PART TWO: THE VALUE OF MONEY
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CHAPTER 8
The Determinants of the Objective Exchange-Value, or Purchasing Power, of Money (cont.)
II. Fluctuations in the Objective Exchange Value
of Money Evoked by Changes in the Ratio Between the Supply of Money and the
Demand for It
6 The Quantity Theory
That the objective exchange value of
money as historically transmitted (der geschichtlich überkommene objektive
Tauschwert des Geldes) is affected not only by the industrial use of the
material from which it is made, but also by its monetary use, is a proposition
which hardly any economist would nowadays deny. It is true that lay opinion was
molded entirely by the contrary belief until very recent times. To a naive
observer, money made out of precious metal was "sound money" because the piece
of precious metal was an "intrinsically" valuable object, while paper money was
"bad money" because its value was only "artificial." But even the layman who
holds this opinion accepts the money in the course of business transactions, not
for the sake of its industrial use-value, but for the sake of its objective
exchange value, which depends largely upon its monetary employment. He values a
gold coin not merely for the sake of its industrial use-value, say because of
the possibility of using it as jewelry, but chiefly on account of its monetary
utility. But, of course, to do something, and to render an account to oneself of
what one does and why one does it, are quite different things. [26]
Judgment
upon the shortcomings of popular views about money and its value must be
lenient, for even the attitude of science toward this problem has not always
been free from error. Happily, the last few years have seen a gradual but
definite change in popular monetary theory. It is now generally recognized that
the value of money depends partly on its monetary function. This is due to the
increased attention that has been devoted to questions of monetary policy since
the commencement of the great controversy about the standards. The old theories
proved unsatisfactory; it was not possible to explain phenomena such as those of
the Austrian or Indian currency systems without invoking the assumption that the
value of money originates partly in its monetary function. The naivety of the
numerous writings which attacked this opinion and their complete freedom from
the restraining influence of any sort of knowledge of the theory of value may
occasionally lead the economist to regard them as unimportant; but they may at
least claim to have performed the service of shaking deep-rooted prejudices and
stimulating a general interest in the problem of prices. No doubt they are a
gratifying indication of a growing interest in economic questions; if this is
kept in mind, it is possible to think more generously of many erroneous monetary
theories.
It is true that there has been no lack of attempts to explain
the peculiar phenomena of modern monetary systems in other ways. But they have
all been unsuccessful. Thus, in particular, Laughlin's theory comes to grief in
failing to take account of the special aspects of the value of money that are
associated with the specifically monetary function. Quite correctly, Laughlin
stresses as the peculiar characteristic of money substitutes their constant and
immediate convertibility into money. [27] Nevertheless, he would seem to be
mistaken on a fundamental point when he applies the name of token money to such
currencies as the rupee from 1893 to 1899 and the Russian ruble and Austrian
gulden at the time of the suspension of cash payments. He accounts for the fact
that a piece of paper which is not immediately convertible into gold can have
any value at all, by reference to the possibility that it will nevertheless
someday be converted. He compares inconvertible paper money with the shares of a
concern which is temporarily not paying any dividend but whose shares may
nevertheless have a certain exchange value because of the possibility of future
dividends. And he says that the fluctuations in the exchange value of such paper
money are consequently based upon the varying prospects of its ultimate
conversion. [28]
The error in this conclusion may be most simply
demonstrated by means of an actual example. Let us select for this purpose the
monetary history of Austria, which Laughlin also uses as an illustration. From
1859 onward the Austrian National Bank was released from the obligation to
convert its notes on demand into silver, and nobody could tell when the state
paper money issued in 1866 would be redeemed, or even if it would be redeemed at
all. It was not until the later 1890s that the transition to metallic money was
completed by the actual resumption of cash payments on the part of the
Austro-Hungarian Bank.
Now Laughlin attempts to explain the value of the
Austrian currency during this period by reference to the prospect of a future
conversion of the notes into metallic commodity money. He finds the basis of its
value, at first in an expectation that it would be converted into silver, and
afterward in an expectation that it would be converted into gold, and traces the
vicissitudes of its purchasing power to the varying chances of its ultimate
conversion. [29]
The inadmissibility of this argument can be demonstrated in
a striking fashion. In the year 1884—the year is chosen at random—the five
percent Austrian government bonds were quoted on the Viennese Stock Exchange at
an average rate of 95.81, or 4.19 percent below par. The quotation was in terms
of Austrian paper gulden. The government bonds represented claims against the
Austrian state bearing interest at five percent. Thus both the bonds and the
notes were claims against the same debtor. It is true that these government
bonds were not repayable, that is to say, not redeemable on the part of the
creditor. Nevertheless, seeing that interest was paid on them, this could not
prejudice their value in comparison with that of the non-interest-bearing
currency notes, which also were not redeemable; furthermore, the interest on the
bonds was payable in paper money, and, if the government redeemed them, it could
do this also in paper money. In fact, the bonds in question were redeemed
voluntarily in 1892, long before the currency notes were converted into gold.
The question now arises: How could it come about that the government bonds,
bearing interest at five percent, could be valued less highly than the
non-interest-bearing currency notes? This could not possibly be attributed, say,
to the fact that people hoped that the currency notes would be converted into
gold before the bonds were redeemed. There was no suggestion of such an
expectation. Quite another circumstance decided the matter.
The currency
notes were common media of exchange—they were money—and consequently, besides
the value that they possessed as claims against the state, they also had a value
as money. It is beyond doubt that their value as claims alone would not have
been an adequate basis even for a relatively large proportion of their actual
exchange value. The date of repayment of the claims that were embodied in these
notes was in fact quite uncertain, but in any case very distant. As claims, it
was impossible for them to have a higher exchange value than corresponded to the
then value of the expectation of their repayment. Now, after the cessation of
free coinage of silver it was fairly obvious that the paper gulden (and
incidentally the silver gulden) would not be converted at a rate appreciably in
excess of the average rate at which it circulated in the period immediately
preceding the conversion. In any case, after the legal determination of the
conversion ratio by the Currency Regulation Law of August 2, 1892, it was
settled that the conversion of the currency notes would not take place at any
higher rate than this. How could it come about, then, that the gold value of the
krone (the half-gulden) already fluctuated about this rate as early as the
second half of the year 1892 although the date of conversion was then still
quite unknown? Usually a claim to a fixed sum, the date of payment of which lies
in the uncertain future, is valued considerably less highly than the sum to
which it refers. To this question Laughlin's theory cannot offer an answer; only
by taking account of the fact that the monetary function also contributes toward
value is it possible to find a satisfactory explanation.
The attempts that
have so far been made, to determine the quantitative significance of the forces
emanating from the side of money that affect the exchange ratio existing between
money and other economic goods, have followed throughout the line of thought of
the quantity theory. This is not to say that all the exponents of the quantity
theory had realized that the value of money is not determined solely by its
nonmonetary, industrial employment, but also or even solely by its monetary
function. Many quantity theorists have been of another opinion on this point and
have believed that the value of money depends solely on the industrial
employment of the monetary material. The majority have had no clear conception
of the question at all; very few have approached its true solution. It is often
hard to decide in which class certain of these authors should be placed; their
phraseology is often obscure and their theories not seldom contradictory. All
the same, let us suppose that all quantity theorists had recognized the
significance of the monetary function in the determination of the value of the
monetary material, and criticize the usefulness of their theory from this point
of view.
When the determinants of the exchange ratios between economic
goods were first inquired into, attention was early devoted to two factors whose
importance for the pricing process was not to be denied. It was impossible to
overlook the well-known connection between variations in the available quantity
of goods and variations in prices, and the proposition was soon formulated that
a good would rise in price if the available quantity of it diminished.
Similarly, the importance of the total volume of transactions in the
determination of prices was also realized. Thus, a mechanical theory of price
determination was arrived at—the doctrine of supply and demand, which until very
recently held such a prominent position in our science. Of all explanations of
prices it is the oldest. We cannot dismiss it offhand as erroneous; the only
valid objection to it is that it does not go back to the ultimate determinants
of prices. It is correct or incorrect, according to the content given to the
words demand and supply. It is correct, if account is taken of all the factors
that motivate people in buying and selling. It is incorrect, if supply and
demand are interpreted and compared in a merely quantitative sense. [30]
It
was an obvious step to take this theory, that had been constructed to explain
the reciprocal exchange ratios of commodities, and apply it to fluctuations in
the relative values of commodities and money also. As soon as people became
conscious of the fact of variations in the value of money at all, and gave up
the naive conception of money as an invariable measure of value, they began to
explain these variations also by quantitative changes in supply and
demand.
It is true that the usual criticism of the quantity theory (often
expressed with more resentment than is consonant with that objectivity which
alone should be the distinctive mark of scientific investigation) had an easy
task so far as it was leveled against the older, incomplete, version. It was not
difficult to prove that the supposition that changes in the value of money must
be proportionate to changes in the quantity of money, so that for example a
doubling of the quantity of money would lead to a doubling of prices also, was
not in accordance with facts and could not be theoretically established in any
way whatever. [31] It was still simpler to show the untenability of the naive
version of the theory which regarded the total quantity of money and the total
stock of money as equivalent.
But all these objections do not touch the
essence of the doctrine. Neither can any sort of refutation or limitation of the
quantity theory be deduced from the fact that a number of writers claim validity
for it only on the assumption ceteris paribus; not even though they state
further that this supposition never is fulfilled and never could be
fulfilled. [32] The assumption ceteris paribus is the self-evident appendage of
every scientific doctrine and there is no economic law that can dispense with
it.
Against such superficial criticism the quantity theory has been well
able to defend itself triumphantly, and through the centuries, condemned by some
and exalted as an indisputable truth by others, it has always been in the very
center of scientific discussion. It has been dealt with in an immense
literature, far beyond the power of any one person to master. It is true that
the scientific harvest of these writings is but small. The theory has been
adjudged "right" or "wrong," and statistical data (mostly incomplete and
incorrectly interpreted) have been used both to "prove" and to "disprove"
it—although sufficient care has seldom been taken to eliminate variations
brought about by accidental circumstances. On the other hand, investigation on a
basis of the theory of value has but seldom been attempted.
If we wish to
arrive at a just appraisal of the quantity theory we must consider it in the
light of the contemporary theories of value. The core of the doctrine consists
in the proposition that the supply of money and the demand for it both affect
its value. This proposition is probably a sufficiently good hypothesis to
explain big changes in prices; but it is far from containing a complete theory
of the value of money. It describes one cause of changes in prices; it is
nevertheless inadequate for dealing with the problem exhaustively. By itself it
does not comprise a theory of the value of money; it needs the basis of a
general value theory. One after another, the doctrine of supply and demand, the
cost-of-production theory, and the subjective theory of value have had to
provide the foundations for the quantity theory.
If we make use in our
discussion of only one fundamental idea contained in the quantity theory, the
idea that a connection exists between variations in the value of money on the
one hand and variations in the relations between the demand for money and the
supply of it on the other hand, our reason is not that this is the most correct
expression of the content of the theory from the historical point of view, but
that it constitutes that core of truth in the theory which even the modern
investigator can and must recognize as useful. Although the historian of
economic theory may find this formulation inexact and produce quotations to
refute it, he must nevertheless admit that it contains the correct expression of
what is valuable in the quantity theory and usable as a cornerstone for a theory
of the value of money.
Beyond this proposition, the quantity theory can
provide us with nothing. Above all, it fails to explain the mechanism of
variations in the value of money. Some of its expositors do not touch upon this
question at all; the others employ an inadequate principle for dealing with it.
Observation teaches us that certain relations of the kind suggested between the
available stock of money and the need for money do in fact exist; the problem is
to deduce these relations from the fundamental laws of value and so at last to
comprehend their true significance.
7 The Stock of Money and the Demand for Money
The process, by which supply and demand are accommodated to each
other until a position of equilibrium is established and both are brought into
quantitative and qualitative coincidence, is the higgling of the market. But
supply and demand are only the links in a chain of phenomena, one end of which
has this visible manifestation in the market, while the other is anchored deep
in the human mind. The intensity with which supply and demand are expressed, and
consequently the level of the exchange ratio at which both coincide, depends on
the subjective valuations of individuals. This is true, not only of the direct
exchange ratios between economic goods other than money, but also of the
exchange ratio between money on the one hand and commodities on the
other.
For a long time it was believed that the demand for money was a
quantity determined by objective factors and independently of subjective
considerations. It was thought that the demand for money in an economic
community was determined, on the one hand by the total quantity of commodities
that had to be paid for during a given period, and on the other hand by the
velocity of circulation of the money. There is an error in the very starting
point of this way of regarding the matter, which was first successfully attacked
by Menger. [33] It is inadmissible to begin with the demand for money of the
community. The individualistic economic community as such, which is the only
sort of community in which there is a demand for money, is not an economic
agent. It demands money only insofar as its individual members demand money. The
demand for money of the economic community is nothing but the sum of the demands
for money of the individual economic agents composing it. But for individual
economic agents it is impossible to make use of the formula: total volume of
transactions ÷ velocity of circulation. If we wish to arrive at a description of
the demand for money of an individual we must start with the considerations that
influence such an individual in receiving and paying out money.
Every
economic agent is obliged to hold a stock of the common medium of exchange
sufficient to cover his probable business and personal requirements. The amount
that will be required depends upon individual circumstances. It is influenced
both by the custom and habits of the individual and by the organization of the
whole social apparatus of production and exchange.
But all of these
objective factors always affect the matter only as motivations of the
individual. They are never capable of a direct influence upon the actual amount
of his demand for money. Here, as in all departments of economic life, it is the
subjective valuations of the separate economic agents that alone are derisive.
The store of purchasing power held by two such agents whose objective economic
circumstances were identical might be quite different if the advantages and
disadvantages of such a store were estimated differently by the different
agents.
The cash balance held by an individual need by no means consist
entirely of money. If secure claims to money, payable on demand, are employed
commercially as substitutes for money, being tendered and accepted in place of
money, then individuals' stores of money can be entirely or partly replaced by a
corresponding store of these substitutes. In fact, for technical reasons (such,
for example, as the need for having money of various denominations on hand) this
may sometimes prove an unavoidable necessity. It follows that we can speak of a
demand for money in a broader and in a narrower sense. The former comprises the
entire demand of an individual for money and money substitutes; the second,
merely his demand for money proper. The former is determined by the will of the
economic agent in question. The latter is fairly independent of individual
influences, if we disregard the question of denomination referred to above.
Apart from this, the question whether a greater or smaller part of the cash
balance held by an individual shall consist of money substitutes is only of
importance to him when he has the opportunity of acquiring money substitutes
which bear interest, such as interest-bearing banknotes—a rare case—or bank
deposits. In all other cases it is a matter of complete indifference to
him.
The individual's demand and stock of money are the basis of the
demand and stock in the whole community. So long as there are no money
substitutes in use, the social demand for money and the social stock of money
are merely the respective sums of the individual demands and stocks. But this is
changed with the advent of money substitutes. The social demand for money in the
narrower sense is no longer the sum of the individual demands for money in the
narrower sense, and the social demand for money in the broader sense is by no
means the sum of the individual demands for money in the broader sense. Part of
the money substitutes functioning as money in the cash holdings of individuals
are "covered" by sums of money held as "redemption funds" at the place where the
money substitutes are cashable, which is usually, although not necessarily, the
issuing concern. We shall use the term money certificates for those money
substitutes that are completely covered by the reservation of corresponding sums
of money, and the term fiduciary media[34] for those which are not covered in
this way. The suitability of this terminology, which has been chosen with regard
to the problem to be dealt with in the third part of the present work, must be
demonstrated in that place. It is not to be understood in the light of banking
technique or in a juristic sense; it is merely intended to serve the ends of
economic argument.
Only in the rarest cases can any particular money
substitutes be immediately assigned to the one or the other group. That is
possible only for those money substitutes of which the whole species is either
entirely covered by money or not covered by money at all. In the case of all
other money substitutes, those the total quantity of which is partly covered by
money and partly not covered by money, only an imaginary ascription of an
aliquot part to each of the two groups can take place. This involves no fresh
difficulty. If, for example, there are banknotes in circulation one-third of the
quantity of which is covered by money and two-thirds not covered, then each
individual note is to be reckoned as two-thirds fiduciary medium and one-third
money certificate. It is thus obvious that a community's demand for money in the
broader sense cannot be the sum of the demands of individuals for money and
money substitutes, because to reckon in the demand for money certificates as
well as that for the money that serves as a cover for them as the banks and
elsewhere is to count the same amount twice over. A community's demand for money
in the broader sense is the sum of the demands of the individual economic agents
for money proper and fiduciary media (including the demand for cover). And a
community's demands for money in the narrower sense are the sum of the demands
of the individual economic agents for money and money certificates (this time
not including cover).
In this part we shall ignore the existence of
fiduciary media and assume that the demands for money of individual economic
agents can be satisfied merely by money and money certificates, and consequently
that the demand for money of the whole economic community can be satisfied
merely by money proper. [35] The third part of this book is devoted to an
examination of the important and difficult problems arising from the creation
and circulation of fiduciary media.
The demand for money and its relations
to the stock of money form the starting point for an explanation of fluctuations
in the objective exchange value of money. Not to understand the nature of the
demand for money is to fail at the very outset of any attempt to grapple with
the problem of variations in the value of money. If we start with a formula that
attempts to explain the demand for money from the point of view of the community
instead of from that of the individual, we shall fail to discover the connection
between the stock of money and the subjective valuations of individuals—the
foundation of all economic activity. But on the other hand, this problem is
solved without difficulty if we approach the phenomena from the individual
agent's point of view.
No longer explanation is necessary, of the way in
which an individual will behave in the market when his demand for money exceeds
his stock of it. He who has more money on hand than he thinks he needs, will
buy, in order to dispose of the superfluous stock of money that lies useless on
his hands. If he is an entrepreneur, he will possibly enlarge his business. If
this use of the money is not open to him, he may purchase interest-bearing
securities; or possibly he may decide to purchase consumption goods. But in any
case, he expresses by a suitable behavior in the market the fact that he regards
his reserve of purchasing power as too large.
And he whose demand for
money is less than his stock of it will behave in an exactly contrary fashion.
If an individual's stock of money diminishes (his property or income remaining
the same), then he will take steps to reach the desired level of reserve
purchasing power by suitable behavior in making sales and purchases. A shortage
of money means a difficulty in disposing of commodities for money. He who is
obliged to dispose of a commodity by way of exchange will prefer to acquire some
of the common medium of exchange for it, and only when this acquisition involves
too great a sacrifice will he be content with some other economic good, which
will indeed be more marketable than that which he wishes to dispose of but less
marketable than the common medium of exchange. Under the present organization of
the market, which leaves a deep gulf between the marketability of money on the
one hand and the marketability of other economic goods on the other hand,
nothing but money enters into consideration at all as a medium of exchange. Only
in exceptional circumstances is any other economic good pressed into this
service. In the case mentioned, therefore, every seller will be willing to
accept a smaller quantity of money than he otherwise would have demanded, so as
to avoid the fresh loss that he would have to suffer in again exchanging the
commodity that he has acquired, which is harder to dispose of than money, for
the commodity that he actually requires for consumption.
The older
theories, which started from an erroneous conception of the social demand for
money, could never arrive at a solution of this problem. Their sole contribution
is limited to paraphrases of the proposition that an increase in the stock of
money at the disposal of the community while the demand for it remains the same
decreases the objective exchange value of money, and that an increase of the
demand with a constant available stock has the contrary effect, and so on. By a
flash of genius, the formulators of the quantity theory had already recognized
this. We cannot by any means call it an advance when the formula giving the
amount of the demand for money (volume of transactions ÷ velocity of
circulation) was reduced to its elements, or when the attempt was made to give
exact precision to the idea of a stock of money, so long as this occurred under
a misapprehension of the nature of fiduciary media and of clearing transactions.
No approach whatever was made toward the central problem of this part of the
theory of money so long as theorists were unable to show the way in which
subjective valuations are affected by variations in the ratio between the stock
of money and the demand for money. But this task was necessarily beyond the
power of these theories; they break down at the crucial
point. [36]
Recently, Wieser has expressed himself against employing the
"collective concept of the demand for money" as the starting point for a theory
of fluctuations in the objective exchange value of money. He says that in an
investigation of the value of money we are not concerned with the total demand
for money. The demand for money to pay taxes with, for example, does not come
into consideration, for these payments do not affect the value of money but only
transfer purchasing power from those who pay the taxes to those who receive
them. In the same way, capital and interest payments in loan transactions and
the making of gifts and bequests merely involve a transference of purchasing
power between persons and not an augmentation or diminution of it. A functional
theory of the value of money must, in stating its problem, have regard only to
those factors by which the value of money is determined. The value of money is
determined in the process of exchange. Consequently the theory of the value of
money must take account only of those quantifies which enter into the process of
exchange. [37]
But these objections of Wieser's are not only rebutted by the
fact that even the surrender of money in paying taxes, in making capital and
interest payments, and in giving presents and bequests, falls into the economic
category of exchange. Even if we accept Wieser's narrow definition of exchange,
we must still oppose his argument. It is not a peculiarity of money that its
value (Wieser obviously means its objective exchange value) is determined in the
process of exchange; the same is true of all other economic goods. For all
economic goods it must therefore be correct to say that the theory of value has
to investigate only certain quantities, namely, only those that are involved in
the process of exchange. But there is no such thing in economics as a quantity
that is not involved in the process of exchange. From the economic point of
view, a quantity has no other relationships than those which exercise some
influence upon the valuations of individuals concerned in some process or other
of exchange.
This is true, even if we admit that value only arises in
connection with exchange in the narrow sense intended by Wieser. But those who
participate in exchange transactions, and consequently desire to acquire or
dispose of money do not value the monetary unit solely with regard to the fact
that they can use it in other acts of exchange (in Wieser's narrower sense of
the expression), but also because they require money in order to pay taxes, to
transfer borrowed capital and pay interest, and to make presents. They consider
the level of their purchasing-power reserves with a view to the necessity of
having money ready for all these purposes, and their judgment as to the extent
of their requirements for money is what decides the demand for money with which
they enter the market.
8 The Consequences of an Increase in the Quantity
of Money While the Demand for Money Remains Unchanged or Does Not Increase to
the Same Extent
Those variations in the ratio between the individual's
demand for money and his stock of it that arise from purely individual causes
cannot as a rule have a very large quantitative influence in the market. In most
cases they will be entirely, or at least partly, compensated by contrary
variations emanating from other individuals in the market. But a variation in
the objective exchange value of money can arise only when a force is exerted in
one direction that is not canceled by a counteracting force in the opposite
direction. If the causes that alter the ratio between the stock of money and the
demand for it from the point of view of an individual consist merely in
accidental and personal factors that concern that particular individual only,
then, according to the law of large numbers, it is likely that the forces
arising from this cause, and acting in both directions in the market, will
counterbalance each other. The probability that the compensation will be
complete is the greater, the more individual economic agents there are.
It
is otherwise when disturbances occur in the community as a whole, of a kind to
alter the ratio existing between the individual's stock of money and his demand
for it. Such disturbances, of course, cannot have an effect except by altering
the subjective valuations of the individual; but they are social economic
phenomena in the sense that they influence the subjective valuations of a large
number of individuals, if not simultaneously and in the same degree, at least in
the same direction, so that there must necessarily be some resultant effect on
the objective exchange value of money.
In the history of money a
particularly important part has been played by those variations in its objective
exchange value that have arisen in consequence of an increase in the stock of
money while the demand for it has remained unchanged or has at least not
increased to the same extent. These variations, in fact, were what first
attracted the attention of economists; it was in order to explain them that the
quantity theory of money was first propounded. All writers have dealt most
thoroughly with them. It is perhaps justifiable, therefore, to devote special
attention to them and to use them to illuminate certain important theoretical
points.
In whatever way we care to picture to ourselves the increase in
the stock of money, whether as arising from increased production or importation
of the substance of which commodity money is made, or through a new issue of
fiat or credit money, the new money always increases the stock of money at the
disposal of certain individual economic agents. An increase in the stock of
money in a community always means an increase in the money incomes of a number
of individuals; but it need not necessarily mean at the same time an increase in
the quantity of goods that are at the disposal of the community, that is to say,
it need not mean an increase in the national dividend. An increase in the amount
of fiat or credit money is only to be regarded as an increase in the stock of
goods at the disposal of society if it permits the satisfaction of a demand for
money which would otherwise have been satisfied by commodity money instead,
since the material for the commodity money would then have had to be procured by
the surrender of other goods in exchange or produced at the cost of renouncing
some other sort of production. If, on the other hand, the nonexistence of the
new issue of fiat or credit money would not have involved an increase in the
quantity of commodity money, then the increase of money cannot be regarded as an
increase of the income or wealth of society.
An increase in a community's
stock of money always means an increase in the amount of money held by a number
of economic agents, whether these are the issuers of fiat or credit money or the
producers of the substance of which commodity money is made. For these persons,
the ratio between the demand for money and the stock of it is altered; they have
a relative superfluity of money and a relative shortage of other economic goods.
The immediate consequence of both circumstances is that the marginal utility to
them of the monetary unit diminishes. This necessarily influences their behavior
in the market. They are in a stronger position as buyers. They will now express
in the market their demand for the objects they desire more intensively than
before; they are able to offer more money for the commodities that they wish to
acquire. It will be the obvious result of this that the prices of the goods
concerned will rise, and that the objective exchange value of money will fall in
comparison.
But this rise of prices will by no means be restricted to the
market for those goods that are desired by those who originally have the new
money at their disposal. In addition, those who have brought these goods to
market will have their incomes and their proportionate stocks of money increased
and, in their turn, will be in a position to demand more intensively the goods
they want, so that these goods will also rise in price. Thus the increase of
prices continues, having a diminishing effect, until all commodities, some to a
greater and some to a lesser extent, are reached by it. [38]
The increase in
the quantity of money does not mean an increase of income for all individuals.
On the contrary, those sections of the community that are the last to be reached
by the additional quantity of money have their incomes reduced, as a consequence
of the decrease in the value of money called forth by the increase in its
quantity; this will be referred to later. The reduction in the income of these
classes now starts a countertendency, which opposes the tendency to a diminution
of the value of money due to the increase of income of the other classes,
without being able to rob it completely of its effect.
Those who hold the
mechanical version of the quantity theory will be the more inclined to believe
that the increase in the quantity of money must eventually lead to a uniform
increase in the prices of all economic goods, the less clear their concept is of
the way in which the determination of prices is affected by it. Thorough
comprehension of the mechanism by means of which the quantity of money affects
the prices of commodities makes their point of view altogether untenable. Since
the increased quantity of money is received in the first place by a limited
number of economic agents only and not by all, the increase of prices at first
embraces only those goods that are demanded by these persons; further, it
affects these goods more than it afterward affects any others. When the increase
of prices spreads farther, if the increase in the quantity of money is only a
single transient phenomenon, it will not be possible for the differential
increase of prices of these goods to be completely maintained; a certain degree
of adjustment will take place. But there will not be such a complete adjustment
of the increases that all prices increase in the same proportion. The prices of
commodities after the rise of prices will not bear the same relation to each
other as before its commencement; the decrease in the purchasing power of money
will not be uniform with regard to different economic goods.
Hume, it may
be remarked, bases his argument concerning this matter on the supposition that
every Englishman is miraculously endowed with five pieces of gold during the
night. [39] Mill rightly remarks on this, that it would not lead to a uniform
increase in the demand for separate commodities; the luxury articles of the
poorer classes would rise more in price than the others. All the same, he
believes that a uniform increase in the prices of all commodities, and this
exactly in proportion to the increase in the quantity of money, would occur, if
"the wants and inclinations of the community collectively in respect to
consumption" remained the same. He assumes, no less artificially than Hume, that
"to every pound, or shilling, or penny, in the possession of any one, another
pound, shilling, or penny were suddenly added."[40] But Mill fails to see that
even in this case a uniform rise of prices would not occur, even supposing that
for each member of the community the proportion between stock of money and total
wealth was the same, so that the addition of the supplementary quantity of money
did not result in an alteration of the relative wealth of individuals. For, even
in this quite impossible case, every increase in the quantity of money would
necessarily cause an alteration in the conditions of demand, which would lead to
a disparate increase in the prices of the individual economic goods. Not all
commodities would be demanded more intensively, and not all of those that were
demanded more intensively would be affected in the same degree. [41]
There
is no justification whatever for the widespread belief that variations in the
quantity of money must lead to inversely proportionate variations in the
objective exchange value of money, so that, for example, a doubling of the
quantity of money must lead to a halving of the purchasing power of
money.
Even assuming that in some way or other—it is confessedly difficult
to imagine in what way—very individual's stock of money were to be increased so
that his relative position as regards other holders of property was unaltered,
it is not difficult to prove that the subsequent variation in the objective
exchange value of money would not be proportioned to the variation in the
quantity of money. For, in fact, the way in which an individual values a
variation in the quantity of money at his disposal is by no means directly
dependent on the amount of this variation; but we should have to assume that it
was, if we wished to conclude that there would be a proportionate variation in
the objective exchange value of money. If the possessor of a units of money
receives b additional units, then it is not at all true to say that he will
value the total stock a + b exactly as highly as he had previously valued the
stock a alone. Because he now has disposal over a larger stock, he will now
value each unit less than he did before; but how much less will depend upon a
whole series of individual circumstances, upon subjective valuations that will
be different for each individual. Two individuals who are equally wealthy and
who each possess a stock of money a, will not by any means arrive at the same
variation in their estimation of money after an increase of b units in each of
their stocks of money. It is nothing short of absurdity to assume that, say,
doubling the amount of money at the disposal of an individual must lead to a
halving of the exchange value that he ascribes to each monetary unit. Let us,
for example, imagine an individual who is in the habit of holding a stock of a
hundred kronen and assume that a sum of a further hundred kronen is paid by
somebody or other to this individual. Mere consideration of this example is
sufficient to show the complete unreality of all the theories that ascribe to
variations in the quantity of money a uniformly proportionate effect on the
purchasing power of money. For it involves no essential modification of this
example to assume that similar increases in the quantity of money are
experienced by all the members of the community at once.
The mistake in
the argument of those who suppose that a variation in the quantity of money
results in an inversely proportionate variation in its purchasing power lies in
its starting point. If we wish to arrive at a correct conclusion, we must start
with the valuations of separate individuals; we must examine the way in which an
increase or decrease in the quantity of money affects the value scales of
individuals, for it is from these alone that variations in the exchange ratios
of goods proceed. The initial assumption in the arguments of those who maintain
the theory that changes in the quantity of money have a proportionate effect on
the purchasing power of money is the proposition that if the value of the
monetary unit were doubled, half of the stock of money at the disposal of the
community would yield the same utility as that previously yielded by the whole
stock. The correctness of this proposition is not disputed; nevertheless, it
does not prove what it is meant to prove.
In the first place, it must be
pointed out that the levels of the total stock of money and of the value of the
money unit are matters of complete indifference as far as the utility obtained
from the use of the money is concerned. Society is always in enjoyment of the
maximum utility obtainable from the use of money. Half of the money at the
disposal of the community would yield the same utility as the whole stock, even
if the variation in the value of the monetary unit was not proportioned to the
variation in the stock of money. But it is important to note that it by no means
follows from this that doubling the quantity of money means halving the
objective exchange value of money. It would have to be shown that forces emanate
from the valuations of individual economic agents which are able to bring about
such a proportionate variation. This can never be proved; in fact, its contrary
is likely. We have already given a proof of this for the case in which an
increase of the quantity of money held by individual economic agents involves at
the same time an increase of their income or wealth. But even when the increase
in the quantity of money does not affect the wealth or income of the individual
economic agents, the effect is still the same.
Let us assume that a man
gets half his income in the form of interest-bearing securities and half in the
form of money; and that he is in the habit of saving three-quarters of his
income, and does this by retaining the securities and using that half of his
income which he receives in cash in equal parts for paying for current con
sumption and for the purchase of further securities. Now let us assume that a
variation in the composition of his income occurs, so that he receives
three-quarters of it in cash and only one-quarter in securities. From now on
this man will use two-thirds of his cash receipts for the purchase of
interest-bearing securities. If the price of the securities rises or, which is
the same thing, if their rate of interest falls, then in either case he will be
less willing to buy and will reduce the sum of money that he would otherwise
have employed for their purchase; he is likely to find that the advantage of a
slightly increased reserve exceeds that which could be obtained from the
acquisition of the securities. In the second case he will doubtless be inclined
to pay a higher price, or more correctly, to purchase a greater quantity at the
higher price, than in the first case. But he will certainly not be prepared to
pay double as much for a unit of securities in the second case as in the first
case.
As far as the earlier exponents of the quantity theory are
concerned, the assumption that variations in the quantity of money would have an
inversely proportionate effect on its purchasing power may nevertheless be
excusable. It is easy to go astray on this point if the attempt is made to
explain the value phenomena of the market by reference to exchange value. But it
is inexplicable that those theorists also who suppose they are taking their
stand on the subjective theory of value could fall into similar errors. The
blame here can only be laid to the account of a mechanical conception of market
processes. Thus even Fisher and Brown, whose concept of the quantity theory is a
mechanical one, and who attempt to express in mathematical equations the law
according to which the value of money is determined, necessarily arrive at the
conclusion that variations in the ratio between the quantity of money and the
demand for it lead to proportionate variations in the objective exchange value
of money. [42] How and through what channels this comes about is not disclosed by
the formula, for it contains no reference at all to the only factors that are
decisive in causing variations of the exchange ratios, that is, variations in
the subjective valuations of individuals.
Fisher and Brown give three
examples to prove the correctness of their conclusions. In the first, they start
with the supposition that the government changes the denomination of the money,
so that, for example, what was previously called a half-dollar is now called a
whole dollar. It is obvious, they say, that this will cause an increase in the
number of dollars in circulation and that prices reckoned in the new dollars
will have to be twice as high as they were previously. Fisher and Brown may be
right so far, but not in the conclusions that they proceed to draw. What their
example actually deals with is not an increase in the quantity of money but
merely an alteration in its name. What does the "money" referred to in this
example really consist of? Is it the stuff of which dollars are made, the claim
that lies behind a credit dollar, the token that is used as money, or is it the
word dollar?
The second example given by Fisher and Brown is no less
incorrectly interpreted. They start from the assumption that the government
divides each dollar into two and mints a new dollar from each half. Here again
all that occurs is a change of name.
In their third example they do at
least deal with a real increase in the quantity of money. But this example is
just as artificial and misleading as those of Hume and Mill which we have
already dealt with in some detail. They suppose that the government gives
everybody an extra dollar for each dollar that he already possesses. We have
already shown that even in this case a proportionate change in the objective
exchange value of money cannot follow.
One thing only can explain how
Fisher is able to maintain his mechanical quantity theory. To him the quantity
theory seems a doctrine peculiar to the value of money; in fact, he contrasts it
outright with the laws of value of other economic goods. He says that if the
world's stock of sugar increases from a million pounds to a million
hundredweight, it would not follow that a hundredweight would have the value
that is now possessed by a pound. Money only is peculiar in this respect,
according to Fisher. But he does not give a proof of this assertion. With as
much justification as that of Fisher and Brown for their mechanical formula for
the value of money, a similar formula could be set out for the value of any
commodity, and similar conclusions drawn from it. That nobody attempts to do
this is to be explained simply and solely by the circumstance that such a
formula would so clearly contradict our experience of the demand curves for most
commodities, that it could not be maintained even for a moment.
If we
compare two static economic systems, which differ in no way from one another
except that in one there is twice as much money as in the other, it appears that
the purchasing power of the monetary unit in the one system must be equal to
half that of the monetary unit in the other. Nevertheless, we may not conclude
from this that a doubling of the quantity of money must lead to a halving of the
purchasing power of the monetary unit; for every variation in the quantity of
money introduces a dynamic factor into the static economic system. The new
position of static equilibrium that is established when the effects of the
fluctuations thus set in motion are completed cannot be the same as that which
existed before the introduction of the additional quantity of money.
Consequently, in the new state of equilibrium the conditions of demand for
money, given a certain exchange value of the monetary unit, will also be
different. If the purchasing power of each unit of the doubled quantity of money
were halved, the unit would not have the same significance for each individual
under the new conditions as it had in the static system before the increase in
the quantity of money. All those who ascribe to variations in the quantity of
money an inverse proportionate effect on the value of the monetary unit are
applying to dynamic conditions a method of analysis that is only suitable for
static conditions.
It is also entirely incorrect to think of the quantity
theory as if the characteristics in question affecting the determination of
value were peculiar to money. Most of both the earlier and the later adherents
of the theory have fallen into this error, and the fierce and often unfair
attacks that have been directed against it appear in a better light when we know
of this and other errors of a like kind of which its champions have been
guilty.
9 Criticism of Some Arguments Against the Quantity Theory
We
have already examined one of the objections that have been brought against the
quantity theory: the objection that it only holds good ceteris paribus. No more
tenable as an objection against the determinateness of our conclusions is
reference to the possibility that an additional quantity of money may be
hoarded. This argument has played a prominent role in the history of monetary
theory; it was one of the sharpest weapons in the armory of the opponents of the
quantity theory. Among the arguments of the opponents of the currency theory it
immediately follows the proposition relating to the elasticity of
cash-economizing methods of payment, to which it also bears a close relation as
far as its content is concerned. We shall deal with it here separately;
nevertheless all that we can say about it in the present place needs to be set
in its proper light by the arguments contained in the third part of this book,
which is devoted to the doctrine of fiduciary media.
For Fullarton, hoards
are the regular deus ex machina. They absorb the superfluous quantity of money
and prevent it from flowing into circulation until it is needed. [43] Thus they
constitute a sort of reservoir which accommodates the ebb and flow of money in
the market to the variations in the demand for money. The sums of money
collected in hoards lie there idle, waiting for the moment when commerce needs
them for maintaining the stability of the objective exchange value of money; and
all those sums of money, that might threaten this stability when the demand for
money decreases, flow back out of circulation into these hoards to slumber
quietly until they are called forth again. This tacitly assumes[44] the
fundamental correctness of the arguments of the quantity theory, but asserts
that there is nevertheless a principle inherent in the economic system that
always prevents the working out of the processes that the quantity theory
describes.
But Fullarton and his followers unfortunately neglected to
indicate the way in which variations in the demand for money set in motion the
mechanism of the hoards. Obviously they supposed this to proceed without the
will of the transacting parties entering into the matter at all. Such a view
surpasses the naivest versions of the quantity theory in its purely mechanical
conception of market transactions. Even the most superficial investigation into
the problem of the demand for money could not have failed to demonstrate the
untenability of the doctrine of hoards.
In the first place, it must be
recognized that from the economic point of view there is no such thing as money
lying idle. All money, whether in reserves or literally in circulation (that is,
in process of changing hands at the very moment under consideration), is devoted
in exactly the same way to the performance of a monetary function. [45] In fact,
since money that is surrendered in an exchange is immediately transferred from
the ownership of the one party to that of the other, and no period of time can
be discovered in which it is actually in movement, all money must be regarded as
at rest in the cash reserve of some individual or other The stock of money of
the community is the sum of the stocks of individuals; there is no such thing as
errant money, no money which even for a moment does not form part of somebody's
stock. All money, that is to say, lies in some individual's stock, ready for
eventual use. It is a matter of indifference how soon the moment occurs when a
demand for money next arises and the sum of money in question is paid out. In
every household or family the members of which are at least moderately
prosperous there is a minimum reserve whose level is constantly maintained by
replenishment. (The fact has already been mentioned, that besides objective
conditions, subjective factors influencing the individual economic agent help to
determine the amount of the individual demand for money.) What is called storing
money is a way of using wealth. The uncertainty of the future makes it seem
advisable to hold a larger or smaller part of one's possessions in a form that
will facilitate a change from one way of using wealth to another, or transition
from the ownership of one good to that of another, in order to preserve the
opportunity of being able without difficulty to satisfy urgent demands that may
possibly arise in the future for goods that will have to be obtained by way of
exchange. So long as the market has not reached a stage of development in which
all, or at least certain, economic goods can be sold (that is, turned into
money) at any time under conditions that are not too unfavorable, this aim can
be achieved only by holding a stock of money of a suitable size. The more active
the life of the market becomes, the more can this stock be diminished. At the
present day, the possession of certain sorts of securities which have a large
market so that they can be realized without delay and without very considerable
loss, at least in normal times, may make the holding of large cash reserves to a
certain extent unnecessary.
The demand for money for storage purposes is
not separable from the demand for money for other purposes. Hoarding money is
nothing but the custom of holding a greater stock of it than is usual with other
economic agents, at other times, or in other places. The hoarded sums of money
do not lie idle, whether they are regarded from the social or from the
individual point of view. They serve to satisfy a demand for money just as much
as any other money does. Now the adherents of the banking principle seem to hold
the opinion that the demand for storing purposes is elastic and conforms to
variations in the demand for money for other purposes in such a way that the
total demand for money, that is, that for storing purposes and that for other
purposes taken together, adjusts itself to the existing stock of money without
any variation in the objective exchange value of the monetary unit. This view is
entirely mistaken. In fact, the conditions of demand for money, including the
demand for storage purposes, is independent of the circumstances of the supply
of money. The contrary supposition can be supported only by supporting a
connection between the quantity of money and the rate of interest,[46] that is,
by asserting that the variations arising from changes in the ratio between the
demand for money and the supply of it, influence to a different degree the
prices of goods of the first order and those of goods of higher orders, so that
the proportion between the prices of these two classes of goods is altered. The
question of the tenability of this proposition, which is based on the view that
the rate of interest is dependent on the greater or lesser quantity of money,
will have to be brought up again in part three. There the opportunity will also
arise for showing that the cash reserves of the banks that issue fudiciary media
no more act as a buffer in this way than these mythical hoards do. There is no
such thing as a "reserve store" of money out of which commerce can at any time
supply its extra requirements or into which it can direct its
surpluses.
The doctrine of the importance of hoards for stabilizing the
objective exchange value of money has gradually lost its adherents with the
passing of time. Nowadays its supporters are few. Even Diehl's membership of
this group is only apparent. He agrees, it is true, with the criticism directed
by Fullarton against the currency theory. On the other hand, he concedes that
Fullarton's expressions inert and dormant are erroneously applied to reserves of
money; since these reserves are not idle but merely serve a different purpose
from that served by circulating money; he also agrees that sums of money in such
reserves and sums used for purposes of payment are not sharply distinguishable,
and that the same sums serve now one purpose and now the other. In spite of
this, however, he supports Fullarton as against Ricardo. He says that, even if
the sums taken out of the reserves must again be replaced out of the stocks of
money present in the community; this need not occur immediately; a long period
may elapse before it is necessary; and that in any case it follows that the
mechanical connection which Ricardo assumes to exist between the quantity of
money in circulation and the prices of commodities cannot be accepted, even with
regard to hoards. [47] Diehl does not show in greater detail why a long period may
elapse before the sums supposed to be taken from the reserves are replaced. But
he does admit the fundamental correctness of the criticism leveled at
Fullarton's arguments; it is possible to grant the sole reservation that he
makes if we interpret it as meaning that time may and must elapse before changes
in the quantity of money express themselves all over the market in a variation
of the objective exchange value of money. For that the increase in individuals'
stocks of money which results from the inflow of the additional quantity of
money must bring about a change in the subjective valuations of the individuals,
and that this occurs immediately and begins immediately to have an effect in the
market, can hardly be denied. On the other hand, an increase in an individual's
demand for money while his stock remains the same, or a decrease of his stock
while his demand remains the same, must lead at once to changes in subjective
valuations which must be expressed in the market, even if not all at once, in an
increase of the objective exchange value of money. It may be admitted that every
variation in the quantity of money will impel the individual to check his
judgment as to the extent of his requirements for money and that this may result
in a reduction of his demand in the case of a diminishing stock of money and an
augmentation of it in the case of an increasing stock, but the assumption that
such a limitation or extension must occur has no logical foundation, not to
speak of the assumption that it must occur in such a degree as to keep the
objective exchange value of money stable.
A weightier objection is the
denial of the practical importance of the quantity theory, that is implied in
the attribution to the present organization of the money, payment, and credit
system of a tendency to cancel out variations in the quantity of money and
prevent them from becoming effective. It is said that the fluctuating velocity
of circulation of money, and the elasticity of methods of payment made possible
by the credit system and the progressive improvement of banking organization and
technique, that is, the facility with which methods of payment can be adjusted
to expanded or contracted business, have made the movement of prices as far as
is possible independent of variations in the quantity of money, especially since
there exists no quantitative relation between money and its substitutes, that
is, between the stock of money and the volume of transactions and payments. It
is said that if in such circumstances we still wish to preserve the quantity
theory we must not base it merely upon current money but "extend it to embrace
all money whatever, including not only all the tangible money substitutes that
are capable of circulation, but also every transaction of the banking system or
agreement between two parties to a contract that replaces a payment of money."
It is admitted that this would make the theory quite useless in practice, but it
would secure its theoretical universality. And it is not denied that this raises
an almost insoluble problem—that of the conditions under which credit comes into
being and of the manner in which it affects the determination of values and
prices. [48]
The answer to this is contained in the third part of the
present work, where the problem of the alleged elasticity of credit is
discussed. [49]
10 Further Applications of the Quantity Theory
In general the quantity theory has not been used for investigating the consequences
that would follow a decrease in the demand for money while the stock of money
remained the same. There has been no historical motive for such an
investigation. The problem has never been a live one; for there has never been
even a shadow of justification for attempting to solve controversial questions
of economic policy by answering it. Economic history shows us a continual
increase in the demand for money. The characteristic feature of the development
of the demand for money is its intensification; the growth of division of labor
and consequently of exchange transactions, which have constantly become more and
more indirect and dependent on the use of money, have helped to bring this
about, as well as the increase of population and prosperity. The tendencies
which result in an increase in the demand for money became so strong in the
years preceding the war that even if the increase in the stock of money had been
very much greater than it actually was, the objective exchange value of money
would have been sure to increase. Only the circumstance that this increase in
the demand for money was accompanied by an extraordinarily large expansion of
credit, which certainly exceeded the increase in the demand for money in the
broader sense, can serve to explain the fact that the objective exchange value
of money during this period not only failed to increase, but actually decreased.
(Another factor that was concerned in this is referred to later in this
chapter.)
If we were to apply the mechanical version of the quantity
theory to the case of a decrease in the demand for money while the stock of
money remained unaltered, we should have to conclude that there would be a
uniform increase in all commodity prices, arithmetically proportional to the
change in the ratio between the stock of money and the demand for it. We should
expect the same results as would follow upon an increase of the stock of money
while the demand for it remained the same. But the mechanical version of the
theory, based as it is upon an erroneous transference of static law to the
dynamic sphere, is just as inadequate in this case as in the other It cannot
satisfy us because it does not explain what we want to have explained. We must
build up a theory that will show us how a decrease in the demand for money while
the stock of it remains the same affects prices by affecting the subjective
valuations of money on the part of individual economic agents. A diminution of
the demand for money while the stock remained the same would in the first place
lead to the discovery by a number of persons that their cash reserves were too
great in relation to their needs. They would therefore enter the market as
buyers with their surpluses. From this point, a general rise in prices would
come into operation, a diminution of the exchange value of money. More detailed
explanation of what would happen then is unnecessary.
Very closely related
to this case is another, whose practical significance is incomparably greater.
Even if we think of the demand for money as constantly increasing it may happen
that the demand for particular kinds of money diminishes, or even ceases
altogether so far as it depends upon their characteristics as general media of
exchange, and this is all we have to deal with here. If any given kind of money
is deprived of its monetary characteristics, then naturally it also loses the
special value that depends on its use as a common medium of exchange, and only
retains that value which depends upon its other employment. In the course of
history this has always occurred when a good has been excluded from the
constantly narrowing circle of common media of exchange. Generally speaking, we
do not know much about this process, which to a large extent took place in times
about which our information is scanty. But recent times have provided an
outstanding example: the almost complete demonetization of silver. Silver, which
previously was widely used as money, has been almost entirely expelled from this
position, and there can be no doubt that at a time not very far off, perhaps
even in a few years only, it will have played out its part as money altogether.
The result of the demonetization of silver has been a diminution of its
objective exchange value. The price of silver in London fell from 60-9/10d. on
an average in 1870 to 23-12/16d. on an average in 1909. Its value was bound to
fall, because the sphere of its employment had contracted. Similar examples can
be provided from the history of credit money also. For instance, the notes of
the southern states in the American Civil War may be mentioned, which as the
successes of the northern states increased, lost pari passu their monetary value
as well as their value as claims. [50]
More deeply than with the problem of
the consequences of a diminishing demand for money while the stock of it remains
the same, which possesses only a small practical importance, the adherents of
the quantity theory have occupied themselves with the problem of a diminishing
stock of money while the demand for it remains the same and with that of an
increasing demand for money while the stock of it remains the same. It was
believed that complete answers to both questions could easily be obtained in
accordance with the mechanical version of the quantity theory, if the general
formula, which appeared to embrace the essence of the problems, was applied to
them. Both cases were treated as inversions of the case of an increase in the
quantity of money while the demand for it remained the same; and from this the
corresponding conclusions were drawn. Just as the attempt was made to explain
the depreciation of credit money simply by reference to the enormous increase in
the quantity of money, so the attempt was made to explain the depression of the
seventies and eighties by reference to an increase of the demand for money while
the quantity of money did not increase sufficiently. This proposition lay at the
root of most of the measures of currency policy of the nineteenth century. The
aim was to regulate the value of money by increasing or diminishing the quantity
of it. The effects of these measures appeared to provide an inductive proof of
the correctness of this superficial version of the quantity theory, and
incidentally concealed the weaknesses of its logic. This supposition alone can
explain why no attempt was ever made to exhibit the mechanism of the increase of
the value of money as a result of the decrease in the volume of circulation.
Here again the old theory needs to be supplemented, as has been done in our
argument above.
Normally the increase in the demand for money is slow, so
that any effect on the exchange ratio between money and commodities is
discernible only with difficulty. Nevertheless, cases do occur in which the
demand for money in the narrower sense increases suddenly and to an unusually
large degree, so that the prices of commodities drop suddenly. Such cases occur
when the public loses faith in an issuer of fiduciary media at a time of crisis,
and the fiduciary media cease to be capable of circulation. Many examples of
this sort are known to history (one of them is provided by the experiences of
the United States in the late autumn of 1907), and it is possible that similar
cases may occur in the future.
[26] See Wieser, Über den Ursprung
und die Hauptgesetze des wirtschaftlichen Wertes, op. cit., pp. iii.
[27] See Laughlin, The Principles of
Money (London, 1903), pp. 513 f.
[28] Ibid., pp. 530 f.
[29] Ibid., pp. 531 ff.
[30] See Zuckerkandl, op. cit.,
pp. 123 ff.
[31] See Mill, Principles of
Political Economy (London, 1867), p. 299.
[32] Cf. Marshall, before the Indian
Currency Committee, "Report" (London, 1898—99; Q. 11759), in
Official Papers (London, 1926), p. 267.
[33] See Menger, op. cit.,
pp. 325 ff.; also Helfferich, op. cit., pp. 500 ff.
[34] See Appendix B.
[35] Examination of the relationship of
this supposition to the doctrine of the "purely metallic currency" as expounded
by the Currency School would necessitate a discussion of the criticism that has
been leveled at it by the Banking School; but certain remarks in the third part
of the present work on fiduciary media and the clearing system will fill the
gap left above.
[36] It is remarkable that even
investigators who otherwise take their stand upon the subjective theory of
value have been able to fall into this error. So, for example, Fisher and
Brown, The Purchasing Power of Money (New York, 1911), pp. 8 ff.
[37] See Wieser, "Der Geldwert und
seine Veränderungen," pp. 515 ff.
[38] See Hume, Essays, ed.
Frowde (London), pp. 294 ff.; Mill, op. cit., pp. 298 ff.; Cairnes,
Essays in Political Economy, Theoretical and Applied (London, 1873),
pp. 57 ff.; Spiethoff, "Die Quantitätstheorie insbesondere in ihrer
Verwertbarkeit als Haussetheorie," Festgaben für Adolf Wagner
(Leipzig, 1905), pp. 250 ff.
[39] Hume, op. cit., p. 307
[40] Mill, op. cit., p. 299.
[41] See Conant, "What Determines the
Value of Money?" Quarterly Journal of Economics 18 (1904): 559 ff.
[42] See Fisher and Brown, op. cit.,
pp. 28 ff., 157 ff.
[43] See Fullarton, On the
Regulation of Currencies, 2d ed. (London, 1845), pp. 69 ff., 138 f.;
Wagner, Die Geld-und Kredittheorie der Peelschen Bankakte
(Vienna, 1862), pp. 97 ff.
[44] Elsewhere, explicitly as well.
See Fullarton, op. cit., pp. 57 f.; Wagner, op. cit., p. 70.
[45] See also Knies, Geld und Kredit
(Berlin, 1876), vol. 2, 1st half, pp. 284 ff.
[46] See Fullarton, op. cit.,
p. 71.
[47] See Diehl, Sozialwissenschaftliche
Erläuterungen zu David Ricardos Grundsätzen der Volkswirtschaft und
Besteuerung, 3d ed. (Leipzig, 1922), Part 2, p. 230.
[48] See Spiethoff, op. cit.,
pp. 263 ff.; Kemmerer, op. cit., pp. 67 ff.; Mill, op. cit.,
pp, 316 ff.
[49] See pp. 302 ff. below.
[50] See White, Money and Banking
Illustrated by American History (Boston, 1895), pp. 166 ff.
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