CHAPTER XX

RECAPITULATION OF POSITIVE DOCTRINE

The chapters which have gone before have been, in considerable degree, concerned with the analysis of unsuccessful efforts to solve the problem of the value of money, as the quantity theory, or the attempts to apply the notions of supply and demand, marginal utility, and cost of production, to the problem. Not all that has gone before has been, even in form, primarily critical. The chapter on "Economic Value" lays the foundation for the main constructive theory of the book, and in virtually every chapter some portion of our positive doctrine has been developed. In the doctrines criticised, elements of truth have been noted, and in showing the errors of the doctrines considered, constructive doctrine has been presented by way of contrast. The theories criticised, moreover, even where they have gone astray in solving problems, have at least the merit of _stating_ problems, and so have aided in clearing the way for theories better based.

It is the task of the present chapter to present, in a series of theses, the main constructive results so far attained. No effort will be made to follow the order of the exposition which has preceded. A summary of that will be found in the detailed analytical table of contents. Rather, we shall seek to draw from what has preceded the positive doctrine which is scattered through the preceding chapters, and to present it by itself, as a basis for the more systematic formulation of constructive theory which the following chapters are to contain.

1. The theory of the value of money is a special case of the general theory of value.

2. Value is a phenomenon of psychological nature. Not physical quantities, but psychological significances, are relevant when the problem of value and price causation is involved.

3. Value is not a ratio of exchange, or "purchasing power," but is an absolute quantity, prior to exchange. It is the fundamental and essential attribute or quality of wealth, the common or homogeneous element present amidst the diversities of the physical forms of wealth, by virtue of which comparisons may be instituted among different kinds of wealth, and different items of wealth may be added to make a sum, put into ratios of exchange, and so on.

4. Economic value is a _species_ of the _genus_, _social value_, cooerdinate with legal value, and moral value. It is part of a system of social motivation and control.[454] Psychological in character, it none the less presents itself to an individual as an objective, external force, to which he must adapt himself.

5. Individual prices have two cooeperating causes: (a) the social economic value of the money-unit, and (b) the social economic value of the unit of the good in question.

6. The average of prices, or the "price-level," is a mere mathematical summary of the particular prices. The causation involved in the average of prices is nothing more than the causation involved in the particular prices.

7. The value of money is to be distinguished from the "reciprocal of the price-level," or the "purchasing power of money." The value of money is an absolute quantity, one of the factors, determining each particular price. Particular prices and general prices may change because of changes in the values of goods, with no change in the value of money. Or, particular prices and general prices may change because of changes in the value of money, with goods remaining constant in value.

8. The absolute value of money, assumed constant, is presupposed by the great body of present day price theory, as supply and demand, cost of production, and the capitalization theory. These theories are, therefore, inapplicable to the problem of the value of money.

9. But supply and demand, cost of production, the capitalization theory, and other laws concerned with the concatenation and interrelations of prices, being applicable to the problem of particular prices, are also applicable to the problem of general prices. (Chapter on "The Passiveness of Prices.")

10. The general price-level, as a consequence of changes in particular prices, growing out of changes in the values of goods, may rise or fall, without antecedent changes in the value of money, or the quantity of money, or the volume of credit, or the volume of trade, or in the "velocities of circulation" of money or credit. (Chapter on "The Passiveness of Prices.")

11. The general laws of prices, supply and demand, cost of production, the capitalization doctrine, the imputation doctrine, etc., conflict with the quantity theory. In the cases where they conflict, the first named doctrines are correct, and the quantity theory is wrong. (Chapter on "The Passiveness of Prices.")

12. The value of money, being a special case of economic value, is subject to the same general laws. This means, from the standpoint of my theory, that the theory of social value is applicable to the problem of the value of money.

13. This is not the same as saying that the whole value of money is to be explained by the social value of gold bullion, conceived of as a mere commodity. A hypothetical case was constructed in the chapter on "Dodo-Bones," in which gold is the standard of value, but is not employed as a medium of exchange or in reserves, where the whole value of money is to be explained by the value of gold bullion, conceived of as a commodity.

14. But, in general, money gets part of its value from its monetary employments. (Chapter on "Dodo-Bones.")

15. The additional value which comes to gold bullion as a consequence of its employment as money, is itself to be explained on social value principles. It grows out of the social value of the services which money performs.

16. The functions of money remain to be examined in detail. And the relation between the value of particular services of money and the capital value of money, has not yet been analyzed. There is a relation between the two--a relation which varies under different conditions--even though it has been shown in the chapter on the "Capitalization Theory" that the relation is not the simple one which holds between the values of services and the capital value of ordinary income-bearers. There must be an increment to the value of gold bullion as a consequence of its being coined, however, since otherwise there would be no force leading it to be coined.

17. This increment in value to bullion, as a consequence of coinage, becomes evident when free coinage is suspended. An agio of coin over uncoined bullion may easily appear.

18. But this is not to assert the doctrine of the quantity theory. Because

19. The money service presupposes the existence of value for money from some source other than the monetary employment (chapter on "Dodo-Bones"); and

20. Hence the monetary employment can explain only a differential portion of the value of money.

21. The proposition that money must have value from some source other than the monetary employment does not mean, necessarily, that money must be made of precious metals, or be convertible into precious metals. The value of money is, indeed, most stable and best sustained when such is the case. But it is possible for money made of paper to have value apart from the prospect of redemption--though no clear case has been made, in the writer's opinion, for the view that this has historically occurred. But as a hypothetical possibility, my theory holds that paper money may attain a value of its own, growing out of various factors which a social psychology can explain, including law, patriotism, and custom. Social values in every sphere are imperfectly rationalized. Values which in their origin are secondary and derived may become substantial and independent of their "presuppositions." This is true of legal and moral values. It is true of the capital value of land. It may be true of paper money. This matter has been discussed in the chapters on "Economic Value" and on "Dodo-Bones." The social value theory has not the limitations of the utility theory in dealing with such cases, nor is it tied to a metallist or bullionist interpretation. Legal, moral, and patriotic factors, and the influence of social custom, all fall readily into the social value doctrine.

22. The "measure of values" function, and the "standard of deferred payments" function, need not require the actual use of money, and need not add to the value of money. The function of "medium of exchange," and other functions to be analyzed in a later chapter on that topic, do involve the actual employment of money, and are sources of value for money.

23. The quantity of money and credit are matters of high importance in economic life. They affect vitally the smooth functioning of production and exchange. While not accepting the extreme view of those writers who see in scarcity or abundance of money the primary cause of the ebb and flow of civilization, I maintain that the quantity of money and credit does make a vast difference, and that the quantity theory contention that, after a transition is effected, the only consequence of a change in the quantity of money is a proportional change in the price-level, is wholly indefensible. (Chapter on "Volume of Money and Volume of Trade.")

24. Very much of economic theory has been developed in abstraction from money. For economic statics, with its delicate marginal adjustments, on the assumption that friction is banished, that the market is fluid, that labor and capital and goods are mobile, etc., money does appear a needless complication. But the static assumptions are only possible because money and credit have smoothed the way. It is the business, the function, of money and credit to overcome "friction," to effect "transitions," to make it possible for "normal" tendencies to manifest themselves. (Chapter on "Volume of Money and Volume of Trade.")

25. The main work of money and credit is in effecting "transitions," bringing about readjustments, enabling society, with little shock, to adapt itself to dynamic change. The great bulk of the actual exchanging that takes place is speculation, and would not occur if economic life were in static equilibrium. This is true both as a matter of theory and as a matter of statistics. More than half of the checks deposited in the United States are deposited in New York City, where "wholesale" and "retail" deposits are a small factor. Bank clearings fluctuate in close conformity with stock exchange transactions. Great banks, and the bulk of banking transactions, are everywhere found in the speculative centres. (Chapters on "Volume of Money and Volume of Trade," and "The Rediscovery of a Buried City.")

26. Hence a functional theory of money must be essentially a dynamic theory: must rest in a study of "friction," "transitions," and the like. And,

27. Hence a theory of money like the quantity theory, concerned with "long run tendencies" and "normal equilibria" and "static adjustments" touches the real problem of the value of money not at all.

28. An increase of money tends to increase trade. (Chapter on "Volume of Money and Volume of Trade.")

29. An increase of credit tends to increase trade. (Same chapter.)

30. An increase of trade tends to increase the volume of credit, and, where the money supply is flexible, tends to increase the money supply also. (Chapter on the "Volume of Trade and the Volume of Money and Credit.")

31. Production waits on trade. The problem of marketing in the modern world is often more important than the problems of production in the narrower sense. Selling costs are probably greater than strict "costs of production." "Volume of trade," far from being dependent on "physical capacities and technique," is almost indefinitely flexible, with changing tone of the market, with changing values, and with other changes, including changes in the volume of money and credit. (Chapter on "Volume of Money and Volume of Trade.")

32. The relation between the volume of money and the volume of credit is exceedingly flexible. The relation between the world's volume of credit and the world's volume of gold is likewise exceedingly loose, uncertain, and flexible. (Chapters on "Volume of Money and Volume of Credit," and "The Quantity Theory and World Prices.")

33. "Velocity of circulation" is a blanket name for a complex and heterogenous set of activities of men. It is a passive resultant of many causes, and is itself a cause of nothing. The safest generalization possible concerning it is that it varies with the volume of trade and with prices.

34. Barter remains an important factor in modern economic life, and is a flexible substitute for the use of checks and money, increasing when the money market "tightens." It is greatly facilitated by the "common measure of values" function of money.

35. The general criticism of the mechanistic scheme of causation involved in the quantity theory has, as its positive corollary, the doctrine that psychological explanations must be given--that the phenomena are intricate and complex, as intricate and complex as the play of human ideas and emotions, and the network of social relationships.

36. This means that the theory of value, and of the value of money, as here presented, cannot assume the simple form, or the mathematical precision, which have made the quantity theory so alluring. It means, further, that the present study, as in part pioneer work, will lack finish and definiteness in many places, will contain errors and gaps, and will leave many problems unsolved, and many distinctions undrawn. At many points, the analysis is confessedly incomplete, and the problems imperfectly thought through--often inadequately _stated_, if seen at all.

In what follows, these theses, with doctrines yet to be developed, will be woven together into a systematic theory of money and credit.

The study of the functions of money, in relation to its value, will best be approached, I think, through a study of the origin of money. In this, I shall base my conclusions chiefly on the work of Karl Menger and W. W. Carlile, who seem to me to have done most in this field.

On the basis of the general theory of value developed in the first chapter, and the results of the two chapters which are to follow on the origin and functions of money, I shall reach my main conclusions as to the laws of the value of money. On the basis of this theory of value, and of the theory of the functions of money, I shall also try to develop a psychological theory of credit, and to assimilate credit phenomena to the general phenomena of value. The development which the theory of credit has had, at the hands of men whose chief interest was that of the jurist or accountant, is valuable and important. I do not wish to discredit what has been done. Many important doctrines concerning credit have been developed. The general theory of elastic bank-credit, worked out in the controversy between the "Currency" and the "Banking" Schools, is of the highest importance. This theory I have discussed in the chapter on "The Volume of Trade and the Volume of Money and Credit." I still feel, however, that there are gaps in the prevailing ideas on credit which only a social psychology can fill. I shall undertake to construe credit as a part of the social system of motivation and control, and to differentiate it from other parts of that system by an analysis of its functions. I think, too, that the theory of the relation of credit and money is in especially unsatisfactory shape, particularly with reference to the factors governing reserves.

A final chapter, in Part IV, will undertake to bring together the various points in our discussion which deal with the theory of prosperity, and will seek to bring the notions of "theory of prosperity _vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._ transitional tendencies," and certain other similar contrasts, into a higher synthesis, which will, to be sure, not rob these contrasts of their significance, but will rather find certain generic principles which they share, and so make it possible to measure considerations in one sphere in terms of considerations in the other sphere. In very large degree, students of dynamics and students of statics have been talking at cross-purposes, missing the force of one another's arguments, and have been quite unable, even when understanding one another, to come to agreement, precisely because they have lacked principles by means of which they could compare in any quantitative way the forces which each studies. A higher synthesis, which would give static and dynamic theories common ground, would seem to be a desideratum of high importance. Such a synthesis would go far toward unifying the science of economics. I believe that the theory of money and credit, approached from the angle of the social value theory, will meet this need.