



Produced by Curtis Weyant and the Online Distributed
Proofreading Team at http://www.pgdp.net (This book was
produced from scanned images of public domain material
from the Google Print project.)









                            HARVARD COLLEGE
                                LIBRARY

                                FROM THE

                           QUARTERLY JOURNAL
                              OF ECONOMICS



                         THE MACMILLAN COMPANY
                  NEW YORK. BOSTON. CHICAGO. DALLAS
                        ATLANTA. SAN FRANCISCO

                        MACMILLAN & CO., LIMITED
                       LONDON. BOMBAY. CALCUTTA
                               MELBOURNE

                   THE MACMILLAN CO. OF CANADA, LTD.
                                TORONTO




                                  THE
                             VALUE OF MONEY

                                   BY

                      B. M. ANDERSON, JR., PH. D.
          ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY
                        AUTHOR OF "SOCIAL VALUE"


                                New York
                         THE MACMILLAN COMPANY
                                  1917

                         _All rights reserved_



                            COPYRIGHT, 1917
                        BY THE MACMILLAN COMPANY
             Set up and electrotyped. Published May, 1917.



                                   To

                             B. M. A., III
                                  AND
                                J. C. A.

                     WHO OFTEN INTERRUPTED THE WORK
                     BUT NONE THE LESS INSPIRED IT




PREFACE


The following pages have as their central problem the value of money.
But the value of money cannot be studied successfully as an isolated
problem, and in order to reach conclusions upon this topic, it has been
necessary to consider virtually the whole range of economic theory; the
general theory of value; the role of money in economic theory and the
functions of money in economic life; the theory of the values of stocks
and bonds, of "good will," established trade connections, trade-marks,
and other "intangibles"; the theory of credit; the causes governing the
volume of trade, and particularly the place of speculation in the volume
of trade; the relation of "static" economic theory to "dynamic" economic
theory.

"Dynamic economics" is concerned with change and readjustment in
economic life. A distinctive doctrine of the present book is that the
great bulk of exchanging grows out of dynamic change, and that
speculation, in particular, constitutes by far the major part of all
trade. From this it follows that the main work of money and credit, as
instruments of exchange, is done in the process of dynamic readjustment,
and, consequently, that the theory of money and credit _must be a
dynamic theory_. It follows, further, that a theory like the "quantity
theory of money," which rests in the notions of "static equilibrium" and
"normal adjustment," abstracting from the "transitional process of
readjustment," touches the real problems of money and credit not at all.

This thesis has seemed to require statistical verification, and the
effort has been made to measure the elements in trade, to assign
proportions for retail trade and for wholesale trade, to obtain
_indicia_ of the extent and variation of speculation in securities,
grain, and other things on the organized exchanges, and to indicate
something of the extent of less organized speculation running through
the whole of business. The ratio of foreign to domestic trade has been
studied, for the years, 1890-1916.

The effort has also been made to determine the magnitudes of banking
transactions, and the relation of banking transactions to the volume of
trade. The conclusion has been reached that the overwhelming bulk of
banking transactions occur in connection with speculation. The effort
has been made to interpret bank clearings, both in New York and in the
country outside, with a view to determining quantitatively the major
factors that give rise to them.

In general, the inductive study would show that modern business and
banking centre about the stock market to a much greater degree than most
students have recognized. The analysis of banking assets would go to
show that the main function of modern bank credit is in the direct or
indirect financing of corporate and unincorporated _industry_.
"Commercial paper" is no longer the chief banking asset.

It is not concluded from this, however, that commerce in the ordinary
sense is being robbed by modern tendencies of its proper banking
accommodation, or that the banks are engaged in dangerous practices. On
the contrary it is maintained that the ability of the banks to aid
ordinary commerce is increased by the intimate connection of the banks
with the stock market. The thesis is advanced--though with a recognition
of the political difficulties involved--that the Federal Reserve Banks
should not be forbidden to rediscount loans on stock exchange
collateral, if they are to perform their best services for the country.

The quantity theory of money is examined in detail, in various
formulations, and the conclusion is reached that the quantity theory is
utterly invalid.

The theory of value set forth in Chapter I, and presupposed in the
positive argument of the book, is that first set forth in an earlier
book by the present writer, _Social Value_, published in 1911. That book
grew out of earlier studies in the theory of money, in the course of
which the writer reached the conclusion that the problem of money could
not be solved until an adequate general theory of value should be
developed. The present book thus represents investigations which run
through a good many years, and to which the major part of the past six
years has been given. On the basis of this general theory of value, and
a dynamic theory of money and exchange, our positive conclusions
regarding the value of money are reached. On the same basis, a
psychological theory of credit is developed, in which the laws of credit
are assimilated to the general laws of value.

In a final section, the constructive theory of the book is made the
basis for a "reconciliation" of "statics" and "dynamics" in economic
theory--an effort to bring together the abstract theory of price
(_i. e._, "statics") which has hitherto chiefly busied economists, and
the more realistic studies of economic change (_i. e._ "dynamics") to
which a smaller number of economists have given their attention. These
two bodies of doctrine have hitherto had little connection, and the
science of economics has suffered as a consequence.

This book was not written with the college student primarily in mind.
None the less, I incline to the view that the book, with the exception
of the chapter on "Marginal Utility," is suitable for use as a text with
juniors and seniors in money and banking, if supplemented by some
general descriptive and historical book on the subject, and that the
whole book may very well be used with such students in advanced courses
in economic theory. I think that bankers, brokers, and other business
men who are interested in the general problems of money, trade,
speculation and credit, will find the book of use. Naturally, however,
it is my hope that the special student of money and banking, and the
special student of economic theory will find the book of interest. The
book may interest also certain students of philosophy and sociology, who
are concerned with the applications of philosophy and social philosophy
to concrete problems.

My obligations to others, running through a good many years, are very
great. With Professor E. E. Agger, I talked over very many of the
problems here discussed, in the course of two years of close association
at Columbia University, and gained very much from his suggestions and
criticisms. Professor E. R. A. Seligman has read portions of the
manuscript, and given valuable advice. Professor H. J. Davenport has
given the first draft an exceedingly careful reading, and his criticisms
have been especially helpful. Professor Jesse E. Pope supervised my
investigations in the quantity theory of money in 1904-5, in his seminar
at the University of Missouri, and gave me invaluable guidance in the
general theory of money and credit then. More recently, his intimate
first hand knowledge of European and American conditions, both in
agricultural credit and in general banking, has been of great service to
me. Mr. N. J. Silberling, of the Department of Economics at Harvard
University, has been helpful in various ways, particularly by making
certain statistical investigations, to which reference will be made in
the text, at my request. Various bankers, brokers, and others closely in
touch with the subjects here discussed have been more than generous in
supplying needed information. Among these may be especially mentioned
Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the
_Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H.
Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston,
various gentlemen in the offices of Charles Head & Co., and Pearmain and
Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr.
W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate
Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee
Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade,
DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of
the Bankers Trust Company, New York. My greatest obligations are to two
colleagues at Harvard University. Professor F. W. Taussig has given the
manuscript very careful consideration, from the standpoint of style as
well as of doctrine, and has discussed many problems with me in detail.
Professor O. M. W. Sprague has placed freely at my service his rich
store of practical knowledge of virtually every phase of modern money
and banking, and has read critically every page of the manuscript. None
of these gentlemen, of course, is to be held responsible for my
mistakes. I also make grateful acknowledgment of the aid and sympathy of
my wife.

In the course of the discussion, frequent criticisms are directed
against the doctrines of Professors E. W. Kemmerer and Irving Fisher,
particularly the latter, as the chief representatives of the present day
formulation of the quantity theory. Both their theories and their
statistics are fundamentally criticised. I find myself in radical
dissent on all the main theses of Professor Fisher's _Purchasing Power
of Money_, and at very many points of detail. To a less degree, I find
myself unable to concur with Professor Kemmerer. But I should be sorry
if the reader should feel that I fail to recognize the distinguished
services which both of these writers have performed for the scientific
study of money and banking, or should feel that dissent precludes
admiration. I acknowledge my own indebtedness to both, not alone for the
gain which comes from having an opposing view clearly defined and ably
presented, but also for much information and many new ideas. My general
doctrinal obligations in the theory of money and credit are far too
numerous to mention in a preface. My greatest debt in general economic
theory is to Professor J. B. Clark.

                                                 B. M. ANDERSON, JR.

  HARVARD UNIVERSITY, March 31, 1917.




ANALYTICAL TABLE OF CONTENTS


_PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE_


CHAPTER I

ECONOMIC VALUE
                                                                  PAGE
  Problem of value of money special case of general theory of
    value; present chapter concerned with general theory             1

  Formal and logical aspects of value: value as quality; value
    as quantity; value and wealth                                  5-6

  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?                                                       6-12

  Doctrine so far in accord with main current of economic
    opinion                                                      12-14

  Causal theory of value new: marginal utility, labor theory,
    etc., rejected                                               14-16

  Social explanation required: "individual" a social product,
    both in history of individual and in history of race         16-19

  And above individual impersonal psychic forces, law, public
    opinion, morality, economic values                           19-20

  Three types of theory have dealt with these: theory of
    extra-human objective forces; extreme individualism;
    social value theory                                          20-21

  Illustrated in jurisprudence, ethics, and economic theory      21-26

  Law, morals, and economic values generically alike, but have
    _differentiae_                                                26-28

  But not differentiated on basis of states of consciousness
    of individual immediately moved by them, because many
    minds in organic interplay involved                          28-33

  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                                             33-38

  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                                                     38-41

  Pragmatic character of theory                                  41-43

  Relation of social values to individual values                 43-45


CHAPTER II

SUPPLY AND DEMAND, AND THE VALUE OF MONEY

  _Hiatus_ between general theory of value and theory of value
    of money                                                     46-47

  Partly because former has been developed by different writers
    from those who have developed latter                         47-49

  But chiefly because supply and demand, cost of production,
    etc., _assume_ fixed value of money, and are theories of
    _price_, rather than _value_                                    49

  Supply and demand useful but superficial formula, common
    property of many value theories                              49-50

  Crude and unanalyzed in Smith and Ricardo; first made precise
    by J. S. Mill, who gives essentials of modern doctrine       49-51

  Boehm-Bawerk's pseudo-psychology spoils Mill's clean-cut
    doctrine                                                     51-52

  Supply and demand assumes fixed _value_ of money-unit, and
    hence inapplicable to money itself                           52-56

  But supply and demand does _not_ assume fixed _price-level_    56-57

  Cairnes _vs._ Mill                                             57-58

  Mill's unsuccessful effort to apply supply and demand to
    money                                                        59-62

  Walker's attempt                                                  62

  Supply and demand in the "money market"                        62-63


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                    64

  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                                                 64-67

  Because "real cost" doctrine does not square with facts        67-69

  "Money-cost" of producing money-metal                          69-70

  Austrian cost doctrine runs still in money terms, assuming
    value, money, and fixed value of money                       70-71

  "Negative social values" as "real costs"                    note, 71


CHAPTER IV

THE CAPITALIZATION THEORY AND THE VALUE OF MONEY

  Money as "capital good," and "money-rates" as rentals          72-73

  Capitalization theory; formula; capital value passive
    resultant of annual income and rate of discount              73-74

  But in case of money, rental and rate of discount not
    independent variables                                        74-76

  And in case of money, capital value not passive shadow,
    but active cause of income                                      76

  Capitalization theory assumes money, and fixed value of
    money                                                        76-77

  Assumed fixed value of money absolute,