It deserves to be said, perhaps, that the term M´ (deposits) in his equation is not entirely independent, but is in some degree a function of T. I say to some degree; it is dependent on T in part only, and not for very long periods. Professor Fisher has here treated it as dependent simply on M.... He has indicated the qualifications which must be attached to this dependence of deposits on bank reserves. He has pointed out that though a general dependence appears over long periods of time, it is affected by changes in banking ways, and by the tendency to build up a higher superstructure of deposits in times of active business. But there is also a connection between T, volume of trade, and M´. That is, for short periods—nay, for periods of some years—an increasing volume of trade tends of itself to bring about an increasing volume of deposits. (I may say, parenthetically, that "volume of trade" does not seem to me an apt expression; "units of commodities," the other phrase used by Professor Fisher, is better.) Though I would by no means go the length of Professor Laughlin's reasoning, which seems to imply that every act of exchange supplies automatically its own medium of exchange, it does seem to me that our modern mechanism of deposit banking supplies an elastic source of deposits, which, for considerable periods, enables them to run pari passu with the transactions and loans resting on them. In the end, an increase of deposits finds its limit in the volume of cash held by the banks. But there is some elasticity of adjustment, by which loans and deposits increase as fast as transactions or faster; and this accounts in no small degree for the rise in prices during periods of activity. The phenomenon shows itself most strikingly in stock exchange loans, especially in a center like New York. There the business creates for itself quasi-automatically its own medium of exchange. I suspect it is undue generalization from operations of this sort that has led Professor Laughlin to take his extreme position—a position which I can not but think untenable. Some allowance for the temporary interaction between M´ and T is necessary for the completeness of Professor Fisher's reasoning.
Ralph H. Hess[75]: Professor Fisher's formula (MV + M´V´ = PT) approximately expresses the mathematical equality of purchase and payment which cannot be questioned. I say approximately because M´ (defined by Professor Fisher as "bank deposits subject to check"), if it be made to express an accurate measure of circulating credit, should include not only open bank accounts, but certain other values which constitute current means of payment, such as bankers' bills, trade bills, cashiers' checks, and certified checks....
The relation which Professor Taussig has pointed out between M´ and T (the value of negotiable credit and the contemporary volume of trade) is not only possible, but, in any community of modernized commerce, is actual. Moreover, a knowledge of the process by which commerce is financed by the existing mechanism of discount, loan, deposit, and draft justifies the conclusion that, if the volume of trade (T) be resolved into its factors, namely, materials of trade and their frequency of exchange, the latter factor of T is quite commensurate with the velocity of credit (V´).
To me it seems incontestable that the volume and velocity of credit currency, as represented by bank deposits and other circulating media, vary directly as the volume and value of the materials of trade in the process of exchange, and are, mathematically speaking, dependent functions thereof. Granting this relation, an analysis of the equation of exchange establishes PT as the major determinant of M´V´, and, in so far as paper money may be authorized and issued upon the security of commercial assets, of M. That part of the money in circulation which does not derive its circulating powers from actual and potential commercial values is itself material of barter incorporating so-called intrinsic values.
The conclusion is clear that P (price) is independent of all other terms and factors of Professor Fisher's equation, that V and V´ are determined by the mechanical circumstances and organization of exchange, and that the value of M and M´, taken collectively, is a spontaneous derivative of PT. The fundamental determinants of prices and of "price levels," therefore, are to be found outside of monetary and credit agencies per se.
As to the nature and order of the price-making process and the actual forces behind price movements, I am in substantial accord with Professor Laughlin. That prices, individually and collectively considered, express the value-proportion of demand for and supply of goods on the market to demand for and "visible supply" of the standard commodity is fundamentally logical. Nor is there occasion to quibble over the paradox of disturbed equilibrium of demand and supply. Physically considered, the goods which objectify these terms are, of course, identical; but, in the valuation process, demand and supply denominate, respectively, desire and utility—the generally acknowledged antecedents of value. Price is the equalizing factor between the effective demand for gold and the effective demand for other goods, each taken in conventional units; and price changes are resultants of, and commensurate with, net variations in the value-factors of the standard and of the objects of exchange.
Referring to the nature of credit and the economic qualities of credit instruments, the somewhat figurative expression "goods coined into a means of payment" is a striking and accurate characterization. It is possible that all legitimate market values, under normal trade conditions, may be liquidized through credit agencies, and the goods in which they are incorporated be thus rendered immediately and conveniently exchangeable. This process may be consummated independently of prices and with slight regard to the actual supply of money. The truth of this assertion is, in fact, demonstrated daily in the marts of trade.
J. Laurence Laughlin[76]: There is time to answer briefly only a few of the points raised by several speakers. First, Professor Fisher's equation of MV + M´V´ = PT is to my mind not a solution, but only a statement, of the problem of price levels. It can be read backward as well as forward. For instance, it does not follow that the level of prices (P) will rise with an increase of M´, since—as Professor Taussig has pointed out already—an active development of trade and industry (T) would itself be a reason for an increase of banking loans and deposits subject to check (M´), thus equalizing effects on both sides of the equation without necessarily increasing P. This result is, in fact, one of the points on which I have steadily insisted in my own exposition of the theory of prices and credit; and Professor Fisher's equation allows it to appear distinctly. His equation does not show causes; it states a static situation, into which various causes may be read. The facts between 1876 and 1896 disclose an increase of bank deposits of 500 or 600 per cent., and yet that period was distinguished as one of falling prices. Therefore M´ cannot be regarded as having been proved to be a cause of higher prices.