Indirect calculations, however, even when logically complete, ought to be checked up by other methods, when possible. We have some further data, drawn from an earlier period, 1890-91-92, which suggest the same conclusion.

The reason commonly offered for holding that New York clearings exaggerate local New York transactions, as compared with country clearings and country transactions, is that New York is the clearing house for the country. Country banks send their idle cash there; country banks pay other banks by drafts on their New York balances; country banks send out of town checks to New York for collection; business men in St. Louis pay business men in Chicago with New York exchange, etc. These items are supposed greatly to swell New York clearings.

Now several of these reasons are not at all valid. Cash shipped back and forth between New York and the interior does not get into clearings. Secondly, New York, because of the charges made for collecting out of town checks, has tended to lose much of the collection business. Chicago probably does a great deal more of it than New York does.[404] However, even if checks on out of town banks were sent largely to New York for collection, they would not get into the clearings. New York banks send checks on country banks directly to country correspondents. Checks on out of town banks sent in for collection do swell clearings in Boston and Kansas City, where arrangements have been made, to the advantage of all concerned, to have the clearing houses handle this business. But New York has not made provision for it.[405] The only checks that get into New York clearings will be checks drawn on New York banks.[406]

These checks will be of two kinds: (1) checks drawn by individuals and firms on New York banks. These checks will commonly be drawn by people in New York, and, in so far as they come from out of town, will represent business between New York and other places, hence, New York business. (2) Drafts by banks on their New York balances. These will be of three kinds: (a) drafts sold, especially by country banks, to their customers who need to make payments in other cities. Many of these will represent payments to New Yorkers for transactions between New York and the country, hence New York business, and will appear in the check deposits of individuals, firms, and corporations in New York, (b) There will also be drafts from one country bank, on New York, to another country bank, in which New York is truly being used as a clearing house, New York exchange taking the place of an intercity shipment of cash.[407] (c) Drafts by New York banks on New York banks, to avoid deficits at the Clearing House, or—especially in the case of private bankers, between whom and brokers the line is hard to draw,—for general purposes.

Now, fortunately, we have some data, trustworthy, even though old, for the volume of bank-drafts on New York, and, more important, for the proportion of drafts on New York to drafts on banks in other cities. These figures are, as stated, from the three years, 1890, 1891, and 1892. For the purpose in hand, however, they are relevant, since then, as now, New York clearings were nearly twice as great, on the whole, as country clearings, and if this excess of New York clearings is due to that cause, it should have manifested itself in these figures. If the proportion of these drafts on New York to the total of bank-drafts was greater than the proportion of New York clearings of total clearings, we might find reason for supposing that New York clearings were unduly swelled by this fact. But in fact, drafts on New York are not out of proportion. The figures are virtually complete for drafts drawn by all the national banks on national and other banks for the years in question. They will be found in the Comptroller's Reports for the three years, under the caption, "Domestic Exchanges." For 1890 the figures are:

The Comptroller (Report of 1890, p. 19) gives an estimate for drafts drawn by State and private banks of an additional 6,089 millions. He does not try to apportion these among New York and the other cities. There is no reason to suppose that the percentage for these banks of drafts drawn on New York would be higher than for national banks, and there is some reason for supposing that they would be lower: namely, that these institutions would lack the incentive supplied by the National Bank Act for depositing reserves in a Central Reserve City. The Comptroller's figures probably do not include the great private banks in New York, which deposit in New York commercial banks, and draw huge checks against their deposits. These checks, probably, however, chiefly represent stock exchange collateral loans to brokers, and so appear in brokers' deposits as well as in New York clearings—represent New York deposits. I do not use this estimate in my computations. If I did, the results, so far as proportions are concerned, would be the same, since I could do nothing but assign the same proportions to them. It will be seen that my argument rests on the proportions, chiefly.

Now what difference would be made if we wiped out all these draft transactions, and reduced clearings to correspond? New York clearings in 1890 were 37,660 millions; country clearings were 21,184 millions. Let us subtract the drafts on New York from New York clearings, and the drafts on other places from the country clearings. The result is: New York clearings, 30,376 millions; country clearings, 16,918 millions. New York clearings still retain their former status! New York clearings are still nearly twice as great as country clearings! It is not the bank drafts used in making New York the "clearing house" for the country that swell New York clearings as compared with the rest of the country! It is something else! The main explanation, as we have in part seen, and shall further see, is a mass of speculative transactions, chiefly Stock Exchange transactions, and loan transactions connected therewith! New York clearings grow out of New York business, primarily.

The figures for the other two years vary little from those of 1890. What variation there is shows a growth of drafts on interior cities, and a decline of drafts on New York. New York showed 63.07% of these drafts in 1890, 61% in 1891, and 60.77% in 1892.[408]

As we have seen, the only checks or drafts that get into New York clearings are those drawn on New York banks. The checks on New York banks probably almost all represent business in which one party is a New York individual, firm, or corporation. The drafts by out-of-town banks will contain all the items, virtually, that represent "clearings" through New York. Not all of these, by any means, will represent such clearings. A very substantial part of them will represent exchange sold to customers to make payments in New York. We exaggerate the "clearing through New York" when we subtract all these drafts from New York clearings. Since, however, we treat country clearings in the same way, no error results, so far as the proportions between them are concerned.

The two sets of data converge. Both from the figures of 1913-14, in conjunction with estimated check circulation in 1909, and from the figures of 1890-92, can we conclude that New York clearings do not overcount New York transactions. The conclusion would seem to be inevitable that New York is really as important in our volume of banking transactions as its clearings would indicate. This may be qualified by a recognition of the possibility that New York clearings are more efficient in handling check deposits than are clearings in other cities. Some scattering data from national banks for single days at a time indicate that a higher percentage of checks is cleared in New York than elsewhere in the country,[409] and one observation for five national banks for a ten-day period shows 67% of checks deposited cleared.[410] These checks include deposits made by other banks, as do the figures of Kemmerer's observations. But there are no direct observations covering New York for a long enough period, or for enough institutions, to warrant any definite conclusions.[411]

The error of assuming clearings of March 17 in the country outside New York to be abnormally low, swelled Professor Fisher's total figure for check circulation by 31 billions, as we have seen. On the other hand, the error of assuming New York City to be complete in Kinley's figures tended to make the total smaller than it would have been, since New York City was 28% below normal, and an increase of 28% applied to half of Professor Weston's figure of 1.02 billions, gives about 70 millions more for the day, or 21 billions more for the year, than when the 28% increase is applied to only a quarter of Professor Weston's figure. These two errors roughly neutralize one another, and we may accept Professor Fisher's "finally adjusted" estimate of 353 billions[412] for the year as roughly approximating the amount of checks deposited.[413] How "rough" an estimate one gets by taking a single day as the basis for a year need not be here discussed. I should be disposed to think that an indirect calculation, via clearings, in view of our more extensive knowledge of the relation of clearings to "total transactions," might well be worth more, so far as deposits outside New York are concerned. Since, however, we lack any extended figures for the relation of transactions and clearings in New York, and since even for the country we are obliged to make guesses as to the relation of "checks deposited" to "total transactions," I refrain from trying to improve further on Professor Fisher's estimate for checks deposited in 1909—even though questioning that "check deposits" and M´V´ are identical.

What, however, shall we say of M´V´ for other years? In the calculation of this, Professor Fisher relies on the absolute figures for 1909 (and 1896, similarly calculated), together with an "index" based on New York and country clearings. In this index he weights country clearings by 5,[414] and New York clearings by 1. The result is, of course, that country clearings dominate the index. But New York clearings are much more variable than country clearings. The range of variation in New York clearings for the years 1897 to 1908, inclusive, is from 33.4 billions in 1897, to 104.7 billions, in 1906; the latter figure being more than three times as great as the former. The range in country clearings is from 23.8 billions, in 1897, to 57.8 billions, in 1907, the latter figure being 2¹⁰/₂₃ as great as the former. But more significant is the degree of year by year variability. The country clearings, with the exception of 1908, always rise,—a steady, if not quite symmetrical, increase. New York clearings, however, go up and down, 42 billions in 1898, 60.8 billions in 1899, 52.6 billions in 1900, 79.4 billions in 1901, 66.0 billions in 1903, 104.7 billions in 1906, 87.2 billions in 1907, 79.3 billions in 1908. New York clearings are highly variable in both directions, while country clearings vary almost wholly in one direction, with a maximum difference of 6.4 billions between any two consecutive years, and with an average yearly variation of only 3.5 billions.[415] When country clearings are weighted by 5, almost all of the high degree of variability of New York clearings is covered up, and volume of checks deposited for years other than 1909 and 1896 is thrown hopelessly away from the facts. It is too large by far in most years. In 1905, 1906 and probably 1901 it is too small. It does not vary nearly enough. As V´ for years other than 1909 and 1896 is determined, for Professor Fisher's equation, by dividing the M´V´ thus estimated by the M´ for the year, it is clear that V´ as estimated by Professor Fisher is very much less variable than it is in fact. It is pretty variable even in his figures, but his figures do not nearly show how variable it is.[416]

Again, this undue weighting of country clearings, swallowing up New York, vitiates Professor Fisher's estimates for V, the velocity of money, for years other than 1909 and 1896. One of the elements in the calculation of V is the estimated V´.[417] Since V´ is wrong, V will also be wrong. V is probably much more variable than Professor Fisher's figures would indicate. With great admiration for the ingenuity of Professor Fisher's speculations regarding V, I find too many elements of conjecture, and too many arbitrary assumptions, to give me confidence in the figure for any year. I refrain from going into any general criticism of his method of calculating V, however, contenting myself with the one clear point that, to the extent that the values of V for years other than 1909 and 1896 depend on the estimated M´V´ for those years, they are less variable than they ought to be.[418]

The same conclusion regarding Professor Fisher's estimates for V´ have been reached, by a different method, by Professor Wesley C. Mitchell. He, too, concludes that V´ is, in fact, more variable than Professor Fisher would indicate.[419]

I conclude, therefore, that neither V´ nor V has been correctly calculated, for years other than 1909 and 1896. I pass now to a consideration of T, the volume of trade, after which I shall consider P, the price-level, in the equation of exchange.

Let us first recall the point made in the chapter on "The Equation of Exchange," that P and T, the price-level and the volume of trade, are not independent even in idea. If one is given an independent definition, the other cannot be given an independent definition. If the equation is to be true, then P must be weighted by the numbers of each item (as hats) exchanged. P is not a mere average, but is a weighted average, and T is always the denominator in the formula for P. In developing statistics for P and T, therefore, this fact must be kept in mind, and the elements entering into each must coincide, and vary together year by year.

In our chapter on "The Volume of Money and the Volume of Trade," we showed that the great bulk of trade is speculation. We showed that the indicia of variation which Fisher[420] and Kemmerer have constructed for trade, dominated by inflexible physical items of consumption and production, give wholly misleading results for every year except the base year. They give a steadily growing, inflexible figure, with little variation from its steady path. Trade, if chiefly speculation, is highly flexible, varies enormously from year to year, waxes and wanes. This point need not be further developed. At best Fisher's figure for trade can be accepted only for one year, 1909.

Is, however, the figure for 1909, 387 billions, an acceptable figure? Is it not decidedly too large? It is made up, it will be recalled, by taking the figures for MV and M´V´, adding them together to get one side of the equation, and declaring them equal to PT. P is then declared to be $1, by the arbitrary device of taking as the unit of T one dollar's worth of every sort of good at the prices of 1909. T is, then, 387 billions, since MV plus M´V´ equals 387 billions. The theory underlying this is that deposits made in banks correctly represent trade.[421] Our criticisms as to the absolute magnitude assigned to T (and hence to MV plus M´V´) will rest in large measure in challenging this assumption. It is our contention[422] that deposits made in banks very greatly overcount trade.

Deposits made in banks include taxes and other public revenues; they include loans and repayments, and interest-payments; they include gifts and benevolences, money sent by parents to children away from home, pensions, payments of insurance losses, annuities, dividends on stocks, payments to and from savings and loan associations, fines, contributions to churches, and other non-commercial organizations, etc., etc. None of this represents trade.

But further, whether payments are in trade or not, many times indeed does it happen that several checks are drawn in connection with the same transaction. Professor Kemmerer, entertaining this possibility, thought it might be neutralized by cases where the same check passes through several hands, making payments in several different transactions. He calls this, however, a "gratuitous assumption of unverifiable accuracy,"[423] and makes no claim to have given the matter careful study.

In general, I think it safe to hold that the case where a single check passes through several hands is not important.[424] It will happen chiefly with small checks in small places, or with small checks paid to laborers. It is the pecuniary magnitude of checks, rather than their number, that counts here. I am informed by several bankers that large checks are almost universally deposited at once. This is for several reasons: (1) The recipient of the check wishes to make sure that it is good. (2) It is unlikely that the check is of the right size for another transaction, unless the recipient is a mere agent for a third party, in which case he should (but commonly does not) pass it on to his principal, if double counting is to be avoided. (3) Every person who handles sums of any size wishes a record of the transaction, and his own canceled check is a receipt which he would not have if he passed on the check of another.

This last point will go far toward explaining why bank transactions may multiply without a corresponding multiplication of trade. The banks do the bookkeeping for modern business in increasing degree. Checks are records, of high legal value. A colleague recently told me that he, in his own capacity, had just drawn a check to himself, as trustee, transferring a sum from one account to another. Another colleague, with eight different bank accounts, estimates that over 50% of the deposits in three of them represent transfers from other accounts. This kind of duplication, where trust relations are involved, is enormous. Intercorporate relations and separate bank accounts within a corporation complicate it still further.

A check is drawn by a subsidiary corporation to its dividend account, and deposited; a check on this dividend account[425] is then deposited in the general account of the parent corporation; a third deposit, of the same funds, is then made in the dividend account of the parent corporation; a fourth deposit of the same funds is made in a trust fund which holds stock in the parent corporation; a fifth deposit in the personal account of the beneficiary of the trust fund; a sixth deposit may be made of a check on this fund in the personal account of the beneficiary's wife. The first three of these deposits, at least, will be made of the total dividend of the subsidiary corporation. Not one of these six deposits represents trade. Payments of wages and rents should count as trade, but payments of interest and dividends stand on a separate footing. When a man has bought a stock or a bond, he has already bought all the income which is to come from them, and to count the interest and dividends as separate items is double counting. They are payments, but not trade. Even if the dividend payment be counted as trade, however, it is counted six times.

There is enormous overcounting as a consequence of the combinations of corporations, each of which retains its own numerous bank accounts. The Interstate Commerce Commission calls attention to great duplications from this cause in connection with railway income accounts.[426] Even within single corporations the duplications[427] are very great. Thus, the local agent of a railroad deposits his receipts in a local bank. His check, or, more usually, the draft of the bank, is subsequently deposited in a bank at headquarters. Subsequent disbursements, in places away from headquarters, particularly of wages, will frequently be preceded by deposits in other local banks. This duplication will be true of telegraph, telephone, insurance and other companies which have scattered agencies, including the wholesale trade. Advertising agencies will illustrate it. All checks between agent and principal, customer and broker, etc., will illustrate it. There is a great deal of double counting in stock transactions from this source. Thus, a Boston broker takes orders, with a check for margin, for execution in New York. The order is executed by a New York broker, who deals with another New York broker, who represents a Louisville broker, who represents a Louisville client. Now to the extent that any checks at all pass between the Boston broker and his client, the Boston broker and the New York broker, the other New York broker and the Louisville broker, or the Louisville broker and his client, we have overcounting. Only the check between the two New York brokers is properly counted. It is, of course, well known that a small percentage of the dealings of a customer of a brokerage house is represented by checks between broker and customer. Professor Fisher states this to be about 5%.[428] It is, however, 5% of overcounting! Moreover, through keeping "open accounts," with irregular settlements of "margins" only, the Boston broker and the New York broker reduce markedly the checks passing between them. There is a back and forth flow of items which in large degree cancel one another, since the Boston broker sells in New York as well as buys there, and the New York broker, to a less degree, both buys and sells Boston securities, through his Boston correspondent. But not all by any means is canceled, and all the checks that pass in this way represent double counting. The total is large.

Public funds are included in the deposits reported to Kinley. Taxes are not trade. Double, triple and multiple counting comes as revenues are received by local authorities, transferred to State accounts, subsequently redistributed to local accounts, or to the treasurers of State institutions, transferred from one bank to another, etc. The State of Massachusetts scatters its deposits in banks all over the State, and makes transfers from one account to another. The City of Boston has many bank accounts. The Federal Treasury deals largely with banks over the country.

Whenever a retail store has branches, duplications are likely to occur. "Chain stores" make great overcounting. "Kiting" swells bank deposits.

Replying to these contentions, Professor Fisher has urged that there is large undercounting, also, and that the undercounting balances the overcounting. I have myself called attention to a good deal of undercounting in the chapter on "Barter." A substantial amount of ordinary trade is carried on by means of partially offsetting book-credit, time bills of exchange, simple barter, etc. The amount might even run high, as compared with ordinary trade, when the clearing arrangements in the stock and produce exchanges are taken into account. But it is impossible to figure out anything at all in this line which is to be compared with the great gap between the 141 billions of trade we were able to find,[429] and the 387 billions Professor Fisher assigns to trade. The gap of over 245 billions is much too great. Besides, in our 141 billions, we have counted barter items, book-credit items, time-bill of exchange items, etc., already.

The main item of undercounting must be in connection with the clearing arrangements in the speculative exchanges. This would seem to be Professor Fisher's view, as well.[430] Data are at hand for the two great exchanges of the country which enable us to measure, with some precision, the amount of the undercounting—i. e., to tell the extent to which checks are dispensed with in the trading of these two great exchanges. The two exchanges are the Chicago Board of Trade and the New York Stock Exchange.

For the New York Stock Exchange, figures are taken from Pratt's Work of Wall Street, 1912 ed., pp. 166-167, 180, 273. The figures are for the big year, 1901, when 266 million shares were sold, more than in 1909 by 51 millions of shares, and when the Stock Exchange Clearing House should have done better, in the magnitude of the undercounting, than it did in 1909. Figures since 1901 are, Pratt states,[431] not available. Pratt also gives figures for 1893, but does not give data as to the percentage of stocks handled by the Clearing House, so that comparison with the 1901 figures cannot be made.

In 1901, 265,944,659 shares were sold. Of these, 15% were "X-Clearing House," i. e., not on the list of stocks handled through the Stock Exchange Clearing House. This 15% was paid for in full by check. The bond sales are not cleared, and so another billion dollars of checks is required for this item.[432] If we assume (on the basis of the estimates given to the writer by DeCoppet & Doremus, and Mr. Byron W. Holt, for recent years) that 25% of the 100 share sales would be added if "odd lots" were counted, we have another large item that does not go to the Clearing House. "Private clearings" reduce the number of checks in connection with odd lots, but not so effectively as is the case with hundred share sales put through the Clearing House. So far the Clearing House has done nothing. What did it do with the 85% of the stocks in hundred share lots offered for clearing?

The figures are perfectly definite. The 85% of the 266 million shares sold was 226 million shares. The "share balance" remaining after the Clearing House had done its best was 134 million shares.[433] The number of shares sold, then, for which checks did not have to pass as a result of the clearing process was 93 millions. In terms of dollars, we may put the same figures. The estimated money-value of the 266 million shares sold was 20.5 billions;[434] 85% of this is 17,425 millions. The certifications required to pay for the 134 million share balance was 10,930 millions. The saving in checks was, thus, 6,495 millions of dollars. This is the full extent to which the Stock Exchange Clearing House undercounts recorded share sales. This is less than 1.7% of Professor Fisher's 387 billions! To offset this, however, we have overcounting in the 5% of checks for all dealings on the Exchange which pass between brokers and customers, as shown, and all the checks between brokers and out-of-town brokers. We shall also find items of overcounting which vastly more than offset this undercounting, in loan transactions between brokers, and between banks and brokers, to which we shall shortly give attention.

This six and a half billions in checks saved on account of sales of stocks is no small matter, absolutely. But this, though measuring the extent of undercounted sales, by no means measures the services of the Clearing House to the Stock Exchange. Not merely stocks sold have to be cleared. Stocks borrowed are also cleared. Borrowing of stocks is not trade, but borrowing of stocks requires the passage of money and checks. When stocks are borrowed, money is loaned. A bear sells short. He has to deliver next day. He accomplishes this by having his broker "borrow" the stock he needs from a broker representing a bull, who is long on the stocks, and who needs money to "carry" them. The bull, who lends the stock, receives dividends from the bear, as they accrue, and pays the bear interest on the money lent. An enormous lot of this takes place. Moreover, to some extent, these transactions are increased artificially, in order that the broker may make his "clearing sheet" misleading, and avoid revealing his position with reference to the market.[435] Loans of stock and sales of stock appear alike in the transactions of the Clearing House. Moreover, apart from the necessities of the bears for stocks to deliver, we have the necessities of the bulls for money to carry their stocks. If a broker who has borrowed largely from the banks finds his customers turning to the bear side of the market, he has an excess of funds. He may repay his loans, but they may be, in part, time loans, and in any case, he may find it just as well, if he can make a small fraction of 1% in interest, to lend to another broker, among whose customers the bulls are increasing. A vast deal of money is thus transferred, on collateral security, by means of "loaning stocks." Brokers prefer to borrow money from one another in this manner, since no margins are required, in general, whereas banks would require margins. These various reasons make a vast deal of "borrowing and carrying" transactions, and a regular place is set aside for them on the Floor—Post 4, commonly called the "Money Post." At this post, also, the banks, through brokers, lend on call, and the published call rates are established there. Of this, however, we shall have more to say later.

The extent to which this loaning of stocks takes place at the "Money Post," as compared with the loaning done privately, varies. It makes no difference, however, from the standpoint of the volume of these transactions that go to the Clearing House whether they are put through at the "Money Post" or outside. The loans made by the banks at the "Money Post" do not affect the Stock Exchange Clearing House totals.[436] Formerly the "Money Post" was a place where the position of the bears could be gauged in a given stock. If the demand for a stock was great, the bulls could take heart, and increase the pressure. To avoid giving away this information, however, borrowing is done on a large scale privately, at present.[437] Of course, if the pressure gets too strong, it will manifest itself at the money post anyhow, since bears borrowing particular stocks will forego all or part of the interest, or even pay a premium for the stock.[438]

Now it is possible, from the figures given for the total clearings of the Stock Exchange Clearing House, in conjunction with the figures of recorded sales, and the percentage of "X-Clearing House" sales, to get a fairly accurate idea of the magnitude of these stock borrowing operations between brokers. The total number of shares offered for clearing by "both sides" in 1901 was 926,347,300! This is double the actual amount, since both buyer and seller report the same transaction to the Clearing House, the former with a "receive from" sheet, and the latter with a "deliver to" sheet. Half this amount, or 463,173,650 shares, represents the actual number of shares to be handled. As we have seen, 226 millions of this (85% of the recorded sales of 266 millions) represents sales. The rest, or 237,173,650, represents borrowing of stocks.[439] Borrowing exceeds actual sales, if the figures for 1901—a year of enormous sales—are representative. We have, now, an explanation of the prevailing opinion among brokers that the Stock Exchange Clearing House dispenses with the major part of the checks that would otherwise be required. For their purposes, it does make a vast difference. Pratt's figures[440] show that, without the Clearing House, certifications of $27,995,896,400 would have been required; that certifications of $17,065,042,800 were obviated[441] by the Clearing House, leaving the balance of $10,930,853,600 of certifications which had to be used. This balance, as we have seen, is the major portion of what would have had to be paid anyhow for the stocks actually sold and offered for clearing. The saving on the actual sales is only 6.5 billions. But the saving to the brokers was, of course, much greater. Even six and a half billions is no slight matter for any purpose except the explanation of our 245 surplus billions! Pratt gives an estimate at another place of the certifications required by the Stock Exchange sales, reaching virtually the same conclusion that we have reached by a somewhat different combination of his figures. He indicates that 14 billions of certifications were required, counting in the bonds, in 1901.[442] This compares with the 20.5 billions estimated value of stocks sold, and approximately one billion of bonds. This leaves 7.5 billions of certifications obviated on sales. This takes no account of the "odd lots." If they run to an additional 25%, we have five billions more which are not put through the Clearing House. My information is, however, that "private clearings" reduce the checks in connection with these, though not so efficiently as is the case with the big Clearing House.

Do the figures that get into the "all other" deposits from those connected with the Stock Exchange undercount sales made there? Not yet have we taken account of an item which swamps all that we have considered. I refer to loan transactions by the banks, particularly call loans. The volume of these is enormous. At the "Money Post" alone, the figures average between 20 millions and 25 millions a day.[443] The range is from 10 to 50 millions. The major part of these loans are not made on the Floor of the Exchange, however, but privately, between banks and brokers. Even on the Floor, no records of the loans are kept, and only estimates are available. For the loans made privately, no figures are attainable at all. The total must be enormous. One authority writes, in a letter, "The total amount of money loaned at the post varies considerably, depending upon the rate. For instance, when money is under 3%, loans are largely made directly between the banks and the brokers, but when it gets over 3% and gets strong, more loans are made at the post. Some national banks make all their loans there right along, so I understand." My information from an officer of the National City Bank is that it lends the major part of its demand money on the floor of the Exchange. The other chief lenders, according to the Pujo Report,[444] are the National Bank of Commerce, The Chase National, the Hanover National, J. P. Morgan and Co., and Kuhn-Loeb. The same report states that the bulk of such loans are made directly between banks and brokers, and not at the "Money Post."

How do these transactions affect Kinley's figures for deposits, and so Fisher's total of 387 billions? The small dealer deals, usually, with one bank. When he borrows, he gets a "credit" on his deposit account, but makes no "deposit" that would get into Kinley's figures. But stockbrokers deal with many banks. They have one bank which "certifies" for them, and with which they regularly keep a "balance." But for their loans, they deal with whatever bank gives them the best rate, or has the funds to spare. In time of tight money, they shift their loans with great frequency. They borrow also from one another. "Money" is "worth money" in New York, and idle funds will be lent by whomever has them for whatever the market will pay, on collateral security on call. When a broker deposits money in his bank borrowed from another bank or another broker, he gets a deposit credit which does get into Kinley's figures—he deposits a certified check, or a bank draft. The following has been described as a typical transaction by the bond expert of a Boston banking house, and has been amplified by several Wall Street men with whom I have discussed it. A, whose home bank is Bank W, has borrowed, on call, $500,000 from Bank X. Bank X calls the loan. A finds Bank Y willing to lend him enough to pay it off. Before he can get the new loan from Bank Y, however, he must get his collateral released by Bank X. Before he can do that, he must pay off the loan at Bank X. His recourse, then, is to Bank W, his regular bank, which certifies for him, and with which he keeps his balance. Bank W gives him a certified check (either an overcertification, or a "morning loan" transaction), for $500,000, with which he pays off the loan at Bank X. He then takes the collateral from Bank X to Bank Y, and makes a new loan. He gets a draft from Bank Y, which he deposits with Bank W, and then draws another check against his deposit with Bank W to pay off the "morning loan," in case the transaction took that form. Here are three checks for this loan transaction, two of which get into clearings, and one of which gets into "all other deposits." But the checks may be multiplied. A, instead of getting a new loan at Bank Y, may call a loan from broker B, who may then call a loan from broker C, who may go to Bank Y to get the funds he needs to pay B. Here are two new checks in the series, both of which get into the "all other" deposits. Checks fly about recklessly in Wall Street, and men will turn over money many times, if an eighth of 1%, or less, can stick by the way, on a good sum, for a few days! This is strikingly illustrated by a fact which caught my attention in the monthly bank statement of a brokerage house which I was allowed to examine. The deposits made during the month, and the checks drawn during the month, balanced to within five hundred and fifty dollars out of several millions. The broker said of this: "It would be true even for a single day, and it would be true for a year. The bank requires us to keep a minimum balance; it is to our interest not to keep more than that. If we have more at the end of the day, we lend it out; if we have less, we borrow to make up the deficiency. We try to have just that balance, and no more, to our credit at the bank at the end of every day." The handling of funds by a brokerage house is a fine art, involving both technical skill and a philosophic grasp of the factors of the "money market." Are rates going up? Then it is well to reduce call loans, and borrow more on time. If lower rates are anticipated, more call money will be employed—with the possibility of a "squeeze" if too much is taken that way. Hidden dangers must be foreseen. The sums borrowed are enormous, and brokers' profits depend in very substantial degree on their skill in borrowing as cheaply as possible, and in utilizing their funds to the utmost.

It is here, I think, in loan transactions between banks and brokers and between brokers, that we have a major part of the explanation of the huge deposit figures for New York City, and for the tremendous influence of stock sales on clearings, which Mr. Silberling's[445] figures show. This is the opinion of Professor O. M. W. Sprague, who first called my attention to the volume of call loans, and rapid shifting of call loans, in New York, and it is the opinion of every Wall Street man with whom I have discussed the matter. The actual pecuniary magnitude of the share sales and bond sales is not enough to do it. The mass of connected loan transactions, however, substantially greater in volume than the actual sales of securities, is, with the security sales, enough to do it.

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

I conclude, therefore, that stock exchange transactions, instead of being undercounted in bank deposits, are very greatly overcounted.[447] The big item that does it is loan transactions between brokers and brokers and between brokers and banks.

The evidence from the Chicago Board of Trade, with reference to the extent of clearings within the exchange there, comes in a letter from the Secretary of the Board of Trade to Professor Taussig. The only clearing house transactions are in connection with "futures." All "spot" transactions are paid in full by check. All futures other than those offset by clearing are paid in full by check. The total amount put through the Clearing House in 1915 was 118 millions, of which the balances paid were 41 millions (saving checks to the extent of 77 millions). This 77 millions is a trifle indeed as compared with the gap of 245 billions we are trying to fill! It is a trifle also as compared with the business done on the Board of Trade. The Secretary estimates that commodities to the value of $375,000,000 actually arrived on the exchange in 1915. On the average, the figure would be $350,000,000. For the Stock Yards "it is approximately the same—last year was $375,000,000. Of fruits, vegetables, poultry, butter, eggs, etc., sold in South Water Street, it is claimed by their statisticians, the value is $350,000,000, or a total of about eleven hundred millions arriving [Italics mine] yearly at this great market place, all of which is paid for by checks, and when the ownership changes, the change of ownership is always paid by check." How many times the goods change hands, cannot be stated on the basis of records of the Board of Trade. The Secretary contents himself with saying that they are "sold and resold many times." We have discussed this, on the basis of reputed figures of the Federal tax on grain futures in 1915, in our chapter on "Volume of Money and Volume of Trade." In any case, it is clear that the 77 millions of checks economized, though absolutely great, is relatively a bagatelle. It is, moreover, more than compensated for by loan transactions. The Secretary estimates that for a sixty-day period, when grain is coming in, from two to four millions will be lent by the banks daily on arriving grain. How great the loan transactions on subsequent sales will be we can only conjecture.

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

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

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

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

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

PART III. THE VALUE OF MONEY

CHAPTER XX

RECAPITULATION OF POSITIVE DOCTRINE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

18. But this is not to assert the doctrine of the quantity theory. Because

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

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

21. The proposition that money must have value from some source other than the monetary employment does not mean, necessarily, that money must be made of precious metals, or be convertible into precious metals. The value of money is, indeed, most stable and best sustained when such is the case. But it is possible for money made of paper to have value apart from the prospect of redemption—though no clear case has been made, in the writer's opinion, for the view that this has historically occurred. But as a hypothetical possibility, my theory holds that paper money may attain a value of its own, growing out of various factors which a social psychology can explain, including law, patriotism, and custom. Social values in every sphere are imperfectly rationalized. Values which in their origin are secondary and derived may become substantial and independent of their "presuppositions." This is true of legal and moral values. It is true of the capital value of land. It may be true of paper money. This matter has been discussed in the chapters on "Economic Value" and on "Dodo-Bones." The social value theory has not the limitations of the utility theory in dealing with such cases, nor is it tied to a metallist or bullionist interpretation. Legal, moral, and patriotic factors, and the influence of social custom, all fall readily into the social value doctrine.

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

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

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

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

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

27. Hence a theory of money like the quantity theory, concerned with "long run tendencies" and "normal equilibria" and "static adjustments" touches the real problem of the value of money not at all.

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

29. An increase of credit tends to increase trade. (Same chapter.)

30. An increase of trade tends to increase the volume of credit, and, where the money supply is flexible, tends to increase the money supply also. (Chapter on the "Volume of Trade and the Volume of Money and Credit.")

31. Production waits on trade. The problem of marketing in the modern world is often more important than the problems of production in the narrower sense. Selling costs are probably greater than strict "costs of production." "Volume of trade," far from being dependent on "physical capacities and technique," is almost indefinitely flexible, with changing tone of the market, with changing values, and with other changes, including changes in the volume of money and credit. (Chapter on "Volume of Money and Volume of Trade.")

32. The relation between the volume of money and the volume of credit is exceedingly flexible. The relation between the world's volume of credit and the world's volume of gold is likewise exceedingly loose, uncertain, and flexible. (Chapters on "Volume of Money and Volume of Credit," and "The Quantity Theory and World Prices.")

33. "Velocity of circulation" is a blanket name for a complex and heterogenous set of activities of men. It is a passive resultant of many causes, and is itself a cause of nothing. The safest generalization possible concerning it is that it varies with the volume of trade and with prices.

34. Barter remains an important factor in modern economic life, and is a flexible substitute for the use of checks and money, increasing when the money market "tightens." It is greatly facilitated by the "common measure of values" function of money.

35. The general criticism of the mechanistic scheme of causation involved in the quantity theory has, as its positive corollary, the doctrine that psychological explanations must be given—that the phenomena are intricate and complex, as intricate and complex as the play of human ideas and emotions, and the network of social relationships.

36. This means that the theory of value, and of the value of money, as here presented, cannot assume the simple form, or the mathematical precision, which have made the quantity theory so alluring. It means, further, that the present study, as in part pioneer work, will lack finish and definiteness in many places, will contain errors and gaps, and will leave many problems unsolved, and many distinctions undrawn. At many points, the analysis is confessedly incomplete, and the problems imperfectly thought through—often inadequately stated, if seen at all.

In what follows, these theses, with doctrines yet to be developed, will be woven together into a systematic theory of money and credit.

The study of the functions of money, in relation to its value, will best be approached, I think, through a study of the origin of money. In this, I shall base my conclusions chiefly on the work of Karl Menger and W. W. Carlile, who seem to me to have done most in this field.

On the basis of the general theory of value developed in the first chapter, and the results of the two chapters which are to follow on the origin and functions of money, I shall reach my main conclusions as to the laws of the value of money. On the basis of this theory of value, and of the theory of the functions of money, I shall also try to develop a psychological theory of credit, and to assimilate credit phenomena to the general phenomena of value. The development which the theory of credit has had, at the hands of men whose chief interest was that of the jurist or accountant, is valuable and important. I do not wish to discredit what has been done. Many important doctrines concerning credit have been developed. The general theory of elastic bank-credit, worked out in the controversy between the "Currency" and the "Banking" Schools, is of the highest importance. This theory I have discussed in the chapter on "The Volume of Trade and the Volume of Money and Credit." I still feel, however, that there are gaps in the prevailing ideas on credit which only a social psychology can fill. I shall undertake to construe credit as a part of the social system of motivation and control, and to differentiate it from other parts of that system by an analysis of its functions. I think, too, that the theory of the relation of credit and money is in especially unsatisfactory shape, particularly with reference to the factors governing reserves.

A final chapter, in Part IV, will undertake to bring together the various points in our discussion which deal with the theory of prosperity, and will seek to bring the notions of "theory of prosperity vs. theory of wealth," "statics vs. dynamics," "normal vs. transitional tendencies," and certain other similar contrasts, into a higher synthesis, which will, to be sure, not rob these contrasts of their significance, but will rather find certain generic principles which they share, and so make it possible to measure considerations in one sphere in terms of considerations in the other sphere. In very large degree, students of dynamics and students of statics have been talking at cross-purposes, missing the force of one another's arguments, and have been quite unable, even when understanding one another, to come to agreement, precisely because they have lacked principles by means of which they could compare in any quantitative way the forces which each studies. A higher synthesis, which would give static and dynamic theories common ground, would seem to be a desideratum of high importance. Such a synthesis would go far toward unifying the science of economics. I believe that the theory of money and credit, approached from the angle of the social value theory, will meet this need.