change in the fifth, the increase in the volume of trade, has tended to produce a fall. Of the four price-raising causes we find the most important absolutely to be the increase in bank deposits (M'). But if we measure these bank deposits (as they should be measured) relatively to the money in circulation, then their increase is found to be a less important price-raiser than the increase in the quantity of money. Fully as important as the increase of, deposits is the increase in their velocity, V'. The least important price-raising factor is V, the velocity of circulation of money.

The relative importance of the four price-raising factors can be stated numerically if we compute from the equation of exchange what the rise of prices between 1896 and 1910 would have been had any particular one of the four price-raising factors, instead of increasing, remained unchanged, assuming of course that the other three factors and the volume of trade should have changed exactly as they did change. We find that had it not been for the increase of M from .88 to 1.64, that is, if M had remained .88 throughout the period under consideration while the other factors had changed

M'

exactly as the facts show that they did, (namely, from 3.1 to

M

4.4; V from 18.8 to 21; V' from 36.6 to 52.7; T from 191 to 399), prices, instead of changing from 60.3 to 104.0, would have changed from 60.3 to about 56. In other words, prices, instead of rising as they did rise 72 per cent would have actually fallen 7 per cent. By similar calculations we find that had it not been for the relative inM'

crease in bank deposits, that is, for the increase of

M'

prices, in

stead of rising 72 per cent, would have risen only 25 per cent. Again, had it not been for the increase in V, prices, instead of rising 72 per cent, would have risen only 71 per cent, and had it not been for the increase in V', prices instead of rising 72 per cent would have risen only 24 per cent.

'Such a calculation is easily made by taking the formula P =

MV + M'V'

T

tuting on the right hand side the statistical value for 1910 for T and for all

M'
M,

but one of the four price-raising factors, M, V, V', their statistical values

for 1910, and for the remaining one the statistical value for 1896.

Putting the matter in a slightly different way we may say that had it not been for the increase in money in circulation (M), prices for 1910 would have been 46 per cent lower than they were, while

M'

with similar calculations for V' and V respectively the prices

" M

would have been lower by 28, 28 and 1 per cent. In other words M' of the four price-raising causes namely the increases in M, M V and V', the increase in money (M) is by far the most important and the increase in its velocity (V), by far the least important, and their velocity

M'

while the other two—relative deposits [M]

Μ

(V′)—stand approximately half-way between.

It need scarcely be noted that although these five factors fully account for all changes in the price level, yet other influences exist anterior to these factors. The proper mode of conceiving these other influences is to regard them as influencing prices, not directly, but indirectly by influencing one or more of the five factors (M, M', V, V', and T) on which, and on which alone, the price level (P) directly depends. Of these anterior or indirect influences on the price level the most important seem to be: first, the increase in the world's gold production, to which is chiefly due the increase in M noted; second, the concentration of population in cities, which has increased V'; third, the increase in banking facilities which has increased M'. Doubtless numerous other factors exist less important that the three mentioned. Gold is believed to be by far the most important factor. The changes in tariff laws have probably exerted some influence but that influence seems to be slight."

It is noteworthy that in the year 1910 there has been little increase of money in circulation as compared with the previous year, and that the increase of prices during that year is almost solely due to the increase of bank deposits.

We cannot, however, infer that gold production played no part in the prices for 1910 as compared with 1909. The problem of price levels is an international one, and had it not been for the especially American fact of the increase of bank deposits, this country doubtless would have shared in the world's increased stock of money. The increase of deposits has tended to prevent what would have been the natural increase of money in the United 'See Purchasing Power of Money, pp. 312-314.

States. Putting the matter in a different light, we may say that if there had been no increase in the money of the world as a whole but only an increase in American deposits and if there had occurred the same increase in American deposits (relatively to money) there would have been an actual decrease in the money in the United States for the deposits would have expelled the money. Such expulsion was only prevented by the increase of money abroad. Consequently, while money in the United States is not very much greater than it was a few years ago, it is very considerably greater than it would have been had it not been for the increase of the world's money resulting from the increased production of gold. Had our currency been subjected to both inflations -that of money (M) and that of deposits (M')-our prices would have risen disproportionately to foreign prices. It was, in fact, a tendency toward such a disproportionate rise in American prices that prevented the increase of our stock of money, for it made America a good country to sell in and a poor country to buy in, thus affecting the foreign exchanges.

What is the outlook for the future? Prediction is hazardous at all times, and especially now, as the present tendencies are not altogether simple and self-consistent and there exist currents and cross currents. Thus the sales of stocks and our exports and imports have declined during 1910 as compared with 1909, while our internal commerce has expanded. Again the prices of stocks have decreased while the prices of commodities have increased. Furthermore, the clearings, which are an indication of the payments by check (M'V') have decreased in New York City while outside of New York City they have increased.

At the present writing the best indications seems to point to the conclusion that the year 1911 will show a general contraction; that is, a shrinkage of the weights in our mechanical balance (especially M') and their movement toward the fulcrum-and this without a disturbance sufficiently acute to be called a crisis. However, it seems also probable, in view of all the circumstances of the case, and especially of the progressive increase in the gold supply, that

'These include an inflation of land values, of bank loans and deposits based on these land values, and of the rates of interest on farm loans, an increased "slowness in collections" observed by credit men, continued great bank clearings outside of N. Y. City, increased failures and increased investments, as well as, on the other hand, slight falling off in building, in bank clearings in N. Y. City, in immigration, and in commodity prices.

the upward trend of prices and the tendency toward expansion of trade, and of money and deposits with their velocities, will be resumed within a year or two, continuing until the process does culminate in a crisis. In other words, in spite of the apparently impending recession, we are still in a period of incubation for a future crisis. The exact date of such a crisis, of course, it would be foolish to predict, but if it occurs at all, it would seem likely to occur between, say 1913 and 1916. This prognostication is, of course, purely tentative and based chiefly on the existence of the expansive tendency shown in the diagram and the fact that such a tendency led to the crisis of 1907 and, so far as our fragmentary knowledge allows us to judge, to the crises of 1857, 1866 and 1873.8 The incubating period for such a crisis varies in different cases, but seems to be shorter when prices are rapidly rising than in other cases. The chief factor at work during the incubating period is, so far as the world in general is concerned, the increase in the supply of gold; and so far as conditions in this country in particular are concerned, it is the unprecedented extension of deposit banking.

The disproportionate growth of deposit banking and the consequent increase of the purchasing ability of the population is strikingly shown by the decreasing percentage which cash transactions (M'V') bear to the total of all transactions, MV + M'V', and the increasing percentage which the check transactions (M'V') bear to the same total.

The calculations given above enable us to determine with considerable precision the relative importance of cash and check transactions during the fifteen years under consideration. They are as follows:

This statement is in accordance with the facts and theories in Juglar's Des Crises Commerciales, Paris (Guillaumin), 1889; Thom's Brief History of Panics in the U. S., New York (Putnam), 1893; Babson's Business Barometers for Forecasting Conditions, 1910, Wellesley Hills; and my Purchasing Power of Money.