Front Page Titles (by Subject) PART IX.: DYNAMICS OF CIRCULATION. - A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada)
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PART IX.: DYNAMICS OF CIRCULATION. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 3 (France, Italy, Spain, Portugal, Canada).
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DYNAMICS OF CIRCULATION.
The Author hopes that the following Essay, recently read before the Statistical Society of Paris, may with propriety be presented, at the close of his Treatise, as illustrating principles regulating the use of monetary instruments in the Latin nations.
CONNECTED with a great number of the problems of political economy and statistics, we find an abstract and rather vague concept suggested—the concept of dynamics, or rapidity. The idea of dynamics, so plain when it concerns bodies in motion, becomes confused when applied to social phenomena. It is nevertheless impossible to misconceive its importance. In commerce, in industry, the rapidity with which products are used is a vital matter. You will remember the remarkable discourse of our colleague, M. Edmond Duval, in which he showed that in prosperous periods the pledges at the mont de piété (pawnshops) were redeemed promptly, while in times of embarrassment the redemptions were very much less numerous. We have here a phenomenon for which we shall find an analogy by considering this subject of monetary dynamics.
Political economy teaches us that the usefulness of money depends upon two factors; first the mass of the money, and second the rapidity with which it circulates, meaning the number of times that it changes hands in a given period. One may say, to draw upon mechanical technology, that the service rendered by money stands in proportion to its quantity of motion (quantité en mouvement). This is why the most energetic commercial nations have striven, by artifices, to augment the rapidity of the money circulation. They effect a saving on the handling of money, which is very costly, and yet obtain equal results. On the authority of Palgrave and Martin, England, thanks to its cheques and clearing-house, balances all its accounts with less than £75,000,000 of gold and £21,000,000 of silver. France, on the other hand, with a lesser trade, possesses, according to De Foville, a stock of money comprising 4,500,000,000 francs of gold and 2,500,000,000 francs of silver; the difference between the two nations being as 96 to 280. The explanation of this difference is that England makes up for lack of money by rapidity of circulation. The valuation of the mass of money in a country is a delicate but not an impossible task. Palgrave and Martin in England, and De Foville in France, have arrived by different processes at satisfactory approximations which have been confirmed in practical ways. As to the rapidity with which this mass of money moves, in its varying forms of specie, bank notes, credit transfers, and settlements, nothing is known in the existing state of statistics; and notwithstanding the somewhat ambitious title of this treatise. I shall not deal with that problem in its general aspects, but shall confine myself to particular phases, the solution of which can be given with entire certainty.
One part of the great movement of money is effected through the medium of banks by open accounts; which constitute a very wide branch of the stream of circulation—a branch with which we are perfectly familiar in every respect. The banks receive from their customers funds on deposit, which are termed “credits.” Upon the order of a depositor, given in the shape of a transfer, the bank transfers to a new account all or part of a credit, and, by a mere stroke of the pen, and without the displacement of a coin or a note, effects a payment of any amount. For instance, in the Bank of France, in 1894, such transfers amounted to 50,000,000,000 francs. The amount of money kept by the banks is not altered by the transfers; it is only distributed in a different manner. Funds deposited in a bank may also be moved by cheques, which sometimes may occasion money transfers, but usually bring about a withdrawal of cash. The sums paid on transfers or cheques form the “debits” of current accounts. The difference between the credit and debit is called the “balance.” This balance occasions the movement of funds through changes of ownership; and it may be said that it is the active and circulating part of the open accounts. The system of open accounts may be represented correctly as a reservoir receiving a stream (credit), which flows through an orifice (bank). The balance is the level of the supply in the reservoir; the portion that has flowed out is the debit. The rapidity of the outflow is what I propose to figure out.
To arrive at this, let us say that A B is the distance separating a debtor from his creditor.
I call this distance 1. A payment will have to traverse the distance 1 to the sum paid. If I interpose a bank “c” at an equal distance from both creditor and debtor, and if the payment is made through the medium of this bank, the payment traverses one-half the entire distance from the debtor to the bank and one-half from the bank to the creditor. This reasoning remains correct whatever may be the number of debtors and creditors. It can, therefore, be extended to the totality of payments made into the bank and the totality of payments made out of the bank. If we designate these respectively by m and m1, the total displacement of funds passing through the bank will be . As the bank can displace only that which it holds, i. e., the daily balances, is the sum of the daily displacement of balances, or, expressed more simply, the displacement of the average balance of the year. If S is the average balance and V its annual displacement—i. e., its rapidity—we have the equation
or, in ordinary language: Half the combined amount of annual credits plus annual debits is equal to the quantity of movement of the average balance of the year. From the preceding equation we obtain
This shows the value of V; and on the basis of the above formula the accompanying illustrative charts* have been prepared. It should be added that all the bank figures to which the formula is applied are official, and that the statistics of rapidity of circulation thus derived are therefore scrupulously exact. In examining the fluctuations of the charts a simple glance will be sufficient to distinguish those relating to countries with sound finances from those which concern countries with disordered finances.
The following table gives the rapidity of circulation during the last eleven years for France, Germany, and Belgium:
It would have been interesting to include in this exhibit the rapidities of circulation for the Bank of England and the banks of the United States, but no data have been obtainable from these institutions except the balances of open accounts, which are not sufficient to admit of conclusions such as I desire to draw. Moreover, in those two countries the banks of issue pay none but clearing-house balances, and it is probable that calculations of rapidity from such figures as can be had would show results corresponding but little to the rapidities of general circulation. For the banks represented in the foregoing table the rapidities are easily computed. Germany has a slight advantage arising from the fact that in that country cheques and transfers (giro accounts) are more in use than in France and Belgium. These rapidities are reckoned from movements and highest balances, which are as follows for the last eleven years (in millions of French money):
The importance of the factors involved demonstrates that they must have a real influence on the economy of a country.
Passing now to the countries with disordered finances, we find low rapidities of circulation, testifying equally to the feebleness of exchange and irksome contingencies generally. I have traced, as far as possible, the deviations of rapidity of the Banks of Portugal, Spain, and Italy, and likewise of the Bank of Greece. In the case of Greece, however, the curve nearly approaches a parallel to the axis of the abscisses.
The movements and balances which I give below, although less important—at least in relative value—than those of the Banks of France, Germany, and Belgium, represent nevertheless a large aggregate of circulating fund of the countries under consideration.
It remains to remark that in general the more the condition of a country deteriorates, the more the average balances of current accounts grow.
Hitherto, I have taken into consideration only such accounts as do not bear interest, which are the true indices of the course of commerce. It is well also to examine how the case stands in respect to interest-bearing accounts. I give now the rapidities of some banks of issue that permit deposits of this kind:
There are two explanations for the slowness of money displacement in accounts at interest: First, the character of the clientage, which for the most part is not a commercial one, but lives on the income of the funds deposited in the bank; and second, the employment of interest money so placed as a kind of reserve, which is used after other resources are exhausted. Oftentimes the great banks of issue have been criticised for refusing to grant interest on deposits. A study of this question of rapidity of circulation leaves no doubt that they act wisely, for the payment of interest has a definite deadening tendency. Besides, the whole of the nation would have to pay for the handling of money on which the depositors alone would enjoy the profits coming from a granting of interest. This opinion is fortified by examination of the rapidities of circulation in several French credit associations that allow interest. Their rapidities bear no comparison to that of the Bank of France.
A comparative study of rapidities of circulation is not merely interesting as a matter of curiosity, but has practical utility. I have undertaken it to ascertain what economies may be effected by perfecting methods of payments. In 1893, if at the Bank of France the rapidity of circulation had been the same as at the Crédit Industriel et Commercial, the balance necessary to bring about a movement of specie of 48,809 millions would have been 1577 millions. As the Bank had used only 405 millions, there were 1172 millions for which no other employment was found. Again, if we could have been able to give to our cash the same rapidity as in Germany, we would have required only 295 millions.
Without entering upon a discussion as to the relative merits of circulations based, respectively, upon coin and upon the use of cheques and balancings, I simply present my general deduction that preference attaches to the latter for reasons of cheapness, and that a judicious use of the same gives to the country concerned the free handling of hundreds of millions of capital, with interest corresponding. I content myself, however, with merely suggesting this subject of economy in the use of money capital. The purpose of the present inquiry does not go beyond seeking a method for the calculation of rapidity of circulation; and, after having determined the fluctuations of rapidity, I have noticed without surprise that, in the Bank of France, their conspicuous aspects correspond with great fidelity to the periods of “crises and settlements” given by M. Juglar. M. Juglar defines a crisis as “the stoppage of rise in prices,” and a settlement as “the stoppage of a fall in prices,” and remarks that these phenomena find easy connection, by a process of cause and effect, with other phenomena readily observable, amongst which he mentions the following: (1) When a crisis breaks out, the discounts of banks of issue rise to a maximum; (2) the cash on hand reaches a maximum; (3) importations come to a minimum. On the other hand, when the contrary movements come about, the effect of the crisis is broken and a settled state begins. Movements of capital and balances of accounts apparently escape the influence of crises and settling stages, although the latter are often attended by a maximum of average annual balances.
I shall not depend for my conclusions upon this theory of crises; for classical though it has become, it is not yet fully accepted by all minds; and, besides, we well know that rules are sometimes reversed by accidenta causes. So far as France is concerned, the fluctuations in the rapidity of circulation afford an absolutely reliable test and leave no room for uncertainty. The following is M. Juglar’s list of crises and settlements since 1810:
Taking into consideration that the beginning of a period of crisis and the termination of a period of settlement are always comparatively slow in movement, and may encroach upon years antecedent or following, my calculations still show that the rapidity attains its maximum in critical times and its minimum when times become settled. The theory of M. Juglar is therefore verified by this new test, verified without exception or qualification during a term of eighty-five years, wherein the phenomena under observation have presented themselves twenty-five times. In view of all this, it appears very unreasonable to see in these circumstances mere coincidences; and, indeed, we seem to be dealing with a general economic law from which practice may derive benefit.
May it not be possible to so make use of the law of fluctuations of rapidity as to determine when we are approaching the acme of business? The answer to this question is difficult, for we have to do entirely with a problem of future phenomena that may or may not be reproductive of the past. Meanwhile, it is perhaps not too bold to apply, in our “Economic Meteorology”—to use M. de Foville’s term—the methods employed for forecasting the weather. The indications of the rapidity lines are identical with the barometric ones. The rising of the barometer is assurance of fine weather; and increase of circulation rapidity foretells activity of business. In the two cases the probability of the foreseen event is equally trustworthy. In examining the fluctuations in rapidity of circulation for the Bank of France a slight rise is observable for the year 1893, which continues in 1894. Now, the year 1894 was, at least for exchange operations, more active than the preceding year, and it may also be said that general commercial affairs showed an improvement; for, according to official statistics, the revenue on stamps for commercial paper surpassed that of 1893 by more than six millions—corresponding to an aggregate of ten to eleven billions in commercial paper. The rise of the wave, although not rapid, is rather marked, but it had not much opportunity for decided progress in 1895. Accordingly, it is presumable that we have entered on a period of relative prosperity. It is very desirable to reinforce these indications in any given case by the signs of M. Juglar’s barometer.
I make no more pretension than does M. Juglar to prophetic powers. I do not in any manner believe that the prognostications of the rapidity lines are to be taken as an infallible guide; but I think that, on consulting them carefully, they may supply, all other considerations being favorable, a valuable aid in forecasting an opinion of the future, with some chances of decided eventual justification.
The foregoing comments do not apply alone to the Bank of France. The credit associations in general do not obey the same influences, as is shown by the fluctuations of the Crédit Industriel et Commercial, the amplest wave that I have been able to trace so far as these establishments are concerned. Neither can I affirm that the lines of rapidity abroad have the same significance as with us; for methods of bank operation differ. However, the maxima and minima seem to come about under the influence of analogous causes. One of the waves is particularly interesting—that of the National Bank of Italy.* It reflects, in a way, the economic history of the country. In Portugal, Spain, and even Greece, crises of exchange are preceded by a maximum of rapidity, which, in all probability, does not happen by mere coincidence. In Belgium and Germany the maximum rapidities of 1889 and 1890 seem to point to the Argentine crisis, and, in a more general manner, to the national crises from which these two countries suffered so much as creditors of nations with straitened finances.
The suggestions I have here submitted are the result of attentive study and long-continued reflection. I have undertaken to estimate, in a concrete form, the importance of a factor which, though hitherto not exactly ignored, has been little considered. In seeking to understand, in their dynamic manifestation, phenomena which have been known heretofore only in their static aspects, I have been so fortunate as to verify a remarkable law and to contribute to the evidences of its precise workings. To the extent, therefore, that I have been able to furnish my contribution to the edifice erected by my savant colleague, M. Juglar, I do not deem my trouble in vain.
Subjoined are charts showing, respectively, the rapidity of open accounts at the Bank of France and at the National Bank of Italy.
Banks of Alsace and Lorraine, AFTER THE ANNEXATION.
BY ARTHUR RAFFALOVICH, correspondant de l’institut de france; agent of the imperial russian ministry of finance at paris.
NEW YORK. 1896.
[* ] See end of Essay.
[* ] See chart at the end of this Essay.