". . . º. º.º. º. º. 3...º.º. * "...r. - 3 ºft.*.* g * * --- $º • . > * ºx.” ºr: " " - ". .
:: ****, ºr º **. : * *
** *
- - ~ * -4 $. - * * * : *-** *** * .
º:3; sº-º: * * - . . * > *ws. ; :: *::. - £ :*
... ºººººº-º-º: ... .º.º. 21. <r > 2. ºt -
- cir- 3 * i-º, ºr -
- *- .**.-- " .…
… **:4
L-s” * ---
- ***, *, *-*.*s-slº, F ...- . . . . . . .” No. 2, June, 1915, published
Čand mig Association: Inquiries in regard to memb
A. Young, Cornell University, Ithaca, N.Y. . . . . . . . .
27. -º-º-º:
America.
sº------. tº
sor A.
ſº
*2
“.
}~ ; c.
ship should be made ... * * > .
-
*
§
-- gº
*
&
*.
-
-
-
-
$,
*
:
**-*.
*
-
--
+-
-
--
-
-
-
—t
..
;
.*'-
-*.
--
-
-
--
*
>
*
s.
Ay
º
&
#
º:
=-
--
-
-
,-
-
º
º
5.
.
.
.
-yº,
-:
--
*.
sº
:
:
:
à
-
flºws
-*
-
*
-
:
&
.
3.
:
r:
--
*
-
*
**.
º:
--
***
*
º
º
--
-
.”
w
-
*
-
*
*
º
:g
:º
-
w
-
.-
-
*
..
l
-
&
--
--
# -".
*
. .
-
-
*-
---
º
.
§
-
-
-
r
-
-
->
---
--
-
t
^-
º
-
º
A:
º
*
*...*
-
*::
-
---
-
-
---
+.
*
-
*
-
-
*
-
-
--
--
3-
-
:
§-
:
§
t
*
wº. E
..T. . . . ~~
# * * * * * *.*.*.
& “º rººt:
§
;:
-
: ;... . .” - 4. #---" " - {−. *
, - "º ...:", sº ~f~, - * , tº
...as s." º - & r: - - •ºr **:-gº.
22. Tº ſº. - - -º-º:
§:* .* #º
... º.º. t. - ~
-*.*
*.
*::sº.
º
s
*
** *::=
**** . . ."
i- ri - *
• * ~ * * t-
㺠*śī. ,-ºl º: ºš.
º 'º - : º,
3.
f
s
º
*** - ºr
. …,
::::... . . ." --_ -
*:::::::::::: *****














































The black areas indicate weights, or counter-poises, the equilibrium of which corresponds to the “equation of exchange.”
These black areas from left to right represent:
M’, i.e., bank deposits subject to check in billions of dollars.
M, i.e., money in circulation in the United States (outside of the United States Treasury and the banks) in billions of dollars.
T, i.e., the volume of trade circulated in billions of “units” (each “unit” being that quantity which could be purchased for one
dollar in 1909).
The lever arms of the above three weights represent:
V’, i.e., the velocity of circulation (“activity”) of the deposits, M'. *-
V, i.e., the velocity of circulation of the money, M. a
P, i.e., the index number, or scale of prices, at which the trade, T, is conducted. (This scale of prices is measured as a percentage
of the scale of prices of 1909.)
M.Y. M.Y - T, P
2.71 x 36.6 4- 88x 18.8 |
m sº
1896 Gºo Žo go 55 4of so 2: ſo
x/394 + .eox! le.e
Isoz Gº-E-F-E-º-º-º-º:
3.22 x 40.6 + 97x; 20.2
1898 Gºo Žo eo so ho 3o Žo ſo
3.ask azo + 103: 2.5
I I | | I
1899 G32 7O 32 so 3O go IO 19–22–32—32–22–32–72-93 | |||O 12
4443 38.3+ Lleix 204 := 255 Mk 76.5%
I-I-I -** if:--º-º-º-º- ºſ---
19CO Géo & Co. ºo & so tº |O to 20 so ºb so go Zo º co-co do so)
513 x 40.6 22's -: 29 ºf 80.5%
m*** **** __º iº t a——— *
I I I I |- . ! Dr. T | ſ I I | I M I I TI
19C Géo 7O 6O 52 4o 3O {2O |O b & so ab so go Zo º so co-lo-ea)
4O x 40.5 + .25'x 21.6 - 287 \x 85.7%
-º-º-º-º-º-º-à------——º
1902 Go 7O 6C) 5o 4o 3o 20 |O |O 2C) 4O 50 CO 70 60 9C IOO i IO I2O
5.73 30.7 ± 1.39; 20.9 - 31O x! 82.6%
T I I rººm, º |- EN I- I I–I----- iº I–1–
19C3 Go 7O 6O 5O <p JO £2 |O 19–22–30–39–22–02—70—82–92–122–112– 2b)
5.77 x 39.e. + 1.3e is 20.4 -: 3|O x} 92.6%
I l I | mºm, iºn I ^ EN I I I I l T-I iº -
1904 Go fo to go o so to |O 2–22–30–40—20—20—20—30 A 90–192—llo—leº
f T —w- w º
. 54 x/ 242.7 -- 1.45}, 21.6 == 55\x 87.7%
****, *: __^T\ A
l I I !. I [N] I I U I I T l
|S}O5 8O 7O 6O 5O_/ 4O JO i2O |O to 22–30–40–50–60—20—eo—20—loo lo–led
|9C)6
so
-b
5O
eb
I78
so
º
i.
t
|O
|2O
35 93.2%
|9C)7 so ab so eb 26 eb 28 |||O 12
I ºf 9.2%
|SO8 so ab 35 eb 76 e. \ 11o 120
*i-ſºº.”
|SO9 so ab so so zo-so so cº–lo is
th {- 99 ºx IO4.O%
TFN I I I I I I ſº
| 9 || O 30–40–50–60—70—80–90–1901–19
77e.V. aes 1.64 x 2C.9 243 ºf oz.2%
| r—mºm." “fºr F-TFN—H-----H-I-
19 | | Gao 7O *—#2—tº 32—º |O f to eo—30–40–50–eo—zo—so so—look—lio–leo
e. I 7 x ſ 53.5 + 1.71 k 220 - 45O x\ |O5.3%
sº | I l I I | |
1912 - Go 7O so lºo 4O 3o zo Mo Al TST 25 T55 T2.5, 55 sº 75
i ..a |
W | l
e.15 is 54.o +- 1.7ex 2Lo == • * * * *g, * * * - 455 x} IO4.8%
9 | - N º [ZNU I I I I ! W |
| 3 3O 7O 6O 5O 4O JO 2O |O |O 2C 3O 4O 5C 6O 7C 8C SO IOO ||O_bºC)
e.e3Nº. 4ee is& Zo - 2432; lo-ox
| 9 |4 Geo 70 s | | | —I- Ex- I I | I | I I I i
6 5O a;O JO 2O |O |O 2C) 3O 4O 5O 6O 7C) 3O 9C) |OO ... l IO I2O
EQUATION OF Exchange. For SIX PERIODS IN 1914 ... -----
(V’, V, and T have been multiplied by twelve, to convert them from rates per month to rates per year.) iſi
M : Y + 1.x - T. F
| 9 |4 © 12 x {- 1.77 x 94. &=: 96 x IO5.2%
JAN. Goºo : : *—: º bº º Tô 25 go abºlº, 25 gººmbº
9.6 \x <!8. + Leo's 2e :-} 460 x} IO4.2%
! –a–
MAR. Go Zo go tº 2, 3, 26 b = To 25 25 25 25 gº 25 25 25 ºf Ib 28
\ º —r-
9.34 y 47.O + 1.73 k 17. :-- |
I |
JUNE Gºo 7O .. 65C) ão—-40 3O &–8 ºr -º-; ; L.L.; so—º
* x 38.4 + 1.89 § lº.9 =
l ! I
SEPT. Cso 7O 6O 22– 242 3O 2O. # IO […] ſo 2O 3b Ab 55 e5 76
8.77 x/45. + 2.06 k ſea †-3
t -
OCT. Gºo zo—cº-ººo so. 297 bºº ºb. 25 25-25 25-25-25Tº cºmbº
as—º-º-º-º-º-º-º-º: 59 x} IO2.1%
º !
|DEC, *—º–39–42—32–22 to Tºº Tibºzº, 25 25-35. Tº T35 25-25 cºlº



Money, Prices, Credit, and Banking
THE EQUATION of Exchange For 1914 AND THE WAR. The equa-
tion of exchange as calculated for 1914 is:"
Circ. of money (83) + Circ. of checks (416) = Value of goods bought (449)
Money X its velocity + peposits X their veloc = Trade X scale of prices
M S V Mr. X. Vº = T × P
X
1.94 × 17 i. 8.89 × 47 432 × 104 per cent
The large diagram gives the comparisons between the figures for
1914 and those for 1913 as well as previous years.” The heavy
areas are used in place of the symbolization of money, deposits, and
trade, employed in previous years. This improvement was suggested
to me by reading Brinton's Graphic Methods. The black areas are
more easily comparable than the old symbols, both because they are
closer together and because they are comparable in length alone.
The lever arms of these areas or weights, representing V, V’ and
P, are also more easily comparable than in the diagrams previously
published, because of their being brought closer together. The dotted
lines connecting the centers of the black areas evidently constitute
plotted curves showing the increase or decrease in the scale of prices
* As in former articles the numbers for M and M' are expressed in billions
of dollars and T in billions of units per year. -
*The methods by which the data in this article have been worked out are
similar to those employed in the articles of previous years. For details the
reader is referred especially to the Amragas EconoMIc REVIEw, June, 1912,
pp. 811–819.
As first computed, the two sides of the equation of exchange for 1914 showed
a discrepancy of a little over 5 per cent, which is considerably more than
usual. This discrepancy was, as in previous years, corrected by slight mutual
adjustments in the figures for the six factors concerned.
We have, this year, for the first time, as a possible check on the computa-
tions of the equation of exchange, the calculations for nearly two years, made
by the Committee on Clearing Houses of the American Bankers Association,
through its secretary, Mr. O. Howard Wolfe. These show between the part
of 1913 for which statistics are available (which begins March 12) and the
corresponding period in 1914, a reduction in “checks charged” of 8 per cent
as against a reduction in our calculations for M' V', based on clearing sta-
tistics (for full years) of 5% per cent. This discrepancy of 2% per cent
between the two ways of measuring changes in M' V' is not inconsiderable; but
any adjustment required thereby in the equation of exchange, when properly
distributed over the different factors, would be very slight. For this reason
and for other technical reasons—especially the fact that, as yet, the figures
I
and in the velocities of money and deposits exactly as in the case of
any ordinary plotted curves.
Comparing 1914 with the previous year we note a shrinkage in the
volume of trade amounting to about 5 per cent, a very slight fall in
the price level, a shrinkage in the velocity of deposits of about 13
per cent, and an assumed equal shrinkage in the velocity of money.
In contrast with these contractions we observe expansions in the
quantity of money in circulation and in the volume of bank deposits
amounting to about 9 per cent and 8 per cent respectively.
Inasmuch as the above-named disturbances are undoubtedly due
for the most part to the European war, it has seemed advisable to
calculate separately the equation of exchange for various periods in
1914 before and after the outbreak of the war in August. I have,
therefore, constructed a second diagram to show the condition of the
equation of exchange near the six dates” for which the Comptroller's
data for national banks are available. Three of the dates were before
and three after the outbreak. The data given by the Comptroller for
money and deposits on these dates are taken as representative of the
six respective months in which they fall. For these months I have
estimated, so far as possible, all the six magnitudes” in the equation
of exchange.
It will be observed that for the three periods which preceded the
war, there were comparatively small fluctuations in the six magnitudes
for checks charged cover too small a territory (comprising only about 7 per
cent of the total business of the country) to be representative of the coun-
try’s credit operations—I have not thought it necessary to attempt any nu-
merical corrections based on the figures for checks charged. In the ab-
sence of any reliable guide since”1909 as to the velocity of circulation of
money and because the process of extrapolation which hitherto has been used
is becoming increasingly unreliable with the lapse of time, this velocity has
been assumed to fluctuate in tune with the fluctuations of the velocity of
circulation of deposits subject to check. The figures for the velocity of money
are, therefore, very hypothetical and subject to a possible error, perhaps of
25 per cent, although, fortunately, this error would not greatly affect the
other magnitudes in the equation. -
My thanks are due to Royal Meeker, Commissioner of Labor Statistics, for
advance information in regard to the index number of wholesale prices for
1914 and for the separate months of the year.
*The dates are January 13, March 4, June 30, September 12, October 31,
and December 31.
*As shown in the heading of this diagram, all the magnitudes which are
rates per unit of time, i.e., the volume of trade and the velocities, i.e., T, V
and V', are here expressed on a per annum basis, not a per month basis.
In working out the statistics for M and M' for the various periods of
2
of the equation of exchange, but that, following the outbreak of the war,
violent fluctuations were observable.
The volume of trade showed a sudden fall and subsequent recovery,
the fall being almost 25 per cent between June and September, and
the recovery being exactly equal, though slower. -
On the other side of the equation, the outbreak of war was followed
by a sudden contraction in the velocities” of circulation, amounting to
20 per cent at first, which as in the case of trade, was followed by a
complete recovery. This slowing down of the velocity of money is
what is commonly called “hoarding.”
The quantity of money in circulation which, before the war, cor-
responded closely to its magnitude in 1918, immediately began to
expand beyond the June figures, September showing an increase of
10 per cent, October 20 per cent, and December nearly 40 per cent.
On the other hand, the volume of deposits subject to check executed
an exactly opposite though somewhat more gradual movement, con-
tracting relatively to June, 1 per cent, 7 per cent, and 17 per cent in
September, October, and December respectively.
The changes in the scale of prices were comparatively small. There
was an increase of 5 per cent between June and September, after
which time there was a recession to the original scale.
By the end of the year the only factors which had not recovered
substantially the condition from which they were disturbed in June
were money and deposits, the former having been greatly expanded
and the latter greatly contracted. . .
These changes are closely associated with the changes in a third
magnitude, viz., the money held in the banks, i.e., the (true) bank re-
1914, it was assumed that the money and the deposits subject to check in
other than national banks, maintained at all times the same ratio to the
corresponding magnitudes of national banks as they did in June, the only
date for which figures for all banks are available.
The volume of trade (T) for the six respective months has been com-
puted indirectly, i.e., from the other factors in the equation of exchange. There
seems to be no more direct way of calculating its seasonal fluctuations.
The fluctuations in checks charged, according to the statistics of Mr. Wolfe,
mentioned in the first footnote, do not correspond well with the fluctuations ob-
tained from the statistics of clearings, nor with the results of common Óbser-
vation. This is doubtless to be ascribed to the (as yet) small and therefore
unrepresentative character of the returns.
*Just as for the year 1914 (compared with 1913), so for the six periods
within it, the change in the velocity of money was arbitrarily assumed to have
been proportional to changes in the velocity of deposits.
serves, which decreased (with fluctuations) from 1.67 billions in June
to 1.19 billions in December, namely, 30 per cent.
The following table shows this and other magnitudes not contained
in the equation, but closely connected therewith.
Money in banks “Virtual” velocity of Cash exchanges as
(in billions) circulation of money percentages of
in circulation and total circu-
banks lation
January 1.68 151 6.6
March 1.65 140 6.7
June I.67 I38 6.3
September 1.59 II0 6.9
October 1.65 116 7.9
December 1.19 I32 I0.0
The first column shows the drain, just mentioned, on reserves; the
second shows the sudden fall and gradual subsequent recovery of
what I have called the “virtual velocity of circulation” of money,
i.e., the quotient obtained by dividing the total circulation of media
e s
wrº +k. +a+al ºr ran arr ºwn tº sa
of exchange, i.e., of money and checks, by the total money in use,
i.e., what is commonly, though improperly, called money in circulation
—money not only in pockets and tills for commercial purposes, but
also that in banks (though not including what is in the United States
Treasury). The third column shows the percentage of exchange"work
done in cash." It shows an increase from 6% per cent before the
war to 10 per cent in December, i.e., an increase of 50 per cent. In
other words, the use of credit currency in business sank from a normal
93% to 90 per cent.
The changes, both in the first and last columns of the above table,
show, in different forms, the contraction of credit and the shift to-
ward a cash basis. The recovery from this displacement is only now
beginning and will require presumably a large part of the year 1915
before the normal balance is regained.
To summarize, we may note four chief disturbances in the six magni-
tudes of the equation of exchange: (1) a sudden slowing down fol-
lowed by a gradual recovery in the volume of trade, on the right side;
(2) a sudden slowing down followed by a gradual recovery in the
velocities of circulation on the left; (3) a progressive contraction of
deposits; (4) a progressive expansion of money in circulation.
Evidently (1) and (2), being similar movements on opposite sides
of the equation, nearly offset each other, as do (3) and (4), being op-
posite movements on the same side of the equation. Thus the scale
of prices is left relatively unchanged.
We may, therefore, group the four phenomena into two: (a) a sud-
*This percentage is simply the ratio MV -ī- (MV + M'V').
4.
den slowing down followed by a gradual recovery in the rates at which
both goods and the means of paying for them change hands; and (b)
a progressive shift away from credit toward cash. ; : • -
The equation of exchange simply records these phenomena. It does
not, of itself, reveal the causes which produced them. But the phe-
nomena conform in a very simple manner with the theory that they
are due to the shock of war. * - -
The relations between the factors in the equation of exchange are
elastic and any sudden shock expends most of its force in disturbing
the relations among these factors. -
The sudden slowing down and subsequent gradual recovery in the
movement of both trade and money suggest the action of shock ab-
sorbers or rubber tires on an automobile. They represent the first
points where the shock impinges before it can be distributed else-
where. The shock of war first caused the public to “stop, look, and
listen.” Those who had goods held them and those who had means
of payment held them also. -
The next mechanisms to be affected were the quantities of money
and deposit currency. They are like the large springs on an auto-
mobile which take more time than the shock absorbers to execute
their movements. ‘. - -
Thus there has been a twofold absorption of the shock, first by
T, V, and V’, and afterward by M and M’. -
Expressing the matter in psychologic terms, the impulse to “play
safe” not only explains the arrest of trade operations, but also ex-
plains the displacements in the volume of credit and cash. The sud-
den hoarding produced by the war in turn produced a sense of a
“money famine.” This led to the withdrawal of cash from banks
and led the banks to curtail loans and reduce their deposit obligations.
It also led the public and the government to undertake various ex-
pedients to increase the quantity of money. The increase in the
money supply was thus a case of “elastic currency.” The slow recoil
of the elastic spring is still in process of taking place.
The scale or level of prices (P) may be likened to the body of the
automobile which was thus doubly protected from the effects of the
jolt. So far as the scale of prices, P, enters into the readjustments,
it was quite as much in the role of cause as in that of effect. The
sudden rise of prices in September was doubtless in part a specu-
lative marking up of goods with the expectation that the market would
justify the rise. A British banker, Gellender," shows that such an
* Publications of the (British) Institute of Bankers, November, 1901.
5
upward movement very commonly follows the outbreak of war. Af-
terwards, when producers saw that they had overshot the mark, prices
receded.
In short, there was a mutual give and take among all of the factors
in the equation of exchange.
These changes correspond to those discussed a priori in my Pur-
chasing Power of Money.” Ordinarily, and in the long run, the scale
of prices reflects directly a change in any other factor of the equa-
tion, just as ordinarily and in the long run the body of the automo-
bile follows the ups and downs of the road. But in periods of
transition and adjustment, such as those following the sudden shock of
war, the chief effects are not so much between prices and the other
factors as among these other factors themselves; just as in passing
over a sudden obstacle the chief effect is to disturb not the body of
the automobile but the relative positions of the sustaining parts.
Needless to say, the prognostications made a year ago have in many
respects not been fulfilled. The war has upset all calculations. In
the light of the present situation the outlook seems to be: (1) a gen-
eral shift back from cash to credit following the return to the pre-
war conditions already accomplished in the volume of trade and
velocities of circulation; (2) a further expansion in the six factors
of the equation of exchange; (3) a still further expansion after the
WąI’.
IRVING FISHER.
Yale University.
*See especially, pp. 70, 71, 161-168.