Produced by Curtis Weyant and the Online Distributed Proofreading Team at http://www.pgdp.net (This book was produced from scanned images of public domain material from the Google Print project.) HARVARD COLLEGE LIBRARY FROM THE QUARTERLY JOURNAL OF ECONOMICS THE MACMILLAN COMPANY NEW YORK · BOSTON · CHICAGO · DALLAS ATLANTA · SAN FRANCISCO MACMILLAN & CO., LIMITED LONDON · BOMBAY · CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, LTD. TORONTO THE VALUE OF MONEY BY B. M. ANDERSON, JR., PH. D. ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY AUTHOR OF "SOCIAL VALUE" New York THE MACMILLAN COMPANY 1917 _All rights reserved_ COPYRIGHT, 1917 BY THE MACMILLAN COMPANY Set up and electrotyped. Published May, 1917. To B. M. A., III AND J. C. A. WHO OFTEN INTERRUPTED THE WORK BUT NONE THE LESS INSPIRED IT PREFACE The following pages have as their central problem the value of money. But the value of money cannot be studied successfully as an isolated problem, and in order to reach conclusions upon this topic, it has been necessary to consider virtually the whole range of economic theory; the general theory of value; the rôle of money in economic theory and the functions of money in economic life; the theory of the values of stocks and bonds, of "good will," established trade connections, trade-marks, and other "intangibles"; the theory of credit; the causes governing the volume of trade, and particularly the place of speculation in the volume of trade; the relation of "static" economic theory to "dynamic" economic theory. "Dynamic economics" is concerned with change and readjustment in economic life. A distinctive doctrine of the present book is that the great bulk of exchanging grows out of dynamic change, and that speculation, in particular, constitutes by far the major part of all trade. From this it follows that the main work of money and credit, as instruments of exchange, is done in the process of dynamic readjustment, and, consequently, that the theory of money and credit _must be a dynamic theory_. It follows, further, that a theory like the "quantity theory of money," which rests in the notions of "static equilibrium" and "normal adjustment," abstracting from the "transitional process of readjustment," touches the real problems of money and credit not at all. This thesis has seemed to require statistical verification, and the effort has been made to measure the elements in trade, to assign proportions for retail trade and for wholesale trade, to obtain _indicia_ of the extent and variation of speculation in securities, grain, and other things on the organized exchanges, and to indicate something of the extent of less organized speculation running through the whole of business. The ratio of foreign to domestic trade has been studied, for the years, 1890-1916. The effort has also been made to determine the magnitudes of banking transactions, and the relation of banking transactions to the volume of trade. The conclusion has been reached that the overwhelming bulk of banking transactions occur in connection with speculation. The effort has been made to interpret bank clearings, both in New York and in the country outside, with a view to determining quantitatively the major factors that give rise to them. In general, the inductive study would show that modern business and banking centre about the stock market to a much greater degree than most students have recognized. The analysis of banking assets would go to show that the main function of modern bank credit is in the direct or indirect financing of corporate and unincorporated _industry_. "Commercial paper" is no longer the chief banking asset. It is not concluded from this, however, that commerce in the ordinary sense is being robbed by modern tendencies of its proper banking accommodation, or that the banks are engaged in dangerous practices. On the contrary it is maintained that the ability of the banks to aid ordinary commerce is increased by the intimate connection of the banks with the stock market. The thesis is advanced--though with a recognition of the political difficulties involved--that the Federal Reserve Banks should not be forbidden to rediscount loans on stock exchange collateral, if they are to perform their best services for the country. The quantity theory of money is examined in detail, in various formulations, and the conclusion is reached that the quantity theory is utterly invalid. The theory of value set forth in Chapter I, and presupposed in the positive argument of the book, is that first set forth in an earlier book by the present writer, _Social Value_, published in 1911. That book grew out of earlier studies in the theory of money, in the course of which the writer reached the conclusion that the problem of money could not be solved until an adequate general theory of value should be developed. The present book thus represents investigations which run through a good many years, and to which the major part of the past six years has been given. On the basis of this general theory of value, and a dynamic theory of money and exchange, our positive conclusions regarding the value of money are reached. On the same basis, a psychological theory of credit is developed, in which the laws of credit are assimilated to the general laws of value. In a final section, the constructive theory of the book is made the basis for a "reconciliation" of "statics" and "dynamics" in economic theory--an effort to bring together the abstract theory of price (_i. e._, "statics") which has hitherto chiefly busied economists, and the more realistic studies of economic change (_i. e._ "dynamics") to which a smaller number of economists have given their attention. These two bodies of doctrine have hitherto had little connection, and the science of economics has suffered as a consequence. This book was not written with the college student primarily in mind. None the less, I incline to the view that the book, with the exception of the chapter on "Marginal Utility," is suitable for use as a text with juniors and seniors in money and banking, if supplemented by some general descriptive and historical book on the subject, and that the whole book may very well be used with such students in advanced courses in economic theory. I think that bankers, brokers, and other business men who are interested in the general problems of money, trade, speculation and credit, will find the book of use. Naturally, however, it is my hope that the special student of money and banking, and the special student of economic theory will find the book of interest. The book may interest also certain students of philosophy and sociology, who are concerned with the applications of philosophy and social philosophy to concrete problems. My obligations to others, running through a good many years, are very great. With Professor E. E. Agger, I talked over very many of the problems here discussed, in the course of two years of close association at Columbia University, and gained very much from his suggestions and criticisms. Professor E. R. A. Seligman has read portions of the manuscript, and given valuable advice. Professor H. J. Davenport has given the first draft an exceedingly careful reading, and his criticisms have been especially helpful. Professor Jesse E. Pope supervised my investigations in the quantity theory of money in 1904-5, in his seminar at the University of Missouri, and gave me invaluable guidance in the general theory of money and credit then. More recently, his intimate first hand knowledge of European and American conditions, both in agricultural credit and in general banking, has been of great service to me. Mr. N. J. Silberling, of the Department of Economics at Harvard University, has been helpful in various ways, particularly by making certain statistical investigations, to which reference will be made in the text, at my request. Various bankers, brokers, and others closely in touch with the subjects here discussed have been more than generous in supplying needed information. Among these may be especially mentioned Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the _Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H. Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston, various gentlemen in the offices of Charles Head & Co., and Pearmain and Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr. W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade, DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of the Bankers Trust Company, New York. My greatest obligations are to two colleagues at Harvard University. Professor F. W. Taussig has given the manuscript very careful consideration, from the standpoint of style as well as of doctrine, and has discussed many problems with me in detail. Professor O. M. W. Sprague has placed freely at my service his rich store of practical knowledge of virtually every phase of modern money and banking, and has read critically every page of the manuscript. None of these gentlemen, of course, is to be held responsible for my mistakes. I also make grateful acknowledgment of the aid and sympathy of my wife. In the course of the discussion, frequent criticisms are directed against the doctrines of Professors E. W. Kemmerer and Irving Fisher, particularly the latter, as the chief representatives of the present day formulation of the quantity theory. Both their theories and their statistics are fundamentally criticised. I find myself in radical dissent on all the main theses of Professor Fisher's _Purchasing Power of Money_, and at very many points of detail. To a less degree, I find myself unable to concur with Professor Kemmerer. But I should be sorry if the reader should feel that I fail to recognize the distinguished services which both of these writers have performed for the scientific study of money and banking, or should feel that dissent precludes admiration. I acknowledge my own indebtedness to both, not alone for the gain which comes from having an opposing view clearly defined and ably presented, but also for much information and many new ideas. My general doctrinal obligations in the theory of money and credit are far too numerous to mention in a preface. My greatest debt in general economic theory is to Professor J. B. Clark. B. M. ANDERSON, JR. HARVARD UNIVERSITY, March 31, 1917. ANALYTICAL TABLE OF CONTENTS _PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE_ CHAPTER I ECONOMIC VALUE PAGE Problem of value of money special case of general theory of value; present chapter concerned with general theory 1 Formal and logical aspects of value: value as quality; value as quantity; value and wealth 5-6 Absolute _vs._ relative conceptions of value: value of money _vs._ "reciprocal of price-level"; value prior to exchange; value and exchangeability; do prices correctly express values? 6-12 Doctrine so far in accord with main current of economic opinion 12-14 Causal theory of value new: marginal utility, labor theory, etc., rejected 14-16 Social explanation required: "individual" a social product, both in history of individual and in history of race 16-19 And above individual impersonal psychic forces, law, public opinion, morality, economic values 19-20 Three types of theory have dealt with these: theory of extra-human objective forces; extreme individualism; social value theory 20-21 Illustrated in jurisprudence, ethics, and economic theory 21-26 Law, morals, and economic values generically alike, but have _differentiæ_ 26-28 But not differentiated on basis of states of consciousness of individual immediately moved by them, because many minds in organic interplay involved 28-33 Economic social value (a) of consumers' goods and services: "utility" and scarcity; "marginal utility"; social explanation of marginal utility; marginal utilities the conscious _focus_ of economic values of consumers' goods; but only minor part of these values; individuals, classes and institutions heavily weighted by legal, moral, and other social values, in power over economic values of consumers' goods 33-38 Economic social value (b) of labor, land, stocks, bonds, "good will," etc.; based only in part on values of consumers' goods; partially independent, directly influenced by contagion, and centers of power and prestige 38-41 Pragmatic character of theory 41-43 Relation of social values to individual values 43-45 CHAPTER II SUPPLY AND DEMAND, AND THE VALUE OF MONEY _Hiatus_ between general theory of value and theory of value of money 46-47 Partly because former has been developed by different writers from those who have developed latter 47-49 But chiefly because supply and demand, cost of production, etc., _assume_ fixed value of money, and are theories of _price_, rather than _value_ 49 Supply and demand useful but superficial formula, common property of many value theories 49-50 Crude and unanalyzed in Smith and Ricardo; first made precise by J. S. Mill, who gives essentials of modern doctrine 49-51 Böhm-Bawerk's pseudo-psychology spoils Mill's clean-cut doctrine 51-52 Supply and demand assumes fixed _value_ of money-unit, and hence inapplicable to money itself 52-56 But supply and demand does _not_ assume fixed _price-level_ 56-57 Cairnes _vs._ Mill 57-58 Mill's unsuccessful effort to apply supply and demand to money 59-62 Walker's attempt 62 Supply and demand in the "money market" 62-63 Chapter III COST OF PRODUCTION AND THE VALUE OF MONEY Types of cost theory: modern cost doctrine is "money costs" doctrine, and inapplicable to value of money 64 Labor cost: Smith; Ricardo; Ricardo's confession of failure; "real costs" in Senior and Cairnes; Mill's "money-outlay" cost doctrine, and Cairnes' criticism; but "money-cost" has survived 64-67 Because "real cost" doctrine does not square with facts 67-69 "Money-cost" of producing money-metal 69-70 Austrian cost doctrine runs still in money terms, assuming value, money, and fixed value of money 70-71 "Negative social values" as "real costs" note, 71 CHAPTER IV THE CAPITALIZATION THEORY AND THE VALUE OF MONEY Money as "capital good," and "money-rates" as rentals 72-73 Capitalization theory; formula; capital value passive resultant of annual income and rate of discount 73-74 But in case of money, rental and rate of discount not independent variables 74-76 And in case of money, capital value not passive shadow, but active cause of income 76 Capitalization theory assumes money, and fixed value of money 76-77 Assumed fixed value of money absolute, and not relative 77-78 Capitalization theory, in current formulation, inapplicable to value of money 78-79 CHAPTER V MARGINAL UTILITY AND THE VALUE OF MONEY Marginal utility theory usually thinly disguised version of supply and demand, and hence inapplicable to money 80 View that money is unique in having no utility _per se_ 81-83 Marginal utility and "commodity theory" of money-value 81-82 Quantity theorists and marginal utility of money 81-82 Money an instrumental good, and marginal utility no less applicable here than elsewhere; marginal utility invalid as general theory of value, hence invalid when applied to money 82-120 Wieser's theory of value of money 83-88 A circle in reasoning 88-90 Schumpeter's similar circle 100 But Schumpeter's general utility theory, though inapplicable to value of money, in form avoids a causal circle 90-98 Schumpeter's _conspectus_; different from Böhm-Bawerk and most utility theorists 90-92, 113-120 Defects and limitations of Schumpeter's general theory 90-98 Schumpeter's substitutes for social value concept 98-99 Von Mises sees circle of Wieser and Schumpeter 100 Seeks to avoid it by construing utility theory as historical, instead of static, theory 101 But this departs from fundamentals of utility theory; other difficulties 101-110 Kinley's doctrine 110-111 General criticism of utility theory 111-115 Davenport, Wicksteed, Fisher, Perry 113-120 _PART II. THE QUANTITY THEORY_ CHAPTER VI THE QUANTITY THEORY OF PRICES. INTRODUCTION Preliminary statement of quantity theory, and of critical theses to be developed in following chapters. Virtually every contention and every assumption of quantity theory to be challenged 123-129 CHAPTER VII DODO-BONES Quantity theory doctrine that valueless objects can serve as money; Nicholson's assumption: money made of dodo-bones 130-131 Fisher's view also 130 And Ricardo's 131-132 Will dodo-bones circulate? Dodo-bones and poker chips; circular reasoning 132 Both medium of exchange and standard of value must be valuable 133 Is inconvertible paper an exception? 133-134 Doctrine that money gives legal claim to things in general 134 Kemmerer's assumptions; money made of commodity, once valuable, now used only as money 135 Commodity theory requires present commodity value 135 Historical _vs._ cross-section view: possibility that such money would circulate 135-136 Value not tied up with marginal utility or commodities: social value theory; derived values often become independent of original presuppositions, in economic as well as legal and moral spheres 136-139 But this no basis for quantity theory: social psychology, not mechanics 139 "Banker's psychology" _vs._ psychology of blind habit: India, Austria, United States; monetary phenomena of war times; "credit theory" of Greenbacks 139-142 Question-begging definitions 142-143 Assumptions of quantity theory: blind habit and fluid prices 143-144 Extreme commodity theory denies that money-use adds to value of money; usually not true; analysis of money-functions 144-150 Hypothetical case in which whole value of money comes from commodity value 150-152 Money must have value apart from monetary employments, but, in general, gains additional value from employment as money 152-153 CHAPTER VIII THE "EQUATION OF EXCHANGE" Fisher leading, most consistent, most uncompromising quantity theorist: wide acceptance of his views 154 Taussig _vs._ Fisher 155 Fisher and dodo-bone doctrine: logical part of quantity theory; Fisher's value concept 155-156 "Equation of exchange": analysis of Fisher's version, typical of all 156-171 In what sense equality between two sides of equation? Meaning of "T" 158-161 No "goods side" to equation; both sides sums of money; equal because identical; equation meaningless 161-162 All factors in equation highly abstract 162-163 "P" and "T" cannot both be given independent definitions: P defined as _weighted_ average, with T in denominator; and must be changed from year to year, as elements in T change, even though no prices change 164-166 This makes circular theory: _problem_ defined in terms of _explanation_ 165-166 Causal theory associated with equation of exchange 166 Equation amplified to include credit; not acceptable to Nicholson or Walker, and caricature of conditions in Germany and France 166-170 Book-credit, bills of exchange, etc., excluded 167-170 Why a one-year period? 170-171 CHAPTER IX THE VOLUME OF MONEY AND THE VOLUME OF CREDIT Mill thought credit acts on prices like money, and that this reduces quantity theory tendency to indeterminate degree; Fisher holds volume of money _in circulation_ governs volume of credit, so that quantity theory stands 172 Fisher's arguments for fixed ratio, _money_ to bank-deposits 172-173 Argument a _non-sequitur_, even if contentions true 173-177 Contentions untrue: no fixed ratio between _reserves_ and deposits, or reserves and demand liabilities, either in America or Europe 177-182 Taussig's views; virtually surrender of quantity theory in modern conditions 182-185 Bulk of quantity theorists in between Fisher and Taussig, but nearer to Fisher's view than to Taussig's 185 CHAPTER X "NORMAL" VS. "TRANSITIONAL" TENDENCIES Quantity theory qualified by distinction between "normal" and "transitional" effects of change in quantity of money, etc. 186 Meaning of distinction, and extent of qualification hard to determine: is "normal period" real period in time? How long is "transitional period"? Is it realistic, or hypothetical? Is equation of exchange realistic? Concrete _vs._ hypothetical price-levels 186-189 Legitimate and illegitimate abstraction 189-190 Causation and temporal order 190-191 Fisher admits very slight qualification of "normal theory" 192 Mill's quantity theory "short run" theory; Taussig's "long run" theory; radically different logic in the two 192-193 Fisher's theory sometimes "long run" and sometimes "short run" 194-195 CHAPTER XI BARTER Quantity theory spoiled if resort to barter possible and important 196 Extent of barter and other flexible substitutes for money and bank-credit; simple barter; different methods of corporate consolidations; flexibility, with state of money-market; clearing-house arrangements in speculative exchanges; offsetting book-credits 197-200 Barter made easier under money economy, by measure of value function of money 201 Bills of exchange; foreign trade 201 CHAPTER XII VELOCITY OF CIRCULATION Velocity conceived by quantity theory as causal entity, independent of quantity of money and prices; necessary assumption for law of proportionality 203 "Coin-transfer" _vs._ "person-turnover" concepts 203-204 Velocity really non-essential by-product, meaningless average 204-205 Doctrine that velocity independent of money; habit and convenience; hoarding; hoarding by banks 205-209 Velocity and volume of trade; vary together 209-214 Value of money causally governs velocity 214-215 CHAPTER XIII. THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION Quantity theory doctrine that volume of trade, and volume of money (and credit), are independent; trade governed by physical and technical conditions, not money 216-219 View that quantity of money vitally affects production and trade 219 Walker, Sombart, Withers, Price, Holt 219-222 Increase of money increases trade, even on static theory: increase of money increase of capital; lowered margin in exchanges; money-rates and interest; money tool of exchange; elasticity of demand for money-service; in Arizona and New York City 222-225 _Trade_ distinguished from _production_ and from _stock_ 225-226 Trade chiefly speculation; Fisher's $387,000,000,000 of trade in U. S. in 1909 analyzed; index of variation in trade; figure based on Kinley's returns from 12,000 banks; double-counting 227-230 Figure largely represents speculation; statistics of total wealth of U. S.; small rôle of wholesale and retail deposits; "all other deposits" bunched in speculative centers, especially New York; trifling "deposits" in country banks; evidence of bank-clearings: clearings and stock speculation; clearings and ordinary business 230-241 Measurement of "ordinary trade" 241-248 Volume of stock speculation 248-251 Commodity speculation 251-252 Unorganized speculation 252-254 Bill and note speculation 255 Fisher's and Kemmerer's indicia of trade variation wholly misleading 255-257 Production waits on trade; selling costs _vs._ "cost of production"; "good will"; are banks useless? 257-262 "Normal _vs._ transitional": statics _vs._ dynamics; money and credit make static assumptions possible; very little trade in "normal equilibrium" or static state; volume of trade depends on transitions and dynamic changes; functional theory of money and credit must be dynamic theory; abstraction from money by static theory; no static theory of money and credit possible; quantity theory misses whole point of money-functions 262-266 APPENDIX TO CHAPTER XIII THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES Ambiguity of "domestic trade": figures comparable with export and import figures cannot include turnovers; net income of United States, minus imports on retail basis, counted as domestic trade; exports on retail basis counted as foreign trade; net income for 1910; index of variation for other years; cautions and qualifications; ratio of foreign to domestic trade, 1890-1916 267-278 CHAPTER XIV THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT Interdependence of trade, and money (and credit); increasing trade causes increase of money and credit 279-281 Quantity theory doctrine: Fisher _vs._ Laughlin 281-282 Quantity theory has no explanation of elastic bank credit: "Currency Theory" of deposits 282-285 Loans and deposits 285-288 Bills of exchange 288-290 Summary of quantity theory doctrine 290-291 CHAPTER XV THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES" Heart of quantity theory: price-level cannot change without prior change in money, deposits, trade, or velocities: independently rising price-level, unable to alter trade or velocities, would drive money away, and so be unable to sustain itself; individual prices can rise independently, but other prices must fall to compensate 292-295 Criticism: argument impressive only because it assumes an _uncaused_ rise in general price-level; when causes assigned, prices can independently rise, compelling modification in other factors in "equation of exchange"; "transitional" and "normal" effects: instances 295-299 Quantity theory conflicts with supply and demand: supply and demand holds good: particular prices and price-level 299-300 Generalization of conflict to include cost of production, capitalization theory, imputation theory 300 Capitalization theory _vs._ quantity theory; different psychological assumptions of the two theories 300-306 Cost of production _vs._ quantity theory; money-_income_ _vs._ quantity of money 306-308 Quantity theory false, granting all its assumptions 308-310 Doctrine that price-level independent of particular prices, and presupposed by them, false; absolute value of money, not price-level, presupposed; price-level may change with value of money constant, through changes in absolute values of goods 310-314 CHAPTER XVI THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS Quantity theory holds that gold movements depend on price-_levels_; but price-level mere average, cause of nothing 315-316 Some prices, rising, tend to repel gold, but most prices have no such effect 316-317 Some prices, rising, bring in gold 317-319 Gold movements and money-rates 319-320 CHAPTER XVII THE QUANTITY THEORY _vs._ GRESHAM'S LAW 321-323 CHAPTER XVIII THE QUANTITY THEORY AND "WORLD PRICES" Types of quantity theory: world's volume of _gold vs._ quantity of _money_ in given country; standard _vs._ token money; abandonment of dodo-bone theory and "equation of exchange" 324-326 Credit does not rest on money: measure of values _vs._ reserves; loans and wealth; value of money _vs._ price-level 326-328 Loose relation of reserves and credit in world as whole; no proportionality of quantity of gold to value of gold; no quantity theory needed to assert that value of gold related to its quantity 328-330 CHAPTER XIX STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY OF A BURIED CITY Criticism of quantity theory statistics yields constructive conclusions; Mitchell and Greenbacks; Kemmerer's and Fisher's statistics of "equation of exchange"; Kemmerer's criticism of earlier statistics 331-335 Kemmerer's and Fisher's figures all wrong except for volume of money and deposits, and prices in base year; if correct, would not prove quantity theory 335-337 Fisher's statistics, resting on Kemmerer's, chiefly studied: their relation to Kinley's "deposits" figures 337-338 M´V´ calculated: errors in calculation; New York very incomplete in Kinley's figures; private banks and trust companies; clearings and "deposits," in New York and outside; "total transactions" and clearings; Fisher exaggerates country checks by at least 116 billions, for 1909; major part of all "check deposits" in New York City 348-353 New York as "clearing house" for United States: extent of, and influence of on New York clearings, much overestimated; bulk of New York clearings and New York "deposits" grow out of New York business 353-361 Index of variation for M´V´ wrongly weighted; V´ wrongly calculated for all years; which upsets calculation of V 361-363 Volume of trade: greatly exaggerated by bank transactions, which include vast deal of duplications in checks, loans and repayments, etc. 363-368 Fisher's reply; _under_counting offsets _over_counting 368-369 Main items of undercounting in clearing houses of speculative exchanges; measurement of, in New York Stock Exchange, and Chicago Board of Trade; swamped by call loan transactions, which exceed security sales 369-381 Price-indexes of Kemmerer and Fisher, dominated by wholesale prices, have no relevance to their "equations of exchange" 381-383 In general, their figures bury speculation and New York City 383 PART III. THE VALUE OF MONEY CHAPTER XX RECAPITULATION OF POSITIVE DOCTRINE Recapitulation of constructive theses of Parts I and II, and program of Parts III and IV 387-396 CHAPTER XXI THE ORIGIN OF MONEY, AND THE VALUE OF GOLD Problem stated 397-401 Value _vs. saleability_: degrees of saleability; theory of saleability; "buying price" _vs._ "selling price"; indirect exchange in barter economy; development of commodity of superior saleability into money 401-406 Money never unique 406-407 Origin of gold money: ornament; store of value; social prestige of prodigality and of ornament; love of approbation, sex-impulse, and competitive display; elastic value-curve of gold; industrial employments of gold 407-413 Distribution of wealth and power, and value of gold 413-416 CHAPTER XXII THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY Classification 417-418 Measure of values (standard of value) distinguished from medium of exchange; former does not add value to money metal, latter does 418-424 Reserve function 424 Money as "bearer of options"; distinguished from store of value; the _dynamic_ function of money _par excellence_; explanation of low rates on call loans, and short loans, and low yield of high grade bonds, which share "bearer of options" function; "pure rate" of interest _vs._ "money rates": Austria; the New York money market 424-432 Legal tender; the _Staatliche Theorie_ 432-436 Standard of deferred payments; which functions add to value of money metal? 436 Relation of money rates to capital value of money 436-442 Agio when coinage is restricted: India _vs._ Western World 442-450 Equilibrium of gold in arts and gold as money: difficulties of marginal analysis; the money-market phenomena 450-458 CHAPTER XXIII CREDIT Analysis rather than definition: "futurity" not essence of credit; credit part of general value system; stocks as credit instruments; juridical and accounting phases 459-462 Confidence; involved in general value phenomena as well as credit; social psychology of confidence; contagions; influence of centers of prestige; nothing unique in credit; selling _vs._ borrowing 462-469 Definition of credit; credit _vs._ credit transaction; credit and exchange; bulk of credit grows out of dynamic conditions 469-474 Functions of credit; increasing saleability of non-pecuniary wealth; corporate organization; limits of credit expansion 475-478 Consideration of objections: that personal loans do not rest on wealth; public loans; that value behind loan would not exist if loan were not made 478-484 Schumpeter's "heresies"; his view of the function of the banker: "dynamic credit"; America _vs._ Continental Europe 484-488 Peculiarities and functions of bank credit; technique of banking: capital; assets; reserves; "liquidity"; money market 488-496 CHAPTER XXIV CREDIT--BANK ASSETS AND BANK RESERVES Traditional view that liquid commercial loans normal and dominant type of bank asset disproved; cannot exceed 11-1/2 per cent of assets of American banks; analysis of bank assets: "other loans and discounts"; stock collateral loans; loans on "other collateral security"; stocks and bonds held by banks; classes of banks; various combinations; excluding real estate loans, more than half of credit extended by State and national banks and trust companies is to stock market; rapid development of stock collateral loans: New York; Europe 498-512 Activity of different types of loans: banking assets get liquidity chiefly from stock market, and from produce speculators 512-516 Credit extended to Wall Street not at expense of ordinary commerce; country banks and Wall Street 516-518 Federal Reserve Banks should rediscount stock collateral loans; "Money Trust" a trust in financing corporations, not ordinary commerce; panics and Federal Reserve System 520 Quantity theory, putting all exchanges on a par, grotesque: volume of trade and prices in the stock market 520-523 Direct and indirect financing of corporations by banks; "margin dealer" as "banker" 523-526 Adam Smith's view of banker's functions, and of safe bank loans 526 Correct on basis of facts of his day, but corporate organization and organized stock market have made smelting house as liquid as consumers' goods 527 Division of labor in banking: America _vs._ Germany 527-528 Agriculture in money market 528-529 Reserve problem: special case of problem of liquid assets; many flexible substitutes for cash 529-532 Causal relation runs from deposits to reserves; gold production and reserve-ratio 532-535 No static law or "normal ratio" possible; reserve function entirely dynamic function; reserve not needed in "static state"; illustrated by London money market; "ideal credit economy" 536-544 _PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS_ CHAPTER XXV THE RECONCILIATION OF STATICS AND DYNAMICS Theory of money as focus of general economic theory, exhibiting interdependence of doctrines; basis of further unification of statics and dynamics in higher synthesis 547-548 Statics _vs._ dynamics, normal _vs._ transitional, and related contrasts; illustrations; divergent lines of doctrine: tariffs, wars, overproduction, extravagance, etc. 548-552 Statics quantitative; dynamics qualitative 552-553 Statics and dynamics both abstract 553-554 Dynamics and "friction" 554-555 "Theory of prosperity" and dynamics 555-556 Statics and cross-section analysis; statics as price-theory; dynamics as value-theory 556-560 Generalization of statics: price-theory applied to dynamic phenomena: capitalization; costs; "taxonomy;" "discounting" dynamic changes; money the static measuring-rod: wide scope of money-measure; measurement of non-economic values 560-569 Generalization of dynamics: all values, whether of wheat or "good will," have social psychological explanation; technological and biological factors, and the static equilibrium; business cycles 569-575 Business man _vs._ economic theorist, and value-theory; manipulation of values and prices 575-578 Statics and time 578-580 Immaterial capital 580-582 Statics and dynamics have not different subject-matter 583-586 Equilibrium of all social values: statics and dynamics of the law: social forces and social control 586-589 Summary of Part IV 589-591 PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE THE VALUE OF MONEY CHAPTER I ECONOMIC VALUE The problem of the value of money is a special case of the general problem of economic value. The present chapter is concerned with the general theory of value, while the rest of the book will consider the numerous peculiarities and complications which make money a special case. The main proof of the theory here presented is to be found in a previous book[1] by the present writer. A number of periodical articles by several writers which have since appeared, in criticism or in further development of the theory, have at various points led to shifting emphasis and clearer understanding on the author's part, and the present exposition, without seeking explicitly to meet many of these criticisms, or to embody the new developments, will none the less be different because of them. To one writer in particular, Professor C. H. Cooley, the theory is indebted for restatement, amplification, and important additions.[2] On the whole, however, the theory presented in this chapter is substantially the theory presented in the earlier book. The theory is set forth in the present chapter with sufficient fullness to make the present volume independent of the earlier book. Value has long been recognized as the fundamental economic concept. There have been many and divergent definitions of value, and many different theories as to its origin. It is the belief of the present writer--not shared by all his critics!--that the definition of value which follows, and the conception of the function of value in economic theory involved in it, conform to the actual use of the term in the main body of economic literature. The theory of the _causes_ of value here advanced is new, but the definition of value, and the conception of the relation of value to wealth, to price, to exchange, and to other economic ideas, seem to the present writer to conform to what is implied, and often expressed, in the general usage of economists.[3] It is important to separate sharply two questions: one, the theory of the causes of value, and the other, the definition of value, or the question of the formal and logical aspects of the value concept. The two questions cannot be wholly divorced, but clarity is promoted by considering them separately. We shall take up the formal and logical aspects of the matter first. Value is the common quality of wealth. Wealth in most of its aspects is highly heterogeneous: hay and milk, iron and corn-land, cows and calico, human services and gold watches, dollars and doughnuts, pig-pens and pearls--all these things, diverse though they be in their physical attributes, have one quality in common: Economic Value.[4] By virtue of this common or generic quality, it is possible to add wealth together to get a sum, to compare items of wealth with one another, to see which is greater, to get ratios of exchange between items of wealth, to speak of one item of wealth, say a crop of wheat, as being a percentage of another, say the land which produced it, etc. This common quality, value, is also a _quantity_. It belongs to that class of qualities which can be greater or less, can mount or descend a scale, without ceasing to be the same quality,--like heat or weight or length. Such qualities are _quantities_. There is nothing novel in the statement that a quality is also a quantity. It is implied in every day speech. We say that a man is tall, or heavy, or that the room is hot--qualitative statements; or we may say exactly how tall, or how heavy, or how hot--quantitative statements. The distinction between qualitative analysis and quantitative analysis in chemistry implies the same idea. Thus we may speak of a piece of wealth as having a definite quantity of value, or say that the value of the piece of wealth is a definite quantity. We may then work out mathematical relations among the different quantities of value, sums, ratios, percentages, etc. Ratios of Exchange are ratios between two quantities of value, the values of the units of the two kinds of wealth exchanged.[5] A good many economists, particularly in their chapters on definition, have defined value as a ratio of exchange. This is inaccurate. The ratio of exchange presupposes _two_ values, which are the terms of the ratio. The ratio is not between milk and wheat in all their attributes. It is between milk and wheat with respect to one particular attribute. Compare them on the basis of weight, or cubic contents, and you would get ratios quite different from the ratio which actually is the ratio of exchange. The ratio is between their values. [Illustration: Ratio of Exchange Milk ------------------------- Wheat \ / \ / \ Value Value / \ / \ / \ / \ / Social Mind ] In the diagram above, something of what is to follow is anticipated, since the cause of value is indicated. Wheat is shown to be exerting an influence on milk, and milk exerts an influence on wheat. The comparative strength of these two influences determines the ratio of exchange between them. But these two influences are not ultimate. The ratio of exchange is a relation, a _reciprocal_ relation. It works both ways. But behind this relativity, this scheme of relations between values, there lie two values which are absolute. These values rest in the pull exerted on wheat and on milk by the human factor which is fundamental, which in our diagram we have called the "social mind." Values lie behind ratios of exchange, and causally determine them. The important thing for present purposes is merely to note that value is prior to exchange relations, that it is an absolute quantity, and not, as many economists have put it, purely relative. The ratio of exchange is relative, but there must be absolutes behind relations. A _price_ is merely one particular kind of ratio of exchange, namely, a ratio of exchange in which one of the terms is the value of the money unit.[6] In modern life, prices are the chief form of ratio of exchange, but it is important for some purposes to remember that they are not the only form. Values may simultaneously rise and fall. There may be an increase or decrease in the sum total of values. Ratios of exchange cannot all rise or fall. A rise in the ratio of the value of wheat to the value of milk means a fall in the ratio of the value of milk to the value of wheat. Both may have fallen in absolute value, but both cannot simultaneously rise or fall with reference to one another. This is the truism regarding ratios of exchange which many economists have inaccurately applied to value itself in the doctrine that there cannot be a simultaneous rise or fall of values. There can be a simultaneous rise or fall of values, but not a simultaneous rise or fall of ratios of exchange. There can be a general rise or fall of prices. Goods in general, other than money, may rise in value, while money remains constant in value. This would mean a rise in prices. Or, money may fall in value while goods in general are stationary in value. This would also mean a rise in prices. In either case, more money would be given for other goods, and the ratio between the value of the money unit and the value of other goods would have altered adversely to money. There are writers to whom the term, value of money, means merely the average of prices (or the reciprocal of the average of prices). For them, a rise in the average of prices is, _ipso facto_, a fall in the value of money. This view will receive repeated attention in later chapters. The view maintained in the present book is that the value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters. Every price implies _two_ values, the value of the money-unit and the value of the unit of the good in question. Value is prior to _exchange_. Value is not to be defined as "power in exchange." Certain writers[7] who see the need of a quantitative value, which can be attributed to goods as a quality, still cling to the notion that value is relative, that two goods must exist before one value can exist, and that value is "power in exchange," or "purchasing power." The power is conceived of as something more than the fact of exchange, and as a cause of the exchange relations, but is, none the less, defined in terms of exchange. This position, however, does not really advance the analysis. It is a verbal solution of difficulties merely. To say that goods command a price because they have power in exchange is like saying that opium puts men to sleep because it has a dormitive power. Physicians now recognize that this is no solution of difficulties, that it is merely a repetition of the problem in other words. If we wish to explain exchange, we must seek the explanation in something anterior to exchange. If value is to be distinguished from ratio of exchange at all, it cannot be defined as "power in exchange." To seek to confine value to exchange relations, moreover, makes it impossible to speak of the value of such things as the Capitol at Washington City, or the value of an entailed estate, or of values as existing _between_ exchanges. Nor can we make the price which a good would command at a given moment the test of its value, except in the case of the highly organized, fluid market. Land, at forced sale, notoriously often brings prices which do not correctly express its value. Moreover, even for wheat in the grain pit, the exchange test is valid only on the assumption that a comparatively small amount is to be sold. If very much is put on the market, the situation is changed, and the value falls. In other words, if "bulls" cease to be "bulls," and shift to the other side of the market, the very elements which were sustaining the value of the wheat have been weakened, and of course its value falls. "Power in exchange" is a function of two factors, (1) value and (2) saleability. A copper cent has high saleability, with little value, while land has high value with little saleability.[8] Some things have value with no saleability at all. In a socialistic community, where all lands, houses, tools, machines, etc., are owned by the state, and where such "prices" as exist are authoritatively prescribed, value and exchange would have no necessary connection. Values would remain, however, guiding the economic activity of the socialistic community, directing labor now here, now there, determining the employment of lands now in this sort of production, now in that. Exchange is only one of the manifestations of value. More fundamental, and more general, including "power in exchange," but not exhausted by it, is the power which objects of value have over the economic activities of men. This is the fundamental function of values. The entailed estate, which cannot be sold, still has power over the actions of men. The care which is taken of it, the amount of insurance which an insurance company will write on it, etc., are manifestations and measures of its value. The same may be said of the Capitol at Washington.[9] In the fluid market, prices correctly express values. Assuming that the money-unit is fixed in value, variations in prices in the fluid market correctly indicate variations in values. The great bulk of our economic theory, the laws of supply and demand, cost of production, the capitalization theory, etc., do assume the fluid market, and a fixed value of the dollar.[10] Our economic theory is static theory, in general, and abstracts from the time factor and from "friction." In fact, values change first, and then, more or less rapidly, and more or less completely, prices respond. In the active wholesale and speculative markets, where the overwhelming bulk of exchanging takes place, the prices respond quickly. Static theory is thus adequate for the explanation of these prices, for most practical purposes, so long as the changes in prices are due to changing values of goods, rather than to changing value of the money-unit. Moreover, the distinction between value and price is, in a fluid market, where the value of money is changing slowly, often not important. In the assumption of money, and of a fixed value of money, the absolute value concept is already assumed. No harm is done, however, if the economist does not explicitly refer to this, but goes on merely talking about money-prices. Very many economic problems indeed may be solved that way. This is why the inadequate character of the conceptions of value as "ratio of exchange" or "purchasing power" has not prevented these notions from being serviceable tools in the hands of many writers. But there are many problems for which these conceptions are not adequate, because the implicit assumption of a fixed value of money cannot be made. Among these problems is the problem of the value of money itself, which constitutes the subject of this book. For that problem, an absolute value concept is vital. If, in our diagram above, we substitute for "social mind" the more general expression, "human factor," we should find that our value concept is the common property of many writers. We should find it fitting in with the absolute value notion of Adam Smith and of Ricardo.[11] The "human factor" which _explains_ the absolute value is, for them, labor. We should find it fitting in with the "socially necessary labor time" of Marx: the value of a bushel of wheat is the amount of labor time which, on the _average_, is required to produce a bushel of wheat. It is an absolute value. It is a causal coefficient with the absolute value, similarly explained, of the bushel of corn, in explaining the wheat-price of corn. Our concept will fit in exactly with the "social use-value" of Carl Knies, according to whom the economic value of a good in society is an _average_ of its varying use-values to different individuals in the market. This average is an absolute quantity. The absolute values of units of two goods, thus explained, causally fix the exchange ratio between the goods. Knies' value-theory, it may be noticed, is explicitly modeled on that of Marx, to whom he refers, the difference being that Knies takes an average of individual use-values, while Marx takes an average of individual labor-times, as the causal explanation.[12] Our value concept will fit perfectly with Professor J. B. Clark's "social marginal utility" theory of value. Indeed, the present writer gratefully acknowledges that the concept is Professor Clark's rather than his own, and that all that is necessary for its explanation has been set forth by Professor Clark.[13] Professor Clark's _causal_ theory of value, his explanation of this absolute quantity of value as a _sum_ of individual marginal utilities, we have elsewhere[14] criticised as involving circular reasoning, like all marginal utility theories, in so far as they offer causal explanations. But his statement of the logical character of value, of the relation of value to wealth, of value to price, of value to exchange, of the functions of the value concept in economic theory, and of the functions of value in economic life,--Clark's doctrines on these points we have accepted bodily, and in so far as the present writer has added anything to them it has been by way of elaboration and defence. The concept of value here developed is explicitly adopted by T. S. Adams, David Kinley, W. A. Scott, W. G. L. Taylor, L. S. Merriam, and A. S. Johnson, among American writers, to name no others. All of these writers would concur in the formal and logical considerations[15] as to the nature of value here presented, whatever differences might appear among them as to the causal explanation of value. The value concept here presented performs the same logical functions as the "inner objective value" of Karl Menger, Ludwig von Mises, and Karl Helfferich, discussed in our chapter on "Marginal Utility," below, and is, in its formal and logical aspects, to be identified with that notion. It is essentially like Wieser's "public economic value," discussed in the same chapter.[16] That there should remain critics[17] who consider the present writer a daring innovator, who is thrusting a personal idiosyncracy in terminology upon economic theory, is striking evidence that men often talk about books which they have not read! The reader who accepts, provisionally, the doctrine so far presented, as a tool of thought which will aid us in the further progress of the argument, may do so with the full assurance that he is accepting a tried and tested concept, which has seemed necessary to very many indeed of the great masters of the science.[18] So far, the writer feels himself in accord with the main current of economic thought. When we
{'title': 'The Value of Money by Benjamin M. Anderson', 'source': 'Project Gutenberg', 'lang': 'en'}