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Shakti and Shakta

John Woodroffe

The Revolt of the Netherlands

Friedrich Schiller

My Man Jeeves

P. G. Wodehouse

The Diplomatic Background of the War

Charles Seymour

Elementary principles of economics

by Irving Fisher


§ 3. Influence of Individual Habits on Velocities of Circulation, and therefore on Prices

Having examined those causes outside the equation which affect the volume of trade, our next task is to consider those causes that affect the velocities of circulation of money and of deposits. For the most part, the causes affecting one of these velocities affect the other also. These causes may be classified as follows: —

1. Habits of the individual

(a) As to hoarding,

(b) As to book credit and loans,

(c) As to the use of checks.

2. Systems of payments in the community

(a) As to frequency of receipts and of disbursements,

(b) As to regularity of receipts and of disbursements,

(c) As to correspondence between time and amount of receipts and of disbursements. 3. General causes

(a) Density of population,

(b) Rapidity of transportation.

1. (a) Taking these up in order, we may first consider what influence hoarding has on the velocity of circulation. Velocity of circulation of money is the same thing as its rate of turnover. It is found (Chapter VIII, § 3) by dividing the total payments effected by money in a year by the average amount of money in circulation in that year. It depends upon the rates of turnover of the individuals which compose the society. This velocity of circulation or rapidity of turnover of money is the greater for each individual, the more he expends with a given average amount of cash on hand, or the less average cash he keeps for a given yearly expenditure. One man keeps an average of $10 in his pocket and expends $500 a year; he, therefore, turns over the contents of his pocket fifty times a year. Another, while expending the same sum ($500),keeps the more prudent average of $20; he, therefore, turns over his stock of cash only twenty-five times a year.

Some people are by habit always impecunious or short of ready money and tend to have a high rate of turnover; others carry a full purse and have a slow rate of turnover. When, as used to be the custom in France, people put money away in stockings and kept it there for months, the velocity of circulation must have been extremely slow. The same principle applies to deposits.

Hoarded money is sometimes said to be withdrawn from circulation, but this is only another way of saying that hoarding tends to decrease the velocity of circulation.

1. (b) The habit of " charging," i.e., using book credit, tends to increase the velocity of circulation of money, because the man who gets things "charged" does not need to keep on hand as much money as he would if he made all payments in cash. A man who daily pays cash needs to keep cash for daily contingencies. The system of cash payments, unlike the system of book credit, requires that money shall be kept on hand in advance of purchases. Evidently, if money must be provided in advance, it must be provided in larger quantities than when merely required to liquidate past debts. In the system of cash payments a man must keep money idle in advance, lest he be caught in the embarrassing position of lacking it when he most needs it. With book credit he knows that even if he should be caught without a cent in liis pocket, he can still get supplies on credit. These he can pay for when money comes to hand. As soon as this money is received there is a use awaiting it to pay debts accumulated. For instance, a laborer receiving and spending $7 a week, if he cannot " charge," must make his week's wages last through the week. If he spends $1 a day, his weekly cycle must show on successive days at least as much as $7, $6, $5, $4, $3, $2, and $1, at which time another $7 comes in. This makes an average of at least $4. But if he can charge everything, and then wait until pay day to meet the resulting obligations, he need keep nothing through the week, paying out his $7 when it comes in. His weekly cycle need show no higher balances than $7, $0, $0, $0, $0, $0, $0, the average of which is only $1.

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