PRESENT MONETARY PROBLEMS 165 



or contraction, is primarily based on transactions in goods; its 

 relation to money is a secondary, and incidental , connection. Credit 

 being a transfer of goods involving the return of an equivalent in 

 the future, forms of credit appear only as a consequence of transac- 

 tions in goods. More transactions, not more money, cause an 

 increase of forms of credit; and, by an interesting process of evolu- 

 tion, forms of credit, especially the deposit-currency of banks, act 

 as a medium of exchange, obviating recourse to money. The belief, 

 however, that credit depends on money, and not on goods, is wide- 

 spread, and much discussion is probably before us on this point. 



The relation of credit to the theory of prices is evident; some 

 think that all the money plus all the credit (whatever that may 

 be) act primarily to fix the level of prices; but any sane person will 

 see at a glance that the forms of credit, such as bills, drafts, etc., 

 arising from the movement of the wheat crop, have no effect on the 

 price of that crop, the price having been made antecedent to 

 the creation of the forms of credit which came into existence only 

 because of the actual sales of wheat. Does a farmer wait until he 

 sees how many wheat bills are drawn before fixing the price of his 

 wheat? Evidently not; and the popular conception needs thor- 

 ough criticism. 1 



When men speak of " our expansion of credit," they have a very 

 vague and general idea in their minds. The definite and distinct 

 forces at work are covered with darkness; and when a revulsion of 

 trade comes the results are accepted as coming from some undefined 

 and mysterious force which can only be felt, but not explained. It 

 remains the duty of the economic thinker to outline with scientific 

 exactness the forces uniting in the upward wave of overtrading, 

 and to state with equal definiteness the causes of the receding move- 

 ment. Principles must be sought for which will explain the differing 

 actualities of each special crisis. 



IV 

 Theory of Prices 



Only after the honest student has come to a satisfactory conclu- 

 sion in regard to the nature of money and credit is he in a position 

 to discuss with profit the pivotal problem of this field the theory 

 of prices. Perhaps I may be criticised for treating here the present 

 monetary problems from too theoretical a point of view; and it 

 may be urged that I should have presented the practical problems 

 confronting each leading nation, and discussed their relations to 

 the several monetary systems actually in use. But I must respect- 



1 Fora full discussion of " Credit/' see my Principles of Money, chap. 4 (1903). 



