Chapter XIX: Statistical Demonstrations of the Quantity Theory—The Rediscovery of A Buried City

IN the following chapter, as in most of the preceding chapters, constructive doctrine is aimed at, even though the discussion takes, in considerable part, the form of critical analysis of opposing views. We shall seek to set forth the facts, as far as may be, regarding the relations of banking transactions to trade, the relations of clearings to amounts deposited in banks, the relation of New York City clearings to country clearings, and of New York bank transactions to bank transactions in the rest of the country. We shall seek to ascertain the extent of variability in that highly elusive magnitude, “velocity of circulation,” particularly “V′.” We shall indicate something of the bearing of index numbers of prices on the theory of the value of money as here presented. In reaching conclusions on these and related matters, we shall build on the investigations of Dean Kinley, on the very interesting statistical studies of Kemmerer and Fisher based on Kinley’s figures, on investigations more recently made by the American Bankers’ Association regarding the relation of bank transactions and bank clearings, on figures from reports by the Comptroller of the Currency, as well as on other sources. One purpose of the chapter is to criticise the statistics which purport to prove the quantity theory. The bulk of the chapter is given to this. But the work of Fisher and Kemmerer thus criticised yields rich rewards for the study. The conclusions they have drawn from their figures are, in the judgment of the writer, untenable, but the figures themselves are of immense interest and importance.

The controversy over the quantity theory has been waged with many weapons. Theory, history, and statistics—to say nothing of invective!—have been freely employed. In large measure, the statistical studies have been concerned with the direct comparison of quantity of money and prices, in their variations from year to year. One of the best of these studies, that of Professor Wesley C. Mitchell, in his History of the Greenbacks (followed by his Gold, Prices and Wages under the Greenback Standard), has, to the minds of many students, including the present writer, put it beyond the pale of controversy that the fluctuations in the gold premium, and in the level of prices, in the United States during the Greenback period, both for long periods and for daily changes, were not occasioned by changes in the quantity of money,¹ but rather, primarily, by military and political events, and other things affecting the credit of the Federal Government, together with changes affecting the values of gold and of goods. Professor Mitchell’s discussion is so detailed and thorough, that what controversy remains relates, not to his facts, but rather to the possibility of interpreting those facts in harmony with the quantity theory, by repudiating the notion that the direct comparison of gold premiums or of prices with quantity of money gives a valid test.²

Recent defenders of the quantity theory have undertaken the examination of more complex statistics than those concerned with the simple concomitance of quantity of money and prices. Two of these studies, the first by Professor Kemmerer¹ and the second by Professor Fisher, are so elaborate, have commanded such general attention, and have been accepted by so many students as conclusive demonstrations, that I feel it proper to give them detailed examination. I do this especially because highly important facts for our construction argument emerge from this critical examination. Kemmerer’s and Fisher’s studies reach high-water mark in the effort to give statistical demonstrations of the quantity theory. If they are invalid, then I know no other attempts which many students would suppose to be possible substitutes. The theory involved in both these studies is clearly stated by Professor Kemmerer: “A study of this kind, to be of any value, must cover the monetary demand as well as the monetary supply. Any test of the validity of the quantity theory consisting merely of a comparison of the amount of money in circulation with the general price-level is as worthless as would be a test of the power of a locomotive by a simple reference to its speed without taking into account the load it was carrying or the grade it was moving over.” This criticism of many previous studies is, in general, I think, valid, though I should except from this list such detailed studies as that of W. C. Mitchell, who takes account, as far as may be, of all the variables involved, and who considers day by day and week by week changes. I think the older studies of Tooke,² may also be excepted. In point of fact, if one wishes to know how much reliance may be placed in the quantity theory as a basis for prediction, when one knows that money is increasing, the simple comparison of money and prices is a fair test. If the “other things” which must be “equal” are so numerous and complex that the quantity theory cannot manifest itself in a direct comparison, much of its significance as a basis of prediction is gone.

It is perfectly true, however, that studies running through long periods, which give simply figures for general prices and figures for quantity of money, omitting volume of trade, are not very relevant either for proof or disproof.¹ And the conception underlying the studies of Kemmerer and Fisher, that not merely money and prices, but also volume of bank-credit, volume of trade, velocity of monetary circulation, and velocity of bank-credit, must be measured, undoubtedly represents a big advance in the conception of the statistical problem involved. The mere stating of the problem is an intellectual achievement of no mean order, and the ingenuity and scholarship involved in seeking data for concrete measurement of these highly elusive elements must command the admiration of every student of monetary problems. Volume of trade, velocity of money and velocity of bank-credit had been generally supposed, until these studies were undertaken, to be beyond the reach of the statistician. There can be no doubt at all that the efforts to measure them, or to measure variations in them, by Kemmerer and Fisher, have greatly advanced our general knowledge of the phenomena of money and credit.

With great admiration for the magnificence of the problem undertaken, and for the industry, ingenuity and scholarship which have been devoted to its solution, I have nevertheless reached the conclusion that the figures assigned by these writers to the magnitudes of their “equations of exchange” are, with the exceptions of the figures for money and deposits, widely at variance from the real facts in the case, and second, that if they were correct, they could in no sense be said to constitute proof of the quantity theory.

In the critical analysis which follows, chief attention will be devoted to Fisher’s statistics. His is the later study, and it follows, in main outlines, the methods laid down by Kemmerer. He has employed Kemmerer’s statistics in considerable part, amplifying them for later years, using some data not available when Kemmerer wrote, and undertaking a fuller solution of certain problems than Kemmerer did. I shall, however, from time to time make reference to Kemmerer’s figures, and show points of difference between the two studies.

Let me first briefly state the second point of my criticism of these studies: namely, that even if the statistics are correct, they do not constitute proof of the quantity theory. The statistics purport to be concrete data filling out for different years the equation of exchange.¹ But the equation of exchange, as we have seen, does not prove the quantity theory. The quantity theory is a causal theory, and causation involves an order in time. The concrete figures for the equation do not prove that. Even Kemmerer’s concluding chart on p. 148, showing a rough concomitance between “relative circulation” and general prices does not show that changes in relative circulation are causes of changes in general prices. The causation might be the reverse for anything his figures tell us. Fisher himself recognizes this, in considerable degree: “As previously remarked, to establish the equation of exchange is not completely to establish the quantity theory of money, for the equation does not reveal which factors are causes and which are effects.”² Again: “But, to a candid mind, the quantity theory, in the sense in which we have taken it, ought to appear sufficiently secure without such checking. Its best proof must be a priori.”¹

The main criticism here, however, relates to the figures themselves, rather than to their meaning. The figures given by Professor Fisher are concrete magnitudes to fill out his equation of exchange, MV+M′V′ = PT² for the years since 1896. Thus, for 1909, the figures are: M = 1.61 billions; M′ = 6.68 billions; V = 21.1; V′ = 52.8; P = $1; T = 387 billions.³

Now in what follows, I shall challenge all these estimates except P for 1909, V for 1896 and 1909, and M and M′ for all years. The figures for M and M′, being the results of fairly simple computations based on Governmental statistics, need not be questioned. P for 1909 is arbitrarily placed at $1.00. V for 1896 and 1909, for reasons which will later appear, is better based than for other years, though Kemmerer and Fisher have differed greatly in their estimates for V, the former placing it at 47 and the latter at 18 or 20.⁴ My, criticisms with reference to V, however, will relate to the years other than 1909 and 1896.

The sources from which these absolute magnitudes are drawn are, primarily, two investigations by Dean David Kinley, one in 1896 and the other in 1909, in coöperation with the Comptroller of the Currency.⁵ The purpose of these investigations was to ascertain the proportions of checks and money in payments in the United States. Banks of all kinds, national and State banks, trust companies, private banks, etc., were requested by the Comptroller to supply data for a given day (March 16 in 1909) showing what their customers deposited on that day. They were asked to classify these deposits as cash, on the one hand, and as checks, drafts, etc. on the other. They were also asked to give a cross classification of the same deposits, as “retail deposits,” “wholesale deposits,” and “all other deposits.” In 1909, over 12,000 banks of all kinds, out of about 25,000 banks, replied, and of these replies 11,492 were in available form. These replies showed a total of deposits of over 688 millions of dollars. Of this total, 647 millions were in checks, so that checks made up 94.1% of the whole. About 60 millions of this total were retail deposits, about 125 millions were wholesale deposits, and the rest, about 503 millions, were classed in the “all other” category. Kinley’s use of these figures, for his purpose, seems to me in every way conclusive and safe. He was interested merely in the question of the proportions of checks and money in payments, retail, wholesale, and “all other.” The absolute magnitudes of the elements in the equation of exchange he was not trying to measure. Professor Fisher’s use of the figures presents a different problem.¹

Let us consider, first, Professor Fisher’s estimate of M′V′, taken together. M′V′ is considered to be equal to the total amount (in dollars) of checks deposited during the year.² To get this, for 1909, Kinley’s figure, above, for checks deposited in 11,492 banks on March 16, 1909, is used. This figure is 647 millions. As half the banks had not reported, an estimate for the non-reporting banks was obtained from Professor Weston, who had aided Dean Kinley in the investigation, and who had access to the original data. Professor Weston estimated the total checks deposited during the day at 1.02 billions.¹ The question then arose as to whether this day was typical for the year. Professor Fisher found New York City bank clearings of March 17 (the day after, on which these checks would get into the clearings) to be 28% below the average for the year. He assumed the rest of the country to be half as abnormal as New York City, and increased the 1.02 billions to 1.20 billions, getting what he conceived to be the daily average of checks deposited in the United States in 1909. Multiplying this figure by 303, the number of banking days in New York City (and so, presumably, a fair average for the number of banking days in the country), he obtained 364 billions for the checks deposited in 1909. This figure he considered to be M′V′, the volume of bank deposits,² multiplied by its velocity of circulation. To obtain V′, therefore, his problem was simple: he divided the figure for M′V′ by the figure for M′ previously obtained from government statistics, and obtained V′.

Now I wish to call attention to three important errors involved in this calculation of M′V′ for 1909. (1) The assumption that the total check circulation is the same as the volume of checks actually used in trade is a violent one. Payments may be tax payments, loans and repayments, gifts, what not. Many checks may be used in a single transaction. Surely not all of this is properly to be counted in the M′V′ of the equation of exchange. But this topic is better discussed in connection with the estimate for T, and I reserve its fuller discussion till then. (2) The assumption that the rest of the country was abnormal in its clearings on March 17, 1909, is a pure assumption, which investigation does not verify. The rest of the country was, in fact, nearly normal! The error that comes for the year from increasing the total on this assumption amounts to at least 31 billions! The total for the year, on Professor Fisher’s method of computation, with the correction to make the assumption regarding outside clearings correspond with the facts, is 333 billions, instead of 364 billions! As the figure for 1909 is a basic figure, on which figures for other years are calculated, this error is extremely significant.¹

(3) A yet more serious error in this computation is the assumption that New York City was complete in Kinley’s figures, while the rest of the country was incomplete. This error, as we shall see, largely neutralizes the error above, so far as the “finally adjusted” figure for 1909 is concerned, but it makes a vital difference in the figures for other years, as will appear, since it affects the “weighting” of New York clearings and outside clearings in the index of variation by means of which M′V′ for years other than 1909 is determined. The assumption that New York is complete, in Kinley’s figures, and that all of the extra hundreds of millions added by Professor Weston in his estimate for the non-reporting banks belongs to the country outside New York, is made by Professor Fisher both on pp. 444–445, in estimating M′V′ for 1909, and on p. 446, in finding an index of variation for M′V′. The only reason given, so far as I can find, is the following: “This figure, being for New York, [Italics mine], is probably nearly complete.” (Loc. cit., p. 446.) With this as a basis, Professor Fisher proceeds in his calculations to treat the figure for New York, 239 millions, as absolutely complete, and gives the rest of Professor Weston’s 1.02 billions for the day, or 786 millions, to the country outside. The error above mentioned, of assuming the rest of the country to be abnormally low on March 17 in its clearings, still further increases the amount assigned to the rest of the country in the total figures for the year.¹ The conclusion finally is that New York had deposits of 93 billions in checks for the year, while the rest of the country had deposits of 271 billions in checks. As New York clearings for the year were 104 billions, while clearings for the rest of the country were only 62 billions, Professor Fisher concludes that New York clearings overcount New York check deposits, and outside clearings greatly undercount outside check deposits, so that, in the index of variation of check deposits, for years other than 1909 and 1896, New York clearings should be given a weight of only 1, while outside clearings should be weighted by 5. “That is, on the basis of 1909 figures, five times the outside clearings plus once the New York clearings should be a good barometer of check transactions.” (P. 447.) All this rests on the assumption that New York figures for March 16, 1909, were complete, and the only reason assigned is, “being from New York!”

Now the figures from New York were not complete. And New York clearings do not overcount New York check deposits. Outside clearings do not undercount outside check deposits nearly to the extent that Professor Fisher assumes. For each of these three statements I shall offer what would seem to be conclusive evidence, and I shall attempt to get an estimate of the real relation between New York check transactions and check transactions for the rest of the country.

First, the figures for New York were far from complete. It may be noted that Dean Kinley, in his volume for 1909,¹is very careful to repudiate the assumption that the cities were complete more than the country: “Moreover, it is a mere assumption that the non-reporting banks are mainly the small banks in the country districts. A great many city banks also did not report.” (Italics mine.) That this is true for New York is abundantly evident from figures there given for the private banks and the trust companies, not to consider at all the State and national banks. New York shows only $1,751 in checks deposited in the “all other deposits” in private banks! This is a city which includes among its private bankers J. P. Morgan & Co., Kuhn, Loeb and Co., J. & W. Seligman & Co., and others! Figures from these banks appear nowhere in Kinley’s totals, since deposits made by these banks in other banks are also excluded from Kinley’s figures.¹ Of course, exact figures cannot be given to show how much New York would be increased had the private banks made full reports. We have no reports of any kind from these institutions. Every feature of their business is kept from the lime light, as far as possible—a practice which is much to be regretted, since it arouses hostility and suspicion, where a statement of the facts in the case would frequently entirely dispel them. We have, however, some information regarding the magnitude of their deposits, meaning by deposits, not what Kinley means in this investigation, namely, checks, etc., deposited on a given day, but rather, deposits in the balance sheet sense of demand obligations to depositors. In Nov. 1912, J. P. Morgan and Co. held deposits of $114,000,000, exclusive of 49 millions on deposit with their Philadelphia branch of Drexel & Co. About half of these were deposits of interstate corporations. Kuhn-Loeb held, on the average, for the six years preceding 1913 over 17 millions of deposits of interstate corporations. What their aggregate deposits were, we do not know. These figures are obtained from the report of the Pujo Committee.¹ Morgan’s deposits were equalled by only three banks and two trust companies in New York (as of April 3, 1915), and Kuhn-Loeb’s deposits for interstate corporations alone exceeded the total deposits of any one of the great majority of the New York Clearing House banks and trust companies. Of course, large deposits in the balance sheet sense need not mean large deposits made on a given day. Private bankers’ deposits may be inactive. But we know, first, that half of these figures for Morgan, and the whole of the figures given for Kuhn-Loeb, represent the deposits of active business corporations, engaged in interstate business. They are not mere trust funds lying idle, or awaiting investment in securities. What the rest are we can only conjecture. That they are deposits of men and firms connected with the Stock Exchange in some way is highly probable. The whole drift of the statistics presented in this book, and of the argument developed in this book, would serve to show that such deposits are likely to be more than ordinarily active.² I refrain from assigning any figures as to the amount of checks deposited in private banks in New York on March 16, 1909. It must have run high into the millions.¹ It certainly exceeded the two thousands, or less, reported to Kinley! The figures for New York were, thus, incomplete.

But the trust companies were also incomplete. The national banks in New York reported checks totaling 186.5 millions, for all three classes of deposits; the State banks reported only 38.1 millions; the trust companies only 14.2 millions. With aggregate deposits, as shown by their balance sheets, exceeding the deposits of national banks² the New York City trust companies reported, as deposited on March 16, 1909, less than half as much as the State banks, less than a tenth as much as the national banks, and only 6.8% of the two combined—5.9% of the total from all three classes of institutions!

These figures are hard to reconcile with the assumption that the trust companies in New York were complete on that date.

It is, of course, possible that the trust companies, though having large deposits, have inactive deposits. This is sometimes held to be the case. But that the difference is so great in activity of deposit accounts between banks and trust companies is hardly credible. I have looked into this matter with considerable care, and have secured information and opinions from men intimately acquainted with the trust companies of New York from the inside. The only available quantitative measure of the activity of deposits would seem to be the volume of a bank’s clearings. This is not perfectly accurate, by any means, but it is the best available test. Through the courtesy of a Vice President of one of the largest New York trust companies, I have obtained figures from an official of the Clearing House, which show that in New York trust company clearings run from 20 to 25% of the whole. On this basis, the trust company figures for 1909 were incomplete to the extent of from 33 millions to 46 millions, on the day in question. These clearings figures, however, are for the year, 1915, and not for the period before May, 1911, when the trust companies were admitted to the Clearing House. Prior to that time they did not deal directly with the Clearing House, but through the member banks. Do these figures, therefore, represent the situation as it existed in 1909? The possibility was entertained that entering the Clearing House had made a difference in the reserve policy of the trust companies, and so had made them change the character of their business, in such a way as to bring about greater activity of accounts. This question was put to the official of the trust company before mentioned, and his reply is that the State law regarding reserves (passed after the Panic of 1907) had already brought about this change in reserve policy, and so no difference was made upon entering the Clearing House.

The same gentleman, by the way, replying to a question regarding the deposits in private banks in New York, and the influence of such deposits on clearings, writes: “The actual figures could not be obtained from the Clearing House . . ., consequently can only say that deposits made with these houses add to the Clearing House totals very large sums.”

There is one piece of evidence which would seem to negative these conclusions regarding the trust companies. In the Report of the New York State Superintendent of Banks, for Dec. 31, 1907, p. xxxv, is a statement that during the two years, 1903–05, the trust companies of New York cleared only 7% as much as the banks. The statement relates, however, to a period during which the trust companies not only had no Clearing House membership, which of course was true up to 1911, but also had largely withdrawn from the privilege of clearing through member banks.¹ Under these circumstances, even 7% would seem quite high. Inquiry was made of the Honorable Clark Williams, who was State Superintendent of Banks at the time the report was made, as to the source of the figures.² Mr. Williams, in reply, defends the figures as correct for that period, but authorizes the writer to quote him as in no way surprised at the percentages given above, 20 to 25% of the total clearings, in view of developments and changes in trust company business.

I conclude that the trust company figures for March 16, 1909, were exceedingly incomplete. The national bank figures were probably more nearly complete than any others, first because they are large, and second, because national banks would feel more obligation than other banks to reply to questions from the Comptroller. The State bank figures, 38.1 millions, as against national bank figures of 186.5 millions, were probably incomplete also, to a considerable extent, though State banks are not dominating factors in New York City. That they should exceed the figures for trust companies is surely evidence of the incompleteness of the trust company figures. The private banks are incomplete, with absolute certainty, since they are virtually not represented at all.

Further evidence that the New York figures were incomplete, however, will appear in the data regarding our second thesis, namely, that New York clearings do not overcount New York check deposits. The aggregate check deposits reported from New York, on the date in question, is 239 millions. Clearings for that day were 268 millions,¹ substantially exceeding the reported check deposits. Now do clearings exceed check deposits in New York City?

Evidence with reference to outside clearings, in connection with bank transactions, we now have in very definite and abundant form, and it will be convenient to approach the question of New York clearings, first, indirectly, via country clearings. We shall, therefore, take up first the thesis that clearings outside New York do not undercount bank deposits outside New York nearly as much as Professor Fisher thinks. According to his estimate, checks deposited during the year in banks outside New York (exclusive of checks deposited by one bank in another) were 271 billions. (Loc. cit., 446.) Outside clearings were only 62 billions, and his conclusion is that the ratio of deposits to clearings is 4.4 to 1, or, in other words, that outside clearings amount to less than 22.8% of outside check deposits.

Now an extensive investigation, covering the period from June, 1913, to Oct. 1914, inclusive, has been made by the American Bankers’ Association, through Mr. O. Howard Wolfe, Secretary of the Clearing House Section. This investigation covered cities of various sizes, in various parts of the country. Its results are immensely more trustworthy than any results based on a single day, as Professor Fisher’s results are, could be, even had Professor Fisher’s method been otherwise correct. An account of this investigation is to be found in the Annalist of Dec. 7, 1914.¹ This investigation involves, for the period in question, a comparison of “total bank transactions” in each city with the clearings of that city, together with a summary covering all the cities. “Total bank transactions” consist of all debits against deposit liabilities of each member of the Clearing House, whether they come through the Clearing House or over the counter. They include payrolls, for example, which, of course, never get into clearings. They include drafts on deposits of one bank in another. In a letter to the Editor of the Annalist, Mr. Wolfe states that “total bank transactions include all debits against deposit liabilities, whether by check, draft or charge ticket. The only exceptions are certified checks and certain cashier’s checks, both of which to an extent represent a duplication.” For the period in question, clearings amounted, on the average, for all cities, to 40% of “total transactions.” The cities did not include New York City, as stated.

Now we cannot apply this 40% at once to the question in hand. Professor Fisher’s 22.8% relates to the relation between clearings and checks and drafts deposited, excluding items deposited by banks, and excluding, of course, cash deposited. What is the relation between Kinley’s “deposits” and Wolfe’s “total transactions”?

It is clear that “total transactions” must, in a period of time, exceed Kinley’s “deposits” very considerably. In a general way, what goes out of a bank, and what comes into a bank, must approximately equal one another in a period of time. In a general way, a depositor finds his income and his outgo balancing. Of course, some accumulate, paying in more than they withdrew, but in general such accounts are made with savings banks. The business man borrows from his bank, getting a “deposit credit” (without “depositing” in Kinley’s sense), then checks against his “deposit,” then receives checks in payments to himself, “deposits” them, building up his deposit balance again, and then checks against his deposit balance, in favor of the bank, to pay off his loan. What comes in and what goes out—abstracting from the growth of a rapidly expanding bank—balance. But notice, in the case cited above, that “total transactions” include more items than Kinley’s “deposits” show. When the bank makes a loan, and gives a deposit credit, this does not, usually, show in Kinley’s deposits. When, however, the loan is paid off by a check to the bank, it does show in “total transactions.” Moreover, when a man deposits cash in the bank, it does not show in Kinley’s figures for checks deposited. When, however, he withdraws cash from the bank, or his check to another is “cashed,” it does appear in “total transactions.” Further, checks deposited to the credit of one bank in another do not appear in Kinley’s figures. Checks drawn, however, by one bank on another do appear in total transactions. How great the difference is between “total transactions” and “deposits” in the banks outside New York we cannot say precisely. The cash items alone, on the basis of Kinley’s figures, would make a difference of about 9%.¹ To allow 11% excess to “total transactions” over “deposits” for the other reasons listed, is surely not to make an exaggerated allowance. We thus count “deposits” in Kinley’s sense, for the banks outside New York City, as 80% of “total transactions.” Since, then, clearings are 40% of “total transactions,” they will be 50% of “deposits.” This figure is more than twice as great as Professor Fisher’s figure of 22.8%. Even if we counted deposits as equalling total transactions, Professor Fisher’s estimate would be clearly very much too low.

How, then, do we stand? On Professor Fisher’s showing, the overwhelming bulk of checks deposited were in the country outside New York—271 billions for the year, outside, as against 93 billions in New York City. If the ratio (50%) for outside clearings to deposits was the same for 1909 that it was in 1913–14 for the outside banks, we shall have to revise this radically. We have 62 billions of country clearings in 1909; we would have, then, 124 billions¹ of country check deposits! If Fisher’s total figure for the country is correct, 353 billions as “finally adjusted,” the balance, or 229 billions, would belong to New York! New York clearings, 104 billions, would thus be less than half of New York deposits! If we count outside clearings for 1909 as only 40% of outside check deposits, outside deposits would be, for 1909, only 155 billions, as against Professor Fisher’s 271 billions, a difference of 116 billions! I am sure that his error in estimating outside check deposits is at least as great as that, and that we cannot assign to New York City less than a major part of the total check deposits of the whole country.

This result fits in with the figures actually reported to Dean Kinley, corrected to fit the known facts about March 17 clearings, better than Professor Fisher’s estimate, by a good margin. According to Professor Fisher’s estimate, New York City checks deposited are only 25.5% of the total. Kinley’s actual figures give 239 millions to New York City, and 408 millions to the country outside. But New York clearings were 28% below normal on March 17, while country clearings were only 2.45% below normal. Adding 28% to the figure for New York checks, we get 306 millions. Adding 2.45% to the outside checks, we get 418 millions. Of the total, 724 millions, New York checks would be, then, 42.3%. We have shown reasons for considering New York deposits to be very incomplete for March 16, particularly as regards the private banks and trust companies. Comparison of the New York figures with the results indicated by the ratio of country clearings to country deposits would thus indicate that New York was much less complete than the country as a whole. Even so, I need to add but 7.3% of the total to Kinley’s actual figures for New York, corrected in the light of next day clearings, to give New York half of the check deposits. Professor Fisher must subtract 16.8% of the total from the actual figures for New York, as corrected in the light of next day’s clearings, in order to get his figure of 25.5%. To vary as widely from the actually reported figures as Professor Fisher does, I should have to assign 59.1% of total check deposits to New York City. I refrain from making an exact estimate. I am content with the conclusion that something more than half of the checks deposited in 1909 were in New York. This seems to be too clear for serious controversy.

The indirect approach to the relation between New York clearings and New York deposits, via the study of outside clearings in 1913 and 1914, taken in conjunction with the figures for check deposits in 1909, would seem to make it quite clear that New York clearings do not exceed New York deposits, or, indeed, constitute a substantially higher percentage of them than is the case with country clearings and deposits.¹ Logically, assuming the correctness of the estimate for checks deposited, the case is complete: we have a simple problem in arithmetic: given country clearings for 1909, 62 billions; given the ratio of country clearings to country deposits (and a minimum for this ratio is clearly given, in the 40% which country clearings are of “total transactions”), we can fix a maximum for country deposits, which is 155 billions. Then, given our estimate of 353 billions for total check deposits, we subtract the maximum possible for country deposits from it, and get a minimum possible for New York City of 198 billions of check deposits. Comparing this with the known clearings of 104 billions in New York, we find that New York clearings constitute, as a maximum possible, 52.5% of New York check deposits. If the reasons given for holding check deposits in the country to be less than total transactions are accepted, the ratio of clearings to deposits in New York City is lower.

Indirect calculations, however, even when logically complete, ought to be checked up by other methods, when possible. We have some further data, drawn from an earlier period, 1890–91-92, which suggest the same conclusion.

The reason commonly offered for holding that New York clearings exaggerate local New York transactions, as compared with country clearings and country transactions, is that New York is the clearing house for the country. Country banks send their idle cash there; country banks pay other banks by drafts on their New York balances; country banks send out of town checks to New York for collection; business men in St. Louis pay business men in Chicago with New York exchange, etc. These items are supposed greatly to swell New York clearings.

Now several of these reasons are not at all valid. Cash shipped back and forth between New York and the interior does not get into clearings. Secondly, New York, because of the charges made for collecting out of town checks, has tended to lose much of the collection business. Chicago probably does a great deal more of it than New York does.¹ However, even if checks on out of town banks were sent largely to New York for collection, they would not get into the clearings. New York banks send checks on country banks directly to country correspondents. Checks on out of town banks sent in for collection do swell clearings in Boston and Kansas City, where arrangements have been made, to the advantage of all concerned, to have the clearing houses handle this business. But New York has not made provision for it.² The only checks that get into New York clearings will be checks drawn on New York banks.³

These checks will be of two kinds: (1) checks drawn by individuals and firms on New York banks. These checks will commonly be drawn by people in New York, and, in so far as they come from out of town, will represent business between New York and other places, hence, New York business. (2) Drafts by banks on their New York balances. These will be of three kinds: (a) drafts sold, especially by country banks, to their customers who need to make payments in other cities. Many of these will represent payments to New Yorkers for transactions between New York and the country, hence New York business, and will appear in the check deposits of individuals, firms, and corporations in New York. (b) There will also be drafts from one country bank, on New York, to another country bank, in which New York is truly being used as a clearing house, New York exchange taking the place of an intercity shipment of cash.¹ (c) Drafts by New York banks on New York banks, to avoid deficits at the Clearing House, or—especially in the case of private bankers, between whom and brokers the line is hard to draw,—for general purposes.

Now, fortunately, we have some data, trustworthy, even though old, for the volume of bank-drafts on New York, and, more important, for the proportion of drafts on New York to drafts on banks in other cities. These figures are, as stated, from the three years, 1890, 1891, and 1892. For the purpose in hand, however, they are relevant, since then, as now, New York clearings were nearly twice as great, on the whole, as country clearings, and if this excess of New York clearings is due to that cause, it should have manifested itself in these figures. If the proportion of these drafts on New York to the total of bank-drafts was greater than the proportion of New York clearings of total clearings, we might find reason for supposing that New York clearings were unduly swelled by this fact. But in fact, drafts on New York are not out of proportion. The figures are virtually complete for drafts drawn by all the national banks on national and other banks for the years in question. They will be found in the Comptroller’s Reports for the three years, under the caption, “Domestic Exchanges.” For 1890 the figures are:

Drafts on	(000,000 omitted)
New York	$ 7,284 (63.07%)
Chicago	1,084 (9.39%)
St. Louis	188 (1.64%)
Other reserve cities	2,537 (21.88%)
Other cities	464 (4.02%)
Total	11,550 (100%)

The Comptroller (Report of 1890, p. 19) gives an estimate for drafts drawn by State and private banks of an additional 6,089 millions. He does not try to apportion these among New York and the other cities. There is no reason to suppose that the percentage for these banks of drafts drawn on New York would be higher than for national banks, and there is some reason for supposing that they would be lower: namely, that these institutions would lack the incentive supplied by the National Bank Act for depositing reserves in a Central Reserve City. The Comptroller’s figures probably do not include the great private banks in New York, which deposit in New York commercial banks, and draw huge checks against their deposits. These checks, probably, however, chiefly represent stock exchange collateral loans to brokers, and so appear in brokers’ deposits as well as in New York clearings—represent New York deposits. I do not use this estimate in my computations. If I did, the results, so far as proportions are concerned, would be the same, since I could do nothing but assign the same proportions to them. It will be seen that my argument rests on the proportions, chiefly.

Now what difference would be made if we wiped out all these draft transactions, and reduced clearings to correspond? New York clearings in 1890 were 37,660 millions; country clearings were 21,184 millions. Let us subtract the drafts on New York from New York clearings, and the drafts on other places from the country clearings. The result is: New York clearings, 30,376 millions; country clearings, 16,918 millions. New York clearings still retain their former status! New York clearings are still nearly twice as great as country clearings! It is not the bank drafts used in making New York the “clearing house” for the country that swell New York clearings as compared with the rest of the country! It is something else! The main explanation, as we have in part seen, and shall further see, is a mass of speculative transactions, chiefly Stock Exchange transactions, and loan transactions connected therewith! New York clearings grow out of New York business, primarily.

The figures for the other two years vary little from those of 1890. What variation there is shows a growth of drafts on interior cities, and a decline of drafts on New York. New York showed 63.07% of these drafts in 1890, 61% in 1891, and 60.77% in 1892.¹

As we have seen, the only checks or drafts that get into New York clearings are those drawn on New York banks. The checks on New York banks probably almost all represent business in which one party is a New York individual, firm, or corporation. The drafts by out-of-town banks will contain all the items, virtually, that represent “clearings” through New York. Not all of these, by any means, will represent such clearings. A very substantial part of them will represent exchange sold to customers to make payments in New York. We exaggerate the “clearing through New York” when we subtract all these drafts from New York clearings. Since, however, we treat country clearings in the same way, no error results, so far as the proportions between them are concerned.

The two sets of data converge. Both from the figures of 1913–14, in conjunction with estimated check circulation in 1909, and from the figures of 1890–92, can we conclude that New York clearings do not overcount New York transactions. The conclusion would seem to be inevitable that New York is really as important in our volume of banking transactions as its clearings would indicate. This may be qualified by a recognition of the possibility that New York clearings are more efficient in handling check deposits than are clearings in other cities. Some scattering data from national banks for single days at a time indicate that a higher percentage of checks is cleared in New York than elsewhere in the country,¹ and one observation for five national banks for a ten-day period shows 67% of checks deposited cleared.² These checks include deposits made by other banks, as do the figures of Kemmerer’s observations. But there are no direct observations covering New York for a long enough period, or for enough institutions, to warrant any definite conclusions.³

The error of assuming clearings of March 17 in the country outside New York to be abnormally low, swelled Professor Fisher’s total figure for check circulation by 31 billions, as we have seen. On the other hand, the error of assuming New York City to be complete in Kinley’s figures tended to make the total smaller than it would have been, since New York City was 28% below normal, and an increase of 28% applied to half of Professor Weston’s figure of 1.02 billions, gives about 70 millions more for the day, or 21 billions more for the year, than when the 28% increase is applied to only a quarter of Professor Weston’s figure. These two errors roughly neutralize one another, and we may accept Professor Fisher’s “finally adjusted” estimate of 353 billions¹ for the year as roughly approximating the amount of checks deposited.² How “rough” an estimate one gets by taking a single day as the basis for a year need not be here discussed. I should be disposed to think that an indirect calculation, via clearings, in view of our more extensive knowledge of the relation of clearings to “total transactions,” might well be worth more, so far as deposits outside New York are concerned. Since, however, we lack any extended figures for the relation of transactions and clearings in New York, and since even for the country we are obliged to make guesses as to the relation of “checks deposited” to “total transactions,” I refrain from trying to improve further on Professor Fisher’s estimate for checks deposited in 1909—even though questioning that “check deposits” and M′V′ are identical.

What, however, shall we say of M′V′ for other years? In the calculation of this, Professor Fisher relies on the absolute figures for 1909 (and 1896, similarly calculated), together with an “index” based on New York and country clearings. In this index he weights country clearings by 5,¹ and New York clearings by 1. The result is, of course, that country clearings dominate the index. But New York clearings are much more variable than country clearings. The range of variation in New York clearings for the years 1897 to 1908, inclusive, is from 33.4 billions in 1897, to 104.7 billions, in 1906; the latter figure being more than three times as great as the former. The range in country clearings is from 23.8 billions, in 1897, to 57.8 billions, in 1907, the latter figure being 2 10/23 as great as the former. But more significant is the degree of year by year variability. The country clearings, with the exception of 1908, always rise,—a steady, if not quite symmetrical, increase. New York clearings, however, go up and down, 42 billions in 1898, 60.8 billions in 1899, 52.6 billions in 1900, 79.4 billions in 1901, 66.0 billions in 1903, 104.7 billions in 1906, 87.2 billions in 1907, 79.3 billions in 1908. New York clearings are highly variable in both directions, while country clearings vary almost wholly in one direction, with a maximum difference of 6.4 billions between any two consecutive years, and with an average yearly variation of only 3.5 billions.² When country clearings are weighted by 5, almost all of the high degree of variability of New York clearings is covered up, and volume of checks deposited for years other than 1909 and 1896 is thrown hopelessly away from the facts. It is too large by far in most years. In 1905, 1906 and probably 1901 it is too small. It does not vary nearly enough. As V′ for years other than 1909 and 1896 is determined, for Professor Fisher’s equation, by dividing the M′V′ thus estimated by the M′ for the year, it is clear that V′ as estimated by Professor Fisher is very much less variable than it is in fact. It is pretty variable even in his figures, but his figures do not nearly show how variable it is.¹

Again, this undue weighting of country clearings, swallowing up New York, vitiates Professor Fisher’s estimates for V, the velocity of money, for years other than 1909 and 1896. One of the elements in the calculation of V is the estimated V′.² Since V′ is wrong, V will also be wrong. V is probably much more variable than Professor Fisher’s figures would indicate. With great admiration for the ingenuity of Professor Fisher’s speculations regarding V, I find too many elements of conjecture, and too many arbitrary assumptions, to give me confidence in the figure for any year. I refrain from going into any general criticism of his method of calculating V, however, contenting myself with the one clear point that, to the extent that the values of V for years other than 1909 and 1896 depend on the estimated M′V′ for those years, they are less variable than they ought to be.³

The same conclusion regarding Professor Fisher’s estimates for V′ have been reached, by a different method, by Professor Wesley C. Mitchell. He, too, concludes that V′ is, in fact, more variable than Professor Fisher would indicate.¹

I conclude, therefore, that neither V′ nor V has been correctly calculated, for years other than 1909 and 1896. I pass now to a consideration of T, the volume of trade, after which I shall consider P, the price-level, in the equation of exchange.

Let us first recall the point made in the chapter on “The Equation of Exchange,” that P and T, the price-level and the volume of trade, are not independent even in idea. If one is given an independent definition, the other cannot be given an independent definition. If the equation is to be true, then P must be weighted by the numbers of each item (as hats) exchanged. P is not a mere average, but is a weighted average, and T is always the denominator in the formula for P. In developing statistics for P and T, therefore, this fact must be kept in mind, and the elements entering into each must coincide, and vary together year by year.

In our chapter on “The Volume of Money and the Volume of Trade,” we showed that the great bulk of trade is speculation. We showed that the indicia of variation which Fisher² and Kemmerer have constructed for trade, dominated by inflexible physical items of consumption and production, give wholly misleading results for every year except the base year. They give a steadily growing, inflexible figure, with little variation from its steady path. Trade, if chiefly speculation, is highly flexible, varies enormously from year to year, waxes and wanes. This point need not be further developed. At best Fisher’s figure for trade can be accepted only for one year, 1909.

Is, however, the figure for 1909, 387 billions, an acceptable figure? Is it not decidedly too large? It is made up, it will be recalled, by taking the figures for MV and M′V′, adding them together to get one side of the equation, and declaring them equal to PT. P is then declared to be $1, by the arbitrary device of taking as the unit of T one dollar’s worth of every sort of good at the prices of 1909. T is, then, 387 billions, since MV plus M′V′ equals 387 billions. The theory underlying this is that deposits made in banks correctly represent trade.¹ Our criticisms as to the absolute magnitude assigned to T (and hence to MV plus M′V′) will rest in large measure in challenging this assumption. It is our contention² that deposits made in banks very greatly overcount trade.

Deposits made in banks include taxes and other public revenues; they include loans and repayments, and interest-payments; they include gifts and benevolences, money sent by parents to children away from home, pensions, payments of insurance losses, annuities, dividends on stocks, payments to and from savings and loan associations, fines, contributions to churches, and other non-commercial organizations, etc., etc. None of this represents trade.

But further, whether payments are in trade or not, many times indeed does it happen that several checks are drawn in connection with the same transaction. Professor Kemmerer, entertaining this possibility, thought it might be neutralized by cases where the same check passes through several hands, making payments in several different transactions. He calls this, however, a “gratuitous assumption of unverifiable accuracy,”¹ and makes no claim to have given the matter careful study.

In general, I think it safe to hold that the case where a single check passes through several hands is not important.² It will happen chiefly with small checks in small places, or with small checks paid to laborers. It is the pecuniary magnitude of checks, rather than their number, that counts here. I am informed by several bankers that large checks are almost universally deposited at once. This is for several reasons: (1) The recipient of the check wishes to make sure that it is good. (2) It is unlikely that the check is of the right size for another transaction, unless the recipient is a mere agent for a third party, in which case he should (but commonly does not) pass it on to his principal, if double counting is to be avoided. (3) Every person who handles sums of any size wishes a record of the transaction, and his own canceled check is a receipt which he would not have if he passed on the check of another.

This last point will go far toward explaining why bank transactions may multiply without a corresponding multiplication of trade. The banks do the bookkeeping for modern business in increasing degree. Checks are records, of high legal value. A colleague recently told me that he, in his own capacity, had just drawn a check to himself, as trustee, transferring a sum from one account to another. Another colleague, with eight different bank accounts, estimates that over 50% of the deposits in three of them represent transfers from other accounts. This kind of duplication, where trust relations are involved, is enormous. Intercorporate relations and separate bank accounts within a corporation complicate it still further.

A check is drawn by a subsidiary corporation to its dividend account, and deposited; a check on this dividend account¹ is then deposited in the general account of the parent corporation; a third deposit, of the same funds, is then made in the dividend account of the parent corporation; a fourth deposit of the same funds is made in a trust fund which holds stock in the parent corporation; a fifth deposit in the personal account of the beneficiary of the trust fund; a sixth deposit may be made of a check on this fund in the personal account of the beneficiary’s wife. The first three of these deposits, at least, will be made of the total dividend of the subsidiary corporation. Not one of these six deposits represents trade. Payments of wages and rents should count as trade, but payments of interest and dividends stand on a separate footing. When a man has bought a stock or a bond, he has already bought all the income which is to come from them, and to count the interest and dividends as separate items is double counting. They are payments, but not trade. Even if the dividend payment be counted as trade, however, it is counted six times.

There is enormous overcounting as a consequence of the combinations of corporations, each of which retains its own numerous bank accounts. The Interstate Commerce Commission calls attention to great duplications from this cause in connection with railway income accounts.¹ Even within single corporations the duplications² are very great. Thus, the local agent of a railroad deposits his receipts in a local bank. His check, or, more usually, the draft of the bank, is subsequently deposited in a bank at headquarters. Subsequent disbursements, in places away from headquarters, particularly of wages, will frequently be preceded by deposits in other local banks. This duplication will be true of telegraph, telephone, insurance and other companies which have scattered agencies, including the wholesale trade. Advertising agencies will illustrate it. All checks between agent and principal, customer and broker, etc., will illustrate it. There is a great deal of double counting in stock transactions from this source. Thus, a Boston broker takes orders, with a check for margin, for execution in New York. The order is executed by a New York broker, who deals with another New York broker, who represents a Louisville broker, who represents a Louisville client. Now to the extent that any checks at all pass between the Boston broker and his client, the Boston broker and the New York broker, the other New York broker and the Louisville broker, or the Louisville broker and his client, we have overcounting. Only the check between the two New York brokers is properly counted. It is, of course, well known that a small percentage of the dealings of a customer of a brokerage house is represented by checks between broker and customer. Professor Fisher states this to be about 5%.¹ It is, however, 5% of overcounting! Moreover, through keeping “open accounts,” with irregular settlements of “margins” only, the Boston broker and the New York broker reduce markedly the checks passing between them. There is a back and forth flow of items which in large degree cancel one another, since the Boston broker sells in New York as well as buys there, and the New York broker, to a less degree, both buys and sells Boston securities, through his Boston correspondent. But not all by any means is canceled, and all the checks that pass in this way represent double counting. The total is large.

Public funds are included in the deposits reported to Kinley. Taxes are not trade. Double, triple and multiple counting comes as revenues are received by local authorities, transferred to State accounts, subsequently redistributed to local accounts, or to the treasurers of State institutions, transferred from one bank to another, etc. The State of Massachusetts scatters its deposits in banks all over the State, and makes transfers from one account to another. The City of Boston has many bank accounts. The Federal Treasury deals largely with banks over the country.

Whenever a retail store has branches, duplications are likely to occur. “Chain stores” make great overcounting. “Kiting” swells bank deposits.

Replying to these contentions, Professor Fisher has urged that there is large undercounting, also, and that the undercounting balances the overcounting. I have myself called attention to a good deal of undercounting in the chapter on “Barter.” A substantial amount of ordinary trade is carried on by means of partially offsetting book-credit, time bills of exchange, simple barter, etc. The amount might even run high, as compared with ordinary trade, when the clearing arrangements in the stock and produce exchanges are taken into account. But it is impossible to figure out anything at all in this line which is to be compared with the great gap between the 141 billions of trade we were able to find,¹ and the 387 billions Professor Fisher assigns to trade. The gap of over 245 billions is much too great. Besides, in our 141 billions, we have counted barter items, book-credit items, time-bill of exchange items, etc., already.

The main item of undercounting must be in connection with the clearing arrangements in the speculative exchanges. This would seem to be Professor Fisher’s view, as well.² Data are at hand for the two great exchanges of the country which enable us to measure, with some precision, the amount of the undercounting—i. e., to tell the extent to which checks are dispensed with in the trading of these two great exchanges. The two exchanges are the Chicago Board of Trade and the New York Stock Exchange.

For the New York Stock Exchange, figures are taken from Pratt’s Work of Wall Street, 1912 ed., pp. 166–167, 180, 273. The figures are for the big year, 1901, when 266 million shares were sold, more than in 1909 by 51 millions of shares, and when the Stock Exchange Clearing House should have done better, in the magnitude of the undercounting, than it did in 1909. Figures since 1901 are, Pratt states,¹ not available. Pratt also gives figures for 1893, but does not give data as to the percentage of stocks handled by the Clearing House, so that comparison with the 1901 figures cannot be made.

In 1901, 265,944,659 shares were sold. Of these, 15% were “X-Clearing House,” i, e., not on the list of stocks handled through the Stock Exchange Clearing House. This 15% was paid for in full by check. The bond sales are not cleared, and so another billion dollars of checks is required for this item.² If we assume (on the basis of the estimates given to the writer by DeCoppet & Doremus, and Mr. Byron W. Holt, for recent years) that 25% of the 100 share sales would be added if “odd lots” were counted, we have another large item that does not go to the Clearing House. “Private clearings” reduce the number of checks in connection with odd lots, but not so effectively as is the case with hundred share sales put through the Clearing House. So far the Clearing House has done nothing. What did it do with the 85% of the stocks in hundred share lots offered for clearing?

The figures are perfectly definite. The 85% of the 266 million shares sold was 226 million shares. The “share balance” remaining after the Clearing House had done its best was 134 million shares.³ The number of shares sold, then, for which checks did not have to pass as a result of the clearing process was 93 millions. In terms of dollars, we may put the same figures. The estimated money-value of the 266 million shares sold was 20.5 billions;⁴ 85% of this is 17,425 millions. The certifications required to pay for the 134 million share balance was 10,930 millions. The saving in checks was, thus, 6,495 millions of dollars. This is the full extent to which the Stock Exchange Clearing House undercounts recorded share sales. This is less than 1.7% of Professor Fisher’s 387 billions! To offset this, however, we have overcounting in the 5% of checks for all dealings on the Exchange which pass between brokers and customers, as shown, and all the checks between brokers and out-of-town brokers. We shall also find items of overcounting which vastly more than offset this undercounting, in loan transactions between brokers, and between banks and brokers, to which we shall shortly give attention.

This six and a half billions in checks saved on account of sales of stocks is no small matter, absolutely. But this, though measuring the extent of undercounted sales, by no means measures the services of the Clearing House to the Stock Exchange. Not merely stocks sold have to be cleared. Stocks borrowed are also cleared. Borrowing of stocks is not trade, but borrowing of stocks requires the passage of money and checks. When stocks are borrowed, money is loaned. A bear sells short. He has to deliver next day. He accomplishes this by having his broker “borrow” the stock he needs from a broker representing a bull, who is long on the stocks, and who needs money to “carry” them. The bull, who lends the stock, receives dividends from the bear, as they accrue, and pays the bear interest on the money lent. An enormous lot of this takes place. Moreover, to some extent, these transactions are increased artificially, in order that the broker may make his “clearing sheet” misleading, and avoid revealing his position with reference to the market.¹ Loans of stock and sales of stock appear alike in the transactions of the Clearing House. Moreover, apart from the necessities of the bears for stocks to deliver, we have the necessities of the bulls for money to carry their stocks. If a broker who has borrowed largely from the banks finds his customers turning to the bear side of the market, he has an excess of funds. He may repay his loans, but they may be, in part, time loans, and in any case, he may find it just as well, if he can make a small fraction of 1% in interest, to lend to another broker, among whose customers the bulls are increasing. A vast deal of money is thus transferred, on collateral security, by means of “loaning stocks.” Brokers prefer to borrow money from one another in this manner, since no margins are required, in general, whereas banks would require margins. These various reasons make a vast deal of “borrowing and carrying” transactions, and a regular place is set aside for them on the Floor—Post 4, commonly called the “Money Post.” At this post, also, the banks, through brokers, lend on call, and the published call rates are established there. Of this, however, we shall have more to say later.

The extent to which this loaning of stocks takes place at the “Money Post,” as compared with the loaning done privately, varies. It makes no difference, however, from the standpoint of the volume of these transactions that go to the Clearing House whether they are put through at the “Money Post” or outside. The loans made by the banks at the “Money Post” do not affect the Stock Exchange Clearing House totals.¹ Formerly the “Money Post” was a place where the position of the bears could be gauged in a given stock. If the demand for a stock was great, the bulls could take heart, and increase the pressure. To avoid giving away this information, however, borrowing is done on a large scale privately, at present.² Of course, if the pressure gets too strong, it will manifest itself at the money post anyhow, since bears borrowing particular stocks will forego all or part of the interest, or even pay a premium for the stock.¹

Now it is possible, from the figures given for the total clearings of the Stock Exchange Clearing House, in conjunction with the figures of recorded sales, and the percentage of “X-Clearing House” sales, to get a fairly accurate idea of the magnitude of these stock borrowing operations between brokers. The total number of shares offered for clearing by “both sides” in 1901 was 926,347,300! This is double the actual amount, since both buyer and seller report the same transaction to the Clearing House, the former with a “receive from” sheet, and the latter with a “deliver to” sheet. Half this amount, or 463,173,650 shares, represents the actual number of shares to be handled. As we have seen, 226 millions of this (85% of the recorded sales of 266 millions), represents sales. The rest, or 237,173,650, represents borrowing of stocks.² Borrowing exceeds actual sales, if the figures for 1901—a year of enormous sales —are representative. We have, now, an explanation of the prevailing opinion among brokers that the Stock Exchange Clearing House dispenses with the major part of the checks that would otherwise be required. For their purposes, it does make a vast difference. Pratt’s figures¹ show that, without the Clearing House, certifications of $27,995,896,400 would have been required; that certifications of $17,065,042,800 were obviated² by the Clearing House, leaving the balance of $10,930,853,600 of certifications which had to be, used. This balance, as we have seen, is the major portion of what would have had to be paid anyhow for the stocks actually sold and offered for clearing. The saving on the actual sales is only 6.5 billions. But the saving to the brokers was, of course, much greater. Even six and a half billions is no slight matter for any purpose except the explanation of our 245 surplus billions! Pratt gives an estimate at another place of the certifications required by the Stock Exchange sales, reaching virtually the same conclusion that we have reached by a somewhat different combination of his figures. He indicates that 14 billions of certifications were required, counting in the bonds, in 1901.³ This compares with the 20.5 billions estimated value of stocks sold, and approximately one billion of bonds. This leaves 7.5 billions of certifications obviated on sales. This takes no account of the “odd lots.” If they run to an additional 25%, we have five billions more which are not put through the Clearing House. My information is, however, that “private clearings” reduce the checks in connection with these, though not so efficiently as is the case with the big Clearing House.

Do the figures that get into the “all other” deposits from those connected with the Stock Exchange undercount sales made there? Not yet have we taken account of an item which swamps all that we have considered. I refer to loan transactions by the banks, particularly call loans. The volume of these is enormous. At the “Money Post” alone, the figures average between 20 millions and 25 millions a day.¹ The range is from 10 to 50 millions. The major part of these loans are not made on the Floor of the Exchange, however, but privately, between banks and brokers. Even on the Floor, no records of the loans are kept, and only estimates are available. For the loans made privately, no figures are attainable at all. The total must be enormous. One authority writes, in a letter, “The total amount of money loaned at the post varies considerably, depending upon the rate. For instance, when money is under 3%, loans are largely made directly between the banks and the brokers, but when it gets over 3% and gets strong, more loans are made at the post. Some national banks make all their loans there right along, so I understand.” My information from an officer of the National City Bank is that it lends the major part of its demand money on the floor of the Exchange. The other chief lenders, according to the Pujo Report,² are the National Bank of Commerce, The Chase National, the Hanover National, J. P. Morgan and Co., and Kuhn-Loeb. The same report states that the bulk of such loans are made directly between banks and brokers, and not at the “Money Post.”

How do these transactions affect Kinley’s figures for deposits, and so Fisher’s total of 387 billions? The small dealer deals, usually, with one bank. When he borrows, he gets a “credit” on his deposit account, but makes no “deposit” that would get into Kinley’s figures. But stockbrokers deal with many banks. They have one bank which “certifies” for them, and with which they regularly keep a “balance.” But for their loans, they deal with whatever bank gives them the best rate, or has the funds to spare. In time of tight money, they shift their loans with great frequency. They borrow also from one another. “Money” is “worth money” in New York, and idle funds will be lent by whomever has them for whatever the market will pay, on collateral security on call. When a broker deposits money in his bank borrowed from another bank or another broker, he gets a deposit credit which does get into Kinley’s figures—he deposits a certified check, or a bank draft. The following has been described as a typical transaction by the bond expert of a Boston banking house, and has been amplified by several Wall Street men with whom I have discussed it. A, whose home bank is Bank W, has borrowed, on call, $500,000 from Bank X. Bank X calls the loan. A finds Bank Y willing to lend him enough to pay it off. Before he can get the new loan from Bank Y, however, he must get his collateral released by Bank X. Before he can do that, he must pay off the loan at Bank X. His recourse, then, is to Bank W, his regular bank, which certifies for him, and with which he keeps his balance. Bank W gives him a certified check (either an overcertification, or a “morning loan” transaction), for $500,000, with which he pays off the loan at Bank X. He then takes the collateral from Bank X to Bank Y, and makes a new loan. He gets a draft from Bank Y, which he deposits with Bank W, and then draws another check against his deposit with Bank W to pay off the “morning loan,” in case the transaction took that form. Here are three checks for this loan transaction, two of which get into clearings, and one of which gets into “all other deposits.” But the checks may be multiplied. A, instead of getting a new loan at Bank Y, may call a loan from broker B, who may then call a loan from broker C, who may go to Bank Y to get the funds he needs to pay B. Here are two new checks in the series, both of which get into the “all other” deposits. Checks fly about recklessly in Wall Street, and men will turn over money many times, if an eighth of 1%, or less, can stick by the way, on a good sum, for a few days! This is strikingly illustrated by a fact which caught my attention in the monthly bank statement of a brokerage house which I was allowed to examine. The deposits made during the month, and the checks drawn during the month, balanced to within five hundred and fifty dollars out of several millions. The broker said of this: “It would be true even for a single day, and it would be true for a year. The bank requires us to keep a minimum balance; it is to our interest not to keep more than that. If we have more at the end of the day, we lend it out; if we have less, we borrow to make up the deficiency. We try to have just that balance, and no more, to our credit at the bank at the end of every day.” The handling of funds by a brokerage house is a fine art, involving both technical skill and a philosophic grasp of the factors of the “money market.” Are rates going up? Then it is well to reduce call loans, and borrow more on time. If lower rates are anticipated, more call money will be employed—with the possibility of a “squeeze” if too much is taken that way. Hidden dangers must be foreseen. The sums borrowed are enormous, and brokers’ profits depend in very substantial degree on their skill in borrowing as cheaply as possible, and in utilizing their funds to the utmost.

It is here, I think, in loan transactions between banks and brokers and between brokers, that we have a major part of the explanation of the huge deposit figures for New York City, and for the tremendous influence of stock sales on clearings, which Mr. Silberling’s¹ figures show. This is the opinion of Professor O. M. W. Sprague, who first called my attention to the volume of call loans, and rapid shifting of call loans, in New York, and it is the opinion of every Wall Street man with whom I have discussed the matter. The actual pecuniary magnitude of the share sales and bond sales is not enough to do it. The mass of connected loan transactions, however, substantially greater in volume than the actual sales of securities, is, with the security sales, enough to do it.

When the call rate is high, which will particularly happen when bank reserves are low, the shifting in loans will be much increased. One bank will have money to lend one day, but the next day will have to call it, to meet heavy demands at the Clearing House, while some other bank will have the surplus funds to lend. The brokers, by bidding up the rate, will tempt the temporary lending even of small surpluses, if their necessities are great. The volume of “all other deposits” and of bank clearings will be swelled by this much beyond ordinary. That this should not be revealed to ordinary statistical tests is due to the fact that speculation tends to fall off at such a time, so that the other factors in the stock exchange operations tend to reduce daily deposits and bank clearings. Mr. Silberling has applied to this problem the technique of a refinement of the correlation method, the method of partial correlation, with the result of confirming this view.¹

I conclude, therefore, that stock exchange transactions, instead of being undercounted in bank deposits, are very greatly overcounted.² The big item that does it is loan transactions between brokers and brokers and between brokers and banks.

The evidence from the Chicago Board of Trade, with reference to the extent of clearings within the exchange there, comes in a letter from the Secretary of the Board of Trade to Professor Taussig. The only clearing house transactions are in connection with “futures.” All “spot” transactions are paid in full by check. All futures other than those offset by clearing are paid in full by check. The total amount put through the Clearing House in 1915 was 118 millions, of which the balances paid were 41 millions (saving checks to the extent of 77 millions). This 77 millions is a trifle indeed as compared with the gap of 245 billions we are trying to fill! It is a trifle also as compared with the business done on the Board of Trade. The Secretary estimates that commodities to the value of $375,000,000 actually arrived on the exchange in 1915. On the average, the figure would be $350,000,000. For the Stock Yards “it is approximately the same—last year was $375,000,000. Of fruits, vegetables, poultry, butter, eggs, etc., sold in South Water Street, it is claimed by their statisticians, the value is $350,000,000, or a total of about eleven hundred millions arriving [Italics mine] yearly at this great market place, all of which is paid for by checks, and when the ownership changes, the change of ownership is always paid by check.” How many times the goods change hands, cannot be stated on the basis of records of the Board of Trade. The Secretary contents himself with saying that they are “sold and resold many times.” We have discussed this, on the basis of reputed figures of the Federal tax on grain futures in 1915, in our chapter on “Volume of Money and Volume of Trade.” In any case, it is clear that the 77 millions of checks economized, though absolutely great, is relatively a bagatelle. It is, moreover, more than compensated for by loan transactions. The Secretary estimates that for a sixty-day period, when grain is coming in, from two to four millions will be lent by the banks daily on arriving grain. How great the loan transactions on subsequent sales will be we can only conjecture.

While able to find, then, important cases of trade and speculation which dispense with the use of checks, I cannot find anything of magnitude sufficient to aid Professor Fisher’s case, and I find, on the other hand, enormous overcounting in every field where business and banks meet, as well as in the relations of banks to non-commercial depositors.

I conclude, therefore, with reference to the figures of Fisher and Kemmerer¹ for volume of trade, that they are much exaggerated for the base year, and that for every other year they are wholly wrong, both because of their excessive magnitude, and because the index of variation has been wrongly chosen.

The discussion of P, the price-level, in the statistics of Kemmerer and Fisher need not be extended. P, for the equation of exchange, and for the quantity theory, is a weighted average, each price that goes into it being weighted by the number of exchanges involving the commodity of which it is the price. The weighting of P should correspond to the elements in T, the volume of trade, and should vary from year to year, as the elements in T change.² Now Kemmerer’s P is weighted as follows: wages, 3, security prices, 8, wholesale prices, 89.³ If our conclusions with reference to the composition of the volume of trade, as developed in the chapter on “Volume of Money and Volume of Trade,” are valid, this weighting gives us a P which has no relevance to the equation of exchange. The wholesale items should have a weight of not more than one-sixth of the total for 1909. Certain commodities, as wheat and cotton, in which there is heavy speculation, should be given great weight, and securities should have, probably, the greatest weight of all. If “trade” is to be extended to cover transactions in bills of exchange and loan transactions (as it is by Kemmerer),¹ then P should contain these things, weighted more than all else put together, particularly if call loans are included. The weights should be radically altered from year to year. We should then get a P which would fit the “equation of exchange”—though what else it would be good for is hard to say! The same criticism applies to Fisher’s P. It is dominated by wholesale prices.² It therefore has no relevance to an equation of exchange in which only one-sixth at the very most of the items are wholesale items. Neither Fisher nor Kemmerer alter their weights in P at all, to correspond to yearly alterations in the composition of T.

As indicia of changes in the absolute value of money, Kemmerer’s and Fisher’s index numbers, or other index numbers of numerous wholesale prices, with a substantial weighting of wages, are probably better than an index dominated by stocks. Stocks fluctuate more widely than wholesale prices and wages, their values are more affected by variations in business confidence, and by variations in the rate of interest. For measuring the value of money, the index numbers here criticised are very good. But for the purpose for which they are chosen, namely, to fill the equation of exchange, and to measure variations in a price-level of the sort the quantity theory and the equation of exchange are concerned with, they are simply irrelevant. If it were really true that such an index number varied with the quantity of money, then the quantity theory would be effectively disproved!

Now, in general summary of our criticisms of the figures of Kemmerer and Fisher: they have systematically buried New York City, and systematically covered up speculation. All the errors converge in this direction. The indicia of trade cover up speculation and the other things that go on in New York, and other financial centers. The indicia of prices do likewise. Fisher weights New York clearings only 1, while weighting country clearings 5, in his index of variation of check transactions. He also counts New York returns for March 16, 1909, as complete, and gives all of his estimate for non-reporting banks to the country. Kemmerer does not do this, but he does exaggerate the importance of money, as compared with checks, and does not allow the velocity of money to vary at all in his figures, thus getting a much greater constancy in the figure for total circulation of money and checks than is proper, and covering up the flexibility and variability which New York gives to our system.¹ In general, our task in this chapter has been an archæological excavation—we have rediscovered a buried city.

¹ See especially History of the Greenbacks, pp. 188ff.; 207–208; 275–279.

² Various efforts have been made by adherents of the quantity theory to meet the facts developed by Mitchell with reference to the Greenbacks. Thus, it has been suggested that the coming to par of the Greenbacks shortly before the resumption of specie payments was an accidental coincidence, due to the fact that the volume of trade in the United States just happened to grow to the right amount to bring the Greenbacks to par at that time. No statistical evidence has been offered for this thesis, I believe. It is, indeed, the only logical thing which a quantity theorist could say on the matter, except one alternative, (F. R. Clow, J .P. E., vol. 11, p. 597) namely, that if the Greenbacks should exist in such quantity that, under the quantity theory, their value ought to fall below the discounted future value of the gold in which they were to be redeemed, speculators would take them out of circulation, holding them for the interest, and so reduce their quantity that the value would rise to that discounted future value. The first thesis, that based on putative changes in the volume of trade, though highly improbable in fact, is logically possible. The second thesis, however (Purchasing Power of Money, p. 261) meets serious difficulties. What motive would a speculator have for taking the Greenbacks out of circulation, and hoarding them? The answer is, he gets thereby the “interest,” as the Greenbacks approach the date for redemption in gold. If this were the only way in which he could get this gain, the answer would be good. But there is another way in which he can get it, and something more besides, namely, by lending out his Greenbacks. In that case, since the creditor gets the full benefit of an appreciating standard of deferred payments, he would get all the “interest” which he could get by hoarding, and, in addition, he would get contract interest on his loan. Of course, if the principle of “appreciation and interest” worked out with perfect smoothness, he would find his contract interest reduced as the other rose, and one might even expect, if the Greenbacks were very redundant, that contract interest would disappear. There is no evidence that this did happen, however! And so long as any contract interest existed, we have a thoroughly valid reason why a holder of Greenbacks would lend them rather than hoard them.

Another effort to harmonize the facts with the theory consists in the contention that anticipated future increases in the Greenbacks would work in the same way as actual increases. But this is to shift the whole basis of the quantity theory, which rests in the notion of a mechanical and—in the mass—unconscious equilibration of quantity of money and number of exchanges. The quantity of money is not increased until it is increased! Cf. Mill, Principles, Bk. III, ch. 12, par. 2, and Jos. F. Johnson, Money and Currency, Rev. ed., p. 235.

Professor Fisher has another way to meet the facts of the Greenback régime, and that is by holding that they prove his case! I do not think that anyone, however, who examines the figures he offers on p. 260 (loc. cit.) will be impressed by the degree of concomitance between money and prices which they exhibit, especially after Mitchell’s careful analysis of changes in detail.

At another point, Professor Fisher maintains (p. 263) that the rapid changes in gold premium which came with news from the military operations (e. g., the 4% drop in Greenbacks after Chickamauga), were due to alterations in velocity of circulation and in volume of trade! As the gold market usually got the news by wire, before the newspapers got it, however, this thesis is not very convincing.

¹ Kemmerer, E. W., Money and Credit Instruments in their Relation to General Prices, New York, 1907; Fisher, Purchasing Power of Money, New York, 1911; subsequent yearly continuations of “The Equation of Exchange” in the American Economic Review. The references here, as throughout, are to the 1913 edition of Professor Fisher’s book.

²History of Prices.

¹ To this type would belong Professor Fisher’s figures with reference to the years, 1860–66 on p. 260 of his Purchasing Power of Money.

¹ This relates particularly to Fisher’s figures.

²Loc. cit., p. 298.

¹Ibid., p. 297.

²Cf. our chapter, supra, on the “Equation of Exchange.”

³ These are the “finally adjusted” figures. Loc. cit., 304.

⁴Ibid., p. 277. Fisher’s estimate for V, as corresponding more closely to Kinley’s figures for the proportions of money and checks in trade, is to be preferred to Kemmerer’s. Cf. our comments on this point, infra, in this chapter. Even the figures for M′ are not correct, since they do not include deposits growing out of “morning loans,” cancelled during the day. Infra, ch. 24.

⁵Report of the Comptroller, 1896; The Use of Credit Instruments in Payments in the United States, National Monetary Commission Report, Washington, 1910.

¹ I am indebted to the Annalist for permission to use here materials first published in the Annalist in articles by the present writer: “Home vs. Foreign Trade,” Feb. 6, 1916; “Tests of Home Trade Volume—a Rejoinder,” March 6, 1916; “Home Trade Volume,” March 20, 1916, p. 377. To these articles Professor Fisher replied: “A Multi-Billion Dollar Nation,” Annalist, Feb. 21, 1916; and “Over and Under Counting,” Ibid., March 13, 1916.

² Except checks deposited by one bank in another. Kinley’s figures exclude these in 1909, but not in 1896.

¹ The methods and data employed by Professor Fisher are described at length in his Purchasing Power of Money, ch. XII, and Appendix to ch. XII.

² M′ is the average of bank deposits, as shown by the balance sheets, for all banks in the country for the year. Throughout, the reader must distinguish this from the “deposits” of Kinley’s figures—amounts “deposited” on March 16.

¹ It is easier, sometimes, to make an assumption regarding a set of facts than to find out what they are! In this case, some work was involved. Old newspapers had to be hunted up for various cities, and letters had to be written, to find out, for various cities, (a) clearings for March 17, 1909, and (b) the number of banking days in the year 1909. This work was done by Mr. N. J. Silberling, who got figures from 12 cities which had 69% of all clearings outside New York. These cities are: Chicago, Philadelphia, Boston, St. Louis, Pittsburg, San Francisco, Baltimore, New Orleans, Atlanta, Providence, St. Paul, and Seattle. The daily average of clearings for these cities in 1909 was $136,222,436; the actual clearings for March 17, 1909, was $132,961,273. The ratio of average daily clearings to actual clearings on March 17 was 1.0245:1. The increase needed in the figure for deposits outside New York, then, was only 2.45%. Mr. Silberling, wishing to be conservative in view of the 31% of outside clearings not investigated, allows outside clearings to be 3% below normal. On this basis, following Professor Fisher’s method of computation, he multiplies the deposits assigned by Professor Fisher to New York by 1.28, and the deposits assigned to the country outside by 1.03, getting total deposits for the day of 1.11 billions, as against Professor Fisher’s figure of 1.20 billions, and a total for the year of 333 billions, as against a total obtained by Professor Fisher of 364 billions.

¹ To this 786 millions is added all that comes from the erroneous assumption regarding outside clearings, when figures for the whole year are obtained. Country deposits, for the year, are thus still further exaggerated by 31 billions!

¹The Use of Credit Instruments, etc., p. 152. There is abundant evidence in Dean Kinley’s figures that only a decidedly minor part of the amount (373 millions) of checks allowed by Professor Weston for the non-reporting banks could have been outside the larger cities. The amount deposited in a day in a country bank is so small that a great multitude of these banks would be required to show as much as a single New York City institution. Thus, ninety banks (27 national banks, 58 State banks, 3 private banks, 1 stock savings bank, 1 trust company) in Arkansas, report only $728,148 in checks, an average of $8,090 per bank. If all the 13,000 non-reporting banks were country banks, and if this ratio held, we should have 105 millions more for the day (instead of Professor Weston’s 373 millions), or 31 billions more for the year. This average is based chiefly on State and national banks. The average is too high for the private banks (whose daily average as reported is $4,010), and for the mutual savings banks (whose daily average is $1,254). It is well above the daily average of the stock savings banks, which are, in many States, practically commercial banks ($6,405). In the non-reporting banks there are comparatively few national banks, and about 5,000 private banks and savings banks, of these the great majority being private banks. We cannot make up the 373 millions in the country districts. Nor can we make up the 373 millions by taking in all the reserve and central reserve cities, exclusive of New York. Chicago, in the returns, shows 42.6 millions in checks; St. Louis, 14 millions; Boston, 48.8 millions; Philadelphia, 28.6 millions; the other reserve cities show 40.2 millions—a total of 174 millions. If we doubled the returns for these cities, we should still be 200 millions short of the 373 millions added by Professor Weston to the total! Neither in the country districts, nor in the major cities outside New York can we find enough to make up that addition. Very much of the amount added for non-reporting banks must be found in New York City itself.

¹ Dean Kinley’s questionnaire asked the banks reporting their deposits for the day to exclude deposits made by other banks. These deposits were not excluded in the 1896 investigation.

¹ House Committee on “Money Trust.” Feb. 28, 1913. Pp. 57, 78, 145.

²Cf. supra, and infra our discussion of the volume of trade, and infra, our discussion of credit, particularly the analysis of bank-loans.

¹Vide the opinion expressed by an official of a New York trust company, quoted below, on p. 346.

²Cf. Horace White, Money and Banking, 5th ed., p. 364.

¹ Kirkbride and Sterret, The Modern Trust Co., New York, 1905, pp. 59–60; Cannon, Clearing Houses, Nat. Mon. Com. Report, p. 178; Conant, Principles of Money and Banking, II, p. 244.

² Inquiry was also made of Professor George E. Barnett, who had cited the figures given by the New York Supt. of Banks at p. 133 of his State Banks and Trust Companies. Professor Barnett writes, in part, as follows: “I made no independent inquiry at the time, and accepted the statement of the superintendent of banks without critical examination of its basis. From what you say, it appears highly probable that he was mistaken in his conclusions. The only question in which I was interested was whether the reserves of the trust companies could be reasonably lower than those of the national banks. I did not care so much about the exact ratio of clearings and only quoted that incidentally.” For the purposes which both Professor Barnett and Mr. Williams had in view, the exact ratio was unimportant. The higher figures which I have given above would support the thesis in which both were interested, namely, that trust company accounts are less active than bank accounts, and so lower reserves may be safely held by trust companies than by national banks.

¹ Fisher, loc. cit., p. 444.

¹ P. 443. Other discussions of this investigation are in the Journal of the American Bankers’ Association, Jan. 1914, p. 487; Ibid., Feb. 1915, p. 555; National Banker, March, 1915.

¹ None of the cities covered in the figures given in the Annalist were in New York State. Kinley’s figures show that the percentage of checks received in deposits of March 16, 1909, in banks outside New York State was 91%. Loc. cit., p. 180.

¹ Multiplying the 408 millions of checks deposited outside New York on March 16, 1909 by 303, the assumed number of banking days, gives 123.6 billions. Probably, therefore, 124 billions is too small a figure. But we should be slow in modifying a figure based on 17 months’ observations because of the figures from one day’s observations.

¹ I have greater confidence in this conclusion, since seeing a letter from Mr. Howard Wolfe, who made the investigation of outside clearings and “total transactions” for the American Bankers’ Association, to Mr. Osmund Phillips, Editor of the Annalist. Mr. Wolfe writes: “I do not believe that the experience of the New York banks would differ from that of other institutions which now supply [these figures].”

¹ My information on this point comes from Professor O. M. W. Sprague. It is corroborated by an official of the Bankers Trust Company in New York.

²Vide Rodney Dean, of the Fifth Avenue Bank, New York, “The Problem of Collecting Transit Items,” Journal of the American Bankers’ Association, Jan. 1914, p. 537. Boston inaugurated the system in 1899–1900; Kansas City five years later. Since the above was written, I have learned that New York, in recent months, has introduced the new system. This does not affect our argument regarding the figures for 1909.

³ Since the foregoing was written, my attention has been called by Mr. Osmund Phillips, Financial Editor of the New York Times, and Editor of the Annalist, to indirect ways in which items on out of town banks sent to New York for collection will affect New York clearings. Country correspondent banks to which New York banks send these items for collection, may remit for them in four ways: (1) by sending cash; (2) by sending items on out-of-town banks, which the New York bank will send on to some other correspondent for collection; (3) by draft on the New York bank which has sent the items to be collected; (4) by draft on some other New York bank. In the last case, New York clearings are affected. The first case is not, quantitatively, important. The second and third cases would seem to be the normal types, assuming correspondent relations between New York banks and country banks to be reciprocal, since the New York bank would be disposed, as far as possible, to turn over its collection business to its own depositors among the country banks. Mr. Phillips says, however, that the fourth case is important. To the extent that this is true, our conclusion that out of town collection items do not affect New York clearings must be modified, and it becomes a matter of importance whether these items are large or small. My information, as stated above, is that Chicago exceeds New York City in this.

If, however, the Kansas City and Boston arrangements held in New York, these collection items would be represented twice in New York clearings. The fact that the items do not themselves get into the clearings remains.

Direct information regarding New York clearings is very desirable. Our indirect approach must be considered inconclusive until more detailed figures for New York City are at hand. We need figures covering all types of banks in New York, for a period of, say, a year (to allow for seasonal changes), in which deposits made by one bank in another are separated from other deposits. National banks alone would exaggerate the item of deposits by one bank in another, especially as they are the depositories of the great private banks.

¹ Or, in some cases, taking the place of cash dealings between banks and a local clearing house. On the face of it, it is incredible that balances between cities, or within cities, after the country clearing houses have done their work, should be so great as to account for a very great part of New York clearings. These balances between cities other than New York, and balances within country clearing houses, must be a minor fraction of country clearings, and country clearings are little more than half of New York clearings. Ordinary commerce, as shown in chapter XIII, cannot give rise to great sums in the aggregate, to say nothing of giving rise to great balances.

¹ The whole thing is summed up on p. 25 of the Comptroller’s Report for 1892.

¹Cf. Kemmerer, Money and Credit Instruments, p. 117.

²Annalist, July 6, 1914, p. 8. The editor of the Annalist gives me the following information: data for twenty banks, six in New York and fourteen in Chicago, Philadelphia, Boston, and St. Louis, for the week, Aug. 28—Sept. 2, 1916, show that clearings are 71% of “total transactions” in New York, and about 40% in the other cities. These figures are all for national banks, except for one bank in St. Louis.

³ There is one further generalization developed in connection with Mr. Wolfe’s investigation of the ratio of clearings to “total transactions” which seems to have relevance here, though I am not sure how it should be interpreted. The average ratio, as stated, is about 40%. This varies, however, for different cities. “The rule seems to be that the larger the proportion of bank deposits to individual deposits, the smaller will be the figure representing this ratio. In Cincinnati, for example, it is 31.4% while in Los Angeles it is 59.7%.” (Jour, of American Bankers’ Ass’n, Jan. 1914, p. 487.) How safely based this generalization is cannot be told from the context, as no further facts are offered. Nor is its bearing on the question at issue, as to whether or not New York clearings bear a higher ratio to New York deposits than country clearings do to country deposits, entirely clear. It would seem to indicate that deposits made by outside bankers in the banks of reserve cities make smaller contributions to clearings than individual deposits do, and this would fit in with the fact that checks on outside banks, deposited for collection by one bank in another, do not get into clearings. What further explanation or significance it has I leave to the reader. It is possible that there are a number of important relevant facts missing regarding New York clearings, and that the conclusions here reached may require later revision.

¹Loc. cit., p. 304.

² But not as a correct estimate of M′V′ for the equation of exchange! We do not know what part of these checks were used in “trade.” Cf. our discussion of the estimate of T, infra.

¹ Kemmerer does not do this, but takes total clearings for the country as his index of variation. Loc. cit., 118–120. His figures for “check circulation” are, thus, more variable than Fisher’s. In this, Kemmerer’s results are much to be preferred.

² I have taken the figures for clearings from Professor Fisher’s table, loc. cit., p. 448.

¹Loc. cit., p. 304. Cf. our chapter on “Velocity of Circulation,” supra.

²Loc. cit., pp. 477–478.

³ There is, of course, the further point, to be emphasized in the discussion of T, infra, that MV (and hence V), assuming the calculation otherwise correct, is too large, to the extent that it includes tax payments, loans and repayments, dealings between agent and principal, etc. But this criticism does not so clearly apply to MV as it does to M′V′.

¹Business Cycles, p. 308.

² That volume of trade and volume of physical goods are virtually interchangeable in Fisher’s thought is strikingly illustrated on p. 195 of the Purchasing Power of Money: “A doubling in the quantities of all commodities sold, or (what is almost the same thing) a doubling of the quantities consumed.” Italics are mine.

¹ This is strictly true only of the part of T which comes from the figure for M′V′, 353 billions. In calculating MV, Professor Fisher introduces more complexities, into which we shall not enter, as the absolute amount is small—only 34 billions!—and the possible error from this source not great enough to affect a calculation where 20 billions one way or the other is within the “margin of error.”

²Vide Annalist, Feb. 17, Feb. 21, March 6, March 13, and March 20, 1916, for a discussion of this point by Professor Fisher and the present writer.

¹Op. cit., pp. 112–113. It is interesting to note that Kemmerer’s argument takes the form of proving, not that bank transactions do not overcount trade, but merely that they do not undercount trade. With this contention I am in hearty agreement! The overcounting is worse in Kemmerer’s figures for 1896 than for fisher’s in 1909, since the 1896 figures included deposits made by one bank in another, while the 1909 figures do not. Cf. Kemmerer, p. 105, and Kinley, in Report of the Comptroller for 1896 and in the 1909 monograph, passim.

²Vide the present writer’s discussion in the Annalist, March 6, 1916, P. 313.

¹ I am informed by Mr. B. F. Smith, Treasurer of the Cambridge Trust Company, that the practice of having separate dividend accounts is a very widespread one, especially with the larger corporations.

¹Statistics of Railways, 1909, p. 71.

² Professor Fisher, in his Annalist article of Feb. 21, 1916, quotes Dean Kinley (The Use of Credit Instruments, p. 151), as holding that duplications have largely been eliminated from his 1909 figures. Professor Fisher overlooks the fact that Dean Kinley is here referring, not to money value of trade, but merely to volume of checks. Dean Kinley merely indicates that by eliminating deposits made by one bank in another, he has avoided having the same check counted in deposits made in two or more banks on the same day. Even this is not wholly avoided. (Ibid., pp. 158–159.) It was extensive in the 1896 figures. Dean Kinley thinks, properly enough, that he has a sufficiently close approximation to the volume of checks, for the reporting banks, but what the checks were drawn for he does not undertake to say. His problem was payments, not trade. From the angle of volume of trade, he finds duplications even in the retail deposits (Jour, of Polit. Econ., vol. 5, p. 165).

¹Annalist, March 13, 1916, p. 344.

¹ Chapter on “Volume of Money and Volume of Trade,” pp. 241–248. We really did not “find” nearly that much. The figures assigned to retail and wholesale trade rest on figures for retail and wholesale bank “deposits,” and are, especially the wholesale figures, much too large.

²Annalist, Feb. 21 and March 13, 1916.

¹Loc. cit., p. 180.

²Ibid., pp. 166–167; l87; 273.

³ Pratt, loc. cit., p. 166.

⁴Ibid., p. 187.

¹ Emery, Speculation on the Stock and Produce Exchanges, pp. 89; 74–95. A Boston broker expresses the opinion that the magnitude of artificial borrowing to make the clearance sheet misleading is not great, so far as Boston is concerned. I have got no estimates for New York.

¹ The banks, of course, are not borrowing stocks.

² Van Antwerp, The Stock Exchange from Within, New York, 1913, p. 290.

¹ It recently happened that Alaska Gold was being “loaned flat” on the Boston Stock Exchange, which was a prelude for a six point advance in the next two or three days, as the bears were driven to cover.

² One factor complicates this. Are all the hundred share sales recorded? In our chapter on “Volume of Money and Volume of Trade,” we called attention to a statement to the effect that brokers get together before the market opens, and compare “stop loss” orders, matching these with other orders, with the understanding that they automatically go into effect if the “market” reaches the prices indicated. The statement indicated that this substantially increases sales beyond the recorded totals, as such sales do not get on the ticker. I think, however, that this cannot throw our reckoning out greatly. The great majority of sales are not on “stop loss” orders. None of the sales of “floor traders,” who average a third of the total trading (Pujo Committee Report, Feb. 28, 1913, p. 45), would be on “stop loss” orders. The bulk of the rest is not. Moreover, not all stop loss orders, by any means, would be executed in this manner. It is not easy to see how, under the rules and practices of the Exchange, many other sales could go unrecorded, except on days of greatest stress. On September 25, 1916, when over 2,300,000 shares were sold, the daily paper spoke of sales missed by the ticker, which was swamped with sales to be recorded, as an item of some magnitude. But the Ticker is wonderfully efficient. It some-times gets behind the market by several minutes, but it rarely misses anything, under ordinary conditions.

¹Ibid., p. 166.

² This explains the estimates of Wall Street men that the Clearing House reduces checks by two-thirds. For their purposes, the saving is almost that much, of the items offered for clearings. Cf. Van Antwerp, The Stock Exchange from Within, pp. 121–122.

³Ibid., p. 273. There is one billion difference between Pratt’s estimate and mine. I incline to the view that mine is correct, the more as he puts his figure, 14 billions, as a safe lower limit. But a billion one way or the other is trifling!

¹ An official of the Bankers Trust Company has secured for me from a broker at the “Money Post” an estimate of 20 to 25 millions as an average, with 50 millions as a maximum, for 1915. The Pujo Committee, in its report in 1913, p. 34, gives a similar estimate.

²P. 34

¹Annalist, Aug. 14, 1916.

¹ N. J. Silberling, “The Mystery of Clearings,” Annalist, Aug. 14, 1916, p. 223.

² There is one further piece of evidence which has been obtained through the courtesy of a New York brokerage house. At the request of the gentleman who has supplied the figures, I have altered them by a constant percentage, to prevent possible identification, but the proportions among them hold as they were given. The figures show the business of the house for the month of March, 1916. The figures show:

Market value of stocks and bonds bought,	1,644,630
Total deposits made during month,	1,475,502
Average borrowed from banks,	952,000

For this house, then, for this month, the deposits were less than the value of securities sold, by 11.5%. The month, however, was unusual. It was a month of reduced activity, following large activity. This is strikingly shown by the figure for the average bank loans for the month—over two-thirds of the total deposits for the month. The house had a large bull clientèle, which was holding its stocks, and not selling on a bear market. The turnover was very slow, as Wall Street goes. It was a time of extraordinarily easy money when banks called few if any loans. The broker, in explanation of his figures, says: “The most of our checks were to other brokers. Checks to banks about equaled checks to customers. Your assumption that we did not pay off many loans in March is, I think, right.” The same broker states in another letter that he thinks that, in general, the bulk of checks to and from brokers are in dealings with banks. In this month, then, with this factor reduced to a minimum, we still have deposits undercounting sales by only 11.5%. The figures do not prove my thesis that brokers’ deposits greatly overcount their sales, but they at least show that they do not greatly undercount them. In view of the peculiarities of the month chosen, with transactions between banks and brokers cut to the minimum, they are quite consistent with the contention that normally the brokers’ deposits will much exceed their sales.

¹ Kemmerer’s main figures are merely indicia of variation, rather than absolute magnitudes, for trade. On p. 136, d. (loc. cit), however, he indicates that his figures for “total monetary and check circulation” is also a figure for “total business transactions”—and counts 89% of it as wholesale trade.

²Cf. the discussion of the relation of P and T in the chapter on “The Equation of Exchange.”

³Op. cit., p. 136.

¹Ibid., pp. 70–71.

²Loc. cit., p. 487.

¹ Kemmerer does not accept Kinley’s estimate of 75% for checks as compared with money in payments as a “sure minimum” for 1896, but rather counts it as a “fair maximum.” (Loc. cit., p. 106.) Using this as a basis, he gets a monetary circulation for 1896 of 47.7 billions, and a “velocity of money” (since the monetary stock in circulation in 1896 was a little over 1 billion) of 47. (Loc. cit., p. 114.) Kinley’s fuller investigation in 1909 has made it clear that his 1896 conclusions understated, rather than overstated, the proportion of checks to money. His “sure minimum” was needlessly low. He concludes in 1909 that 80 to 85% for checks is safe. (Op. cit., p. 201.) Cf. Fisher’s comments, loc. cit., pp. 430; 460 et seq. Fisher’s V is about half as great as Kemmerer’s, and varies to some extent. I think Fisher, since his results are closer to Kinley’s later figures, has made much the better estimate here.