PART II. THE QUANTITY THEORY
Reading edition
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 challenged123-129
CHAPTER VII DODO-BONES
Quantity theory doctrine that valueless objects can serve as money; Nicholson's assumption: money made of dodo-bones130-131
Fisher's view also130
And Ricardo's131-132
Will dodo-bones circulate? Dodo-bones and poker chips; circular reasoning132
Both medium of exchange and standard of value must be valuable133
Is inconvertible paper an exception?133-134
Doctrine that money gives legal claim to things in general134
Kemmerer's assumptions; money made of commodity, once valuable, now used only as money135
Commodity theory requires present commodity value135
Historical vs. cross-section view: possibility that such money would circulate135-136
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 spheres136-139
But this no basis for quantity theory: social psychology, not mechanics139
"Banker's psychology" vs. psychology of blind habit: India, Austria, United States; monetary phenomena of war times; "credit theory" of Greenbacks139-142
Question-begging definitions142-143
Assumptions of quantity theory: blind habit and fluid prices143-144
Extreme commodity theory denies that money-use adds to value of money; usually not true; analysis of money-functions144-150
Hypothetical case in which whole value of money comes from commodity value150-152
Money must have value apart from monetary employments, but, in general, gains additional value from employment as money152-153
CHAPTER VIII THE "EQUATION OF EXCHANGE"
Fisher leading, most consistent, most uncompromising quantity theorist: wide acceptance of his views154
Taussig vs. Fisher155
Fisher and dodo-bone doctrine: logical part of quantity theory; Fisher's value concept155-156
"Equation of exchange": analysis of Fisher's version, typical of all156-171
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 meaningless161-162
All factors in equation highly abstract162-163
"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 change164-166
This makes circular theory: problem defined in terms of explanation165-166
Causal theory associated with equation of exchange166
Equation amplified to include credit; not acceptable to Nicholson or Walker, and caricature of conditions in Germany and France166-170
Book-credit, bills of exchange, etc., excluded167-170
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 stands172
Fisher's arguments for fixed ratio, money to bank-deposits172-173
Argument a non-sequitur, even if contentions true173-177
Contentions untrue: no fixed ratio between reserves and deposits, or reserves and demand liabilities, either in America or Europe177-182
Taussig's views; virtually surrender of quantity theory in modern conditions182-185
Bulk of quantity theorists in between Fisher and Taussig, but nearer to Fisher's view than to Taussig's185
CHAPTER X "NORMAL" VS. "TRANSITIONAL" TENDENCIES
Quantity theory qualified by distinction between "normal" and "transitional" effects of change in quantity of money, etc.186
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-levels186-189
Legitimate and illegitimate abstraction189-190
Causation and temporal order190-191
Fisher admits very slight qualification of "normal theory"192
Mill's quantity theory "short run" theory; Taussig's "long run" theory; radically different logic in the two192-193
Fisher's theory sometimes "long run" and sometimes "short run"194-195
CHAPTER XI BARTER
Quantity theory spoiled if resort to barter possible and important196
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-credits197-200
Barter made easier under money economy, by measure of value function of money201
Bills of exchange; foreign trade201
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 proportionality203
"Coin-transfer" vs. "person-turnover" concepts203-204
Velocity really non-essential by-product, meaningless average204-205
Doctrine that velocity independent of money; habit and convenience; hoarding; hoarding by banks205-209
Velocity and volume of trade; vary together209-214
Value of money causally governs velocity214-215
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 money216-219
View that quantity of money vitally affects production and trade219
Walker, Sombart, Withers, Price, Holt219-222
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 City222-225
Trade distinguished from production and from stock225-226
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-counting227-230
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 business230-241
Measurement of "ordinary trade"241-248
Volume of stock speculation248-251
Commodity speculation251-252
Unorganized speculation252-254
Bill and note speculation255
Fisher's and Kemmerer's indicia of trade variation wholly misleading255-257
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-functions262-266
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, 1890-1916267-278
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 credit279-281
Quantity theory doctrine: Fisher vs. Laughlin281-282
Quantity theory has no explanation of elastic bank credit: "Currency Theory" of deposits282-285
Loans and deposits285-288
Bills of exchange288-290
Summary of quantity theory doctrine290-291
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 compensate292-295
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: instances295-299
Quantity theory conflicts with supply and demand: supply and demand holds good: particular prices and price-level299-300
Generalization of conflict to include cost of production, capitalization theory, imputation theory300
Capitalization theory vs. quantity theory; different psychological assumptions of the two theories300-306
Cost of production vs. quantity theory; money-income vs. quantity of money306-308
Quantity theory false, granting all its assumptions308-310
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 goods310-314
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 nothing315-316
Some prices, rising, tend to repel gold, but most prices have no such effect316-317
Some prices, rising, bring in gold317-319
Gold movements and money-rates319-320
CHAPTER XVII
THE QUANTITY THEORY vs. GRESHAM'S LAW321-323
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-level326-328
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 quantity328-330
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 statistics331-335
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 theory335-337
Fisher's statistics, resting on Kemmerer's, chiefly studied: their relation to Kinley's "deposits" figures337-338
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 City348-353
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 business353-361
Index of variation for M´V´ wrongly weighted; V´ wrongly calculated for all years; which upsets calculation of V361-363
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 overcounting368-369
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 sales369-381
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 City383