poration by an amendatory act (other amendments having been adopted in preceding years), so that the institution could exert itself in promoting the exportation of agricultural products to foreign countries in those cases which offered special reasons for government aid of this kind. In other countries, somewhat similar measures have from time to time been taken. Great Britain, for example, after the close of the war, organized an export credit plan whose object it was to relieve bankers of the liability growing out of unduly hazardous elements in the export trade. Various instances might be cited of action on the part of other nations intended to afford special credit accommodations either to facilitate particular movements of goods or to help out special classes in the community. It is not necessary to go into the detail of these different organizations, but their general characteristics should be noted. This is found in the fact that they constitute a diversion of capital from the channels in which it would naturally flow to others into which it has been diverted by government intervention and guaranties. The result is to transfer a part of the normal credit risks of the country out of the hands of the banks, and so saddle them upon the shoulders of the community as a whole represented in the governmental mechanism.

It is probable that the relationship between the government and the banking mechanism in modern countries will grow closer and more intimate in future years. This makes it the more important to recognize the consequences of such interference and especially to note the influence exerted by government banking schemes upon the general credit structure.

CHAPTER XXX

PRICES, MONEY, AND BANKING

1. RELATION OF MONEY TO BANK CREDIT.

IN preceding chapters reference has often been made to money, with only a passing explanation of its functions and

The most extensive reference that has been made to it in its relation to banking is found in the sections on reserves and notes, where the thought was developed that one problem in connection with the reserves of the bank is that of providing always a sufficient amount of specie with which to meet current obligations that may be presented. Nothing has been said with regard to the theory of money or prices, because of the belief that this phase of the subject can best be dealt with after the reader has attained a working knowledge of the methods of banking. It is now time, however, to set forth some of the main problems of money in its relation to bank credit.

As has been seen incidentally at an earlier point, money is regarded by many as having been a development in the process of exchange which preceded credit and which certainly preceded even the most fundamental forms of banking. Without stopping to inquire further into the historical accuracy of this view of the situation, it may be admitted that the exchange of goods largely by the use of money is a step in the process of working out the modern exchange system which preceded any considerable development of banking as we know it to-day. Looking back a century, for example, it will be found that most civilized nations had accepted the view that it was the duty of governments to establish the standard of value, coin money and issue it, while it was also true that the larger part of exchanges was consummated either immediately or eventually by the actual transfer of money or its paper representatives. The con

cept of a banking system in which transfers of credit on the books of banks took the place of credit individually extended by traders, and in which, therefore, the liability for the soundness of credit was shifted to the banks, has been the product of the last three-quarters of a century or less. This being so, it was natural that in the earlier days of modern banking the bank should be regarded as an institution for lending money or furnishing money, and that its function should be conceived of very largely in terms of the money standard. It was equally natural that the reserves of the bank should be considered as consisting of actual money, and that solvency and liquidity on the part of the bank should be regarded as measured by the ability to command money when customers sought it. The foregoing chapters have shown the erroneous character of this idea. Still it remains true that, with conditions in the world as they are at the present time, money retains, and, so far as one can forsee, will continue to retain for an indefinite period, an important function as the means of liquidating obligations. Banks will continue to be tested by their ability to command money, and it is probable that economists will continue to theorize about bank credit as a substitute for money or as a means of avoiding the use of money.

It is at the latter point that the student who enters the field of scientific banking, needs most to clarify his ideas. As the modern economic world has developed, most of its business transactions are in one way or another connected actually or nominally with money. The value of goods is stated in terms of money even when the goods themselves are sold without the actual acquirement of any cash whatever by the seller. The level of prices is measured in terms of money and the problem of the value of money is thus fundamental in the whole theory of exchange, and hence has a vital relationship to banking both in theory and in practice.

II. MEANING OF THE VALUE OF MONEY.

What is meant by the value of money? The significance of the term can best be understood by regarding it as the

converse of the term "value of commodities." When we speak of the price of a given group of commodities as $100 we mean that they will exchange for a quantity of money or its equivalent expressed by the figure 100. The term "dollar," "pound sterling," "franc," would have no meaning were it not for statutes in the countries whose standards they are, requiring that they shall represent a specified number of grains of gold, or, in some conditions, of silver. The value of commodities then may be regarded as the quantity of standard metal, represented by a term legally defined (as dollar, pound sterling, franc, etc.), or the equivalent thereof in some other form, which they can command. Strictly speaking, however, the value of commodities expressed in terms of money is technically at least the quantity of the standard metal for which they will exchange. Reversing this conception, it is clear that the value of money means the quantity of commodities for which a given unit or amount of the precious metal which is accepted as money will exchange. Thus in the case of the group of commodities whose value was taken as $100 above, the value of $100 is the aggregate of commodities constituting the group already referred to. The difficulty in reversing the term and using them interchangeably lies in the fact that, whereas money is a single commodity, other items of goods vary. Strictly speaking, therefore, the value of money must be taken as the total amount of all existing commodities that can be bought at a given time, for which a unit of money would exchange. This concept, as readily appears, is unwieldy for ordinary use. Since we can never tell exactly what commodities money will be offered for, and, since not all commodities are constantly or freely bought, the term There must, however, be a way of measuring the value of goods" or "value of commodities."

III. MEASUREMENT OF VALUE BY INDEX NUMBERS.

There must, however, be a way of measuring the value of money and of ascertaining it at any given time. Since it is not possible to measure or ascertain the exchange value of money for all commodities at any given time, economists

have agreed upon lists of commodities whose prices are to be taken as measuring the value of money. Thus, for instance, if at any given moment we say that a bushel of wheat is worth $1, a ton of pig iron $20, a yard of cloth $3.50, and so on up to a total of $100, we may say that the value of the precious metal contained in $100 is represented by the sum total of the units of different goods thus selected for comparison. The purpose of thus reversing the idea of value is, however, primarily that of making possible comparisons of value at different times.

The working of the index-number plan for the measurement of prices is comparatively simple. Its use is necessitated simply by the fact that it is possible to combine or add dissimilar units only after reducing them to a mathematical base or equivalent. For instance, if it be desired to average the price of ships and clothing and vegetables, no success can be had without first getting a mathematical expression for each price. The index-number plan involves further the choice of a definite base period from which to reckon. For instance, assume that it is desired to compare the level of prices in the year 1910 with that of the year 1900. The first problem is to select the commodities which are to be taken as representative of all others. Suppose that ten such commodities are chosen and that they are, say, pig iron, copper, wool, woolen cloth, raw cotton, cotton cloth, wheat, corn, anthracite coal, and a standard grade of lumber. Evidently these prices are entirely incomparable. They will run from, say, $25 a ton for pig iron to $1 a bushel for wheat or $15 a ton for coal. The first step, therefore, is to regard these various prices as merely the base from which to figure, assigning to each one of them an abstract value of 100. Evidently, then, the combined price of these commodities in the year 1900 will be 1,000that is to say, ten times 100, the base or equivalent price of each article. Now, if in the year 1910 pig iron instead of being $25 per ton is $30, the index number for that article will be 5-25 above what it was in the year 1900— that is to say, it will be 120. Again, if the price of wheat was $1 per bushel in 1900 and in the year 1910 turns out