1. _Conditions affecting producers._
(a) Geographical differences in natural resources.
(b) The division of labor.
(c) Knowledge of the technique of production.
(d) The acc.u.mulation of capital.
2. _Conditions affecting consumers._
(a) The extent and variety of human wants.
3. _Conditions connecting producers and consumers._
(a) Facilities for transportation.
(b) Relative freedom of trade.
(c) Character of monetary and banking systems.
(d) Business confidence.
1 (a). It is evident that if all localities were exactly alike in their natural resources, in other words, in their comparative costs of production, no trade would be set up between them.... Cattle raising in Texas, the production of coal in Pennsylvania, of oranges in Florida, and of apples in Oregon have increased the volume of trade for these communities respectively.
1 (b). Equally obvious is the influence of the division of labor....
1 (c).... The state of knowledge of production will affect trade. Vast coal fields in China await development, largely for lack of knowledge of how to extract and market the coal. Egypt awaits the advent of scientific agriculture, to usher in trade expansion. Nowadays, trade schools in Germany, England, and the United States are increasing and diffusing knowledge of productive technique.
1 (d). But knowledge, to be of use, must be applied; and its application usually requires the aid of capital. The greater and the more productive the stock or capital in any community, the more goods it can put into the currents of trade....
Since increase in trade tends to decrease the general level of prices, anything which tends to increase trade likewise tends to decrease the general level of prices. We conclude, therefore, that among the causes tending to decrease prices are increasing geographical or personal specialization, improved productive technique, and the acc.u.mulation of capital. The history of commerce shows that all these causes have been increasingly operative during a long period including the last century.
Consequently, there has been a constant tendency, from these sources at least, for prices to fall.
2 (a).... An increase of wants, by leading to an increase in trade, tends to lower the price level. Historically, during recent times through invention, education, and the emulation coming from increased contact in centers of population, there has been a great intensification and diversification of human wants and therefore increased trade.
Consequently, there has been from these causes a tendency of prices to fall.
3 (a). Anything which facilitates intercourse tends to increase trade.
Anything that interferes with intercourse tends to decrease trade. First of all, there are the mechanical facilities for transport. As Macaulay said, with the exception of the alphabet and the printing press, no set of inventions has tended to alter civilization so much as those which abridge distance,--such as the railway, the steamship, the telephone, the telegraph, and that conveyer of information and advertis.e.m.e.nts, the newspaper. These all tend, therefore, to decrease prices.
3 (b). Trade barriers are not only physical but legal. A tariff between countries has the same influence in decreasing trade as a chain of mountains. The freer the trade, the more of it there will be....
3 (c). The development of efficient monetary and banking systems tends to increase trade. There have been times in the history of the world when money was in so uncertain a state that people hesitated to make many trade contracts because of the lack of knowledge of what would be required of them when the contract should be fulfilled. In the same way, when people cannot depend on the good faith or stability of banks, they will hesitate to use deposits and checks.
3 (d). Confidence, not only in banks in particular, but in business in general, is truly said to be "the soul of trade." Without this confidence there cannot be a great volume of contracts. Anything that tends to increase this confidence tends to increase trade....
We see, then, that prices will tend to fall through increase in trade, which may in turn be brought about by improved transportation, by increased freedom of trade, by improved monetary and banking systems, and by business confidence. Historically, during recent years, all of these causes have tended to grow in power, except freedom of trade....
Having examined those causes outside the equation which affect the volume of trade, our next task is to consider the outside causes that affect the velocities of circulation of money and of deposits. For the most part, the causes affecting one of these velocities affect the other also. These causes may be cla.s.sified as follows:
1. _Habits of the individual._
(a) As to thrift and h.o.a.rding.
(b) As to book credit.
(c) As to the use of checks.
2. _Systems of payments in the community._
(a) As to frequency of receipts and of disburs.e.m.e.nts.
(b) As to regularity of receipts and disburs.e.m.e.nts.
(c) As to correspondence between times and amounts of receipts and disburs.e.m.e.nts.
3. _General causes._
(a) Density of population.
(b) Rapidity of transportation.
1 (a). Taking these up in order, we may first consider what influence thrift has on the velocity of circulation. Velocity of circulation of money is the same thing as its rate of turnover. It is found by dividing the total payments effected by money in a year by the amount of money in circulation in a year. It depends upon the rates of turnover of the individuals who compose the society. This velocity of circulation or rapidity of turnover of money is the greater for each individual the more he spends, with a given average amount of cash on hand; or the less average cash he keeps, with a given yearly expenditure....
1 (b). The habit of "charging," _i.e._, using book credit, tends to _increase_ the velocity of circulation of money, because the man who gets things "charged" does not need to keep _on hand_ as much money as he would if he made all payments in cash. A man who pays _cash_ daily needs to keep cash for daily contingencies. The system of cash payments, unlike the system of book credit, requires that money shall be kept on hand _in advance_ of purchases. Evidently, if money must be provided in advance, it must be provided in larger quant.i.ties than when merely required to liquidate past debts....
But we have seen that to increase the rate of turnover will tend to increase the price level. Therefore, book credit tends to increase the price level....
1 (c). The habit of using checks rather than money will also affect the velocity of circulation; because a depositor"s surplus money will immediately be put into the bank in return for a right to draw by check....
We see, then, that three habits--spendthrift habits, the habit of charging, and the habit of using checks--all tend to raise the level of prices....
2 (a). The more frequently money or checks are received and disbursed, the shorter is the average interval between the receipt and the expenditure of money or checks and the more rapid is the velocity of circulation.
This may best be seen from an example. A change from monthly to weekly wage payments tends to increase the velocity of circulation of money. If a laborer is paid weekly $7 and reduces this evenly each day, ending each week empty-handed, his average cash ... would be a little over half of $7, or about $4. This makes his turnover nearly twice a week. Under monthly payments the laborer who receives and spends an average of $1 a day will have to spread the $30 more or less evenly over the following 30 days. If, at the next pay day, he comes out empty-handed, his average money during the month has been about $15. This makes his turnover about twice a month. Thus the rate of turnover is more rapid under weekly than under monthly payments....
Frequency of disburs.e.m.e.nts evidently has an effect similar to the effect of frequency of receipts; _i.e._, it tends to accelerate the velocity of turnover, or circulation.
2 (b). _Regularity_ of payments also facilitates the turnover. When the workingman can be fairly certain of both his receipts and expenditures, he can, by close calculation, adjust them so precisely as safely to end each payment cycle with an empty pocket. This habit is extremely common among certain cla.s.ses of city laborers. On the other hand, if the receipts and expenditures are irregular, either in amount or in time, prudence requires the worker to keep a larger sum on hand, to insure against mishaps.... We may, therefore, conclude that regularity, both of receipts and of payments, tends to increase velocity of circulation.
2 (c). Next, consider the synchronizing of receipts and disburs.e.m.e.nts, _i. e._, making payments at the same intervals as obtaining receipts....
This arrangement obviates the necessity of keeping much money or deposits on hand, and therefore increases their velocity of circulation....
3 (a). The more densely populated a locality, the more rapid will be the velocity of circulation.
There is definite evidence that this is true of bank deposits. The following figures give the velocities of circulation of deposits in ten cities, arranged in order of size:
Paris 116 Berlin 161 Brussels 123 Madrid 14 Rome 43 Lisbon 29 Indianapolis 30 New Haven 16 Athens 4 Santa Barbara 1