Irving Fisher

“ III.24 Since, then, insufficiency of cash is so troublesome a condition,—so difficult to escape when it has arrived, and so difficult to forestall when it begins to approach,—a bank must so regulate its loans and note issues as to keep on hand a sufficient cash reserve, and thus prevent insufficiency of cash from even threatening. It can regulate the reserve by alternately selling securities for cash and loaning cash on securities. The more the loans in proportion to the cash on hand, the greater the profits, but the greater the danger also. ”

“ A bank depositor, A, has not ordinarily "deposited money"; and whether he has or not, he certainly cannot properly say that he "has money in the bank." What he does have is the bank's promise to pay money on demand. The bank owes him money. When a private person owes money, the creditor never thinks of saying that he has it on deposit in the debtor's pocket.
§ 2 III.14 It cannot be too strongly emphasized that, in any balance sheet, the value of the liabilities rests on that of the assets. The deposits of a bank are no exception. ”

“ Money is called "primary" if it is a commodity which has just as much value in some use other than money as it has in monetary use. Primary money has its full value independently of any other wealth. Fiduciary money, on the other hand, is money the value of which depends partly or wholly on the confidence that the owner can exchange it for other goods, e.g. for primary money at a bank or government office, or at any rate for discharge of debts or purchase of goods of merchants. The chief example of primary money is gold coin ”

“ In the ultimate analysis, and outside of its function of insuring credit, a bank is really an intermediary between borrowers and lenders. It is by virtue of bringing borrowers and ultimate lenders together and providing the former with a supply of loans which would not otherwise exist, that a bank simultaneously tends to lower the rate of interest and increase the supply of credit currency. ”

“ Banks supply two kinds of currency, viz. bank notes—which are money; and bank deposits (or rights to draw) —which are not money. (2) A bank check is merely a certificate of a right to draw. (3) Behind the claims of depositors and note holders stand, not simply the cash reserve, but all the assets of the bank. (4) Deposit banking is a device by which wealth, incapable of direct circulation, may be made the basis of the circulation of rights to draw. ”

“ We must not be misled by the fact that the cash assets may be less than the deposits. When the uninitiated first learn that the number of dollars which note holders and depositors have the right to draw out of a bank exceeds the number of dollars in the bank, they are apt to jump to the conclusion that there is nothing behind the notes or deposit liabilities. ”

“ Through banking, he who possesses wealth difficult to exchange can create a circulating medium. He has only to give to a bank his note—for which, of course, his property is liable—get in return the right to draw, and lo! his comparatively unexchangeable wealth becomes liquid currency. To put it crudely, banking is a device for coining into dollars land, stoves, and other wealth not otherwise generally exchangeable. ”

“ A business firm would hardly pay car fares with checks and liquidate its large liabilities with cash. Each person strikes an equilibrium between his use of the two methods of payment, and does not greatly disturb it except for short periods of time. He keeps his stock of money or his bank balance in constant adjustment to the payments he makes in money or by check. Whenever his stock of money becomes relatively small and his bank balance relatively large, he cashes a check. ”

“ Banks more often lend rights to draw (or deposit rights) than actual cash, partly because of the greater convenience to borrowers, and partly because the banks wish to keep their cash reserves large, in order to meet large or unexpected demands. It is true that if a bank loans money, part of the money so loaned will be redeposited by the persons to whom the borrowers pay it in the course of business ”

“ In cities it is more convenient both for the payer and the payee to make large payments by check; whereas, in the country, trips to a bank are too expensive in time and effort to be convenient, and therefore more money is used in proportion to the amount of business done.*38 Again, the wealthier the members of the community, the more largely will they use checks. Laborers seldom use them; but capitalists, professional and salaried men use them habitually, for personal as well as business transactions. ”

“ Instead of taking grain, machines, or steel ingots on deposit, in exchange for the sums lent, banks prefer to take interest-bearing notes of corporations and individuals who own, directly or indirectly, grain, machines, and steel ingots: and by the banking laws the banks are even compelled to take the notes instead of the ingots. The bank finds itself with liabilities which exceed its cash assets; but in either case the excess of liabilities is balanced by the possession of other assets than cash. These other assets of the bank are usually liabilities of business men. ”

“ III.17 It is interesting to observe that the formation of the great modern "trusts" has given a considerable impetus to deposit currency; for the securities of large corporations are more easily used as "collateral security" for bank loans than the stocks and bonds of small corporations or than partnership rights. ”

“ These liabilities are in turn supported by the assets of the business men. If we continue to follow up the ultimate basis of the bank's liabilities we shall find it in the visible tangible wealth of the world. ”

“ In the long run a bank maintains its necessary reserve by means of adjusting the interest rate charged for loans. If it has few loans and a reserve large enough to support loans of much greater volume, it will endeavor to extend its loans by lowering the rate of interest. If its loans are large and it fears too great demands on the reserve, it will restrict the loans by a high interest charge. ”

“ III.38 In a given community the quantitative relation of deposit currency*37 to money is determined by several considerations of convenience. In the first place, the more highly developed the business of a community, the more prevalent the use of checks. Where business is conducted on a large scale, merchants habitually transact their larger operations with each other by means of checks, and their smaller ones by means of cash. Again, the more concentrated the population, the more prevalent the use of checks. ”

“ A mortgage on real estate is one degree more exchangeable. Yet even a mortgage is less exchangeable than a well-known and safe corporation security; and a corporation security is less exchangeable than a government bond. In fact persons not infrequently buy government bonds as merely temporary investments, intending to sell them again as soon as permanent investments yielding better interest are obtainable. ”

“ Even when the borrower has only a promise, by fiction he is still held to have deposited money; and like the original cash depositors, he is given the right to make out checks. The total value of rights to draw, in whichever way arising, is termed "deposits." ”

“ II.52 A second illustration is found in a debased currency. Suppose a government cuts each dollar in two, coining the halves into new "dollars"; and, recalling all paper notes, replaces them with double the original number—two new notes for each old one of the same denomination. In short, suppose money not only to be renamed, as in the first illustration, but also reissued; prices in the debased coinage will again be doubled just as in the first illustration. ”

“ Money against deposits, (5) Money against goods, (6) Deposits against goods. For our purpose, only the last two types of exchange are important, for these constitute the circulation of currency. As regards the other four, the first and third have been previously explained as "money changing" and "barter" respectively. The second and fourth are banking transactions: the second being such as the selling of drafts for checks, or the mutual cancellation of bank clearings; and the fourth being such operations as the depositing or the withdrawing of money, by depositing cash or cashing checks. ”

“ For that reason the money side of the equation is of course greater than the total amount of money in circulation.
II.19 The equation of exchange relates to all the purchases made by money in a certain community during a certain time. We shall continue to ignore checks or any circulating medium not money. We shall also ignore foreign trade and thus restrict ourselves to trade within a hypothetical community. ”

“ A bank note, on the other hand, is both circulating medium and money. Between these two lies the final line of distinction between what is money and what is not. True, the line is delicately drawn, especially when we come to such checks as cashier's checks or certified checks, for the latter are almost identical with bank notes. Each is a demand liability on a bank, and each confers on the holder the right to draw money. Yet while a note is generally acceptable in exchange, a check is specially acceptable only, i.e. ”

“ II.16 Personally, I believe that few mental attitudes are more pernicious, and in the end more disastrous, than those which would uphold sound practice by denying sound principles because some thinkers make unsound application of those principles. ”

“ II.14 The quantity theory has been one of the most bitterly contested theories in economics, largely because the recognition of its truth or falsity affected powerful interests in commerce and politics. ”

“ The qualities of primary money which make for exchangeability are numerous. The most important are portability, durability, and divisibility.*12 The chief quality of fiduciary money which makes it exchangeable is its redeemability in primary money, or else its imposed character of legal tender. ”

“ The truth of this proposition is evident from the equation MV + M'V' = SpQ; for if, say, M and M' are doubled, while V and V' remain the same, the left side of the equation is doubled and therefore the right side must be doubled also. But if the Q's remain unchanged, then evidently all the p's must be doubled, or else if some are less than doubled, others must be enough more than doubled to compensate. ”

“ No bank could escape failure if a large percentage of its note holders and depositors should simultaneously demand cash payment.*28 The paradox of a panic is well expressed by the case of the man who inquired of his bank whether it had cash available for paying the amount of his deposit, saying, "If you can pay me, I don't want it ”

“ In order that the lever arms at the right may not be inordinately long, we have found it convenient to reduce the unit of measure of coal from tons to hundredweights, and that of cloth from yards to feet, and consequently to enlarge correspondingly the numbers of units (the measure of coal changing from 10,000,000 tons to 200,000,000 hundred-weights, and that of the cloth from 30,000,000 yards to 90,000,000 feet) . The price of coal in the new unit per hundredweight becomes 25 cents per hundredweight, and that of cloth in feet becomes 33 1/3 cents per foot. ”

“ In the opposite event, he deposits cash. In this way he is constantly converting one of the two media of exchange into the other. A private individual usually feeds his purse from his bank account; a retail commercial firm usually feeds its bank account from its till. ”

“ II.34 In general, a change in one of the four sets of magnitudes must be accompanied by such a change or change in one or more of the other three as shall maintain equilibrium.
II.35 As we are interested in the average change in prices rather than in the prices individually, we may simplify this mechanical representation by hanging all the right-hand weights at one average point, so that the arm shall represent the average prices. This arm is a "weighted average" of the three original arms, the weights being literally the weights hanging at the right. ”

“ Likewise, the property value of a fifty-cent piece, a quarter, a ten-cent piece, a five-cent piece, or a one-cent piece is considerably greater than its value as wealth. The value of a paper dollar as wealth—for instance, a silver certificate—is almost nothing. ”

“ Turning to the goods side of the equation, we have to deal with the prices of goods exchanged and quantities of goods exchanged. The average*17 price of sale of any particular good, such as bread, purchased in the given community during the given year, may be represented by p (price) ”