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 | 130 |
| And Ricardo’s | 131-132 |
| Will dodo-bones circulate? Dodo-bones and poker chips; circular reasoning | 132 |
| Both medium of exchange and standard of value must be valuable | 133 |
| Is inconvertible paper an exception? | 133-134 |
| Doctrine that money gives legal claim to things in general | 134 |
| Kemmerer’s assumptions; money made of commodity, once valuable, now used only as money | 135 |
| Commodity theory requires present commodity value | 135 |
| 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 | 139 |
| “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 | 154 |
| Taussig vs. Fisher | 155 |
| 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 | 166 |
| 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 | 172 |
| 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 | 185 |
| 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-levels | 186-189 |
| Legitimate and illegitimate abstraction | 189-190 |
| Causation and temporal order | 190-191 |
| 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 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 | 196 |
| 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 | 201 |
| Bills of exchange; foreign trade | 201 |
| 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 | 203 |
| “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 | 219 |
| 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 | 255 |
| 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 | 300 |
| 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 | 383 |