The Value of Money

by Benjamin M. Anderson

[319] Loc. cit., p. 165, n. The doctrine is reiterated on p. 168.

[320] This is strikingly true in the stock market—the place where more trade takes place than in any other market. See the figures in the preceding chapter with reference to stock transactions, and the chapter on "Bank Assets and Bank Reserves."

[321] For a history of this debate, with bibliography, see Laughlin's Principles of Money, ch. 7, on the "History and Literature of the Quantity Theory," esp. pp. 260 and 263-264. Laughlin shows the connection of the currency principle and the quantity theory.

[322] It may be that in the brief discussion of elastic bank-notes on p. 173 (loc. cit.), Fisher means to given an explanation of the theory of elasticity from a quantity theory standpoint. The statement there is that money not only tends to flow away from places where prices are high, but also from times when money is high. "If the price-level is high in January as compared with the rest of the year, bank-notes will not tend to be issued in large quantities then. On the contrary, people will seek to avoid paying money at high prices and wait till prices are lower. When that time comes they may need more currency; bank-notes and deposits may then expand to meet the excessive demand for loans which may ensue. Thus currency expands when prices are low and contracts when prices are high, and such expansions and contractions tend to lower the high prices and to raise the low prices, thus working toward mutual equality."

If this be the quantity theory account of elasticity—and it would seem to be about the only thing the quantity theory could say—it is about as far from giving an account of the real facts as any theory could be! Something of this sort is suggested, perhaps, by the behavior of Canadian bank-notes, which do expand in the fall, when prices of wheat are lowest, and contract in January, when wheat prices are higher. This grows, however, out of the peculiarities of an agricultural country, and does not at all illustrate the general doctrine maintained. First, wheat prices in the fall are low because wheat is most abundant then. Wheat prices in January, under the influence of speculation, commonly differ from wheat prices in the fall by an amount about equal to the elevator charges, rattage, insurance, interest, and other carrying charges involved. Second, wheat prices are only one element in the general price-level. Low wheat does not prove that the level is necessarily low. A good wheat crop may mean increases in general prices, and often does. Third, and more important, the real reason for an expansion in Canadian notes at such a time is that the wheat has to be moved. The farmers do not want to carry it; the speculators are ready to carry it; and it must be sold. Expanding trade, at the season, is the cause of expanding bank-notes. The influence of the price of wheat is exactly the reverse of that which Fisher assigns. If the price of wheat is low in the crop-moving season, less notes will be issued than if the price is high. In other words, the greater the increase in PT, not P or T alone, the greater will be the expansion of bank-notes. Decrease either P or T, and less notes will be issued.

In general, the phenomenon of elastic bank-credit is the phenomenon of an expanding bank-note or deposit issue accompanied by rising prices and volume of trade, and a decrease when trade and prices decrease. This is all commonplace, but I feel it best to refer to familiar sources to show how old and well recognized my statement of the case is. The following is from Mill's Principles of Economics, Bk. III, ch. 24, par. 1: "Not only has this fixed idea of the currency as the prime agent in the fluctuations of price made them shut their eyes to the multitude of circumstances which, by influencing the expectations of supply, are the true causes of almost all speculations and of almost all fluctuations of price; but in order to bring about the chronological agreement required by their theory, between the variations of bank issues and those of prices, they have played such fantastic tricks with facts and dates as would be thought incredible, if an eminent practical authority had not taken the trouble of meeting them, on the ground of mere history, with an elaborate exposure. I refer, as all conversant with the subject must be aware, to Mr. Tooke's History of Prices. The result of Mr. Tooke's investigations was thus stated by himself, in his examination before the Commons Committee on the Bank Charter question in 1832; and the evidences of it stand recorded in his book: 'In point of fact, and historically, as far as my researches have gone, in every signal instance of a rise or fall of prices, the rise or fall has preceded, and therefore could not be the effect of, an enlargement or contraction of the bank circulation.'"

I see nothing in Fisher's discussion of credit to differentiate it from the position of the old Currency School. And the reason is a very simple one: Fisher has followed the quantity theory to its logical conclusions!

[323] See our chapter on the "Volume of Money and the Volume of Credit."

[324] How close the relation between loans and deposits is may be seen from Professor Mitchell's chart, Business Cycles, p. 344. The same chart exhibits the variations in the reserve percentage, which is very much greater. The New York Clearing House banks, which we have seen (supra, "Volume of Money and Volume of Credit") have a spread of from 24.89% to 37.59% in the yearly average of percentage of reserves to deposits—a spread of over 50%—show a variation in yearly average for the percentage of loans to deposits of only 24.3%—the range being from 83% to 104%. Ibid., pp. 325 and 331. For a partially different series of years, see the chart of J. P. Norton, Statistical Studies in the New York Money Market, facing p. 104.

[325] Neither deposits nor loans vary proportionately with trade. Very active trade may merely increase the activity of loans and deposits, causing both to be shifted more rapidly—larger outgo, larger income, loans more frequently contracted and paid off, larger amounts "deposited" on a given day, but balances, both of loans and deposits, at the end of the day not increased proportionately with the activity. This is strikingly illustrated in the business of the stockbroker.