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.