewes bears to the social mind concept of the present writer. Cf. Social Value, ch. 9. Wieser's concept excludes individual peculiarities. It is an abstraction from individual values, a distillation of their common essence. The social value concept of the present writer is a focal point in which are summarized all the individual values, whether alike or divergent, and not merely the individual marginal utilities of the goods in question (Wieser's only factors) but also the individual emotions which affect the distribution of wealth. Wieser's concept is based on a study of individual marginal utilities considered as atomic elements; that of the present writer looks on the social mind as an organic whole, in which individual mental processes are phases, and does not try to synthesize a social value out of elements, but rather, to analyze it into elements. In the function in economic theory for which they are destined, however, the two concepts have much in common. Both seek to be the fundamental economic quantity. Both seek to be causal forces, lying behind prices, even though expressed in prices; both oppose the conception of value as merely relative.

[73] Social Value, chs. 5, 6, 7, and 13. Infra in the present chapter.

[74] See especially the chapter on "The Passiveness of Prices."

[75] Cf. the writer's "Schumpeter's Dynamic Economics," Political Science Quarterly, Dec. 1915. Schumpeter's theory, as there presented, is based on the brief discussion in his Theorie der wirtschaftlichen Entwicklung (Leipzig, 1912), pp. 61 et seq., 105, 166-667, 116, 464, and on Schumpeter's verbal expositions of the theory during his American trip. Since that account was published, Professor W. C. Mitchell has given an account of Schumpeter's doctrine, based on the fuller discussion in Schumpeter's Wesen und Hauptinhalt der theoretischen NationalÖkonomie, which is in accord with the account here given. (Mitchell, in Papers and Proceedings, Supplement to March, 1916, American Econ. Rev., p. 150.) Mitchell attributes the essential elements of Schumpeter's theory to Walras. The first exposition in English of the conception, so far as the present writer is aware, is in Irving Fisher's Mathematical Investigations in the Theory of Value and Prices, Trans. Conn. Acad. of Arts and Sciences, 1892. Professor Fisher, in his preface, accords priority to Jevons, Auspitz and Lieben, and to Walras. The conception is not to be found in Jevons, though many of the ideas involved in it are. The first non-mathematical exposition of the doctrine, so far as I know, is by Schumpeter. As will be made clear in a footnote at the end of the present chapter, neither Wicksteed nor Davenport has really forced the problem through, to the full equilibrium picture, and neither has escaped the Austrian circle. I do not concur with Professor Mitchell's interpretation of Wicksteed on this point. It may well be that mathematical method, with a system of simultaneous equations, was necessary for the development of the idea. If so, it illustrates both the strength and the weakness of mathematical economic theory: it clarifies thinking, but it gets no causal theory! At all events, no causal theory emerges in this case.

[76] Positive Theory of Capital, Bk. IV, and GrundzÜge der Theorie des wirtschaftlichen GÜterwerts, in Conrad's JahrbÜcher, 1886. The writer who would adhere to Schumpeter's doctrine must give up all notion that any individual occupies a critical "marginal" position. All men are equally marginal in Schumpeter's scheme.

[77] Positive Theory of Capital, p. 156.

[78] Schumpeter's scheme gives no money-prices. No form of this scheme gives any quantitative values. Nothing but ratios can come from it.

[79] Supra, chs. on "Value" and "Supply and Demand."

[80] See, infra, the chapters on "Volume of Money and Volume of Trade," and "The Functions of Money."

[81] Infra, chs. on "Origin of Money," "Functions of Money," and "Credit."

[82] Supra, ch. on "Supply and Demand."

[83] See note at the end of this chapter.

[84] Supra, chapter on "Cost of Production."

[85] That this is wholly alien to BÖhm-Bawerk's thought is sufficiently indicated by BÖhm-Bawerk's vigorous criticism of Professor J. B. Clark, in "The Ultimate Standard of Value," Annals of the American Academy, vol. v, pp. 149-209. It may be noticed that Schumpeter makes use of Menger's and BÖhm-Bawerk's general doctrine of imputation of the value of goods of the first order to goods of higher orders, without seeing that his equilibrium picture gives no basis for such a procedure.

[86] Cf. comments on Professor R. B. Perry's view, in the long note at the end of this chapter.

[87] Cf. BÖhm-Bawerk, GrundzÜge, etc. (loc. cit.), pp. 5, 478, n.; Social Value, chs. 2 and 11; J. M. Clark and B. M. Anderson, Jr., in Quarterly Journal of Economics, 1915—"The Concept of Value." I may add that this equilibrium scheme is, in my judgment, equally useless as the basis of a hedonistic theory of welfare, since it is absolute amounts of utility that are significant there.

[88] Theorie der wirtschaftlichen Entwicklung, pp. 83-84.

[89] Loc. cit., ch. 3, part ii.

[90] Ibid., p. 199.

[91] For the assimilation of credit phenomena to the general phenomena of value, by means of the social value doctrine, see infra our section on "Credit." The social value doctrine is still further generalized in the chapter on "The Reconciliation of Statics and Dynamics."

[92] Ibid. p. 169.

[93] Vide Mathematical Investigations, loc. cit., p. 62, where Fisher assumes one price to be unity, "to determine a standard of value." Purchasing Power of Money, pp. 174-175.

[94] Loc. cit., pp. 72 et seq.

[95] Pp. 132-136.

[96] See Social Value, chs. vi and vii.

[97] Bk. ii, ch. vi.

[98] "Cf. Davenport, Value and Distribution, 560. 'For, in truth, not merely the distribution of the landed and other instrumental, income-commanding wealth in society, but also the distribution of general purchasing power ... are, at any moment in society, to be explained only by appeal to a long and complex history [italics mine], a distribution resting, no doubt, in part upon technological value productivity, past or present, but in part also tracing back to bad institutions of property rights and inheritance, to bad taxation, to class privileges, to stock-exchange manipulation ... and, as well, to every sort of vested right in iniquity.... But there being no apparent method of bringing this class of facts within the orderly sequences of economic law, we shall—perhaps—do well to dismiss them from our discussion....' [Italics are mine.] It may be questioned if the 'orderly sequence' is worth very much if it ignore facts so decisive as these! It is precisely this sort of abstractionism which has vitiated so much of value theory. Most economists slur over the omissions; Professor Davenport, seeing clearly and speaking frankly, makes the extent of the abstraction clear. We venture to suggest that the reason he can find no place for facts like these within the orderly sequence of his economic theory is that he lacks an adequate sociological theory at the basis of his economic theory. A historical regressus will not, of course, fit in in any logical manner with a synthetic theory which tries to construct an existing situation out of existing elements. Our plan of a logical analysis of existing psychic forces makes it possible to treat these facts which have come to us from the past, not as facts of different nature from the 'utilities' with which the value theorists have dealt, but rather as fluid psychic forces, of the same nature, and in the same system, as those 'utilities.'"

[99] Of course, we do not mean to question the immense light which history throws upon the nature of existing social forces.

[100] Theory of Political Economy, 4th ed., p. 34.

[101] Art. "Geld," in HandwÖrterbuch der Staatswissenschaften.

[102] Cf. Helfferich, Das Geld, Leipzig, 1903, for the same terminology, pp. 485-486.

[103] Exchange creates values. It does not necessarily create utilities. Wheat going from a famine-stricken part of India to a place where it will sell for higher prices does not gain in utility thereby.

[104] A possible exception to this general statement might be made for Professor H. J. Davenport, who would insist that his version of the utility theory is based on "relative marginal utility," rather than on marginal utility in BÖhm-Bawerk's fashion. No critic has been more merciless than he in the criticism of the Austrian confusions of demand-curves with utility-curves, etc. But it is not clear to me that Professor Davenport has freed himself from the general doctrine that he criticises. I am not sure that he would accept Schumpeter's version of the Austrian theory as correct. It may be possible to read Schumpeter's doctrine into chapter 7 of Davenport's admirable Economics of Enterprise, but it is not clear that one could read it in the chapter! That individual price-offer depends on the marginal utilities of alternative goods, in comparison with the marginal utility of the good in question, Davenport does emphasize. But the complication that not merely the utilities of alternative goods, but also their prices, have to be taken into account, and that this involves circular reasoning when an effort is made to give a summary of the whole system of prices by means of individual utility calculations, he does not, so far as I can see, grapple with. He summarizes the thing on p. 104: "The steps, then, are from (1) utility to (2) marginal utility, thence to (3) the comparison of marginal utilities, and finally to (4) price-offer." He takes no account here of the complication that the third step is in large degree a comparison, not of marginal utilities proper, but rather, of "subjective values in exchange." Yet just in this lies a vital difficulty of utility theory, in so far as it attempts to explain causation. Moreover, Professor Davenport is seeking to explain the causal relation of utility to demand, the old Austrian problem. The explanation of demand is, indeed, the problem with which all theories of value must come to terms, if they are to be of any use. As we have seen, Schumpeter's schema has no bearing whatever on the explanation of demand, or on causation of any sort. Schumpeter's scheme leaves money out, and demand-curves run in money terms. Davenport's scheme assumes money—and "purchasing power." (Loc. cit., 91.) We have seen in the chapter on "Supply and Demand" that the notion of demand and supply involves money and a fixed absolute value of money. Professor Davenport is thus doubly assuming value, the thing to be explained! Laws of "relative marginal utility" developed on the assumption of money, and in abstraction from changes in the value of money, are not likely to be of service when the problem of the value of money itself is taken up. On pp. 95-96, Davenport comes closest to Schumpeter's doctrine, saying that "the total situation is directive of each individual in it," and that there are "mutual reactions," such that particular facts are both effects and causes, illustrated by the last person who jumps on a crowded raft—does he sink the others, or do they sink him? This recognizes the complexity of the problem, but it is not clear that it even purports to do more than that. What is called for is a definition of the essential elements in that "total situation," with precise statement as to what is assumed constant and what is allowed to vary, and an analysis of the "mutual reactions," with a starting point and a terminus ad quem,—an equilibrium in which "mutual reactions" cease to trouble with their endless circle! Schumpeter's schema, though meeting criticism on other scores, does meet this logical test, but Davenport's does not appear to do so.

It is interesting to note that Professor Alvin S. Johnson, in his review of the Economics of Enterprise, concludes that Professor Davenport, instead of meaning by "relative marginal utility" anything of the sort that Schumpeter has in mind in his equilibrium picture of all utilities to all individuals, really has an absolute value in mind. (Quarterly Journal of Economics, May, 1914, pp. 433-436.) There is much in Professor Davenport's book to justify this interpretation.

Professor Davenport's application of "utility" to the problem of the value of money will be found on pp. 267-275 of the Economics of Enterprise. The general discussion of money and credit in the Economics of Enterprise has been exceedingly illuminating to me, and my indebtedness to it will appear in the present book.

Much of what has been said of Davenport's "relative utility" theory may also be said of Wicksteed's. (Common Sense of Political Economy, London, 1910.) This is in many ways a remarkable book, characterized by excellencies of many different sorts. But it fails to present the utility theory in such a way as to avoid circular reasoning. Wicksteed sees the confusion of utility-curves with demand-curves, and protests vigorously and at length against it. (E. g., pp. 147-150.) He starts out by assuming money and a set of market prices. His earlier chapters are given to showing how the individual adjusts himself to the market, bringing his "marginal utilities" of various goods into harmony with the market prices. He recognizes that he has made these assumptions (pp. 130-131), and that he cannot use the results thus achieved as an explanation of the market prices. They are "our goal, not our starting point." But by pp. 161-162 he finds himself with the "suspicion" that nothing special or peculiar is to be found in the laws of "market or current prices—a phenomenon which it is obviously impossible to regard as ultimate, which demands explanation, and which we have not yet explained.... Much remains to be done, but we can already see that the preferences of each individual help to determine the terms or conditions under which the choice of other members of the community must be exercised. If you take the individuals of the community two and two it is clear that the marginal preferences of each determine the limits within which direct exchanges with the other can be entertained, and we must already have at least a presentiment that the collective scale is the register of the final and precise 'resultant' of all these mutually determining conditions and forces."

This seems to forecast Schumpeter's doctrine, but in the development which follows, we do not find it. The heart of his analysis of the causation of prices is in ch. vi, on "Markets." The "summary" which precedes that chapter again suggests Schumpeter's analysis—the notion of an all-embracing equilibrium. But when we get into the detailed analyses of the chapter we find nothing more than an exceedingly good account of the process by which supply and demand of particular goods, considered separately, become equated, through two-sided competition, and under conditions of monopoly. Instead of "relative marginal utilities," we see customers coming into the market with various money-prices in mind, and sellers trying out various money-prices—not marginal utilities, nor yet two or more marginal utilities in comparison with one another, but rather, money-prices, which, in the minds of the buyers may be supposed to represent "subjective values in exchange," based on both marginal utilities and objective prices of other things that enter into the budget, and which, in the minds of sellers, represent estimates of the prices which buyers may be induced to pay. Wicksteed does not transcend the circle. Finally, despite his caution to avoid the more glaring forms of the circle, and the confounding of demand-curves with utility-curves, and of utility with value, he does lapse into it in its completest form in expounding the Austrian doctrine of cost of production. "The only sense, then, in which cost of production can affect the value of one thing is the sense in which it is itself the value of another thing. Thus what has been variously termed utility, ophelemity, or desiredness, is the sole and ultimate determinant of all exchange values." (P. 391.) Here is the illicit leap from marginal demand price to marginal utility which all utility theorists make, sooner or later! It is true that costs in one place are reflections of demand elsewhere. But it is not true that costs in one place have any definite quantitative relation to utilities in another place!

When Wicksteed comes to discuss the value of money, he makes slight use of the notion of abstract ratios among relative utilities, and employs a concept which he has nowhere vindicated or explained: the value of money, as distinct from the reciprocal of the price-level, treating the value of money as something which can be directly influenced by sinister rumors affecting the credit of the Government, and which can be an independent cause affecting velocity of circulation, and the amount of trade done by means of money. Loc. cit., p. 623. See infra, our chapter on "Velocity of Circulation."

The only writers I know at first hand who have really thought the thing through, and avoided the circle in form, are Schumpeter and Irving Fisher. (Mathematical Investigations in the Theory of Value and Prices, Trans. Conn. Acad. of Arts and Sciences, 1892. See bibliographical note, supra, in this chapter.) I have given an exposition of Schumpeter, rather than Fisher, because the former has put the doctrine in non-mathematical form. In the text I have indicated the limitations of their doctrine. Fisher definitely avows the impossibility of applying the doctrine to the problem of the value of money. Purchasing Power of Money, p. 174. Schumpeter doesn't apply it to money, and when he tries to work out a utility doctrine of money, he lapses into the Austrian circle in a very obvious form. In later writings, Fisher also seems to forget the limitations imposed on utility theory in his earlier essay. In his Elementary Principles, ed. 1912, Fisher lists (pp. 408-409) a great multitude of factors that might affect the price of pig iron, and then says: "Back of these causes lie other causes, multiplying endlessly as we proceed backward. But if we trace back all these causes to their utmost limits, they will all resolve themselves into changes in the marginal desirability or undesirability of satisfactions and of efforts, respectively, at different points of time, and in the marginal rate of impatience as between any one year and the next." Here these marginal psychic magnitudes, which in the earlier essay appeared merely as surface phenomena, resultants of a total situation, proportional to prices, causes of nothing, merely symptoms of a completed equilibrium, are erected into atomic verÆ causÆ, the ultimate ultimates!

It is interesting to contrast this with a yet more recent statement by a philosopher who has undertaken a defence of the utility theory of economic value, Professor R. B. Perry, in the Quarterly Journal of Economics, for May, 1916. Considering the contentions of the present writer that many general social causes, in addition to the individual utilities concerned with consumption, are needed to explain changes in the values of goods, such as changes in fashion, mode, in general business confidence, in moral attitude toward different sorts of consumption, in the distribution of wealth, in taxes and other laws, Professor Perry says: "If the Austrian School has neglected this, then it needs to be corrected. But the essential contention of that school remains, so far as I can see, unaltered; in that these changes work through individuals and have their point of application in a more or less rational comparison of needs made by the individual buyer or seller. Whatever affects these individual schedules on a sufficiently large scale will affect prices. But to ignore the individual channels through which these forces pass, is elliptical." (Pp. 469-470. Italics mine.) Now I call attention to several points in the foregoing. First, I would contrast it with the doctrine quoted from Professor Fisher's Elementary Principles. Where Fisher puts the utilities far back in the realm of ultimate causation, making them the source from which spring all the proximate social causes which might affect the price of pig iron (such as "a trade war," "a change in fashion," a "change in incomes," "decreasing foresight," etc., loc. cit., p. 409), Professor Perry would make individual utility schedules the final focal point, toward which converge, and through which pass, all the causal forces, however richly explained by antecedent social factors, which affect prices. The utility theory of value means all things to all men!

But a second point with reference to Professor Perry's doctrine. It is perfectly true that all social activities are the work of individuals. Society is nothing apart from the individuals who make it up. To think of society and the individual as separate and antithetical is a fallacy which I have criticised in detail in Part III of Social Value. The social value theory does not mean that there are social forces which do not run through individual channels. This is not to accept the notion that individuals are really, in their psychical nature, isolated monads, however. There is a functional unity of individual minds, and no individual can be understood in abstraction from society. But this view is as old as Aristotle. I have not contended that prices can change apart from the mental activities of individual men, working upon one another. So far there may be no issue with Professor Perry.

But there is a big issue when he contends that all the causation is focussed in individual utility schedules, and in a more or less rational comparison of needs made by the individual buyer and seller. This is demonstrably erroneous. Let us assume, for example, that utility schedules of every individual New Yorker remain unchanged, but that, through a change in the law (the work of individual men, under the influence of their own individual emotions and ideas, of, say, ethical character), incomes in New York City are equalized. Hold rigidly to the assumption that there are no changes in utility schedules. Will there not be, none the less, a radical readjustment of prices? Will not the prices of Riverside palaces and steam yachts sink and the prices of things which the poor esteem rise? The utility-curves of the erstwhile rich, assumed to remain unchanged, no longer count for so much as before in the market. The rich cannot go so far down their curves in the consumption process as before. The poor, or those who had been poorest, now count for more in the market. They can lower their margins. In other words, the forces affecting the distribution of wealth, in so far as they are legal and moral in character, at least, may affect the price-situation, without altering utility schedules. Some social factors, as changes in mode and fashion, will work through the utility schedules, but others will not. One big variable affecting prices which need not, in idea, at least, affect utility schedules at all, and whose main influence is anyhow not directed through them, is the volume of business confidence. This factor we shall analyze in our discussion of credit, infra. Professor Perry thus escapes only part of the criticism which we have made (Social Value, pp. 45 and 56) of the Austrian theory: (1) that it abstracts the individual from his vital contacts with other individuals, and (2) that, within the individual mind thus abstracted, the Austrians make a further abstraction, taking as relevant only the interests concerned with consumption of economic goods, summed up in the utility schedules. The second criticism applies to Professor Perry as well. Men's total interests are not summed up in utility schedules, and do not affect prices exclusively via utility schedules.

It may be noticed, also, with reference to Professor Perry's discussion that he has misconstrued the Austrian theory in conceiving it as an analysis of an historical process, with a beginning and an end, instead of a static picture, in which preËxisting individual factors come into equilibrium. (Loc. cit., 475.) He seeks thus to avoid the Austrian circle, but as we have shown in the discussion of von Mises in the text, this way is not open to the Austrians.

Able and penetrating though Professor Perry's discussion is, on the psychological side, it fails, I think, to take adequate account of the complexities with which the economist and sociologist must deal.

In general, I find no version of the utility theory of value which is defensible, and, above all, no effort to apply it to the value of money which has met with success.

[105] Vide Taussig, Principles, I, 432.

[106] "Der Bankzins als Regulator der Waarenpreise," Conrad's JahrbÜcher, 1897.

[107] Loc. cit., ch. 8.

[108] Cf. ch. on "Economic Value."

[109] Nicholson, J. S., Money and Monetary Problems, pp. 64-66; 71-73.

[110] Works, McCulloch ed. 1852, p. 213.

[111] Cf. the criticism of Nicholson by W. A. Scott, Money and Banking, 1903 ed., ch. 4.

[112] Cf. Mill, Principles, Bk. III, ch. xiii, par. 1. "Nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others." It is not quite fair to identify Mill's doctrine with the circle stated above, however, since Mill couples it with a reference to convention, resting on the influence of government—a mention, without analysis, of some of the factors to be discussed shortly.

[113] Cf. Knies, Das Geld, I, p. 140.

[114] Cf. Social Value, ch. 2. Infra, our chapter on "The Functions of Money."

[115] Das Geld, Leipzig, 1903, p. 477.

[116] Laughlin, rejoinder to Clow, "The Quantity Theory and its Critics," in Jour. of Pol. Econ., 1902.

[117] Principles of Money, passim.

[118] Cf. Social Value, pp. 132-136, and supra, ch. on "Marginal Utility and Value of Money."

[119] Strictly speaking, there is no marginal utility, but only a "subjective value in exchange," for money of the sort here discussed. See supra, the chapter on "Marginal Utility."

[120] The psychological reactions of the people in times of stress and uncertainty toward different kinds of money cannot be predicted with any certainty, and there seems to be absolutely no definite or universal law governing the matter. The present writer collected a lot of newspaper clippings at the outbreak of the present World War. From these it appears that in both Paris and Berlin there was a very great distrust of bank-notes, and an insistence by retailers, restaurants, landladies, etc., on coin. But silver, which was not standard money, seems to have been accepted without question. When hoarding is referred to in these clippings, it is invariably gold that is mentioned. A similar hoarding of gold took place during the Balkan crisis at the time of the outbreak of the war between the Balkan Allies and Turkey. Professor E. E. Agger informs me, however, that he has found some evidence that bank-notes as well as gold were hoarded in Austria, at this time.

Sometimes we have a suspension of Gresham's law, and an acceptance of all kinds of money at varying ratios. The following clipping from the Boston Herald of March 17, 1914, illustrates this: "Douglas, Ariz., March 16.—Four kinds of money are now circulating in the Mexican territory controlled by the Constitutionalists. These are United States currency, the first issues of the Constitutionalist government and of Sonora state, and 'Villa money,' or that issued by Chihuahua at the instance of the rebel military commander. United States takes precedence. Merchants in Sonora, in order to protect themselves and at the same time observe the laws requiring acceptance of the rebel currency issues, have established a sliding scale of prices. This was discovered when five merchants were arrested at Cananea by Constitutionalist secret service men, who found that for American money they could buy goods for less than half the amount exacted when payment was offered in Mexican currency. The uncertainty of the rebel campaign against Torreon is reflected in the money market. To-day Constitutionalist sold for 22 and 28 cents American on the peso. Mexican federal currency commanded from 30 to 32 cents." In the experience of travellers who have discussed the matter with the writer, there was little of this flexibility of relation between paper money and coin in Berlin, or Paris at the outbreak of the present War. Where paper was refused, it was absolutely refused, and where it was accepted, it seems to have been accepted without discount. No doubt, a fuller investigation would reveal all manner of variation in the behavior of different people in different centres, and at the same centres, at the outbreak of the War.

[121] Money and Banking, 1903 ed., pp. 58-60; 101-104.

[122] Principles of Money, p. 530.

[123] Written in December, 1914.

[124] Cf. Clow, F. R., "The Quantity Theory and its Critics," Jour. of Pol. Econ., 1902, p. 602.

[125] Cf. Emery, Speculation, pp. 90-91.

[126] Cf. BÖhm-Bawerk's criticisms of the "use" theory of interest. (Capital and Interest, passim.) Both use theories and productivity theories are probably suggested, in part, by peculiarities which money possesses in pre-eminent degree. See infra, the chapter on the "Functions of Money."

[127] A more precise analysis of all these points will be given in the chapter on "The Functions of Money."

[128] Cf. Professor Taussig's account of expansions and contractions of the silver currency in his Silver Situation, passim.

[129] For bibliography, see Am. Econ. Rev., Dec., 1914, pp. 838-839.

[130] New York, 1911. All references to this book in the present volume are to the 1913 edition, which contains some new matter.

[131] Standard of Value, London, 1912, p. 48, n.

[132] Papers and Proceedings, Supplement to March, 1913, number of American Econ. Review, p. 131.

[133] American Econ. Rev., Supplement to March, 1916, number, p. 138.

[134] Loc. cit., pp. 31-32.

[135] Loc. cit., pp. 175ff.

[136] "The Passiveness of Prices," infra.

[137] Particularly in view of the elaborate statistics, to be considered below, with which it is sought to make the equation realistic.

[138] Loc. cit., p. 16ff.

[139] Loc. cit. p. 25.

[140] Ibid., p. 26.

[141] Ibid., p. 27.

[142] Where it is not meaningless, as at various points in the theory of mechanics, the product is always of a different denomination from either factor.

[143] Vide our ch. on "Supply and Demand," supra, for a discussion of Mill's doctrine as to the "demand" for money.

[144] What is here said of Fisher's equation of exchange applies, for the most part, to all versions of it.

[145] Loc. cit., p. 298. Cf. our chapter, infra, on "Statistical Demonstrations of the Quantity Theory."

[146] Purchasing Power of Money, p. 290.

[147] The amplified equation is MV + M´V´ = PT, which takes account of bank-credit. This is explained, infra.

[148] Loc. cit., p. 487. I recur to this point in discussing the statistics of the "equation of exchange" in ch. 19.

[149] Infra, ch. on "Quantity Theory and World Prices."

[150] Loc. cit., p. 48.

[151] Loc. cit., p. 370. The same position is taken by Kemmerer, Money and Credit Instruments, pp. 68 et seq. Mill denies the validity of these distinctions. See Principles, Bk. III, ch. 12, Par. 8.

[152] The above was written before the discussion in the Annalist (Feb. 7, Feb. 21, March 6, March 13, March 20, 1916) in which the present writer urged that Professor Fisher had greatly exaggerated the volume of trade in the United States by taking banking transactions as representative of trade. In reply (see especially the number for Feb. 21, pp. 245 et seq.) Professor Fisher maintains that the overcounting to which I call attention is offset by undercounting, and considers offsetting book-credits, which actually dispense with the use of money and checks, an important element in the undercounting. I am unable to reconcile this position with the reasons given for excluding book-credits from the "equation of exchange." A detailed discussion of the points at issue appears in later chapters, particularly in the chapter on "Statistical Demonstrations of the Quantity Theory."

[153] Quarterly Journal of Economics, vols. 8 and 9; Political Economy, pp. 169-175; Money, chs. 3-8.

[154] In our analysis of bank-loans, infra, we shall find reason to hold that Walker, though false to the logic of the quantity theory, comes nearer to a tenable doctrine than do Kemmerer, Fisher, Andrew, and most other quantity theorists.

[155] Principles, Bk. III, chs. 11 and 12.

[156] Purchasing Power of Money.

[157] Loc. cit., pp. 50-51.

[158] Loc. cit., p. 280.

[159] A. W. Atwood, "Hoarded Gold," Saturday Evening Post, Dec. 12, 1914, p. 26.

[160] Cf. Kinley, D., The Use of Credit Instruments, Senate Document 399, 1910, pp. 192-194.

[161] Ibid., pp. 102-103. In the same volume, on p. 200, the figures are given incorrectly, as 70% checks and 30% cash. C. A. Phillips, Readings in Money and Banking, 1916, p. 151, repeats this erroneous statement.

[162] Cf. Sprague, Crises under the National Banking System, Nat. Monetary Commission Report, pp. 71-75; 200, 202.

[163] Cf. also p. 280 of Fisher's Purchasing Power of Money.

[164] Kemmerer (Money and Credit Instruments, p. 80) maintains that, "under perfectly static conditions," money in circulation and money in bank reserves will keep a fixed relation to one another. He offers no argument to support this view. Of course, "under perfectly static conditions," everything keeps in fixed relation to everything else. The volume of credit will keep a fixed relation to the number of laborers and to the supply of clocks. But this would hardly establish causal connections! Fisher multiplies "fixed relations" of various kinds, without, so far as very diligent search can tell, offering any argument to support them. Thus, we have on p. 105 the statement, "We have seen that normally the quantities of other currency are proportional to the quantity of primary money, which we are supposing to be gold." Where this thesis has been demonstrated, he does not indicate. In view of the fact that gold has been the one really flexible element in our money supply, the thesis is hardly credible. On pp. 146-147, facing this difficulty, Fisher says: "Since, however, almost all the money can be used as bank reserves, even national bank-notes being so used by state banks and trust companies, the proportionate relations between money in circulation, money in reserves, and bank-deposits will hold approximately true as the normal condition of affairs. The legal requirements as to reserves strengthen the tendency." Here is a very substantial growth in the doctrine, with only one new argument, namely, that concerning legal reserve requirements—which gives minimal ratios, not fixed ratios. In what way the fact that most kinds of money can serve as legal reserves gives reason for the doctrine of fixed proportions is not made clear. For Professor Fisher, however, it seems quite enough, for on p. 162, in the heart of his causal theory, he boldly announces: "There must be some relation between the amount of money in circulation, the amount of reserves, and the amount of deposits. Normally we have seen that the three remain in given ratios to each other." (Italics mine.) It is doubtless somewhat dangerous to make a confident negative statement concerning a book which has no index. But careful reading of all that has preceded this statement reveals no references to this topic except those quoted above. "We have seen" is not a legitimate premise when so important an issue is involved. In our discussion of reserves in the section on credit, as well as in the discussion of the volume of trade, it will appear that no "normal" or "static" relations of this kind are possible.

[165] "The price-level outside of New York City, for instance, affects the price-level in New York City only via changes in the money in New York City. Within New York City it is the money which influences the price-level, and not the price-level which influences the money. The price-level is effect and not cause." (Loc. cit., p. 172.)

[166] Loc. cit., p. 50.

[167] W. C. Mitchell, Business Cycles, p. 306.

[168] Ibid., p. 325.

[169] J. P. Norton, Statistical Studies in the New York Money Market, p. 71, and chart opposite p. 72.

[170] Ibid., chart facing p. 72.

[171] Cf. Mitchell, loc. cit., chart, p. 298, and text, p. 295. As the ratio of reserves to money in circulation was greater in 1911 than in 1894, and as the ratio of deposits to reserves was also higher, we have a still wider variation in the ratio of money in circulation to deposits—M:M´

[172] See the striking figures collected by A. P. Andrew for 1907. Quart. Jour. of Econ., Feb. 1908, p. 297.

[173] Infra, our discussions of the relations of volume of money and credit to volume of trade, and our discussion of credit in the constructive part of the book. The theory of money and credit must be a dynamic theory.

[174] Senate Document, No. 405, 1910. For the Bank of England, see p. 25; for the CrÉdit Lyonnais, pp. 224-226; for the Deutsche Bank, pp. 374-375.

[175] Statist, 1912, p. 577.

[176] "The Prospects of Money," British Economic Journal, Dec. 1914.

[177] Cf. Ashley, W. J., Gold and Prices, N. Y., 1912, pp. 21 et seq.

[178] Cf. von Mises, "The Foreign Exchange Policy of the Austro-Hungarian Bank," British Econ. Jour., 1909, vol. 19. Cf. Keynes, Indian Currency and Finance.

[179] Conant, Principles of Money and Banking, vol. II, p. 50. In 1899, the reserve of the Bank of Belgium consisted of 107 millions (francs) in specie, and 108 millions in foreign bills.

[180] Principles of Economics, vol. I, pp. 432 et seq.

[181] In the chapter on "Quantity Theory and International Gold Movements," infra.

[182] The Joint Stock Banks in England keep "till money" in cash, even though their "reserves" are chiefly deposits at the Bank of England.

[183] Fisher, loc. cit. passim. Vide especially ch. 8.

[184] Purchasing Power of Money.

[185] Business Cycles, pp. 580, 595-596.

[186] Cf. C. M. Walsh, The Measurement of General Exchange Value, pp. 480-481.

[187] On pp. 314-315, and elsewhere, Fisher indicates that all the causes affecting prices operate through the factors in the equation of exchange. Cf. p. 74. This would require a concrete equation of exchange throughout.

[188] Chapter on "Passiveness of Prices."

[189] Loc. cit., p. 169.

[190] Cf. his Silver Situation. 1878 to 1891 do not give time enough for quantity of money to dominate volume of credit, in his exposition!

[191] Mill, Principles, Bk. III, ch. 12, par. 1.

[192] Fisher, loc. cit., p. 62.

[193] "A Compensated Dollar," Quart. Jour. of Econ., Feb. 1913.

[194] The chapter on "Dodo-Bones," supra, and the chapter on "The Quantity Theory and World Prices," infra.

[195] Loc. cit., p. 156.

[196] Ibid., p. 160.

[197] Or organs for pianos, etc. A common practice—less common in the North than formerly—is the payment of bills at country stores in produce. There is not a little barter at secondhand stores in New York City.

[198] Mr. Burton Thompson, of No. 7 Wall St., who knows the real estate situation there intimately, states that while dealers do not like to "swap" real estate, and do little of it when business is good, they are forced to do it extensively when business is sluggish, "as has been the case for the past four or five years."

[199] Cf. E. S. Meade, Corporation Finance, p. 376, and passim.

[200] The same thing often happens when a bond issue is paid off—bond-holders may take their pay in new bonds. "Conversions" of bonds into stocks, or of preferred into common stock, are also barter transactions. $220,000,000 of the $420,000,000 which Mr. Carnegie and his associates received from the Steel Trust for their plants, etc., was paid, not with money and checks, but with bonds. Vide Stevens, Industrial Combinations and Trusts, p. 101.

[201] The foregoing had been written before the discussion in the Annalist of Feb. and March, 1916 (pp. 183-184, 245-272, 313-317, 344, 377), in which Professor Fisher and the present writer joined issue with reference to Professor Fisher's estimate, 387 billions, for the volume of trade in the United States in 1909. The present writer contended that the banking transactions which Professor Fisher took as representative of trade greatly overcounted trade, since they included loans and repayments, taxes, several checks in one transaction, gifts, etc., etc. Professor Fisher contended that the overcounting was offset by undercounting, and instanced particularly the clearing-house arrangements in the speculative exchanges, where checks are in part dispensed with, and the offsetting in "running accounts" through book-credit. This indicates a substantial change in Professor Fisher's view as compared with that set forth in the Purchasing Power of Money, where he maintains, as shown above, that barter is virtually non-existent, that money and checks are "for all practical purposes and all normal cases," "necessities of modern trade," (p. 160), and that book-credit merely postpones, and does not dispense with, the use of money and checks (p. 370).

The extent of the offsetting by barter, clearing-houses in the exchanges, and book-credit, though very great, is quite small as compared with Professor Fisher's 387 billions, and does not nearly offset the overcounting. The writer has obtained some fairly definite data on this point, which will be presented in the chapter on "Statistical Demonstrations of the Quantity Theory," in discussing the volume of trade.

[202] Miscellaneous Articles on German Banking, Report of National Monetary Commission, p. 175. Cf. infra, pp. 288-290.

[203] Cf. our chapter on "The Functions of Money," infra.

[204] One familiar feature of corporation finance makes barter much preferable to money transactions, in one connection, which involves very many corporations indeed, at their inception. Stock, in order to be marketable, must be "full-paid and non-assessable." If the corporation sells its stock to the first stockholders, this means that money must be paid for it to the full par value, dollar for dollar. This is usually not easy. An especial difficulty would then present itself that the promotor would have trouble in getting any pay for his work. (Meade, Corporation Finance, passim; Sullivan, American Corporations, passim.) If, however, the stocks are paid for in goods and services, the courts are much less exacting in looking to see if full value has been received. Barring obvious fraud, the courts will usually count the stock full paid and non-assessable even though the value of the goods and services received is not very great. The first sale of the stocks of a new corporation, therefore (if it is important enough to wish to have a public market for its stocks), is a barter transaction, as a rule.

[205] Purchasing Power of Money, p. 152.

[206] Ibid., pp. 352 et seq.

[207] Infra, ch. on "Passiveness of Prices." Weighted averages of "person-turnovers" will not save the situation here, if incomes stop entirely, since the persons involved then drop out altogether. Moreover, weighted averages would clearly depend on incomes, and hence on prices, and hence could not depend on habits exclusively, or causally explain prices.

[208] Loc. cit., pp. 152-153.

[209] Ibid., p. 154. Italics mine.

[210] Supra, ch. on "Volume of Money and Volume of Credit." Infra, ch. on "Bank Assets and Bank Reserves."

[211] Cf. Kinley, Money, pp. 145 and 205-206, for the discussion of various moveable margins of this sort.

[212] Van Hise, Concentration and Control, p. 16. The tendency to accumulate hoards when money is plentiful is notoriously strong in countries like India.

[213] Loc. cit., pp. 167-168.

[214] Ibid., p. 164.

[215] Cf. Davenport's analysis of the causes governing volume of trade, Economics of Enterprise, p. 272.

[216] Loc. cit., p. 110.

[217] Perhaps not quite correct, since he does recognize differences in degree as between different places, though, perhaps properly, from the standpoint of his normal theory, saying nothing about differences in degree as between different times in the same place.

[218] Cf. also p. 315, loc. cit., where this is placed as one of three main causes of the historical rise in prices.

[219] That the overwhelming bulk of trade is in the cities will appear in our chapter, infra, on "Volume of Money and Volume of Trades."

[220] On the average, in the United States, the banks have less money than the people have. Vide Mitchell, Business Cycles, pp. 295 and 298.

[221] Based on arbitrary assumptions as to variability. Cf. his p. 477. Cf. our chapter, infra, on "Statistics of the Quantity Theory."

[222] Other passages might be cited to show that Fisher thinks that T and the V's are fundamentally governed by different causes. For example, he says "an increased trade in the Southern States, where the velocity of circulation of money is presumably slow, would tend to lower the average velocity in the United States, simply by giving more weight to the velocity in the slower portions of the country." Loc. cit., p. 166.

[223] Cf., infra, our chapter on "Statistical Demonstrations of the Quantity Theory."

[224] Common Sense of Political Economy, p. 623.

[225] Principles, I, 432.

[226] Loc. cit., pp. 432, 438-439.

[227] Ibid., p. 439. Cf. our chapter, supra, on "Volume of Money and Volume of Credit," where Taussig's view as to the relation of money and bank-credit is analyzed.

[228] Loc. cit.

[229] Virtually the same expression is to be found in Barbour, David, The Standard of Value, London, 1912, p. 43. Barbour denies vigorously that more money can increase business, since it cannot increase the number of laborers, or of machines, or the amount of food, etc. The doctrine that volume of trade is fixed by (1) volume of products, and (2) degree of specialization of production, and hence is independent of volume of money, appears in Davenport, Econ. of Enterprise, 271-273.

[230] In this view, Fisher typifies the general position of the quantity theory, and, indeed, in part even of those who do not agree with the quantity theory, but who, with the quantity theorists, view the problems of money and banking as matters of static theory. High or low prices, once the transition is made, exhaust the effects of increasing or decreasing the money supply. During the period of transition, certain readjustments in relations between creditors and debtors arise, which lead to either temporary prosperity or temporary distress, but after the transition, it is a matter of indifference whether or not money is abundant. Though the view is, logically, an essential part of quantity theory reasoning, we find much of it vigorously maintained by Laughlin, Principles of Money, ch. on "Amount of Money Needed by a Country." Laughlin and Fisher would seem to be at one in maintaining that the quantity of money in a country is a matter of indifference, and from the views of both would follow a condemnation of the idea that any long run consequences for volume of trade, efficiency of production, etc., could follow from increasing or decreasing the volume of money.

It may be just as well here to indicate the conviction of the present writer that the relation between the quantity theory and the bimetallic movement is historical rather than logical. Indeed, in laying the stress they did on the importance of an inadequate stock of money in accounting for the depression of the latter part of the 19th Century, the bimetallists were out of harmony with the quantity theory.

[231] P. 50.

[232] Pp. 358-372, vol. I.

[233] Loc. cit., p. 160. Cf. our chapter on "Barter."

[234] The fact that prices are often high in gold mining regions, as compared with prices in the general world markets, has been taken by many writers as proof of the quantity theory. Cf. Kemmerer, Money and Credit Instruments, pp. 50-51, 58; Cairnes, J. E., Essays in Political Economy, particularly the discussion of the Australian episode. It seems to me that this is particularly inconclusive. High prices characterize remote mining regions of all kinds, whether gold, silver, copper, diamonds, tin or what not be the quest. Prices are not lower in the tin and copper region in the northern part of the Seward Peninsula in Alaska than they are in the gold region about Nome in the southern part of that peninsula. They are high in both places, not because of the abundance of gold or of money, but because of the great value of goods, which have to be brought with great trouble and expense from the United States. They are higher in the region of the Saw Tooth Mountains, in the centre of this peninsula, where hydro-electric power for the use of the gold miners about Nome, and for the copper and tin mines further north, is being developed, than they are at Nome itself, on the coast, where the gold is being mined. They were high in Australia because the discovery of gold led everybody to abandon everything but gold mining, and to bring in virtually everything from a distance. Wooden beams were imported to Australia from Sweden! (Pierson, N. G., Principles of Economics, I, p. 389.) One would expect prices in gold money to be higher in a silver or copper mining region, which is prospering, than in a gold mining region, equally remote, where a great deal of gold is being mined, but at a cost too great to make the region prosperous.

[235] Loc. cit., p. 51.

[236] Meaning of Money, p. 18.

[237] Price's address before Western Econ. Asso'n, Nov. 26, 1915; Holt's letter; Dec. 2.

[238] Loc. cit., p. 172.

[239] See our discussion of "money rates" and "interest rates," supra, in the chapter on "Capitalization," and infra, in the chapters on "The Functions of Money," and on "Credit."

[240] Infra, chapter on "Functions of Money," and supra, chapters on "Capitalization" and "Dodo-Bones."

[241] Cf. our chapters on "Supply and Demand," and "The Origin of Money."

[242] New York City can always use idle funds, "at a price."

[243] Kemmerer, as well as Fisher, allows physical production and consumption to dominate his "index" of trade variation. Loc. cit., pp. 130-131; Fisher, loc. cit., p. 479. Cf. our discussion of their statistics, infra.

[244] This confusion of volume of trade and volume of production is a companion of the confusion discussed on p. 307, infra, of quantity of money with volume of money-income. The two confusions, found in virtually all expositions of the quantity theory, give it most of its plausibility.

[245] Loc. cit., ch. 12, and appendix to ch. 12.

[246] Supra, ch. on "Equation of Exchange."

[247] In a letter to the writer, Professor Fisher states that the figures for the physical receipts at the cities, which dominate his index for T, have not been available for recent years, and that since they were discontinued, he has relied chiefly on the indirect calculation of T via the other factors in the equation. These figures were discontinued in 1912. In the American Economic Review for June, 1916 (p. 457, n.) Professor Fisher states that the indirect calculation of T has always had more weight in his figures than the direct calculation. This would serve in some degree to lessen the errors of his index of variation. The extent to which he has allowed his T as directly calculated on the basis of the index to be modified by the indirect calculation, is indicated on p. 302 of the Purchasing Power of Money, as follows: "The alterations in T, as shown in Figure 16, though still greater than the preceding, are nevertheless so small and uniform as to preserve an almost perfect parallelism between the original and the altered curve. The differences rarely exceed 10%." Even an indirect calculation of T, however, would not avoid the criticisms here urged, since the other factors, MV, M´V´, and P are all, as we shall see in the chapter on "Statistical Demonstrations of the Quantity Theory," calculated by methods which give very excessive weight to trade outside New York City and to non-speculative transactions.

[248] Loc. cit., p. 485.

[249] The Use of Credit Instruments in Payments, Senate Document No. 399, 61st Congress, 2nd Session.

[250] This brief account will be amplified for critical discussion in the statistical chapter below. Fisher in fact calculated MV and M´V´ separately. The account above given is strictly accurate only for that part of T, 353 billions, which is carried on by means of checks. The calculation of MV, however, is also based on Kinley's figures. My account here is adequate for the question at issue, which is, not as to the absolute magnitude of trade, but rather, as to the proportions of speculation and other elements in trade.

[251] The substance of the argument here presented first appeared in articles in the Annalist, to which I am indebted for permission to use it here. See the numbers of Feb. 7, March 6, and March 20, 1916. Professor Fisher's replies, directed wholly against the charge of double counting, appeared in the Annalist of Feb. 21 and March 13, 1916. Professor Fisher does not question my contention that speculation makes up the overwhelming bulk of trade, in these replies. He rather seeks to meet the charge of overcounting by holding that bank-transactions do not fully count speculation! This he thinks particularly true of stock exchange transactions. Cf. his article of Feb. 21, 1916.

[252] The Census Bureau figures have been subject to a good deal of criticism, and I therefore refrain from trying to draw precise conclusions from them.

[253] The figures showing the number of banks reporting from each State, together with the number of reports rejected, will be found on pp. 47-49 of his monograph. The figures above are combinations of figures from his various tables. These tables are so carefully indexed in Dean Kinley's monograph that detailed page references are unnecessary here.

[254] Cf. our discussion of this topic in the statistical chapter, infra.

[255] Loc. cit., pp. 153-154.

[256] Discussions in Economics and Statistics, I, 204. Quoted by Kinley, loc. cit., 152.

[257] The coefficient of correlation has been developed by the biologists, chiefly Karl Pearson, but has been applied to problems in many fields, especially economics, sociology, psychology, and education. A good source is Yule's Introduction to the Theory of Statistics. Professor H. L. Moore has made extensive use of the method in his Laws of Wages, and his Economic Cycles.

Connected with the coefficient of correlation, usually, is a figure for "probable error," which depends, primarily, on the square root of the number of observations. When the probable error is low, and the coefficient of correlation high (as .8), it is commonly supposed that a very high degree of causal connection is established. I shall not go into detail in discussion of the method. My personal judgment is that it is overrated, that "spurious" correlations, leading to quite erroneous conclusions, have frequently resulted from it, and that the labor involved in calculating coefficients of correlation is frequently too great for the results obtained. I should never be disposed to accept conclusions based on a "correlation coefficient" unless there were other converging evidence to support it. In effect we have, in the coefficient of correlation, nothing more than a refinement of the method of comparing two curves on a graph. The curves tell the story, in a general way, whereas the coefficient of correlation sums up all the comcomitant variations (and disagreements) in one figure. The eye does not readily compare the degree of relation between two curves with the degree of relation between two others. When it is desired to know which, of several relationships, is closest, the graphic method, or the method of comparing series of figures, burdens the attention. The coefficient of correlation condenses the information to such a degree as to make comparison easy. It is, then, merely a refinement of familiar statistical methods. Used wisely, guided by sound theory, it aids in presenting facts. It enables us to state quantitatively things we already know qualitatively. But there is no magic in it! As I have mentioned both Mr. Silberling and Professor Moore in this connection, it is proper to say that both of them are fully alive to the dangers and limitations of the method, and that Professor Moore emphasises strongly the need for sound a priori testing of hypotheses before submitting them to the test of correlation. One danger, that of getting a high correlation merely because both of the variables compared are growing rapidly, has been avoided by Mr. Silberling by the use of successive percentage deviations, instead of absolute figures. For reasons explained by Mr. Silberling in a footnote, he uses, instead of the "probable error," a statement of the number of observations. Thus, "r = .78 (46)" means that the coefficient of correlation is .78, and that there are 46 observations for each of the two variables compared.

[258] They get into clearings, however, two days after.

[259] Professor Kemmerer, also. See his index of variation of trade, op. cit., pp. 130-131.

[260] It is unfortunate that weekly figures from railways do not exist in such number, or for roads of sufficient importance, to justify correlations of the weekly figures with clearings.

[261] Professor W. M. Persons informs me that Mr. Silberling's results are in accord with calculations which he has made. Vide his article in the Am. Econ. Rev. of Dec. 1916.

[262] The Wealth and Income of the People of the United States, New York, 1915.

[263] See our chapter, "Statistical Demonstrations of the Quantity Theory."

[264] Loc. cit., pp. 78-79.

[265] Jour. of Polit. Econ., vol. v, p. 165.

[266] Even this is too high, for 1909, on the basis of our estimate for net income in 1909, in the Appendix to this chapter.

[267] The extent of speculation in wholesale trade is discussed in this chapter, infra. "Double counting" is discussed in the chapter on "Statistical Demonstrations of the Quantity Theory."

[268] The Use of Credit Instruments, p. 151.

[269] The figures for rent and wages are from W. I. King, op. cit. The other figures are from the Statistical Abstract of the United States, unless otherwise stated. King's estimates are for 1910. The other figures are for 1909. Compare this list with my discussion in the Annalist, March 6, 1916, p. 317, where I made computations purposely much too large. In that computation I clearly greatly exaggerated salaries and professional incomes, and rent as well as retail and wholesale trade. My figure there included the rent of houses as well as the rent of land. King's figure is only for land rent. However, in view of the fact that a high percentage of real estate is used by the owner, with the result that no rent-payments are required, I think King's figure high enough for the whole item.

[270] Professor Fisher has estimated total real estate exchanges in the country at less than 1% of the total 387 billions (op. cit., p. 226), and a colleague of the Harvard Business School has given me an estimate of $1,300,000,000 for total advertising in the United States. Neither of these items is properly counted part of the "static" trade that would occur were things in "normal equilibrium." If, however, we counted them, we should add only 1%, say, of the total. When it is seen how insignificant, in comparison with the 387 billions indicated by deposits, the figures for total manufactures, total farm products, and total wages, are, there really is little need to argue the case. It is impossible to find, in the "ordinary trade" we have not mentioned, items whose total will equal the least of these three. Moreover, we have allowed for a multitude of these items in permitting the figure for retail trade to be as high as it is, and have left large leeway in making no deduction for the speculation in wholesale trade, and in counting farm products in full. Interest and dividends I have not counted. They are not "trade." When we have counted stock sales, we have already counted the exchanges in which dividends were sold. The man who buys the stocks has already bought the dividends. To count the dividends in addition would be a case of that double counting of capital and income against which Professor Fisher has warned us in his Nature of Capital and Income. Rents and wages represent payment for current services, and are properly items of trade. Interest and dividends are one-sided money payments, completing transactions for which money has already passed, and in which a man is merely getting a delivery of something he has already bought. In general, loans and repayments are not properly counted as part of ordinary, or physical trade. If, however, we counted total corporate dividends and interest we should get only $4,781,000,000 (King's estimate, loc. cit., p. 262). This is a little over 1%. What else is there? In his article of March 13, 1916, in the Annalist, Professor Fisher failed to meet my suggestion that a bill of particulars was called for!

[271] See the table of shares and approximate values in Pratt's Work of Wall Street, 1912 ed., p. 187. This table covers the years, 1890-1911.

[272] Boston Transcript, "Tape Record of Sales Incomplete," May 6, 1916, Pt. I, p. 12. The Transcript quotes as authority the New York Commercial. Following the extraordinary market of Sept. 25, 1916, when the ticker recorded 2,317,000 shares sold on the New York Stock Exchange, the newspapers estimated that missed sales, odd lots, and unrecorded sales on stop loss orders, would bring the total above 3,000,000 shares. There was an unusual number of stop orders caught that day. There will be very few other sales of 100 shares missed by the ticker, except in times of extraordinary pressure. See Boston Herald, Sept. 26, 1916, p. 1.

[273] Hollander, J. H., Bank Loans and Stock Exchange Speculation, Senate Document 589, 61st Congress, 2nd Session, p. 23.

[274] Pratt, Work of Wall Street, 1912 ed., p. 264.

[275] Annalist, Dec. 27, 1915, p. 719—"Selling Phantom Grain."

[276] My information regarding the Coffee Exchange in New York comes from the Treasurer of the Exchange, Mr. Jas. H. Taylor, through the courtesy of Mr. W. H. Aborn, of Aborn and Cushman, New York.

[277] Report of the Hughes Commission, in appendix to Pratt's Work of Wall Street, Rev. ed., p. 417. This report gives information regarding all the organized exchanges in New York.

[278] L. Conant, Jr., "The United States Cotton Futures Act," American Economic Review, March, 1915, p. 1.

[279] Hughes Commission, loc. cit., p. 418.

[280] Taussig, Principles of Economics, I, p. 405; Kinley, Report of the Comptroller for 1896, p. 89.

[281] This is probably more extensive in London than in the United States.

[282] Loc. cit., p. 47.

[283] Loc. cit., pp. 130-131. The very title, "growth of business," suggests the fallacy to which we refer in the text, namely, that we have a steady upward movement, with little variation. This is largely true of production and consumption. It is in no sense true of "trade," as distinguished from production.

[284] Kemmerer relied on the investigation of 1896, whereas Fisher used more the figures of 1909. Kemmerer does not, in general, assign an absolute magnitude for "trade," but for 1890 he gives a figure. Loc. cit., p. 136. d.

[285] Loc. cit., p. 136, d.

[286] A recent discussion of these problems is to be found in Shaw, A. W., Some Problems in Market Distribution, Harvard Univ. Press, 1915.

[287] Op. cit., pp. 51-52.

[288] London, Paris, and New York all do a great deal of manufacturing, particularly of finer things, whose value is high, and which require a high proportion of labor, as compared with machinery. Cf. our discussion of the London "Money Market," infra, in Part III.

[289] Ibid., p. 47.

[290] Cf. Jenks, The Trust Problem, Rev. ed., p. 29. The doctrine that these costs are net social loss is challenged by the present writer in an article, "Competition vs. Monopoly," in the New York Independent, of Oct., 1912.

[291] "Royal" has been estimated at $5,000,000; "Spearmint" at $100,000,000. Mr. Guy C. Hubbard, of the Dry Goods Economist, New York, has given the writer some exceedingly interesting data regarding the value, as bankable collateral, of various trade-marks and firm names.

[292] Cf. our discussion of "The Reconciliation of Statics and Dynamics," infra.

[293] Significant in this connection, is the contention of recent students of American agriculture, that the great need is better organization and credit, facilities for marketing.

[294] Loc. cit., p. 89. Though Fisher does not conclude that banking is bad, he does conclude that gold mining is a parasitic and socially injurious industry, like the making of burglars' "jimmies." See his Elementary Principles of Economics, N. Y., 1912, pp. 499-500.

[295] Fisher does admit that the character of the banking system, and of the money system, will affect the volume of trade. "There have been times in the history of the world when money was in so uncertain a state that people hesitated to make many contracts because of the lack of knowledge of what would be required of them when the contract should be fulfilled. In the same way, when people cannot depend on the good faith or stability of banks, they will hesitate to use deposits and checks" (78). But there is nowhere an admission that the amount of bank-credit has any influence on the volume of trade, and there are repeated assertions, as already instanced in the text, that the volume of trade is quite independent of the volume of money and bank-credit.

[296] Part IV of this book gives a detailed analysis to the problems involved in these contrasts.

[297] This thesis was set forth by the present writer at the 1915 meeting of the American Economic Association. See Papers and Proceedings, Supplement to March, 1916, Amer. Econ. Rev., pp. 168-169.

[298] Cf. J. B. Clark, Distribution of Wealth, passim, and J. Schumpeter, Theorie der wirtschaftlichen Entwicklung, pp. 1-101. See also the present writer's "Schumpeter's Dynamic Economics," Pol. Sci. Quart., Dec, 1915, and A. S. Johnson, in Quart. Jour. of Econ., May, 1914.

[299] Principles, Bk. III, ch. xviii, par. 1.

[300] Theorie der wirtschaftlichen Entwicklung, p. 77. Since the foregoing was written, Professor W. C. Mitchell has presented an admirable historical paper on "The RÔle of Money in Economic Theory," in which he has multiplied instances, in the history of the science, of this contempt for money, or abstraction from money, in economic theory. He finds that Marshall, and some other later writers, have given much fuller recognition to the rÔle of money, which he conceives of primarily as an institution which has rationalized economic behavior, by forcing upon the individual bookkeeping habits of thought. This still leaves it legitimate to abstract from money, however, for "pure theory." Highly important as is the "measure of values" function, it does not explain the main work which money, as money, actually does in economic life, nor need it be a source of value for money. Cf., infra, our chapter on "The Functions of Money." Professor Mitchell's paper will be found in "Papers and Proceedings," Supplement to the March, 1916, number of the Am. Econ. Rev.

[301] The materials in this appendix are taken from an article published in the Annalist of Jan. 8, 1917, pp. 39, 53-54, and the New York Times Annual Financial Review of Dec. 31, 1916, and are reprinted by the courtesy of the New York Times Company.

[302] Vide Annalist, Feb. 7, 1916, pp. 183-184, and Feb. 21, 1916, p. 246.

[303] Wealth and Income of the People of the United States, p. 129.

[304] The justification of this procedure is argued more fully in my article in the Annalist of Feb. 7, 1916, above referred to.

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

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

The figures for exports and imports are for calendar years. They were obtained, for the years 1890-1909, from Statistics of the United States, 1867-1909 (National Monetary Commission Report), and, for the years since 1909 from the Commercial and Financial Chronicle. For 1916, November and December are estimated.

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

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

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

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

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

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

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

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

[314] In chapter XVI.

[315] Cf. our chapter, infra, on "The Quantity Theory and International Gold Movements."

[316] Italics mine.

[317] Loc. cit., p. 165.

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

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

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

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

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

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

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

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

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

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

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

[326] Supra, p. 47.

[327] Italics mine.

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

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

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

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

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

[333] Purchasing Power of Money, pp. 169-170.

[334] Ibid., p. 170.

[335] Ibid., p. 171.

[336] Ibid., p. 172.

[337] Ibid., p. 172. Italics mine.

[338] Ibid., pp. 174-181.

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

[340] The Capitalization theory is briefly outlined by BÖhm-Bawerk, in the critical and historical volume of his Kapital und Kapitalzins (English title of the volume, Capital and Interest), in his criticisms of the theories of Henry George and Turgot. It has subsequently been elaborated, and much improved, by Fetter, in his Principles of Economics, and, more recently, has been restated, with mathematical formulÆ, by Fisher, in his Rate of Interest. A good brief statement will be found in Seligman, Principles of Economics, ch. on "The Capitalization of Value." Extensive use has been made of it by Veblen. More recently, it has been elaborated in the controversy over the theory of interest participated in by Seager, Fisher, Brown and Fetter, in the American Economic Review, 1912-13-14, and the Quarterly Journal of Economics, 1913.

[341] Italics mine.

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

[343] E. g., Fisher, Purchasing Power of Money, p. 179.

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

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

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

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

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

[349] Op. cit., p. 27.

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

[351] Purchasing Power of Money, pp. 175-179.

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

[353] Loc. cit., p. 14.

[354] Cf. Social Value, chs. 2 and 11, and "The Concept of Value Further Considered," Quart. Jour. of Econ., Aug., 1915. See also, supra, the chs. on "Value," "Supply and Demand," "Cost of Production," and "Capitalization."

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

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

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

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

[359] Cf. Trosien, Der landwirtschaftliche Kredit und seine durchgreifende Verbesserung, p. 29, cited by J. E. Pope, loc. cit., p. 705, n.

[360] This was seen by Mill, (Principles, Bk. III, ch. viii, par. 4), and has been especially emphasized by Laughlin, Principles of Money, ch. 10. Cf. A. C. Whitaker's discussion in the Quart. Jour. of Econ., Feb. 1904.

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

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

[363] W. C. Mitchell, History of the Greenbacks, ch. on "The Circulating Medium," and passim.

[364] See Conant, Modern Banks of Issue, New York, 1896, p. 114. An interesting analysis of the course of the gold premium and of prices during the period of the Bank Restriction in England, and of the controversies relating thereto, will be found in Knies, Der Credit (vol. II of Geld und Credit), pp. 247 et seq. The same period is studied in detail by Thos. Tooke in his History of Prices.

[365] Money and Monetary Problems, p. 105, and preceding.

[366] Nicholson, loc. cit., 84ff.

[367] Ibid., 76ff.

[368] Cf. Laughlin, J. L., Principles of Money, and Scott, W. A., Money and Banking.

[369] Cf. infra, our discussion of credit. It is not maintained that credit needs to be based on physical goods, but it is maintained that credit is based on values, which are generally not the value of a sum of gold.

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

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

[372] Cf. the chapter on "The Origin of Money," infra.

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

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

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

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

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

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

[376] History of Prices.

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

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

[379] Loc. cit., p. 298.

[380] Ibid., p. 297.

[381] Cf. our chapter, supra, on the "Equation of Exchange."

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

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

[384] Report of the Comptroller, 1896; The Use of Credit Instruments in Payments in the United States, National Monetary Commission Report, Washington, 1910.

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

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

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

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

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

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

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

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

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

[394] Cf. supra, and infra our discussion of the volume of trade, and infra, our discussion of credit, particularly the analysis of bank-loans.

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

[396] Cf. Horace White, Money and Banking, 5th ed., p. 364.

[397] Kirkbride and Sterret, The Modern Trust Co., New York, 1905, pp. 59-60; Cannon, Clearing Houses, Nat. Mon. Com. Report, p. 178; Conant, Principles of Money and Banking, II, p. 244.

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

[399] Fisher, loc. cit., p. 444.

[400] P. 443. Other discussions of this investigation are in the Journal of the American Bankers' Association, Jan. 1914, p. 487; Ibid., Feb. 1915, p. 555; National Banker, March, 1915.

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

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

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

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

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

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

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

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

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

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

[409] Cf. Kemmerer, Money and Credit Instruments, p. 117.

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

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

[412] Loc. cit., p. 304.

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

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

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

[416] Loc. cit., p. 304. Cf. our chapter on "Velocity of Circulation," supra.

[417] Loc. cit., pp. 477-478.

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

[419] Business Cycles, p. 308.

[420] That volume of trade and volume of physical goods are virtually interchangeable in Fisher's thought is strikingly illustrated on p. 195 of the Purchasing Power of Money: "A doubling in the quantities of all commodities sold, or (what is almost the same thing) a doubling of the quantities consumed." Italics are mine.

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

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

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

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

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

[426] Statistics of Railways, 1909, p. 71.

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

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

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

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

[431] Loc. cit., p. 180.

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

[433] Pratt, loc. cit., p. 166.

[434] Ibid., p. 187.

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

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

[437] Van Antwerp, The Stock Exchange from Within, New York, 1913, p. 290

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

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

[440] Ibid., p. 166.

[441] This explains the estimates of Wall Street men that the Clearing House reduces checks by two-thirds. For their purposes, the saving is almost that much, of the items offered for clearings. Cf. Van Antwerp, The Stock Exchange from Within, pp. 121-122.

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

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

[444] P. 34.

[445] Annalist, Aug. 14, 1916.

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

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

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

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

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

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

[450] Op. cit., p. 136.

[451] Ibid., pp. 70-71.

[452] Loc. cit., p. 487.

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

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

[455] Menger, "Geld," HandwÖrterbuch der Staatswissenschaften; Carlile, Evolution of Modern Money.

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

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

[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 "Äusserer 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 HandwÖrterbuch 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 MÉtaux PrÉcieux, 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 HandwÖrterbuch 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 fÜr 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 rÔle 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. BÖhm-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 Économiste EuropÉen (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 naÏve 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 CrÉdit 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 BÖhm-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 Économique, 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

Footnotes have been moved from the middle of a paragraph to the end of this HTML version. Also, some of the page references in the index have been corrected. 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.

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

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