The Theory of Money and Credit

In order to be able to make an accurate estimate of the bearing of clearing methods of payment and of fiduciary media on the development of the demand for money, it is necessary to be clear about the nature of variations in the demand for money.

Fluctuations in the demand for money, insofar as the objective conditions of its development are concerned, are governed in all communities by the same law. An extension of the procedure of exchange mediated by money increases the demand for money; a decrease of indirect exchange, a return to exchange in natura, decreases it. But even apart from variations in the extent of indirect exchange which are insignificant nowadays, large variations in the demand for money occur which are determined by factors of general economic development. Increase of population, and progress in division of labor, together with the extension of exchange which goes hand in hand with it, increase the demand for money of individuals, and also therefore the demand for money of the community, which consists merely in the sum of the demands for money of individuals. Decrease of population and retrogression of the exchange economy, bring about a contraction in it. These are the determinants of the big changes in the demand for money. Within these large variations, it is possible to observe smaller periodical movements. Such are in the first place brought about by commercial and industrial fluctuations, by the alternation of boom and depression peculiar to modern economic life, by good and bad business.3  The crest and the trough of the wave always cover a period of several years. But also within single years, quarters, months, and weeks, even within single days, there are considerable fluctuations in the level of the demand for money. The transactions involving the use of money are concentrated together at particular points of time; and even where this is not the case, the demand for money is differentiated by the practice on the part of buyers of settling their share of transactions on particular dates. On the daily markets it may perhaps seldom happen that the demand for money during the hours of the market is greater than before or after The periodical rise and fall of the demand for money can be seen much more clearly where transactions are concentrated in weekly, monthly and annual markets. A similar effect results from the custom of not paying wages and salaries daily, but weekly, monthly, or quarterly. Rents, interest, and repayment installments, are as a rule paid on particular days. The accounts of the tailor, the shoemaker, the butcher, the baker, the bookseller, the doctor, and so forth, are often settled not daily but periodically. The tendency in all these arrangements is enormously strengthened by the mercantile practice of establishing certain days as days of settlement, or paydays. The middle and last days of the month have gained a special significance in this connection, and among the last days of the month, particularly the last day of the quarters. But, above all, the payments that have to be made in a community during the year are concentrated in the autumn, the decisive circumstance being that agriculture, for natural reasons, has its chief business period in the autumn. All of these facts have been repeatedly and exhaustively illustrated by statistics; nowadays they are the common property of all discussions on the nature of banks and money.4

• 3On the question of the dependence of economic fluctuations on credit policy, see pp. 405 f. 
• 4See Jevons, Investigations in Currency and Finance, pp. 8, 151 ff.; Palgrave, Bank Rate and the Money Market in England, France, Germany, Holland and Belgium 1844-1900 (London, 1903), pp. 106 ff.; 138; J. Laughlin, The Principles of Money (London, 1903), pp. 409 ff.