Part II. The Quantity Theory

CHAPTER VI

THE QUANTITY THEORY OF PRICES. INTRODUCTION

Preliminary statement of quantity theory, and of critical theses to be developed in following chapters. Virtually every contention and every assumption of quantity theory to be challenged 123-129

CHAPTER VII

DODO-BONES

Quantity theory doctrine that valueless objects can serve as money; Nicholson's assumption: money made of dodo-bones 130-131

Fisher's view also

And Ricardo's 131-132

Will dodo-bones circulate? Dodo-bones and poker chips; circular reasoning

Both medium of exchange and standard of value must be valuable

Is inconvertible paper an exception? 133-134

Doctrine that money gives legal claim to things in general

Kemmerer's assumptions; money made of commodity, once valuable, now used only as money

Commodity theory requires present commodity value

Historical vs. cross-section view: possibility that such money would circulate 135-136

Value not tied up with marginal utility or commodities: social value theory; derived values often become independent of original presuppositions, in economic as well as legal and moral spheres 136-139

But this no basis for quantity theory: social psychology, not mechanics

"Banker's psychology" vs. psychology of blind habit: India, Austria, United States; monetary phenomena of war times; "credit theory" of Greenbacks 139-142

Question-begging definitions 142-143

Assumptions of quantity theory: blind habit and fluid prices 143-144

Extreme commodity theory denies that money-use adds to value of money; usually not true; analysis of money-functions 144-150

Hypothetical case in which whole value of money comes from commodity value 150-152

Money must have value apart from monetary employments, but, in general, gains additional value from employment as money 152-153

CHAPTER VIII

THE "EQUATION OF EXCHANGE"

Fisher leading, most consistent, most uncompromising quantity theorist: wide acceptance of his views

Taussig vs. Fisher

Fisher and dodo-bone doctrine: logical part of quantity theory; Fisher's value concept 155-156

"Equation of exchange": analysis of Fisher's version, typical of all 156-171

In what sense equality between two sides of equation? Meaning of "T" 158-161

No "goods side" to equation; both sides sums of money; equal because identical; equation meaningless 161-162

All factors in equation highly abstract 162-163

"P" and "T" cannot both be given independent definitions: P defined as weighted average, with T in denominator; and must be changed from year to year, as elements in T change, even though no prices change 164-166

This makes circular theory: problem defined in terms of explanation 165-166

Causal theory associated with equation of exchange

Equation amplified to include credit; not acceptable to Nicholson or Walker, and caricature of conditions in Germany and France 166-170

Book-credit, bills of exchange, etc., excluded 167-170

Why a one-year period? 170-171

CHAPTER IX

THE VOLUME OF MONEY AND THE VOLUME OF CREDIT

Mill thought credit acts on prices like money, and that this reduces quantity theory tendency to indeterminate degree; Fisher holds volume of money in circulation governs volume of credit, so that quantity theory stands

Fisher's arguments for fixed ratio, money to bank-deposits 172-173

Argument a non-sequitur, even if contentions true 173-177

Contentions untrue: no fixed ratio between reserves and deposits, or reserves and demand liabilities, either in America or Europe 177-182

Taussig's views; virtually surrender of quantity theory in modern conditions 182-185

Bulk of quantity theorists in between Fisher and Taussig, but nearer to Fisher's view than to Taussig's

CHAPTER X

"NORMAL" VS. "TRANSITIONAL" TENDENCIES

Quantity theory qualified by distinction between "normal" and "transitional" effects of change in quantity of money, etc.

Meaning of distinction, and extent of qualification hard to determine: is "normal period" real period in time? How long is "transitional period"? Is it realistic, or hypothetical? Is equation of exchange realistic? Concrete vs. hypothetical price-levels 186-189

Legitimate and illegitimate abstraction 189-190

Causation and temporal order 190-191

Fisher admits very slight qualification of "normal theory"

Mill's quantity theory "short run" theory; Taussig's "long run" theory; radically different logic in the two 192-193

Fisher's theory sometimes "long run" and sometimes "short run" 194-195

CHAPTER XI

BARTER

Quantity theory spoiled if resort to barter possible and important

Extent of barter and other flexible substitutes for money and bank-credit; simple barter; different methods of corporate consolidations; flexibility, with state of money-market; clearing-house arrangements in speculative exchanges; offsetting book-credits 197-200

Barter made easier under money economy, by measure of value function of money

Bills of exchange; foreign trade

CHAPTER XII

VELOCITY OF CIRCULATION

Velocity conceived by quantity theory as causal entity, independent of quantity of money and prices; necessary assumption for law of proportionality

"Coin-transfer" vs. "person-turnover" concepts 203-204

Velocity really non-essential by-product, meaningless average 204-205

Doctrine that velocity independent of money; habit and convenience; hoarding; hoarding by banks 205-209

Velocity and volume of trade; vary together 209-214

Value of money causally governs velocity 214-215

CHAPTER XIII

THE VOLUME OF MONEY AND THE VOLUME OF TRADE—TRADE AND SPECULATION

Quantity theory doctrine that volume of trade, and volume of money (and credit), are independent; trade governed by physical and technical conditions, not money 216-219

View that quantity of money vitally affects production and trade

Walker, Sombart, Withers, Price, Holt 219-222

Increase of money increases trade, even on static theory: increase of money increase of capital; lowered margin in exchanges; money-rates and interest; money tool of exchange; elasticity of demand for money-service; in Arizona and New York City 222-225

Trade distinguished from production and from stock 225-226

Trade chiefly speculation; Fisher's $387,000,000,000 of trade in U. S. in 1909 analyzed; index of variation in trade; figure based on Kinley's returns from 12,000 banks; double-counting 227-230

Figure largely represents speculation; statistics of total wealth of U. S.; small rôle of wholesale and retail deposits; "all other deposits" bunched in speculative centers, especially New York; trifling "deposits" in country banks; evidence of bank-clearings: clearings and stock speculation; clearings and ordinary business 230-241

Measurement of "ordinary trade" 241-248

Volume of stock speculation 248-251

Commodity speculation 251-252

Unorganized speculation 252-254

Bill and note speculation

Fisher's and Kemmerer's indicia of trade variation wholly misleading 255-257

Production waits on trade; selling costs vs. "cost of production"; "good will"; are banks useless? 257-262

"Normal vs. transitional": statics vs. dynamics; money and credit make static assumptions possible; very little trade in "normal equilibrium" or static state; volume of trade depends on transitions and dynamic changes; functional theory of money and credit must be dynamic theory; abstraction from money by static theory; no static theory of money and credit possible; quantity theory misses whole point of money-functions 262-266

APPENDIX TO CHAPTER XIII

THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES

Ambiguity of "domestic trade": figures comparable with export and import figures cannot include turnovers; net income of United States, minus imports on retail basis, counted as domestic trade; exports on retail basis counted as foreign trade; net income for 1910; index of variation for other years; cautions and qualifications; ratio of foreign to domestic trade, 1890-1916 267-278

CHAPTER XIV

THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT

Interdependence of trade, and money (and credit); increasing trade causes increase of money and credit 279-281

Quantity theory doctrine: Fisher vs. Laughlin 281-282

Quantity theory has no explanation of elastic bank credit: "Currency Theory" of deposits 282-285

Loans and deposits 285-288

Bills of exchange 288-290

Summary of quantity theory doctrine 290-291

CHAPTER XV

THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES"

Heart of quantity theory: price-level cannot change without prior change in money, deposits, trade, or velocities: independently rising price-level, unable to alter trade or velocities, would drive money away, and so be unable to sustain itself; individual prices can rise independently, but other prices must fall to compensate 292-295

Criticism: argument impressive only because it assumes an uncaused rise in general price-level; when causes assigned, prices can independently rise, compelling modification in other factors in "equation of exchange"; "transitional" and "normal" effects: instances 295-299

Quantity theory conflicts with supply and demand: supply and demand holds good: particular prices and price-level 299-300

Generalization of conflict to include cost of production, capitalization theory, imputation theory

Capitalization theory vs. quantity theory; different psychological assumptions of the two theories 300-306

Cost of production vs. quantity theory; money-income vs. quantity of money 306-308

Quantity theory false, granting all its assumptions 308-310

Doctrine that price-level independent of particular prices, and presupposed by them, false; absolute value of money, not price-level, presupposed; price-level may change with value of money constant, through changes in absolute values of goods 310-314

CHAPTER XVI

THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS

Quantity theory holds that gold movements depend on price-levels; but price-level mere average, cause of nothing 315-316

Some prices, rising, tend to repel gold, but most prices have no such effect 316-317

Some prices, rising, bring in gold 317-319

Gold movements and money-rates 319-320

CHAPTER XVII

THE QUANTITY THEORY vs. GRESHAM'S LAW 321-323

CHAPTER XVIII

THE QUANTITY THEORY AND "WORLD PRICES"

Types of quantity theory: world's volume of gold vs. quantity of money in given country; standard vs. token money; abandonment of dodo-bone theory and "equation of exchange" 324-326

Credit does not rest on money: measure of values vs. reserves; loans and wealth; value of money vs. price-level 326-328

Loose relation of reserves and credit in world as whole; no proportionality of quantity of gold to value of gold; no quantity theory needed to assert that value of gold related to its quantity 328-330

CHAPTER XIX

STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY—THE REDISCOVERY OF A BURIED CITY

Criticism of quantity theory statistics yields constructive conclusions; Mitchell and Greenbacks; Kemmerer's and Fisher's statistics of "equation of exchange"; Kemmerer's criticism of earlier statistics 331-335

Kemmerer's and Fisher's figures all wrong except for volume of money and deposits, and prices in base year; if correct, would not prove quantity theory 335-337

Fisher's statistics, resting on Kemmerer's, chiefly studied: their relation to Kinley's "deposits" figures 337-338

M´V´ calculated: errors in calculation; New York very incomplete in Kinley's figures; private banks and trust companies; clearings and "deposits," in New York and outside; "total transactions" and clearings; Fisher exaggerates country checks by at least 116 billions, for 1909; major part of all "check deposits" in New York City 348-353

New York as "clearing house" for United States: extent of, and influence of on New York clearings, much overestimated; bulk of New York clearings and New York "deposits" grow out of New York business 353-361

Index of variation for M´V´ wrongly weighted; V´ wrongly calculated for all years; which upsets calculation of V 361-363

Volume of trade: greatly exaggerated by bank transactions, which include vast deal of duplications in checks, loans and repayments, etc. 363-368

Fisher's reply; undercounting offsets overcounting 368-369

Main items of undercounting in clearing houses of speculative exchanges; measurement of, in New York Stock Exchange, and Chicago Board of Trade; swamped by call loan transactions, which exceed security sales 369-381

Price-indexes of Kemmerer and Fisher, dominated by wholesale prices, have no relevance to their "equations of exchange" 381-383

In general, their figures bury speculation and New York City