The Value of Money

[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.'"