The economic effects of the creation of purchasing power by commercial banks

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THE ECONOMIC EFFECTS OF TEE CREATION OF PURCHASING POWER BY COMMERCIAL BANKS

A T h esis P resented to th e F acu lty o f t h e D e p a rtm e n t o f E conom ics U n iv e rs ity o f Southern C a lif o r n ia

In P a r t i a l F u l f i l l m e n t o f the R equirem ents f o r th e D egree o f M a ste r o f A r t s I n Econom ics

By Burnham P u tn a m B e c k w i t h February,

1930

UMI Number: EP44598

All rights reserved INFORMATION TO ALL U SERS T he quality of this reproduction is d e p en d e n t upon the quality of the copy subm itted. In th e unlikely event that th e author did not sen d a com plete m anuscript and th ere are missing p ag es, th e se will be noted. Also, if material had to be removed, a note will indicate th e deletion.

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UMI EP44598 Published by P roQ uest LLC (2014). Copyright in th e Dissertation held by the Author. Microform Edition © P roQ uest LLC. All rights reserved. This work is protected ag ain st unauthorized copying under Title 17, United S ta te s C ode

P roQ uest LLC. 789 E ast E isenhow er Parkw ay P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6 - 1346

This

thesis,

having

been

approved

by

the

s p e c i a l F a c u l t y C o m m i t t e e , is a c c e p t e d b y the Council

on

Graduate

of

the

University

in

partial

of

fulfillment

Study

and

Southern of

the

R es ea r ch C al i f o rn i a,

r e q u ir e m e n t s

f o r th e d e g r e e of.....Master..of.Arts..........

Date.. .?.e ^

> 1 ? 30

i

CONTENTS C hapter

Page

In tro d u ctio n I* II*

M e t h o d o f a p p r o a c h .................. . ...................... . ........................ . . . I n f l a t i o n ..............* ................................... . ....................................... P rin cip le

III.

I

of d iffe re n tia l ra tio s

5 *

E x p r o p r i a t i o n . . . ............................... As a n im m e d ia te r e s u l t . . .

17 ............

.

As a p e r m a n e n t r e s u l t . ........................................................ IV .

22 29

U p o n v o l u m e o f p r o d u c t i o n . ...........................................

E9

C o m p u l s o r y s o c i a l s a v i n g ............................................

31

E l a s t i c i t y o f h a n k c r e d i t ............................

3S

Up on c h a r a c t e r o f p r o d u c t i o n . . .......................................

38

Up on o r g a n i z a t i o n a n d c o n t r o l o f i n d u s t r y

42

Upon d i s t r i b u t i o n

44

o f i n c o m e ................. ... .........................

E x a m i n a t i o n o f a s s u m p t i o n s ........................ .

55 58

P u l l employm ent o f c a p i t a l andl a b o r . . . . . . . . . .

71

Even r a t e

75

o f i n t r o d u c t i o n o f b a n k c r e d i t ..............

S u m m a r y .................... VT.

18

E f f e c t s o f i n f l a t i o n a n d e x p r o p r i a t i o n ........................

S u m m a r y .............................. V.

11

86 _

Besume o f t h e s i s ........................

91

B i b l i o g r a p h y ...............

95

A p p e n d i x .......................

100

ii

L I S T OF TABLES T able I*

Page Demand d e p o s i t s o f s e l e c t e d r e p o r t i n g m em b er b a n k s o f t h e F e d e r a l B e s e r v e System i n l e a d in g c i t i e s

II*

1 9 1 9 - 1 9 2 7 ..................... 1 0 1 - 2 - 3

D is tr ib u tio n o f lo a n s acc o rd in g to occu­ p a t i o n s N a t i o n a l b a n k s , N o v e m b er 1 5 ,

III.

C om parative t a b l e

1 9 2 0 .. 104

show ing t h e v e l o c i t y o f

c i r c u l a t i o n o f m o n e y a n d demand d e p o s i t s 1896-1909 a s e s t im a t e d by I r v i n g F i s h e r . . . .

105

iii

INTRODUCTION I n o u r m odern c a p i t a l i s t i c

s o c i e t y com m ercial b a n k e rs

p e r f o r m two d i s t i n c t a n d n o t n e c e s s a r i l y r e l a t e d t h e y p r o v i d e a m echanism f o r th e

fu n ctio n s,

t r a n s f e r o f p u r c h a s i n g pow­

e r from i n v e s t o r o r d e p o s i t o r t o th e e n t r e p r e n e u r o r from buyer to s e l l e r ,

and th e y l ik e w i s e p ro v id e m ost o f t h e a d d i ­

t i o n a l p u r c h a s i n g power r e q u i r e d by th e expanding i n d u s t r i a l s o c i e t y .

grow th of a r a p i d l y

The f o r m e r f u n c t i o n i s a l s o

p e rfo rm ed by in v e s tm e n t banks and s a v i n g s b a n k s, m a in ly by com m ercial b a n k s.

It

is th is

the l a t t e r

second fu n c tio n ,

t h e c r e a t i o n o f p u r c h a s i n g power, w hich w i l l be s t u d i e d i n th is

th esis. F o r m e r ly c o m m e rc ia l b a n k s c r e a t e d p u r c h a s i n g power i n

th e form o f bank n o t e s ,

but s t r i c t

governm ent r e g u l a t i o n o f

t h i s m ethod h a s c a u s e d t h e b a n k s i n E n g la n d and A m erica t o adopt a d if f e r e n t ex p ed ien t,

t h a t o f d e v e lo p in g the use o f

ch eck in g acc o u n ts and c r e a t in g

p u r c h a s i n g power by a n e n o r ­

m ous e x p a n s i o n o f d em an d d e p o s i t s . has enabled th e banks to c re a te

T h is change i n m ethod

f a r m ore p u r c h a s i n g power

t h a n t h e y had e v e r dream ed o f in t h e d a y s o f b an k n o t e i n ­ flatio n ,

but th is

phenomenon h a s o c c u r r e d so r e c e n t l y and

s o r a p i d l y t h a t e c o n o m i s t s h a v e n o t y e t b ecom e aY/are o f t h e problem s c r e a t e d by i t .

I n f a c t no c o m p r e h e n s i v e a n a l y s i s

o f t h i s phenomenon from th e s o c i a l s t a n d p o i n t h a s y e t b een p rin te d alth o u g h v a rio u s a s p e c ts of i t

have been d is c u s s e d

iv i n b o th p o p u la r and l e a r n e d p e r i o d i c a l s and b o o k s . v e n t i o n a l w o rk s on m oney, c r e d i t ,

The c o n ­

and banking w ere v i r t u a l l y ,

a l l w r i t t e n p r e v i o u s t o t h e r e c e n t enorm ous g r o w th i n bank d e p o s i ts and th e y alm o st c o m p le te ly n e g le c te d d is c u s s io n o f the s o c i a l s ig n if ic a n c e o f bank c r e d i t . b o o k s on p r a c t i c a l b a n k i n g , t h e h i s t o r y n atu re

o f money and c r e d i t ,

but

T h ere a r e num erous of b a n k in g and th e

they e i t h e r

ignore or d is ­

c u s s b r i e f l y and s u p e r f i c i a l l y t h e s o c i a l and econom ic e f ­ f e c t s o f t h e c r e a t i o n o f p u r c h a s i n g power by c o m m erc ial banks.

The f o l l o w i n g t a b l e

h e lp s to e x p la in t h i s n e g le c t

o f t h e p r o b l e m b y s h o w i n g how r e c e n t l y t h e g r e a t b u l k o f th is

b a n k m on ey h a s b e e n c r e a t e d . I n d i v i d u a l D e p o s i t s i n U. S . Banks'*1 8 9 0 ............................$ 4 , 0 6 0 , 8 0 3 , 0 0 0 . 1 9 0 0 ............................$ 7 , 2 3 8 , 9 8 6 , 0 0 0 . 1 9 1 0 ............................$15., 2 8 3 , 3 9 6 , 0 0 0 . 1 9 2 0 ............................$ 3 7 , 3 1 5 , 1 2 3 , 0 0 0 . 1 9 2 7 ............................$ 5 1 , 1 3 2 , 5 5 4 , 0 0 0 .

R oughly s p e a k in g a b o u t h a l f o f e a c h t o t a l i n t h i s sists

o f d em an d d e p o s i t s o r p u r c h a s i n g p o w e r .

tab le

con­

A l l o t h e r mon­

e y i n u s e i n t h e U n i t e d S t a t e s i n 1927 am ounted t o o n l y a b o u t e i g h t and a h a l f b i l l i o n d o l l a r s . A nother im p o rta n t re a so n fo r

the l a c k o f a t t e n t i o n d e ­

v o t e d t o t h i s p ro b le m o f t h e l a r g e r econom ic and s o c i a l e f ­ f e c t s o f c o m m e rc ia l b a n k i n g , no d o u b t ,

i s t o be fo u n d i n t h e

1 S t a t i s t i c a l A b s tr a c t o f the U n ited S t a t e s ,

1928,

238.

V

fact

t h a t m ost o f t h e work i n t h i s f i e l d

h a s been done by

p r o f e s s o r s o f c o m m erc e a n d b y p r a c t i c a l b a n k e r s t h e m s e l v e s who h a v e b e e n i n t e r e s t e d p r i n c i p a l l y i n p r o b l e m s o f p r o f i t ­ a b le o p e ra tio n in in d iv id u a l banks.

Even th e d i s c u s s i o n o f

governm ent r e g u l a t i o n te n d s t o em phasize th e need o f p r o t e c t ­ in g sound b a n k e r s from unsound b a n k e r s r a t h e r t h a n t h e e f ­ f e c t o f com m ercial b a n k in g upon th e n a t i o n a s a w h o le.

Good

b a n k in g i s assum ed to be t h a t form o f b a n k in g which y i e l d s t h e l a r g e s t and t h e most r e g u l a r p r o f i t s c la s s w ithout s a c r i f i c i n g th e t h e i r banks.

s a f e t y of

to bankers as a the d e p o s its

in

A l l l i m i t a t i o n of t h e power of c o m m erc ial b an k s

t o c r e a t e p u r c h a s i n g power i s f o r t h e p u rp o s e o f i n s u r i n g repaym ents of d e p o s i t s .

W hether or n o t

the c r e a tio n of

p u r c h a s i n g pow er can h a v e a n y u n d e s i r a b l e econom ic e f f e c t s upon s o c i e t y o t h e r th a n i t s d ep o sits

e f f e c t upon r e a d y repaym ent o f

i s a q u e s t i o n r a r e l y c o n s i d e r e d b y m odern e c o n o m i s t s .

In b r i e f ,

th e s e a re the re a so n s f o r th e c h o ic e of the

su b ject of th is th e s is .

T h e p r o b l e m m e r i t s much m o r e t h a n

a n M. A. t h e s i s t r e a t m e n t ,

b u t such tre a tm e n t i s

p l a c e b e c a u s e no c o m p r e h e n s iv e s t u d y o f th e p u b lish ed .

The g e n e r a l p u r p o s e o f t h e

not out of

problem has been

th esis

i s to

study

\

\

t h e eco n o m ic e f f e c t s upon t h e volume o f p r o d u c t i o n an d t h e

!

/

d istrib u tio n

o f incom e o f t h e c r e a t i o n o f p u r c h a s i n g power

by c o m m e rc ia l b a n k s i n a m odern c a p i t a l i s t i c has been found f e a s i b l e am ental e f f e c t s ,

price

It

t o a n a l y z e i n d e t a i l o n l y tw o f u n d ­ in f la tio n and e x p ro p ria tio n of pur­

c h a s in g pow er, b u t o t h e r e f f e c t s ficially .

so ciety .

a r e d i s c u s s e d more s u p e r ­

vi The m e t h o d c h o s e n f o r - t h e p u r p o s e o f t h i s t h e s i s

is

e s s e n t ia ll y d ed u ctiv e,

t h o u g h some s t a t i s t i c s w i l l b e p r e ­

s e n te d and econom ists*

o p i n io n s w i l l be qu o ted i n o r d e r to

support th e a n a ly s is .

T h is m ethod i s

in ev itab le

due to th e

c o m p l e x i t y o f th e phenomena t r e a t e d .

So n u m e r o u s a r e t h e

facto rs

problem t h a t i t

in v o lv e d i n each p h ase o f the

n e c e s s a r y t o a b s t r a c t a s many o f t h e m a s p o s s i b l e to

is

in order

see c l e a r l y th e e f f e c t s of the rem aining f a c t o r s .

The

v a l i d i t y and e f f e c t o f eac h a s s u m p tio n w i l l be d i s c u s s e d a f t e r w a r d s so t h a t we may b e s u r e o u r a s s u m p t i o n s do n o t a lte r

the n a tu r e of our c o n c lu s io n s . One o f t h e c h i e f b e n e f i t s o f t h i s m e t h o d i s

a l l o w s a s e p a r a t i o n or i s o l a t i o n

th at

it

o f bank c r e d i t and i t s

phenomena fro m o t h e r b a n k in g o p e r a t i o n s .

The m e t h o d p e r ­

m i t s a c o m p a riso n o f r e s u l t s betw een a s o c i e t y w i t h t h o r ­ o u g h ly d e v e l o p e d b a n k i n g i n s t i t u t i o n s b u t no b a n k c r e d i t , i.e . the

r e s e r v e r e q u i r e m e n t s o f 1 00$ f o r demand d e p o s i t s , same s o c i e t y a f t e r

a nd

b a n k c r e d i t h a s b e e n i n t r o d u c e d and

extended over a p e rio d of y e a r s . The t e r m b a n k c r e d i t a s u s e d i n t h i s t h e s i s w i l l a p p l y s o l e l y t o dem an d d e p o s i t s c r e a t e d o r e x t e n d e d b e y o n d t h e amount w hich w ould be a l l o w e d b y a law r e q u i r i n g a 100$ le g a l ten d er re s e rv e .

Xn c o n t e m p o r a r y s o c i e t y b a n k - c r e a t e d

p u r c h a s in g power a l s o e x i s t s

in the

form o f bank n o t e s .

I n g e n e r a l t h e a n a l y s i s and c o n c l u s i o n s o f t h i s

th esis w ill

v ii a p p l y t o t h i s f o r m o f bank- c r e d i t c l a s s o f bank n o t e s has i t s w hich d i s t i n g u i s h

a l s o . * 1’

However,

each

own n u m e r o u s l e g a l r e s t r i c t i o n s

i t b o th from d e p o s i t c r e d i t and fro m o t h e r

c l a s s e s o r i s s u e s of bank n o t e s . The r e a s o n i n g o f t h i s fundam ental p r i n c i p l e s . these th is

t h e s i s w i l l b e b a s e d u p o n two

The f i r s t

and more i m p o r t a n t o f

i s t h e q u a n t i t y t h e o r y of money. t h e s i s we may s t a t e

th is

theory

For t h e

in the

o t h e r t h i n g s b ein g e q u a l a change in the

purpose o f

f a m i l i a r form :

q u a n tity of p u r­

c h a s i n g power c a u s e s a p r o p o r t i o n a l c h an g e i n t h e p r i c e lev e l. W h i l e r e j e c t e d o r q u e s t i o n e d b y a few

g

the q u a n tity

t h e o r y o f m on ey h a s a v e r y c o n s i d e r a b l e p r e p o n d e r a n c e o f 3 econom ic o p i n i o n b e h in d i t . To d i s c u s s t h e c a s e f o r a n d a g a i n s t t h e t h e o r y w o u ld r e q u i r e a t h e s i s a v ery thorough d e m o n stra tio n o f the re a d e r should

r e f e r to

in i t s e l f .

For

q u a n ti t y th e o ry the

Irv in g F i s h e r 's book,

The P u r c h a s ­

i n g Power o f Money. ^ As a m a t t e r o f f a c t , b a n k d e p o s i t s a r e a s e a s y t o u n d e r - : s t a n d a s b an k n o t e s , and what i s s a i d i n t h i s c h a p t e r o f b a n k d e p o s i t s may i n s u b s t a n c e , b e t a k e n a s t r u e a l ­ so o f b a n k n o t e s . The c h i e f d i f f e r e n c e i s a f o r m a l o n e, th e n o t e s c i r c u l a t i n g from hand to hand, w h ile th e d e p o s i t c u r r e n c y c i r c u l a t e s o n l y by means o f s p e c i a l o r d e r s c a l l e d " c h e c k s ” . F i s h e r , The P u r c h a s i n g Power o f Money, 34. ^ S e e L a u g h l i n , P r i n c i p l e s o f M o n e y , a l s o C a n n a n , An E c o n ­ o m ist fs P r o t e s t , 224-25. rz

The q u a n t i t y t h e o r y , t h o u g h o f t e n c r u d e l y f o r m u l a t e d , h a s b e e n a c c e p t e d b y L o c k e , Hume, Adam S m i t h , R i c a r d o , M i l l , IT a lk e r, M a r s h a l l , H a d l e y , F e t t e r , Kemmerer, H a w tre y , F i s h e r , a n d m o s t w r i t e r s on t h e s u b j e c t .

\

v iii

T h e r e a r e a f e w e c o n o m i s t s who b e l i e v e o f bank c r e d i t

th a t the

q u a n tity 1 in u se i s d e p e n d e n t upon t h e p r i c e l e v e l in ­

s te a d o f th e p r i c e l e v e l b e in g d ep en d en t upon th e

q u an tity of

p u r c h a s in g power.

th is

how ever,

is

Of c o u r s e i t

The o n l y f a c t o f i m p o r t a n c e t o

the i n e v i t a b l e is

c h a s i n g power,

c o n j u n c t i o n o f t h e s e phenomena.

only f e a s i b l e so t h a t

th esis,

to c o n t r o l t h e v o l u m e o f p u r ­

for th e p ra c tic a l

purposes of s o c ia l

c o n t r o l we w i l l a c t a n d r e a s o n a s t h o u g h t h e

q u an tity of

money w ere t h e c a u s e and t h e p r i c e l e v e l t h e

re su lt.

The s e c o n d i m p o r t a n t b a s i s o f t h i s t h e s i s c e p t o f dem an d d e p o s i t s a s p u r c h a s i n g p o w e r . who p a y o u r m o n t h l y b i l l s proof of th e f a c t

i s the

con­

Those o f us

b y c h e q u e n e e d no a d d i t i o n a l

t h a t demand d e p o s i t s

power and t h e r e f o r e a f f e c t p r i c e s .

serve as purch asin g

Of c o u r s e i f

th is

is

t r u e th e n b a n k s i n c r e a s e t h e s u p p l y of p u r c h a s i n g power o r c r e a t e new m o n ey when t h e y i n c r e a s e t h e i r

t o t a l demand

"The i d e a o f t h o s e b a n k e r s who t a k e b l a m e t o t h e b a n k s s e e m s t o b e t h a t b y some e x e r c i s e o f t h e b l a c k a r t , th e y have ’c re a te d * th e e x t r a th o u sa n d m i l l i o n d e p o s i t s out of n o th in g . B ut you and I and t h e o t h e r p e r s o n s whose b a l a n c e s have i n c r e a s e d c an e a c h o f u s e x p l a i n how we h a v e b e e n a b l e t o , a n d why we h a v e p r e f e r r e d t o i n c r e a s e them . The p r i n c i p a l f a c t o r h a s b e e n t h e r i s e of p r i c e s , w hich, w h ile our r e a l p o s i t i o n h as o f te n b e e n w o r s e n e d , so t h a t some o f u s e n j o y l e s s o f t h e . g oo d t h i n g s o f t h i s l i f e , h a s c a u s e d o u r m o ney r e c e i p t s a n d o u r money o u t g o i n g s t o b e g r e a t e r t h a n t h e y w e r e . The n a t u r a l r e s u l t i s t h a t we c a n k e e p , a n d f i n d i t c o n v e n i e n t t o k e e p , l a r g e r sums a t t h e b a n k . I f pounds came o n l y t o b u y w h a t h a l f p e n c e d o , d e p o s i t s w o u l d s o o n r i s e t o n e a r 500 t i m e s t h e i r p r e s e n t a m o u n t . Instead o f b e in g a c au se , the abnorm al i n c r e a s e o f d e p o s i t s i s one o f t h e m ost o b v i o u s c o n s e q u e n c e s o f t h e r i s e o f p ric e s." Cannan, op. c i t . , p . 225.

d e p o s its .'* ’ for t h is the

W hether th e

increase

banker or

i n p u r c h a s i n g pow e r i s o f n o i m p o r t a n c e t o

argum ent o f t h i s t h e s i s .

ed t h a t

it

the b o r r o w e r i s r e s p o n s i b l e

P a st ex p erien ce has d em o n strat­

i s most f e a s i b l e to g o v e rn t h e r a t i o

o f bank r e ­

s e r v e s t o demand d e p o s i t s b y p r e s s u r e u p o n t h e b a n k e r r a t h e r t h a n by p r e s s u r e upon t h e b o r r o w e r . d esirab le

to

it

is

e v e r d eem ed

r e g u l a t e t o t a l p u r c h a s i n g power i n u s e t h i s

w i l l be done by c o n t r o l l i n g the c o n tro llin g

If

a c t i o n s o f b a n k s , n o t by

t h e n e e d s o f b u s i n e s s m en.

t h e s i s w/e s h a l l s p e a k a s i f

it

i s t h e b a n k e r s who c r e a t e

p u r c h a s i n g p o w e r when d e m a n d d e p o s i t s B e a r i n g i n m in d t h e

T herefore in t h i s

increase.

p u rp o s e of t h e t h e s i s and t h e

fu n d a m e n ta l p r i n c i p l e s o r a s s u m p tio n s upon w hich i t b a s e d , we may now b e g i n o u r a n a l y s i s o f t h e

two

is

problem i t s e l f . -

nWe s e e , t h e n , t h a t t h e b a n k s a r e n o t m e r e l y t h e s t o r e r s . o f c a s h f o r commerce, b u t t h e m s e l v e s c r e a t e c a s h - r e s o u r c e s , m o s tly in th e form o f new ly form ed d e p o s i t s , a n d p u t them a t t h e d i s p o s a l o f b u s i n e s s i n t h e s h a p e of advances. W ith t h i s d e v e lo p m e n t th e c o n c e n t r a t i o n o f c a sh in the banks r e a c h e s i t s f i n a l s t a g e . " C assel, A T h e o ry o f S o c i a l Economy, 3 8 8 - 9 .

CHAPTER I METHOD OF APPROACH For the iso lated

purpose of t h i s t h e s i s

econom ic s o c i e t y h a v i n g no c o m m e r c ia l i n t e r c o u r s e

w ith th e r e s t o f the wonId. istic

we w i l l i m a g i n e a n

I t w i l l be a modern c a p i t a l ­

s o c i e t y , a s s i m i l a r to modern E n g lan d o r t h e U n i t e d

S t a t e s a s o u r a s s u m p t i o n s may p e r m i t .

T his s o c i e t y w i l l

h a v e a g o l d c u r r e n c y and no o t h e r medium o f e x c h a n g e e x ­ c e p t gold c e r t i f i c a t e s a c t u a l l y backed by t h e s t a t e d o f g o ld in governm ent v a u l t s .

amount

A ll th e fu n c tio n s of b an k in g ,

e x c e p t th e c r e a t i o n o f p u r c h a s i n g pow er, w i l l be a d e q u a t e l y perform ed in t h i s

so ciety .

We w i l l f u r t h e r m o r e a s s u m e t h a t i n g , no c h a n g e i n p o p u l a t i o n ,

th ere

i s no s o c i a l s a v ­

a n d no i n c r e a s e

in p ro d u c tio n .

The n u m b e r o f p u r c h a s e s a n d s a l e s r e q u i r e d t o p r o d u c e a n d d istrib u te

e a c h y e a r ’ s incom e w i l l r e m a i n u n c h a n g e d f r o m

y e ar to y e ar as w i l l the

exchanges o f c a p i t a l com m odities,

in c lu d in g s to c k s and bonds. m onetary p u rp o se s in t h i s $ 3 0 ,0 0 0 ,0 0 0 ,0 0 0 ,

the

$ 9 0 ,0 0 0 ,0 0 0 ,0 0 0 ,

and t h e

The a m o u n t o f g o l d u s e d f o r

s o c i e t y w i l l b e assu m ed t o be

a n n u a l com m odity p r o d u c t i o n t o t a l c a p i t a l w e a lth $ 3 0 0 ,0 0 0 ,0 0 0 ,0 0 0 .

I f we now a p p l y I r v i n g F i s h e r ’ s w e l l known f o r m u l a , M x V z F x T (the

a m o u n t o f m o n ey a n d b a n k c r e d i t ,

M,

tim es i t s

av erag e v e l o c i t y of

lev el,

t i m e s the number o f f i n a n c i a l t r a n s a c t i o n s ,

P,

t u r n o v e r , V, e q u a l s t h e

p rice T ),

t o o u r assum ed s o c i e t y w e * fin d t h a t our a s s u m p tio n s a u t o ­ m a tic a lly e lim in ate a l l v a ria tio n s q u a n ti t ie s to the e q u a tio n .

in each of th e s e

We h a v e a s t a t i c

four

econom ic

so ciety . I n t o t h i s e q u i l i b r i u m o f econom ic f o r c e s , so ciety , to r,

th is s ta tic

we w i l l now i n t r o d u c e o n e d i s t u r b i n g d y n a m i c f a c ­

bank c r e d i t ,

and a tte m p t to t r a c e

th e above e q u a t io n .

We w i l l a l s o

i t s e f f e c t upon P in

attem p t to d is c o v e r the

e f f e c t o f th e i n t r o d u c t i o n o f bank c r e d i t upon a l l o t h e r econom ic phenomena i n o u r assum ed s o c i e t y .

We w i l l a s s u m e

Y to rem ain c o n s t a n t d u r in g th e i n t r o d u c t i o n o f bank c r e d i t a n d t o b e e q u a l f o r b o t h mon ey a n d b a n k c r e d i t . s i d e r T t o b e u n a l t e r e d e x c e p t by t h e

increase

We w i l l c o n ­ in th e supply

o f c o m m o d i t i e s d u e t o t h e new b a n k c r e d i t . As t o t h e r a t e a n d t h e d e g r e e o f t h e b a n k c r e d i t we w i l l c e n tra l au th o rity

assume t h a t

th is

th a t an equal r a t i o

i s so r e g u l a t e d b y some of in c re a s e

p u r c h a s i n g p o w e r , money a n d b a n k c r e d i t , fo r a period

in tro d u ctio n of

in to ta l

w i l l occur each year

o f ten years u n t i l bank c r e d it

h a l f o f th e t o t a l p u r c h a s i n g power i n u s e .

c o n s titu te s oneWe w i l l a l s o

a s s u m e t h a t t h e a m o u n t o f g o l d i n u s e a s m o n ey r e m a i n s t h e same d u r i n g t h i s

p erio d .

The f o l l o w i n g o u t l i n e o f o u r a s s u m p t i o n s may s i m p l i f y the t a s k o f u n d e rs ta n d in g o u r h y p o t h e t i c a l s o c i e t y and w i l l also

serve to

be r e f e r r e d

g i v e e a c h a s s u m p t i o n a n u m b e r b y w h i c h i t may

to in l a t e r

d iscu ssio n .

1.

I s o l a t e d s t a t e — no f o r e i g n t r a d e .

2 . Modern c a p i t a l i s t i c 3.

econom ic s t r u c t u r e .

Gold c u r r e n c y o n l y — $ 3 0 , 0 0 0 , 0 0 0 , 0 0 0 .

4. A ll ban king f a c i l i t i e s ,

b u t 100% r e s e r v e b e h i n d

a l l demand d e p o s i t s . 5 . C a p i t a l w e a l t h o f $ 3 0 0 , 0 0 0 , 0 0 0 , 0 0 0 . , no s o c i a l sav in g . 6 . No c h a n g e i n p o p u l a t i o n . 7. C o n s ta n t a n n u a l volume of p r o d u c t i o n ,

v alu e

$ 9 0 ,0 0 0 ,0 0 0 ,0 0 0 . 8 . F u l l e m p lo y m e n t o f c a p i t a l a n d l a b o r . 9.

In tro d u c tio n o f bank c r e d i t . a.

So r e g u l a t e d t h a t y e a r l y r a t i o

of increase

i n p u r c h a s i n g power i s e q u a l f o r b.

So r e g u l a t e d

th at a t

the

ten y ears.

end o f t h i s t e n

y e a r p e rio d bank c r e d i t c o n s t i t u t e s

one-

h a l f o f t o t a l p u r c h a s i n g power. c . No f l o w o f g o l d t o

in d u stria l uses.

d. Equal v e l o c i t y o f tu r n o v e r o f gpld b e fo re and a f t e r

in tr o d u c tio n of bank c r e d i t .

e . E qual v e l o c i t y o f t u r n o v e r o f com m odities before

and a f t e r i n t r o d u c t i o n o f bank

cre d it. f.

E q u a l i t y of v e l o c i t y a s betw een o ld gold c u r r e n c y a n d new b a n k c r e d i t .

A f te r the

e f f e c t s of t h e

in tro d u c tio n o f bank c r e d it

i n t o t h i s assu m e d econom ic u n i t have b e e n a n a l y s e d , e a c h o f

th e above a s s u m p tio n s w i l l be d i s c u s s e d and i t s th e c o n c lu s io n s o f the

th esis,

We may now t u r n t o

a n a ly s is of the

the

d u c t i o n o f banlc c r e d i t

in to

e f f e c t upon

i f a n y , w i l l be b r o u g h t o u t . e ffe c ts of th e in tro

our assum ed s o c i e t j'.

CHAPTER I I INFLATION In o rd er t o e s t a b l i s h i n f l a t i o n as an in e v ita b le f e c t o f b a n k c r e d i t we w i l l a n a l y s e o f the

first

so ciety .

the c r e a t i o n and u s e

in sta llm e n t of bank c r e d i t

We w i l l

ef­

i n o u r assumed

suppose t h a t a 'M r. A goes to h i s bank to

borrow a m i l l i o n d o l l a r s .

I f a l l the

funds of t h i s s o c i e t y

w h i c h h a v e b e e n d e p o s i t e d a s demand d e p o s i t s c a n n o t b e lo an ed to o t h e r s , a ll

th is

i s one o f our a s s u m p t i o n s ,

and i f

th o s e w hich have b een d e p o s i t e d a s tim e d e p o s i t s have

a l r e a d y b e e n i n v e s t e d i n s e c u r i t i e s o r l o a n e d o u t a s dem an d d ep o sits,

t h e n Mr. A f s b a n k c a n o n l y l o a n h i m t h e d e s i r e d

sum o f a m i l l i o n d o l l a r s

in the

m a k i n g u s e o f t h e new s t a t e ratio

f o r m o f dem and d e p o s i t s by

l a w which, p e r m i t s a r e s e r v e

low er th a n 100$ a g a i n s t

demand

d ep o sits.

Now i f Mr. A ’ s b a n k d o e s t h i s a n d g r a n t s h i m t h e d e ­ s ire d loan o f a m illio n d o lla rs ,

Mr. A ’ s p u r c h a s i n g p o w e r

w i l l b e i n c r e a s e d b y t h a t a m o u n t a n d he w i l l p u r c h a s e a d ­ d i t i o n a l raw m a t e r i a l s o r m a c h i n e r y and h i r e w orkers w ith t h a t bank c r e d i t . terials,

m ach in ery ,

But th e

ad d itio n al

s u p p l y o f r a w ma­

and w o r k e r s w i l l b e a p p r o x i m a t e l y t h e

same a f t e r M r . ' A h a s s e c u r e d h i s b a n k l o a n a s i t was t h e day b e f o r e .

We h a v e a s s u m e d t h a t a l l c a p i t a l a n d l a b o r w a s

6' a lr e a d y em plo y ed ,1 and the 2 n o t com m odities.

bank h a s c r e a t e d p u r c h a s i n g power,

I f we a p p l y t h e q u a n t i t y t h e o r y o f m o n ey t o t h i s tio n ,

i n w h i c h M r. A ' s b a n k i n c r e a s e s t h e

in g power w i t h o u t co m m o d ities,

r e s u l t w i l l be p r i c e And t h i s p r i c e

is

in fla tio n ,

in fla tio n

is not

in ev itab le th a t

supply o f

im m ediate 3 o th e r th in g s b ein g eq u al.

the

th e r e s u l t of e x c e s s iv e or

abnorm al e x te n s io n o f bank c r e d i t , th at

supply o f p u rch as­

s im u lta n e o u s ly i n c r e a s i n g the

the c o n c lu s io n

situ a­

man y e c o n o m i s t s a d m i t

such e x te n s io n o f bank c r e d i t c a u se s i n f l a t i o n w ith o u t

co nceding t h a t

in fla tio n is 4 o f bank c r e d i t , but rath er

v ersal f ir s t

in ev itab le it

is

upon e v e ry e x te n s io n

th e u n e s c a p a b le and u n i ­

e f f e c t of any in cre ase

in the u se o f bank c r e ­

d i t u n d e r o u r assum ed c o n d i t i o n s . M r. A w i l l g a i n n o b e n e f i t f r o m h i s b a n k l o a n u n l e s s he u s e s i t

to o b ta in c o n tr o l of la b o r and c a p i t a l p re v io u s ly

The e f f e c t o f t h i s v e r y i m p o r t a n t a s s u m p t i o n u p o n t h e c o n ­ c lu s io n s of t h i s ch ap ter i s d iscu ssed in a l a t e r ch apter, t h a t on a s s u m p t i o n s .

g

■ ’’The a n t i c i p a t i o n o f future f u n d s ( e x t e n s i o n o f b a n k c r e ­ d i t ) c r e a t e s no g r e a t e r s a t i s f a c t i o n s . . . . ” T a y l o r , The C r e d i t S y s t e m , 2 9 . ”Th’e f u n d s t h a t t h e b a n k s u p p l i e s a r e n o t t h e m s e l v e s c a p ­ ita l. The b a n k c a n n o t , b y m u l t i p l y i n g l o a n s , i n c r e a s e s o c i e t y ’ s fund o f c a j p i t a l . " A gger, O rg a n iz ed B a n k in g , 68. 5 ^The a u t h o r s ( F o s t e r a n d C a t c h i n g s ) m a i n t a i n , we t h i n k c o r r e c t l y , t h a t th e f i r s t e f f e c t o f an in c r e a s e in the volum e o f money by b a n k l o a n s f o r i n c r e a s e d p r o d u c t i o n , i s a t e n d e n c y t o r a i s e p r i c e s , b e c a u s e t h e new money i s d i s b u r s e d i n w ag es, e t c . , b e f o r e the a d d i t i o n a l goods a r e m a r k e t e d . ” So.uter, P o l i a k P r i z e E s s a y s , 48. ^ ”As we s h a l l s e e l a t e r , w h e n e x p a n s i o n o f b a n k c r e d i t r e a c h e s a n a b n o r m a l s t a g e , we h a v e c r e d i t i n f l a t i o n a n d a g e n e r a l r i s e in p r i c e s . " R u fe n e r, P r i n c i p l e s of E conom ics, 456.

u s e d by o t h e r e n t r e p r e n e u r s .

These o t b e r e n t r e p r e n e u r s w i l l

not re lin q u ish c o n tro l of th is

c ap ita l

and la b o r w ith

p r o f i t - m a k i n g p o s s i b i l i t i e s u n l e s s f o r c e d t o do s o . e v e r , M r. A h a s t h e p o w e r t o

force

its How­

them to r e l i n q u i s h

th is

c o n t r o l b y o f f e r i n g more f o r th e d e s i r e d l a b o r and c a p i t a l th a n th e y can a f f o r d to p ay .

In doing so he r a i s e s

p r ic e l e v e l o f la b o r and c a p i t a l in p ra c tic e

c o m m o d i t i e s . ’*’

o th er e n trep ren eu rs r e s o r t

s e l v e s and t h u s m a i n t a i n t h i s m erely s h i f t s

t h e i r r e a l p u r c h a s i n g power, b u t

the b u r d e n o f th e

and i t

s e rv ic e s ap p ro p ria te d

en tire

lo ss of re a l

by M r. A.

then, th a t

T his e f f e c t o f bank c r e d i t

i n t h e n e x t two c h a p t e r s . the

loan o f a m illio n d o lla r s

of bank c r e d it

t o Mr. A r e s u l t s

th is

perm anen t a s w e l l a s im m ediate?

in fla tio n

c h ie fly th e

i s t h e y who g i v e u p t h e g o o d s a n d

w i l l b e d i s c u s s e d more f u l l y We c o n c l u d e ,

Of c o u r s e

to bank lo a n s them ­

p u r c h a s i n g p o w e r u p o n t h o s e who c a n n o t b o r r o w , lab o rin g c la s s e s ,

th e

i n im m ediate

in fla tio n .

Is

Some w r i t e r s

MA c o n v i n c i n g p o i n t i n t h e i n q u i r y a s t o t h e a c t i o n o f n o rm a l c r e d i t on p r i c e s i s t o be f o u n d i n a r e f e r e n c e t o t h e e f f e c t o f s u c h c r e d i t on n o r m a l e x p e n s e s o f p r o d u c ­ tio n . Does c r e d i t c h a n g e a n y o f t h e e l e m e n t s e n t e r i n g i n t o th e norm al ex p en se s o f p ro d u c tio n o f any a r t i c l e ? I f i t d o e s n o t , how c a n i t b e s a i d t o h a v e a n y d i s t i n c t r e s u l t on g e n e r a l p r i c e s ? Goods a l r e a d y p r o d u c e d c a n ­ n o t be i n f l u e n c e d a s t o t h e i r e x p e n s e s o f p r o d u c t i o n b y new m e a n s o f e x c h a n g i n g t h e m ; i f i t i n f l u e n c e s p r i c e a t a l l in t h a t way, i t w ould be by r e d u c in g p r i c e th ro u g h g r e a te r e f f i c ie n c y of e x c h a n g e .” L au g h lin , op. c j t . , p. 101. When M r . A g o e s i n t o t h e m a r k e t h e r a i s e s t h e p r i c e o f a l l g o o d s a n d s e r v i c e s he b u y s , o t h e r w i s e t h e c u s t o m a r y p u r ­ c h a s e r s o f t h e s e goo d s and s e r v i c e s would p u r c h a s e th e m . Thus he r a i s e s th e p r i c e o f go ods a lr e a d y p ro d u c e d . A lso he in c r e a s e s th e c o s ts of p ro d u c tio n of a l l e n tr e p r e n e u r s who may u s e s i m i l a r g o o d s a n d s e r v i c e s i n t h e f u t u r e .

8 on b a n k in g h ave c o n c e d e d t h a t i n f l a t i o n

i s the

im m ediate r e ­

s u l t o f an i n c r e a s e i n t o t a l bank c r e d i t i n u se b u t have thought t h a t

e v e n t u a l l y th e u s e o f t h i s b a n k c r e d i t would

in c re a s e the

su p p ly of com m odities s u f f i c i e n t l y

co m p letely fo r the th e lo n g ru n the It su lt

is

in itia l

to com pensate

i n f l a t i o n a r y e f f e c t so t h a t

in

p r i c e l e v e l would n o t b e i n f l a t e d . 1

t r u e t h a t the

l o a n t o M r. A may e v e n t u a l l y r e ­

i n an i n c r e a s e d s u p p ly o f co m m o d ities and i t

fo re v ery im portant fo r us to d isc o v e r th e an in c r e a s e upon the

p rice le v e l.

is th ere­

e f f e c t o f such

Bank l o a n s a r e f o r

short

1 "When a b a n k g r a n t s a d e p o s i t c r e d i t t o a c u s t o m e r , t h a t c u s to m e r i s e q u ip p e d w i t h t h e power to e n t e r t h e m a r k e ts and s u p p l y h i s w a n ts , t h e r e b y t e n d i n g to r e d u c e t h e t o t a l sto c k of goods, o r a t l e a s t t e n d in g to r e d i s t r i b ­ u te p u r c h a s in g pow er. P re su m a b ly , however, th e p u r­ c h a s e s w i l l r e s u l t i n t h e b u i l d i n g up o f s t o c k s o f o t h e r k i n d s o f g o o d s , so t h a t t h e t o t a l volum e and v a l ­ ue o f goods w i l l b e r e s t o r e d t o th e o r i g i n a l e q u i l i ­ brium , or p erh ap s i n c r e a s e d ." Munn, B a n k C r e d i t , P r i n ­ c i p l e s and O p e ra tin g P r o c e d u r e , 27. W h i l e Munn s a y s " o r p e r h a p s i n c r e a s e d , " P o s t e r a n d U a tc h in g s a r e co n v in c ed t h a t th e s u p p l y o f com m odities w ill in crease s u ffic ie n tly to cause d e fla tio n ra th e r than i n f l a t i o n . " O u r c a s e s sh o w t h a t w h e n e v e r , i n a p r o f i t economy, i n c r e a s e d p r o d u c t i o n i s f i n a n c e d by means o f a n e x p a n s i o n o f bank c r e d i t , t h i s p r o c e s s l e a d s e v e n t u a l l y t o a d e f i c i e n c y o f p u r c h a s i n g pow er, e v e n i f a l l t h e b o r r o w e d m o n ey i s p a i d a s w a g e s . " P r o f i t s , 311. On t h e o t h e r h a n d some e c o n o m i s t s do n o t b e l i e v e t h a t th e c r e a t i o n o f bank c r e d i t h a s any e f f e c t upon th e t o t a l su p p ly of com m odities. "Banks a r e th e p r i n c i p a l c r e a t o r s and the p r i n c i p a l c u s t o d i a n s o f l o a n fund c a p ­ i t a l . . . . I f l o a n a b l e c a p i t a l were t h e e x p r e s s i o n o f the w e a lth o f s o c i e t y , or of i t s p o s s e s sio n s of s o c i a l c a p i t a l , i t would be i m p o s s i b l e to e x p l a i n th e f a c t t h a t in the l a s t f i f t e e n y e a rs the d e p o s its of th e n a tio n a l b a n k s a l o n e i n t h e U n i t e d S t a t e s have i n c r e a s e d from two b i l l i o n s o f d o l l a r s t o s i x a n d a h a l f b i l l i o n s . T h e s e f u n d s m a y , a few y e a r s h e n c e , b e h a l f a s g r e a t o r , p o s s ib ly , tw ic e as g r e a t , w ith o u t im p ly in g any s l i g h t e s t c o r r e s p o n d i n g ch an g e i n t h e t o t a l volume o f e x i s t i n g s o c ia l w ealth . D a v e n p o r t, E conom ics o f E n t e r p r i s e , 3 4 8 -9 .

p e r io d s o f tim e and th e

b o rro w e r m ust be in a p o s i t i o n t o

re p a y th e lo a n a t t h e end o f e ac h su c h p e r i o d .

T herefore

Mr. A w o u l d n o t b e l i k e l y t o s p e n d h i s b a n k l o a n u p o n c o n ­ s u m a b l e c o m m o d i t i e s e x c e p t f o r t h e p u r p o s e o f r e s e l l i n g them.. In o r d e r t o f a c i l i t a t e and lo an s,

i n s u r e prom pt rep a y m en t o f bank

the banks th e m se lv e s o r d i n a r i l y i n s i s t

ceeds of th e

th a t th e pro­

lo a n be i n v e s t e d i n p r o d u c tiv e c a p i t a l w hich

w ill e arn the

i n t e r e s t r e q u i r e d b y the

lo an .

But th e p eo p le

f r o m whom t h e b a n k s h a v e e x p r o p r i a t e d t h i s c u r r e n t r e a l p u r ­ c h a s i n g po¥#er w o u l d m o s t l i k e l y h a v e s p e n t a b le co m m o dities,

as w i l l be

it

upon consum­

e x p la in e d l a t e r on in t h i s

th esis. T herefore,

i f M r. A u s e s a l l

bank c r e d i t to in c r e a s e th e try ,

p ro d u c tiv e c a p i t a l o f h i s coun­

and i f h i s i n v e s t m e n t t u r n s ou t t o b e s o c i a l l y p r o f i t ­

ab le, the

of h is m illio n d o lla r

two d i s t i n c t a n d i m p o r t a n t r e s u l t s w i l l f o l i o ? / .

c a p i t a l o f s o c i e t y w i l l be i n c r e a s e d by a m i l l i o n d o l ­

la rs.

S e c o n d , t h e a n n u a l c o n s u m a b le com m odity p r o d u c t i o n o f

t h a t s o c i e t y w i l l be in c re a s e d by the in te rest

s e c u re d from t h i s

Of c o u r s e for

F irst,

in stan ce,

no a d d i t i o n

to

c ap ita l

p r o f i t made o n a n d t h e

in v estm en t.

i f Mr. A ’ s i n v e s t m e n t b e s o c i a l l y u n e c o n o m i c , if

it

is

u s e d f o r t r a d i n g on t h e

s to c k m arket,

e i t h e r t h e c a p i t a l o r i n c o m e o f s o c i e t y may

r e s u l t a n d i n d e e d b o t h may b e d e c r e a s e d th e o t h e r hand i f h i s in c re a se the c a p ita l

t h e r e b y , w h i l e on

in v estm en t be re m a rk a b ly w ise i t

may

o f s o c i e t y by s e v e r a l m i l l i o n s and t h e

a n n u a l incom e c o r r e s p o n d i n g l y .

We s h a l l a s s u m e t h a t h e m e e t s

10 w ith r e a s o n a b le s u c c e s s and i n c r e a s e s the v a lu e of h i s lo a n and i t s 5% i n t e r e s t ad d itio n .

on t h e

s o c i e t y ’s c a p i t a l by

i n c o m e by s u f f i c i e n t t o p a y

l o a n a n d t o r e t u r n h i m 5% n e t p r o f i t

in

B u t e v e n i f Mr. A p a y s h i s b a n k e r s # 5 0 , 0 0 0 i n t e r ­

e s t and makes an e q u a l n e t p r o f i t he w i l i have o n ly i n c r e a s e d t h e t o t a l a n n u a l s u p p ly o f co n su m ab le co m m o d ities by o n e t e n t h t h e amount which t h e p l y o f p u r c h a s in g pow er.

bank h as in c r e a s e d It

is cle ar,

then,

the t o t a l th at

the c r e a tio n

o f new p u r c h a s i n g p o w e r b y Mr, A ’ s b a n k m u s t r e s u l t in fla tio n

sup­

in p rice

f o r consum able c o m m o d ities u n l e s s a t l e a s t n i n e -

t e n t h s o f t h i s new p u r c h a s i n g p o w e r i s purposes o th e r th an

the

p erm anently used fo r

p u rc h a s e o f consum able c o m m o d itie s .

H aving c o n s id e r e d th e e f f e c t

o f Mr. A ’ s b a n k l o a n u p o n

t h e su p p ly of consum able goods a n d t h e i r now c o n s i d e r t h e e f f e c t u p o n t h e

p rice le v e l,

we may.

s u p p ly o f c a p i t a l g o o d s and

s e e i f n i n e - t e n t h s o f t h e n e w l y c r e a t e d p u r c h a s i n g po¥/er c a n be used f o r t h e i r p u rch a se and s a l e w ith o u t price le v e l.^

In o t h e r w ords the

in fla tin g th eir

p r o b l e m we . h a v e now t o

T h is p a r t i c u l a r phase o f th e q u e s tio n has in th e p a s t o rd ­ i n a r i l y b e e n n e g l e c t e d b y w r i t e r s on i n f l a t i o n , who h a v e devoted t h e i r a t t e n t i o n to th e e f f e c t of changes in th e q u a n t i t y o f p u r c h a s i n g power upon c o n su m a b le c o m m o d itie s a s sh ow n b y w e l l known i n d e x n u m b e r s . I n t h e l a s t few y e a r s , how ever, t h e r e h a s b e e n c o n s i d e r a b l e m agazine and newspaper d is c u s s io n o f th e i n c r e a s in g use of bank c r e d i t i n t h e New Y o r k s t o c k m a r k e t . But t h e l a t t e r d i s c u s s i o n s have been e q u a l ly o n e - s i d e d in t h a t th e y have f a i l e d to n o t e th e e f f e c t s of the u s e o f c r e d i t i n t h e s t o c k m a rk e t upon c o n s u m a b le com m odity p r i c e s . I t has been r e p e a t e d l y c l a i m e d t h a t t h e s t o c k m a r k e t i s t a k i n g n e e d e d c r e d i t aw ay from l e g i t i m a t e b u s i n e s s , w hich s t a t i s t i c s a p p e a r to deny ( s e e B e n j a m i n M. A n d e r s o n , The C h a s e E c o n o m ic B u l l e t i n , V o l . V I I I , No. 4 ) , b u t few i f a n y o f t h e s e w r i t e r s h a v e p o in te d o ut t h a t t h i s flow of c r e d i t i n to th e s to c k m arket h a s p r e v e n t e d a n o t h e r w i s e i n e v i t a b l e and m a r k e d r i s e i n t h e p r i c e l e v e l o f co n su m ab le c o m m o d itie s w h ic h m ig h t be much m o r e u n d e s i r a b l e t h a n t h e p r e s e n t i n f l a t i o n i n s t o c k m arket p r ic e s .

11 consider is ,

can the

new p u r c h a s i n g p o w e r c r e a t e d b y Mr. A ’ s

b a n k be u s e d i n e x c h a n g i n g t h e c a p i t a l c o m m o d i ti e s w h ic h i t c a lls

in to

b e i n g so t h a t i t

w ill n e ith e r cause a r i s e

p r i c e l e v e l o f consum able o r p r o d u c t i v e uses h is m illio n

goods?

in the

I f Mr, A

d o l l a r lo a n t o add a m i l l i o n d o l l a r s ’ w orth

o f c a p i t a l e q u i p m e n t t o t h e w e a l t h o f s o c i e t y he i n c r e a s e s su p p ly o f exchangeable

com m odities by th e

bank has in c r e a s e d the

su p p l s ^ o f p u r c h a s i n g p o w e r .

i f we c o u n t h i s itie s

a d d itio n to

the

sa m e a m o u n t a s t h e Indeed,

t h e s u p p l y o f c o n s u m a b l e commod­

o f a b o u t o n e - t e n t h a n n u a l l y of t h e amount o f h i s l o a n ,

we f i n d t h a t h e h a s

in c re a s e d the

t i e s by s l i g h t l y more t h a n t h e from t h i s e x c e s s p r o d u e t i o n

t o t a l s u p p l y o f co m m od i­

amount o f h i s l o a n , a n d i t

th a t the

bank draw s i t s

is

in te re st

a n d Mr. A h i s p r o f i t s . It

is

probably t h i s

f a c t of a n a d d i t i o n to the

o f e x ch a n g ea b le com m odities e q u a l to d itio n

supply

o r g r e a t e r th a n the a d ­

to t h e s u p p l y o f p u r c h a s i n g power which h a s d e c e i v e d

man y e c o n o m i s t s i n t o c o n c l u d i n g t h a t no e v e n t u a l i n f l a t i o n resu lts

from th e

have f a i l e d

prudent

e x te n sio n of bank c r e d i t . 1

t o p e r c e i v e w h a t we w i l l

d if f e r e n tia l r a t i o s ," a p rin cip le

c a ll the

v ita l

They

"p rin cip le

t o any u n d e r s t a n d i n g

o f th e e f f e c t o f bank c r e d i t upon p r i c e s and one w h ic h , f a r as the p r e s e n t w r i t e r p l i e d by on ly one w r i t e r

i s aw are, on b a n k i n g ,

as

has been s t a te d and ap­ d

We h a v e a s s u m e d t h e w e a l t h o f o u r

1 Gf. f o o t n o t e page 8.

of

. H. R o b e r t s o n . im aginary s o c ie ty to

12 be $ 3 0 0 ,0 0 0 ,0 0 0 ,0 0 0 and th e #3 0 ,0 0 0 ,0 0 0 ,0 0 0 a t bank c r e d i t . m od ities

is

t o t a l c i r c u l a t i n g m edia t o b e

th e b e g in n in g o f t h e p e r i o d o f grow th of

The r a t i o

o f p u r c h a s i n g power t o c a p i t a l

30/300 o r 1 /1 0 .

However,

b e e n made a n d he l a s h a d t i m e t o

com­

a f t e r M r. A ’ s l o a n h a s

invest i t ,

the r a t i o ,

as­

s u m in g he i n c r e a s e s t h e w e a l t h b y a d o l l a r v a l u e e q u a l t o h i s loan,

w i l l be 3 0 , 0 0 1 / 3 0 0 , 0 0 1 .

W h i l e t h e c r e a t i o n o f new

p u r c h a s i n g p o w e r b y M r . A ’ s b a n k h a s i n a b s o l u t e a m o u n t s made an a p p ro x im a te ly e q u a l a d d i t i o n b o th to in g m edia and to t h e increase crease

the t o t a l c i r c u l a t ­

s u p p ly o f com m odities,

the p e rc e n ta g e

in th e form er is a b o u t te n tim e s the p e rc e n ta g e

in th e l a t t e r .

And i t

is

th is fa c t of d ifferen t

in ­ rat­

i o s o f i n c r e a s e b e tw e e n p u r c h a s i n g power a n d c o m m o d itie s t h a t makes i n f l a t i o n

in ev itab le

and,

in d eed ,

about nine-

t e n t h s a s g r e a t a s i t w ould be w ith o u t any i n c r e a s e su p p ly of com m odities due to

t h e u s e o f t h e new b a n k c r e d i t . ^

A ccording t o th e q u a n tity in the

t h e o r y o f m on ey a n i n c r e a s e

s u p p l y o f p u r c h a s i n g power c a u s e s i n f l a t i o n ,

f a c to r s b ein g eq u al,

in the

u n le s s the

o th er

s u p p ly of c o m m o d itie s

”We s e e now, t h e r e f o r e , t h a t t h e c r e a t i o n o f a d d i t i o n a l b a n k l o a n s t o t h e f u l l amount of an a d d i t i o n t o t h e s u p p l y o f g o o d s may i n c r e a s e t h e v o l u m e o f a v a i l a b l e m o n ey o u t o f p r o p o r t i o n t o t h e i n c r e a s e i n volume of a v a i l a b l e g o o d s; and th e a b i l i t y o f b u y e rs to buy b e in g t h e r e b y in c r e a s e d in g r e a te r degree than the w illin g n e s s of s e l l e r s to s e l l , t h e l e v e l o f p r i c e s w i l l t e n d to r i s e . . . .And t h e c a u s e r e s i d e s i n o u r o l d f r i e n d t h e ’’v e l o c i t y o f c i r c u l a t i o n , ” o r th e p e c u lia r r e l a t i o n of c h ec k in g acc o u n ts to ch eck s. The p r o p o s e d p l a n w o u l d o n l y b e s o u n d i f t h e p i e c e s o f money c r e a t e d a s t h e r e s u l t o f a b a n k l o a n o n l y c h a n g e d hands once, or r a t h e r , to be q u ite a c c u r a t e , i f th e y o n ly changed hands a s o f t e n a s th e goods w hich e l i c i t e d th e l o a n . ” R o b e r t s o n , Money. 8 8 - 9 .

13 i n c r e a s e s by a p p r o x i m a t e l y an e q u a l r a t i o .

I f th e supply

o f p u r c h a s i n g power i s d o u b le d u n d e r t h e s e c o n d i t i o n s th e s u p p l y o f c o m m o d i ti e s m u s t be d o u b l e d a l s o t o p r e v e n t tio n .

Nor d o e s t h i s e x a c t m a t h e m a t i c a l fo rm o f t h e

t h e o r y have to p rin cip le

be a c c e p t e d

of d iffe re n tia l

q u a n tity

in o r d e r f o r one to a c c e p t ratio s.

For in stan ce,

in fla ­

the

under our

a s s u m p t i o n s t h e t o t a l s u p p l y o f p u r c h a s i n g p o w e r i n Mr. A ’ s s o c i e t y can be d o u b led by the c r e a t i o n of | 3 0 , 00 0 ,0 0 0 ,0 0 0 of bank c r e d i t .

The a d d i t i o n o f t h i r t y

w o rth o f c o m m o d ities to

the t o t a l

b illio n s of d o lla rs’

stock of goods in t h i s

' sam e s o c i e t y w i l l o n l y r e s u l t i n a n e g l i g i b l e in th a t

sto ck .

power o f t h e

O b v i o u s l y a 10.0$ i n c r e a s e i n t h e p u r c h a s i n g

people w ill cause

in fla tio n

alm ost a s g r e a t as

would o c c u r w i t h o u t t h i s 10$ i n c r e a s e i n t h e m o d ities.

10$ in c r e a s e

We w i l l r e f e r

to t h i s f a c t

to t o t a l p u r c h a s i n g power and t o t h e

s t o c k . o f com­

th a t equal a d d itio n s su p p ly of exchangeable

com m odities o r d i n a r i l y c o n s t i t u t e r a d i c a l l y d i f f e r e n t r a t i o s o f in c re a s e a s the It

’’p r i n c i p l e

of d ifferen tial ra tio s .”

should p e rh a p s be p o in te d o u t t h a t

cu ssio n o f the e f f e c t m o d ities,

of th e

in crease

ten -elev en th s^ c a p ita l

in the

in the

above d i s ­

s u p p l y o f com­

c o m m o d itie s , upon th e p r i c e

l e v e l o f c o n s u m a b l e c o m m o d i t i e s we h a v e a s s u m e d t h a t a m i l ­ l i o n d o l l a r s w o r t h o f new c a p i t a l w o u l d r e q u i r e

a s much p u r ­

c h a s in g power t o exchange i t w it h o u t r a i s i n g t h e p r i c e l e v e l

^ T en -ten th s o f th e o r ig in a l lo an p lu s o n e -te n th in c re a s e in p r o d u c tio n o f consum able com m odities r e s u l t i n g from i n ­ v e s tin g the loan w ith average prudence.

14 a s w ould a m i l l i o n d o l l a r s w o r th of a d d i t i o n a l consum able com m odities.

T h is i s

an a ssu m p tio n most f a v o r a b l e to

who a r g u e t h a t b a n k c r e d i t

does not cau se

in fla tio n ,

a m odern s o c i e t y c a p i t a l e q u ip m e n t, once i n u s e ,

those fo r in

i s not bought

a n d s o l d a n y w h e r e n e a r l y a s o f t e n a s a r e c o n s u m a b l e com m o d i­ tie s.

The new p u r c h a s i n g p o w e r c r e a t e d b y M r. A ’ s b a n k w i l l

be u sed a lm o st e n t i r e l y to

exchange consum able c o m m o d itie s ,

th e s u p p ly o f w hich i t w i l l o n l y i n c r e a s e by o n e - t e n t h th e v a lu e o f th e lo a n , and te n - e le v e n th s o f th e calls

com m odities i t

i n t o b e in g w i l l be c a p i t a l com m odities w hich w i l l r e ­

quire l i t t l e

p u r c h a s i n g power f o r t h e i r e x c h a n g e s .

M oreover, a p p lie d to itie s.

the p r i n c i p l e

the in c re a s e

The i n c r e a s e

of d i f f e r e n t i a l r a t i o s may b e

in the

s u p p l y o f c o n s u m a b l e commod­

in th e s u p p ly o f consum able com m odities

would b e a b o u t o n e - t e n t h t h e v a l u e

of t h e

lo an a n n u a lly .

p rin cip le

o f d i f f e r e n t i a l r a t i o s w ould r e d u c e th e

th e p r ic e

le v e l of t h i s o n e-ten th

o n e -te n th ,

or o ne-hundredth,

e f f e c t upon

in cre ase to o n e -te n th of

when c o m p a r e d w i t h t h e

t i o n a r y e f f e c t o f t h e new p u r c h a s i n g p o w e r u p o n t h e l e v e l o f consum able com m odities i f th eir

a ll of it

in fla ­ price

be used f o r

exchange. W hether t h e

itse lf tie s

The

i n f l a t i o n cau sed by bank c r e d i t m a n ife sts

in the p ric e

l e v e l o f c o n s u m a b l e o r c a p i t a l co m m od i­

d e p en d s upon th e c h a r a c t e r o f th e

a d d i t i o n a l bank l o a n s .

I n t h e c a s e o f Mr. A t h e c h i e f e f f e c t w i l l b e u p o n t h e p r i c e l e v e l o f consum able c o m m o d itie s, th is

c a p i ta l to

f o r we h a v e a s s u m e d he u s e s

i n c r e a s e p r o d u c t i o n a n d i n o r d e r t o do t h i s

16

he m ust a t t r a c t e l.

la b o r by o f f e r i n g wages above th e c u r r e n t l e v ­

T hese wages w i l l be s p e n t upon consum able g o o d s .

To

o b t a i n h i s raw m a t e r i a l s , w h ic h w ould o t h e r w i s e h a v e b e e n c o n s u m e d , he m u s t p r e v e n t

th e c u sto m a ry consum ers from b uying

them by o f f e r i n g more f o r

them t h a n t h e y have b e e n aecustom e.d

to pay. On t h e o t h e r h a n d ,

if

t h i s money had b e e n l o a n e d t o

p ro sp e c tiv e ' sp ecu lato rs

in

l a n d o r common s t o c k s

t i o n a r y e f f e c t would a p p e a r in t h e tal

com m odities.

p rice

th e i n f l a ­

le v e l of th ese c a p i­

An i n d i r e c t e f f e c t u p o n t h e p r i c e

co n su m ab le c o m m o d itie s m ight

resu lt

i f the

lev el of

prev io u s h o ld ers

o f t h e l a n d o r common s t o c k p u r c h a s e d s p e n d a p o r t i o n o f t h e p r o f i t s from t h e i r s a l e upon consum able in re in v e s tin g t h e ir c a p ita l i.e .,

com m odities, o r i f

t h e y p u r c h a s e d new s e c u r i t i e s ,

f i n a n c e d new e n t e r p r i s e s w h i c h m u s t o f n e c e s s i t y b u y

c o n su m ab le goods and h i r e l a b o r p r e v i o u s l y u s e d to p ro d u c e co n su m ab le goods i n o r d e r to o b t a i n t h e n e c e s s a r y c a p i t a l f o r t h e i r own a c t i v i t i e s .

Of c o u r s e

a n d s e a s o n e d eommon s t o c k s

did

w h a ts o e v e r upon t h e p r i c e l e v e l The f a c t

th a t brokers*

th is

if a ll se lle rs

t h e r e w o u l d b e no e f f e c t

o f l a n d o r common s t o c k s .

l o a n s a n d common s t o c k p r i c e s u s u a l l y

go u p a n d down t o g e t h e r p r o v e s t h a t much o f t h e p u r c h a s i n g power i s n o t u s e d rath er

o f land

a d d itio n al

t o f i n a n c e new e n t e r p r i s e s b u t

i s used to exchange th e se aso n ed s to c k s a t

increased

p rices. We may now c o n c l u d e ratio s

th a t the p rin c ip le

and a lm o s t any i n t e r p r e t a t i o n

of the

of d i f f e r e n t i a l q u a n tity

th eory

1'6

o f m o n ey r e n d e r b o t h i m m e d i a t e a n d p e r m a n e n t i n f l a t i o n in ev itab le

an

r e s u lt of th e ex ten sio n of a d d itio n a l bank c re d it

i n o u r assum ed s o c i e t y .

And t h i s

p ro p o rtio n a l to the r a t i o

i n f l a t i o n w i l l be ro u gh ly

o f in c re a se in t o t a l purchasing

p o w e r i f we a c c e p t t h e m o r e e x a c t m a t h e m a t i c a l f o r m o f t h e q u a n tity th eo ry .

A ccord in g to the

l a t t e r a 100$ in c r e a s e

i n p u r c h a s i n g power w i t h a p p r o x i m a t e l y a 11$ i n c r e a s e su p p ly o f exchangeable 90$ i n f l a t i o n

c o m m o d itie s would

of the p ric e

le v e l.

resu lt

in

in th e

about a

17'

CHAPTER■I l l EXPROPRIATION T h is c h a p te r d e a ls f e c t o f bank c r e d i t

w ith a u n i v e r s a l and i n e v i t a b l e

w h i c h is: n e x t i n

ef­

im portance to i n f l a t i o n

and w hich h a s r e c e i v e d much l e s s a t t e n t i o n fro m e c o n o m i s t s . T h is e f f e c t i s a com pulsory t r a n s f e r o f r e a l p u rc h a s in g power fro m t h e p u b l i c

to c e r t a i n

p r i v a t e b a n k e r s and t h e i r

borrow ers. I n o r d e r t o u n d e r s t a n d how a n y i n c r e a s e o f bank c r e d i t

in th e amount

in use causes a t r a n s f e r of r e a l purchasing

p o w e r i n o u r a s s u m e d s o c i e t y we m u s t r e t u r n t o t h e a n a l y s i s o f fir. Af s i n i t i a l l o a n from h i s b a n k .

We f o u n d t h a t

the

s u p p l y o f l a b o r , raYf m a t e r i a l s a n d m a c h i n e r y i n t h i s s o c i e t y w ould be no l a r g e r a f t e r t h e g r a n t i n g o f Mr. A’ s l o a n t h a n i t had been b e fo re th e

l o a n was made. The b a n k h a s c r e a t e d p u r 1 c h a s in g pow er, n o t c o m m o d ities. Now n o o n e b o r r o w s m on ey

1

”B u t n o t e t h e p e c u l i a r t h i n g a b o u t b a n k l o a n s . B ankers g e t th e means o f l e n d i n g , n o t by s a v i n g , m e re ly , a lth o u g h t h e y may do some s a v i n g , b u t b y i n c r e a s i n g t h e m o n ey su p p ly , in c re a s in g bank d e p o s its . In o th e r w ords, i n ­ s t e a d o f l e n d i n g m o n ey i n c o m e t h e y h a v e s a v e d t h e y p r i n t a n d l e n d b a n k n o t e s , o r t h e y l e n d t o b u s i n e s s m en , n o t money, b u t d e p o s i t s i n t h e i r b a n k s , w hich r e p r e s e n t m e re ­ l y p r o m is e s t o p ay money. L e n d i n g b y b a n k e r s may b e com­ p a r e d w i t h l e n d i n g b y a governm ent t h a t s im p ly p r i n t s p a p e r m o ney a n d l e n d s i t . Such l e n d i n g , s i n c e i t d o e s n o t r e p r e s e n t s a v i n g s , m e r e l y i n c r e a s e s t h e b o r r o w e r Ts c a p a c i t y to buy goods w ith o u t d e c r e a s i n g the l e n d e r ’s c a p a c ity to buy. In o th e r k in d s of len d in g the le n d e r , by means o f h i s l o a n , t r a n s f e r s h i s power to buy goods to t h e b o r r o w e r . ” R u f e n e r , op . c i t . . p . 456.

18 a n d p a y s i n t e r e s t u p o n i t u n l e s s h e h a s some u s e f o r

it.

I f M r. A u s e s h i s l o a n t o i n c r e a s e h i s p u r c h a s e s o f l a b o r , raw m a t e r i a l s and m a c h i n e r y o t h e r p e o p le

in h is

so ciety

w i l l h ave to d e c r e a s e by an e x a c t l y e q u a l amount t h e i r c u s ­ tom ary p u r c h a s e s o f

t h o s e sa m e c o m m o d i t i e s .

P r e c i s e l y the

same e c o n o m i c p h e n o m e n o n o c c u r s wh en a g o v e r n m e n t f i n a n c e s a w ar w ith p a p e r m oney.1

P rice

u s e d b y Mr. A a n d h i s b a n k e r , go vernm ent,

in fla tio n

as i t

is

the

instrum ent

i s used by a w ar-tim e

to d e p r i v e o t h e r p e r s o n s o f t h e i r power to

p u r c h a s e t h e c o m m o d itie s he d e s i r e s , a n d w h ic h t h e y would have p u rch a se d e x c e p t

for h is

To r e p e a t t h e a r g u m e n t l o a n t o Mr. A r e s u l t s

in

enterin g

the m a r k e t.

d if f e r e n t w ords, the bank

i n a new r a t i o

betw een u n i t s

of

"Now a s s o o n a s t h e s t a t e , i n a n y f o r m w h a t e v e r , h a s .. g i v e n o u t m o r e f o r t h e w a r t h a n i t c o u l d g e t a t i t s d i s p o s a l i n th e form o f r e a l s a v i n g s , a r i s e i n p r i c e s has n e c e s s a r i l y been the r e s u l t . T he h i g h p r i c e s h a v e f o r c e d th e g r e a t c l a s s e s of th e p o p u l a t i o n whose i n ­ c o m e s h a v e n o t r i s e n i n t h e sa m e p r o p o r t i o n t o s e v e r e r e s t r i c t i o n s in t h e i r consum ption. I n t h i s way a c e r ­ t a i n amount o f r e a l c o m m o d i ti e s h a s b e e n s e t f r e e f o r t h e d i s p o s a l o f the s t a te ,w h i c h h a s b e e n a b l e ' t o buy t h e s e c o m m o d i t i e s f o r t h e f r e s h m o n ey a r t i f i c i a l l y created . Thus, u l t i m a t e l y t h e e x p e n se s o f th e g o v e rn ­ ment ha v e b e e n f i n a n c e d , a s t h e y n e c e s s a r i l y must, b e , by th e a i d o f r e a l s a v in g s of t h e c o u n tr y . But t h e s e s a v in g s have to a l a r g e e x t e n t b een c o m p u lso ry and th e means f o r t h i s c o m p u ls io n h a s b e e n i n f l a t i o n . T his i n f l a t i o n has t h e r e f o r e w ithout doubt been an e f f e c t i v e m eans o f w ar f i n a n c e ; b u t c e r t a i n l y a means w hich h a s c a u s e d g r e a t h a r d s h i p to w id e c i r c l e s o f t h e p e o p l e , an d h a s had t h e m ost p e r n i c i o u s i n f l u e n c e on t h e w h o le econom ic l i f e o f t h e c o u n t r y . ” G a s s e l , o p . c i t . , 2 2 - 3 . I n o n e s e n s e t h e s a v i n g s d e s c r i b e d b y C a s s e l a s "com­ p u l s o r y ” a r e v o l u n t a r y s i n c e t h e y a r e due to t h e a c ­ t i o n s o f t h e g o v ern m en t and th e s a v e r s c o n t r o l th e g o v ern m en t and h e n c e a r e r e s p o n s i b l e f o r i t s a c t i o n s .

19 p u r c h a s i n g power and c o m m o d itie s o r p r i c e a resu lt a ll

th e o th e r p eople in th e

and a s a g ro u p , incom e i s l e s s bank c r e d i t .

fin d

th a t the

in fla tio n .1

sta te ,

As.

in d iv id u ally

p u r c h a s i n g power o f t h e i r

t h a n i t w a s b e f o r e M r . A m ade u s e o f h i s T he b a n k h a s n o t t r a n s f e r r e d

its

p urchasing

" T h e r e i s no w a y i n w h i c h a g e n e r a l a n d p e r m a n e n t r i s e o f p r i c e s , o r i n o t h e r w o r d s , d e p r e c i a t i o n o f money, c a n b e n e f i t a n y b o d y ., e x c e p t a t t h e e x p e n s e o f s o m e b o d y e lse. The s u b s t i t u t i o n o f p a p e r f o r m e t a l l i c c u r r e n c y i s a n a t i o n a l g a i n ; any f u r t h e r i n c r e a s e o f p a p e r beyond t h i s i s b u t a form o f r o b b e r y . " "An i n c r e a s e o f n o t e s i s a m a n i f e s t g a i n t o t h e i s s u e r s , who, u n t i l t h e n o t e s a r e r e t u r n e d f o r p a y m e n t, o b t a i n th e u se o f t h a n a s i f t h e y w ere a r e a l c a p i t a l ; and s o l o n g a s t h e n o t e s a r e no p e r m a n e n t a d d i t i o n t o t h e c u rre n c y , but m erely su p ersed e go ld or s i l v e r to th e same a m o u n t , t h e g a i n o f t h e i s s u e r ' i s a l o s s t o n o o n e ; i t i s o b t a i n e d by s a v i n g t o t h e com m unity th e e x p e n s e ' o f the m o re® co stly m a t e r i a l . But i f t h e r e i s no g o l d o r s i l v e r t o be s u p e r s e d e d — i f th e n o t e s a r e added to t h e c u r r e n c y , i n s t e a d o f b e i n g s u b s t i t u t e d f o r t h e me­ t a l l i c p a r t o f i t — a l l h o l d e r s of t h e c u r r e n c y l o s e , by the d e p r e c ia tio n of i t s v a lu e , th e ex ac t e q u iv a le n t o f what th e i s s u e r g a i n s . A t a x i s v i r t u a l l y l e v i e d on them f o r h i s b e n e f i t . " J . S. M ill, P r i n c i p l e s o f P o l­ i t i c a l Economy. I I , 7 1 . " T h is w hole m a t t e r o f a d d i t i o n a l l o a n s t h u s r e v i v e s th e - s u s p i c i o n s w i t h w h i c h i n p a r a g r a p h o n e we a p p r o a c h e d th e b a n k in g system . For i n the case o f an a d d it i o n a l l o a n i t i s t r u e t h a t t h e b a n k ’ l e n d s * m on ey w i t h o u t i n s u r i n g t h a t a t t h e d a t e t h e l o a n i s made t h e r e i s a n y r e a l s t u f f to len d . T here is not n e c e s s a r i l y any c o r ­ r e s p o n d i n g p r e l i m i n a r y a c c u m u l a t i o n , s u c h a s w a s re-* p r e s e n te d i n o u r o r i g i n a l i n s ta n c e by t h e f a r m e r ’s wheat crop. And i f t h e r e i s n o t , a n y s a v i n g t h a t i s d o n e i s d o n e d u r i n g t h e e l e v e n t h h o u r , b y t h e m em b e r s o f t h e g e n e r a l p u b l i c , who f i n d t h e v a l u e o f t h e i r m o n ey d i m i n i s h e d , and a r e f o r c e d t o a b s t a i n f r o m c o n ­ s u m p t io n w h ic h t h e y would o t h e r w i s e h a v e e n j o y e d . The com m unity i s i n e f f e c t c o m p e l l e d , b y t h e e x t r a p u r c h a s ­ i n g povtfer p u t i n t o t h e h a n d s o f t h e b o r r o w e r , t o s h a r e w i t h him i t s c u r r e n t incom e o f r e a l t h i n g s , and su c h h o a r d s o f r e a l t h i n g s a s . i t may p o s s e s s . Of c o u r s e t h e a d d i t i o n a l l o a n w i l l p r e s u m a b ly j u s t i f y i t s e l f by and b y , by a d d i n g t o th e flo w o f r e a l g o o d s ; . . . .B u t so lo n g as i t i s o u t s t a n d i n g , th e lo a n is of th e n a tu r e o f a t a x o r c o m p u l s i o n t o s a v e im posed on th e g e n e r a l com m unity j o i n t l y b y t h e b o r r o w e r a n d t h e b a n k . " R o b e r t s o n , o p . c 1 1 ♦ ,p.90.

p o w e r t o M r. A b u t h a s a p p r o p r i a t e d t o t a l p u r c h a s i n g power o r r e a l

some f r a c t i o n

of the

20

in co m e o f s o c i e t y a s a w h o l e

an d t r a n s f e r r e d t h i s p u r c h a s i n g power o r r e a l incom e t o 1 M r. A. Aj.1 t h a t h a s t a k e n p l a c e i s t h e r e a l l o c a t i o n o f a n incom e no l a r g e r w h ile t h e was g r a n t e d . th eir real

S ince the

loan

i s bein g used th a n b e fo re

it

p e o p l e who t h u s l o s e a p o r t i o n o f

incom e do n o t e x p r e s s l y c o n s e n t o r a g r e e t o t h i s

t r a n s f e r o f r e a l p u r c h a s i n g power t h e

phrase,

ex p ro p riatio n

2

o f r e a l p u r c h a s in g pow er,

d e s c r i b e s t h e phenom enon more a c ­

c u r a t e l y th an the

t r a n s f e r o f r e a l p u r c h a s i n g poweri

phrase,

I t may b e o b j e c t e d t h a t a c c e p t bank c r e d i t

the s e l l e r m ust b e w i l l i n g to

i n payment f o r h i s goods or s e r v i c e s b e ­

f o r e any t r a n s a c t i o n c a n t a k e p l a c e , and t h a t s e n ts to th e

i f he con­

t r a n s a c t i o n we c a n n o t a c c u r a t e l y t e r m t h e r e ­

s u l t e x p ro p r ia tio n s in c e t h i s term im p lie s la c k of consent on t h e p a r t o f t h e p e r s o n e x p r o p r i a t e d .

T his o b j e c t i o n i s

b a s e d upon a s e r i o u s m is c o n c e p t i o n of t h e econom ic p r o c e s s d e scrib e d above. is

For i t

is n o t th e s e l l e r o f th e

ex p ro p riated , but ra th e r i t

is th e

g o o d s who

p e r s o n o r p e r s o n s who

in the norm al c o u rs e of b u s i n e s s w ould have p u rc h a s e d t h e s e goods and s e r v i c e s e x c e p t f o r th e h i s new b a n k - c r e a t e d g iv e t h e i r c o n se n t to

i n t r u s i o n o f Mr. A w i t h 3 p u r c h a s i n g pow er. T h e s e p e o p l e do n o t the p r o c e s s w hich r e s u l t s

in

th eir

e x p ro p ria tio n . J.

g

S. M i l l and R o b e r t s o n ,

lo c. c i t .

D efined a s "th e a c t o f d e p r i v i n g of o w n ersh ip o r p r o p r i e ­ t a r y r i g h t s " in T /eb ster’s I n te r n a tio n a l D ic tio n a r y . "The a c t u a l c a p i t a l r e p r e s e n t e d b y b a n k - n o t e s i s

o b tain ed

21 I t w i l l b e r e m e m b e r e d t h a t we f o u n d b y a p p l y i n g t h e p rin cip le

o f d i f f e r e n t i a l r a t i o s and the

q u a n tity th eo ry

o f m o n ey t h a t t h e i n f l a t i o n c a u s e d b y new b a n k c r e d i t o u r assum ed s o c i e t y i s r o u g h l y p r o p o r t i o n a l to the betw een th e q u a n t i t y ^

in

ratio

o f new p u r c h a s i n g p o w e r a n d t h e

q u an tity

(co n td .) from th e p u b l i c . I f t h e power o f i s s u i n g n o t e s d o e s n o t e x i s t , t h i s c a p i t a l can be o b t a i n e d o n ly by th e d e p o s i t o f c a sh o r t i t l e s to c a s h w ith the b a n k by d e p o s i t o r s . Where th e power o f i s s u i n g n o t e s e x i s t s , the lo a n i s e q u a l l y made b y t h e p u b l i c t o t h e b a n k , a n d b y t h e b a n k t o t h e b o rro w e r from th e c a p i t a l b e lo n g in g to th e p u b l ic , b ut i t i s made i n a l e s s d i r e c t a n d c o n s c i o u s m a n n e r . Each p r o d u c e r who s u r r e n d e r s g o o d s t o a n o t h e r f o r a b a n k n o t e h a s g i v e n up r e a l c a p i t a l f o r a p r o m is e by t h e b a n k to d e ­ liv e r c a p ita l. He i s t h u s i n a s e n s e a l e n d e r t o t h e b a n k , a s he w o u l d b e i f h e m ad e a d i r e c t d e p o s i t t h e r e . B ut th e s e e v id e n c e s o f th e in d e b te d n e s s of the bank a re ex­ c h a n g e a b le f o r th e com m odities of o t h e r s . . . . " C onant, P r i n c i p l e s o f Money a nd B a n k i n g , 2 2 - 2 3 . The a b o v e q u o t a t i o n i l l u s t r a t e s two v e r y p r e v a l e n t m i s ­ c o n c e p tio n s c o n cern in g bank c r e d i t . One i s t h e i d e a t h a t t h e " p r o d u c e r who s u r r e n d e r s g o o d s t o a n o t h e r f o r a b a n k n o t e " i s " i n a s e n s e th e l e n d e r to th e b a n k . " T h is p r o ­ d u c e r h a s .m e r e ly exchanged h i s goods f o r e f f e c t i v e p u r ­ c h a s i n g p o w e r , -w hich i s w h a t e v e r y s e l l e r d o e s i n e v e r y sale. T h e p e r s o n who i s e x p r o p r i a t e d , o r b e c o m e s " i n a s e n s e a l e n d e r t o t h e b a n k , " a s C o n a n t- i n e x a c t l y t e r m s t h e p r o c e s s , i s n o t t h e s e l l e r , who i s a s r i c h i f n o t r i c h e r a f t e r t h e t r a n s a c t i o n a s h e was b e f o r e , b u t w h o e v e r w ould h a v e b o u g h t t h e s e go o d s i f no b a n k c r e d i t h a d been ex ten ded . The s e c o n d m i s c o n c e p t i o n , i m p l i e d t h o u g h n o t c o m p l e t e l y s t a t e d i s t h a t demand d e p o s i t o r s " l e n d " t h e i r f u n d s t o th e banks in w hich t h e y d e p o s i t them . T his is tru e of s a v i n g s b u t n o t o f d em an d d e p o s i t s . The b a n k i s a m e r e w arehouse f o r th e l a t t e r , w hich a r e b o u g h t and so ld e v e ry day j u s t as o th e r k in d s o f w arehouse r e c e i p t s a re bought and s o ld . M oreover the d i s t i n c t i v e c h a r a c t e r i s t i c of money i s i t s e x c h a n g e a b i l i t y . The d e p o s i t o r m a k e s u s e o f t h i s c h a r a c t e r i s t i c or a t t r i b u t e o f h is dep o sited funds c o n s ta n tly . How t h e n c a n we s a y h e h a s l o a n e d t h i s a t t r i b u t e o f h i s money t o s o m e o n e e l s e ? What w o u l d we t h i n k i f a g r a i n e l e v a t o r c o n s i d e r e d t h a t i t s dem an d d e p o s i t s w e r e l o a n e d t o i t a n d i s s u e d a n d l o a n e d o u t a d d i t i o n a l w a r e h o u s e r e c e i p t s f o r them?

22

o f p rev io u sly e x is tin g

p u r c h a s i n g power i n s p i t e o f t h e f a c t

t h a t t h e s u p p l y o f c o m m o d i t i e s may h e i n c r e a s e d

in ab so lu te

v a l u e by t h e f u l l v a l u e o f t h e n e w ly c r e a t e d p u r c h a s i n g p o w e r. But a d i f f e r e n t p r i n c i p l e a p p l i e s p u r c h a s i n g power e x p r o p r i a t e d

in r e g a r d t o th e

in the

amount o f

process.

C r e a t i n g new p u r c h a s i n g p o w e r c a u s e s i n f l a t i o n e v e n w h e n used to in c re a se

th e s u p p ly o f co m m odities b e c a u se th e

o v e r o f p u r c h a s i n g power i n m odern s o c i e t i e s a v e ra g e t u r n o v e r o f a l l com m odities,

i s man y t i m e s t h e

and o n l y t h e f i r s t

o v e r o f t h e new p u r c h a s i n g power s e r v e s t o p l y o f co m m o d ities.

tu rn ­

tu rn ­

in c re a se the sup­

B u t t h i s same f a c t l i m i t s

the e x p ro p r ia ­

t i o n o f p u r c h a s i n g power t o t h e v a lu e o f t h e c o m m o d itie s p u r ­ chased by th a t f i r s t

t u r n o v e r o f t h e new p u r c h a s i n g p o w e r

s in c e th e b o rro w er can only

spend i t o n c e .

a l s u p p l y o f p u r c h a s i n g power c re a s e d from t h i r t y

to

in o u r assum ed s o c i e t y be i n ­

six ty b illio n

d o lla rs,

sumed, p r i c e s w i l l a lm o s t d o u b le b u t th e p r o p ria te d o f only t h i r t y itie s,

than i t

lev e ls

a s we h a v e a s ­

p u b lic w i l l be ex­

b illio n d o llars*

and th e s e a t v a ry in g p r ic e

w i l l be l e s s

Thus i f t h e t o t ­

w o r t h o f commod­

so t h a t

a p p e a rs to be a t f i r s t

the lo s s

sig h t.

The q u e s t i o n i m m e d i a t e l y a r i s e s w h e t h e r t h i s e x p r o p r i a ­ t i o n w i l l be te m p o ra ry o r p e rm a n e n t.

In o th e r w ords,

do

M r. A a n d o t h e r b o r r o w e r s e v e n t u a l l y r e s t o r e t o t h e

p u b lic

t h e r e a l p u r c h a s i n g power o r i g i n a l l y e x p r o p r i a t e d ?

Some

e c o n o m is ts have re a s o n e d t h a t

i f th e e x p ro p ria te d purchasing

power be u se d s o l e l y an d e f f e c t i v e l y t o

in c r e a s e the s u p p ly

o f c o m m o d i t i e s t h e e x p r o p r i a t i o n w o u l d be o n l y t e m p o r a r y

23 inasm uch a s th e

i n c r e a s e in th e su p p ly o f com m odities, o th e r

t h i n g s b e i n g e q u a l , would e v e n t u a l l y c h a s i n g power o f t h e

in c re a s e the r e a l p u r­

c o n s u m e r b y t h e a m o u n t he h a d l o s t when

th e b a n k c r e d i t was f i r s t

e x ten d ed .^

In o t h e r w ords,

f e r o f p u r c h a s i n g po w e r o c c u r s w h e n t h e b a n k f i r s t its

c u s t o m e r t o b u y more c o m m o d i t i e s w i t h o u t

in the su p p ly ,

but th is tra n sfe r

any f u r t h e r

in crease

in th e

f u l l v alu e

any in c r e a s e

increases

of his

the

loan w ith o u t

s u p p l y o f p u r c h a s i n g powre r .

We h a v e a l r e a d y a n a l y z e d t h i s w hich i t

en ab les

of p u r c h a s i n g power i s r e ­

v e r s e d when t h e b a n k ' s c u s t o m e r e v e n t u a l l y s u p p ly o f com m odities by th e

tran s­

argum ent

in th e form in

is used to d e m o n stra te t h a t bank c r e d i t does not

c a u s e p e r m a n e n t i n f l a t i o n a n d we h a v e f o u n d t h a t , the p r i n c i p le

of d iffe re n tia l r a t i o s , i t

We w i l l now a n a l y z e

it

as an argum ent

is

due to

90% i n v a l i d .

a g a i n s t perm anent ex­

p ro p riatio n . I n M r. A ' s c a s e i m m e d i a t e e x p r o p r i a t i o n o f p u r c h a s i n g p o w e r o c c u r r e d t h e moment h e m ade u s e o f h i s

bank lo a n .

The

c o m m o d i t i e s h e p u r c h a s e d w o u l d h a v e b e e n c o n s u m e d by o t h e r s had n o t

the

c u sto m a ry and p r o s p e c t i v e

p u rc h a se rs of th e s e

same c o m m o d i t i e s b e e n d e p r i v e d o f t h e i r p o w e r t o

purchase

t h e m b y t h e c r e a t i o n a n d u s e o f Mr. A ' s b a n k c r e d i t . M r. A,

i n s t e a d o f consum ing t h e s e c o m m o d itie s ,

in s tru m e n ts o f f u r t h e r ^p ro d u ctio n ,

If

u se d them a s

he would h av e i n c r e a s e d

1 "Of c o u r s e t h e a d d i t i o n a l l o a n w i l l p r e s u m a b ly j u s t i f y i t s e l f by a n d by, by a d d i n g t o t h e f lo w o f r e a l goods . . . . " R o b e r t s o n , o p . c i t . ,p.5Q. - G f . f o o t n o t e , p a g e 8 .

tile a v a i l a b l e

supply of

h is bank c r e d i t . com m odities to

c o m m o d itie s by t h e

I f M r. A s h o u l d t h e n

f u l l v alu e of

r e s e l l th ese c a p ita l

the p u b lic and w ith h i s b a n k 's a id d e s tr o y th e

p u r c h a s i n g power r e c e i v e d f o r them ,

it

is

indeed tr u e

t h e o r i g i n a l t r a n s f e r o f p u r c h a s i n g power i s

thereby re v e rse d ,

a n d Mr. A h a s o n l y p r o f i t e d

by t h e u s e o f t h e s e

in th e

But t h i s r e s u l t

in terv en in g

p erio d .

m e re ly fro m an i n c r e a s e in v a lu e to incident

in th e

the in c re a se

to th e

in the

e x p r o p r i a t e d co m m odities to th e

on b a n k c r e d i t T able I ,

does not

fo llo w

s u p p l y o f p u r c h a s i n g power R ath er t h i s re v e rs e

ent i r e l y

p u r c h a s i n g po w e r r e c e i v e d f o r

com m odities

s u p p ly of com m odities e q u al

o r ig in a l lo an .

o f p u r c h a s i n g power i s

th at

tran sfer

d epend en t upon r e s a l e

of the

p u b lic an d e x t i n c t i o n o f the

them .

A glance a t s t a t i s t i c s

i n u se i n any co n tem porary

so ciety ,

see

A p p e n d i x , w i l l shoxv t h a t t h i s n e c e s s a r y e x t i n c t i o n

of bank c r e d i t ,

th at

is,

necessary

to

the r e v e r s e t r a n s f e r

o f p u r c h a s i n g power d i s c u s s e d a b o v e , n e v e r o c c u r s e x c e p t in y e a r s of b u s i n e s s d e p r e s s i o n and th e n p e rio d o f tim e.

But i f

do n o t d e s t r o y t h e the e x p ro p ria te d

i n t h e a b o v e c a s e Mr. A a n d h i s b a n k

p u r c h a s i n g power o b t a i n e d f ro m r e s a l e

co m m o d ities to th e

some o t h e r b o r r o w e r w i l l u s e t h i s same r e s u l t , a te d by i t s

e x p ro p riatio n , w ill

p u b lic,

o f t h i s bank c r e d i t to

and u s e d .

t h e n Mr. A o r

fo llo w from or be p e rp e tu ­ p u r c h a s i n g power

Only by th e e x t i n g u i s h i n g

can t h e e x p r o p r i a t e d p u r c h a s i n g power

so ciety .

of

p u r c h a s i n g power a n d t h e

u s e a s i n e v i t a b l y a s when t h i s

was o r i g i n a l l y c r e a t e d

be r e t u r n e d

only fo r a b r i e f

I f we i m a g i n e t h e c a s e o f an a m b i t i o u s a nd a b l e c o u n t e r ­ f e i t e r . who u s e s a l l h i s c r e a t e d p u r c h a s i n g p o w e r t o t r a n s f o r m consum able com m odities i n t o c a p i t a l u n d e r s t a n d why t h e m e r e does not re s to re t a k e n from them .

in crease

goods,

in th e

we c a n r e a d i l y

s u p p ly o f com m odities

t o t h e p u b l i c t h e p u r c h a s i n g power o r i g i n a l l y F o r so l o n g a s t h e c o u n t e r f e i t e r r e t a i n s

p o s s e s s io n o f th e s e com m odities th ey have no e f f e c t upon th e p u r c h a s i n g power o f th e p u b l i c . p u b l i c and d e s t r o y s t h e

I f he r e s e l l s

the

p u r c h a s i n g power r e c e i v e d f o r them ,

h i s o r i g i n a l e x p r o p r ia tio n w i l l be r e v e r s e d . a t y p i c a l c o u n t e r f e i t e r he w i l l n o t power b u t w i l l u s e i t

them t o

fo r th e

But i f

destroy t h i s

he i s

purchasing

purchase o f o th e r goods,

thus

rep e atin g or p erp etu atin g th e o rig in a l e x p ro p ria tio n . th is

i s p r e c i s e l y what bankers

r a r e ly d eclin es tem p o rarily ,

do.

T o tal bank c r e d it

And in use

in co n tem p o rary s o c i e t i e s and th e n o n ly

and o f c o u r s e our a s s u m p tio n s p r e c l u d e s such a

d e c l i n e i n o u r assumed s o c i e t y . There here.

is

one o t h e r p o i n t

th a t re q u ire s co n sid era tio n

I f Mr. A o r o u r i m a g i n a r y c o u n t e r f e i t e r

r e s e l l the

e x p r o p r i a t e d com m odities t o th e

them p r o d u c t i v e l y so t h a t

p erio d of years

, c a n we s a y t h a t o v e r a larg e fo r

I f we o v e r l o o k i n t e r e s t o n t h e

o r ig in a l ex p ro p riated v alu es,

p u b lic ,

but uses

s tr e a m o f goods

t h i s w i l l com pensate s o c i e t y a t

th e o rig in a l' ex p ro p riatio n ?

feiter

p u b lic,

th ey in c re a s e the

flo w in g i n to th e m a rk e ts every y e a r

does n o t

tu rn s over t h i s flow of

a n d i f Mr. A o r t h e goods f r e e

or a c c e p t s payment a n d d e s t r o y s

it

co u n ter­

of c h a rg e to th e afterw ard s,

then

we m i g h t c o n c l u d e t h a t s o c i e t y a t l a r g e

is e v e n tu a lly reim ­

b u rsed f o r the

But i t

o rig in a l ex p ro p riatio n .

is

su rely

it

n a i v e t o a r g u e t h a t e i t h e r Mr. A o r t h e c o u n t e r f e i t e r r e i m ­ b u r s e s or co m p ensates s o c i e t y

for th e

o rig in a l ex p ro p ria tio n

when he r e c e i v e s i n p a y m e n t f r o m s o c i e t y

the f u l l m a rk e t p r i c e

f o r the

If eith er

a d d i t i o n a l flow o f c o m m o d ities.

consumed t h i s a d d i t i o n a l flow o f would be o b v io u s t h a t co m pensating s o c i e t y

in

com m odities h i m s e l f ,

it

s o d o i n g he w a s n o t r e i m b u r s i n g o r

i n a n y way w h a t s o e v e r .

s c a r c e l y l e s s o b v io u s when, creased

o f them

in stead

flow o f w e a l t h h i m s e l f ,

I t o u g h t to be

of consum ing t h i s

e i t h e r M r. A o r t h e

in ­

co u n ter­

f e i t e r e x c h a n g e s t h e s e g o o d s , by means o f money, f o r o t h e r g o o d s w h i c h he h i m s e l f w i l l c o n s u m e o r i n v e s t f o r h i s p e r ­ sonal p r o f it.

Of c o u r s e Mr. A i s f o r c e d

to sh a re

th is

flow

o f c o m m o d itie s o r s e r v i c e s w ith h i s b a n k e r by p a y in g him in te rest,

and in t h i s r e s p e c t o n ly does h is c a s e d i f f e r

t h a t o f th e im aginary c o u n t e r f e i t e r In th e to

from

p ic tu re d above.

o r d i n a r y c o u r s e o f b u s i n e s s M r. A w i l l r e s e l l

the p u b lic

the

same o r a n e q u i v a l e n t v a l u e o f c o m m o d i t i e s

and r e t u r n to th e bank th e

su m o f p u r c h a s i n g p o w e r r e c e i v e d

f o r them in o r d e r t o r e p a y h i s o r i g i n a l

loan.

He w i l l h a v e

p r o f i t e d m e re ly b y th e te m p o ra ry use o f the co m m odities in q u e s t i o n and w i l l h a v e s h a r e d t h i s in the

form o f i n t e r e s t .

a rticle s,

bankers

C o n s e q u e n t l y M r. A i s n o t t h e

tru e agent o f e x p ro p ria tio n . power to e x p r o p r i a te ,

p r o f i t w ith h is

He m e r e l y b o r r o w s t h e b a n k ’ s

p a y s a r e n t upon th e

and e v e n t u a l l y r e t u r n s

to

ex p ro p ria te d

the b a n k a l l t h e

27 e x p r o p r i a t e d r e a l p u r c h a s i n g pow er. th is

The b a n k c a n r e s t o r e

e x p r o p r i a t e d r e a l p u r c h a s i n g power t o th e

by e x tin g u is h in g It

it,

p u b lic

t h a t i s b y r e f u s i n g to r e lo a n

only

it.

s h o u l d b e n o t e d t h a t i n t h e a b o v e a n a l y s i s we h a v e

used the assu m p tio n l e s s fav o rab L e p ro p riatio n ,

to t h e a rg u m e n t f o r e x ­

n a m e l y t h a t t h e new b a n k c r e d i t

tran sfo rm s con­

sum ption i n t o p r o d u c tio n a n d hence i n c r e a s e s th e s u p p ly o f com m odities.

Of c o u r s e i f

th e t r a n s f e r of r e a l purchasing

power i s fro m s a v e r to s a v e r , no s u c h i n c r e a s e o c c u r s . f o r th e argum ent t h a t

consum er,

A v e r y s t r o n g c a s e m i g h t b e made

i n man y c a s e s t h i s

i s from sa v e r to s a v e r ,

tra n sfe r actu ally

i n o t h e r words t h a t

r e a l p u r c h a s i n g power due to new b a n k c r e d i t

or f r o m c o n s u m e r t o

the

t h o s e who l o s e

in flatio n ary

force o f

would have s a v e d and i n v e s t e d t h i s r e a l

p u rc h a sin g pow er.

The p u b l i c a t

larg e,

t h e T/orking c l a s s ,

i s much m ore l i k e l y

c h i e f l y composed o f to c u r t a i l s a v i n g

t h a n o t h e r e x p e n d i t u r e s when i t s r e a l

i n c o m e g o e s down.

Or a g a i n i t m i g h t w e l l b e a r g u e d t h a t

i n man y c a s e s t h e

t r a n s f e r o f r e a l p u r c h a s i n g power i s f r o m c o n s u m e r t o c o n s u m e r . F o r i n s t a n c e , b a n k c r e d i t u s e d to f i n a n c e o f f u r c o a t s and p l e a s u r e c a r s a n d to o p e r a to r s to c h ie fly .

p u sh up s e c u r i t y p r i c e s

F in a lly ,

in stallm en t

enable

sales

s to c k m arket

s t i m u l a t e s consum ption

i f we w a n t e d t o make t h e v e r y w o r s t c a s e

f o r b a n k c r e d i t , we m i g h t a r g u e t h a t

it

causes tra n s fe r of

r e a l p u r c h a s i n g p o w e r f r o m t h o s e who w o u l d h a v e s a v e d i t t h o s e who s p e n d i t

upon fu r c o a t s and p le a s u r e

cars.

to

But

i n o r d e r t o p r o v e a n y o f t h e a b o v e t h e o r i e s we w o u l d h a v e t o

have s t a t i s t i c s

on what t h e e x p r o p r i a t e d i n d i v i d u a l s would

h a v e d o n e w i t h t h e i r r e a l p u r c h a s i n g po w e r i f no e x p r o p r i a ­ t i o n had o c c u r r e d .

T h i s we s h a l l n e v e r h a v e .

T h ere fo re in

o r d e r to r e n d e r our c o n c lu sio n s a s to e x p r o p r i a ti o n u n a s s a i l ­ a b le,

we h a v e a s s u m e d t h e s t a t i s t i c s

case,

nam ely t h a t

e n tirely tistic s

the t r a n s f e r o f r e a l

from consum ers

fav o rab le

Some s t a ­

on w hat t h e e x p r o p r i a t o r s a c t u a l l y do w i t h th e p r e s e n t e d and d i s c u s s e d

fo llo w in g ch ap ter.

We may now s t a t e the f i r s t

the c o n c lu s io n s o f t h i s

ch ap ter.

In

p l a c e we h a v e f o u n d t h a t i m m e d i a t e e x p r o p r i a t i o n

o f r e a l p u r c h a s i n g power r e s u l t s fro m th e f i r s t of bank c re d it

in o u r assum ed s o c i e t y .

e x te n s io n o f bank c r e d i t w i l l have th e su lt.

to our

p u r c h a s i n g power i s

to s u c c e s s f u l i n v e s t o r s .

e x p r o p r i a t e d p u r c h a s i n g power a r e in the

lea st

ex ten sio n

Every a d d i t i o n a l same i m m e d i a t e r e ­

I n t h e s e c o n d p l a c e we h a v e f o u n d t h a t

th e p ro ­

d u c t i v e employm ent o f t h i s r@ a l p u r c h a s i n g power n e v e r retu rn s riated is

to so c ie ty from i t .

the

p u r c h a s i n g power o r i g i n a l l y e x p r o p ­

In th e th ir d

p l a c e we h a v e f o u n d t h a t

t h e ban k w hich i s th e r e a l a g e n t o f e x p r o p r i a t i o n .

it

29

CHAPTER IV EFFECTS OF INFLATION AND EXPROPRIATION1 *

1 . Upon Volum e o f P r o d u c t i o n . In t h i s

c h a p t e r we w i l l d i s c a r d t h e

h y p o th e tic a l case

o f Mr. A ’ s f i r s t l o a n a n d d i s c u s s t h e n u m e r o u s e f f e c t s o f the su lt

in fla tio n

and e x p r o p r i a t i o n w h i c h we h a v e f o u n d t o r e ­

from th e s te a d y

i n o u r assum ed s t a t e .

i n c r e a s e i n t h e volum e o f h an k c r e d i t We w i l l c o n s i d e r f i r s t

th e e f f e c ts

upon t h e p h y s i c a l volum e o f p r o d u c t i o n . As we h a v e a s s u m e d a l l

l a b o r and c a p i t a l to

be f u l l y

em ployed i n o u r i m a g in a r y s t a t e

at th e

t r o d u c t i o n o f bank c r e d i t

c a n b e no im m e d ia te r e ­

su lt

th ere

e x ce p t a change in t h e

tim e o f th e

in ­

c h a r a c te r of p ro d u c tio n .

The

b u s i n e s s men who b o r r o w t h e new b a n k c r e d i t w i l l u s e i t f o r p r o d u c t i v e p u rp o se s o n ly b ecau se th e y m ust s ta n d re a d y to repay t h e i r loans a t p e rio d ic

in te rv als.

T herefore

t h e r e a l p u r c h a s i n g power e x p r o p r i a t e d by th e b a n k s a n d loaned to

t h e m w i l l c o n s t i t u t e a n a d d i t i o n a l de mand f o r

1 T h i s d i s c u s s i o n o f t h e s e n u m e r o u s e f f e c t s m a k e s no p r e t e n c e o f b e in g a th o ro u g h a n a l y s i s o f any o f them . Any o n e o f t h e m m i g h t w e l l b e made t h e s u b j e c t o f a n in d iv id u al d is s e r ta tio n . B u t , t o th e w r i t e r ’ s know­ l e d g e , u p t o t h e p r e s e n t t i m e no o n e h a s e v e n g o n e s o f a r a s t o p u b l i s h a c o m p r e h e n s iv e l i s t o f t h e econom ic e f f e c t s o f bank c r e d i t . T his c h a p te r a tte m p ts to a c ­ c o m p l i s h t h a t e n d , and l i t t l e m o r e .

30 c a p i t a l goods. I f we a s s u m e t h a t s o c i e t y a t e r s have e x p r o p r ia te d spent i t sh ift

th is

l a r g e , f r o m whom t h e b a n k ­

r e a l p u r c h a s i n g p o w e r, would h av e

upon co n su m ab le g o o d s,

t h e n t h e r e w o u ld b e a r a d i c a l

i n p r o d u c ti o n from consum able t o c a p i t a l

r e s u lt of th is e x p ro p riatio n . t h e sa m e r a t i o

Once t h i s

goods a s a

s h if t has

b e tw e e n c o n s u m a b le and c a p i t a l

taken p la c e

goods in p ro ­

d u c t i o n would be m a i n t a i n e d d u r i n g t h e r e m a in d e r o f t h e p e r ­ iod o f bank c r e d i t ex p an sio n b e e a u se e a c h y e a r th e

same p r o ­

p o r t i o n o f t h e t o t a l p u r c h a s i n g pow er would b e e x p r o p r i a t e d by th e

b a n k s and l o a n e d t o b u s i n e s s men.

T h e r e may b e some q u e s t i o n a s above a ssu m p tio n t h a t a l l

of th e

ex p ro p riatio n .

purchase of T h is

f u n d a m e n t a l a s s u m p t i o n o f no s o c i a l s a v i n g even w ith o u t

v a lid ity

of the

e x p ro p ria te d p u rchasing

power would have b e e n u s e d f o r t h e goods e x c e p t f o r th e

to the

is

consum able

im plied in our

(#5).

But

such an a ssu m p tio n bank c r e d i t c o n s t i t u t e s a

**■ "The i n c r e a s e o f t h e c o m m u n i t y ’ s m a t e r i a l o u t f i t — i t s f a c t o r i e s , r a i l w a y s , power p l a n t s - - t a k e s p l a c e n o t o n ly th ro u g h sa v in g s bu t th ro u g h the c r e a tio n o f p u r­ c h a s i n g power a t th e h a n d s o f t h e b a n k s . A ll t h a t the p r o m o t e r s a n d t h e b u s i n e s s m a n a g e r s w a n t i s "money” — t h e w h e r e w i t h a l t o b u y m a c h i n e r y and t o p a y l a b o r e r s . So f a r a s t h e i m m e d i a t e p h y s i c a l o p e r a t i o n s a r e c o n c e r n e d , t h e y go a h e a d a s s o o n a s t h e p u r c h a s i n g p o w e r g e t s i n t o t h e i r h a n d s , i r r e s p e c t i v e o f w h e t h e r i t cam e f r o m i n v e s t o r s or fro m t h e b a n k s w h ic h e x t e n d c r e d i t s and d ep o sits. P h y s i c a l i n v e s t m e n t may t h u s p r o c e e d i n advance of in v e s to r s sa v in g s; n o t m erely because p ro ­ m o t e r s p r o v i s i o n a l l y p u t i n f u n d s o f t h e i r own, b u t b e c a u s e t h e b a n k s p u t a t t h e i r d i s p o s a l g r e a t sums w hich a r e c r e a t e d out o f t h i n a i r so to s p e a k . And t h u s t h e m a k i n g o f new p l a n t a n d t h e e x t e n s i o n o f o l d may f a r o u t s t r i p t h e r e a l s a v i n g s o f t h e c o m m u n i t y . ” T a u s s ig , P r i n c i p l e s o f E conom ics, I , 399.

51

n e t a d d itio n to a l l o th e r sa v in g s because a s long a s b u s in e s s men c a n b o r r o w s u f f i c i e n t r e a l s a v i n g s f r o m s a v e r s t h e m s e l v e s the banks a re unable to lo a n t h e i r

c re d it.

It

i s o n l y w hen

t h e d e m a nd f o r p u r c h a s i n g p o w e r e x c e e d s t h e s u p p l y l e g i t i ­ m a t e l y s a v e d t h a t b u s i n e s s men b o r r o w f r o m t h e b a n k s m o r e than

savers put

i n them i n t h e fo rm o f money.

W h ile t h e o n l y i m p o r t a n t e f f e c t on p r o d u c t i o n d u r i n g th e f i r s t

y e a r w i l l b e a s h i f t i n m a n u f a c tu r e from consum­

a b le to c a p i t a l goods,

the p ro d u ctiv e e ffe c t of these a d d i­

t i o n a l c a p i t a l goods w i l l b e g in to be f e l t

during th e

second

y e a r and s t e a d i l y t h e r e a f t e r a s lo n g a s bank c r e d i t c o n ti n u e s to expand.

These a d d i t i o n a l f a c i l i t i e s

fo r p roduction w ill

have a v e r y m arked e f f e c t upon t h e p h y s i c a l volum e o f d u c tio n w hich w i l l r i s e

y e ar by y ear d u rin g t h i s

E v e r y w o r k e r w i l l h a v e more and b e t t e r t o o l s ,

pro­

p erio d .

m ach in ery ,

and

p o w e r t o a i d h i m , a n d man y w o r k e r s w i l l b e r e p l a c e d b y m a c h ­ in ery . ings.

T his i s

but th e custom ary e f f e c t o f la r g e

But in t h i s

in v o lu n tary ,

case the

s o c i a l s a v in g i s com pulsory and

and th e i n t e r e s t

to th e b an k ers,

not to the

so cial sav­

income on the

savings accru es 1 in v o lu n tary sav ers.

«Hor h a s s u c h a f o r c e d l o a n t h e u s u a l m e r i t o f f o r c e d l o a n s — t h a t t h e y do n o t c a r r y a f u l l r a t e o f i n t e r e s t . For as we know t h e b o r r o w e r p a y s t h e b a n k i n t e r e s t , a n d t h e b a n k hands over p a r t o f i t to o th e r p e o p le . But t h e i n t e r e s t d o e s n o t n e c e s s a r i l y go t o t h o s e w h o , u n d e r t h e p r e s s u r e o f r i s i n g p r i c e s , do t h e r e a l " a b s t i n e n c e ” . The e f f e c t o f a n a d d i t i o n a l b a n k l o a n m a y .b e t h a t t h e com m unity h a s to s t i n t i t s e l f t e m p o r a r i l y to m eet not o n ly th e c la im on goods e x e r c i s e d by the b o r r o w e r , b u t a l s o t h a t e x e r ­ c i s e d b y t h e r e c e i v e r s o f money i n t e r e s t . ” R o b e r t s o n , op. c i t . , p. 91. "When m a s s i v e m a n u f a c t u r e h a d b e e n w e l l s e t u p i t c e a s e d t o b e d e p e n d e n t on t r a d e f o r i t s s u p p l y of c a p i t a l . It borrow ed from b a n k e r s ; w h ile th e b a n k e r s su p p le m e n te d t h e i r own r e s o u r c e s b y o t h e r s o b t a i n e d f r o m t h e g e n e r a l p u b lic. In p a r t i c u l a r , t h e y i s s u e d n o t e s ; and t h e s e

Many s t u d e n t s o f b a n k i n g " b e l i e v e t h a t of bank c r e d i t re n d e rs a n o ta b le w hile not s p e c i f i c ,

se rv ice to

t h e y p r o b a b l y m ea n t h a t

the

e la stic ity g so ciety , and, it

i n c r e a s i n g t h e p h y s i c a l volume o f p r o d u c t i o n . th e A ppendix, iab le

how ever,

in d icates

seasonal flu ctu atio n

in th e

use in th e U nited S ta te s .

th a t th ere

d o e s so b y T able

I in

i s no a p p r e c ­

amount o f bank c r e d i t

in

At l e a s t s u c h s e a s o n a l f l u c t u a ­

t i o n a m o u n t s t o o n l y a b o u t 2% w h e n t h e s e c u l a r t r e n d i s e lim in ated .

T his c o n c lu s io n

q u a rte rly rep o rts

for the

a re o n ly given f o r the

is th e re s u lt last

last

of av erag in g th e

nine y e a rs .

tw o y e a r s ,

M onthly f i g u r e s

n o t a lo n g enough

p erio d to perm it d e te rm in a tio n o f a seaso n al f lu c tu a tio n , b u t t h e s e m o n t h l y f i g u r e s show n o m o r e f l u c t u a t i o n

than th e

(co n td .) passed in to g e n e ra l c i r c u l a t i o n ; thus c o n s t i t u t i n g in e f f e c t q u iet l o a n s from th e p u b l ic t o the b a n k s , th e lo a n s b e i n g t h u s p a s s e d on t o t h e p u b l i c a t l a r g e . The u l t i m ­ a t e r e s u l t was t h a t tlie p u b l i c l e n t , a l m o s t g r a t i s , t o b a n k s t h e power o f i s s u i n g n o t e s ; a n d t h e bank u s e d t h e s e n o t e s a s a c h i e f e m b o d i m e n t o f t h e l o a n s , w h i c h t h e y made t o p a r t i c u l a r members o f t h e p u b l i c i n r e t u r n f o r a g r e e d i n t e r e s t ( o r d i s c o u n t ) o n t h e l o a n s . ’* M a r s h a l l , M o n e y , C r e d i t a n d Commerce, 7 2 . 2

" I n a l l t h e s e f l u c t u a t i o n s o f t h e demand f o r means o f payment i t i s a g r e a t a d v a n ta g e t h a t th e d e p o s i t s can e a s i l y b e e n l a r g e d b y new a d v a n c e s , a n d so t h e y r e p r e s ­ e n t a v e r y e l a s t i c m ed iu m o f p a y m e n t . ” C a s s e l , o p . c i t . , 392. "T he c l e a r p r e s e n t a t i o n o f t h e f u n c t i o n o f t h e d e p o s i t . c u r r e n c j r i s due t o P r o f e s s o r D u n b a r , who d e s c r i b e d i t s r e l a t i v e e l a s t i c i t y a s f o l l o w s ; *I t a d a p t s i t s e l f t o t h e d e m a n d o f t h e moment w i t h o u t v i s i b l e e f f o r t a n d e i t h e r b y e x p a n s i o n o r c o n t r a c t i o n , a s t h e c a s e may b e ; and i t does t h i s q u i t e i r r e s p e c t i v e o f l e g i s l a t i v e p u r ­ p o s e o r g u i d a n c e . ’ . . . .The p e r f e c t e l a s t i c i t y o f t h e d e p o s i t c u r r e n c y i s i t s most v a l u a b l e , a s i t i s a t th e sa m e t i m e i t s l e a s t a p p r e c i a t e d , c h a r a c t e r i s t i c . " Laughl i n > o p . c i t . . 1x120- 1 .

33 q u a rte rly fig u res

f o r m any " i n d i v i d u a l y e a r s i n c l u d e d

in th e

a n a ly s i s. A t l e a s t o n e w e l l known s t u d e n t o f b a n k i n g h a s b e e n l e d in to

error

on t h i s

p o i n t by a ssu m in g t h a t bank c l e a r i n g s a re

an a c c u r a t e m easure o f th e

volum e o f b a n k c r e d i t

o u tstan d in g .^

D r. W i l l i a m R a n d o lp h B u r g e s s o f t h e F e d e r a l R e s e r v e Bank o f New Y o r k h a s f o u n d t h a t a r e l a r g e l y accounted

se a so n a l changes in bank c le a rin g s

for

v e lo c ity o f tu rn o v e r of to v ary i t s

by l a r g e

se aso n al v a r ia tio n s in the 2 d ep o sits. But t h e a b i l i t y

demand

v e lo c ity of tu rn o v er

is not p e c u lia r to th a t

o f p u r c h a s i n g p o w e r we h a v e d e f i n e d a s b a n k c r e d i t . any b e n e f i t s from su c h v a r i a t i o n s are not

e la stic .

o f tu rn o v er

i s a v e r y s o u n d r e a s o n why b a n k c r e d i t I f bank c r e d i t

is

to be e l a s t i c

w i l l i n g to fo re g o i n t e r e s t on i t in u se .

save t h e i r

But i t

is

ju st

is not

b a n k e rs m ust be

d u r i n g p e r i o d s when i t

is

as u n p r o f ita b le fo r bankers to

c r e d i t f o r t i m e s o f s e a s o n a l n e ed as i t w ould be

f o r b u s i n e s s men t o k e e p i d l e y e a r in o r d e r to have need.

Hence

due to th e e x i s t e n c e o f bank c r e d i t .

There

not

in v e lo c ity

form

Yet th e

it

c a s h on hand t h r o u g h o u t

the

on h a n d d u r i n g p e r i o d s o f s e a s o n a l

o n ly p u rp o se of an e l a s t i c

c u r r e n c y would b e

^ "D eposit c u rre n c y a lo n e e x h i b i t s a h ig h d e g re e o f se a so n a l e la stic ity . The l i n e s h o w i n g t h e a v e r a g e a m o u n t o f c l e a r i n g s in d ic a t e s 4 c lo s e ad ju stm en t of the su p p ly of d e p o s it c u rre n c y to the v a ry in g re q u ire m e n ts o f t r a d e . " M o u l t o n , The F i n a n c i a l O r g a n i z a t i o n o f S o c i e t y , 50 1 . 2

W. R a n d o l p h B u r g e s s , " V e l o c i t y o f B a n k D e p o s i t s , " J o u r n a l A m erican S t a t i s t i c a l A s s o c i a t i o n , X V III (J u n e , 19 2 3 J , 727-40.

54

to elim in a te th is

l a t t e r n ecessity .

Idle

bank c r e d i t

i d l e m o n ey a r e e q u a l l y u n d e s i r a b l e f r o m t h e p o in t,

and to r e p l a c e one w ith

and

ow ners’ sta n d ­

the o t h e r c a n n o t

have any

e f f e c t s upon t h e volum e o f p r o d u c t i o n o t h e r t h a n t h o s e r e ­ s u l t i n g from co m p u lso ry s o c i a l s a v i n g . Of c o u r s e t h e f a c t t h a t e la stic

enough to s a t i s f y

in p r a c tic e bank c r e d it

seasonal v a ria tio n s

i s not

in the g ro ss

demand f o r p u r c h a s i n g p o w e r d o e s n o t p r o v e t h a t b a n k c r e d i t fails

to

s a t i s f y such s e a s o n a l v a r i a t i o n s w ith in p a r t i c u l a r

in d u strie s.

There i s l i t t l e

doubt th a t bank c r e d i t

d o e s s u p p ly t h e w ide v a r i a t i o n s i n d u s t r i e s and c o r p o r a t i o n s .

in

actu ally

demand f r o m i n d i v i d u a l

But t h i s

f u n c t i o n co uld have

been e q u a l l y w e ll p erfo rm ed i n our assum ed s t a t e b e f o r e th e i n t r o d u c t i o n o f b a n k c r e d i t b y the i n u s e so l o n g a s t h e t o m onth.

p u r c h a s i n g power a l r e a d y

t o t a l demand d i d n o t v a r y f r o m m o n t h

S a v in g s b an k s c o u ld have u sed t h e i r fu n d s f o r

s h o r t tim e lo a n s

t o b u s i n e s s men a n d t h e y c o u l d h a v e made

l a r g e te m p o ra r y l o a n s to one i n d u s t r y i n d u s t r i e s had f a l l e n

off a t

th at

tim e.

To c o n c l u d e d i s c u s s i o n o f t h i s b a n k c r e d i t w ould n o t s u p p ly t h e in our assum ed s o c i e t y , because

if

i f demand fro m o t h e r

p o in t,

we may s a y t h a t

se aso n al needs o f in d u s try

i t be s i m i l a r to

the U n ited S t a te s ,

i t w ould n o t be s e a s o n a l l y e l a s t i c .

H orace W hite a r g u e s

th a t th e

s o c i e t y and in c r e a s e s t o t a l

com m ercial b anker s e rv e s

p r o d u c tio n s in c e he "e n a b le s

th e m ost d e s e r v i n g p e rs o n s i n th e

com m unity t o g e t c a p i t a l . "

35 Many o t h e r e c o n o m i s t s s h a r e " t h i s o p i n i o n ' 1'" w i t h h i m .

If

t h r i f t y men s a v e p u r c h a s i n g p o w e r a n d a s k c o m m e r c i a l b a n k e r s to

in v est

it

f o r them ,

and s t i m u l a t e

the b a n k e rs c e r t a i n l y b e n e f i t s o c i e t y

p r o d u c t i o n by l o a n i n g t h i s

t o t h e m ost a b l e b u s i n e s s men. ex p ro p riate loan t h i s

B u t when c o m m e r c i a l b a n k e r s

t h e p u r c h a s i n g p o w e r o f t h e c o n s u m i n g p u b l i c a nd

p u r c h a s i n g p o w e r t o b u s i n e s s men t h e c a s e i s v e r y

d ifferen t.

2

For i t

is

a c a rd in a l p rin cip le

om ics t h a t f r e e c o m p e ti t io n te n d s trib u tio n italism ,

purchasing-pow er

of th e f r u i t s

to b r in g

of in d u stry .

of orth o d o x econ­ about a ju st d is ­

Under c o m p e titiv e cap­

i s n o t t h e m e r e f a c t t h a t a b u s i n e s s m an d o e s n o t

h a v e more c a p i t a l

t h a n he h a s sound p r o o f t h a t

a s much t o d e s e r v e t h a t who d o e s h a v e i t ?

he h a s n o t done

a d d i t i o n a l d e s i r e d c a p i t a l a s t h e man

I f th e c o m p e titiv e sy ste m w orks i t

m a tic a lly p uts c a p ita l,

p a s t incom e, and p r e s e n t

au to ­

income

in

t h e h a n d s o f t h o s e who h a v e d o n e t h e m o s t t o p r o d u c e t h e m . Now a l l a b a n k e r who e x p r o p r i a t e s p u r c h a s i n g p o w e r d o e s i s ’’F r o m t h e s t a n d p o i n t o f t h e n a t i o n t h e c h i e f a d v a n t a g e s o f c r e d i t a r e t h e more c o m p l e t e u t i l i z a t i o n o f i t s h u ­ man a n d n a t u r a l r e s o u r c e s a n d t h e i n c r e a s e i n t h e e f ­ ficien cy of i t s c a p ita l. The t a l e n t s , s k i l l s , a p t i t u d e s , and t a s t e s of th e v a r i o u s p e o p le c o n s t i t u t i n g a n a t i o n v a ry w id e ly , a n d in o r d e r c o m p le te ly to u t i l i z e t h e s e fo r purposes of p ro d u ctio n i t i s n ecessary th a t i t s cap­ i t a l and n a t u r a l r e s o u r c e s should be p la c e d in th e hands o f t h o s e b e s t q u a l i f i e d to em ploy them . C re d it is a m e a n s t o t h i s e n d . ” S c o t t , Money a n d B a n k i n g , 1 2 0 - 1 . 2

, ” The l o a n s f o r t h e r e c o n s t r u c t i o n o f t h e w o r l d ’ s e c o n o m i c l i f e o n a s o u n d b a s i s m u s t come f r o m a s o u n d s o u r c e ; a n d t h i s c a n b e no o t h e r t h a n d e l i b e r a t e s a v i n g s . ” C a s s e l i s h e r e r e f e r r i n g t o c o m p u l s o r y s o c i a l s a v i n g due to e x te n s io n of b a n k - c r e d i t . C a s s e l , The W o r l d ’ s Mone­ t a r y P ro b le m s, 96.

36 to t r a n s f e r i t p e titio n

f r o m t h o s e “p e o p l e

has p laced

it,

i n w h o s e h a n d s f r e e com­

and w ith o u t

t h e i r know ledge,

to

t h o s e whom c o m p e t i t i o n h a s p r o v e n t o b e l e s s p r o d u c t i v e a n d d eserv in g of i t

by n o t a u t o m a t i c a l l y g i v i n g them t h i s v e r y

p u r e h a s in g pow er.

It

is

indeed a

serio u s

p r e s e n t econom ic o r g a n i z a t i o n o f s o c i e t y

ind ictm en t

of the

i f we n e e d t o h a v e

p r iv a te bankers a l t e r the n a tu r a l d i s t r ib u t i o n

o f incom e,

r e s u l t i n g from f r e e c o m p e titio n and i n d iv i d u a l i n i t i a t i v e , in o r d e r to p la c e t h a t

incom e i n t h e

han d s o f t h e m ost a b l e

and p ro d u c tiv e e n tr e p r e n e u r s . C urrency i n f l a t i o n

alo n e has a v e ry

im portant e f f e c t

upon t h e volume o f p r o d u c t i o n where t h e r e o f c a p i t a l and l a b o r ,

but

as t h i s

i s unem ploym ent

co n d itio n is c o n tra ry to

o u r a s s u m p t i o n #9 we m u s t d e f e r d i s c u s s i o n o f t h i s u n t i l we d i s c u s s t h e

re su lts

effect

o f t h a t a ssu m p tio n upon o u r

a n a l y s i s and c o n c l u s i o n s . Next to

the b e l i e f t h a t bank c r e d i t

t i o n by t r a n s f e r r i n g

in c re a s e s produc­

c a p i t a l f r o m l e s s c o m p e t e n t t o more

co m p eten t p r o d u c e r s p e rh a p s t h e m ost w id e ly a c c e p t e d f u n c ­ tio n o f bank c r e d it

e x c h a n g e and

thus in c re a sin g

is th a t of f a c ilita tin g 1 t h e volum e o f p r o d u c t i o n .

W h ile few

w r i t e r s go i n t o

d e ta il as to

j u s t how c r e d i t

exchange th e y a p p a r e n tly b e lie v e t h a t

fa c ilita te s

the m ere i n c r e a s e

t h e s u p p ly o f p u r c h a s i n g power makes i t

p o ssib le

in

f o r many

1 "As s t a n d a r d m o n ey f a c i l i t a t e s e x c h a n g e o v e r t h e b a r t e r e c o n o m y , s o c r e d i t f a c i l i t a t e s e x c h a n g e o v e r t h e money econom y." W e s t . e r f i e l d , B anking P r i n c i p l e s and P r a c ­ t i c e , I , 37-8.

37 s o c i a l l y p r o d u c tiv e ex ch an g es to t a k e p la c e w hich o th e r w is e could n e v e r o c c u r. due to

its

It

is tru e,

e x c h a n g e s o f s t a p l e c o m m o d itie s and

sto c k exchange s e c u r i t i e s , i.e .,

w ires,

but th ese exchanges are n o t p ro ­

t h e y have no e f f e c t upon th e

d u ctio n except to w hich i s

th at

p e c u lia r n a tu re bank c r e d i t g r e a t ly in c r e a s e s the

number o f s p e c u l a t i v e

d u ctiv e,

a s we h a v e p o i n t e d o u t ,

in crease

volume o f p r o ­

the amount o f t h i s

pro d u ctio n

used to m a in ta in b ro k e rs, s to c k ex ch an g es,

leased

e tc .

Bank c r e d i t c a n n o t

f a c i l i t a t e exchange, e x ce p t through

c a u s i n g com pulsory s o c i a l s a v in g and c o n seq u e n t i n c r e a s e

in

th e number o f e x c h a n g e s , b e c a u s e i f

com­

it

w ere not f o r t h i s

p u l s o r y s o c i a l s a v i n g bank c r e d i t would i n c r e a s e t h e p r i c e l e v e l i n t h e same p r o p o r t i o n t h a t o f p u r c h a s i n g p o w e r so t h a t tran sact

it

in c re a s e s th e supply

t h e in c r e a s e d s u p p ly can o n ly

th e sam e number of e x c h a n g e s ..

T his

is

im p licit

in

t h e q u a n t i t y t h e o r y o f m o n ey w h i c h we h a v e a s s u m e d t o b e tru e

for

the p urpose o f t h i s t h e s i s .

Some e c o n o m i s t s h a v e e m p h a s i z e d t h e f a c t

th at c re d it

b e n e f i t s s o c i e t y a s a w hole b y f i x i n g r e s p o n s i b i l i t y and c o n s e q u e n tly i n c r e a s i n g the

p h y s i c a l volume o f p r o d u c t i o n . 1

1 "One o b j e c t o f c r e d i t i s t o f i x r e s p o n s i b i l i t y . The s o c ­ io lo g is t p ro p e rly ex p lain s th a t in d u stry i s a s o c ia l o rg an izatio n . P o l i t i c a l e c o n o m y h a s b e e n much o c c u p i e d w ith t h e p r i n c i p l e t h a t , w ith o u t i n t e n d i n g to b e s o c i a l b e i n g s , o r t o b e g e n e r o u s , men d o , n e v e r t h e l e s s , i n t h e f u l l m e a n n e s s o f t h e i r h e a r t s , h e l p one a n o t h e r . So p e r f e c t i s the o rg a n iz a tio n of p ro d u c tio n t h a t , a s b u s­ i n e s s i s c a r r i e d on, r e s p o n s i b i l i t y i s com pulsory: i t im posed th r o u g h t h e i n s t r u m e n t a l i t y o f c r e d i t . ’I p ro m is e to pay #100.00* i s a p e r s o n a l u n d e r t a k i n g e n t e r e d

The a r g u m e n t i s

to the

38 e f f e c t t h a t a man who g i v e s h i s n o t e

in payment f o r a p u rc h a se t h e r e b y assum es th e r e s p o n s i b i l i t y : o f pay in g f o r t h a t

purchase.

r e s p o n s i b i l i t y and in c r e a s e

Thus c r e d i t

i s supposed to f i x

the e f f i c i e n c y of p ro d u c tio n .

T h is r a t h e r n a iv e argum ent c a n b e answ ered by p o i n t i n g out th at

if

th e above p u r c h a s e r had p a i d f o r h i s p u r c h a s e i n

c a s h he would have a ssu m e d t h e r e s p o n s i b i l i t y

f o r payment

e v e n m ore c o m p l e t e l y t h a n he did b y m eans o f a c r e d i t m ent.

We may c o n c l u d e t h a t b a n k c r e d i t

in stru ­

w i l l not a f f e c t the

volume o f p r o d u c t i o n i n o u r assum ed s o c i e t y by f i x i n g r e s ­ p o n sib ility . 2 . Upon D e v e l o p m e n t o f P a r t i c u l a r

In d u stries.

As p o i n t e d o u t a b o v e t h e f i r s t e f f e c t o f t h e tio n

in tro d u c­

of b a n k c r e d i t i n o u r assum ed s o c i e t y w i l l be a s h i f t

in p r o d u c tio n from consum able t o c a p i t a l

goods.

N atu rally

th is

w i l l c a u se a r a p i d developm ent o f th o s e i n d u s t r i e s w hich 1 supply th ese c a p ita l goods. These i n d u s t r i e s a r e m a n u fa c tu rin g 1 (co n td .) i n t o b y Mr. H o b s o n . He h a s p u r c h a s e d $ 1 0 0 . 0 0 w o r t h o f g o o d s o f M r. D o b s o n , a n d h a s g i v e n h i s n o t e f o r t h a t su m . When D o b s o n m a n u f a c t u r e d t h e m , he a s s u m e d t h e p r i m a r y l i a ­ b i l i t y f o r a l l the c h a rg e s c o n n e c te d w i t h them , b u t , a s s o o n a s Hobson g a v e him t h e n o t e , t h e l a t t e r became a n s w e r ab le fo r t h e i r s o c ia l d i s t r i b u t i o n . He w a s b o u n d t o p r o ­ t e c t them f r o m d e t e r i o r a t i o n u n t i l a c o n s u m e r demanded t h e m , a n d t h e n t o e x a c t , i f p o s s i b l e , a t l e a s t s o much c o m p e n s a t i o n a s w o u l d c o v e r t h e i r c o s t s . . . .T h e c r e d i t document e x a c t l y p l a c e s t h e r e s p o n s i b i l i t y . The s u c c e s s of th e w orking o f th e c r e d i t o r g a n i z a t i o n depends upon th e f a c t t h a t th e s o c i a l onus seldom re b o u n d s upon Dobson. I f i t n e v e r s p r u n g b a c k , t h a t w o u l d b e an a l m o s t i d e a l s ta te of a f f a i r s . " T a y lo r , op . c i t . . p . 49. "But t h e m o s t i m p o r t a n t c l a s s o f p r o d u c t i o n w h ic h e b b s and flo w s w ith th e c o n t r a c t i o n s and e x p a n s io n s o f c r e d i t i s the p ro d u c tio n o f f ix e d c a p i t a l . " H a w tre y , C u r r e n c y and C r e d i t » 94.

39 r a th e r than a g r ic u ltu r a l in c h a ra c te r. The i n t r o d u c t i o n a n d g r o w t h o f h a n k , c r e d i t w i l l g i v e a m arked im p e tu s t o

sp ecu latio n

in s e c u r i t i e s and com m odities

w h i c h may p r o p e r l y h e t e r m e d a n i m p o r t a n t e r n e c o n o m i c s o c i e t 3^. tie s

L iste d s e c u r itie s

i n d u s t r y i n a mod­ and s t a p l e

co m m od i­

f o r m t h e h e s t c o l l a t e r a l f o r b a n k l o a n s known t o b a n k ­

ers.

M oreover,

sp ecu latio n

w i l l be p r o f i t a b l e

in s e c u r i t i e s and com m odities

a s l o n g a s t h e c r e a t i o n o f new b a n k c r e ­

d i t c o n tin u e s because of the r e s u l t i n g t h e i r m arket p r i c e s . i s t i c a l bureaus, a co n stan tly as the

B rokerage h o u ses,

steady i n f la ti o n leased w ires,

in

sta t­

s t o c k and com m odity e x c h a n g e s w i l l a b s o r b

i n c r e a s i n g volume o f c a p i t a l and l a b o r a s l o n g

banks co n tin u e

to c re a te

a d d i t i o n a l p u r c h a s in g pow er.

E v e n t u a l l y a c o n d i t i o n w i l l be r e a c h e d w here b r o k e r s o c c a ­ s i o n a l l y borrow so m eth in g betw een a h a l f and a f o u r t h th e bank c r e d i t

of a l l

in u s e ,''’ a s in th e U n ite d S t a t e s a t t h e p r e s ­

en t tim e. In a d d i t i o n to

s t i m u l a t i n g s p e c u l a t i o n th e grow th o f

bank c r e d i t w i l l i n e v i t a b l y r e s u l t the

in d u s tr y o f b an k in g ,

if

i n a m arked s t i m u l u s to

i t may b e c a l l e d

w ill receiv e a p erp etu al in te r e s t

such.

income fro m a l l

The b a n k s the bank

c red it

t h e y e x te n d and t h e i r o n ly a d d i t i o n a l c o s t s w i l l be 2 th o s e o f e x t r a b o o k k e ep in g and c r e d i t i n v e s t i g a t i o n . In B r o k e r s * l o a n s o f New Y o r k F e d e r a l R e s e r v e m e m b e r s .were $ 6 , 0 2 0 , 0 0 0 , 0 0 0 on Aug. 7, 1 9 2 9 .

2

" I t i s a g r e a t fa v o r t o th e b an k in g w orld t h a t th e s t a t e - p e rm its the is s u e of n o te s . As i s w e l l k n o w n , o t h e r b u s i n e s s men may n o t i s s u e n o t e s , o r p r i v a t e b i l l - w a r -

40 t h e U n i t e d S t a t e s t o d a y b a n k s r e c e i v e a t o t a l income o f about $ 1,00 0,00 0,0 00 a year

(4$)

$35 ,0 0 0 ,0 0 0 ,0 0 0 o f bank c r e d i t

on a p p r o x i m a t e l y

in u s e .

S im ila r la r g e a d d i t i o n a l b anking p r o f i t s s o c i e t y cau se la b o r and c a p i t a l to e n t e r th e the p r o f i t s p ro fits server fits

on t h i s

la b o r and c a p i t a l f a l l

in o th e r lin e s of a c t i v i t y .

i n our assumed in d u stry u n til

to

Hence t h e

th e le v e l a t c a s u a l ob­

in o u r assum ed s t a t e m ig h t c o n c lu d e t h a t b a n k in g p r o ­

had not been und uly r a i s e d by th e i n t r o d u c t i o n o f bank

c r e d i t b e c a u s e d i v i d e n d s on b a n k s t o c k s w o u l d a v e r a g e n o h i g h e r t h a n d i v i d e n d s on o t h e r c o m p a r a b l e s t o c k s . f a c t t h e r e w ould have occurred a v e r y g r e a t i n g p r o f i t s a n d a n im m e nse e x p a n s i o n i n ance o f the

the

But in

in crease

in bank­

s i z e and i m p o r t ­

b an king i n d u s t r y .

A l l o f t h e pur c h a s i n g power e x p r o p r i a t e d b y t h e d u rin g the period

o f bank c r e d i t e x p a n sio n in o u r assum ed

s o c i e t y w i l l be l o a n e d t o b u s i n e s s men. them to i n c r e a s e t h e p o in ted o u t, we b e l i e v e

T his w i l l

scale o f t h e i r a c t iv i t ie s ,

enable

as p rev io u sly

and c o n s e q u e n t l y w i l l e n h a n c e t h e i r p r o f i t s .

If

t h a t t h e b u s i n e s s men who b o r r o w t h i s e x p r o p r i a t e d

p u r c h a s i n g power f r o m t h e fact

banks

banks p r o f i t

from i t s u s e , and t h e

t h a t m o s t b u s i n e s s ‘"-men d o s o p r o f i t

is

i n d i c a t e d by t h e i r

2 (co n td .) ran ts. C e r ta in ly the s t a t e a ls o c o n t r o l s th e b u s in e s s by law , f o r i t r i g h t l y c o u n ts i t of p u b l ic u t i l i t y . But i t i s n e v e r t h e l e s s r e m a r k a b le t h a t the p r o f i t s w hich a r e i n c r e a s e d by t h i s m eans, of a m ag n itu d e o n ly e x p l a i n a b l e by th e n o te i s s u e , sh o u ld flow e x c l u s i v e l y t o . t h e owners o f the c a p i t a l (the b a n k e r s ) ." K n a p p , The S t a t e T h e o r y o f Money, 1 3 6 .

41 co n tin u ed e a g e rn e ss

to borrow ,

it

becomes o f c o n s i d e r a b l e

im p o rta n c e to d e te rm in e what i n d u s t r i e s b o rro w th e m ost and hence p r o f i t

th e m ost from th e i n t r o d u c t i o n and g ro w th o f

bank c r e d i t .

In o rd e r to

arriv e a t

p r o b l e m we w i l l t e m p o r a r i l y l e a v e an d exam ine

sta tistic s

some c o n c l u s i o n s o n t h i s

o u r im a g in a ry econom ic u n i t

f o r th e U n ited S t a te s .

T h i s we c a n

l o g i c a l l y do s i n c e we a s s u m e d t h a t o u r i m a g i n a r y e c o n o m i c u n i t was s i m i l a r t o a m odern c a p i t a l i s t i c

so c ie ty in every

r e s p e c t except th o se s p e c i f i c a l l y m entioned. T able

I I i n t h e A p p e n d i x shows t h e d i s t r i b u t i o n

of n a t ­

i o n a l b an k l o a n s 'b e t w e e n i n d u s t r i e s a s o f November 15,

1920

and com pares t h i s w i t h th e p e r c e n t o f the w orking p o p u l a t i o n em ployed i n e a c h o f t h e s e o f 1920. tab le

is

in d u s tr ie s acco rd in g to th e

The m o s t s t r i k i n g

census

c o n d itio n brought out by t h i s

th e f a c t t h a t a b o u t 37$ of a l l n a t i o n a l bank lo a n s

a r e m ade t o m e r c h a n t s w h o , w i t h t h e i r e m p l o y e e s ,

c o n stitu te

1 0 .2 $ o f th e g a i n f u l l y em ployed p o p u l a t i o n , w h e re a s o n ly a b o u t 2 1 $ o f t h e l o a n s a r e m ade t o f a r m e r s who c o n s t i t u t e 2 6 . 3 $ o f th o s e g a i n f u l l y em ployed. about fiv e

I n o t h e r words lo a n s to m e rc h a n ts a r e

tim es a s g r e a t p e r c a p ita a s th e y a re f o r f a rm e rs .

A nother s t r i k i n g p o in t broug ht out by t h i s f a c t t h a t m erchants a re factu rers,

tab le

is the

g r a n t e d much m o r e c r e d i t t h a n m a n u ­

i n f a c t a b o u t f o u r t i m e s a s m uch p e r p e r s o n g a i n ­

f u l l y em ployed. liq u id a sse ts

No d o u b t t h i s

i s b e c a u s e m e r c h a n t s h a v e more

than m an u fa ctu rers,

e x te n d e d m ost f r e e l y upon th e

and,

b ecau se bank c r e d i t i s

se cu rity of liq u id a s s e ts .

42 N o t o n l y do f a r m e r s r e c e i v e much l e s s b a n k c r e d i t •en trep ren eu rs in o th er in d u s tr ie s , receiv e co sts

b u t what c r e d i t

than

t h e y do

t h e m c o n s i d e r a b l y more b e c a u s e t h e y b o r r o w i n

s m a l l a m o u n t s , b e c a u s e t h e y b o r r o w .on c o m p a r a t i v e l y n o n - l i q ­ uid a s s e ts ,

because the c r e d i t r i s k

th e y have p o o rer b an k in g f a c i l i t i e s We may t h e r e f o r e

in th e ir

econom ic g r o u p ,

c o n s i d e r a b l y m ore,

th at

the fa rm e rs l e s s

and b e c a u se

com m unities.

conclude t h a t th e in tr o d u c ti o n

o f bank c r e d i t w ould b e n e f i t larg e

is g reater,

and g r o w t h

th an any o th e r

i t would b e n e f i t t h e m a n u f a c t u r e r s

and t h a t

it

w o u ld b e n e f i t t h e m e r c h a n t s

a g r e a t d e a l m o r e t h a n e i t h e r o f t h e s e o t h e r two m a j o r g r o u p s . 3 . Upon O r g a n i z a t i o n a n d C o n t r o l o f

In d u stry

The i n t r o d u c t i o n a n d g r o w t h o f b a n k c r e d i t i n o u r a s s u m e d s o c i e t y w i l l p ro v e to b e a v e r y d e f i n i t e th e grow th of la r g e It

scale

i s much c h e a p e r t o

to g ra n t c r e d it is th e

facto r

in s tim u la tin g

a s opposed to s m a ll s c a l e p r o d u c tio n .

grant c re d it

in s m a ll am ounts.

in l a r g e am ounts th a n i t

is

The n e c e s s a r y b o o k k e e p i n g

same f o r a h u n d r e d d o l l a r l o a n a s f o r a m i l l i o n d o l l a r

l o a n and th e c o s t s o f c r e d i t

in v estig atio n

p ro p o rtio n to th e s iz e o f the lo a n . t h e more s t a b l e

is

its

The l a r g e r t h e c o r p o r a t i o n .

b u s i n e s s and incom e.

f o r th e bank and t h e r e f o r e

its

do n o t v a r y i n

cred it is

It

b e tter

is

a safer risk 1 a t the bank.

" I n d e e d , t h e m o r e f u l l y a n d p r o f i t a b l y s u c h a s s e t s a r e em­ p lo y ed i n such i n d u s t r i a l b u s i n e s s , e s p e c i a l l y i f th e y a r e e n g a g e d on a l a r g e a n d d o m in a n t s c a l e , t h e b e t t e r w i l l b e t h e i r r a t i n g i n t h e b u s i n e s s com m unity and th e more s e c u r e l y and f u l l y w i l l t h e y s e r v e a s t h e s u b s t a n c e o f t h a t s o l v e n c y on w hich t h e t r a f f i c i n c r e d i t e x t e n s i o n s and c a p i t a l i z a t i o n s i s c a r r i e d o n ." Y eblen, A bsentee O w nership, 377.

43 M o r e o v e r , a l a r g e c o r p o r a t i o n may b o r r o w u p t o 8 0 fo o f t h e v alu e of i t s bonds,

th at

f i x e d a s s e t s on t h e s e c u r i t y o f i t s

s t o c k s and

i s on e v i d e n c e o f o w n e r s h ip o f o r i n t e r e s t

fix ed a s s e ts ,

if

th e s e s t o c k s and bonds a re

in i t s

r e a d i ly m arket­

a b le.

I n c i d e n t a l l y t h e i r m a r k e t a b i l i t y d ep en d s l a r g e l y upon 1 th e s i z e o f t h e company. In a d d itio n

to f a v o r i n g th e

developm ent o f l a r g e r U n i t s

i n p r o d u c t i o n and d i s t r i b u t i o n t h e g r o w t h o f b a n k c r e d i t our assum ed s t a t e w i l l te n d t o d e v e lo p a c e r t a i n t i o n o f c o n t r o l o v e r i n d u s t r y and c r e d i t .

in

c en traliza­

In F ra n ce ,

E n gland,

a n d Gexmany a f e w g r e a t p r i v a t e b a n k s h a v e b ecom e s o p o w e r f u l th at

th ey c o n s titu te

a s o r t o f n a t i o n a l econom ic

general

s t a f f c o m p a r a b l e i n m a n y r e s p e c t s t o t h e S u p r e m e E c o n o m ic C o u n c il o f th e S o v ie t U nion.

When t h e s e b a n k s c a n a g r e e

among t h e m s e l v e s t h e y v i r t u a l l y h a v e t h e the

r a t e and th e c h a r a c t e r o f

t h e i r resp ectiv e

co u n tries.

power to c o n t r o l b o th

th e econom ic d e v e lo p m e n t o f In th e U nited S ta te s t h e con­

s o l i d a t i o n m o v e m e n t am on g p r i v a t e b a n k s i s a m o r e r e c e n t phenomenon, b u t t h e r e a r e

in d icatio n s th a t

b r i n g a b o u t t h e same r e s u l t s is th e

i t may e v e n t u a l l y

in t h i s co u n try .

A lso t h e r e

F e d e r a l R e s e rv e s y s te m w hich h a s a l r e a d y begun to

e x e r c i s e a m easure o f c o n t r o l o v e r th e e x te n s i o n o f bank

1 ,fI t i s i n t e r e s t i n g t o o b s e r v e t h a t t h e f o r m a t i o n o f t h e g r e a t modern t r u s t s h a s g iv e n a c o n s i d e r a b l e im p etu s to d e p o sit c u rre n cy ; fo r the s e c u r i t i e s o f la rg e c o r p o r a t i o n s a r e more e a s i l y u s e d a s ’c o l l a t e r a l s e c ­ u r i t y ’ f o r bank lo a n s than th e s t o c k s .a n d bonds of s m a l l . c o r p o r a tio n s or th a n p a r t n e r s h i p r i g h t s . ” F is h e r, o p . - c i t ., p. 41.

44 c r e d i t and t h e p u r p o s e s f o r w hich i t

i s used.

1

4 . Upo n D i s t r i b u t i o n o f I n c o m e . The i n t r o d u c t i o n a n d g r o w t h o f b a n k c r e d i t less

w i l l have

e f f e c t upon r e n t t h a n upon a n y o f t h e o t h e r econom ic

facto rs

in p ro d u ctio n .

The i n c r e a s e d w e a l t h a n d i n c o m e o f

t h e s t a t e w i l l have th e n orm al e f f e c t upon r e n t , in cre asin g re n t,

th at of

b e c a u s e l a n d w i l l b e r e l a t i v e l y more s c a r c e

a s com pared w ith c a p i t a l due t o t h e c o m p u lso ry s o c i a l s a v ­ in g .

R ent i s a r e s i d u a l s h a re and a s the

increased c a p ita l I

w i l l cause a f a l l

in the r a t e

of in te re st

th is

decrease w ill

be a b s o r b e d by r e n t w h e re v e r r e n t and i n t e r e s t

are the p r in ­

c ip a l c o s ts of p ro d uctio n . As f o r

in te re st,

,

not only w i l l th e r a t e

due to t h e g r e a t l y i n c r e a s e d

supply o f c a p i t a l ,

ume o f i n t e r e s t p a y m e n t s may v e r y w e l l r i s e fall

of in te re st f a l l

in

but the v o l­ sp ite o f th e

in th e r a t e . It

i s w orth n o t in g here t h a t

c e i v e i n t e r e s t upon th e

since

the banks w i l l r e ­

sa v in g s th e y have fo rc e d s o c i e t y to

m a k e , t h e a b s t i n e n c e o r w a i t i n g t h e o r y o f i n t e r e s t w i l l no lo n g e r be a d e q u a te .

As t h i s

o f t h e consum ing p u b l ic

w ill

c o m p u l s o r y s a v i n g on t h e p a r t c o s t the

banks n o th in g except

th e ex penses of in c r e a s e d c o m p e titio n , bookkeeping, cred it 1

in v estig atio n ,

and

th ey w ill m ain tain t h e i r lo an s a t or

"The g e n e r a l s t a f f o f s o l v e n c y h a v e t h e s i t u a t i o n w e l l . i n h a n d a n d t h e i r i n t e r e s t i n i t s m a i n t e n a n c e may b e c o u n te d on to e n d u r e . ” V eblen, op . c i t . , p. 377.

45 n e a r the

l e g a l l i m i t so l o n g ^ a s th e

rate

of in te re st

they

r e c e i v e c o v e rs th e above e x p e n s e s .

Of c o u r s e

of c a p ita l ensures

incom e a b o v e t h i s m i n i ­

them a n i n t e r e s t

mum, b u t a t a n y r a t e s o c i e t y to

the s c a r c i t y

th e c a p i t a l th e y su p p ly by c o m p e llin g

save i s alw ay s s u b - m a r g in a l,

a v ailab le a t a co st le s s

th at

is

it

i s alw ays

th a n the r a t e o f i n t e r e s t n e c e s s a ry '

to b rin g the m arginal u n it of c a p ita l

in to

t h e m arket.'*'

” 0n t h e w h o le t h e c a p i t a l m a r k e t i s r e g u l a t e d by t h e r a t e of in te re st. I f th e r a t e o f i n t e r e s t i s to o low , th e dem an d f o r c a p i t a l e x c e e d s t h e o f f e r , a n d t h e r e s u l t i s a s h o r t a g e o f c a p i t a l d i s p o s a l w hich c a u s e s t h e r a t e to r i s e once m ore, T h is norm al s e l f - r e g u l a t i o n o f th e cap­ i t a l m a rk e t i s d i s t u r b e d by t h e i n t r u s i o n o f t h e banks w i t h t h e i r o f f e r o f bank m eans o f paym ent. I f the banks p u t t h e te r m s f o r t h e i r a d v a n c e s t o o lo w , and t h e e q u i l ­ ib riu m o f th e c a p i t a l m a rk e t i s d i s t u r b e d on t h a t a c ­ c o u n t, i t can o n ly be r e s t o r e d by th e i s s u e o f f u r t h e r bank means o f paym ent. As l o n g a s t h e s h o r t a g e o f c a p ­ i t a l d i s p o s a l i s c o v e re d i n t h i s way, an e x c e s s i v e ly low r a t e o f i n t e r e s t , n o t i n a c c o r d w i t h t h e r e a l s t a t e o f t h e c a p i t a l m a r k e t , may b e m a i n t a i n e d . . . • "But a n a b n o rm a l i n c r e a s e i n t h e p r o d u c t i o n o f c a p i t a l . o f t h i s k in d m ust g r a d u a l l y c u r t a i l th e o p p o r t u n i t i e s f o r a r e m u n e r a t i v e u s e o f c a p i t a l , o r m ak e new i n v e s t ­ m ents o f ' i t l e s s r e m u n e r a tiv e . T h is would i n n o r m a l circu m stan ces le a d to a f a l l in th e r a t e o f i n t e r e s t . But a s t h e r a t e i s a l r e a d y t o o low , the e f f e c t o f th e augm ented p r o d u c t i o n o f c a p i t a l i s t h a t t h e c o n d i t i o n s o f the c a p i t a l m arket a r e g ra d u a lly b ro ug ht in to h a r ­ mony w i t h t h e c u r r e n t l o w r a t e o f i n t e r e s t . In t h i s way t h e e q u i l i b r i u m o f t h e m a r k e t i s r e s t o r e d . The d is tu r b in g e f f e c t of th e bank r a t e of i n t e r e s t c e a se s a s soon a s t h e r a t e becom es norm al once m ore. T his a l s o p u t s an end to t h e s p e c i a l c o m p e t i t i o n on t h e m a r k e t w h i c h t h e b a n k s h a d o c c a s i o n e d b y t h e i r lo w r a t e o f i n t e r e s t , and t h e c a u s e o f the e x t r a o r d i n a r y i n c r e a s e o f ban k m edia o f payment d i s a p p e a r s . The ban k s can o n ly c o n ti n u e t h i s i n c r e a s e o f t h e i r m edia o f paym ent b y l o w e r i n g o n c e more t h e i r r a t e b e lo w t h a t o f th e c a p i t a l m a r k e t . . . .The a r t i f i c i a l r e d u c t i o n o f th e r a t e has le d to an a r t i f i c i a l l y enhanced p ro ­ d u c tio n o f c a p i t a l , w hich i s e q u i v a l e n t to a f o r c e d i n ­ c r e a s e o f s a v i n g on t h e p a r t o f t h e c o m m u n i t y . ” C a s s e l , T h eo ry o f S o c ia l- Economy. 4 1 5 - 7 .

46 M oreover,

b a n k c r e d i t s u p p l i e s w h a t may b e c o n s i d e r e d

th e m a rg in a l u n i t o f c a p i t a l from the

q u a n tity v iew p o in t,

th o u g h s u b m a rg in a l from t h e c o s t o f p r o d u c t i o n v ie w p o in t. C o n seq u en tly i t

h elp s to d eterm in e the r a t e

c a p ita l receiv es. in te rest

If

the a b s t i n e n c e o r w a i t i n g t h e o r y o f

does n o t a p p ly to

o f bank c r e d i t i t

the

c a p i t a l c r e a t e d by e x te n s io n

c an n o t be u se d t o e x p l a i n th e r a t e

i n t e r e s t upon c a p i t a l c r e a t e d i n o t h e r w ays, re c e iv e s the

w hich a l l o t h e r

sa m e r a t e o f i n t e r e s t

of

fo r a ll c ap ita l

e x c e p t where r e n t o r

q u a si-re n ts appear. We m u s t s u b s t i t u t e a h a l f - s c a r c i t y , theory of i n te r e s t.

h a lf-ab stin en ce

The s u p p l y o f b a n k - c r e a t e d c a p i t a l w i l l

rem ain a t any o r d i n a r y i n t e r e s t r a t e .

The m a r k e t r a t e ,

how-?

e v e r , w i l l be t h e n e c e s s a r y r e w a r d f o r a b s t i n e n c e o r w a i t i n g r e q u ir e d to b r in g the m a rg in a l u n i t o f the n o n -b a n k -c re a te d c a p i ta l in to s in c e the

the m ark et.

T his i s p a r t l y a s c a r c i t y th e o ry

amount o f b a n k c r e d i t h e l p s t o d e te r m i n e t h e

in ­

t e r e s t r a t e an d t h i s amount i s d e t e r m i n e d b y f i n a n c i a l c u s ­ tom s and la w s o n l y . Most s i g n i f i c a n t

of a l l w i l l b e

the e f f e c t o f t h e

in ­

t r o d u c t i o n and g ro w th of b a n k c r e d i t upon r e a l wages i n o u r assum ed s o c i e t y .

We h a v e a s s u m e d t h a t l a b o r w a s f u l l y

em­

p loyed b e fo re the

i n t r o d u c t i o n o f b a n k c r e d i t and t h a t

the

supply o f la b o r does not c r e d i t expansion,

and th e

in c re a s e d u rin g the p e rio d of bank e f f e c t o f a l t e r i n g t h e s e assum p­

t i o n s w i l l be d i s c u s s e d l a t e r .

But th e

i n t r o d u c t i o n and

g r o w t h o f b a n k c r e d i t w i l l i n c r e a s e t h e d em an d f o r t h i s

unchanging su p p ly of la b o r

sin c e borrow ers w i l l d e s ire to

u s e t h e i r borrow ed p u r c h a s i n g power to

in crease

t a l e q u i p m e n t and i n v e n t o r i e s a n d s i n c e a l l em ployers o f la b o r w i l l c o n tin u e v a lu e o f p u r c h a s i n g power t o h i r e su lt,

nom inal wages w i l l r i s e

la b o re rs w ith.

p lo y e rs of lab o r s u f f i c i e n t l y to

how t h e s h i f t

a l l the

As a r e ­

u n t i l a new e q u i l i b r i u m o f

n o m i n a l w a ge r a t e s w i l l c u r t a i l t h e

to h ire

p rev io u s

t o h a v e t h e same d o l l a r

s u p p l y and e f f e c t i v e demand i s r e a c h e d .

bank c r e d i t

the

th e ir cap i­

labor

The i n c r e a s e

in the

d em an d o f p r e v i o u s em­

p erm it the bo rrow ers of they d e s i r e .

i n p r o d u c t i o n fro m consum able

T his

is

t o c a p i t a l com­

m o d ities tak es p lace. But i n

sp ite

of the

in crease

in nom inal wages r e a l

w a g e s w i l l a t t h e s:ame t i m e b e r a d i c a l l y d e c r e a s e d .

There

a r e a n u m b e r o f w a y s i n w h i c h t h i s may b e d e m o n s t r a t e d . If less tie s,

labor

i s e m p l o y e d i n p r o d u c i n g c o n s u m a b l e c o m m o d i­

o b v i o u s l y l a b o r e r s , who s p e n d a l l o f t h e i r w a g e s

upon consum able co m m o d ities,

w i l l be ab le

to buy few er o f

t h e m t h a n f o r m e r l y no m a t t e r how h i g h t h e i r n o m i n a l w a g e s become.

Or a g a i n ,

w ith th e

sa m e s u p p l y o f c o m m o d i t i e s b o r -

ro w ers o f bank c r e d i t w i l l b e un ab le

to

buy more o f th em

t h a n f o r m e r l y u n l e s s some o t h e r p e r s o n s b u y l e s s .

These

borrow ers o b ta in

t h e i r d e s i r e d s u p p ly of com m odities o n ly

by i n f l a t i n g th e

p rice

l e v e l w ith t h e i r new ly c r e a t e d p u r ­

c h a s i n g power and t h u s f o r c i n g t h e c o n s u m e rs , m o s t l y l a b ­ orers,

to purchase l e s s th a n

S t i l l an o th er lin e

th e y have been accustom ed t o .

of re a so n in g w ith re g a rd

to t h i s problem

is as fo llo w s.

The b o r r o w e r s o f b an k c r e d i t

r e a l p u r c h a s i n g pow er,

in crease

48 th eir

th e b a n k e r s do n o t l o s e an y r e a l p u r ­

c h a s in g pow er, c o n s e q u e n tly the r e s t o f s o c i e t y m ust l o s e some r e a l p u r c h a s i n g p o w e r . the

lab o rin g c la s s ,

and o t h e r f i x e d

Most o f t h i s l o s s

t h o u g h so m e o f i t

income r e c e i v e r s ,

is

b o r n e by

f a l l s upon c r e d i t o r s

a s w i l l be b ro u g h t out

la te r. T his e x p r o p r i a t i o n cla ss is c red it

o f t h e r e a l incom e o f t h e l a b o r i n g

th e m ost fu n d am en tal e f f e c t o f

in m odern s o c i e t y .

It

end o f t h e p r o c e s s s i n c e a l l th e c r e a tio n

i s th e

the u s e o f b a n k

i m p l i c i t p u rp o s e and

the re w a rd s and p r o f i t s f o r

of bank c r e d i t flow fro m t h i s e x p r o p r i a t i o n o f

t h e incom e o f t h e w o r k in g c l a s s . Such e x p r o p r i a t i o n o f r e a l w ages is su lt

the

in ev itab le

and i m p l i c i t end o f e v e r y p r o c e s s o f i n f l a t i o n .

g e n e r a l l y re c o g n iz e d by e c o n o m is ts t h a t wages te n d to b eh in d whenever t h e p r i c e l e v e l r i s e s .

re­

It is lag

In h i s H is to r y o f

t h e G r e e n b a c k s , ¥ / e s l e y C. M i t c h e l l h a s e m p h a s i z e d t h e f a c t t h a t w a g e s d i d n o t go u p a s f a s t a s t h e c o m m o d i t y p r i c e l e v e l d u r i n g t h e C i v i l W ar.

In th is

c a s e i t was t h e

gov­

e rn m e n t t h a t e x p r o p r i a t e d th e r e a l incom e o f t h e w o r k e r s , though f o r a v e ry v i t a l

purpose,

and in d e e d e v e r y g o v ern m en t

d o e s t h e s a m e i n e v e r y w a r n o m a t t e r how m a n y m o t i o n s t h e y may go t h r o u g h i n o r d e r t o m ak e t h e v o t e r s b e l i e v e t h a t fu tu re

g e n e r a t i o n s w i l l pay f o r t h e s e w a r s .

clo th e

and arm a n a t i o n w i t h w h e a t,

be pro d u ced by f u t u r e

g en eratio n s.

c o tto n , Much t h e

You c a n n o t f £ e d , and s t e e l to same t h i n g may

49 be s a i d o f bank l o a n s . in crease h is

No b o r r o v f e r c a n b u i l d

a new f a c t o r y ,

in v e n to ry , o r e n la rg e h i s w orking fo rc e w ith

men a n d c o m m o d i t i e s t o b e p r o d u c e d i n t h e

fu tu re.

He m u s t

u s e men a n d c o m m o d i t i e s a l r e a d y i n e x i s t e n c e a n d s o m e o n e e l s e m ust c e a s e o r fo re g o th e u se o f It

is

c h ie f ly the

lab o rin g

t h e s e men a n d c o m m o d i t i e s .

c l a s s w hich p e rfo rm s t h i s

f u n c t i o n — o n ly on c o m p u lsio n ,

la tte r

how ever.

H a v i n g now b r i e f l y d i s c u s s e d t h e m o r e i m p o r t a n t e f f e c t s * o f th e g ro w th o f b an k c r e d i t in o u r assum ed s o c i e t y upon ren t,

i n t e r e s t , a n d w a g e s , we w i l l c l o s e w i t h a c o n s i d e r a t i o n

o f th e e f f e c t upon p r o f i t s .

It is

h ig h ly probable th a t

the

s h a r e o f t o t a l incom e d i s t r i b u t e d a s p r o f i t s w i l l be i n c r e a s e d by th e

i n f l a t i o n and e x p r o p r i a t i o n w h i c h w i l l r e s u l t

i n t r o d u c t i o n and grow th of bank c r e d i t .

In the f i r s t

e n t r e p r e n e u r s w i l l have m ore c a p i t a l a t t h e i r t h e y w i l l be u n w i l l i n g t o b o rro w can in c re a s e t h e i r p r o f i t s

th is

so d o in g .

p lace

d i s p o s a l and

c a p i t a l u n le s s th ey

b y so d o i n g .

In th e

ban k s w i l l be u n w i l l i n g to c r e a t e and l o a n p u r c h a s i n g power u n l e s s

from th e

they can in c re a s e

second p la c e

th is a d d itio n al th eir

Most o f t h i s a d d i t i o n a l incom e t o

income b y

th e banks w i l l

b e i n t e r e s t on t h e c a p i t a l t h e y h a v e f o r c e d s o c i e t y

to

but a p o rtio n of i t

to rew ard

the b an k ers In t h i s

m ay v e r y w e l l b e c a l l e d p r o f i t s

for th e ir

co n n ectio n

it

in itiativ e

they ta k e .

i s w o r th r e m a r k in g t h a t most o f t h e

r i s k s of b an k in g a re th e pow er.

and f o r th e r i s k s

save,

r e s u l t o f th e c r e a tio n of purchasing

I f e v e r y b a n k e r k e p t a 100% r e s e r v e b e h i n d a l l o f

h i s demand d e p o s i t s h e w o u ld r u n l i t t l e

risk

of in so lv en cy

in tim e s o f b u s in e s s d e p re s s io n or p a n ic . ev itab le

Hence i t

is

in ­

t h a t w hen b a n k e r s l o w e r t h e s e r e s e r v e s i n o r d e r . t o

c r e a t e p u r c h a s i n g pow er and i n th e

process force

s a v e a d d i t i o n a l c a p i t a l t h e y must c h a r g e

s o c i e t y to

th e ir borrow ers

enough to co m p en sate them f o r u n d e rg o in g t h e s e a d d i t i o n a l risk s.

Of c o u r s e

the p r o f i t s o f p r o f e s s i o n a l

sp e cu la to rs

w i l l b e i n c r e a s e d b e c a u s e t h e y w i l l h a v e much m o r e a v a i l a b l e c a p i t a l w ith w hich to c a r r y on t h e i r

a c tiv itie s,

but

th is

w i l l no d o u b t be e x a c t l y c o u n t e r b a l a n c e d by th e l o s s e s o f t h e i n e x p e r i e n c e d p u b l i c who v e n t u r e i n t o t h e m o d ity exchanges.

F i n a l l y the

in crease

com pulsory s o c i a l s a v in g w ith o u t

in c a p i t a l due to

any change in t h e su p p ly

o f e n t r e p r e n e u r i a l a b i l i t y w i l l make t h e m ore s c a r c e

s t o c k a n d com­

and t h e r e f o r e m o r e v a l u a b l e .

la te r re la tiv e ly The i n c r e a s e d

e a r n i n g s o f s u c h e n t r e p r e n e u r i a l a b i l i t y m ig h t be c a l l e d an i n c r e a s e i n wages o r a n i n c r e a s e o n e ’s p o in t

in p r o f i t s ,

d e p e n d in g upon

o f view .

The g r o w t h o f b a n k c r e d i t ,

how ever, w i l l have v e ry

i m p o r t a n t e f f e c t s u pon t h e d i s t r i b u t i o n o f incom e i n o t h e r ways t h a n by a l t e r i n g t h e

shares of t h is

among t h e e c o n o m i c f a c t o r s , fits. the

For in s ta n c e , the

ren t,

incom e d i v i d e d

in te rest,

wages, and p ro ­

s h a r e o f a n y o n e f a c t o r may r e m a i n

same o r b e o n l y s l i g h t l y a l t e r e d w h i l e t h e

of th is a ltere d .

d istrib u tio n

s h a r e b e t w e e n i n d u s t r i e s a nd i n d i v i d u a l s may b e We h a v e a l r e a d y

d isc u sse d the

e f f e c t of bank c re d it

u p o n p r o d u c t i o n i n v a r i o u s i n d u s t r i e s and t h e same c o n c l u s i o n s may b e e x t e n d e d t o

the

p r o f i t s of and wages i n th o s e i n d u s t r i e s .

51 That i s , ish ,

a g r i c u l t u r a l wages and p r o f i t s w i l l

ten d to dim in­

m a n u f a c t u r i n g p r o f i t s and wages w i l l t e n d to

in crease,

and m e r c a n t i l e p r o f i t s

a n d w a g e s w i l l show a m u ch s t r o n g e r

tendency to

Of c o u r s e , o n c e t h e g r o w t h o f h a n k

c red it

in crease.

ceases,

c o m p e titio n w i l l te n d to e q u a liz e a g a in th e

r a t e s o f p r o f i t and wages in t h e s e i n d u s t r i a l The g r o w t h o f b a n k c r e d i t w i l l a l s o p ro f its of

in d iv id u a l en trep ren eu rs.

re n ts h is fix ed a s se ts, w ill

tend to a l t e r th e

The b u s i n e s s man who

a n d who ow ns no home o r s e c u r i t i e s ,

be u n a b l e t o p r o f i t

f r o m b a n k c r e d i t a s much a s h i s

c o m p e t i t o r s who own t h e i r s e c u r itie s of

groups.

b u i l d i n g s and h a v e hom es a n d

t h e i r own u p o n w h i c h t o b o r r o w .

Of c o u r s e t h e

a c c u m u la tio n and lo a n o f v o lu n ta r y s a v in g s h as t h i s effect,

sa m e

but th e m agnitude o f th e e f f e c t w i l l b e g r e a t l y

enhanced by th e grow th of bank c r e d i t

i n o u r assum ed s o c i e t y .

Bank c r e d i t makes p o s s i b l e a s o r t o f d o u b le u s e o f c ertain

c a p ita l.1

I t may be u s e d a c t i v e l y

in one e n t e r p r i s e

and u se d p a s s i v e l y a s a b a s i s of bank c r e d i t w hich w i l l buy a d d i t i o n a l c a p i t a l a s s e t s t o be u s e d i n a n e n t i r e l y d i f f e r e n t e n te rp rise .

Of c o u r s e ,

t o t a l incom e r e m a in i n g t h e

ow ners o f c a p i t a l c a n n o t g a i n

the p o s s i b i l i t y

same,

o f in cre asin g

^ "Such d o u b le u se of t h e a v a i l a b l e a s s e t s w i l l y i e l d d o u b le e a r n i n g s ; in d e e d , o r d i n a r i l y som ething m o re. S u ffic ie n tly l a r g e a s s e t s engaged as c o r p o r a te c a p i t a l , say in one o f t h e k e y i n d u s t r i e s , w i l l a t t h e same t i m e a n d t o t h e i r f u l l am ount, and w i t h o u t p r e j u d i c e t o t h e i r e a r n i n g c a p a c ity a s c o rp o r a tio n a s s e t s s e rv e a ls o to t h e i r f u l l amount a s a s s e t s o f s o l v e n c y i n t h e f i s c a l e n t e r p r i s e o f th e m e t r o p o l i t a n in v e s tm e n t b a n k in g , p ro v id e d alw ay s t h a t the a s s e t s are h e ld in s u f f i c i e n t l y la rg e b lo c k s ." Y eblen, op. c i t ., p. 377.

th e ir

incom e, t h e i r

in te rest

a n d .p ro fit re c e ip ts

i n t h i s wav

u n l e s s t h o s e w i t h o u t c a p i t a l a t t h e sa m e t i m e c o n f r o n t p o s s i b i l i t y of having t h e i r

incom e fro m l a b o r c u r t a i l e d .

t h e d o u b l e u s e o f c a p i t a l m ade p o s s i b l e

by b a n k c r e d i t

d e p e n d e n t u p o n v o l u n t a r y s a v i n g and l o a n o f t h e s e as is

the

cre d it.

d o u b l e u s e o f c a p i t a l made p o s s i b l e R ath er i t

tio n of a l l d it

e n a b le s the r i c h

th is tim e,

current

savings

by o rd in a ry

p u rc h a s in g pow er.

same t i m e t h a t he i s u s i n g

Bank c r e ­

as purchasing to o .

c a p i t a l e q u ip m e n t he p u r c h a s e s i n

b e u s e d i n tw o d i f f e r e n t

as a c tiv e c a p ita l

it

He c a n e a t h i s c a k e a n d h a v e i t

a d d itio n al

way c a n a l s o

is not

e n t r e p r e n e u r to u se h i s c a p i t a l i n h i s

power i n t h e m a r k e t . 1 M oreover, th e

For

i s d e p e n d e n t upon e x p r o p r i a t i o n o f a p o r ­

consum ers*

b u sin e ss a t the

the

ways a t t h e

same

i n o n e e n t e r p r i s e and a s p u r c h a s i n g

power w ith w hich t o e x p r o p r i a t e com m odity income o f s o c i e t y .

s t i l l m o re o f t h e c u r r e n t

I f bank c r e d i t were e x te n d e d

up t o 100$ o f th e v a l u e o f t h e a s s e t s

and i f

t h e r e w e re no

custom ary or l e g a l l i m i t t o th e e x te n s i o n o f bank c r e d i t , i t w ould be t h e o r e t i c a l l y p o s s i b l e

for

one c a p i t a l i s t

to

borrow s u f f i c i e n t purchasing_jpow er t o buy up a l l th e

1 " I f t h e a c r e s o f a l a n d o w n e r , o r t h e i r o n s t o v e s of . a . s t o v e d e a l e r c a n n o t c i r c u l a t e i n l i t e r a l l y t h e same way t h a t g o ld d o l l a r s c i r c u l a t e , y e t the lan d o w n er o r sto v e d e a l e r may g i v e t o t h e b a n k a n o t e o n w h i c h t h e b a n k e r may b a s e b a n k n o t e s o r d e p o s i t s ; a n d t h e s e b a n k n o t e s and d e p o s its w i l l c i r c u l a t e l i k e g o ld d o l l a r s . . . . To p u t i t c r u d e l y , d e p o s i t b a n k i n g i s a d e v i c e f o r c o in in g in to d o l l a r s la n d , s to v e s , and o th e r w e alth not otherw ise g e n e ra lly ex ch an g eab le. n F is h e r, o p . c i t ., p . 41.

accep tab le a s s e ts W hile

th is

in

the w o rld .

la st p o ssib ility

is h ig h ly th e o r e tic a l

n e v e r t h e l e s s em phasizes a f e a tu r e been n e g le c te d .

T h is f e a t u r e

t h e power and p r o f i t s

of bank c r e d i t t h a t has

i s t h a t bank c r e d i t

in creases

of w ealthy e n tre p re n e u rs r e l a t i v e l y

t o t h e power and p r o f i t s of p o o r e r e n t r e p r e n e u r s . d it

i s an i n s t i t u t i o n ,

or r a th e r

t h o s e who h a v e t h e m o s t c a p i t a l to

Bank c r e ­

p a r t o f an i n s t i t u t i o n ,

c r e d i t,^ " w hich g r e a t l y e n h a n c e s t h e

We h a v e y e t

potency o f c a p i t a l ,

and

p r o f i t th e m ost from i t .

c o n s i d e r th e m ost im p o rta n t m anner i n

w hich bank c r e d i t c a u s e s r e d i s t r i b u t i o n o f p r o f i t s , in te rest

it

and r e n t w i t h i n o u r assu m ed s o c i e t y .

t e r o n i n f l a t i o n we f o u n d t h a t t h e

wages,

In th e chap­

i n t r o d u c t i o n and gro w th

o f bank c r e d i t w ould c a u s e r o u g h ly a 90$ i n f l a t i o n o f t h e p rice rate

l e v e l , w hich

i n f l a t i o n w ould t a k e

over a te n -y e a r p erio d . The e f f e c t

d ito rs

o f s u c h a n i n f l a t i o n u pon d e b t o r s and c r e ­

and upon a l l o t h e r p e r s o n s p a r t i e s

p a y f i x e d sum s o f money a t f u t u r e d a t e s th at

p la c e a t an even

it

say th a t

needs l i t t l e

d isc u ssio n here.

is

to c o n t r a c t s to s o w e l l known

I n g e n e r a l we may

d e b to r s w i l l g a i n what c r e d i t o r s

l o s e and i n

c a s e o f o t h e r m o n e y c o n t r a c t s t h o s e who p r o m i s e

the

to pay

w i l l g a i n w h a t t h o s e who p r o m i s e t o r e c e i v e w i l l l o s e . P e o p l e who l i v e

on incom es from b o n d s , m o r tg a g e s ,

an n u ities,

1 "When a p r i m i t i v e p r a c t i c e o f human l i v i n g , l i k e b a r t e r , - i s a t l a s t ev o lv ed i n t h i s g e n e r a l way, i t becomes an in stitu tio n . C r e d it i s an i n s t i t u t i o n . " T aylor, o p . c i t .; p . 54.

54 lea se s, is

preferred

sto ck ,

e tc .,

w ill suffer

sev erely .

T his

b u t one p h a s e o f t h e e x p r o p r i a t i o n o f p u r c h a s i n g power

d iscu ssed in a previous c h a p te r. One q u a l i f i c a t i o n

re q u ir e s to be in tro d u c ed

above g e n e r a l c o n c lu s io n s . a re r e s p o n s ib le f o r the

in to the

The b a n k s a n d t h e i r b o r r o w e r s

i n f l a t i o n w hich b r i n g s a b o u t

th is

e x p r o p r i a t i o n o f p u r c h a s i n g power and t h e y p r o f i t fro m i t s first

e f f e c t s upon c r e d i t o r s .

not th e

In o t h e r w ords i t

is th ey ,

d e b t o r s , who g a i n w h a t t h e c r e d i t o r s f i r s t

To d e m o n s t r a t e t h i s p o i n t we m u s t r e t u r n i c a l c a s e o f Mr. A*s f i r s t the f i r s t

b u s in e s s day of

c re d ito rs receiv e

some o f t h e i r

to th e h y p o t h e t ­

I f t h i s l o a n i s m ade o n

a given y e a r,

larg e in te re s t

sa m e d a y i t w i l l r a i s e t h e to rs lo se

lo an .

lo se.

a d ay on w h ic h

paym ents,

and s p e n t

on t h e

p r i c e l e v e l s o t h a t ■t h e c r e d i ­

r e a l p u rch asin g pow er.

But the

d e b to r s w i l l n o t have g a in e d t h i s r e a l p u r c h a s in g power b e ­ c a u s e whe n t h e y s a v e d t h e by the c r e d i t o r s were w o rth t h e

on t h e

n o m in a l i n t e r e s t paym ents r e c e i v e d

first

b u s i n e s s day o f t h e y e a r t h e y

c u s to m a ry amount i n r e a l p u r c h a s i n g pow er.

S u c c e e d in g i n t e r e s t p a y m e n ts, how ever, w i l l b e n e f i t d eb to r a t

th e e x p en se of the

cre d ito r,

because

the p ric e

i n f l a t i o n w i l l r a i s e h i s incom e w i t h o u t r a i s i n g of in te rest In th e th at

the

the

amount

he m u s t p a y h i s c r e d i t o r s . c h a p t e r s on i n f l a t i o n

a n d e x p r o p r i a t i o n we f o u n d

i n f l a t i o n c a u s e d an e x p r o p r i a t i o n o f t h e

incom e o f th e l a b o r i n g called a re d is trib u tio n

cla ss.

c u s t o m a r y wage

In a s e n se t h i s m ig h t be

o f wages r a t h e r

th a n an a b s o l u t e

55decrease in or.

the share of c u rr e n t

incom e a t t r i b u t a b l e t o l a b ­

C e r t a i n l y we w o u l d n o t s a y t h a t t h e

income a t t r i b u t a b l e

share of c u rre n t

t o c a p i t a l had d e c r e a s e d b e c a u se i n f l a ­

t i o n had d e c r e a s e d the r e a l p u r c h a s i n g power of i n t e r e s t paym ents.

R a t h e r we s h o u l d c a l l

or i n t e r e s t .

i t a re d istrib u tio n o f rent

Such a c o n c e p t i o n of w ag es makes t h e i r

expro­

p r i a t i o n b y means o f b a n k c r e d i t m ore c o n c r e t e a n d t a n g i b l e . 5 . Summary A b r i e f review of th e d iscu ssed

in t h i s

num erous e f f e c t s

c h a p t e r may s e r v e t o

of bank c r e d i t

d i s e n t a n g l e them

som ew hat. C onceiving i n f l a t i o n and e x p r o p r i a t i o n to be th e m a r y e f f e c t s o f new b a n k c r e d i t e ffe c ts of larg e.

in fla tio n

A d m itted ly ,

p ri­

we u n d e r t o o k t o a n a l y z e t h e

and e x p r o p r i a t i o n upon th e s o c i e t y a t th is

i s much t o o l a r g e a t a s k f o r o n e

ch ap ter. F irst,

we d i s c u s s e d t h e e f f e c t s

of i n f la ti o n

and e x ­

p r o p r i a t i o n upon the p h y s i c a l volum e o f p r o d u c t i o n and fo u n d th at

c o m p u l s o r y s o c i a l s a v i n g would e n s u e , a n d t h a t t h i s

would s l o w l y b u t s u r e l y i n c r e a s e t h e

■volume o f p r o d u c t i o n

th ro u g h o u t th e p e rio d of in tr o d u c tio n

of bank c r e d it

in to

o u r assum ed s o c i e t y . We a l s o f o u n d t h a t lie v in g

th a t bank c r e d i t

p ro d u c tio n a re unsound.

num erous o r th o d o x r e a s o n s f o r b e ­ i n c r e a s e s th e p h y s i c a l volum e o f S ta tistic s

lack s seasonal e l a s t i c i t y . m a tic a lly p u ts la rg e

prove t h a t bank c r e d i t

The c o m p e t i t i v e s y s t e m a u t o ­

incom es i n t h e hands o f a b l e b u s i n e s s

56 m e n , a n d a l l c a p i t a l s h o u l d corae f r o m e a r n e d o r b o r r o w e d incom e,

so t h a t b a n k e r s

d u c tio n by s h i f t i n g

do n o t i n c r e a s e t h e v o l u m e a t

c a p i ta l from le s s

a b l e t o more a b l e

e n t r e p r e n e u r s w hen t h e y c r e a t e b a n k c r e d i t . clu d ed t h a t bank c r e d i t so i n f l u e n c e the p r ic e

does not f a c i l i t a t e

We a l s o

prevent

the

con­

e x c h a n g e and

t h e volum e o f p r o d u c t i o n b e c a u s e i t

l e v e l e n o u g h to

pro­

in fla te s

increased

supply of

p u r c h a s i n g p o w e r f r o m c a r r y i n g o n a n y m ore e x c h a n g e s t h a n p rev io u sly . Second, upon th e th at

we i n v e s t i g a t e d t h e

e f f e c t o f new b a n k c r e d i t

developm ent of p a r t i c u l a r

in d u strie s.

s p e c u l a t i o n on com m odity and s e c u r i t y

be s t i m u l a t e d b y t h e so ciety .

gro?i/th o f b a n k c r e d i t

YJe f o u n d

e x c h a n g e s would i n our assum ed

O b v i o u s l y b a n k i n g w o u l d become m o r e p r o f i t a b l e .

From a b r i e f g l a n c e a t

sta tistic s

we d i s c o v e r e d t h a t

in

m odern s o c i e t y m e r c h a n ts o b t a i n t h e g r e a t e s t b e n e f i t s

from

th e u se o f b an k c r e d i t w h ile 'fa rm e rs r e c e i v e t h e l e a s t b e n efit.

M a n u f a c t u r e r s r a n k somewhere b e tw e e n t h e s e o t h e r

tw o g r o u p s . T h ird ,

we c o n s i d e r e d t h e

effects

o f new b a n k c r e d i t

upon o r g a n i z a t i o n and c o n t r o l of i n d u s t r y .

We c o n c l u d e d

t h a t bank c r e d i t f a v o r s th e c o n c e n t r a t i o n o f i n d u s t r y in to l a r g e r and l a r g e r u n i t s . makes p o s s i b l e a c e r t a i n

A l s o we f o u n d t h a t b a n k c r e d i t amount o f c e n t r a l i z e d

c o n t r o l o v e r t h e econom ic a c t i v i t i e s I t makes W all S t r e e t a s o r t F o u r t h , 'we a t t e m p t e d

-

fin an c ia l

o f an e n t i r e

n atio n .

of suprem e econom ic c o u n c i l .

to a s c e r t a i n t h e e f f e c t s o f bank

c r e d i t upon d i s t r i b u t i o n .

We f o u n d t h a t r e n t w o u l d r i s e

due to t h e g r e a t e r r e l a t i v e be d e c r e a s e d a s a r e s u l t com pulsory s o c i a l s a v in g ,

s c a r c ity o f land.

of e x p ro p ria tio n , if

o rig in a l lev e l.

o b v i o u s l y w ould f a l l d u e t o t h e

of c ap ita l.

In a d d itio n to

wages and i n t e r e s t ,

but the consequent

c o n t i n u e d l o n g eno u g h , would

e v e n t u a l l y r a i s e wages above t h e i r rates

Wages w o u l d

in crease

In terest

in th e

supply

t h e s e c h a n g e s i n econom ic r e n t ,

i n f l a t i o n w ould c a u se a c o n s i d e r a b l e

t r a n s f e r o f c a p i t a l from c r e d i t o r s t o d e b t o r s .

58

CHAPTER 7 EXAMINATION OF ASSUMPTIONS B e f o r e we c a n a p p l y t h e c o n c l u s i o n s o f t h e p r e v i o u s c h a p t e r s to th e grow th o f hank c r e d i t

in contem porary so ­

c i e t y we m u s t e x a m i n e ,

th e assu m p tio n s

w hich d i f f e r e n t i a t e sta te s.

That i s

one a t a tim e ,

o u r assum ed s t a t e

th e purpose o f t h i s

from c o n te m p o ra ry ch ap ter.

We w i l l

ta k e up t h e s e a s s u m p tio n s i n t h e o r d e r t h e y a r e g iv e n i n th e f i r s t

few p a g e s o f t h e t h e s i s . 1.

A s s u m p t i o n o f No F o r e i g n T r a d e .

The i n t r o d u c t i o n o f f o r e i g n t r a d e a s a f a c t o r d o e s not a l t e r th e e f f e c ts

of hank c r e d it,

b u t i t makes them

more co m p lex a n d l e s s

apparent because i t

ten d s to

d if­

fu se th e s e e f f e c t s o v er th e e n t i r e w orld. U n le ss th e grow th o f hank c r e d i t by s i m i l a r grow th i n o t h e r c o u n t r i e s ,

is

com pensated f o r

o r by changes i n th e

v e l o c i t y o f t u r n o v e r o f p u r c h a s i n g pow er o r i n th e number o f t r a n s a c t i o n s t o be e f f e c t e d , o u t and com m odities t o

it

w ill

flow in u n t i l

i n t h e home c o u n t r y h a s b e e n d i f f u s e d T his f o r e ig n i n f l a t i o n ,

o f course,

th e i n f l a t i o n

caused

o v e r t h e w hole w o r ld .

w i l l o c c u r o n l y i n com­

m o d i t i e s h a v in g an i n t e r n a t i o n a l m a r k e t, p e n s a te d f o r by a s u f f i c i e n t

cause g o ld t o flow

d eclin e

a n d w i l l b e com­

in th e p ric e le v e l o f

o t h e r co m m odities to m a i n t a i n th e p r i c e l e v e l f o r a l l

com-

53

m o d ifies a t

t h e s a m e l e v e l , ' e x c e p t i n so f a r a s t h e

in flo w

o f g o l d may p e r m i t a h i g h e r p r i c e l e v e l . T h e d i s p l a c e m e n t o f g o l d b y b a n k c r e d i t ??ould t e n d t o cushion the co u n try .

o f b an k c r e d i t upon p r i c e s

t h e i r c r e d i t w hether th e y w ish o r not and t h e r e - 1

th e y ought to ta k e

in to

c o n s i d e r a t i o n th e w orld need

f o r c r e d i t w henever t h e y e x te n d or c o n t r a c t c r e d i t money.

out lo sin g i t s bank c r e d i t , at a rate

in the r e s t

f a r above th e

co n tract in creasin g

w o rld 's av erag e . bank c r e d i t

at a rate

a v e r a g e and g o ld f l o w s o u t a n d c o m m o d i t i e s i n u n ­

a new w o r l d p r i c e

lev el is reached,

th e n a t i o n w hich e x p ro p ria te a por­

o f th e c u r r e n t incom e o f t h e r e s t o f t h e w o r l d ,

w i s e c o m m o d i ti e s would n o t flo w i n . in r e tu r n

for

ie n ts because

th ese

com m odities i s

at

v a lu e le s s to

c o n d itio n

t i o n o u g h t t o b e m ade t o i t a l and la b o r e x is t

sent

the r e c i p ­

i s alw ays s u f ­

t o t a l w e a l t h and income o f t h a t n a ­

some p r i c e l e v e l a n d a n a d d i t i o n a l

does not a l t e r th a t

o th er­

The g o l d w h i c h i s

t h e s u p p l y o f money i n a n a t i o n

f i c i e n t to purchase the tio n

w orld w i t h ­

u n l e s s com m odity p r o d u c t i o n i s a l s o

m an u factu res t h i s c r e d i t i s enabled to tio n

of the

gold r e s e r v e s and b e in g f o r c e d to

I f one co u n try does develop i t s above th e

the s u p p ly o f

No o n e c o u n t r y c a n g r e a t l y e x c e e d t h e r a t e

o f developm ent of bank c r e d i t

til

i n t h e home

In a s e n s e the b a n k e r s o f one n a t i o n have a w orld

m arket fo r fore

effect

in any way.

su p p ly o f gold One q u a l i f i c a ­

the above s t a t e m e n t .

in th e

re c ip ie n t n atio n ,

If the

id le

cap­

in fla tio n

con­

sequent upon th e r e c e i p t o f th e rent

incom e by b r i n g i n g t h i s

g o l d may i n c r e a s e

the

cur­

c a p i t a l and l a b o r i n t o u s e .

B u t t h e n a t i o n c r e a t i n g a d d i t i o n a l c r e d i t m o n ey h a s s e c u r e d t h e same r e s u l t s the

and o b t a i n e d co m m odities from a b ro a d a t

sam e t i m e w h i l e t h e r e c i p i e n t n a t i o n h a s b e e n f o r c e d

t o g i v e u p some o f i t s su lt.

current

incom e t o

These i n t e r n a t i o n a l e f f e c t s

secure th is r e ­

o f t h e grow th o f bank

c r e d i t h a v e b e e n d i s c u s s e d b y man y e c o n o m i s t s . them e m p h a size t h e g a i n fro m t h e money f o r g o l d a n d t h i s effect

is

Most o f

su b stitu tio n of cred it

b u t a d i f f e r e n t name f o r t h e

d is c u s s e d above as e x p r o p r ia ti o n o f f o r e ig n p u r ­

c h a s in g pow er. 2.

A ssum ption o f C a p ita lis m .

The a s s u m p t i o n o f c a p i t a l i s m w a s made s o t h a t o u r a s ­ s u m e d s o c i e t y s h o u l d b e a s much l i k e as p o s s ib le and y e t a llo w a l u c i d

co n tem p o rary s o c i e t y

a n a l y s i s o f t h e phenom­

ena o f bank c r e d i t . Under s o c ia lis m ,

of course,

i t w ould be d i f f e r e n t ,

th e e f f e c t s o f bank c re d ­

a s some p u r p o s e f u l c o n t r o l o v e r i t s

volum e w o u ld be e x e r c i s e d by t h e g o v e rn m e n t

in o rd er to

m a in ta in a ste a d y p r ic e l e v e l and a s te a d y r a t e developm ent. le g itim ate

M oreover,

th e

o f econom ic

i n t e r e s t on b a n k c r e d i t ab o v e

e x p e n s e s o f h a n d l i n g w ould p r o b a b l y be a p p r o ­

p r i a t e d by s o c i e t y th r o u g h t h e g o vernm ent. But even u n d e r c a p i t a l i s m t h e r e

is

a v e ry r e c e n t devel'

o p m e n t o f some c o n t r o l o f t h e v o l u m e o f b a n k c r e d i t a n d i t s

rate

o f grow th.

In th e U n ited S t a t e s th e F e d e ra l R eserve

System h as begun to e x e r c i s e as i t

is

successful i t w ill

d im in ish the e f f e c t s

such c o n t r o l and in so f a r a lt e r or ra th e r p ro p o rtio n a lly

o f bank c re d it

d iscu ssed in t h is

th e­

sis. The F e d e r a l R e s e r v e B o a r d h a s a n n o u n c e d i t s to prevent

in fla tio n .

purpose

I t has d e fin e d i n f l a t i o n as "the

p r o c e s s o f m aking a d d i t i o n s t o c r e d i t s n o t b a s e d upon a com m ensurate i n c r e a s e

i n t h e p r o d u c t i o n o f g o o d s " . ' 1’

a p p e a rs t h a t th e F e d e ra l R eserve o f f i c i a l s c u re a c o r r e l a t i o n betw een th e r a t e it

and th e r a t e

w ill

resu lt

It

d esire to

se­

o f grow th o f bank c r e d ­

o f g r o w th o f com m odity p r o d u c t i o n ,

w hich

i n a s t e a d y p r i c e l e v e l and a s t e a d y r a t e

b u sin e ss expansion.

of

W hile t h e F e d e r a l R e s e r v e S y ste m d i d

n o t p re v e n t th e com plete b u s in e s s c y c le o f 1919-1929, may h a v e b e e n p a r t l y r e s p o n s i b l e f o r t h e r e l a t i v e l y b le p r i c e l e v e l o f th e y e a rs 1923-29.

it

sta­

The q u e s t i o n o f t h e

a c t u a l power o f t h e F e d e r a l R e se rv e o f f i c i a l s

to c o n tro l

b a n k c r e d i t a n d t h e q u e s t i o n o f how much t h e y h a v e a c c o m p ­ l i s h e d o r w i l l a cco m p lish c an n o t be d is c u s s e d h e re . It

s h o u l d be n o t e d t h a t

th e F e d e r a l R eserv e System

is not attem p tin g to r a d ic a lly in cre ase

o r d e c re a se the

amount o f bank c r e d i t .

s h o u l d do e i t h e r

of th ese th in g s

I n so f a r a s i t

i t w ould p r o p o r t i o n a l l y i n c r e a s e o r d e -

1 F e d e ra l R eserve B u l le t in ,

Ju ly 1,

1919,

614.

62

c rease th e e f f e c ts

o f bank c r e d i t a lre a d y d is c u s s e d in t h i s

th e sis.

R ath er i t

is

in crease

i n t h e amount o f b a n k c r e d i t

a ttem p tin g to s t a b il i z e so t h a t

the r a t e

of

flu ctu atio n s

in t h i s r a t e w ill no t cause f lu c tu a tio n s in b u sin e ss a c t i v ­ ity .

¥/hen we t a k e u p o u r a s s u m p t i o n a s t o t h e r a t e

of crea­

t i o n o f new b a n k c r e d i t i n o u r i m a g i n a r y s o c i e t y we w i l l d i s c u s s t h i s problem a t le n g t h . out here

is

th at

n atio n s a lte r s of its

rate 3.

A ll t h a t n eeds to be p o in te d

c e n t r a l c o n t r o l o f b a n k c r e d i t i n modern

o n ly one e f f e c t

of bank c r e d i t ,

th e e f f e c t

of creatio n .

A s s u m p t i o n o f G o l d C u r r e n c y a n d A m o u n t.

I f a p o rtio n o f th e

o r i g i n a l c u r r e n c y i n o u r assum ed

s o c i e t y h a d b e e n g o v ern m en t p a p e r money, n o t r e d e e m a b le i n gold o r s i l v e r ,

the

e f f e c t s o f th e

i t w ould have b e en th e a g old cu rren cy o nly,

in tro d u c tio n o f bank c re d ­

same a s we h a v e f o u n d t h e m t o b e w i t h but th e e ff e c t o f in tro d u c in g fo re ig n

t r a d e w o u ld be d i f f e r e n t . o f bank c r e d i t a t a r a t e

W ith f o r e i g n t r a d e and c r e a t i o n above t h e w o rld a v e ra g e o n ly th e

g o ld p o r t i o n o f t h e o l d c u r r e n c y w ould flo w a b r o a d . w ere enough o f t h i s g o ld c u r r e n c y to e f f e c t

I f th ere

a new e q u i l i ­

b r i u m o f f o r e i g n a n d d o m e s t i c p r i c e l e v e l s a t some h i g h e r l e v e l t h e n t h e e f f e c t s w ould be no d i f f e r e n t f r o m w here a l l It

th e

case

th e o ld cu rre n cy had been gold.

is p e rfe c tly p o ssib le ,

how ever,

to

w here t h e r e m ig h t n o t be enough g o ld i n th e a b ro a d and r a i s e f o r e i g n p r i c e

lev e ls

im agine a c ase c u rre n c y to flow

su fficie n tly

to e s ta b ­

63 lish

a new e q u i l i b r i u m .

w hat w ould h a p p e n i f

a ll

To m ake t h i s

c le ar le t

us co n sid er

the old c u rre n c y in use b e fo re th e

i n t r o d u c t i o n o f bank c r e d i t had b e en ir r e d e e m a b l e governm ent p a p e r money.

In such a c a se d o m estic p r i c e

i n f l a t i o n co uld

n o t cause a s o - c a lle d u n fav o ra b le b a la n ce o f tra d e because t h e r e w ould be no g o l d c u r r e n c y to e x p o r t .

T h is w ould r e n ­

d e r im p o s s ib le any e x p r o p r i a t i o n o f c u r r e n t f o r e i g n incom e, o r economy o f g o l d as. i t

is

c a l l e d by some.

T here w ould a l ­

so be no e f f e c t upon t h e l e v e l o f f o r e i g n p r i c e s w ould be no e x p o r t o f g o ld t o

in crease

sin ce th e re

fo re ig n p u rch asin g

power n o r any im p o rt o f c o m m o d ities, u n f a v o r a b le b a la n c e o f trad e,

to d e p le te the

tie s.

Thus a l l

f o r e i g n s u p p l y o f e x c h a n g e a b l e c o m m o d i­

o f th e e f f e c t s o f the

in tr o d u c tio n o f bank

c r e d i t w o u l d be c o n f i n e d t o t h e home c o u n t r y u n d e r a p a p e r m o n ey r e g i m e .

The s o l e e x t e r n a l

e f f e c t w o u ld be u p o n t h e

f o r e i g n e x ch an g e v a l u e o f t h e d o m e s tic p a p e r c u r r e n c y w hich w ould so f l u c t u a t e course,

as to b alan ce

im p o rts and e x p o r ts .

f o r e ig n s p e c u l a ti o n in th e d o m estic c u rre n c y ,

Of such

a s A m e ric a n s p e c u l a t i o n i n t h e German m a rk , w o u ld a l t e r t h e s e co n clusions

in the

sam e way a s w o u l d f o r e i g n l o a n s .

T he a s s u m p t i o n o f a d e f i n i t e th irty

b illio n

d o lla rs,

amount o f g o l d c u r r e n c y ,

w a s made t o

fa c ilita te

illu stra tio n

of th e th e o ry of d i f f e r e n t i a l r a t i o s . 4.

A ll B anking F a c i l i t i e s , R eserve B ehind a l l

b u t a One H u n d r e d P e r c e n t

Demand D e p o s i t s .

T h is i s m e re ly one o f t h e a s s u m p tio n s n e c e s s a r y t o

the

64 purpose of our t h e s i s as e x p la in e d in th e in tr o d u c tio n . few e c o n o m i s t s s t i l l

b eliev e

th at th is

is

a c tu a lly the

d i t i o n w hich e x i s t s i n c o n te m p o ra ry s o c i e t y , do n o t b e l i e v e

is,

con­ th ey

t h a t b a n k s c r e a t e p u r c h a s i n g p o w e r a n d whe n

th ey d isc u ss th e b e n e f its f e r e x c lu s iv e ly to from p la c e

th at

A

o f b an king th e y r e ­

such s e r v ic e s as th e t r a n s f e r o f funds

to p la c e ,

ment o f s a v i n g s ,

and e f f e c t s

t h e s a f e - k e e p i n g o f money,

e tc .,

the in v e s t­

and e i t h e r ig n o re o r deny th e c r e a ­

t i o n o f p u r c h a s i n g pow er. W hether th e a ll

the f i s c a l

do i f

c o m m e rc ia l b a n k s w ould be a b l e t o r e n d e r

s e r v i c e s t h e y now r e n d e r a s c h e a p l y a s t h e y

t h e y w ere d e p riv e d o f th e

enorm ous p r o f i t s r e s u l t i n g

from th e c r e a t i o n o f bank c r e d i t i s g la n c e a t herev

a q u e s t i o n we c a n o n l y

C e r t a i n l y th e number o f im p o sin g bank

b u i l d i n g s i n t h e o r d i n a r y A m e ric a n tow n o r c i t y w o u ld be co n sid erab ly sm a ller.

P e r h a p s two b a n k s i n a com m unity

c o u l d p r o v i d e t h e sa m e b a n k i n g f a c i l i t i e s th ree,

four or fiv e ,

cate each o th e r.

how o f f e r e d b y

fo r th e ir a c tiv itie s la rg e ly d u p li­

M oreover,

t h e p e o p l e who p r o f i t

from

w h a t e v e r b a n k i n g s e r v i c e s a r e now g i v e n b e l o w c o s t a r e n o t t h o s e who s u f f e r a l o s s o f r e a l i n c o m e a s a r e s u l t o f t h e e x t e n s i o n o f bank c r e d i t T herefore,

it

and c o n seq u e n t l a r g e p r o f i t s .

w ould h a r d l y be f a i r t o a r g u e t h a t t h e b a n k s

o u g h t t o b e a l l o w e d t o make l a r g e p r o f i t s it

in o rd er to

co st.

from bank c r e d ­

e n a b l e th em t o r e n d e r o t h e r s e r v i c e s below

65 T h e r e may v e r y w e l l h e some q u e s t i o n a s t o w h e t h e r t h e ab o v e a s s u m p t i o n o f a one h u n d r e d p e r c e n t hind a l l

reserve be­

demand d e p o s i t s an d b a n k n o t e s a u t o m a t i c a l l y e l i m ­

i n a t e s th e p o s s i b i l i t y o f any bank c r e d i t b e in g in u s e . is p o ss ib le th a t b a n k e rs’ accep tan ces,

lette rs

t r a v e l e r s 1 cheques and o t h e r such c r e d i t make p o s s i b l e

It

of c re d it,

i n s t r u m e n t s m ight

t h e c r e a t i o n o f a c e r t a i n v e r y s m a l l amount

o f p u r c h a s in g pow er by th e banks even u n d e r th e above a s ­ sum ption.

For th a t reason th is

in s p i r i t

as w ell as l i t e r a l l y .

assu m p tio n ought to be a c c e p te d O r i t may b e a c c e p t e d l i t e r ­

a l l y o n l y i f we a r e c o n t e n t w i t h a p p r o x i m a t i o n s ,

since

it

cer­

t a i n l y does exclude n in e ty - n in e p e rc e n t o f th e bank c r e d i t

in

u se i n a m odern s o c i e t y . A m o r e v i t a l p o i n t a s r e g a r d s t h e sa m e q u e s t i o n i s c o n c e rn in g tim e d e p o s i t s .

Some e c o n o m i s t s b e l i e v e

th at

t h a t new

b a n k c r e d i t may a p p e a r i n t h e f o r m o f t i m e d e p o s i t s . ' 1'

The

^ " I t w ould have b e en i m p o s s i b l e f o r bank c r e d i t t o have e x p a n d e d a s f a s t a s i t h a s done on t h e b a s i s o f a v a i l ­ ab le s u rp lu s re s e rv e s i f a l l o f th e d e p o s its g e n era te d by t h i s e x p a n s i o n h a d t a k e n t h e fo rm o f demand d e p o s i t s . The l e g a l r e s e r v e r e q u i r e d f o r t i m e d e p o s i t s i s o n l y t h r e e p e r c e n t , w h e r e a s f o r demand d e p o s i t s t h i r t e e n p e r c e n t i s r e q u i r e d i n c e n t r a l r e s e r v e c i t i e s (New;York and C h ic a g o ), t e n p e r c e n t i n r e s e r v e c i t i e s , and sev en percent in o th er p lac es. . . . "W hile i n c o u n t r y b a n k s , and i n t h e t h r i f t a c c o u n t s o f c i t y ban k s, tim e d e p o s i t s a r e u s u a l l y t r u e s a v in g s d e­ p o s i t s , i t i s w e l l r e c o g n i z e d among b a n k e r s t h a t t h e t i m e d e p o s i ts o f th e g r e a t c i t y banks a re in a la r g e m easure th e te m p o ra rily i d l e funds o f b u s in e s s c o r p o r a tio n s , o f f o r e i g n b a n k s , o r o f l a r g e i n v e s t o r s who do n o t i n t e n d t o l e a v e th e m i n d e f i n i t e l y a t compound i n t e r e s t w i t h t h e b a n k , b u t who h a v e p u t t h e m i n t h e f o r m t o t i m e d e p o s i t s p r i m a r i l y b e c a u se o f th e h i g h e r i n t e r e s t to be o b t a i n e d th ereb y . T h e y may s h i f t t h e m f r o m t h e t i m e t o t h e d e m a n d

66 w riter,

how ever,

c o n s i d e r s a tim e o r s a v in g d e p o s i t to he

n o t h i n g more o r l e s s

th an a s o r t

of fo o tp rin t

o r book r e ­

c o r d sh o w in g t h e p a t h t a k e n i n t h e p a s t by a c e r t a i n amount o f p u r c h a s in g pow er,

c u r r e n c y o r demand d e p o s i t s .

The t i m e

d e p o s i t m e r e ly r e c o r d s t h e t r a n s f e r o f p u r c h a s i n g power fro m one p e r s o n t o a n o t h e r and t h e amount o f p u r c h a s i n g power o r b ank c r e d i t fer.

a

sp ecific

is the

same b e f o r e a n d a f t e r t h i s

a m o u n t o f p u r c h a s i n g p o w e r may b e d e p o s i t e d

i n a bank a s a tim e d e p o s i t , chase o f bonds, a tim e d e p o s i t

used by th e bank f o r th e p u r­

r e d e p o s i t e d by t h e i n t h e sa m e b a n k ,

f o r th e p u rch ase o f bonds, fin itu m ,

u n til th is

s e l l e r o f th e bonds as

a g a in u se d by th e banks

re d e p o site d ag ain ,

sp ecific

are the f o o t p r in t s o f i t s

e tc .,

ad i n ­

amount o f p u r c h a s i n g pow er h a s

c r e a t e d a s c o r e o f tim e d e p o s i t s i n i t s

5.

tran s­

jo u rn ey in g s.

They

passage.

C a p ita l W ealth o f $ 3 0 0 ,0 0 0 ,0 0 0 ,0 0 0 . and no S o c i a l S a v in g .

The a s s u m p t i o n o f a d e f i n i t e lik e

amount o f w e a l t h was made,

th e a s s u m p tio n o f a d e f i n i t e amount o f p u r c h a s i n g p ow er,

in o rd e r to perm it e n tia l ra tio s. to one,

is

i l l u s t r a t i o n o f the p r in c ip a l of d i f f e r ­

The r a t i o

o f w e a lt h t o p u r c h a s i n g pow er,

a p p r o x i m a t e l y t h e same a s t h a t

1 (c o n td .) form . One o f t h e f i r s t demand f o r money i s n o t ness co rp o ra tio n s, but t h e t i m e t o t h e demand No. 3 , 1 4 .

ten

found in th e U n ited

sym ptoms o f i n c r e a s i n g c o m m e r c ia l in c r e a s e d b o rro w in g s by g r e a t b u s i ­ th e s h i f t i n g o f t h e i r d e p o s i t s from fo rm ." A nderson, o p . c i t . , V o l. V I,

S tates

to d ay .

The a s s u m p t i o n o f no s o c i a l s a v i n g was n e c e s s a r y i n o r i

der to

secure a s t a t i c

econom ic s t a t e

t h e dynamic f a c t o r o f bank c r e d i t .

i n w hich t o

S aving a lo n e has v e ry

im p o rta n t e f f e c t s upon th e p r i c e l e v e l , d u ctio n ,

upon d i s t r i b u t i o n

in tro d u ce

upon volum e o f p r o - 1

o f incom e and o t h e r econom ic p h e ­

n o m e n a w h i c h we h a v e f o u n d t o b e m a r k e d l y a l t e r e d b y b a n k c re d it.

In o rd e r to

t h e s e phenomena i t

iso late

the s u p p l y o f e x c h a n g e a b le c a p i ­

and co n su m ab le c o m m o d itie s w i t h o u t

o f p u r c h a s in g pow er. p rice d e fla tio n .

o f bank c r e d i t upon

was n e c e s s a r y t o assum e no s o c i a l s a v i n g .

R eal saving in c re a s e s ta l

the e f f e c t s

It

in creasin g

the s u p p ly

O ther f a c t o r s b e in g e q u a l t h i s is th is

d eflatio n ary e ffe c t

causes

of r e a l

s a v in g w hich c o m p e n sa te s fo r and t h u s i n e f f e c t h i d e s t h e in fla tio n a ry ieties. now ,

e f f e c t o f bank c r e d i t

For in sta n c e ,

i n m odern econom ic s o c ­

in the U nited S ta te s annual sav in g s

1929, amount r o u g h l y t o

a b o u t $ 1 5 ,0 0 0 ,0 0 0 ,0 0 0 w hile

th e annual in c re a s e in bank c r e d i t i s S ince th e

ratio

to one i t

fo llo w s,

tia l

ratio s,

about $ 1 ,5 0 0 ,0 0 0 ,0 0 0 .

o f w e a l t h t o p u r c h a s i n g power i s a b o u t

th at

acco rd in g to an i n c r e a s e

the p r i n c i p l e

in th e

l e v e l te n tim es a s g r e a t a s th e

of d ifferen ­

su p p ly o f p u rchasing

pow er o f a g i v e n amount h a s an i n f l a t i o n a r y p rice

ten

e f f e c t upon th e

d efla tio n a ry

effect

o f a n e q u a l a d d i t i o n t o t h e s u p p l y o f e x c h a n g e a b l e com m od i­ tie s.

Thus t h e d e f l a t i o n a r y e f f e c t o f th e

$ 1 5 ,0 0 0 ,0 0 0 ,0 0 0

a n n u a l s a v in g s i n th e U n ite d S t a t e s ro u g h ly com pensates f o r and c o m p le te ly o b sc u re s th e

in fla tio n a ry e ffe c t of th e

68

# 1 ,5 0 0 ,0 0 0 ,0 0 0 o f an n u al average a d d itio n s to th e p u r c h a s in g pow er*1 ic

supply of

Of c o u r s e i n a c o m p l e x a n d d y n a m i c e c o n o m ­

s i t u a t i o n s u c h a s we e n c o u n t e r

in th e U nited S ta te s today

t h e r e a r e many o t h e r f a c t o r s w h ic h c o m p l i c a t e o r o b s c u r e t h e e f f e c t s of bank c r e d i t , tan ce w ith le g itim a te facto rs,

b u t none o f th e m compare i n im p o r­

sav in g s.

These o t h e r l e s s

im portant

how ever, have been d is c u s s e d o r w i l l be d is c u s s e d

in th e p o rtio n s of t h i s tio n s re la tiv e

c h a p t e r w hich d e a l w ith

the assum p­

to them .

I f t h e econom ic phenomena o f s a v i n g w ere i n t r o d u c e d i n ­ t o o u r assum ed s o c i e t y none o f th e e f f e c t s o f b an k c r e d i t w ould be a l t e r e d b u t th e i n f l a t i o n a r y f o r c e o f th e o f b an k c r e d i t w ould s e r v e ing in s te a d haps i t

of a c tu a lly

ten t as i t

w ould have i f

to p r e v e n t d e f l a t i o n due t o

in creasin g

w ould c a u s e p r i c e

grow th

th e p ric e

in fla tio n but not

lev e l, to the

sav­

or p er­ sa m e e x ­

t h e r e h a d b e e n no s a v i n g s .

I n contem porary s o c i e t y bank c r e d i t p e rfo rm s a v a lu a b le fu n c tio n in p rev e n tin g d e f la tio n

of p r i c e s and c o n seq u e n t

1 MA g e n e r a l i n c r e a s e o f p u r c h a s i n g p o w e r , a r i s i n g f r o m n o r m ­ a l c r e d i t , a c t s u p o n p r i c e s i n no o t h e r way t h a n w o u l d a n in c re a se d p ro d u c tio n of a l l goods. . . .I n th e l a s t t h i r ­ t y y e a r s , i n f a c t , we h a v e s e e n a n e n o r m o u s e n l a r g e m e n t o f t h e o u t p u t o f g o o d s , a n d w i t h i t h a s come a c o r r e s p o n d ­ ing e x p an sio n o f bank d e p o s i ts , b u t y e t the p r i c e s of each u n i t (to n , b u s h e l, e t c . ) of goods a re , in g e n eral le s s to ­ day th a n a t the b e g in n in g of t h i s p e r io d . n L au g h lin , o p . c i t . , p.94-5 > The f i r s t s e n t e n c e o f t h e a b o v e q u o t a t i o n a m o u n t s t o a n o u t ­ r i g h t c o n t r a d i c t i o n o f an y form o f t h e q u a n t i t y t h e o r y o f money. The s e c o n d s e n t e n c e s h o w s how t h e c o m p e n s a t o r y a c ­ t i o n u p o n p r i c e s o f a n i n c r e a s e i n t h e s u p p l y o f c o m m o d i­ t i e s h i d e s t h e e f f e c t o f b a n k c r e d i t f r o m t h e e y e s o f some e co n o m ists.

b u sin ess d ep ressio n ,

but th is

f u n c t i o n c o u ld be p e rfo rm e d

e q u a l l y w e l l a n d p r o b a b l y m u ch b e t t e r b y t h e g o v e r n m e n t , it

if

w ould a d o p t I r v i n g F i s h e r ’ s p r o p o s e d m ethod o f s t a b i l i z ­

in g th e d o l la r o r th e in g s.

s i m i l i a r p ro p o s a l o f F o s te r and C atch -

E i t h e r o f t h e s e l a t t e r p l a n s w ould e l i m i n a t e e x p r o ­

p riatio n ,

s p e c u l a ti o n and o t h e r u n d e s ir a b le

c r e d it as w ell as i n f la ti o n .

e f f e c ts o f bank

S a v in g s m e re ly com pensate f o r

the l a t t e r e f f e c t w ith o u t a l t e r i n g

th ese o th e r e ffe c ts

o f th e

grow th o f bank c r e d i t . 6.

A ssu m p tio n o f no Change i n P o p u l a t i o n .

T his assum p tion e lim in a te s m e n tio n e d above w hich t e n d t o effects

of bank c r e d i t .

in c re a se ten d s to

the lim ite d

a n a ly s is o f the

O t h e r f a c t o r s r e m a i n i n g t h e same

s p e e d up t h e v e l o c i t y

of tu rn o v er of

s u p p l y o f p u r c h a s i n g pow er and so h a s a s l i g h t

in fla tio n a ry e ffe c t. it

co m p licate the

I n c o n te m p o r a r y econom ic s o c i e t i e s

p o p u la tio n does in c re a s e . th is

one o f t h e m in o r f a c t o r s

If

in tro d u ced in to

o u r assum ed s o c i e t y

w ould a l s o h av e an e f f e c t upon t h e volum e o f p r o d u c t i o n

th r o u g h p r o v i d i n g a l a r g e r number o f l a b o r e r s each y e a r . T h is in c re a s e

in th e

s u p p ly o f c o m m o d itie s w ould h a v e a d e ­

f l a t i o n a r y e f f e c t w h ic h w o u ld p r o b a b l y more t h a n o f f s e t t h e in fla tio n a ry

e f f e c t o f th e p a r a l le l

o f tu r n o v e r o f p u rc h a s in g pow er.

in crease

in th e v e lo c ity

T hese e f f e c t s w ould a l t e r

n o n e o f o u r c o n c l u s i o n s b u t w ould m e r e ly c o n s t i t u t e f o r c e s tow ard i n f l a t i o n

and d e f l a t i o n .

a d d itio n al

70 7 . A s s u m p t i o n o f a C o n s t a n t A n n u a l Volume o f P r o d u c tio n , V alue # 9 0 ,0 0 0 ,0 0 0 ,0 0 0 . T h is a s s u m p tio n i s v e ry s i m i l a r to has the

sam e p u r p o s e , v i z . ,

p ly o f com m odities. self

e lim in a te d the

d u ctio n ,

th at

o f no s a v i n g and

to p rev e n t any changes in the su p ­

I n d e e d , t h e a s s u m p t i o n o f no s a v i n g

it­

c h i e f c a u s e o f i n c r e a s e s i n com m odity p r o -

and the assu m p tio n o f no i n c r e a s e

in p o p u latio n e -

U m inated a n o th e r c a u s e . But t h e r e a re o t h e r c a u s e s o f an i n c r e a s e w hich have n o t been e l i m i n a t e d . tio n s,

Some o f t h e s e

in p roduction a r e new i n v e n ­

s u p e r i o r t e c h n i c a l e d u c a t i o n , d i s c o v e r s ^ o f new m i n e r a l

resources,

e tc.

These f a c t o r s ,

if

in tro d u ced in to

o u r assum ed

s o c i e t y , w o u l d h ave' p r e c i s e l y t h e s a m e e f f e c t u p o n t h e le v e l as leg itim ate

sav in g,

th at

i s t h e y would t e n d to c a u s e

a p ric e d e f la tio n and th u s obscure th e

grow th o f

bank c r e d i t .

iod

of years,

t h e y do n o t c o m p a r e

the

W hilev e ry

as regards th e ir d e fla tio n a ry

p rice

in fla tio n a ry effect of im portant over a p e r­

in im p o rtan ce w ith s a v in g

effect

in any one y e a r .

8 . U nchanging V e l o c i ty of T u rn o v e r,

B oth

f o r C o m m o d itie s a n d Money. T his assu m p tio n h o ld s tr u e in c o n te m p o ra ry s o c i e t y and t h a t money i s u s u a l l y i n e x a c t l y a change in th e the

p rice

Its

purpose i s ,

facto r

to a c o n s i d e r a b le d e g re e even i s why t h e q u a n t i t y t h e o r y o f

form ulated in

the b r i e f s t a te m e n t ,

s u p p l y o f m o ney c a u s e s a p r o p o r t i o n a l c h a n g e i n

l e v e l u n l e s s th e su p p ly o f com m odities i s o f c o u r s e , t o rem ove

altere d .

a n o th er co m p licatin g

in the d e te rm in a tio n o f~ th e p r ic e

lev e l a fte r

the introduction of bank credit. 9, T h is i s

F u l l Employm ent o f C a p i t a l and L a b o r . a v e ry im portant

w hich a c t u a l l y a f f e c t s

a s s u m p tio n and one o f th e

as w ell as f a c i l i t a t e s

few

our conclu­

s i o n s a s t o t h e econom ic c o n s e q u e n c e s o f t h e c r e a t i o n o f p u r c h a s in g power by b an k s.

It

req u ires

c a re fu l co n sid era­

t i o n b ecau se in contem porary s o c i e t y th e r e

i s u s u a lly a con­

s i d e r a b l e d e g r e e o f unem ploym ent o f b o t h c a p i t a l and l a b o r s o t h a t we m u s t a l t e r o u r c o n c l u s i o n s t o f i t econom ic c o n d i t i o n s . place sis

th ese

actu al

T h i s a s s u m p t i o n w a s m ade i n t h e f i r s t

i n o r d e r to s i m p l i f y and c l a r i f y

the d e ta ile d a n a ly ­

o f b a n k c r e d i t and b e c a u s e i t was t h o u g h t t h a t

th is

fac­

t o r c o u l d b e s t u d i e d t o much b e t t e r e f f e c t w h e n i s o l a t e d

it­

self. A c c o r d i n g t o t h e w e l l kn ow n p r i n c i p l e s supply th e r e

is

o f demand an d

o n ly one means o f d i s p o s i n g o f goods and

s e r v i c e s w hich p e o p le w i l l n o t buy a t c u r r e n t p r i c e s ,

and

th at

is

en­

tire

s u p p l y of t h e m .

r e d u c t io n o f p r i c e s u n t i l p e o p le w i l l buy t h e Thus w h e r e v e r t h e r e

o f l a b o r o r c a p i t a l we may c o n c l u d e t h a t r e a l wages,

re a l ren ts,

charges w ill r e s u lt v alu ab le resu lt forces,

is

an o v e rs u p p ly

a red u ctio n

re a l q u asi-ren ts,

and i n t e r e s t

i n a more c o m p l e t e u t i l i z a t i o n

so cial resources.

Now i n f l a t i o n ,

in

the

o f th ese

in ev itab le

o f bank c r e d i t u n le s s o f f s e t by o th e r d e f l a t i o n a r y a c t u a l l y d e c r e a s e s r e a l wages th u s l e a d i n g t o a

f u l l e r employm ent o f l a b o r .

It

also

c a u s e s a f u l l e r em ploy-

72 m ent o f th e c a p i t a l r e s o u r c e s o f a s o c i e t y , b o n d h o l d e r s who c o n t r i b u t e a l a r g e to a c c e p t a d im in ish ed r e a l

p a rtly because

share of i t

are

forced

income f o r t h e u s e o f i t

and

p a r t l y because b u sin e ss p r o f i t s in c re a s e , th u s enab lin g b u s i n e s s m en t o p a y m o r e f o r t h e u s e o f c a p i t a l n o t o w ne d b y o r r a t h e r of th is

c o n tr ib u te d by bond h o l d e r s .

stim u lu s to th e use

and c a p i t a l

fa c ilitie s

of h ith e rto

Much

unem ployed l a b o r

i s founded upon an i l l u s i o n , a n

illu s io n of

th e w o rk e rs and ow ners o f t h i s unem ployed c a p i t a l t h a t t h e i r demands a r e b e in g s a t i s f i e d when t h e y a r e

offered

t h e p r e v i o u s l y d e s i r e d d o l l a r wa ge o r r e n t o r q u a s i - r e n t f o r th e use o f t h i s la b o r and c a p i t a l . due to t h e a c t u a l l y i n c r e a s e d p r o f i t

But m ost o f i t

is

stim u lu s or in c e n tiv e

to p ro d u c tio n . The i n c r e a s e d

supply o f

com m odities r e s u l t i n g

from

u t i l i z a t i o n o f p r e v i o u s l y unem ployed l a b o r and c a p i t a l w i l l h a v e some, b u t v e r y

slig h t,

d e f l a ti o n a r y e f f e c t upon th e

1 ’*0f c o u r s e , t h e s t i m u l u s o f r i s i n g p r i c e s i s p a r t l y founded in i l l u s i o n . The s a l a r i e d o f f i c i a l a n d t h e T r a d e U n i o n i s t h a v e b e e n b e g u i l e d i n t o a c c e p t i n g em­ ploym ent f o r a lo w e r r e a l rew ard t h a n th e y in te n d e d . Even t h e b u s i n e s s l e a d e r i s t h e v i c t i m o f i l l u s i o n ; f o r he i s s p u r r e d o h , n o t o n l y by r e a l g a i n s a t t h e e x p en se o f h i s d e b e n t u r e - h o l d e r s and h i s d o c to r and even (w ith a l i t t l e lu c k ) o f h i s w o rk p eo p le, b u t a ls o by im ag in ary g a in s a t th e expense o f h i s fe llo w b u s i ­ n e s s men. I t is hard a t f i r s t to b e lie v e th a t o th e r p e o p le w i l l r e a l l y h a v e t h e e f f r o n t e r y o r th e good f o r t u n e t o r a i s e t h e i r c h a r g e s a s m u ch a s he h a s r a i s e d h i s ow n. But w hether r e a l or i l l u s o r y th e spur i s e f f e c t i v e ; . . . . rl B o b e r t s o n , o p . c i t . , p . l S 4 .

73

p rice le v e l.1

T h is e f f e c t w i l l be s l i g h t

lo a n can buy and t u r n i n t o tal

th an th e

learn ed th a t

b e c a u s e no b an k

c o m m o d itie s more l a b o r and c a p i ­

d o lla r v alu e o f th e lo a n .

We h a v e a l r e a d y

in accordance w ith the d i f f e r e n t i a l

ory an e q u a l a d d it i o n to th e

ratio

th e­

s u p p ly o f com m odities and p u r ­

c h a s i n g p o w e r w o u l d c a u s e n i n e t y p e r c e n t a s much i n f l a t i o n as a sim i-la r

in crease

i n p u r c h a s in g power w ith o u t any i n ­

c r e a s e in th e su p p ly o f com m odities.

M oreover,

in a r r i v ­

i n g a t o u r p r e v i o u s c o n c l u s i o n s we h a d a l r e a d y a s s u m e d t h a t th e u se o f bank c r e d i t , ta l uses,

by t u r n i n g consum able goods t o c a p i ­

i n c r e a s e d th e s u p p ly o f com m odities by th e

fu ll

v a lu e o f the lo a n . But th e u t i l i z a t i o n

o f p r e v i o u s l y unu sed l a b o r and

c a p i t a l does have an im p o rta n t b e a r in g upon o u r c o n c lu s io n t h a t the

c r e a ti o n o f bank c r e d i t

th e c u rre n t r e a l w orkingm en. purchase

causes e x p ro p ria tio n of

incom e o f s o c i e t y a t l a r g e ,

ch iefly of

E o r s o f a r a s t h e n e w b a n k m on ey i s u s e d t o

s e r v i c e s and c o m m o d itie s w h ich o t h e r w i s e w ould n o t

”A p r o g r e s s i v e i n c r e a s e i n t h e s u p p l y o f m o n e y a n d r i s e i n th e p r i c e - l e v e l , so lo n g a s i t i s n o t so b l a t a n t as to g e n e ra te s o c i a l d i s o r d e r o r sap th e fo u n d a tio n s o f c o n t r a c t , b y a d d i n g t o t h e m on ey de mand f o r g o o d s s t i m u l a t e s a l s o t h e p r o d u c t i o n o f g o o d s; by b e n e f i t ­ in g th e p o ck ets o f th e c o n tr o l le r s of in d u s try , stim ­ u l a t e s a l s o t h e i r e n e r g i e s and a c t i v i t i e s ; by p u t t i n g f a c i l i t i e s i n t o t h e h a n d s o f t h o s e who f e e l c o n f i d e n c e i n th em selv es adds so m ething to th e e f f e c t i v e b r a i n power m o b iliz e d i n th e s e r v i c e o f i n d u s t r y . And t h i s f i l l i p to p r o d u c t i o n , by a d d in g t o th e flo w o f goo d s, s e r v e s t o m o d erate t h e v e r y r i s e i n p r i c e s w hich g iv e s i t b i r t h . ff R o b e r t s o n , o p . c i t . , p . l 2 5 .

74 have been p u rc h a se d a t a l l , larg e

then,

to th a t e x te n t,

i s n o t d e p r iv e d o f co m m o d ities and s e r v i c e s

have consum ed and l e s s e x p r o p r i a t i o n t a k e s p l a c e .

so ciety at it

would

T his un­

d o u b t e d l y o c c u r s d u r i n g boom p e r i o d s o f b u s i n e s s i n c o n t e m ­ porary so c iety ,

but w hether in th e lo n g run bank c r e d i t

c a u s e s a more c o m p l e t e u t i l i z a t i o n

o f l a b o r and c a p i t a l as

a re s u lt of i ts

is

For,

in fla tio n a ry

though bank c r e d i t

in fla tio n ,

th is

force

decidedly d o u b tfu l.

grow th i s a p o w e rfu l f o r c e to w ard s

force is

o ften e n tir e ly

com pensated f o r o r

o f f s e t by t h e d e f l a t i o n a r y f o r c e s d i s c u s s e d a b o v e , is

actu al p rice

in fla tio n ,

and i t

n o t t h e e x t e n s i o n o f new b a n k

c r e d i t w h ic h b r i n g s a b o u t t h e more c o m p le te u t i l i z a t i o n l a b o r a n d c a p i t a l we a r e d i s c u s s i n g .

of

On t h e o t h e r h a n d ,

if

th e f o r c e s to w a rd s d e f l a t i o n were u n r e s t r a i n e d t h e y m ig h t w e l l c a u s e a p e rm a n e n t b u s i n e s s d e p r e s s i o n , w h ich w ould d ecrease th e u t i l i z a t i o n e l co n seq u e n t upon s t a b l e ing t h i s

o f l a b o r and c a p i t a l below t h e l e v ­ p rices.

In th e sense o f p re v e n t­

d e c r e a s e b a n k c r e d i t may c e r t a i n l y b e s a i d t o b r i n g

a b o u t an i n c r e a s e d u t i l i z a t i o n

of th ese reso u rces.

la rg e p ro p o rtio n of e x p ro p ria tio n is these

situ atio n s

wages,

real

sin ce

it

is

in v o lv e d in any o f

e x p ro p r ia tio n th a t low ers r e a l

f i x e d i n t e r e s t p aym ents,

bu sin ess p r o f its ,

But a

e tc .,

and in c r e a s e s

t h u s e n a b l i n g b u s i n e s s men t o u t i l i z e

pre­

v i o u s l y unem ployed l a b o r and c a p i t a l . It ficia l

s h o u ld be n o t e d , effects,

m oreover,

th at

if

so c ia lly bene­

s u c h a s t h e em ploym ent o f p r e v i o u s l y unem-

75 p lo y e d l a b o r and c a p i t a l ,

do r e s u l t

from th e i n f l a t i o n a r y

f o r c e o f new b a n k c r e d i t ,

th ese b e n e fic ia l e ff e c ts

e a s i l y be s e c u r e d by o t h e r m ethods o f i n f l a t i n g v en tin g th e d e fla tio n

p rice lev e l

or pre­

o f p r i c e s w ith o u t any e x p r o p r ia tio n

oceuirihg in th e p r o c e s s . money w o u ld e i t h e r

co u ld

For in stan ce,

the

issu e

of fiat

i n f la te o r p rev e n t th e d e f l a ti o n of the

a n d t h u s h a v e t h e sa m e e f f e c t u p o n t h e e m p l o y ­

m e n t o f o t h e r w i s e w a s t e d l a b o r a n d c a p i t a l t h a t we h a v e a sc rib e d to bank c r e d it in th e p rev io u s parag rap h . 10.

I n t r o d u c t i o n o f Bank C r e d i t .

T h is a ssu m p tio n r e q u i r e s no e x p la n a t i o n as i t b asis the

o f t h e t h e s i s an d a s s u c h was d i s c u s s e d a t l e n g t h i n

In tro d u ctio n .

However, t h e r a t e

o f in tro d u c tio n and

v a rio u s c o n d itio n s consequent upon i t s great

i s the

i m p o r t a n c e a n d we w i l l

in tro d u c tio n are of

th e re fo re proceed to co n sid er

them . 10a.

So R e g u l a t e d t h a t Y e a r l y I n c r e a s e T o ta l P u r c h a s in g Power i s

in

i n t h e Same

R a t i o o v e r a p e r i o d o f T en Y e a r s . T h i s a s s u m p t i o n w a s m ade t o r e m o v e t h e f a c t o r o f f l u c t u a t i o n s i n amount o r r a t e

co m p licatin g

o f grow th o f bank

c r e d i t from o u r a n a l y s i s .

We m u s t now c o n s i d e r t h e e f f e c t

o f in tro d u cin g th is

in to

I f the r a te

facto r

of in crease

ou r problem .

o f p u r c h a s i n g pow er due t o

c r e a t i o n o f b a n k c r e d i t be more r a p i d d u r i n g t h e e a r l i e r

76 p o rtio n th an du rin g the l a t e r p o rtio n o f the p e rio d of i n f l a ­ tio n ,

th e b a n k e rs w i l l g a in c o n t r o l o f p u r c h a s in g power f a s t e r

and r e c e i v e

i n t e r e s t on i t

p o s i t e w i l l be t r u e and f a s t e r l a t e r p rice

fo r a lo n g e r tim e.

i f the ra te

The e x a c t o p ­

o f i n c r e a s e be slow a t

on i n t h e p e r i o d .

first

In both case s th e r a t e

i n f l a ti o n v a rie s w ith th e r a t i o

of th e

in crease

of

in bank

c re d it. In contem porary s o e i e t y th e r a t i o c red it th ere

of in crease

does v a r y from y e a r t o y e a r and a t p e r i o d i c is a decrease

tu atio n s

i n t h e amount o f b a n k c r e d i t .

o f bank in te rv als Such f l u c ­

i n t h e volum e o f b a n k c r e d i t h a v e v e r y i m p o r t a n t

econom ic c o n s e q u e n c e s . We h a v e a l r e a d y d i s c u s s e d t h e m a n n e r i n w h i c h i n f l a t i o n due t o a d d i t i o n a l b a n k c r e d i t a c c e l e r a t e s b u s i n e s s a c t i v i t y . It

is

an ax io m o f ecom ic t h e o r y t h a t

in f la tio n stim u lates

b u s in e s s a c t i v i t y 1 w h ile d e f la tio n r e ta r d s d e c r e a s e s r e a l wages and th e r e a l v a lu e money p a y m e n t s .

The v a l u e

it.

In fla tio n

of a ll

co n tracted

of in v en to ries r is e s

ste ad ily

so

" I c a n n o t b u t a g r e e w i t h M acG ulloch t h a t , p u t t i n g o u t o f s ig h t c a se s o f in d iv id u a l h a rd s h ip , i f such e x i s t , a f a l l i n t h e v a lu e o f g o ld m ust h a v e , and, a s I s h o u ld s a y , h a s a l r e a d y , a m ost p o w e rfu l b e n e f i c i a l e f f e c t . I t lo o s e n s th e c o u n tr y , a s n o th in g e l s e c o u ld , from i t s o ld bonds o f d e b t and h a b i t . I t throw s in c r e a s e d r e ­ w a r d s b e f o r e a l l who a r e m a k i n g and a c q u i r i n g w e a l t h , s o m e w h a t a t t h e e x p e n s e o f t h o s e who a r e e n j o y i n g a c ­ q u ired w ealth . I t e x c i t e s th e a c t iv e and s k i l l f u l c l a s s e s o f t h e c o m m u n i t y t o new e x e r t i o n s , a n d i s , t o some e x t e n t , l i k e a d i s c h a r g e f r o m h i s d e b t i s t o a bankrupt lo n g s tr u g g lin g a g a in s t h i s b u rd e n s. A ll t h i s i s e f f e c t e d w ith o u t a b re a c h o f n a t i o n a l good f a i t h , w hich n o t h i n g c o u ld c o m p e n s a te .” J e v o n s , In v estig a ­ t i o n s i n t o C urrency and F i n a n c e , 91. F o r a ' s i m i l a r ' q u o t a t i o n "s'e'e a l s o f o o t n o t e 1 , p . 7 2 .

77 t h a t b u s i n e s s men a r e e a g e r hold

it

hum.

in sto c k .

ter buy a l l

they can,

P r o f i t s s o a r and t h e w heels of in d u s tr y

B u t when b a n k s f i n a l l y s t o p i n c r e a s i n g

th e o ld r a t e , in ev itab le.

i f o n ly to

a s in 1920 i n

t h e i r lo an s a t

the U n ite d S t a t e s ,

E xpanding b u s i n e s s f i n d s

d ep ressio n

is

i t s e l f u n ab le to f i n ­

an ce i t s e l f and i s f o r c e d to c u r t a i l p r o d u c t i o n and s a c r i f i c e its

in v e n to r ie s to o b ta in n e c e s s a ry fu n d s.

Once p r i c e s s t a r t

f a l l i n g m iddlem en and r e t a i l m e r c h a n ts r e s t r i c t c h a se s u n t i l ro c k bottom i s r e a c h e d . liq u id a tio n bank lo a n s .

and d e p r e s s i o n

D uring t h i s

period of

b u s i n e s s men p a y o f f some o f t h e i r

When p r i c e s r e a c h b o t t o m and s t a y t h e r e f o r

some t i m e b a n k e r s r e d u c e t h e i r i n e s s men a r e w i l l i n g t o cycle

th e ir pur­

in te rest

r a t e s u n t i l the bu s­

s t a r t to expand a g a i n and a n o t h e r

o f in f la tio n and d e fla tio n ,

p r o s p e r i t y and d e p r e s s i o n ,

b e g in s. Bank c r e d i t

seem s t o have a n i r r e s i s t i b l e

tendency to

e x p a n d u n t i l l e g a l l i m i t s a r e r e a c h e d wh en a c r i s i s in e ss d ep ressio n o rd in a rily fo llo w .1

and b u s ­

T h is i s due l a r g e l y

1 "We s h a l l f i n d t h a t t h e e x p a n s i v e t e n d e n c i e s o f c r e d i t a r e in p e r p e t u a l c o n f l i c t w i t h the m ain ten an ce o f a f ix e d s t a n d a r d o f v a l u e , and a g r e a t p a r t o f o u r s u b j e c t i s t a k e n u p w i t h t h e p r o b l e m o f how b e s t t o r e c o n c i l e t h i s c o n f l i c t . " H aw trey, o p . o i t . , p . 16. "But t o w h a te v e r e x t e n t c r e d i t i s th u s u s e d , i t i n t r o d u c e s . n o t o n ly th e dan g ers o f m isp laced c o n fid e n c e , but th e g r e a t d a n g e r com ing fro m t h e s p i r i t o f a d v e n t u r e . The ten d e n cy u n d e r t h e keen sp u r o f a d ev elo p ed ban k in g s y s ­ tem to c a r r y e n t e r p r i s e s b a s e d upon c r e d i t beyond th e p o i n t o f s a f e t y , th e i n f e c t i o n o f an e n t i r e com m unity b y t h e f e v e r o f s p e c u l a t i o n , a r e t o o f a m i l i a r f o r com­ m e n t, and t h e e r r o r s o f b a n k e r s i n a i d i n g and e n c o u r a g ­ in g t h a t w hich t h e y sh o u ld have s t r i v e n t o r e p r e s s o r c o n t r o l , have a t t im e s b ro u g h t th e u t i l i t y o f ban k in g i t s e l f i n t o q u e s t i o n . ” D u n b a r , The T h e o r y a n d H i s t o r y o f B a n k in g . 5, 6.

78 to

th e f a c t t h a t e a c h i n d i v i d u a l bank c o n t r o l s o n ly an i n f i n ­

i t e s i m a l f r a c t i o n o f t h e t o t a l b a n k money i n u s e and c a n n o t restric t

its

own l o a n s w i t h o u t

d r iv in g custom ers to o th e r

banks and l o s i n g p o s s i b l e p r o f i t s . 1 is

Thus t h e b u s i n e s s c y c l e

i n e v i t a b l e u n l e s s some s t r o n g c e n t r a l a g e n c y i s g i v e n t h e

power to d i c t a t e

t o e a c h b a n k the

amount o f i t s

l o a n s and

co n scio u sly attem p ts to u latin g

s t a b i l i z e b u s in e s s a c t i v i t y by re g 2 t h e t o t a l volum e of b a n k c r e d i t . And t h u s f a r i n

th e h i s t o r y o f b a n k in g no c e n t r a l bank h a s e v e r s u c c e s s f u l l y w ield ed t h i s d e s p o tic

but a ll-im p o rtan t

The tw o m o s t common e x p l a n a t i o n s

pow er.

of b usiness, c r i s i s

d e p r e s s io n a r e o v e r p r o d u c t io n and u n d e rc o n su m p tio n . fo rm er em phasizes t h e

fact th at

\/ /

the f a c t

th at

the

The

t h e r e a r e more g o o d s t h a n

can be s o l d a t a p r o f i t a b l e p r i c e , sizes

and

w hile the

consum er i s u n a b le

latter

empha­

to pay enough to

1 "N o r i s t h e r e a n y g r e a t h o p e t h a t t h e s e c r e d i t m e t h o d s w i l l cease because of t h e i r d an g ers. The a d v a n t a g e s a n d c o n ­ v e n i e n c e s t o t h e i n d i v i d u a l b u s i n e s s man a r e t o o p r o ­ nounced. H ere, a g a in , i n d iv i d u a l i n t e r e s t s are n o t p a r ­ a l l e l w ith the g en eral i n t e r e s t . No o n e b u s i n e s s man co u ld a f f o r d to s to p u n le s s a l l should s to p , and e a c h would g a in by v i o l a t i n g t h e r u l e i n t e n d e d f o r a l l . " D a v e n p o rt, o p . c i t . , p . 284. 2 " I t w i l l b e s e e n t h a t t h e a rg u m e n t on t h i s h e a d r u n s on a p r o g r e s s iv e , a u to m a tic , and presum ably in te r m in a b le i n ­ f l a t i o n o f m o n e y - v a lu e s ; or on a c o n t i n u e d d e p r e c i a t i o n o f t h e e f f e c t u a l m o n e y - u n i t ; a c c o r d i n g a s o n e may c h o o s e to view i t . Under th e o ld d i s p e n s a ti o n o f u n c o n c e rte d b a n k i n g , i n so f a r a s t h e m o n e y - u n i t w a s e v e n t u a l l y a c ­ c o u n ta b le to an im p e rso n a l s p e c ie b a s i s , such an i n f l a ­ t i o n would be r i d i n g f o r a n e v e n t u a l f a l l , w h e re o f t h e r e were r e p e a t e d d e m o n s t r a t i o n s . B u t u n d e r t h e new d i s p e n ­ s a t i o n , s i n c e a n d s o f a r a s t h e p r i c e - l e v e l h a s b e co m e a c c o u n ta b le to t h e sound b u s i n e s s s e n s e o f t h e F e d e r a l R e se rv e Board and th e k e e p e rs o f the c r e d i t r e s o u r c e s , no su c h s i n i s t e r e v e n t u a l i t y n e e d b e a p p r e h e n d e d . " V e b l e n , "The L a r g e r U s e o f C r e d i t , ” o p . c i t . -

79 keep in d u s tr y g o in g .^ of s ta tin g

T h e s e a r e m e r e l y tw o d i f f e r e n t ways

t h e f a c t t h a t h a n k s h a v e s l o w e d do w n t h e i r r a t e

o f c r e a t i n g new p u r c h a s i n g p o w e r o r

have a c t u a l l y d e s tro y e d

a c o n s i d e r a b l e volume o f p u r c h a s i n g

pow er.

A nother p o p u la r t h e any o f

the

b u sin e ss cycle

is

th at

it

is caused by f l u c t u a t i o n s in th e c a p i t a l i z a t i o n o f es2 tim ated e a rn in g s. But c h a n g e s i n th e m a rk e t q u o t a t i o n s o f common s t o c k s a n d r e a l upon t h e

effectiv e

e s t a t e c an h a v e no e f f e c t w h a t s o e v e r

p u r c h a s i n g power o f s o c i e t y a s a whole e x ­

c e p t i n so f a r a s t h e y i n f l u e n c e b a n k s and t h e i r to

c r e a t e a n d u s e more o r l e s s b a n k c r e d i t .

the e f f e c t i v e

p u r c h a s i n g power o f s o c i e t y a t

changed i t w i l l c o n tin u e

to p u r c h a s e

borrow ers

And s o l o n g a s larg e

is un­

t h e c u s t o m a r y volume

" A c c o rd in g t o t h e p o i n t o f view from w h ic h t h e s u b j e c t i s a p p ro a c h e d , the e x p la n a tio n u s u a l l y g iv e n i s t h a t o f o v e rp ro d u c tio n , or u n d erco n su m p tio n . The t h e o r y o f o v erp ro d u ctio n s t a t e s , not t h a t th e re is a g e n eral g lu t o f c o m m o d i t i e s - ^ f o r t h a t w o u l d i m p l y t h e r e i s t o o much w e a l t h , w h ic h i s a b s u r d — b u t t h a t t h e r e a r e more goods t h a n c a n b e s o l d a t a p r o f i t a b l e p r i c e . . . .On t h e o th e r hand, th e th e o ry o f u n d erco n su m p tio n em phasized th e i n a b i l i t y o f th e consum er t o pay enough t o keep th e i n d u s t r i e s g o i n g . ” S e lig m a n , P r i n c i p l e s o f E conom ics, 544-5. "Many e x p l a n a t i o n s o f t h e c a u s e s o f f i n a n c i a l c r i s e s . have been o f f e r e d . -N early a l l o f th e s e b e lo n g to th e g e n e r a l g ro u p o f ’ g l u t ' t h e o r i e s , o f w hich g e n u s t h e r e a r e two s p e c i e s , u n d e r - c o n s u m p t i o n a n d o v e r - p r o d u c t i o n th eo ries. T h e s e a r e , i n t r u t h , b u t two a s p e c t s o f t h e same i d e a . ” F e t t e r , E c o n o m i c s . I I , 1 3 5 . , 2

"The t r u e e x p l a n a t i o n o f c r i s e s i s som ewhat d i f f e r e n t . The w h o l e p r o b l e m i s o ne o f c a p i t a l i z a t i o n . . . . T h i s process o f readjustm ent of o v e rc a p ita liz e d v a lu e s nec­ e s s a r i l y in v o lv e s l o s s ; b u t r e a d ju s tm e n t t h e r e m ust be. I f t h e r e a l i z a t i o n o f i t s n e c e s s i t y i s s u d d e n , we h a v e a c r i s e s o r p a n i c ; i f i t can be b r o u g h t a b o u t g r a d u a l l y , we h a v e a p r o c e s s o f l i q u i d a t i o n . In any e v en t t h e r e f o llo w s a p e r io d o f d e p r e s s i o n , w hich m ust c o n t i n u e u n t i l the re a d ju stm e n t o f - c a p i t a l i z a t i o n to a c tu a l e a rn ­ i n g c a p a c i t y h a s become c o m p l e t e . ” S e l i g m a n , o p . c i t .,p .5 4 5 .

80 o f goods and th e w h e e l s o f i n d u s t r y w i l l k e e p on t u r n i n g . The t e r m i n v e n t o r y t h e o r y m ig h t w e l l b e a p p l i e d

to th e

e x p la n a t i o n of b u s in e s s c y c l e s a s c o n se q u e n t upon f l u c t u a ­ tio n s

in th e t o t a l in v en to ry

o f . m iddlem en and m e r c h a n t s .

The i d e a i s t h a t m i d d l e m e n a n d m e r c h a n t s p e r i o d i c a l l y b e c o m e o v e r s t o c k e d w i t h g o o d s and m u st c u r t a i l t h e i r p u r c h a s e s , th u s c a u sin g a c r i s i s and d e p re s s io n , th eir

in v e n to rie s.1

u n t i l they have reduced

B u t how c o u l d t h e m e r c h a n t c l a s s a s a

w hole v a r y th e amount o f t h e i r i n v e n t o r i e s e x c e p t by v a r y i n g 1

’’I t m i g h t b e t h o u g h t t h a t t h e m e r c h a n t s ' a c t i v i t i e s w o u l d . be in n o c o u s b u t f o r th e f a t a l f a c i l i t i e s he r e c e i v e s from th e b a n k e r. I t i s h i s power o f b o rro w in g t h a t en­ a b l e s h i m t o i n c r e a s e h i s s t o c k s a s he p l e a s e s a n d i t i s t h e b a n k e r ’ s power o f r e s t r i c t i n g c r e d i t t h a t i m p e ls the m erchant to reduce h is s to c k s in s p i t e o f a fa v o u r­ a b le m ark et. T h i s i s a q u e s t i o n w h i c h we c o u l d o n l y d e c i d e b y p i c t u r i n g t o o u r s e l v e s a com m unity w i t h o u t banks. B a n k i n g , a s we s a w i n c h a p t e r X I I , c o m p r i s e s two d i s t i n c t f u n c t i o n s — t e m p o r a r y l e n d i n g , a n d t h e p r o ­ v i s i o n o f t r a n s f e r a b l e c r e d i t s a s a means o f p a y m e n t. T h e i r u n i o n i s a m a t t e r o f c o n v e n i e n c e and n o t o f n e c ­ e ssity . W ere t h e y s e p a r a t e d , t h e ’ s u p p l y o f p u r c h a s i n g pow er would l o s e i t s e l a s t i c i t y . But i t i s n o t a t a l l c e r t a i n t h a t t h e c o n s u m e r ’ s o u t l a y w o u l d b ecom e l e s s e la stic . Even I f t h e s u p p l y o f p u r c h a s i n g power were a b s o l u t e l y f i x e d , t r a d e r s w ould a lw a y s e n d e a v o u r to e c o n o m iz e b a l a n c e s e i t h e r by b o r r o w i n g o r by l e n d i n g . I f th e y borrow ed and l e n t a l i t t l e too f r e e l y th e con­ su m e rs incom e would b e i n c r e a s e d a n d t h e c o n s u m e r s p o r ­ t i o n o f t h e u n s p e n t m a rg in w ould grow a t th e e x p e n se of th e tr a d e r s p o rtio n . The a b s e n c e o f b a n k s w i t h t h e i r c o n v e n i e n t poYi/er o f c r e a t i n g p u r c h a s i n g p o w e r w o u l d o n l y m ake t h e i n e v i t a b l e c o n t r a c t i o n o f c r e d i t t h e m o r e v i o ­ l e n t . U n d e r s u c h a s y s t e m t h e slo¥f p a s s a g e o f m o n ey i n ­ t o c i r c u l a t i o n when t r a d e i s a c t i v e a n d i t s slo w r e t u r n w h e n t r a d e r e a c t s w o u l d o c c a s i o n t h e same p e r i o d i c i t y a s has been found to e x i s t u n d e r a b an k in g system . ■"C o n s e q u e n t l y , t h e c r e d i t c y c l e i s n o t t r a c e a b l e t o t h e a s s o c i a t i o n o f th e c r e a t i o n o f p u rc h a s in g power w ith s h o r t te rm l a n d i n g . ” H aw trey, op. c i t . , p . 424. Mr. H a w t r e y b a s e s h i s a r g u m e n t o n t h e s t a t e m e n t ; ’’B u t i t i s n o t a t a l l c e r t a i n t h a jt t h e c o n s u m e r s o u t l a y would

t h e i r u se o f bank c r e d i t ? -

To b e s u r e

81 i n our assum ed s o c i e t y

t h e y m i g h t h a v e b o r r o w e d r e a l s a v i n g s more e x t e n s i v e l y a t one tim e th a n a t a n o th e r , row ing o f r e a l s a v in g s

from t h e

c a lly have re le a s e d t h i s ducers as a c la s s

b u t wh en t h e y c u r t a i l e d

b a n k s t h e y would a u t o m a t i ­

p u r c h a s i n g power f o r

who w o u l d a s s u m e t h e

tim e o f c r i s i s t h i s

goes o u t o f e x is te n c e and t h i s tro u b le .

to

p u r c h a s i n g power

t h e r e c o u l d b e no

in the p r i c e l e v e l to p ersu ad e m erchants

in c re a se o r dim inish t h e i r It

?7hen t h e m e r c h a n t s

i s what c a u s e s m ost o f th e

M oreover, w ith o u t b an k c r e d i t

sudden f l u c t u a t i o n s

loan to p ro ­

in v en to ry -h o ld in g

burden in o rd e r to m a in ta in p ro d u c tio n . rep ay bank lo a n s in

th e ir bor­

in v en to ries

in co n c e rt.

i s a l s o common t o a s c r i b e t h e b u s i n e s s c y c l e t o

(c o n td .) b e c o m e l e s s e l a s t i c . ” Now i n a c t u a l p r a c t i c e i t h a s b e e n f o u n d t h a t c o n s u m e r s 1 p u r c h a s e s show l e s s v a r i a ­ nt io n d u r i n g a b u s i n e s s c y c le t h a n a n y th i n g e l s e . It i s n o t i n c o n su m p tio n b u t i n p r o d u c ti o n f i n a n c e d by bank c r e d i t t h a t th e w ide f l u c t u a t i o n s o f a c t i v i t y oc­ c u r , a n d i f t h e s e c o u l d be r e d u c e d t o t h e l e v e l o f p r e s ­ e n t f l u c t u a t i o n s i n c o n s u m p t i o n t h e b u s i n e s s c y c l e would be l a r g e l y e l i m i n a t e d . M oreover, ev en the r e l a t i v e l y s l i g h t f l u c t u a t i o n s t h a t no w .occu r in consum p tio n a re due t o v a r i a t i o n s in wage incom e c a u s e d by v a r i a t i o n s in the e x te n s io n of bank c r e d i t . -With t h e r a t e o f c o n s u m p t i o n f r e e f r o m d i s t u r b a n c e b y b a n k c r e d i t , no e f f o r t s o f t r a d e r s t o e c o n o m iz e t h e i r b a la n c e s could c au se a b u s in e s s c y c le b e c a u se t r a d e r s w ould l o a n t h e s e b a l a n c e s to each, o t h e r . W ith no ban k c r e d i t t h e r e w o u l d be. n o s u d d e n i n f l a t i o n o r d e f l a t i o n to c a u se m e rc h a n ts to a l l w ant to buy o r s e l l a t the same t i m e . No p u r c h a s i n g p o w e r w o u l d e v e r b e i d l e a s . i t would a lw a y s be p o s s i b l e t o l o a n i t b y r e d u c i n g t h e r a t e o f i n t e r e s t d e m a n d e d , a n d a low r a t e of. i n t e r e s t incom e w ould be p r e f e r a b l e t o n o n e a t a l l . Nor c o u ld t r a d e r s lo a n m ore t h a n t h e y a c t u a l l y had f r e e f o r t h i s p u r p o s e w i t h o u t t a k i n g o v e r t h e f u n c t i o n o f a comm er­ c i a l b a n k and b r i n g i n g b a n k c r e d i t b a c k i n t o e x i s t e n c e . Thus t h e y c o u ld not l o a n t h e i r b a l a n c e s to o f r e e l y . We m ust c o n c lu d e t h a t H aw trey h a s n o t p ro v en h i s p o i n t .

82 p s y c h o l o g i c a l phenomena, o v e r - c o n f id e n c e and u n d e r - c o n f id e n c e . B ut su c h an a n a l y s i s i s p r a g m a t i c a l l y f u t i l e , a l t e r the p sy c h o lo g ic a l n a tu re so ciety can,

if

it

ume o f b a n k c r e d i t o v er-co n fid en ee c red it,

o f man.

h a s a m ind t o ,

On t h e o t h e r h a n d

a b s o lu te ly c o n tr o l th e

i n u s e a t a n y one t i m e .

c a u s e s b u s i n e s s men t o

th u s s ta r ti n g

f o r we c a n n o t

a bu siness c y cle,

T herefore i f

e x t e n d t o o much b a n k it

the p o in t to a s c r i b e th e r e s u l t i n g c y c le to

i s m u ch m o r e t o th e o v e r-e x ten ­

s io n of bank c r e d i t th a n to any p s y c h o lo g ic a l c a u s e s . latter

v o l­

The

c o u r s e i s v e r y s i m i l a r to a s c r i b i n g p h y s i c a l phenom­

e n a t o t h e w i l l o f God ,

for p sy ch o lo g ical a t t r i b u t e s

o f man

a n d t h e w i l l o f God a r e e q u a l l y u n c o n t r o l l a b l e . T h e r e a r e m an y o t h e r l e s s w i d e l y h e l d b u sin ess cy cle.

B ut m ost o f

th e o r ie s o f the

them a r e u n s a t i s f a c t o r y

accept th e c o n ten tio n of th is could n o t occu r in th e a b sen c e

th esis

i f we

th a t b u sin ess cy cles

of c h a n g e s i n t h e p r i c e l e v ­

e l due to f l u c t u a t i o n s i n t h e volum e o f b a n k c r e d i t . 1

Crop

1 "Good a n d Bad T r a d e " b y H a w t r e y i s d e v o t e d t o a d e m o n s t r a ­ t i o n o f t h e f a c t t h a t a l l b u s i n e s s c y c l e s a r e c a u s e d by f l u c t u a t i o n s i n t h e amount of b a n k c r e d i t i n u s e . The fo llo w in g q u o ta tio n from th e in tr o d u c tio n e x p la in s th e p u rp o se of th e w ork. " T h e s e f l u c t u a t i o n s o f t r a d e a r e i m p o r t a n t o n m an y g r o u n d s , . . . . .T h e g e n e r a l r e s u l t up t o w h ich I h o p e t o w ork i s t h a t t h e f l u c t u a t i o n s a r e due t o d i s t u r b a n c e s i n t h e a v a i l a b l e s t o c k o f ’m o n e y * — t h e t e r m ’m o n e y ’ b e i n g t a k ­ en t o c o v e r e v e r y s p e c i e s o f p u r c h a s i n g power a v a i l a b l e f o r im m e d ia te u s e , b o th l e g a l t e n d e r money and c r e d i t money, w h e th e r i n t h e form o f c o i n , n o t e s , o r d e p o s i t s a t b a n k s." p. 3. "And a t t h e . o u t s e t i t m u s t b e r e c o g n i z e d t h a t a r b i t r a r y . c h a n g e s in t h e q u a n t i t y of l e g a l t e n d e r c u r r e n c y i n c i r c u l a t i o n c a n n o t be o f much p r a c t i c a l i m p o r t a n c e . Such c h an g e s r a r e l y o c c u r . A ll th e g r e a t com m ercial c o u n t r i e s o f t h e w o rld u se gold c u r r e n c i e s , and in a

83 f a i l u r e s and u n w ise in v e s tm e n ts m ight lo w e r th e a n n u a l p r o ­ d u ctio n o f a so c ie ty hut i t b u sin ess d ep ressio n in a l l Indeed,

if

c o u l d n o t c a u se unem ploym ent an d o th e r in d u s t r ie s a t the

same t i m e .

t h e volume o f p u r c h a s i n g pow er r e m a i n s u n a l t e r e d

decreased

s a l e s i n o ne i n d u s t r y w i l l a u t o m a t i c a l l y i n c r e a s e

the

of a l l

sales

o t h e r i n d u s t r i e s by an e q u i v a l e n t am ount.

T h e re fo re our assu m p tio n o f a re g u la r r a t e in to ta l

o f in crease

p u r c h a s i n g p o w e r i n o u r a s s u m e d com m unity e l i m i n a t e s

the p o s s i b i l i t y o f b u s in e s s omic s o c i e t i e s b a n k c r e d i t

cy cles.

B ut in contem porary econ^

in c re a s e s a t a very ir r e g u la r r a te

a n d e v e n d e c r e a s e s a t t i m e s t h u s c a u s i n g t h e f a m i l i a r phenom­ enon o f th e r e c u r r in g b u s in e s s

cy cle.

(co n td .) gold c u rre n cy a r b i t r a r y changes cannot occur a t a l l . " p. 73. " I f e x p a n sio n o f bank c r e d i t does not cause u n h e a lth y b u s i n e s s e x p a n s io n w ith the i n e v i t a b l e c r i s e s and d e ­ p r e s s io n , i t c e r t a i n l y p e rm its i t to develop and i t i s d i f f i c u l t t o s e e how t h e u n h e a l t h y e x p a n s i o n c o u l d o c ­ cu r w ith o u t ex p an sio n o f bank c r e d i t , except in th e c a s e o f a v e r y s i m i l a r phenomenon— th e i n f l a t i o n o f th e c u r r e n c y w ith g overnm ent p a p e r m oney." B ufener, o p . c i t . ,p.5 4 0 . " T h i s s u b j e c t i v e c a u s e i n m en i s g i v e n a n o p p o r t u n i t y f o r a c t i o n o n ly when c e r t a i n f a v o r i n g o b j e c t i v e c o n d i ­ tio n s are p re s e n t. Most n o t e w o r t h y o f t h e s e o b j e c t i v e c o n d itio n s i s the g e n e ra l use o f c r e d i t . The c r e d i t s y s t e m g r e a t l y e n h a n c e s t h e r h y t h m o f p r i c e . . . .A c r e d i t system , h i g h l y d e v elo p ed , i s a house of c a rd s a t a tim e o f f i n a n c i a l s t r e s s . " F e t t e r , o p . c i t . , I I , p. 139. "Mo c r i t i c i s m i s h e r e i n t e n d e d a g a i n s t t h e b a n k s i n t h e c a r r y i n g out of t h e i r s e p a r a t e and in d e p e n d e n t fu n c ­ t i o n s , o r a g a i n s t th e m anagers o f the b a n k s , b u t o n ly a g a i n s t th e a c t u a l o r g a n i z a t i o n of the ban k in g sy stem . The b a n k e r s a r e m e r e l y t h e s e r v a n t s o f t h e s y s t e m i n w h ic h t h e y w o rk ; t h e y h a v e no c h o i c e . B u t the f a c t s t i l l s t a n d s t h a t th e l e a d in g and c h a r a c t e r i s t i c f e a ­ tu r e of t h e o rd in a ry p an ic i s th e a b d i c a t i o n by th e banks of th e i r fu n c tio n of m ain tain in g c r e d it." D avenport, o p . c i t .,p ^ 9 1 .

8‘4 1 0 b . So R e g u l a t e d t h a t a t e n d o f Ten y e a r P e r i o d Bank C r e d i t c o n s t i t u t e s

50$ o f a l l

P u r c h a s in g Pow er. The p u r p o s e o f t h i s a s s u m p t i o n i s m e r e l y t o g i v e u s a d efin ite

b a s i s f o r e s t i m a t i n g t h e amount o f i n f l a t i o n ,

p ro p riatio n , the

com pulsory s o c i a l sa v in g ,

e tc .,

ex­

r e s u l t i n g from

i n t r o d u c t i o n of bank c r e d i t i n o u r assum ed s o c i e t y .

T h is a s s u m p tio n d o e s n o t c a l l f o r an im p o s s ib le r a t e ume o f i n c r e a s e

in t o t a l

p u r c h a s in g pow er.

o r v o l­

In th e U nited

S t a t e s b e tw e e n t h e y e a r s 1915 and 1925 t o t a l p u r c h a s i n g power i n c r e a s e d by. a p p r o x i m a t e l y 1 3 0 $ a n d m o s t o f t h i s was i n bank c r e d i t . the r a te

In th e te n y e a r p e rio d

in crease

1900 t o

1910

o f i n c r e a s e was a b o u t 1 0 0 $ .

1 0 c . No f l o w o f G o ld t o

I n d u s tr ia l U ses.

T h is a s s u m p t io n e n a b l e s u s to a r r i v e a t more e x a c t c o n ­ c lu sio n s as to it

the

in fla tio n a ry

f o r c e of bank c r e d i t

sin ce

rem oves a c o m p l i c a ti n g f a c t o r w hich u n d e r o r d i n a r y c irc u m ­

s t a n c e s te n d s t o com p en sate f o r

and thus

t i o n a r y f o r c e o f new b a n k c r e d i t . s o c ie ty th e in fla tio n a ry

purposes.

it

d e c re a se s the

in fla ­

W henever i n c o n te m p o ra ry

f o r c e o f new b a n k c r e d i t

com pensated f o r by o t h e r f a c t o r s in fla tio n

ob scu re the

and r e s u l t s

is

not

fu lly

in a c tu a l p ric e

v alu e o f g o ld used fo r m onetary

T his c a u g e s a flo w o f g o ld from m o n e ta ry t o

indus­

t r i a l u ses u n t i l th e v alu e of gold is

the sam e i n b o t h u s e s ,

thus

in fla tio n a ry effect of

p a rtia lly o ffse ttin g

t h e new b a n k c r e d i t . p ria tio n

c a u s e d by th e

the

in itia l

T his a ls o

s e r v e s to

c re a tio n of the

d iffu se

the ex p ro ­

new b a n k c r e d i t

over a

85 w ider group o f p e o p le ,

for.tT he r e s u l t i n g d e c r e a s e

in the

v a lu e o f i n d u s t r i a l and o rn a m e n ta l g o ld c a u s e s a l o s s to ow ners o f i t w h ic h , e x c e p t f o r the to

thd

f lo w o f g o ld from m o n e ta ry

i n d u s t r i a l u s e s , would h a v e b e e n e n t i r e l y b o r n e b y t h e

h o l d e r s o f p u r c h a s i n g power p r e v i o u s l y i n e x i s t e n c e . lO d . E q u a l V e l o c i t y of

T u rn o v e r o f Gold

B efo re and A f te r i n tr o d u c ti o n of Bank C r e d i t . The p u r p o s e o f t h i s a s s u m p t i o n t o r w hich o b s c u r e s orary

so ciety .

a m atter of so c ia l h ab it c a s h o r bank c r e d i t

changes in th e

remove a n o t h e r f a c ­

t h e e f f e c t o f new b a n k c r e d i t

The v e l o c i t y

th e ir a n ticip a te d

i s to

of

in contem p­

t u r n o v e r o f m o n ey i s

sin ce i t

ch iefly

d e p en d s upon t h e amount o f

p e o p le k e e p on hand w ith w h ic h t o m eet

expenses.

It

is a ffe cte d

f r e q u e n c y or wage, s a l a r y ,

p r i n c i p a l l y by

i n t e r e s t and d i v i ­

dend p a y m e n ts. An i n c r e a s e in fla tio n a ry

in the

v e lo c ity

of

e f f e c t upon the p r i c e

t u r n o v e r o f money h a s an le v e l since

i t b rin g s about

a n i n c r e a s e d e f f e c t i v e m o n e y de mand f o r g o o d s . th e v e l o c i t y o f tu r n o v e r h a s the

A decrease

in

reverse e ffe c t.

1 0 e . E q u a l V e l o c i t y o f T u rn o v e r o f Com m odities B e fo re and A f t e r i n t r o d u c t i o n o f Bank C r e d i t . T h is a s s u m p tio n rem oves a n o t h e r m inor b u t c o n f u s i n g f a c t o r in the

situ atio n .

It

too is

a m atter of s o c ia l h a b it c h ie fly

and c o n s e q u e n t l y c h a n g e s v e r y s l o w l y .

The c h a i n

s t o r e rem oves

86 one t u r n o v e r o f g o o d s ,

and "som etim es m o re,

d u cer and th e consum er. th is

E very

b etw een t h e

pro­

v e r t i c a l c o n s o lid a tio n has

effect. An i n c r e a s e

i n t h e nu m b er of t i m e s a n a v e r a g e com m odity

m ust be b o u g h t and so ld b e f o r e i t d e f l a t i o n a r y e f f e c t upon the

is

f i n a l l y consumed h a s a

p ric e le v e l sin ce

it

co n stitu tes

a n i n c r e a s e d demand f o r a l i m i t e d s u p p l y o f m o n e y . in the average

A decrease

tu rn o v e r h a s the r e v e r s e e f f e c t .

l O f . E q u a l i t y o f T e l o c i t y of T urnover b etw een Q o l d a n d Hew B a n k C r e d i t . T h is a s s u m p tio n makes p o s s i b l e o f the It

e ffects

o f t h e new b a n k c r e d i t

is v ery u nfavorable

sin ce

more d e f i n i t e

to

c alcu latio n

i n our assum ed s o c i e t y .

th e c o n c lu s io n s ' of

in con tem p o rary s o c i e t y bank c r e d i t

th is

th esis

has a b o u t tw ice

t h e v e l o c i t y o f t u r n o v e r o f money and t h e r e f o r e h a s t w i c e a s much i n f l a t i o n a r y resen ted i t

to

e f f e c t upon the p r i c e

have i n t h i s

th e sis.

l e v e l a s we h a v e r e p ­

. T able T i n th e A ppendix

g iv es P ro fe ss o r Irv in g F is h e r ’s estim ate

of th e v e lo c ity of

t u r n o v e r o f o r d i n a r y money an d b a n k c r e d i t , fo r the

de mand d e p o s i t s ,

y e a r s 1896-1909 i n c l u s i v e . R eview o f C o n c lu s io n s

We h a v e now c o n s i d e r e d a l l fa c ilita te

our a n a ly sis

o f bank c r e d i t .

of th e

o f t h e a s s u m p t i o n s m ade t o so cial

e f f e c t s of th e

creatio n

Ho d o u b t t h e y h a v e s e e m e d n u m e r o u s a n d c o n ­

f u s i n g , b u t e v e ry e c o n o m ist makes them a s c o r e o f tim e s i n any d e d u c tiv e ap p ro ach to

p ro b lem s o f econom ic t h e o r y .

For

87 a l l t h a t h a s b een assum ed i n

th is

th esis

of so ciety ,

so f r e q u e n t l y i n d i c a t e d

th e p h rase,

" o th e r th in g s b ein g e q u a l."

We h a v e f o u n d

state

i n econom ic w r i t i n g s by

t h a t many, o f o u r a s s u m p t i o n s h a v e n o e f ­

f e c t upon our c o n c l u s i o n s , and more c l e a r c u t .

is a sta tic

e x c e p t t o m ake t h e m m o r e o b v i o u s

O th e rs have m o d if ie d o u r c o n c lu s io n s i n

v e ry im portant r e s p e c ts .

A b r i e f summary may h e l p t o

fix th e

e f f e c t s o f t h e s e a s s u m p t i o n s i n t h e m ind o f t h e r e a d e r and to b rin g in to c le a r r e l i e f

the

im portance o f c e r t a i n o f

A s s u m p tio n # 1 , no f o r e i g n t r a d e , an t. the

is re la tiv e ly

them .

u nim port­

F r e e f o r e i g n t r a d e w o u ld d i f f u s e b u t would n o t a l t e r effects

of bank c r e d i t .

A ssum ption # 2 , c a p i t a l i s m , of little

is

im portant

p r a c tic a l sig n ific a n c e because it

d itio n s as th ey a re tio n of c e r ta in

but

accords w ith con­

in con tem p o rary s o c i e t y ,

c o lle c tiv istic

lo g ic ally ,

w ith th e e x c e p ­

t r e n d s w h o s e i n f l u e n c e we

n o ted . A ssum ption #3 ,

gold c u r r e n c y ,

a ls o a c c o rd s w ith contem porary c u r r e n c y would p r e v e n t fects

facts.

fo reig n tra d e

o f new b a n k c r e d i t A ssum ption #4,

from d i f f u s i n g th e

a l l banking f a c i l i t i e s

o u r chosen ap p ro ach to th e problem .

e x iste n t.

We f o u n d t h a t a p a p e r ef­

abroad.

r e s e r v e b e h i n d a l l demand d e p o s i t s ,

bank c r e d i t

i s u n im p o rta n t because, i t

b u t a 100$ gold

i s m erely a sta te m e n t o f We d e c i d e d t o

in tro d u ce

i n t o a s o c i e t y w here i t w as p r e v i o u s l y n o n ­ In c id e n ta lly ,

cid ed th a t th ey are

we d i s c u s s e d t i m e d e p o s i t s a n d d e ­

n o t a form o f p u r c h a s in g pow er.

A ssum ption f 5 , i a l saving, in crease

is

88 c a p i t a l o f - $ 3 0 0 , 0 0 0 , 0 0 0 , 0 0 0 and no s o c ­

im portant because

saving and th e

i n com m odity p r o d u c t i o n a r e

m odern s o c i e t y .

consequent

im p o rtan t f e a tu r e s o f

S o c ia l saving has a d e f la tio n a r y

w h i c h may c o m p l e t e l y o f f s e t

the

force

i n f l a t i o n a r y f o r c e o f new

bank c r e d i t . A s s u m p t i o n §Q , n o c h a n g e i f i c i a l assu m p tio n .

in p o p u la tio n ,

A stead y in crease

is

an o th er a r t ­

in p o p u la tio n a l t e r s

th e s u p p ly o f co m m o dities and th e

v e lo c ity o f p urchasing

pow er,

o f new b a n k c r e d i t u p o n t h e

thus o b sc u rin g the e f f e c t s

p rice

lev e l.

a lte r

the

But i n t r o d u c i n g a d d i t i o n a l f o r c e s does n o t

ex isten ce

m achines to l i f t

o f the

o l d a n y m o r e t h a n t h e u s e o f human

w eig h ts a l t e r s

the

e x isten ce of

the fo rc e

of g rav itatio n . A s s u m p tio n # 7 , c o n s t a n t volum e of p r o d u c t i o n , a n o th e r f a c t o r w hich, cates but c re d it.

l ik e the

does not a l t e r th e

last

e lim in a tes

tw o, o b s c u r e s and c o m p li­

in fla tio n a ry

f o r c e o f new b a n k

None o f t h e s e f a c t o r s a f f e c t t h e e x p r o p r i a t i o n c a u s e d

b y new b a n k c r e d i t . A s s u m p t i o n §Q t u n c h a n g i n g v e l o c i t y o f t u r n o v e r f o r b o t h com m odities i s u n im p o rta n t b e c a u se i t

is f a ir ly

tru e

of act­

u a l m odern c o n d i t i o n s . A ssum ption $9, a lte rs

fu ll

employm ent o f

as w e ll a s c l a r i f i e s

la b o r and c a p i t a l ,

our c o n c l u s i o n s b e c a u s e ,

i n so

f a r a s new b a n k c r e d i t h i r e s u n e m p l o y e d l a b o r a n d p u t s t o w ork u n u se d c a p i t a l

in stru m en ts,

e x p r o p r i a t i o n o a u s e d by c r e a t i n g

it

le s s e n s th e

amount o f

new b a n k c r e d i t .

But enough

89 e x p r o p r i a t i o n t o l o w e r read. w a g es m u s t p r e c e d e a n y s u c h e f ­ f e c t u p o n t h e v o l u m e o f e m p l o y m e n t , o t h e r w i s e e m p l o y e r s woulfl h a v e n o new r e a s o n f o r A ssum ption #10,

h i r i n g more men.

the

in tr o d u c tio n o f hank c r e d i t ,

m e re ly a p a r t o f our m ethod of a p p ro a c h in g A ssum ption #10a, an even r a t e o f p u r c h a s i n g pow er, of a ll.

is

In th e f i r s t

to ta l

second p la c e ,

rate

is

place i t

is a r tif ic ia l,

sin c e the c r e a ­ of in -

so ciety . th esis

co u ld n o t

In o th e r w ords,

c r e d i t makes p o s s i b l e

the

th a t th e in the

o ccu r w ithout

in stitu tio n

the b u s in e s s c y c le ,

1

In the

w hile n o t s o l e l y cau sed b y v a r i a t i o n s

th ese v a ria tio n s .

its

th e supply,

i n an even r a t e

t h e c o n t e n t i o n of t h i s

o f c r e a t i o n o f bank c r e d i t ,

appear in

in

p e rh a p s the m ost im p o rta n t a ssu m p tio n

p u r c h a s i n g power i n m o d em

it

bu siness cy cle,

th e problem .

o f in crease

tio n o f bank c r e d i t does not r e s u l t crease in

is

of bank

w hich co uld n o t

absence.

A ssum ption # 1 0b, to be in tr o d u c e d ,

fix in g a d e fin ite

amount o f b a n k c r e d i t

i s m ade m e r e l y t o g i v e u s a c o n c r e t e

fig u re

t o work w i t h . A ssu m p tio n # 1 0 c , no flow o f g o ld e lim in a te s

to

in d u s tria l uses,

a n o t h e r o f t h e many f a c t o r s w h ic h h i d e t h e e f f e c t s

o f new b a n k c r e d i t

in contem porary

so ciety .

A ssum ption #10d, u n c h a n g in g v e l o c i t y of g o ld ,

a n d Assump­

t i o n $10e, unchanging v e l o c i t y of co m m o d ities, m erely s p e c if y t h a t A ssu m p tio n #8 s h a l l d u c tio n of bank c r e d i t A ssum ption # 1 0 f ,

co n tin u e

in to

to a p p l y d u r i n g the

in tro ­

o u r im aginary s o c ie ty .

equal v e lo c ity fo r

gold and bank c r e d i t ,

90 is

a n o t h e r a s s u m p t i o n made t o

o f th e

problem ,

th at

p erm it m ath em a tica l tre a tm e n t

i s to p erm it d e f i n i t e e s tim a te s o f th e

m agnitude of c e r t a i n e f f e c t s

of bank c r e d i t

i

in o u r assum ed t

so ciety .

It

does not

affect

the

c h a ra c te r o f our c o n c lu sio n s.

91 CHAPTER V I RESUME OP THESIS- We m ay now b r i e f l y in o rd er to f i t The t h e s i s

is

th e

review , t h e argum ent' o f t h i s

sep arate

p arts

in to a c o h e r e n t w hole.

a s t u d y o f t h e b r o a d s o c i a l econom ic e f f e c t s

of th e c r e a tio n o f bank c r e d i t . we h a v e t a k e n a s t a t i c the

so ciety

To s i m p l i f y o u r a n a l y s i s and i n t r o d u c e d i n t o

it

as

s o l e dynam ic e le m e n t t h e c r e a t i o n o f b a n k c r e d i t . We f o u n d t h a t u n d e r t h e s e c o n d i t i o n s p r i c e

is

th esis

the

in ev itab le

im m ediate r e s u l t o f th e

c r e d i t because the

Of c o u r s e t h i s o f money, th is

c r e a tio n of bank

s u p p ly o f p u r c h a s i n g power i s

in c re a s e d w ith o u t any change assum es th e

in fla tio n

thereby

i n th e su p p ly o f com m odities.

t r u t h of th e q u a n tity

theory

d i s c u s s i o n o f w h i c h we d i d n o t h a v e s p a c e f o r i n

th esis.

We a l s o f o u n d t h a t

th e I n f l a t i o n c a u s e d by

c r e a t i n g ban k e r e d i t i n o u r assum ed s o c i e t y w ould be p e r ­ m anent, crease

as w e ll a s im m ed iate, b e c a u se an e q u a l d o l l a r i n ­ in

a ratio

the

s u p p ly o f p u r c h a s i n g power w ould c o n s t i t u t e

of in crease

te n tim es as la r g e

t h e same d o l l a r i n c r e a s e S ince t h i s

fact

is

tru e

a s w ould r e s u l t from

in th e supply o f goods p r o d u c e d . g e n e r a l l y o f m odern s o c i e t y ,

w e l l a s o f o u r I m a g i n a r y o n e , we f o r m u l a t e d t h e of d iffe re n tia l ratio s"

to em phasize i t .

t h e one h u n d re d p e r c e n t i n c r e a s e

in

as

"p rin cip le

We c o n c l u d e d t h a t

th e supply of p u rc h a s­

i n g power assum ed to o c c u r i n o u r o t h e r w i s e

sta tic

so ciety

w ould c a u se a p p r o x i m a t e ly a n i n e t y p e r c e n t i n f l a t i o n o f th e price

lev e l.

I n C h a p t e r I I I we d e a l t w i t h t h e e x p r o p r i a t i o n o f r e a l incom e c o n s e q u e n t u p o n t h e c r e a t i o n o f b a n k c r e d i t . th is

to b e b o t h im m ediate and p e rm a n e n t,

u n less

the bank c r e d i t i s

v i s i b l e means o f t h i s

la t e r d estro y ed .

ex p ro p ria tio n ,

since

.p u r c h a s in g power o f t h e p u b l i c a t t h e banks in c re a s e

th at

is,

We f o u n d

of course,

In flatio n it

is

decreases

the the

sa m e t i m e t h a t t h e

th e p u r c h a s i n g power o f t h e i r b o r r o w e r s .

B r i n g i n g new c a p i t a l i n t o

e x i s t e n c e d oes n o t com pensate f o r

th is

c a s e o f b a n k c r e d i t an y more t h a n

it

ex p ro p riatio n

does in

in the

t h e c a s e o f a c o u n t e r f e i t o r who u s e s h i s

in g power t o

t u r n consum able goods to c a p i t a l u s e s .

c h a p t e r on a s s u m p tio n s t h i s

purchas­ In the

c o n c lu sio n i s m o d ified in the

case of bank c r e d it used to h ire

l a b o r and c a p i t a l i n s t r u ­

m ents t h a t w ould o th e r w is e be u nem ployed. I n f l a t i o n and e x p r o p r ia tio n h av in g been d e a l t w ith in some d e t a i l ,

C h a p t e r IV p r o c e e d s t o d i s e u s s m o r e s u p e r f i c i a l ­

l y num erous o t h e r e f f e c t s In th e f i r s t er

is

th is

of th e

p l a c e wre f o u n d t h a t

We t e r m e d

"com pulsory s o c i a l s a v in g " and p o in te d o u t t h a t t h i s i n c a p i t a l would, h a v e a n i m p o r t a n t e f f e c t u p o n t h e

p h y s i c a l volum e o f p r o d u c t i o n . seasonal e la s tic ity ,

We f o u n d t h a t b a n k c r e d i t

does n o t f a c i l i t a t e

probably does n o t equal f r e e tiv e

t h e e x p r o p r i a t e d p u r c h a s e pow­

used to in c re a s e th e c a p i ta l of s o c ie ty .

in crease

lacks

c re a tio n of bank c r e d i t .

c o m p e titio n and p r iv a te

in the m a tte r of p la c in g funds

ab le e n tre p re n e u rs.

and

in itia ­

in th e hands o f th e m ost

We n o t e d t h a t b a n k c r e d i t s t i m u l a t e s

sp ecu latio n ,

com m ercial b a n k in g ,

ita l

We f o u n d t h a t m e r c h a n t s r e c e i v e

goods.

exchange,

and th e p ro d u c tio n o f c a p ­ the

g reatest

93 b en efits

from b an k c r e d i t .

M a n u f a c t u r e r s come n e x t ,

farm ers re c e iv e

le s s b e n e f i t than any o th e r la rg e

en trep ren eu rs.

We c o n c l u d e d t h a t b a n k c r e d i t f a v o r s

grow th o f la r g e s i z e

in d u stria l u n its,

and

group o f the

and t h a t

i t makes

W all S t r e e t a s o r t o f suprem e econom ic c o u n c i l .

F in a lly

we n o t e d t h e e f f e c t s u p o n r e n t , w a g e s a n d i n t e r e s t . C h a p te r V t a k e s u p one by one t h e num erous s p e c i f i c a s s u m p t i o n s c o n t a i n e d i n t h e g e n e r a l one o f a s t a t i c

so ciety

and en d ea v o rs t o d i s c o v e r w h e th e r th e s e a ssu m p tio n s a f f e c t the n a tu re of th e p rev io u s th a t th ese enhance,

co nclu sio n s.

I n g e n e r a l we f o u n d

assu m p tio n s e lim in a te f a c t o r s w hich o r d i n a r i l y

or d im in ish ,

o r co m p letely o f f s e t th e

e f f e c t o f new b a n k c r e d i t w i t h o u t a l t e r i n g r e s u l t i n g from i t .

of c re a tio n o f bank c r e d i t,

le n g th sin ce

it

bu sin ess

cycle

is

the e x p ro p ria tio n

One v e r y i m p o r t a n t a s s u m p t i o n ,

an even r a t e

is

In flatio n a ry

the c o n te n tio n of t h i s

th a t of

was d i s c u s s e d a t th esis

dependent upon th e a l t e r n a t e

th a t the

c r e a t i o n and

d e s t r u c t i o n o f p u r c h a s i n g power i n th e fo rm o f b a n k c r e d i t . In con tem p o rary s o c i e t y th e b u s in e s s c y c le ra n k s w ith r e l a ­ tiv e

i n f l a t i o n and e x p r o p r i a t i o n o f r e a l incom e a s one o f

th e m ajor r e s u l t s tiv e

p rice

of the

ex isten ce

of bank c r e d i t.

i n f l a t i o n we m e a n a p r i c e

By r e l a ­

le v e l h ig h e r than i t

w ould be i n th e a b se n c e o f bank c r e d i t .

In c o n s id e rin g th e

a s s u m p t i o n o f f u l l e m p l o y m e n t o f l a b o r a n d c a p i t a l we c o n ­ c l u d e d t h a t b a n k c r e d i t may i n c r e a s e

th e u se o f c a p i t a l and

l a b o r by lo w e rin g th e r e a l p r i c e w h ic h m ust be p a id f o r th e s e facto rs

i n p r o d u c t i o n a n d so c r e a t i n g a n i n c r e a s e d demand

f o r them .

T his d im in is h e s th e e x p r o p r i a t i o n c a u se d by bank

94 c re d it,

b u t d o e s n o t do away w i t h i t

cause a c o n sid e ra b le

to a la r g e

amount o f e x p r o p r i a t i o n i s

t o d i m i n i s h r e a l wages and r e a l q u a s i - r e n t s

ex ten t be­ req u ired

su fficie n tly

to

s t i m u l a t e t h e demand f o r l a b o r a n d c a p i t a l i n s t r u m e n t s . I n c o n c l u s i o n we may r e m a r k t h a t b a n k c r e d i t i s econom ic i n s t i t u t i o n , of p riv ate

p ro p erty ,

sim ila r to ,

b u t d i s t i n c t from ,

f re e co m p etitio n ,

etc .

th is in s titu tio n

i s w o rth y o f an i n t e n s i v e

w hich i t

has n o t rec eiv e d

in the p a s t.

study of

bank c r e d i t ,

be hoped

th a t the s u b je c t

i t deserves

in o u tlin e

in the f u t u r e .

th esis

those

The s o c i a l

v alu e of

d e a v o r o f t h e w r i t e r t o make t h i s

an

study

I t ha*s b e e n t h e e n ­ an i n s t i t u t i o n a l

i f n o th in g m ore.

w i l l re c e iv e the

It

a tten tio n

is th at

to

95

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Com pany, New Y o r k , 1 9 0 7 . K eynes,

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96 Knapp, George F r e d e r i c k ,

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T h e o r y o f Money.

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C hicago, n .

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The U n i v e r s i t y

d. the G re e n b a c k s . C hicago,

1903.

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W illiam T ru fa n t F o s te r and W ad d ill C a tc h in g s . F o u n d a t i o n f o r E conom ic R e s e a r c h , R o b e r ts o n , B. H . , Money.

The

P o liak

N ew ton, M a s s .,

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Y o r k , 1922* S pahr, W alter E a r l,

The C l e a r i n g a n d C o l l e c t i o n o f C h e c k s ,

The B a n k e r s 1 P u b l i s h i n g T a y l o r , ¥ . G. L a n g w o r t h y , Com pany, New Y o r k , V eblen,

Company, New Y o r k ,

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T h o r s t e i n , A b s e n te e O w nership and B u s i n e s s E n t e r p r i s e

i n R ecen t T im es.

B. W. H u e b s c h ,

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New Y o r k ,

1923.

______________________ , The T h e o r y o f B u s i n e s s E n t e r p r i s e . C h arles S c r ib n e r r s Sons, W ith ers, H a r tle y ,

New Y o r k ,

The M e a n i n g o f M o n e y .

a n d C om pany, New Y o r k ,

1910.

1923. 3rd ed.

E. P,

B utto n

97 P e r i o d ic a l and O ther S o u rces A n d e r s o n , B e n j a m i n M . , " B a n k Money a n d t h e

C a p ita l S u p p ly ,"

The C h a s e E c o n o m i c B u l l e t i n , V o l . V I , N o . 3 , N o v . 8 , 1926. _________________ , " B a n k E x p a n s i o n v e r s u s S a v i n g s , " The C h a s e E c o n o m i c B u l l e t i n , V o l .

V T I I , No. 2 ,

June 25,

1928. _______________

, " B ro k e rs Loans and Bank C r e d i t , "

The C h a s e E c o n o m i c B u l l e t i n , V o l .

V T I I , No. 4 ,

O ct.

51,

1928* B u r g e s s , W. R a n d o l p h ,

" V e l o c i t y o f Bank D e p o s i t s , " J o u r n a l .

o f t h e A m e ric a n S t a t i s t i c a l A s s o c i a t i o n , V o l. XVTII, pp.

727-740; Ju n e ,

E n glan d , M innie Throop,

1923. "S ta tistica l

In q u iry in to

th e In ­

f l u e n c e o f C r e d i t u p o n t h e L e v e l o f P r i c e s , " The U n iv e rsity S tudies of V o l . V I I , No. 1 ; K in ley ,

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M o n e ta ry C o m m issio n , S e n a te Document 3 9 9 , 6 1 s t C o n g r e s s , 2nd S e s s io n , Sprhgue,

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0 . M. W . , " T h e E f f i c i e n c y o f C r e d i t , " A n n a l s o f t h e

A m e r i c a n Academy o f P o l i t i c a l a n d S o c i a l S c i e n c e s , V o l . XCIX, p p . W orking, H o lb r o o k , . Medium,

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1918.

B y e , Raymond T . , P r i n c i p l e s Hew Y o r k , C assel,

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A l f r e d A. K n o p f ,

1928.

G ustav,

The T h e o r y o f S o c i a l E c o n o m y .

B r a c e a n d Com pany, Hew Y o r k , C onant,

H e n r y H o l t a n d Com­

C h arles A .,

H arcourt

1924.

The P r i n c i p l e s o f M oney a n d B a n k i n g .

2 v o l s . H a r p e r a n d B r o t h e r s , Hew Y o r k , 1 9 0 5 . D avenport, H e rb e rt Jo sep h ,

The E c o n o m i c s o f E n t e r p r i s e .

The M a c m i l l a n C om pany, Hew Y o r k , D unbar,

1919.

C h a r l e s F . , The T h e o r y a n d H i s t o r y o f B a n k i n g .

4th ed.

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E d i e , L i o n e l D . , Money, Bank C r e d i t a n d P r i c e s . B r o t h e r s , Hew Y o r k , F e tte r,

F ish er,

1928.

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Hew Y o r k ,

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M a c m i l l a n Com pany, Hew Y o r k , 1 9 2 6 . H ay es,,H .

G ordon,

Our E conom ic S y s t e m .

p a n y , Hew Y o r k , H old sw o rth ,

H e n r y H o l t a n d Com­

1928.

J o h n Thom, M o n e y a n d B a n k i n g .

D. A p p l e t o n a n d

Company, Hew Y o r k , 1 9 1 4 . K eezer, D e x t e r M e r r i a m ,

C u tle r , A ddison T hayer, and G a r f ie ld ,

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L au g h lin ,

J.

L aw rence,

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The P r i n c i p l e s

S o n s , New Y o r k ,

M arsh all, A lfre d ,

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1903.

P r i n c i p l e s o f E conom ics.

M acm illan and C o ., L im ite d , London, M ill,

John S t u a r t ,

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1S98.

to S o c ia l P h ilo so p h y ,

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P h illip s,

4th ed.

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Some o f T h e i r A p p l i c a t i o n ed.

Bank C r e d i t ;

1900.

In c .,

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1925.

( E d . ) R e a d i n g s i n Money a n d B a n k ­

The M a c m i l l a n Com pany, New Y o r k , W illiam A .,

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P r i n c i p l e s and O p e ra tin g P r o - .

M c G r a w - H i l l B ook Com pany,

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1920.

U ses.

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a n d Com pany, New Y o r k , 1 9 2 2 . R ufener,

L. A .,

P r i n c i p l e s o f E conom ics.

C om pany , New Y o r k , S c o tt,

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W i l l i a m A . , Money a n d B a n k i n g .

a n d C o m pany, New Y o r k , S e l ig m a n , Edwin R . A . ,

H oughton M i f f l i n

6th ed.

1926.

P rin c ip les

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R e f e r e n c e to A m erican C o n d i t i o n s . G r e e n a n d C o . , New Y o r k ,

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1927.

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G i n n a n d C om pany ,

APPSMDIX

101

TABLE I DEMAND DEPOSITS OP SELECTED REPORTING MEMBER BANKS OF THE FEDERAL RESERVE SYSTEM IN LEADING CITIES 1919-1927

_

D ate 1919

N e t Demand D e p o s i t s (in m illio n s o f d o lla rs )

M ar.

28

1 0,054

June

27

10,286

S ept. Dec.

26

1 0,839

26

11,174

M ar.

26

11,496

June

25

11, 3 4 7

1920

S ep t. Dec.

24

11,161

31

1 0 , 94-2

M ar.

25

10,186

June

29

10,046

1921

S ept. Dec.

28

9,8 6 6

28

10,174

M ar.

29

10,309

June

28

1 1,124

1922

S ept. „ Dec.

27 27

11,085 11,255

102

TABLE I (CONTINUED) DEMAND DEPOSITS OP SELECTED REPORTING MEMBER BANKS OP THE FEDERAL RESERVE SYSTEM IN LEADING CITIES 1919-1927

D ate

N e t Demand D e p o s i t s

192 3 M a r . 28

11 ,0 8 2

J u n e 27

11 ,1 04

S ept.

1 0,891

26

D e c . 26

11,034

1924 M a r. 26

11 ,1 71

J u n e 25

1 1,837

S ep t.

1 2 ,6 30

24

D ec. 31

13,254

1925 M a r . 25

1 2,588

J u n e 24

1 2,725

S ept.

13,046

30

Dec. 30

1 3 ,2 6 1

1926 Jan.

27

13,034

Feb.

24

12,935

M ar. 31

12 ,9 0 1

A p r. 28

12,829

May 26

12,917

June 30

13,252

103

TABLE I (CONTINUED) DEMAND DEPOSITS OF SELECTED REPORTING MEMBER BANKS OF THE FEDERAL RESERVE SYSTEM IN LEADING CITIES 1919-1927

D ate

N e t Demand D e p o s i t s

J u l y 28

12,846

A u g . 25

12,835

S ep t.

13,003

29 27

.1 2 ,9 1 8

N ov. 24

12,884

D e c . 29

1 3,082

O ct.

1 92 7 Jan.

26

1 2,902

F e b . 23

1 2,841

M a r . 30

13,030

A p r . 27

1 3,065

May 25

1 3,216

J u n e 29

1 3,404

J u l y 27

1 3,258

A u g .31

13,381

S ept. O ct.

Source:

28

13,279

26

13,4 -30

Nov. 30

14,001

D e c , 28

13,786

F e d e ra l R eserve B oard, o r S t a t i s t i c a l A b s tr a c ts o f th e U n ited S ta te s , 1928, p. 253.

104

TABLE I I DISTRIBUTION OF LOANS ACCORDING TO OCCUPATIONS NATIONAL BANKS, NOVEMBER 1 5 , 1 9 2 0

fo lo an s to to ta l lo an s

fo to t o t a l em ployed popula­ tio n

# 1 ,9 9 8 ,9 9 3

21$

26$

M anufacturing concerns

2 ,8 6 2 ,5 0 6

29%

31$

M erchants, and r e t a i l

3 ,5 81 ,46 2

57%

10$

B r o k e rs and in v e s tm e n t hankers

6 6 4 ,010

7%

1$

R ailro ad s, e le c tr ic r a i l ­ ways , l i g h t , h e a t an d power com panies

225,389

2 %o

9$

P r o f e s s i o n a l men

3 7 5 ,438

4 %o

2$

9 ,7 0 7 ,7 9 8

100%

(000 o m i t t e d ) Farm ers and l i v e men

sto ck

w h olesale

T o ta l R eported Percent of t o t a l rep o rte d t o t o t a l Demand D e p o s i t s T o t a l Demand D e p o s i t s o f N a tio n a l Banks

Sources:

70$ 1 3 ,7 6 4 ,7 2 1

A n n u a l R e p o r t o f t h e S e c r e t a r y o f t h e T r e a s u r y on th e S ta te of th e F in a n c e s , 1920. S t a t i s t i c a l A b s tr a c t of the U n ite d S t a t e s . 1928, p. 49.,

105

TABLE I I I COMPARATIVE TABLE SHOWING THE VELOCITY OF CIRCULATION OF MONEY AND DEMAND DEPOSITS 1 8 9 6 - 1 9 0 9 AS ESTIMATED BY IRVING FISHER

(F igures

Source:

show a n n u a l t u r n o v e r )

Year

Money

1896

1 8 .8

3 6 .6

1897

1 9.9

3 9 .4

1898

2 0 .2

4 0 .6

1899

21.5

4 2 .0

1900

2 0 .4

4 0 .1

1901

2 1 .8

4 0 .6

1 90 2

2 1 .6

4 0 .5

1903

2 0.9

39.7

1904

2 0 .4

3 9 .6

1905

21 .6

4 2 .7

1906

21.5

4 6 .3

1907

2 1 .3

45 .3

1908

19.7

4 5 .0

1909

2 1 .1

52.8

Irv in g F ish e r,

Demand D e p o s i t s

The P u r c h a s i n g Power o f Money,

304.