Money

Front matter

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Preface

THE Pollak Foundation for Economic Research welcomed the opportunity to publish, as its first volume, Professor Irving Fisher’s The Making of Index Numbers, because the first need of the science of economics appears to be accurate and generally accepted instruments of meas: urement. In this second volume, we venture upon a preliminary discussion of money, because money, which is our best measure of the strength of economic motives, should be made the core of economic theory, and because more of the world’sdifficulties aredue to monetary policies than to any other economic cause. In any event, this isa good time to study the subject. It seems likely that the era of monetary chaos through which we are passing will become the classic example of unsound public finance.

An understanding of the part that money plays in the world is prerequisite to a solution of the most critical problems of our day, national and international. Such an understanding requires a knowledge of those attributes of a money economy that make it essentially different from a barter economy. Failure to take this difference fully into account appears to be at the root of various popular fallacies. Even our textbooks insist, as a rule, that ‘‘all trade is, of course, barter,’’ and that ‘‘the young economist must do exactly as Solomon and Hiram did — think in goods.” With attention fixed on goods rather than on money, however, the economist, young or old, is in danger of overlooking those aspects of modern production and distribution, particularly the unbalancing of supply and demand, that have most to do with the periodic ups and downs of business.

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Indeed, it is obvious facts and indisputable conclusions that are most frequently overlooked. For that reason, we have not hesitated to deal at length with various propositions that we are well aware will be regarded by some read - ers as tiresome platitudes. That the world can consume, in the long run, no more than it produces; that standards of living depend on sustained production; that production cannot be sustained at a high level without a medium of exchange; that gold is the most satisfactory basis for a medium of exchange; that central banks should be free from political pressure; that monetary reforms are impossible as long as governments meet their deficits by printing money; that sharp fluctuations in price-levels lead to disastrous results; that competition among consumers rather than governments should control prices and production: these are among the commonplaces of sound thinking that the war-wracked world of to-day disregards to its sorrow.

“The money fallacy,’”’ said Simon Newcomb, many years ago, ‘‘is periodic, overwhelming us, not at regular intervals, but from time to time, owing to the influence of changing events. The Americans, more than any other people, have been its victims.’”’ And now, as a natural aftermath of a world war, we are beset on every hand with proposals for reforming the entire economic order. Most of them blithely ignore what money does, and just as blithely assume that money does, or can be made to do, what it cannot possibly do. To offer another panacea for social ills is no part of our purpose. This is fair warning. The reader who is bold enough to venture beyond this preface into the discussion of a subject that has long been regarded as one of the dullest parts of ‘‘ the dismal science’’ will do well to heed this warning. Otherwise, after reading all that the volume offers, he may cry impatiently:

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‘“‘Well, if all this is true of a money economy, have you nothing more to offer by way of constructive proposals?”’ In subsequent studies, based in part upon this volume, the Pollak Foundation expects to have something to say in answer to that question. It hopes thereby to be of some help, at least, to the various economic agencies, happily increasing in number, that are now endeavoring, on the safe basis of fact and reason rather than on the hopeless basis of prejudice and passion, to hasten the day when money — with its purchasing power protected against excessive fluctuations — will do more to promote and less to hinder the work of the world.

The following pages, however, are only introductory — an indispensable groundwork, we believe, but nothing more. It goes without saying that a discussion of all aspects of the topics we have touched upon — the rate of interest, the function of price, the circuit velocity of money, to go no further — would take us far beyond the confines of this volume. Here we have dealt only with some of the larger aspects of monetary phenomena, the significance of which appears to be overlooked at times in discussions of business problems and reform programs. Later on, we may discuss certain refinements and qualifications.

For the present, we shall be content if the reader agrees with us that all proposals for changes in the established order, no matter from what source they arise, must be discussed in the light of the characteristics here outlined of an industrial society based upon the exchange of goods and services for money. This much is fundamental. In so far as our exposition is erroneous, it must be corrected; but in so far as it is sound, it must be accepted as the admitted matter upon which constructive programs will have to be based. If all reformers proceeded from such

Vill ~ PREFACE safe ground — if they were wise enough to distinguish what they know from what they do not know, and to insist on knowing how things really are, and why they are as they are, before launching a campaign for changing them — the world would be spared much strife and false accusation and bitterness and wasted effort.

The authors are grateful to all those who have read parts of the manuscript. Especially helpful have been the frequent criticisms by Hudson B. Hastings of the Pollak Foundation, and the suggestions offered, from time to time, by Irving Fisher, Wesley C. Mitchell, Gilbert H. Montague, Malcolm C. Rorty, John E. Rovensky, Martin J. Shugrue, Carl Snyder, O. M. W. Sprague, and Paul M. Warburg. Particular acknowledgment should be made of the indispensable services of Edith McDonald of the Pollak Foundation. Some of the chapters are in part reprinted, with the kind permission of the publishers, from papers that appeared during 1922 in the Adlantic Monthly, the American Economic Review, the Annalist, and The Saturday Evening Post.

As footnotes, ‘‘ like little dogs barking at the text,’’ annoy many readers, we have corralled all the little dogs in the Appendix, where they can be found easily enough by any one who wants them.

WILLIAM TRUFANT FOSTER WADDILL CATCHINGS NEWTON, MASSACHUSETTS January 1, 1923 |

Contents

. MONEY AND THE CoMMopiTy Basis

. MONEY AS SUSPENDED PURCHASING POWER . MONEY IN RELATION TO Goops

. MONEY ADVANCED IN PRODUCTION