The Value of Money

[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.