The Value of Money

PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE

CHAPTER I
ECONOMIC VALUE

• Problem of value of money special case of general theory of value; present chapter concerned with general theory
• Formal and logical aspects of value: value as quality; value as quantity; value and wealth
• Absolute vs. relative conceptions of value: value of money vs. "reciprocal of price-level"; value prior to exchange; value and exchangeability; do prices correctly express values?
• Doctrine so far in accord with main current of economic opinion
• Causal theory of value new: marginal utility, labor, theory, etc., rejected
• Social explanation required: "individual" a social product, both in history of individual and in history of race
• And above individual impersonal psychic forces, law, public opinion, morality, economic values
• Three types of theory have dealt with these: theory of extra-human objective forces; extreme individualism; social value theory
• Illustrated in jurisprudence, ethics, and economic theory
• Law, morals, and economic values generically alike but have differentiae
• But not differentiated on basis of states of consciousness of individual immediately moved by them, because many minds in organic interplay involved
• Economic social value (a) of consumers' goods and services: "utility" and scarcity; "marginal utility": social explanation of marginal utility; marginal utilities the conscious focus of economic values of consumers' goods, but only minor part of these values; individuals, classes and institutions heavily weighted by legal, moral, and other social values, in power over economic values of consumers' goods
• Economic social value (b) of labor, land, stocks, bonds, "good will," etc.; based only in part on values of consumers' goods; partially independent, directly influenced by contagion, and centers of power and prestige
• Pragmatic character of theory
• Relation of social values to individual values

CHAPTER II
SUPPLY AND DEMAND, AND THE VALUE OF MONEY

• Hiatus between general theory of value and theory of value of money
• Partly because former has been developed by different writers from those who have developed latter
• But chiefly because supply and demand, cost of production, etc., assume fixed value of money, and are theories of price, rather than value
• Supply and demand useful but superficial formula, common property of many value theories
• Crude and unanalyzed in Smith and Ricardo; first made precise by J. S. Mill, who gives essentials of modern doctrine
• Böhm-Bawerk's pseudo-psychology spoils Mill's clean-cut doctrine
• Supply and demand assumes fixed value of money-unit, and hence inapplicable to money itself
• But supply and demand does not assume fixed price-level
• Cairnes vs. Mill
• Mill's unsuccessful effort to apply supply and demand to money
• Walker's attempt
• Supply and demand in the "money market"

CHAPTER III
COST OF PRODUCTION AND THE VALUE OF MONEY

• Types of cost theory: modern cost doctrine is "money costs" doctrine, and inapplicable to value of money
• Labor cost: Smith; Ricardo; Ricardo's confession of failure; "real costs" in Senior and Cairnes; Mill's "money-outlay" cost doctrine, and Cairnes' criticism; but "money-cost" has survived
• Because "real cost" doctrine does not square with facts
• "Money-cost" of producing money-metal
• Austrian cost doctrine runs still in money terms, assuming value, money, and fixed value of money
• "Negative social values" as "real costs"

CHAPTER IV
THE CAPITALIZATION THEORY AND THE VALUE OF MONEY

• Money as "capital good," and "money-rates" as rentals
• Capitalization theory; formula; capital value passive resultant of annual income and rate of discount
• But in case of money, rental and rate of discount not independent variables
• And in case of money, capital value not passive shadow, but active cause of income
• Capitalization theory assumes money, and fixed value of Money
• Assumed fixed value of money absolute, and not relative
• Capitalization theory, in current formulation, inapplicable to value of money

CHAPTER V
MARGINAL UTILITY AND THE VALUE OF MONEY

• Marginal utility theory usually thinly disguised version of supply and demand, and hence inapplicable to money
• View that money is unique in having no utility per se
• Marginal utility and "commodity theory" of money-value
• Quantity theorists and marginal utility of money
• Money an instrumental good, and marginal utility no less applicable here than elsewhere; marginal utility invalid as general theory of value, hence invalid when applied to money
• Wieser's theory of value of money
• A circle in reasoning
• Schumpeter's similar circle
• But Schumpeter's general utility theory, though inapplicable to value of money, in form avoids a causal circle
• Schumpeter's conspectus; different from Böhm-Bawerk and most utility theorists
• Defects and limitations of Schumpeter's general theory
• Schumpeter's substitutes for social value concept
• Von Mises sees circle of Wieser and Schumpeter
• Seeks to avoid it by construing utility theory as historical, instead of static, theory
• But this departs from fundamentals of utility theory; other difficulties
• Kinley's doctrine
• General criticism of utility theory
• Davenport, Wicksteed, Fisher, Perry

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

CHAPTER VII
DODO-BONES

• Quantity theory doctrine that valueless objects can serve as money; Nicholson's assumption: money made of dodo-bones
• Fisher's view also
• And Ricardo's
• Will dodo-bones circulate? Dodo-bones and poker chips; circular reasoning
• Both medium of exchange and standard of value must be valuable
• Is inconvertible paper an exception?
• Doctrine that money gives legal claim to things in general
• Kemmerer's assumptions; money made of commodity, once valuable, now used only as money
• Commodity theory requires present commodity value
• Historical vs. cross-section view: possibility that such money would circulate
• 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
• But this no basis for quantity theory: social psychology, not mechanics
• "Banker's psychology" vs. psychology of blind habit: India, Austria, United States; monetary phenomena of war times; "credit theory" of Greenbacks
• Question-begging definitions
• Assumptions of quantity theory: blind habit and fluid prices
• Extreme commodity theory denies that money-use adds to value of money; usually not true; analysis of money functions
• Hypothetical case in which whole value of money comes from commodity value
• Money must have value apart from monetary employments, but, in general, gains additional value from employment as money

CHAPTER VIII
THE "EQUATION OF EXCHANGE"

• Fisher leading, most consistent, most uncompromising quantity theorist: wide acceptance of his views
• Taussig vs. Fisher
• Fisher and dodo-bone doctrine: logical part of quantity theory; Fisher's value concept
• "Equation of exchange": analysis of Fisher's version, typical of all
• In what sense equality between two sides of equation? Meaning of "T"
• No "goods side" to equation; both sides sums of money; equal because identical; equation meaningless
• All factors in equation highly abstract
• "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
• This makes circular theory: problem defined in terms of explanation
• Causal theory associated with equation of exchange
• Equation amplified to include credit; not acceptable to Nicholson or Walker, and caricature of conditions in Germany and France
• Book-credit, bills of exchange, etc., excluded
• Why a one-year period?

CHAPTER IX
THE VOLUME OF MONEY AND THE VOLUME OF CREDIT

• Mill thought credit acts on prices like money, and that this reduces quantity theory tendency to indeterminate degree; Fisher holds volume of money in circulation governs volume of credit, so that quantity theory stands
• Fisher's arguments for fixed ratio, money to bank-deposits
• Argument a non-sequitur, even if contentions true
• Contentions untrue: no fixed ratio between reserves and deposits, or reserves and demand liabilities, either in America or Europe
• Taussig's views; virtually surrender of quantity theory in modern conditions
• Bulk of quantity theorists in between Fisher and Taussig, but nearer to Fisher's view than to Taussigs

CHAPTER X
"NORMAL" VS. "TRANSITIONAL" TENDENCIES

• Quantity theory qualified by distinction between "normal" and "transitional" effects of change in quantity of money, etc
• Meaning of distinction, and extent of qualification hard to determine: is "normal period" real period in time? How long is "transitional period"? Is it realistic, or hypothetical? Is equation of exchange realistic? Concrete vs. hypothetical price-levels
• Legitimate and illegitimate abstraction
• Causation and temporal order
• Fisher admits very slight qualification of "normal theory"
• Mill's quantity theory "short run" theory; Taussig's "long run" theory; radically different logic in the two
• Fisher's theory sometimes "long run" and sometimes "short run"

CHAPTER XI
BARTER

• Quantity theory spoiled if resort to barter possible and important
• Extent of barter and other flexible substitutes for money and bank-credit; simple barter; different methods of corporate consolidations; flexibility, with state of money-market; clearing-house arrangements in speculative exchanges; offsetting book-credits
• Barter made easier under money economy, by measure of value function of money
• Bills of exchange; foreign trade

CHAPTER XII
VELOCITY OF CIRCULATION

• Velocity conceived by quantity theory as causal entity, independent of quantity of money and prices; necessary assumption for law of proportionality
• "Coin-transfer" vs. "person-turnover" concepts
• Velocity really non-essential by-product, meaningless average
• Doctrine that velocity independent of money; habit and convenience; hoarding; hoarding by banks
• Velocity and volume of trade; vary together
• Value of money causally governs velocity

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
• View that quantity of money vitally affects production and trade
• Walker, Sombart, Withers, Price, Holt
• 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
• Trade distinguished from production and from stock
• 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
• Figure largely represents speculation; statistics of total wealth of U.S.; small role 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
• Measurement of "ordinary trade"
• Volume of stock speculation
• Commodity speculation
• Unorganized speculation
• Bill and note speculation
• Fisher's and Kemmerer's indicia of trade variation wholly misleading
• Production waits on trade; selling costs vs. "cost of production"; "good will"; are banks useless?
• "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

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.

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
• Quantity theory doctrine: Fisher vs. Laughlin
• Quantity theory has no explanation of elastic bank credit: "Currency Theory" of deposits
• Loans and deposits
• Bills of exchange
• Summary of quantity theory doctrine

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
• 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
• Quantity theory conflicts with supply and demand: supply and demand holds good: particular prices and price-level
• Generalization of conflict to include cost of production, capitalization theory, imputation theory
• Capitalization theory vs. quantity theory; different psychological assumptions of the two theories
• Cost of production vs. quantity theory; money-income vs. quantity of money
• Quantity theory false, granting all its assumptions
• 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

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
• Some prices, rising, tend to repel gold, but most prices have no such effect
• Some prices, rising, bring in gold
• Gold movements and money-rates

CHAPTER XVII
THE QUANTITY THEORY VS. GRESHAM'S LAW

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

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
• 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
• Fisher's statistics, resting on Kemmerer's, chiefly studied: their relation to Kinley's "deposits" figures
• 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
• 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
• Index of variation for M'V' wrongly weighted; V' wrongly calculated for all years; which upsets calculation of V
• Volume of trade: greatly exaggerated by bank transactions, which include vast deal of duplications in checks, loans and repayments, etc.
• Fisher's reply; undercounting offsets overcounting
• 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
• Price-indexes of Kemmerer and Fisher, dominated by wholesale prices, have no relevance to their "equations of exchange"
• In general, their figures bury speculation and New York City

PART III. THE VALUE OF MONEY

CHAPTER XX
RECAPITULATION OF POSITIVE DOCTRINE

• Recapitulation of constructive theses of Parts I and II, and program of Parts III and IV

CHAPTER XXI
THE ORIGIN OF MONEY, AND THE VALUE OF GOLD

• Problem stated
• Value vs. saleability: degrees of saleability; theory of saleability; "buying price" vs. "selling price"; indirect exchange in barter economy; development of commodity of superior saleability into money
• Money never unique
• Origin of gold money ornament: store of value; social prestige of prodigality and of ornament; love of approbation, sex-impulse, and competitive display; elastic value-curve of gold; industrial employments of gold
• Distribution of wealth and power, and value of gold

CHAPTER XXII
THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY

• Classification
• Measure of values (standard of value) distinguished from medium of exchange; former does not add value to money metal, latter does
• Reserve function
• Money as "bearer of options"; distinguished from store of value; the dynamic function of money par excellence; explanation of low rates on call loans, and short loans, and low yield of high grade bonds, which share "bearer of options" function; "pure rate" of interest vs. "money rates": Austria; the New York money market
• Legal tender; the Staatliche Theorie
• Standard of deferred payments; which functions add to value of money metal?
• Relation of money rates to capital value of money
• Agio when coinage is restricted: India vs. Western World
• Equilibrium of gold in arts and gold as money: difficulties of marginal analysis; the money-market phenomena

CHAPTER XXIII
CREDIT

• Analysis rather than definition: "futurity" not essence of credit; credit part of general value system; stocks as credit instruments; juridical and accounting phases
• Confidence; involved in general value phenomena as well as credit; social psychology of confidence; contagions; influence of centers of prestige; nothing unique in credit; selling vs. borrowing
• Definition of credit; credit vs. credit transaction; credit and exchange; bulk of credit grows out of dynamic conditions
• Functions of credit; increasing saleability of non-pecuniary wealth; corporate organization; limits of credit expansion
• Consideration of objections: that personal loans do not rest on wealth; public loans; that value behind loan would not exist if loan were not made
• Schumpeter's "heresies"; his view of the function of the banker: "dynamic credit"; America vs. Continental Europe
• Peculiarities and functions of bank credit; technique of banking: capital; assets; reserves; "liquidity"; money market

CHAPTER XXIV
CREDIT—BANK ASSETS AND BANK RESERVES

• Traditional view that liquid commercial loans normal and dominant type of bank asset disproved; cannot exceed 11½ per cent of assets of American banks; analysis of bank assets: "other loans and discounts"; stock collateral loans; loans on "other collateral security"; stocks and bonds held by banks; classes of banks; various combinations; excluding real estate loans, more than half of credit extended by State and national banks and trust companies is to stock market; rapid development of stock collateral loans: New York; Europe
• Activity of different types of loans: banking assets get liquidity chiefly from stock market, and from produce speculators
• Credit extended to Wall Street not at expense of ordinary commerce; country banks and Wall Street
• Federal Reserve Banks should rediscount stock collateral loans; "Money Trust" a trust in financing corporations, not ordinary commerce; panics and Federal Reserve System
• Quantity theory, putting all exchanges on a par, grotesque: volume of trade and prices in the stock market
• Direct and indirect financing of corporations by banks; "margin dealer" as "banker"
• Adam Smith's view of banker's functions, and of safe bank loans
• Correct on basis of facts of his day, but corporate organization and organized stock market have made smelting house as liquid as consumers' goods
• Division of labor in banking: America vs. Germany
• Agriculture in money market
• Reserve problem: special case of problem of liquid assets; many flexible substitutes for cash
• Causal relation runs from deposits to reserves; gold production and reserve-ratio
• No static law or "normal ratio" possible; reserve function entirely dynamic function; reserve not needed in "static state"; illustrated by London money market; "ideal credit economy"

PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS

CHAPTER XXV
THE RECONCILIATION OF STATICS AND DYNAMICS

• Theory of money as focus of general economic theory, exhibiting interdependence of doctrines; basis of further unification of statics and dynamics in higher synthesis
• Statics vs. dynamics, normal vs. transitional, and related contrasts; illustrates; divergent lines of doctrine: tariffs, wars, overproduction, extravagance, etc.
• Statics quantitative; dynamics qualitative
• Statics and dynamics both abstract
• Dynamics and "friction"
• "Theory of prosperity: and dynamics
• Statics and cross-section analysis; statics as price-theory; dynamics as value-theory
• Generalization of statics: price-theory applied to dynamic phenomena: capitalization; costs; "taxonomy;" "discounting" dynamic changes; money the static measuring-rod: wide scope of money-measure; measurement of non-economic values
• Generalization of dynamics: all values, whether of wheat or "good will," have social psychological explanation; technological and biological factors, and the static equilibrium; business cycles
• Business man vs. economic theorist, and value-theory; manipulation of values and prices
• Statics and time
• Immaterial capital
• Statics and dynamics have not different subject-matter
• Equilibrium of all social values: statics and dynamics of the law: social forces and social control
• Summary of Part IV