price level in 1909 would have been 23 per cent lower than it actually was; (3) if the velocity of circulation of money, V, had not changed, the price level for 1909 would have been 1 per cent lower; (4) if the velocity of circulation of deposits, V', had not changed, the price level in 1909 would have been 28 per cent lower; (5) if T had not changed, the price level in 1909 would have been 106 per cent higher.

Thus the changes in the first four factors have tended to raise prices, while the change in T has tended to lower prices. The relative importance of the four price-raising causes may be stated in terms of the per cent already given which represents how much lower prices would have been except for each of these causes separately considered. According to this test we find the relative importance of the four price-raising factors to be as follows: The importance of V is represented by 1,

M'

The importance of is represented by 23,

M

The importance of V' is represented by 28,

The importance of M is represented by 45.

That is, the increase in the quantity of money has an importance nearly double that of any other one price-raising factor. This study includes all the possible price-raising factors. To be sure, there may be innumerable causes raising the price level, but they can operate only through the four factors mentioned, or through the fifth, the volume of trade, which as we have seen has tended during the last fifteen years to depress rather than increase prices.

We conclude, therefore, that the chief cause of the rise in prices. during the last fifteen years has been due to the increase in the money in circulation. This increase in money has doubtless been due in turn to the increase in gold production.

Similarly, back of the other three price-raising factors we shall find other price-raising factors at work. In particular the increase in V', the volume of checks subject to deposit, has probably been due to the concentration of population in cities; for the statistics of Pierre des Essars for the velocity of circulation of different cities in Europe can be used to show that in general the more densely populated a town the more active its bank accounts and the more rapid the velocity of bank deposits. The inM' crease in in other words, the expansion of banks, has doubtless been due in large part to the opening up of the South, and the

M

recent banking laws favoring small towns may have had some part in it.

A by-product of this investigation has been to show the exact proportions of the business of the country conducted in cash and in checks. It is found that the percentage of the total business of the country performed by cash has varied from 14 per cent in 1896 to 9 per cent in 1909. We thus find that the business men's impression that about 10 per cent of the business of the country is performed by cash and about 90 per cent by check, is substanitally correct.

MONEY AND PRICES-DISCUSSION

D. F. HOUSTON: The discussion of money and prices today reminds one very strongly of the discussion forty years ago. Now, as then, the opinion is that prices have risen; but now, as then, there is wide difference as to the explanation. Now, as then, a highly respectable body of economists attribute the rise mainly to the new gold; and now, as then, a number of economists attribute the rise to influences immediately affecting the cost of production of commodities in general, instancing such things as labor unions, monopolies, extravagance, the tariff, general prosperity, etc. When I first glanced at the abstract of Professor Laughlin's interesting paper my thoughts were turned to Cairnes's brilliant discussion. He says:

"But prices having risen, to what is the rise to be attributed? Here too, as I have said, there is a divergence of opinion. Amongst economists I think it is pretty well agreed that the advance is, at least in a large measure, due to the effects of the gold discoveries. But, on the other hand, there is, on the part of commercial writers, and in general of all who view the question from the standpoint of practical business, a strong disposition to ignore, or altogether to deny, the influence of this cause on determining the results. The enhanced scale of wages and prices is not disputed, but it is referred to such causes as 'the recent great development of trade', 'changes in supply and demand, or 'the effect of strikes'; and the facts seeming in each given instance to be traceable to one or more of such influences, the incident of an increased abundance of gold is regarded as something superfluous and irrelevant, and which need not be taken account of in seeking their explanation. Such a mode of argument, however, I do not hesitate to say, implies a fundamental misconception as to the nature of the problem to be solved. For to show that an advance of prices is connected with a development of trade, with changes in supply and demand, or with the action of strikes, is not to prove that it is not due to the gold discoveries. An increased supply of money does not, and cannot, act upon prices, or upon the value of the metal composing it, in any other way than by being made the instrument of trade, by affecting demand and supply, or by furnishing employers with the means and the motives for advancing the wages of their workmen; and, consequently, however clearly the advance may be traceable in each given case to an occurrence of this nature, the problem still lies open: nothing has been done towards determining the question whether the increased monetary supplies may not have been an indispensable condition to the realization of the advance."

He continues:

"I venture to lay down broadly this proposition, that, when an advance in the price of any of the great staples of industry becomes

definitive (monopoly apart), there are two, and only two, adequate explanations of the fact: either the cost of producing the article (understanding by cost, not the money outlay, but the real difficulties of production) has increased, or the cost of producing or obtaining money has diminished.”

With full recognition of the fact that the question is complex and that causes have been at work affecting the cost of production of commodities tending to enhance their price, I should dissent from Professor Laughlin's conclusion that the main explanation lies in this direction, and should contend that the principal factor explaining the rise in price since 1896 has been the enormous increase in the supply of gold and in the devices that have been tremendously developed for facilitating exchange, operating to increase the efficiency of gold and therefore its power to affect price.

Professor Laughlin gives a summary of the production of gold by value for various periods from 1492 to 1905, which I give in part as follows:

Between 1905 and the end of 1909 alone the increase has been $1,700,000,000, making a total of $4,600,000,000 for the period 1896-1909-more than half the total production for the four hundred years from the discovery of America to 1895, an amount only a billion less than the total output of the new gold from 1851 to 1895.

Even if all the gold produced had been preserved, such an enormous addition in less than fifteen years would tend to create the presumption that prices would be strongly affected, even conceding a vast increase in the production of commodities and an increase in the difficulty of securing them. When we consider that much of the gold produced in the four hundred years down. to 1895 was lost, that much of it has gone to backward countries, and that the stock of gold is materially less at any period than the production up to that date, the presumption that gold has been the principal factor in affecting price in the last fourteen years is considerably strengthened.

I recognize that the statistics of the stock of gold, as well as all the others that we deal with, are not exact. I imagine that the estimates of the stock of gold at any period are almost more unreliable than any others that we have to deal with, but I note them for what they are worth and I wish to compare the estimates of the stock of gold at certain dates, in the principal countries of the world, with the world's production of gold up to those dates:

If we assume that the stock of gold in the principal countries of the world in 1895 was 50 per cent greater than the estimate, or six billions of dollars, the total stock existing at that date would still be only a billion and a half more than the aggregate addition in the fourteen years following.

It is generally agreed that prices rose between 1850 and 1873, although the addition to the stock of gold in the leading Western nations was slight, except in the case of France, and here the phenomena were the addition of a considerable mass of gold and the expulsion of a large amount of silver to the East. The new gold had an effect principally psychological in this period, particularly in the United States where the anticipation was that large reserves of gold would be available and where additional stimulus was furnished to speculation and overtrading in all directions, leading to the collapse in 1857.

In the period from 1873 to 1879 prices declined in spite of the great increase in the production of gold, which aggregated about $2,400,000,000 and resulted in an excess importation or retention of gold in the leading countries of approximately two billions of dollars, distributed fairly uniformly through the leading nations. This period was one of tremendous industrial activity, characterized by the opening up of vast regions of new and fertile lands, the completion of transportation facilities through a great part of these regions, and the effective use of numerous important inventions in agriculture and manufacturing, which had as their effect the production of a great increase in the quantities of commodities generally at a lower cost. The