During normal times this arrangement works satisfactorily. In fact, so accustomed are both the farmers and the bankers to renewals that in many rural communities no maturity date is put upon the note at all. The notes are demand notes, payable in theory at either the request of the banker or the wish of the farmer. In practice, however, they are payable when the farmer has the money to do so and not before. So long as the banker does not meet with any abnormal withdrawal of deposits, he is able to continue these loans without any difficulty. But if for some reason, like falling prices or a bad crop failure, the local banker finds that his deposits are being withdrawn just at the time that his customers are asking for their loans to be renewed, he will have to borrow extensively from outside sources or force a liquidation that will do a large amount of harm in his community. This was the exact situation during the crisis of 1920-21.

There is no doubt that a large number of country banks had difficulty in getting all the outside accommodation they desired during 1920-21. The loaning activities of the War Finance Corporation showed that on the whole it was the non-member banks of the Federal Reserve system that experienced the most difficulty of this sort. Many country banks had their reserve positions seriously impaired, and bank examiners were insistent that they strengthen their technical position by liquidating some of their loans. This, taken with the fact that the bankers were anxious to have their borrowers pay up part of their loans because they were becoming afraid of the security back of them, caused the bankers to press their farmer customers for liquidation. One country banker told the writer that he took his automobile and called upon all of his borrowers during this time and requested them to pay up part of their loans. The fact that farmers with good security found it impossible to renew their notes gave plausibility to the theory that a forced credit deflation was on.

V. CONFUSION OF PRICE DEFLATION WITH CREDIT DEFLATION

The farmers made the mistake of confusing their credit problem with their price problem. What was taking place in 1920-21 1 Fifth Annual Report of the War Finance Corporation, 1922, p. 5.

was a world-wide price deflation that no conceivable credit extension in this country could possibly have prevented. This is not saying that the credit stringency of 1920 did not have any effect upon the trend of prices. Without a doubt, the scarcity of credit. accommodation led to hasty marketing in many cases where a more gradual process would have been desirable. But because of this, to imagine for an instant that the lack of this credit accommodation was the primary cause for the decline in the prices of agricultural products is like believing that Chanticleer makes the sun rise.

It was natural that the farmers should think at this time that the primary cause for the decline in prices was the credit stringency. Just at the very time when they did not wish to sell their products, the bankers began to ask them to pay up the loans they had incurred during the previous year or two. How could they pay up, the farmers reasoned, when they couldn't sell their crops for enough to pay what it had cost to produce them? Moreover, if the bankers wouldn't ask them to pay, but instead would grant them additional credit so that they could hold their products a little longer, then the farmers thought that the prices would return to their previous level.' The country banker, however, whose reserves were running very low during this time, frequently insisted that the farmer sell his products for what he could get for them. One doesn't have to look any deeper than this to find the real cause for the farmer's confusion of the credit problem with the price problem. All the farmer saw was that prices were going down and that at the same time it was difficult for him to borrow any money from his bank. Consequently, he came to the not unnatural conclusion that because two things occurred at the same time, one must be the cause of the other. The farmer did not understand that the prices of his product were falling because of world-conditions affecting the supply of and the demand for his goods, and that it was the falling price level, which made his products poor security for loans, that frequently made the banker reluctant to lend him money on this security. This explanation presupposes a

'The subsequent course of prices for three years and more should do much to shake this theory.

is ordinarily indicated in such circumstances. Apparently it had only begun to attract attention in Germany when in 1914 the interest of economists was diverted from such problems. But in the last decade this book has been the source and center of an active study and of an animated discussion. It has come to be referred to as the crowning scholarly achievement of its author.

A few students in America had kept somewhat in touch with this movement through the German economic literature, but the most widely serviceable notices of it were given to American readers in 1927 and 1928 in two most informing articles in the Journal of Political Economy. The valuable result that may be expected from the publication of this translation is the stimulation of further studies here in the field of this important but relatively neglected subject.

The article in this Journal by Dr. Andreas Predöhl on the theory of location in relation to general economics made accessible to the readers of this Journal what was substantially a prepublication review of this book by a scholar thoroughly conversant with the German original and himself one of the most competent students of this comparatively new subject. Referring to that article for a substantive treatment of the contents of the book more satisfactory than anything the reviewer could hope to present within the present limits of space, we may add only a few words of comment.

In approaching this book the reader must be prepared to meet a very abstract treatment and some very heroic assumptions. The author apparently decided a priori that in the problem of location the dominant rôle must be played by transportation costs, and he thereupon proceeded to transmute all other costs into terms of imaginary or equivalent freight charges, and freight charges in turn into physical terms of tons and of distance in miles. Thus the complex cost factors determining the location of a factory are either ignored or reduced to a form that may be shown in geometrical figures and explained in physical terms of the parallelogram of forces. Such questions as the comparative richness of deposits of ore and of fuel or the relative expense of exploiting them, are summarily disposed of by declaring that these simply are the equivalent of so much more-or-less cost of freight and therefore may be graphically represented as greater distances over which the materials and the products must be carried. Thus the author's "locational figure," showing graphically the points where materials, fuel, factory, and consumption are located, shows them all where they are not located on

'XXXV, 278 ff., by W. Krzyzanowski, and XXXVI, 371 ff., by A. Predöhl.

BANKING AND CURRENCY REFORM IN RUSSIA

That a government can live for a considerable time by printing paper money has been demonstrated during recent years by several governments, including that of Russia. In his tract on "Monetary Reform," John Maynard Keynes points out, however, that the Russian government was the only one which deliberately set out to make the country's money valueless and was cynically frank in considering inflation as the only available means for raising funds to meet fiscal requirements. Such a monetary policy cannot be pursued indefinitely; it comes to an involuntary end when the paper money actually loses all value. This stage was reached in Russia some months ago and it is, therefore, of interest to review briefly Russia's attempts at credit and currency reconstruction.

ESTABLISHMENT OF THE STATE BANK

Russia's new State Bank was established in October, 1921, its charter bearing the date of October 13, 1921. Like its predecessor, the old Russian State Bank, the new bank is a purely governmental institution. It is in the department known as the National Commissariat for Finance, and is managed under the supervision of the commissar, or finance minister, by a board of directors appointed by the government. The capital of the bank, which was originally 2,000,000,000,000 soviet rubles, was paid in by the treasury. The net earnings are distributed as follows: 50 per cent goes into a reserve fund; not to exceed 20 per cent is used to improve the condition of the employees; and the rest is turned over to the treasury. The bank has branches in a number of provincial cities, offices in smaller towns, and agencies scattered throughout the country. The only part of the bank's management in which representatives of private business enterprise are included are the loan committees whose task it is to determine the credit standing of institutions and individuals applying to the bank for loans. Even in these committees, however, the majority of votes belong to representatives of the government or of semi-governmental institutions, such as co-operative unions.

of the leading principles. There are first those writers, e.g., Carl Menger, who reject the concept of the velocity of circulation altogether. Second, there is the non-monetary theory that the velocity of circulation of money is only the reverse of the velocity of circulation of goods as held, e.g., by Marx. Mr. Holtrop shows convincingly that both views are untenable (pp. 29, 43, and 169).

He then distinguishes between what he calls "The Movement Theory" (Bewegingstheorie) and "The Cash Reserve Theory" (Kassaldotheorie). The adherents of the bewegingstheorie follow the movement of each banknote and coin, they count the number of times it changes hands and call that the velocity of circulation. They are inclined to conceive of the velocity as an inherent quality of money. Money supply is the product of quantity and velocity. The "money requirement" is determined by the volume of trade (goods to be transacted) and the velocity of circulation of money, in the same way as the demand for freight space is determined by the volume of goods to be shipped and the speed of the vessels (pp. 10 and 28).

The kassaldotheorie concentrates upon the money held by individuals and firms at a given moment of time, the quantity of which depends not on the velocity of circulation of money but on economic motives of the holders. The money requirement is the sum of the cash requirements of the individuals and velocity of circulation is the quotient obtained by dividing the volume of payments (money stream) by the average cash holdings (money in circulation). The velocity of circulation is determined by the cash requirements and not vice versa. It is not, as the bewegings theorists argue, a quality of the money supply, but concerns the demand for money.

It seems to me, however, that Fisher is right in contending that there is only a formal difference between the two theories, for an increase in the ratio of total payments to money in circulation means ipso facto that some coins or notes have changed hands more frequently. Mr. Holtrop categorically denies, however, that the two theories are equivalent. He prefers the kassaldotheorie as the better instrument for causal analysis, although he admits that both methods necessarily yield identical results. Alterations of the velocity of circulation are always the result of those factors which determine the size of the money stream and are not caused independently (p. 111). "There are however changes in the size of the money stream which are unim

'There is no good English term for the Dutch geldbehoefte and the German Geldbedarf.