The Value of Money Part 12

Now my concern here is not with the points at issue as between Fisher and Seager: the "impatience" vs. the "productivity" theories of interest. For the present, I shall accept Fisher's doctrine on that point as true.[342] I am here interested in Fisher's doctrine that a doubling of the general productivity of capital would double, or more than double, the prices of capital instruments, including land. How is such a general rise in prices possible, if the quant.i.ty theory be true?

Is not this a rise in general prices from causes outside the equation of exchange? That Fisher means the _money-prices_ of capital goods when he speaks of capital-values is perfectly clear. In the second quotation, he speaks of "capital-value of $40,000", and in general, his definition of value runs in terms of _price_ (_e. g., Purchasing Power of Money,_ pp.

3-4, and _Elementary Principles_, p. 17). Fisher has no absolute value concept in his system. We have in the pa.s.sages cited two doctrines, both of which contradict the quant.i.ty theory: (1) that a reduction in the rate of interest will raise capital-prices (which are the largest factor by far in the price-level), and (2) that an increase in the product of capital goods means, not only more money paid for the products, but also more money paid for the production-goods. Incidentally, the general imputation theory would call for more money paid to laborers as well.

How can all this be, on the quant.i.ty theory? And what can the poor equation of exchange do in such a case, if money does not increase, if bank-credit is limited by money, if velocities of circulation are fixed by individual habits and convenience, if trade _increases_ as a consequence of the increased number of goods produced, and if prices rise? It will not help much to a.s.sume that the productivity of gold mines is doubled also. The quant.i.ty of money does not depend very much on the annual production of gold. Besides, money need not, from the standpoint of the quant.i.ty theory, be made of gold. It might be irredeemable Greenbacks, fixed in quant.i.ty by law, or even dodo-bones!

Would not the capitalization theory apply in the Greenback Period? I shall not try to solve the riddle. I am not responsible for it!

The conflict between the capitalization theory and the quant.i.ty theory may be more simply stated. a.s.sume that the prices of consumers' goods and services rise, quant.i.ty of money and volume of exchanges remaining unchanged. On the quant.i.ty theory, other prices, the prices of producers' goods and services, lands, and securities, would have to come down enough to compensate, in order that the price-level might remain unchanged. For the capitalization theory, however, the prices of lands, securities, and long time capital goods in general would have to rise, since the incomes on which they are based have risen. Wages of labor engaged in making consumers' goods would also have to rise, on the general imputation theory.

The quant.i.ty theory conflicts with the capitalization theory. The quant.i.ty theory as presented by Fisher conflicts with the capitalization theory as presented by Fisher. Which theory is true? Would prices rise thus, or would they be held down in some way by the limitations on the quant.i.ty of money? I hold that I have already proved, in the reasoning given in connection with my hypothetical island, and in the case of the South with its cotton, that the capitalization theory tendency would prevail. The prices of products rise, and then the prices of the labor, land, and other capital goods which have produced them, rise, the rise in the prices of the capital goods behaving in accordance with the laws of the capitalization theory, and all of the rises after the initial rise in products being in accordance with the imputation theory of the Austrians.

This conflict suggests an interesting point. Various elements in our economic theory, added from time to time by different writers, have necessarily come from different philosophical and sociological view-points, and have behind them different philosophical, psychological, and sociological a.s.sumptions. The quant.i.ty theory, developing, as shown in the chapter on "Supply and Demand and the Value of Money," largely in isolation from the general body of economic theory, has a background of psychological and sociological a.s.sumptions quite different from that of many other doctrines. In the chapter on "Dodo-Bones," I stated these a.s.sumptions. The quant.i.ty theory rests in a psychology of blind habit. It a.s.sumes a rigidity in the social system such that it might be likened to a machine, with a hopper into which money is poured, which grinds out prices at the other end. I set this in contrast with the psychological a.s.sumptions underlying the commodity theory of money. That theory rests on the "banker's psychology." It a.s.sumes a highly reflective and calculating att.i.tude on the part of economic men, with the disposition to look behind appearances for the security, to test things out, to get to bedrock in business affairs. Now the capitalization theory likewise a.s.sumes this banker's psychology. In its refinements, as represented by the mathematical formulae in the appendices of Fisher's _Rate of Interest_, it a.s.sumes a degree of precision in business calculation which few experts in bond departments apply, and which the highly fluid and alert dealers in Wall Street certainly have not time for, even if they had that degree of mathematical knowledge! In practice, it need not be said, particularly in the case of the prices of lands, the capitalization theory finds its predictions very imperfectly realized! But the two theories, resting in such divergent psychological a.s.sumptions, may be expected, _a priori_, to conflict. That they do conflict is not remarkable.

I shall show a similar conflict between the quant.i.ty theory and the law of costs. In general, the quant.i.ty theorist thinks that he has reconciled his theory with cost theory by pointing out that reduced costs manifest themselves in increasing production, which means increasing trade, which should, on the quant.i.ty theory, mean lower prices.[343] I need not, for my purposes, a.n.a.lyze this doctrine in detail, though I am disposed to consider it an accident that the two theories converge at this point. For the present, I shall a.n.a.lyze a case where reducing costs actually come as a consequence of the _reduction_ in the volume of trade, and inquire whether such a case will lead, as the cost theory would a.s.sert, to lowered general prices, or, as the quant.i.ty theory would a.s.sert, to _higher_ general prices. The case is that where by improved methods of handling goods, it is possible to dispense with middlemen. Concretely, a.s.sume that retailers of milk get in direct touch with dairymen, so that middlemen are eliminated, and that as a consequence the price of milk is reduced two cents a quart.

What of the general price-level? T (trade) is reduced. There are less exchanges. Volume of trade does not mean volume of goods _produced_, but volume of _exchanges_. With a reduced trade, the quant.i.ty theory must a.s.sert that prices of commodities other than milk must, on the average, rise, not merely enough to compensate for the fall in milk, but more than that, enough to compensate for the reduced trade as well. But how can the other prices rise? Well, a point comes up obviously: the buyers of milk save two cents a quart. They can spend it for something else.

This will raise the prices of other things. But, on the other hand, the middlemen now have less to spend. They have _exactly as much less_ as the others have _more_, the extra money that milk buyers have being, in fact, the money that the middlemen would otherwise have had. The one offsets the other. There is, then, no reason for the average of other prices to rise. Suppose we carry the process one step further. After a while, the middleman will find other work to do. Then they will have incomes again to spend. But in going to work again, they will be engaged in production, and so will, in general, be increasing the volume of trade. The quant.i.ty theorist could not expect a rise in prices from this!

And here we are given a clue to a fundamental confusion in the quant.i.ty theory, a confusion which, accepted by the reader, gives the quant.i.ty theory much of its plausibility. I refer to the confusion between _volume of money_, and volume of _money-income_.[344] The two need not be the same. The two generally are not the same. In the case I have described, the one has changed without a change in the other. Now if one wishes to view the process of price-causation from the standpoint of money offered for goods,--an essentially superficial,[345] but frequently useful, view-point--it is clearly money-_income_, rather than mere quant.i.ty of money in the country that is important. Into the determination of volume of money-income, however, come factors of a high degree of complexity, among them, prices for which there is no possible place within the confines of so simple and mechanical a doctrine as the quant.i.ty theory.

In pa.s.sing, I notice a point to which I called attention in discussing Fisher's factors in the equation of exchange. I refer to his definition of velocity of circulation as the average of "person-turnovers" of money.[346] In the ill.u.s.tration given, there is no reason to suppose that this average is changed. The middlemen simply drop out of the average. They have no money to turn over! But velocity of circulation, defined as "coin-transfer," (_cf._ _supra_, p. 204) has clearly changed.

The course of money has been short-circuited. It goes through fewer hands in the course of a given period. This last concept of velocity of circulation is clearly the one that must be used, if the equation of exchange is to be kept straight. But this fact should make it clear that velocity of circulation, instead of being the inflexible thing that Fisher has described, resting in individual habits and practices, a true causal factor in the price making process, is really a highly flexible thing, in large degree a pa.s.sive function of trade and prices.

With this distinction between volume of money and volume of money-income[347] clearly held, we are prepared to go further in our attack on the quant.i.ty theory, granting the quant.i.ty theorist all his most rigorous a.s.sumptions, and still demonstrating that prices can vary independently, without prior change in quant.i.ty of money, volume of trade, or velocity of money. Let us a.s.sume the extreme case of the quant.i.ty theory: a closed market; no credit; no barter; a fixed supply of money; a fixed volume of trade; a fixed set of habits affecting velocity, namely, that everyone spends, in the course of the month, all that he has acc.u.mulated by the first of the month. The quant.i.ty theorist could not ask a more iron-clad set of a.s.sumptions than this! If the quant.i.ty theory is not valid here, if the price-level is not absolutely fixed, helpless to change, with these a.s.sumptions, then the quant.i.ty theory, even as a minor tendency, must be surrendered, and the quant.i.ty theorist must admit that the whole line of thought has been fallacious.

But is the price-level pa.s.sive? Suppose we a.s.sume a combination of employers of maid-servants, which forces down the wages of maid-servants from $20 to $10 per month. a.s.sume further that there is no alternative employment for the maid-servants, so that they all remain at work.[348]

So far, we have made a change in _one_ price, the price of domestic service. What of the general average of prices, the price-_level_? Well, so far, the price-level is down. If nothing else takes place, we have reduced the price-level by reducing one price. What else can take place?

Two things: (1) the masters now have $10 per month each more to spend for other things than before. That tends to raise prices in their other channels of expenditure. (2) The maid-servants now have $10 each less to spend,--the same ten dollars! That lessens prices in the lines of their expenditure. These last two changes exactly neutralize one another. The first change, in the price of domestic service, remains unneutralized.

The general price-level is, then, lowered--by a cause acting from outside the equation of exchange, directly on prices. The first change comes in one price. In the final adjustment, that change remains unneutralized. How is this possible? Is the equation of exchange still valid? As a mathematical formula, yes. As expressing a causal theory, in which prices are effect, and money, trade, and velocity causes, no. The equation is kept straight by a reduction in velocity. _Because_ the wages of maid-servants are reduced, _less_ money goes through their _hands_; $10 per month per maid are short-circuited. But the _cause_ is with the _prices_. The price-level, even under these absolutely rigorous a.s.sumptions, is not pa.s.sive.

In general, I conclude that the price-level, under the laws governing particular prices, supply and demand, cost of production, the capitalization theory, the imputation theory, etc., can vary of its own initiative, independently of prior changes in the quant.i.ty of money, or of volume of trade, or other factors that the quant.i.ty theory stresses; and that these changes in the price-level (or in the particular prices which govern the price-level) can maintain themselves, and compel a readjustment in trade, credit, money and velocities, to correspond. This conclusion strikes at the very heart of the quant.i.ty theory, and, if valid, leaves the quant.i.ty theory disproved. More fundamentally, I should put it, prices can change because of changes in the psychological values of goods. These values are _social_ values, and are to be explained only by a social psychology. But for the present it has seemed best to me, as a means of attracting sympathetic attention from a wider circle of economists, to make use of the less debated doctrines of the science in attacking the quant.i.ty theory. It is not necessary to rest the case on my own special theory of value. Supply and demand, cost of production, the capitalization theory, the imputation theory--the general laws of the concatenations and interrelations of prices--are quite adequate for the confutation of the quant.i.ty theory. They are laws concerned with particular prices, and the price-level is nothing but the average of particular prices. Whatever explains, really explains, the particular prices, also explains the price-level.

Fisher, as we have seen, is not of this opinion. Although he has defined the price-level as an average of particular prices[349] he none the less exalts this average into a causal ent.i.ty, prior to and master of the particular prices out of which it is derived, of which it is a mere average.[350] This average, he maintains, is presupposed in the determination of all particular prices.[351] This seems to me a wholly untenable position. _Ex nihilo nihil fit._ There cannot be _more_ in the average than there is in the particulars from which it is derived. In point of fact, there is necessarily vastly less. All the concrete causation is lost. The average, in itself, is nothing but a _statement_, a summary of _results_. I know nothing more metaphysical in the history of economic theory than this hypostasis of an average.[352]

I reject Fisher's notion that the average of prices is an independent ent.i.ty. But I do not consider that the idea lying behind this untenable doctrine is absurd. Cost of production, supply and demand, and the other price theories _do_ presuppose something more fundamental. They do presuppose _money_, and the _value_ of money, as has been shown at length in Part I. The trouble with Fisher's notion comes in his definition of the value of money in purely relative terms as the _reciprocal of the price-level_, and his contention that the study of the value of money is identical with the study of price-levels.[353]

Value is not a mere exchange relation.[354] Rather, every exchange relation involves _two_ values, the values of the two objects exchanged.

These two values _causally_ determine that exchange relation. In the case of particular prices, then, we must consider not only the value of goods, but also the value of money. And the causes determining the general price-level will therefore include not alone the values of goods, but also the value of money. In the foregoing arguments by which I have shown that the price-level can vary independently of the other factors in the quant.i.ty theory scheme, I have been concerned only with changes in the values of goods, measured by a constant unit of value. If the value of money should also be varying, the concrete results on the price-level would have been different. On the face of things, there was nothing in the cases I discussed to require us to suppose that the value of money would also vary. The argument ran on the a.s.sumption of a fixed value of money. I have shown, in earlier chapters, that the a.s.sumption of a fixed value of money is fundamental to the laws of supply and demand, cost of production, and the capitalization theory. In point of fact, this a.s.sumption is rarely true--never strictly true. For causes which are in considerable degree independent of the causes governing the values of goods (as the causes governing their values are in considerable degree independent of one another), the value of money varies, now in the same direction as the values of goods in general, now in an opposite direction. Further, money itself does not escape the general laws of concatenation of values. The value of money has causes which are bound up with the values of other goods. Thus, when prices are rising and trade expanding, there is a tendency--commonly a minor tendency--for money also to rise in value, and so prices do not go quite as high as they would have gone had money remained constant. This tendency arises from the fact that there is more work for money to do in a period of active trade and rising prices. Gold also tends to rise in value in the arts, with prosperity. The reverse tendency manifests itself when prices are falling: money tends, in some measure, to fall in value with the goods,[355] and so prices do not fall as far as they would fall if money remained constant. But in general, the causes governing the values of goods, and the causes governing the value of money, are sufficiently independent to justify us in studying each separately, in abstraction, on the a.s.sumption that the other is unchanged. Hence, supply and demand, cost of production, and the other price theories, which a.s.sume a fixed value of money, are proper tools of thought for the study of the prices of goods.

CHAPTER XVI

THE QUANt.i.tY THEORY AND INTERNATIONAL GOLD MOVEMENTS

The quant.i.ty theory explanation of international gold movements is as follows: if money comes into a country, it raises prices. If the price-level of the country is raised more rapidly than the price-levels of other countries are rising, then the country becomes a bad place in which to buy and a good place in which to sell; its exports fall off, its imports increase, and finally the inflow of money is checked, and, perhaps, money flows out again. The equilibrium of the gold supplies of different countries is thus dependent on the price-levels of the countries involved. The quant.i.ty of gold in a country determines its price-level, and no more gold can stay in a country, on this theory, than that amount which keeps its price-level in proper relation to the price-levels of other countries. It is not necessarily a.s.serted that the price-levels of all countries must be equal--the facts too obviously contradict that. But when this precise statement is not made, the subst.i.tute statement of some "normal" relation between the price-level of one country and that of another becomes a very vague one, and the theory becomes pretty indefinite.

I am here concerned chiefly with one contention: the price-_level_, the average of prices, is not a _cause_ of anything--not of gold movements or anything else. It is a mere summary of many concrete prices. Some of these concrete prices have highly important influence on international gold movements, tending, if they are low, to bring gold in, and if they are high, to repel gold. Others work in the opposite direction, tending if they are low to attract less gold than if they are high. Finally, among all the prices affecting international gold movements, the one which is most significant is commonly not included in the price-level at all: I refer to the "price of money," the short-time interest rate.

Let me elaborate each point. First, it is true that high prices of articles which enter easily into international trade tend to repel gold from the country--meaning by "high prices" prices that are higher than the prices of the same goods abroad. This relates, however, not to the general price-level, but only to a comparatively small set of prices.

Most prices in a country are not prices of articles of international trade. High wages may, indeed, draw in immigrants. But high land rents, and high prices of land cannot bring in land. Nor do high land prices send away much gold to other countries for the purchase of land there.

Indeed, within a single country, the differences in the relation between land yield and capital value of land are enormous. The following figures are taken from an article by J. E. Pope:[356] In Yazoo Co., Mississippi, farm lands are sold at $10 to $25 per acre. The average gross income per acre is $28. In Ca.s.s Co., Iowa, the land prices are from $100 to $125 per acre while the gross income amounts to only $11 per acre, if only crops and dairy products are taken into account, and to $20 if the sales of live stock are included. In Oglethorpe Co., Georgia, the average price is from $10 to $25 per acre, and the average income $10. In Paulding Co., Ohio, land is sold at from $75 to $100 per acre, and the average income per acre, including returns from live stock sold, is $15.

Why should not landowners in Ca.s.s County, Iowa, sell their comparatively unproductive land, at a high price, and go, with their money, to Yazoo County, Mississippi? The answer is simply, that they would have to go _with_ their money, and they prefer to stay at home! Absentee landlordism is not generally popular with men who are seeking paying investments. Land stands at one extreme. But then land is the very biggest item in an inventory of wealth, and, while not _as land_, actively bought and sold,[357] it is a big element in the values of many active securities. The principle holds in less degree of many other things, however. The securities of a local corporation, say a gas plant, find their best market at home, as a rule, unless the city be large. If they are held by foreign capitalists, they still find a very restricted market in the foreign country. Only those who have investigated at first hand will feel free in buying them--unless, indeed, they are guaranteed in some way by a big and well-known house. Prices of personal and professional services vary enormously in different sections of the same country, to say nothing of variations between different countries, and there is a very slow movement indeed toward bringing about higher salaries for rural preachers in Kansas because the salaries of London preachers have risen, or because of increased demand for preachers in Germany. Great numbers of commodities are too bulky to move far. Their prices vary with little relation to similar prices elsewhere. But the principle needs no more elaboration. If the reasoning be simply that men tend to buy where things are cheap, and to sell where things are dear, it is clear that that establishes a very loose relation indeed between the price-levels of different countries.

The second point is that some prices, by rising, actually bring in gold from abroad, while by falling they tend to release gold. I am not here referring to the case discussed in the chapter on "Supply and Demand,"

where a commodity, cotton, with an inelastic demand, is doubled, the doubled quant.i.ty selling for a less aggregate price, and so bringing in less money from abroad. That case would bear considerable generalization. I am referring here to the case where _credit_ is built on the value of long time goods, as lands, or railroads. Concretely, let us suppose an increase in railroad rates allowed by the Public Service Commission of Missouri. This is, in itself a rise in prices. It will, further, on the capitalization theory, make the prices of stocks of the roads operating in the State rise also, and give a margin of additional security for bond-issues. This will make it possible for these roads to float foreign loans (or would have done so before the War), and so will tend to turn the exchanges in our favor. Gold will tend to come in, not to go out. Similarly if the prices of dairy products, or truck gardens, or orchards, or orange groves rise, leading to a rise in the prices of the lands involved, foreign capital will tend to come in as loans--_i.

e._, the exchanges will turn more favorable to us, and the gold movement tend to turn our way. I suppose, by the way, that something of a point could be made against the Single Tax at this point: destroying land values would lessen the security which a community could offer outside lenders. The Single Tax would, thus, hamper the development of countries which need capital from outside. Men who wish to use their own capital, under their own management, might, as the Single Taxers claim, be tempted to come in, if they could be free from taxation on the capital they bring with them; but _lenders_, who wish a good margin of security, would find less inducement to lend.[358] This is a digression, but one feature of it is pertinent: though the foreigner does not care to migrate from his high-priced land to _low_-priced land elsewhere, he is often willing to trust a _loan_ to the owner of _high_-priced land elsewhere. I will not venture the generalization that high-priced land necessarily attracts loans, and tends to turn the gold movements in favor of the country where prices are high. The point has been made that if lands are being exchanged frequently, the new buyer tends to exhaust his credit resources in paying for the land: _i. e._, puts so large a mortgage on it that he has little margin of security to offer for working capital.[359] I shall not here undertake to determine how far as a matter of fact, in different places, the one tendency outweighs the other. It is enough to point out that in many cases, where this factor is absent (as in the case of the railroads cited), rising prices attract, and do not repel, foreign gold, and that for none of these cases is the consequence of rising prices for the gold movements to be explained in the simple way that the quant.i.ty theory doctrine would require.

Finally, the international movements of gold[360] are enormously moved by the short-time rate of interest. The raising of the Bank Rate in England, supplemented, when necessary, by "borrowing from the market" by the Bank of England, as a means of making the Bank Rate effective, quickly turns the course of the exchanges. This is, as has been pointed out, a more effective device when used by the English money-market than when used by borrowing countries, since the borrower, by offering higher rates, is not always able to borrow more, whereas the lender, by demanding higher rates, is usually able to reduce his loans. But the difference is one of degree, and in point of fact a rise in the short time rates in New York City is commonly an effective means of bringing in gold from abroad. It is true that this is not the only factor. I have been at pains to point out how other factors work. I am as far as possible from denying the powerful influence of the "balance of trade"

as treated by the older economists on international gold movements, when both visible and invisible items are included. But my point is, first, that these invisible items are numerous and flexible, and that a big factor in their determination is the short time rate of interest; and second, that the balance of physical items, even, depends, not on the price-level as a whole, but merely on the prices of those particular goods which enter into foreign trade. It is perfectly possible, and, indeed, is very common, for rising prices in a country to lead to expanding trade and expanding bank-credit, which causes bankers to wish to expand their reserves, which leads them to raise their rates on short time loans, which leads gold to come in from abroad. More simply still, the bankers may merely offer an attractive rate to the foreign bankers, and establish credits abroad, against which they draw "finance bills,"

which influence the gold movements in the desired manner.

CHAPTER XVII

THE QUANt.i.tY THEORY _vs._ GRESHAM'S LAW

There is a pretty obvious conflict between the quant.i.ty theory and Gresham's Law. The latter is, essentially, a "_quality_" theory of money. For the quant.i.ty theory, dodo-bones, or anything else will do.

"It is the number, and not the weight, that is essential"![361] For Gresham's Law, the weight makes all the difference in the world, if it is a question as between full weight and light weight coins, and, in general, the _value_ of the thing of which money is made, considered in its commodity aspect, is the starting point of that doctrine.

The quant.i.ty theorist seeks, indeed, to harmonize the two. His theory is that Gresham's Law manifests itself only when there is a _redundancy_ of the currency due to the issue of paper money, or overvalued metal. In such a case, prices rise, he holds, and then the undervalued metal, or the metallic currency, which count no more than the paper or the overvalued metal in circulation, tend to leave the country, to another country where prices are lower, or tend to leave the money use for the arts. But the quant.i.ty theorist must maintain that it is only _via_ increased issue, with consequent rising prices, that Gresham's Law comes into operation. If there are a million dollars of gold in circulation, and a half million of irredeemable paper is added, then only half a million of the gold (or rather a little less than half) will leave. If more than that left, prices would fall, because of the scarcity of money, and then the gold would come back, because it would be worth more in concurrent circulation with the paper than it would be worth as money abroad, or in the arts. On the quant.i.ty theory, there can be no difference in the value of gold and paper, in such a case, after enough gold has left to balance the paper that has been issued. Falling prices would prevent it.

But Gresham's Law is not held by any such fetters! And the facts of monetary history, in important cases, show Gresham's Law controlling, despite the quant.i.ty theory. I will refer briefly to two such cases.

The first centres about the suspension of specie payments by the Northern banks and the Federal Treasury on January 1, 1862. This suspension was not accompanied by any increase of money. Rather, there was a _decrease_,[362] shortly following, in the amount of paper money.

The banks in New York, and certain other States, were bound so strictly by their charters, and by the State laws, that they dared not leave their notes unredeemed. Speculators, buying notes at a discount--for virtually all bank-notes fell to a discount--were able to present them to the banks in these States and demand gold, which led to a very profitable business. The banks protected their gold by ceasing to issue notes, or by reducing the volume of note issue. Certified checks were used to a considerable extent instead. There was certainly no increase, and probably a reduction, a considerable reduction, in the volume of bank-notes in circulation. The only other paper money in circulation was the Demand Notes of the Federal Government, which were not increased after the date of the suspension, and which were in any case small in volume as compared with the total amount of money. On the quant.i.ty theory version of Gresham's Law, there was nothing to drive gold out.

Gold was _not pushed out_ by redundant currency. Rather, it _left_, leaving a monetary vacuum behind. Coincidently, strangely enough, prices _rose_. The vacuum in the money supply was so serious, that the subsequent first issue of the Greenbacks brought a welcome relief.

Throughout the whole of the first year of the suspension, the volume of money was less than it had been in the preceding year. None the less, the gold stayed out of general circulation. It did not come back from abroad. And prices _rose_.[363]

A similar episode, the obverse of this, occurred when the Bank of England _resumed_ specie payments in the early '20's. Then gold came back, the currency was increased, and, coincidently, _prices fell_.[364]

I conclude that the conflict between Gresham's Law and the quant.i.ty theory is real and fundamental, and that in cases where different _qualities_ of money are in concurrent circulation, the undervalued money will leave, regardless of the question of quant.i.ty.

CHAPTER XVII

THE QUANt.i.tY THEORY AND "WORLD PRICES"

Some writers, who would call themselves quant.i.ty theorists, would repudiate many of the doctrines for which Fisher stands, and which the historical quant.i.ty theory involves. The recognition which Fisher's book has received from quant.i.ty theorists generally, justifies me in treating his book as the "official" exposition of the modern quant.i.ty theory, and, indeed, it is easy to show that Fisher is fundamentally true to the quant.i.ty theory tradition. With many writers, the disagreement with Fisher would be a mere matter of degree; they would hold that Fisher has set forth the central principle, that his qualitative reasoning is correct, but that the relations among the factors in his equation are less rigid than he maintains. As I reject even the qualitative reasoning by which Fisher defends his doctrine, and reject even the qualitative tendency which he maintains, my criticisms will apply as well to the position of this group of writers, though I should have less practical differences with them, to the extent that they admit qualifications and exceptions to Fisher's doctrine.

There is, however, a group of writers who seem to feel that the quant.i.ty theory remains sufficiently vindicated if it can be shown that an increase in _gold production_ tends to raise prices throughout the world, while a check on gold production tends to lower prices, and who rest their case on the necessity which bankers find of keeping reserves in some sort of relation to the expansions of bank-credit.

A view of this sort is presented by J. S. Nicholson, whose statement of the application of the quant.i.ty theory to the modern world differs almost _toto coelo_ from his original statement in the dodo-bone ill.u.s.tration already discussed. Nicholson[365] declares that in our modern society "the quant.i.ty of _standard_ money, other things remaining the same, determines the general level of prices, whilst, on the other hand, the quant.i.ty of _token_ money is determined by the general level of prices." Nicholson's reasoning is, substantially, as follows: Although the bulk of exchanging is carried on by means of credit devices, there is still a certain part of exchanging, especially in the matter of paying balances, for which standard money only can be used. He regards the whole credit system as based on standard money, and says that for any given level of prices there is a minimum amount of standard money, absolutely demanded. If the volume of standard money falls below this minimum, the price-level will fall to such a point that the volume of standard money is again adequate. He takes, moreover, a world-wide view, declaring that it is the relation between the volume of gold money throughout the world and the demand for standard money throughout the world which determines the relative values of money and commodities.

"The measure of values or the general level of prices throughout the world will be so adjusted that the metals used as currency, or as the basis of subst.i.tutes for currency, will be just sufficient for the purpose. We see then, that the value of gold is determined in precisely the same manner as that of any other commodity, according to the equation between supply and demand."

In the consideration of this doctrine, let us note several points in which it differs fundamentally from the quant.i.ty theory proper, and from the situation a.s.sumed in the dodo-bone ill.u.s.tration. First, it is not a quant.i.ty theory of _money_. Money is not regarded as a h.o.m.ogeneous thing, each element having the same influence on prices. Rather, _token_ money is the child of prices. This doctrine would in no way fit in with the logic of the equation of exchange, as presented by Fisher. Further, the dodo-bone idea is entirely gone. _Gold_, a commodity with value in non-monetary employments, is under discussion, and it is the quant.i.ty of gold that is counted significant. This recognizes, if not the need, at least the _existence_, of a commodity standard. Nicholson definitely avows the necessity for the _redemption_ of representative money, even going so far as to say that "all credit rests on a gold basis,"[366]