increase as a result of the initial faster outflow of money. Then, under the pressure of higher prices the economic agents try to raise the circulation of commodities, i.e., either to produce goods faster or to turn them over at shorter intervals. This is possible only at increased costs, unless we assume conditions of idle capital equipment and large supply of labor, an assumption which implies the taking of a certain cyclical phase for granted. Likewise, the increase in the number of hands through which a commodity passes (a result of faster selling and buying) helps to drive the price up, if this trading is done, as it is supposed to be done, under the pressure of an expected price increase. As a result, in order to keep up the old volume of commodity buying, selling, and producing and to expand it in accordance with the pressing incentive of rising prices, the economic agents are forced continually to use, not only the augmented amount that may flow to them in the form of a back flow, but also additional stocks of money. Where they get them is another question. But through this whole process of increased velocity of circulation of money, increased velocity of goods, another increase in the velocity of money, the price-raising factor is not that change in velocity of money circulation which is achieved through a rise in the velocity of commodities, but the one which is achieved through the infusion of additional stocks of money into active circulation.

On the contrary, a rise in the velocity of circulation of commodities serves as a check upon an inordinate rise of prices that would have occurred otherwise. One has to look at the actual experience of some of the phases of acute cyclical fluctuations in order to see how any threat of a sharp retardation in the velocity of circulation of commodities, such as may result from a railroad tie-up or an overburdened industrial system, has a catastrophic effect on prices; how prices then rise to the full extent which is allowed by a sudden general concentration of means of purchase upon a reduced or constant flow of goods.

We see then that, as a factor accounting for a rise or decline of prices, change in the velocity of circulation of money can be accepted only as a result of change in the disposition of mone

corporate entity, the influence of certain recent decisions of the Supreme Court has doubtless contributed.

Many of the states have failed to apply either of these views consistently in their policy of taxing corporations under the property tax. The general property tax is evidently based on the doctrine of separate corporate identity, but in the application of this tax a sharp line is often drawn between domestic and foreign corporations, as well as between the corporate stocks and bonds. The extreme illustration is found in the attempt made by some states to impose an inheritance tax on transfers by non-residents of stock in foreign corporations when some part of the tangible assets of the company is located within the state. Such taxes have sometimes been enacted by states which have exempted from property taxation the stocks of domestic corporations held by their own citizens.

The second difficulty arises from failure to grasp the nature of the modern personal income tax and the theoretical basis of its construction and use. The core of this theory is the proposition that the tax is levied, not on separate forms of income as such, but on certain attributes of the individual, and the latter's entire net income is used simply as the basis and measure of the tax. This point was clearly recognized by the Wisconsin court in one of the early income-tax decisions in that state, as appears by the following extract from the decision:

Much confusion of thought arises from regarding the income tax as a tax that is levied upon or attaches to property as such irrespective of the person sought to be taxed. It is the recipient of the income that is taxed, not his property-and the vital question in each case is, Has the person sought to be taxed received an income during the tax year? If so, such income, unless specifically exempted, is subject to a tax, though the property out of which it is paid may have been exempt from an income tax in the hands of the payer. It is the relation that exists between the person sought to be taxed and specific property claimed as income to him that determines whether there shall be a tax. If the person sought to be taxed is the recipient during the tax year of such specific property as income in its ordinary significance, then the person is taxed. But the tax is upon the right to produce, create, receive and enjoy, and not upon specific property. Hence the amount of the tax is measured by the amount of income irrespective of the amount of specific property

Such laws have uniformly been rejected by the courts.

or ability necessary to produce or create it. In the ordinary acceptance of the term this may be said to be a tax upon income as the statute denominated it. But the tax does not seek to reach property or an interest in property as such. It is a burden laid on the recipient of an income.'

The position taken by the National Tax Association's Committee on a Model Plan of State and Local Taxation is generally familiar. The report of this committee defines the personal income tax as "a tax levied on persons with respect to their incomes which are taxed not objectively as such but as elements in determining the taxable ability of the persons who receive them." In explaining the proposal that the personal income tax shall be levied in respect of the citizen's entire income from all sources the committee adds:

The personal obligation of the citizen to contribute to the support of the government under which he lives should not be affected by the forms his investments take, and to exempt any forms of investment can only bring about an unequal and therefore an unjust distribution of the tax.3

A similar line of reasoning was followed by the New York court in a case involving the franchise tax based on the net income of manufacturing and mercantile corporations derived from business done within the state. In this case deduction of dividends received from another corporation subject to the tax was refused on the ground that the measure of the tax is to be the entire net income received from sources within the state, and that there is no basis for deducting income received from other corporations which happen to be paying a similar tax, since the latter is not imposed on particular portions of income as such, but on the privilege of doing business within the state. The net income is simply the measure of the tax. While the personal income tax is not enacted generically as a franchise tax, the above reasoning, to the effect that the tax is on certain attributes of the taxpayer rather than on income as such, is parallel to that by which other courts have sustained the former.

1 State ex. Rel. Sallie F. Moon Co., vs. Wisconsin Tax Commission (166 Wisconsin 287).

2

Proceedings of the Twelfth National Tax Conference, 1919, p. 437.

3 Ibid., p. 439.

4 Northern Finance Corporation vs. Law (236 N.Y. 286).

an increased velocity of circulation of goods or made effective through an increased influx of money into active circulation.

7. The foregoing reasoning suggests that study of specific velocities of circulation of money is of considerable importance as reflecting the specific velocities of circulation of commodities, and thus the channels in which a given increase of outflow of money distributes itself in the system. From the point of view of business-cycle study, it is misleading to speak of a general change in velocity of circulation without tracing how this change works itself out in different ways within the different parts of the economic system. The consideration of these ways would both prevent the interpretation of the concept of velocity of circulation as an independent factor and help to establish the disproportionalities which seem to be of considerable importance in any general movements of the monetary phenomenon.'

12

4. The reality of Stucken's thesis.-We saw that in so far as it may be an explanation of a change in the general price level, Stucken's thesis reduces itself to the assertion that people, in expectation of a continued price increase, deplenish their monetary stocks and spend more money. The question that arises now is how far such an extrapolation of the price increase into the future, on the basis, merely, of a preceding rise of prices, is typical of business-cycle processes. I think that this question can be answered in but one way.

When reformulated, Stucken's thesis is the old one as to the psychological illusion of the business community. It is thus interesting to note that it is used also by Pigou.13 At large such a definite notion as to the future course of prices is characteristic only of a genuine, rapid money inflation of the type that occurred in Germany, Russia, and other countries during the post

"In this connection see the few inductive studies of velocity of circulation which have appeared in this country, viz., R. W. Burgess, "Velocity Circulation of Bank Deposits," Journal of the American Statistical Association, June, 1923, pp. 727 ff., and the articles by C. Snyder which have appeared subsequently. Also, J. H. Rogers, Stock Speculation and the Stock Market (Columbia, Missouri, 1927). They reveal the extreme differences in velocity of circulation between different cities and between different parts of the economic system.

13 Industrial Fluctuations (1929), pp. 171–72.

war years. (It is in this connection that Bortkiewicz discussed the problem in the paper quoted in the foregoing.) That such occurrences are general in business cycles is to be doubted. If the business community or consumers spend money very quickly, that may be owing to a number of other factors besides the fear that prices will continue to rise.

Such a situation may occur in a pronounced "boom" when there develop difficulties in the supply of commodities. A given rise or decline of prices is projected into the future only if there are a number of factors which support the expectation. This happens, e.g., in commodity markets when either lack or overbalance of commodities develops. Such a projection may characterize purely speculative fields like the stock market. But it certainly cannot play the rôle which Stucken assigns to it—the carrying forward of an initial price decline or price rise under conditions in which the industrial system is still functioning fairly normally.

Besides this conditioned character of the stimulus for faster spending of money, the execution of such a decision depends upon conditions. It may be surmised that any acceleration of expenditures with money drawn from the stocks of the individuals themselves is very limited. The main volume of funds for such purposes comes from the banks, and their policies become then of considerable importance in determining whether such a rise in velocity of monetary circulation can occur.

As to the second group of causes which Stucken suggests as accounting for an acceleration or diminution of the velocity of circulation, viz., the investment possibilities for accumulated savings, these cases are obviously conditioned by the whole state of the productive and business system. Besides, so far as in these cases the decrease in velocity of circulation is caused by a business situation in which there is a decrease in the velocity of circulation of commodities, we again have no independent factor influencing price movements. The decline in prices will take place because business people have decided to restrict their demand, and with this restriction, accompanied by a decline in the velocity of circulation of commodities, there will be a decline in