The Project Gutenberg eBook of The Value of Money, by B. M. Anderson, Jr.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[419] Business Cycles, p. 308.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[434] Ibid., p. 187.

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

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

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

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

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

[440] Ibid., p. 166.

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

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

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

[445] Annalist, Aug. 14, 1916.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[458] This is stated by Schumpeter, so far as land is concerned. Vide Quarterly Journal of Economics, Aug. 1915, p. 704. It is due Menger to point out that he does not make the distinction between value and exchangeability which I have just made. His theory rests in an analysis of the saleability or exchangeability of goods. But Menger's conception of value is essentially different from my own. He commonly means by "Wert" merely subjective value, or marginal utility. He objects to the notion that one good measures the value of another, or that goods, when exchanged, are equivalent in value, on the ground that there must be a surplus in value (subjective value) for each exchanger, or exchange would not take place. He has, as a primary concept, no absolute social value. "Tauschwert" is for him a relative value, though he is finally driven to constructing what is virtually an absolute value notion, by distinguishing "äusserer Tauschwert" from "innerer Tauschwert" in the case of money, the latter being concerned exclusively with the causes affecting prices from the side of money, ignoring changes in prices due to causes affecting goods. (Cf. art. "Geld," in Handwörterbuch der Staatswissenschaften, 3d ed., pp. 592-593. He does not make this distinction in developing the theory of saleability of goods, however. Cf. the chapter, supra, on "Marginal Utility and the Value of Money." It is absolute social value which I am here distinguishing from exchangeability. It is equally true, however, that subjective value and exchangeability have no necessary correlation.)