Evening star., 1933-10-01
Prices Fixed by Money Velocity
As Well as amount AvailabIe
Speed With Which Currency Circulates
Has Force in Quantity Theory That
Is l gnored by Inflationists.

theory phrased it-that 1t becomes a
positive force on prices.
We could not ask better illustration
Of this than has been provided by Amer
ican currency figures the last two or
three years. Whereas the volume OF
currency outstanding in March, this
year, was actually $2,700 100000 greater
than that outstanding in october, 1929,
prices in March were at or near their
very lowest of the depression.
Why? Simply because two-thirds OF
that money was boarded in old stock
ings, under mattresses. behind pictures.
It was not 'in active circulation" 1t
was not being used.
Nor is this phenomenon peculiar to
currency. 1t is equally applicable to
bank credit. Se--'-....ber 80, 1881, two
years after thc stock market crash.
when security prices had fallen So per
cent and commodity prices 26 per cent.
the deposits Of the reporting members
of the Federal Reserve System were
actually some $40O, ,000,0 900 greater than
on October 2, 1929.
Velocity Diminished.
What happened to the price levl in
this two-year period was not that money
shrank in volume. but that the velocity
of circulation fell from approximately
200 in October, 1929. to IS in Septem-
Der. 1881. As in the case of the cur
rency cited above, bank deposits were
not in active circulation.
II, then, the price structure has not
been suffering from a shortage Of cur
rency or credit but from lack Of
demand for goods to quicken the turn
over of that currency and credit, how
create such demand? How stimulate
circulation?
On the answer to this question CEN
tiers the present controversy over none
tary policy in the United States, On
one side are the inflationists, on the
other side the advocates of so-called
sound money.
Inflationists of the more sophisticated
class admit there is enough money
available for the needs of trade and
that the gold reserves are ample for
almost unlimited monetary expansion.
They assert, however, that in the last
two or three years, people have been
fleeing from commodities into money
regardless of intrinsic values, because
OF the fear the longer they wait the
greater their loss.
Sellers Panic Is Seen.
We have, they say. been seeing
sellers panic The remedy. they in
sist, is to impair confidence in the dol
lar. In other words, the imitation move
ment, though it has enlisted the sup
port of those vast numbers who think
that all we need is more money, is
predicated essentially and frankly by
its more articulate srokesmen on the
destruction of the quality of our money
through the removal of convertibility
into gold Through this Drocess II is
held, people will be driven by their
doubts of the safety of the currency
to shift from money into property, thus
inducing a rise in price
1t is true impairment of confidence
in the currency is one way of bringing
a reversal Of prices. but all history
shows that it is neither the sound nor
the lasting way In the next two ar
ticles We shall discuss some of what we
believe to be fundamental fallacies I'M
oerlying this recurrent demand for in
fation.'
The eighth article of this series will
appear in The Star tomorrow