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By Root 1381 0

received by individuals was spent again immediately and nobody wanted to hold a sum of money in reserve against unforeseen and indefinite expenditure. But since these assumptions do not hold good, and in fact never could hold good, so long as money is in demand at all as a common medium of exchange, it follows that there is a rigid maximum limit to the transactions that can be settled through the clearing system. A community's demand for money in the broader sense, even with the fullest possible development of the system of reciprocal cancellation, cannot be forced below a minimum which will be determined according to circumstances.

Now the degree in which a clearing system is actually developed within the limits which the circumstances of the time allow for it, is in no way dependent upon the ratio between the demand for money and the stock of money. A relative decline in the one or the other can of itself exercise neither a direct nor an indirect influence on the development of the clearing system. Such development is invariably due to special causes. It is no more justifiable to assume that progressive extension of settlement on the clearing principle reduces the demand for money precisely in the degree in which the increasing development of commerce augments it, than to suppose that the growth of the clearing system can never outstrip the increase in the demand for money. The truth is rather that the two lines of development are completely independent of one another. There is a connection between them only insofar as deliberate attempts to counteract an increase in the exchange value of money by reducing the demand of money through a better development of the clearing system may be made with greater vigor during a period of rising prices; assuming, of course, that the aim of currency policy is to prevent an increase in the purchasing power of money. But this is no longer a case of an automatic adjustment of the forces acting upon the objective exchange value of money, but one of political experiments in influencing it, and the extent to which these measures are accompanied by success remains a matter of doubt.

Thus it is easy to see what little justification there is for ascribing to the clearing system the property, without affecting the objective exchange value of money, of correcting the disparities that may arise between the stock of money and the demand for it, and which could otherwise be eliminated only by suitable automatic variations in the exchange ratio between money and other economic goods. The development of the clearing system is independent of the other factors that determine the ratio between the supply of money and the demand for it. The effect on the demand for money of an expansion or contraction of the system of reciprocal cancellation thus constitutes an independent phenomenon which is just as likely to strengthen as to weaken the tendencies which for other reasons have an influence in the market on the exchange ratio between money and commodities. It seems self-evident that an increase in the number and size of payments cannot be the sole determinant of the demand for money. Part of the new payments will be settled by the clearing system; for this, too, ceteris paribus, will be extended in such a way as thenceforward to be responsible for the settlement of the same proportion of all payments as before. The rest of the payments could only be settled by clearing processes if there was an extension of the clearing system beyond the customary degree; but such an extension can never be called forth automatically by an increase in the demand for money.

4 The Elasticity of a Credit Circulation Based on Bills, Especially on Commodity Bills

The doctrine of the elasticity of fiduciary media, or more correctly expressed, of their automatic adjustment at any given time to the demand for money in the broader sense, stands in the very center of modern discussions of banking theory. We have to show that this doctrine does not correspond to the facts, or at least not in the form in which it is generally expounded