Chapter XI: Barter

IN the statement of the quantity theory, the proviso is commonly made that all exchanges must be made by means of money, or of money and bank-credit. Barter is excluded by hypothesis. If resort to barter were possible, then people might avert the fall in prices due to scarcity of money, or increase in trade, by dispensing with money in part of their transactions, and the proportional decrease in prices which the quantity theory calls for would be lacking. Is this assumption true? Is barter banished from the modern world, or does it remain reasonably possible, and, to a considerable degree, actual?

Fisher maintains the thesis—the failure of which he admits would spoil the quantity theory¹—that barter is practically impossible, and negligible in modern business life. “Practically, however, in the world to-day, even such temporary resort to barter is trifling. The convenience of exchange by money is so much greater than the convenience of barter, that the price adjustment would be made almost at once. If barter needs to be seriously considered as a relief from money stringency, we shall be doing it full justice if we picture it as a safety valve, working against a resistance so great as almost never to come into operation, and then only for brief transition intervals. For all practical purposes and all normal cases, we may assume that money and checks are necessities for modern trade.”²

This contention seems to me untenable. I think it can easily be shown that barter remains an important factor in modern business life, especially if one extends the term barter, a little, to cover various flexible substitutes for the use of money and checks in effecting exchanges. Clearly from the standpoint of the present issue, such an extension of the meaning of barter is legitimate, as any such substitutes would equally spoil the proportionality in the supposed relation between prices and money, or prices and trade.

Where does one find barter? Well, not to be ignored would be the advertisements which fill many columns of such a paper as the New York Telegram in the course of a week: “Wanted: to trade a well-trained parrot for a violin”—a trade that might, or might not, be a wise one! There is a good deal of such simple barter among the people. Then, perhaps more important, is the regular practice of sewing machine, piano, automobile, and other similar companies of taking part of the payment for a new machine, piano,¹ or automobile in the similar thing which the owner is discarding. The old machine, piano, etc., are then repaired, repainted, and sold again. This is a very extensive practice. Again, there are companies which combine the business of wrecking old houses and building new ones, who regularly take the old materials as part of their pay. This is a highly important feature of the organized building trade in great cities, and is frequently done in small towns. The building trade is no negligible matter. The “horse-trade” still thrives in rural regions, and barter of various kinds, of live stock, of grain and hay, of fresh and cured meat, and of labor, is an important feature in rural life in many sections. Much of agricultural rent in the South is still paid in kind, under the “share system.” Much labor, especially farm and domestic labor, is still paid for partly in kind. Where payments for labor are made in orders on company stores, we have again what is virtually barter, from the standpoint of the point at issue. Real estate transactions make large use of barter. Farms are exchanged for one another, with some cash (or more usually, a promissory note) “to boot.” The writer has repeatedly heard real estate men say to customers: “I can’t sell it for you very easily, but I can trade it off, and maybe you can sell what you trade it for.” This is perhaps more frequent in rural real estate transactions, and in the smaller cities, than in large cities, but it is very extensive in New York City.¹

Again, when corporations are to be combined, various plans are possible. There may be a merger; there may be a holding corporation; there may be a lease. If the money market is easy, one of the former methods will be used,—most frequently, for legal reasons, the holding corporation, if there are any valuable franchises involved. But mergers and holding corporations commonly involve buying out the interests which are to be absorbed, and call for the use of checks. If the money market is tight, therefore, the promoter of the combination may frequently find the lease the more advantageous form of consolidation.² The great advantage of the lease is that, when the money market is tight, it involves no financial plan, no underwriting, no outlay of “cash.” This is, therefore, an equivalent of barter, so far as the point at issue is concerned. Even where a holding corporation is formed, however, there may be considerable barter: the stockholders of the corporation which is absorbed may receive payment for their stocks, in whole or in part, in the securities of the holding company, rather than in checks. An era of financial consolidation, such as we have been passing through, and through which we have not by any means gone, though the movement toward monopoly has been in great degree checked, presents a great deal of this sort of barter, or equivalents of barter.¹ A striking thing to notice here, moreover, is the flexible margin between use of bank-credit and barter, a margin depending primarily upon the condition of the money market, and particularly upon the money-rates.

Not yet has the most important element in modern barter been mentioned. I refer to the “clearing-house” arrangements of the stock and produce exchanges. Under these arrangements, brokers who have sold ten thousand shares of Westinghouse El. and M. Common during the day, and bought seven thousand shares, buying and selling being in smaller lots, with a number of different houses, no longer are obliged to deliver ten thousand shares, receiving therefor $700,000, and to receive seven thousand shares, paying therefor $490,000. Instead, they deliver three thousand shares only to the clearing house, and receive from the clearing house only $210,000 when the transaction is, from the standpoint of the particular broker involved, completed. This is a far remove, in technical perfection, from primitive barter, but it is barter, and it saves the using of a vast deal of bank-credit as between brokers. How important it is, from the standpoint of the stock exchange, may be judged from the following statement in Sprague’s Crises Under the National Banking System: “A much more fundamental change in the organization in the New York money market came with the establishment of the stock exchange clearing house in May, 1892. It led to a very considerable reduction in the clearing-house exchanges of the banks and also, and more important, in the volume of certified checks. [Italics mine.] Over-certification of checks ceased to be a factor of the first magnitude in the banking methods of the city. Had not this arrangement for stock-exchange dealings been set up, it is probable that it would have been necessary to close the stock exchange in 1893 and in 1907, and it is also probable that the volume of business transacted in the years after 1897 could not have been handled.” (P. 152.)

The same arrangements have been widely introduced in other stock exchanges, and in the produce exchanges.¹

In general, with reference to barter, this point is significant. The money economy has made barter easier rather than harder. It has made possible a host of refinements in barter, which make it at many points more convenient and cheaper than check or money exchanges. It is common to find our present methods of conducting foreign trade described as a “system of refined barter,” which indeed, from the standpoint of the present issue, it is: bills of exchange are neither money nor bank-credit! Where bills of exchange are used in internal trade extensively—as in Germany, where they pass from hand to hand in several transactions before being discounted at banks¹—we have a highly important substitute for money and deposits, which functions as barter,—flexibility of substitutes for money and deposits is strikingly evident. The feature of the money economy which has thus refined and improved barter is the standard of value (common measure of value) function of money.² This standard of value function, be it noted, makes no call on money itself, necessarily. The medium of exchange and “bearer of options” functions of money are the chief sources of such additions to the value of money as come from the money-use. But the fact that goods have money-prices, which can be compared with one another easily, in objective terms, makes barter, and barter-equivalents, a highly convenient and very important feature of the most developed commercial system. And so we reject another essential assumption of the quantity theory.³

¹Loc. cit., p. 156.

²Ibid., p. 160.

¹ Or organs for pianos, etc. A common practice—less common in the North than formerly—is the payment of bills at country stores in produce. There is not a little barter at secondhand stores in New York City.

¹ Mr. Burton Thompson, of No. 7 Wall St., who knows the real estate situation there intimately, states that while dealers do not like to “swap” real estate, and do little of it when business is good, they are forced to do it extensively when business is sluggish, “as has been the case for the past four or five years.”

²Cf. E. S. Meade, Corporation Finance, p. 376, and passim.

¹ The same thing often happens when a bond issue is paid off—bondholders may take their pay in new bonds. “Conversions” of bonds into stocks, or of preferred into common stock, are also barter transactions. $220,000,000 of the $420,000,000 which Mr. Carnegie and his associates received from the Steel Trust for their plants, etc., was paid, not with money and checks, but with bonds. Vide Stevens, Industrial Combinations and Trusts, p. 101.

¹ The foregoing had been written before the discussion in the Annalist of Feb. and March, 1916 (pp. 183–184, 245–272, 313–317, 344, 377), in which Professor Fisher and the present writer joined issue with reference to Professor Fisher’s estimate, 387 billions, for the volume of trade in the United States in 1909. The present writer contended that the banking transactions which Professor Fisher took as representative of trade greatly overcounted trade, since they included loans and repayments, taxes, several checks in one transaction, gifts, etc., etc. Professor Fisher contended that the overcounting was offset by undercounting, and instanced particularly the clearing-house arrangements in the speculative exchanges, where checks are in part dispensed with, and the offsetting in “running accounts” through book-credit. This indicates a substantial change in Professor Fisher’s view as compared with that set forth in the Purchasing Power of Money, where he maintains, as shown above, that barter is virtually non-existent, that money and checks are “for all practical purposes and all normal cases,” “necessities of modern trade,” (p. 160), and that book-credit merely postpones, and does not dispense with, the use of money and checks (p. 370).

The extent of the offsetting by barter, clearing-houses in the exchanges, and book-credit, though very great, is quite small as compared with Professor Fisher’s 387 billions, and does not nearly offset the overcounting. The writer has obtained some fairly definite data on this point, which will be presented in the chapter on “Statistical Demonstrations of the Quantity Theory,” in discussing the volume of trade.

¹Miscellaneous Articles on German Banking, Report of National Monetary Commission, p. 175. Cf. infra, pp. 288–290.

²Cf. our chapter on “The Functions of Money,” infra.

³ One familiar feature of corporation finance makes barter much preferable to money transactions, in one connection, which involves very many corporations indeed, at their inception. Stock, in order to be marketable, must be “full-paid and non-assessable.” If the corporation sells its stock to the first stockholders, this means that money must be paid for it to the full par value, dollar for dollar. This is usually not easy. An especial difficulty would then present itself that the promotor would have trouble in getting any pay for his work. (Meade, Corporation Finance, passim; Sullivan, American Corporations, passim.) If, however, the stocks are paid for in goods and services, the courts are much less exacting in looking to see if full value has been received. Barring obvious fraud, the courts will usually count the stock full paid and non-assessable even though the value of the goods and services received is not very great. The first sale of the stocks of a new corporation, therefore (if it is important enough to wish to have a public market for its stocks), is a barter transaction, as a rule.