bG the gold supply, and PP the supply of circulating mediums when a 40 per cent reserve is required, plus the amount of gold taken by industry. It is assumed that all the monetary gold is impounded and used as reserve. Consequently PP is drawn so that any point on it is two and one-half times as far from a corre sponding point on II as is a similarly corresponding point on bG. ab represents the existing stock of monetary gold, and therefore if the point b is taken as zero bG will represent the supply schedule for new gold. If specie only is in circulation, the value of gold (in terms of other goods) will be fixed at x, and bc gold will be produced, dc of which will be taken by industry and bd by the monetary system. But if the circulating medium consists of paper money backed by a 40 per cent reserve in gold, the value of gold will be fixed at y, and gold production will be reduced to bg. However, the amount of gold taken by industry will be increased to fe, and consequently the proportion of new gold available for the monetary system will decline; and this fact, together with the decrease in gold production, will result in a reduction in the new gold available to the monetary system to bg-fe, a great reduction.

There is no way of predicting what the behavior of demand would be if a smaller reserve ratio were introduced. A lower value of gold might induce new uses of which we now know nothing, in which case the demand curve would shift to the right; but on the other hand there might be a decline in demand for any one of a number of reasons. Be all that as it may, only if in actual fact considerably less gold were taken by the arts could it be true that the monetary system would receive more gold; and this result does not seem very probable.

Let us now return to the question of the possible value of a so-called elastic bank-note issue on other grounds than those of elasticity. If under such a system of note issue, with its higher price level, less gold were used in the monetary system, society would be using less of its productive resources in the mining of gold to be used for monetary purposes; and inasmuch as there would be virtually no offsetting loss to this gain of resources for

tween the enterprise itself and the various equities represented in its proprietorship. In the new view this function, while remaining indispensable, yields more and more in relative amount of attention received to that of the determination of policy or management. From the old point of view it seems to make no substantial difference in principle whether the income of the owners be regarded as a single category, profit, or divided into two, interest at some "reasonable competitive rate" being separated from profit in a narrower sense. From the economist's standpoint, with regard to explaining the workings of competition in fixing prices and allocating resources, the distinction is always necessary and has always been made. From the standpoint of the business itself, it is a matter of convenience, and the argument from convenience is overwhelmingly on the side of treating the owner's return as a unit.

When the matter is considered in the light of the managerial problem, however, all this is changed. In so far, indeed, as a business is a fixed and indivisible unit, and the only managerial question is that of "to be, or not to be," it is not changed; but most businesses do not have at all the character of fixed and indivisible units or the managerial problem practically would not exist. And, as Mr. Scovell has made superlatively plain, there is no practicable way of making comparisons except by reckoning interest as a cost in the case of each alternative.

At this point, however, the theorist must suggest a criticism. Logically speaking, it is surely clear that the base for figuring interest as a cost is not, as Mr. Scovell argues (chapter vi), the original cost of equipment, etc., but the divertible investment or "opportunity cost" of any alternative-not what has been put into things, but what might be taken out of them for any other purpose. Logically speaking, no fact of the past has in itself any significance at all for management. Policy determination looks exclusively to the future. Historical cost may be practically the most serviceable guide to opportunity cost, but certainly it is a poor one, and the manager's case is sad if he can find nothing better to rely on. During the recent period of rising and falling prices, American business would have been billions of dollars better off if some cosmic catastrophe could have obliterated all its cost records and all memory of them and forced the managers to think in terms of current values. Thus the "transition," to the new managerial standpoint in accounting is still incomplete, even in this book. Perhaps it can never be fully consummated. There are limitations on the

that is, it will be almost entirely offset by a loss to other nations. It will not be entirely offset, however, because of the fact that the action of this one nation will, to a very slight extent, raise the world-price level and consequently there will be a reduction, but in reality a negligible one, in the productive energy that is devoted to the provision of gold to be used in the monetary system.

It will of course be true that in a period during which gold production is inadequate to maintain the existing price level, a gain would be derived from the introduction of bank notes; but it is also true that during a period of excessive gold production the introduction of bank notes would merely add to the harm done by the excessive gold; or, if a nation is already using bank notes, a gain would be derived from eliminating or reducing to some extent the number of these notes if there were an excess of gold production. But even though there be times when an issuance of bank notes would be advantageous on these grounds, it should again be noted that the advantage is derived merely from an avoidance of a changing price level-reserves will still be the indispensable prerequisite to elasticity of the currency, even though bank notes, of the supposedly elastic sort, constitute a part of the currency.

Regardless of the form in which the proceeds of bank loans are taken-be it in the form of gold, bank notes, or deposits-the total of the circulating medium will expand with the making of loans, or with the acquisition of any type of earning assets by the commercial banks; and will contract with the repayment of these loans, or with the sale of any kind of earning assets. Elasticity of the currency is therefore a question of the ability of the banks to make loans and not at all a matter of the kind of security behind the notes issued, nor, indeed, of bank notes at all; and this ability to make loans depends exclusively upon the existence within the banking system of adequate reserves. Moreover, the maintenance of reserves adequate for the purpose of giving elasticity to the currency is itself entirely a question of the presence within the banking system of a non-profit-seeking institution which is

possessed of sufficient resources for the purpose. There is probably a gain to be derived from the issuance of any kind of notes with less than 100 per cent reserves, but this is merely because of the resulting higher price level and the consequent smaller amount of productive resources which is devoted to the mining of gold for the monetary system. Under conditions of inadequate gold production it would be desirable for the country operating on a specie basis to introduce notes of some kind with reserves of less than 100 per cent, but this action would be desirable merely as a means of avoiding the losses incident to a changing price level.

UNIVERSITY OF CHICAGO

L. W. MINTS

THE RELATIONSHIP OF BUSINESS ACTIVITY

W

TO AGRICULTURE

WALTER BAGEHOT, in Lombard Street, was probably the first economist to suggest the inverse price relationship of agriculture and urban industrial enterprise. In the chapter, "Why Lombard Street Is Often Very Dull and Sometimes Extremely Excited," Bagehot makes the following observation:

In 1867 and the first half of 1868 corn was dear, as the following figures show. . . . . From that time it fell, and it was very cheap during the whole of 1869 and 1870. The effect of this cheapness is great in every department of industry. The working classes, having cheaper food, need to spend so much less on that food, and have more to spend on other things. In consequence, there is a gentle augmentation of demand through almost all departments of trade. And this almost always causes a great augmentation in what may be called the instrumental trades—that is, in the trades which deal in machines and instruments used in many branches of commerce, and in the material for such.1

It seems reasonable to assume that decreasing food prices, that is, a reduction in purchasing power of farm population, should bring about an increase in urban business activity through increased purchasing power made available to urban population on account of relative savings effected in terms of lower food prices. What is left to be explained, however, is the decline of food prices; or, under different circumstances, the rise of food prices; or, may be, the reluctance or inability of urban enterprise to maintain its purchasing-power advantage; or any other causal fact, relative or absolute, to generate a change in the respective fortune and misfortune of agriculture and urban industrial enterprise. It is in the hope that it may throw light on this problem that the present study of the price relationship of urban industry to agriculture has been undertaken.

In a recent statistical study of this problem, L. H. Bean, of the Bureau of Agricultural Economics, United States Department 1(New York, 1887), pp. 145-46.