(d) in particular, that volume of money and credit has no influence on trade, and that trade has no direct influence on volume of credit.
All these doctrines are necessary if the contention that an increase of money will proportionately raise prices is to be maintained, or if it is to be maintained that a decrease in trade will proportionately raise prices. I have analyzed each of these contentions, and I find justification for none of them.
Not yet, however, have we reached the least tenable aspect of the quantity theory. There remains the contention that prices are passive, that a change, originating in prices, and involving a change in the average price, or the general price-level, cannot maintain itself—that P is a passive function of the other five magnitudes of the equation of exchange. To this central fortress of the quantity theory we shall devote the next chapter.
CHAPTER XV
THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES"
Is the price-level passive? Is it true that while change may occur from causes outside the equation of exchange in volume of money, volume of trade, and velocities of circulation, a change in the price-level from causes outside the equation is impossible? Must the average of prices be a passive function of M, the V's, M´ and T? Such is the general contention of the quantity theory, and such, very explicitly, is Fisher's contention. The price-level is always effect, and never cause (with slight modifications of the doctrine for transition periods) in its relations to the other magnitudes in the equation of exchange.
Now in one sense, it is my own contention that the price-level can never be a cause of anything. The price-level is an average. Averages may be indicia of causation, but they are not themselves causes. They are not, in reality, anything at all. Causation is a matter which pertains to the particulars of which the average is made. But this is not the doctrine of the quantity theory. The quantity theory does, in certain connections, assign causal influence to the level of prices, particularly in the theory of foreign exchange, where the explanation of international gold movements rests on the doctrine that a price-level in one country, higher than the price-level of another country, drives money away.[332] It will be seen, in a moment, that Fisher relies on this principle to prove that the price-level of a country cannot rise without an increase of money—if it did so rise, it would drive out the money, and so be forced down again. The point at issue may be stated in terms of particular prices. The quantity theory is that, while particular prices may rise from causes affecting them, as compared with other prices, without a change in money, velocities, etc., still there cannot be a rise in the general average, because other prices will be obliged to go down to compensate. The issue is as to the possibility of a rise in particular prices, uncompensated by a corresponding fall in other particular prices, without a prior increase in money, or velocities, or decrease in trade. I take up the issue in this form. I shall maintain that particular prices can, and do, rise, without a prior increase in money or bank-deposits, or change in the volume of trade, or in velocity of money or deposits and also without compensating fall in other particular prices. Putting it in terms of Fisher's equation, I shall maintain, as against Fisher, that P can rise through the direct action of factors outside the equation of exchange, that as a consequence of such rise the other factors readjust themselves, and that a new equilibrium is reached which, in the absence of new disturbances from causes outside the equation, tends to be as permanent and stable as the old equilibrium was.
In the argument which follows, I shall respect thoroughly the distinction between "normal" and "transitional" effects. I do not think that this distinction is properly drawn by Fisher. In my discussion of the relation between the volume of bank-credit and the volume of trade, and in other connections, I have shown that Fisher leaves out of his normal theory most of the concrete factors which do affect both the concrete magnitudes, and the long run averages, of the factors in his own equation. But for the present, I shall meet him on his own ground, give his distinctions their fullest weight, and carry my argument through the "transition" to a point where no further change among the factors in the equation can be expected as a consequence of the initial change assumed.