between India and England in this respect is that in the latter case gold itself is shipped abroad; in the former case rupees accumulate in the Government Reserves owing to the sale of bills, and ipso facto release sovereigns held for that purpose in London. Either process is due to the same cause and produces the same results. The alleged defects in the existing system are not, then, adequate in themselves to justify a new departure which is not otherwise necessary.

To sum up, the case for a gold currency in India stands thus :The demand for a gold coin is not proved; the use of sovereigns may have increased, but we have no means of testing at present whether the increase is real or permanent; it is uncertain to what extent the import or issue of gold coins would encourage hoarding, but to some extent it certainly would encourage it; however, it is important to discourage hoarding, and the existing system does that in the most effective way; the chief objection that has been raised to the present system is founded on a misunderstanding of the facts, and the weakest point, the security for the maintenance of the exchange, will, given normal seasons, become very much stronger. On the other hand, if a series of bad seasons should occur, no gold would flow into India, and whatever system were adopted it would have no effect in protecting the rupee farther than it is already protected. All these points considered, it is questionable whether the time is yet ripe for the establishment of a gold currency in India.

H. DODWELL

REVIEWS

The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crisis. By IRVING FISHER, assisted by HARRY G. BROWN. (New York: The Macmillan Company. 1911. Pp. xxii. + 505. 12s. 6d. net.)

THE state of monetary theory and the literature of it in England present a remarkable contrast to their development in the United States. For nearly twenty years past, in fact since the close of the bimetallic debate, no substantial contribution to this subject has been published in England. In America, on the other hand, stimulated perhaps by the longer continuance of political controversy on monetary matters, the literary output has never ceased to be considerable. The silence of English economists of established reputation can be partly explained by the large measure of agreement on these matters which seems at the present time to exist amongst them; whereas discussions in America have shown such very wide divergencies of opinion that Professor Fisher has declared in his preface that "it has seemed to him a scandal that academic economists have, through outside clamour, been led into disagreements over the fundamental propositions concerning money." But this silence on the part of English economists, who have made no use of the advantage over their American colleagues which freedom from political controversy has given them, has greatly hindered the progress of the science, and the strange position has been reached that the theory of money, as it has been ordinarily understood and taught by academic economists in England for some time past, is considerably in advance of any published account of it. It is hardly an exaggeration to say that monetary theory, in its most accurate form, has become in England a matter of oral tradition. These preliminary remarks are necessary in order to explain that it is from the standpoint of this oral tradition, rather than from that

of any printed book, that an English economist must approach Professor Fisher's very important contribution to the subject.

Professor Fisher's book is marked, as all his books are, by extreme lucidity and brilliance of statement. It is original, suggestive, and, on the whole, accurate; and it supplies a better exposition of monetary theory than is available elsewhere. In reviewing for THE ECONOMIC JOURNAL a book of this type, which is likely to be read by all serious students of the subject with which it deals, it would be a waste of time to attempt a systematic summary of the contents. I propose, therefore, to devote all the rest of my space to a criticism of those parts of Professor Fisher's theory which seem to me weakest, without at all intending to disparage the volume as a whole.

The most serious defect in Professor Fisher's doctrine is to be found in his account of the mode by which through transitional stages an influx of new money affects prices. The following is an abbreviated account (in his own words, though the italics are mine) of the theory which he presents in Chapter IV. :— Let us begin by assuming a slight initial disturbance such as would be produced by an increase in the quantity of gold. This, through the equation of exchange, will cause a rise of prices. As prices rise, profits of business men, measured in money, will rise also, because the rate of interest which they have to pay will not adjust itself immediately. Consequently they are encouraged to expand their business by increasing their borrowings. These borrowings are mostly in the form of short-time loans from banks; and short-time loans engender deposits. This extension of deposit currency tends further to raise the general level of prices, just as the increase of gold raised it in the first place. Further, the rise in prices will accelerate the circulation of money. Evidently the expansion coming from this cycle of causes cannot proceed for ever. The check upon its continued operation lies in the rate of interest. The rise in interest, though belated, is progressive, and, as soon as it overtakes the rate of rise in prices, the whole situation is changed. There are also other forces placing a limitation on further expansion of deposit currency and introducing a tendency to contraction. Not only is the amount of deposit currency limited both by law and by prudence to a certain maximum multiple of the amount of bank reserves; but bank reserves are themselves limited by the amount of money available for use

as reserves.

Now, as an account of the manner in which new gold affects

prices, the above seems to me incomplete and inadequate. It partially explains how, when prices have been raised by new gold, equilibrium is reached again. But Professor Fisher never explains clearly how new gold raises prices in the first instance, and is content with showing by the quantity theory that new gold must raise them somehow. There is, of course, no single explanation suited to all times and places, but the general outlines. of the theory have been indicated by Dr. Marshall in his evidence 1 before the Gold and Silver Commission in 1887, and before the Indian Currency Committee in 1898. There is no space in which to go into this explanation here. Briefly, on account of the influx of new gold, which strengthens their reserves, bankers lend more freely; it is this ease of borrowing which first induces merchants and speculators to increase their purchases, and it is this increased. demand on their part which raises the level of prices. Professor Fisher neglects altogether this first stage of the process, and seems to suggest that, when new gold has been issued, prices rise automatically by a sort of natural magic. As an account of the subsequent stages, Professor Fisher's theory, though possibly expounded too emphatically from the standpoint of interest, can be accepted. But one important cause of the reaction he neglects -namely, the flow of gold out of the banks-thus reducing their willingness to lend-for use in the payment of wages and for retail purchases, upon the money cost of which the rise of business profits and of wholesale prices must eventually react. This is an extremely vital factor in the situation. Two other minor points may be touched on before we leave this part of Professor Fisher's book. Firstly, he somewhat exaggerates the fixity of the ratio between bank reserves and bank deposits. In America, on account of the legal requirements, variations in the ratio may be relatively small. But elsewhere, even over comparatively long periods, the fluctuations fluctuations are, surely, considerable. Secondly, he greatly exaggerates the fixity of the ratio between cash transactions and cheque transactions, in support of which he adduces no sufficient evidence. It is largely because he thinks that these fixities of ratio are automatically preserved (see Chapter IV. and p. 156), that he is led to speak as if an increase of gold automatically raised prices. These tendencies certainly lie behind the actual process, but no account is complete which

1 Professor Fisher's book contains no reference to this evidence, which constitutes the most important contribution to monetary theory published in England since the time of Ricardo, and there seems good reason to suppose that he is not acquainted with it.

is content with showing that prices must "necessarily and mathematically" rise and omits to describe in what manner the tendencies realise themselves.

The treatment of index numbers is Professor Fisher's next topic. He has very conveniently expressed the equation of exchange in the formMV + M'V' = ΣpQ,

where M is the amount of money in active circulation, M' the amount of bank deposits subject to transfer by cheque, V and V their average velocities of circulation, Q the volume exchanged of a given type of goods, and p its price of exchange. He then endeavours to convert the expression EpQ into the form PT, where T measures the volume of trade, and P is an index number expressing the price level at which this trade is carried on. There is no uniquely correct method of expressing P and T, but Professor Fisher argues with ability that the most convenient procedure is to regard T as the number of units of goods sold of all kinds, each unit being of an amount worth a dollar at the prices of the base year, and to regard P as the ratio of the average price in any year to the average price in the base year, the prices being weighted in both cases by reference to the number of units sold in the year in question (i.e., T=ΣpoQ and P=ΣpQ÷ΣPoQ, where po represents the price in the base year). P, calculated in this manner, may be termed the index number of exchange. Professor Fisher then seeks to show that this index number is also the most convenient as a measure of exchange value for the purpose of contracts and deferred payments. In this argument, as also in the statistical verification of later chapters, he seems to overlook the fact that in the index number, which arises out of the equation of exchange, articles have importance in proportion to the number of times they change hands. Services or articles, for which the immediate consumer pays the original producer directly or at but a few removes, have an insignificant effect on this index number, as compared with articles which pass through a great number of hands and are the subject of a great number of exchanges before they reach their ultimate destination. An index number, weighted in this fashion, seems obviously useless for any purposes except those of monetary theory.

After a careful discussion of his fundamental equation of exchange, MV+M'V' = PT, Professor Fisher endeavours to determine statistically the magnitude of each of its terms for the