The Value of Money

CHAPTER I. Economic Value

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

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

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

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, and not relative 77-78

Capitalization theory, in current formulation, inapplicable to value of money 78-79

CHAPTER V. Marginal Utility and the Value of Money

MARGINAL UTILITY AND THE VALUE OF MONEY

Marginal utility theory usually thinly disguised version of supply and demand, and hence inapplicable to money 80

View that money is unique in having no utility per se 81-83

Marginal utility and "commodity theory" of money-value 81-82

Quantity theorists and marginal utility of money 81-82

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 82-120

Wieser's theory of value of money 83-88

A circle in reasoning 88-90

Schumpeter's similar circle 100

But Schumpeter's general utility theory, though inapplicable to value of money, in form avoids a causal circle 90-98

Schumpeter's conspectus; different from Boehm-Bawerk and most utility theorists 90-92, 113-120

Defects and limitations of Schumpeter's general theory 90-98

Schumpeter's substitutes for social value concept 98-99

Von Mises sees circle of Wieser and Schumpeter 100

Seeks to avoid it by construing utility theory as historical, instead of static, theory 101

But this departs from fundamentals of utility theory; other difficulties 101-110

Kinley's doctrine 110-111

General criticism of utility theory 111-115

Davenport, Wicksteed, Fisher, Perry 113-120

PART II. THE QUANTITY THEORY

CHAPTER VI. The Quantity Theory of Prices. Introduction

THE QUANTITY THEORY OF PRICES. INTRODUCTION

Preliminary statement of quantity theory, and of critical theses to be developed in following chapters. Virtually every contention and every assumption of quantity theory to be challenged 123-129

CHAPTER VII. Dodo-Bones

DODO-BONES

Quantity theory doctrine that valueless objects can serve as money; Nicholson's assumption: money made of dodo-bones 130-131

Fisher's view also 130

And Ricardo's 131-132

Will dodo-bones circulate? Dodo-bones and poker chips; circular reasoning 132

Both medium of exchange and standard of value must be valuable 133

Is inconvertible paper an exception? 133-134

Doctrine that money gives legal claim to things in general 134

Kemmerer's assumptions; money made of commodity, once valuable, now used only as money 135

Commodity theory requires present commodity value 135

Historical vs. cross-section view: possibility that such money would circulate 135-136

Value not tied up with marginal utility or commodities: social value theory; derived values often become independent of original presuppositions, in economic as well as legal and moral spheres 136-139

But this no basis for quantity theory: social psychology, not mechanics 139

"Banker's psychology" vs. psychology of blind habit: India, Austria, United States; monetary phenomena of war times; "credit theory" of Greenbacks 139-142

Question-begging definitions 142-143

Assumptions of quantity theory: blind habit and fluid prices 143-144

Extreme commodity theory denies that money-use adds to value of money; usually not true; analysis of money-functions 144-150

Hypothetical case in which whole value of money comes from commodity value 150-152

Money must have value apart from monetary employments, but, in general, gains additional value from employment as money 152-153

CHAPTER VIII. The "equation of Exchange"

THE "EQUATION OF EXCHANGE"

Fisher leading, most consistent, most uncompromising quantity theorist: wide acceptance of his views 154

Taussig vs. Fisher 155

Fisher and dodo-bone doctrine: logical part of quantity theory; Fisher's value concept 155-156

"Equation of exchange": analysis of Fisher's version, typical of all 156-171

In what sense equality between two sides of equation? Meaning of "T" 158-161

No "goods side" to equation; both sides sums of money; equal because identical; equation meaningless 161-162

All factors in equation highly abstract 162-163

"P" and "T" cannot both be given independent definitions: P defined as weighted average, with T in denominator; and must be changed from year to year, as elements in T change, even though no prices change 164-166

This makes circular theory: problem defined in terms of explanation 165-166

Causal theory associated with equation of exchange 166

Equation amplified to include credit; not acceptable to Nicholson or Walker, and caricature of conditions in Germany and France 166-170

Book-credit, bills of exchange, etc., excluded 167-170

Why a one-year period? 170-171

CHAPTER IX. The Volume of Money and the Volume of Credit

THE VOLUME OF MONEY AND THE VOLUME OF CREDIT

Mill thought credit acts on prices like money, and that this reduces quantity theory tendency to indeterminate degree; Fisher holds volume of money in circulation governs volume of credit, so that quantity theory stands 172

Fisher's arguments for fixed ratio, money to bank-deposits 172-173

Argument a non-sequitur, even if contentions true 173-177

Contentions untrue: no fixed ratio between reserves and deposits, or reserves and demand liabilities, either in America or Europe 177-182

Taussig's views; virtually surrender of quantity theory in modern conditions 182-185

Bulk of quantity theorists in between Fisher and Taussig, but nearer to Fisher's view than to Taussig's 185

CHAPTER X. "normal" Vs. "transitional" Tendencies

"NORMAL" VS. "TRANSITIONAL" TENDENCIES

Quantity theory qualified by distinction between "normal" and "transitional" effects of change in quantity of money, etc. 186

Meaning of distinction, and extent of qualification hard to determine: is "normal period" real period in time? How long is "transitional period"? Is it realistic, or hypothetical? Is equation of exchange realistic? Concrete vs. hypothetical price-levels 186-189

Legitimate and illegitimate abstraction 189-190

Causation and temporal order 190-191

Fisher admits very slight qualification of "normal theory" 192

Mill's quantity theory "short run" theory; Taussig's "long run" theory; radically different logic in the two 192-193

Fisher's theory sometimes "long run" and sometimes "short run" 194-195

CHAPTER XI. Barter

BARTER

Quantity theory spoiled if resort to barter possible and important 196

Extent of barter and other flexible substitutes for money and bank-credit; simple barter; different methods of corporate consolidations; flexibility, with state of money-market; clearing-house arrangements in speculative exchanges; offsetting book-credits 197-200

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