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Theodore Morgan


Prentice Hall, Inc, N.Y. 1950, 857 pgs., index, tables, charts, graphs


Reviewer comments:

This is a standard text book on economics published in 1950. In fact it was the text for my freshman beginning economics course. It is very interesting reading now, as it reveals what economics professors were teaching at that time. Actually, it is fascinating because both the reality of much of the 'economy', that is economic activity, has changed significantly and the prevailing theories promoted by economists have also changed in different ways. Many economists and politicians refuse to recognize either the reality described in this book or the significance of the changes. But the book is also 'standard' in its strong 'progressive' (Keynesian) bias.
It was a period immediately after the 'Great Depression and New Deal and World War II. The author claims to support free markets, but nevertheless supports expanded government 'assistance' to 'supplement' markets. So much has changed since then that it can be considered a contribution to the history of economic thought. Yet much of the basic concepts about economics are still valid today. The author's style is very direct and the ideas are well presented for the student. The subjects included and the organization of the book reveal the considerable difference in emphasis on what an economics teacher considered important then in comparison with today. For one important difference there is no resort to econometrics and elaborate math 'model' building. The examples he uses and details about the then current economy provide an excellent historical source for readers to learn about the 1940-50's to compare with today. Some of the differences may be shocking to those who don't remember the history.

Part I is basic economics - explaination of terms and establishment theories. Part II is mostly about how business managers employ economic ideas to business processes. But Part III is an effort to manipulate economic theories and resulting actions in support of progressive public policy agendas, especially related to preventing unemployment.

In chapters 7- 8 -9 -10 he describes the 'standard' view of what money is, where it comes from, and how government regulates it. Included is a clear description of the economist's definition of the 'velocity' of money. These chapters are my focus on the critical issues facing 'us' today, so I will delve deeper in them.

In chapter 21 he writes the basics about interest rates. From the table of contents the reader can see that the emphasis is on practical economic policies and activities in which the reader may be interested, rather than the economic theories over which professional economists chatter.

In Part III he presents the Keynesian economic theory of interest rates, demand vs supply, simply claims that Keynes' refusal to acknowledge Say's Law is valid, promotes the progressive policy of government intervention in markets to create 'full employment.
In my summary review I will skip chapters or sections that are relatively standard and focus on some of the 'high points' he discusses. I might have to quote sections of chapters 7 -10 at length.


Part I. Introductory and Description

But note the four categories into which he divides economic 'problems'. They are all issues of public policy about which progressives have theories that advocate changes.


Chapter 1- Economic Principles and Economic Progress

This opening chapter is to show the reader that economics is about every-day activities that everyone performs. The author divides economic problems into four categories - Productivity, Unemployment, Monopoly and Inequality. This makes clear what he considers the major issues facing the country in 1950 and his solutions and recommendations indicate his political view point. He considers that economic systems are "continually evolving" - a modern concept. He states his own position thusly: "This book takes as its value standard the liberal democratic ideal." He continues by describing what he means by this.


Chapter 2- Some basic Economic Concepts

The major subdivisions indicate the subjects about which the author wants the student to learn the progressive theories.

The Causes of Increased Production
1. The quantity of work
2. The quantity of natural resources
3. The quantity of capital goods
4. Improvement in the methods of using resources: innovations
The relative importance of the causes of increased production.
Biased explanations of increased production
Production Per Member of the Work Force: The United States Compared with Other Countries.
Specialization and exchange
Specialization and interdependence
Cumulative advantages in specialization
The Nature of Economic Reasoning
The author concludes that "Work, natural resources, and capital goods are the means of production. Work includes both mental and physical labor. Total production can often be greatly increased through using more capital goods in complex indirect processes.


Chapter 3- Economic Decisions Under Laissez Faire, A Mixed Economy and Socialism

This is an especially interesting discussion today as the advocacy of 'socialism' has been promoted among the younger generations via academic professors. Dr. Morgan explains the issue well. Planning of future economic as well as any other activity will (hopefully) take place. The issue really is who will do the planning - the decentralized individuals throughout the society whose personal planning is integrated by the free market - OR - a fully centralized bureaucratic group administered by government - OR -whether we want some kind of compromise between the two. He does not support 'socialism' but also finds fault with 'laissez Faire' and advocates increased role of government in a 'mixed economy'.

The utilization of resources in an economy
Dr. Morgan identifies three issues about which the economic system must accomplish socially acceptable results
1. Allocation of resources
2. Degree of employment of resources
3. Distribution of product

1. Economic Decisions in a Lassez-Faire Economy
Supply and demand
The invisible hand
The world of Adam Smith

2. Economic Decisions in a mixed, or Dual, Economy
In this section the author justifies increased government intervention in economic affairs by describing many activities that can 'only' be made to serve social interests by such intervention.

3. Economic Decisions in a Centrally Administered Economy: Socialism
Dr. Morgan writes that he will not discuss existing functioning 'socialist - communist' systems. (Of course not since all are massive failures as well as totalitarian dictatorships).

Instead he provides an abstract and rather idealized description of how a 'socialist' system of production and distribution might function.
Amazingly, he writes that: "The economic logic of socialism is identical with the economic logic of laissez-faire." Really
He does add some thoughts about what might result in socialism-in-practice that differ from his socialism-in- ideal- theory. But he totally misses the crucial point that Ludwig von Mises identified and published in his book - Socialism - back in the 1920's: Namely, that it is impossible for the "Central Planning Board" that Morgan posits to know what the future needs and desires of the citizens will be or what the future available resources and methods of production will be.


Chapter 4- The Scale and Location of Production

Dr. Morgan posits the question - why do productive enerprises vary so greatly in size.
Real Economies and Diseconomies of Size
He writes some interesting theories about this.

A Note on the Optimum Size of a Population
A remarkable topic which leads to:
The Maltusian threat; race suicide
Remarkably he opins that "It is probably the most powerful conservative doctrine ever phrased".

I have read many discussions of the Mallthusian theory, but not that it was considered 'conservative'. Anyway, Dr. Morgan devotes several more pages to discussion of birth and death rates and the dramatic increase in world population since about 1700.
Small - and Large-Scale Enterprise in the United States.
The author provides some interesing historical data on numbers of firms of various sizes in relation to the number of their employees.

The persistence of small business; the growth of huge business
More interesting data: For instance, he notes that the general average number of businesses per 100 population has varied between 1.55 and 1.70 from 1900 to his date. This resulted in there being about 1 million more small business firms in 1947 than there were in 1900. But, there has been an increasing percentage of total out put coming from large firms. And there is no historical record of the existance of the huge-scale firms that now exist. The author provides more interesting data on the economic history of the 19th- 20th centuries.

The Location of Industry
Some factors influencing this:
1. Costs at the plant
2. Transport costs
3. Historical accidents


Chapter 5 -The Organization of Business

Dr. Morgan begins by describing the nature of businesses in colonial times and then during the Civil War and since then. He next turns to describe the structures of businesses. And then he addresses a variety of related subjects.
Certificates of indebtedness
Ownership and control in the corporation
Interest groups
Public Enterprises
The Stock Exchanges and Speculation
The conventional justification of speculation; acute doubts (He is definately against it, citing Lord Keynes)

Keeping the Books
The balance sheet
Liabilities and net worth
The income statement


Chapter 6 -The Rise of Labor Unions; Social legislation of the 1930's

Dr. Morgan writes an interesting description of the growth of skilled labor in the U.S. since the 18th century. His comment: "The world has not before seen a society in which the bulk of the work force consists of skilled employees."

The Rise of Trade Unions in the United States
Another interesting historical section

The response of employers to the growth of unions
Government policy toward unions
Labor and Social Legislation in the 1930's
The Labor Movement in the 1930's and After
Union Organization and Leadership
The strategic position of union officers
Home rule and centralization among unions
Entrance fees, dues, membership restrictions
The author notes that much of the activity described in this chapter is as much or more political than economic in nature.


Chapter 7 - The Nature of Money

The author begins with: "The laws of money are crucial in the operation of our economy". In this statement it is not clear if he means there are economic 'laws' that govern 'money' or that he means the government's laws that define and establish monetary policy are crucial. He provides his definition of what is money.

Commodity Money
"Money is anything that is widely used in payment of debts". He mentions some of the many things -chiefly commodities - that have been used by various societies in the past. But he includes gold in ancient Egypt.

I do not believe that, gold ownership was a monopoly of the ruler and used for decoration and show of wealth. It was a significant export by the Egyptian Pharoh to Mesopotamian kings since there was no metal there and the kings used it strictly as decoration to display their own wealth and power.

He then gives four 'disadvantages' for the use of commodities as money.

The Uses of Money
He discusses the three standard uses listed everywhere.
1 A means of payment - he writes that this is the fundamental use from which the other uses spring. But he includes comment about 'barter' being an alternative in use in some societies in the past.

This is a very common, yet false, idea - practically universal in economics books. But anthropologists have found no examples in history of barter used within societies. Barter was and is used in trade Between traders from different societies having no common standard of money. And the origin of ' money' was not as a means of payment but as a 'measure of account' in early societies by which the rulers kept detailed track of credits and debts acruing to their subjects as they turned in to and withdrew from the palace and temple warehouses.

2 A measure of value - he describes the typical concept - that money can serve as a 'yardstick' when considering the relative value of different goods and services in market exchanges. But he wisely also notes that: "The use of money as a measure over time of the value of things can easily be misleading". He correctly points out that the 'value' of the 'yardstick' itself changes over time and in places.
The idea that money can serve as a measure of value is one that fills many books whose authors advocate establishing a 'standard of value' - frequently citing gold as the basis. But the problem is that 'value' is NOT a characteristic attribute of real goods or services. It is as psychological attribute of goods and services (including gold) in the mind of individuals.

3 A store of value - this role follows from the other two - that money is used for payments and its value remains the same between payments. If the time and location between its being received and spent are brief, it does serve that purpose, but not, for instance, during a deflationary or inflationary period, especially over a long time period.

Present Day Kinds of Money in the United States.
The author describes typical listed standard kinds - currency, checking accounts. He notes that at that time the quantity of checking accounts was 3 to 5 times greater than all the currency in circulation.

Today 'credit' forms by far the largest component of the money supply.

Money Substitutes
In this category he includes savings accounts, short term securities, and other financial assets.


Chapter 8 The Supply of Money:

This is a very interesting chapter from a historical view point. The author supplies much information about the subject in 1948 and selected sample earlier years. He writes that "The quantity of money in the United States has changed widely in recent years".
But that is nothing like the change from 1948 to today, The difference from today is amazing. Here is his table depicting changes between 1929 and 1948.

In Billions of Dollars

Figures for end of Year

  1929 1933 1939 1945 1948

Currency outside banks

$3.6 4.8 6.4 26.5 26.1

Checking accounts adjusted

22.6 15.0 29.8 75.9 85.5


26.4 19.8 36.2 102.4 111.6

The author's task is to explain how the quantity of money can vary so greatly from year to year.

1. The Supply of Currency

He writes that the currency (then) was created in part by the Treasury and in part by the Federal Reserve Banks. As of December 31, 1948 this consisted in billions of dollars of - 1 Treasury Currency: Coin $1.5 - Silver Certificates 2.1 - Other Treasury currency .07
2 Federal Reserve Notes: $23.9 - and .04 billion in gold certificates

Now all that has changed drastically both in quantity and in composition

Treasury Currency
Dr. Morgan provides an interesting account of the nature of the Treasury Currency and how it is created. At that time it included a significant quantity of silver dollars and other silver coins plus nickels and pennies. He explains that the coins must have a legal value greater than the value of the metal in them, otherwise people would melt them (as has happened frequently in the past). Currently (then) the Treasury buys silver at .71 cents an ounce and mints coins with legal value of $1.29 an ounce. This is even though Congress passed a law requiring the Treasury to pay more than the market rate for silver. In addition the Treasury issues (then) Silver Certificates (paper) for which it must keep an equal value of real silver in storage.

Federal Reserve Notes
He writes that there are nearly 6 times (in value) the amount of Federal Reserve notes versus Treasury Currency. These are issued by the 12 Federal Reserve Banks which are required to hold 25% of their value in gold certificates. (then) (And this has been reduced from 40% because the previous requirement restricted the amount of notes the banks could issue.)

Now of course that restriction is completely gone.

Interestingly, he notes that all these circulate at equal value only because people believe they have equal value.

And all money everywhere and always can circulate at 'equal value' for the same reason.

The Determination of the Supply of Currency
The author writes that in 1948 the public in general held $1.0 in currency for every $3.30 they had in bank deposits. When they have more or less currency they exchange it into or out from their banks. The banks, in turn, keep reserves with the Federal Reserve and deposit or withdraw currency to match the public moves. The result is that the public determines the quantity of currency in circulation and the banking system responds as needed. And it is the supply of checking account money that is directly influenced by 'monetary policy'.

Lord Keynes termed this 'the propensity to save' and deplored it. To reduce this 'propensity' and try to stimulate demand for consumption Keynes wanted minimum interest rates. We will return to this ratio when discussing the 'velocity' of money.

This shows another major change to today.

Gain from manufacturing money
The author notes that the government has a profit from making money (seigniorage) but, he says, does not intend that (apparently contrary to every other sovereign in history). But, he continues, actually the main form of money - checking accounts - is created by the private owners of the banks. This, he believes, was not intended, but just came about during history.

He needs to study the history of money and of banks. - especially of the era in which banks issued their own bank notes as money. They use checking accounts now because they are prohibited from printing their own bank notes. (see partial list below) (and the concept of 'fractional reserves')

2 The Supply of Checking Accounts by the Commercial Banking System
This is an important section because here the author explains in detail how the banks and the banking system, including the Federal Reserve creates money via credit instruments (whether the monetary system is anchored in some commodity such as gold or is a purely 'fiat' system based only on government authority.)

There have been significant changes since 1948 but the basic system called 'fractional reserve' is the same, and he describes it in section below..

Intermediary Investment Institutions
These include Savings and Loan companies - merchant banks - insurance companies - mortgage lenders and others - the criteria being that they do not take deposits. But they do play an important role in transfer of money. (and now in its creation - they are called 'shadow banks'.)

Why should loans be made?
The author describes two types of loans, one to consumers and the much larger amount of loans to business.

Short -term a and long-term loans - (basic definition)

Promises to pay and orders to pay ("two main kinds of legal documents" - Promises to pay are most abundant and include bonds which are 'purchased' by banks and governments - and Promissory notes - The second kind of 'bills of exchange and 'trade acceptance' or 'banker's acceptance' drafts.

Types of lending by commercial banks (At the time they were different from savings banks in that the former issued checks on their deposits and the latter did not. They included 'savings and loan' institutions.)

Expansion by a banking system (This interesting section describes in detail with numerical examples showing the 'balance sheets' with assets and liabilities.) The author writes: "The purpose of the banking system is to make earnings, and this it does almost entirely through lending." and "Through making the loans our banking system created (in his example) $1,980,000 in checking accounts (money) that did not exist before. At the same time it has absorbed $900,000 from the public (its cash reserve) so that the net increase in money at this point is $1,080,000.)
Please note that even in this standard economics text of 1948 the author shows that most of the money supply consists of checking accounts and (now those accounts are created by government deposits of credit).

He continues: "The banking system can also increase its checking accounts by lending out on real estate mortgages or by buying corporation securities or government bonds."
Precisely -Government Bonds - which are the accounting companion to government payments via exchanging credit for goods and services.
Next he gives us the key - "Just as the money supply has been expanded through an increase in loans and investments of the banking system, so a decrease in loans and investments would decrease the money supply"

Indeed, but the ability of the banking system to lever its assets into loans depends also on the quantity of its reserves the FED demands be held at reserve banks. So the above relationship works both ways. A decrease in the money supply created by the FED would decrease the quantity of loans and investments the banking system could finance.

The author's revealing descriptions provide more lessons for today. "To the extent therefore that cash flows out of the banking system, its ability to create demand deposits is limited. There are two main reasons why a net outflow of cash from the banking system is likely as the banking system expands deposits. First, as deposits are expanded through increased loans and investments, there is likely to be heavier expenditure for goods and services in the economy. As money incomes rise through this expenditure, and as more people posses more money, they will want to hold more currency in pocket and in the cash registers of businesses. Second, there may be, in consequence of higher incomes and perhaps higher prices locally, an increase in buying from foreigners, and hence an outflow of cash to foreigners."

All of this came true since 1948, but why do politicians and even economists today fail to understand this clear explanation. Today, among other failures, many economists do not believe that the American negative balance of exports and imports of goods and services does and MUST result in an "outflow of cash to foreigners" Except that now the outflow is of Federal government created credit as well as cash.

Expansion by individual banks of a banking system
Dr. Morgan notes that in the U.S. there is not one single bank nor banking organization but thousands of small banks. (This has changed since 1948 when the banking laws enabled banks to have both more satellite banks and to expand across state lines. - but the number of independent banks has greatly deminished.) But his excellent description with examples is worth study.

The Federal Reserve System
In this section the author states that only about half the commercial banks in the US are members of the Federal Reserve System - that has changed.

Sources and uses of Federal Reserve Funds, and the Money Supply (in billions)

Sources of Federal Reserve Funds

Uses of Federal Reserve Funds

The Money Supply

Treasury currency - $4.6

Money in circulation - $28.2

Money outside banks - $26.1

Monetary gold stock - $24.2

Member bank reserves - $20.5

Checking accounts adjusted - $85.5

Federal Reserve credit - $24.1

Treasury cash, and Treasury and other deposits in the Federal Reserve


Total - $52.9

Total - $52.9

Total - $111.6


I leave it to the reader to compare this information with the FED balance sheet today

There are still 12 Federal Reserve Banks located in different parts of the country. The author discusses the role of these banks and of the Open Market Committee, plus the "main assets" of the system. All this has changed, especially the role of 'gold certificates.
I skip this as it is well described in many books.

The expansion (or contraction) of member bank reserves In this section the author expands on the topic in the previous sections about how bank reserves held at the FED relate to expansion and contraction of the money supply. He writes, that this relationship to the money supply is a "Strategic question"
"There are three main causes of changes both in reserves and in money in circulation". "1. the issuance of treasury currency... This is well described.
2. An increase in the monetary gold stock - This no longer applies.
3. An increase in Federal Reserve credit. This is crucial today for understanding money. The author's description and example with a table is vital.

"The quantity of money in the United States has changed drastically between years of depression, peacetime boom, and full war effort. The Treasury currency and Federal Reserve notes that together make up our pocket money are supplied through the Federal Reserve Banks to accord with public demand for currency as compared with checking accounts. Most checking accounts are created by commercial banks through lending: extending a loan means that the checking account is set up for the benefit of the borrower..... " And he writes more. But everything has changed even more drastically since 1948.


Chapter 9 -The Demand For Money

Dr. Morgan sets the subject matter: "The main problem we are concerned with in this chapter is the relation between the total amount of money and the total amount of spending in our economy." ... "The relation between quantity of money and total spending is a loose one. The reason for this is that people may decide to hold a smaller or larger proportion of the money at their disposal idle, rather than to spend it promptly."

This idea is what leads economists since the early 20th century to favor the theory of the 'velocity' of money. But there are other causes for differences between the total amount of 'money' and total amount of spending. For instance, the per capita amount of money: The perception of impending decline in the value of money: The composition of the money supply, currency versus credit (especially credit related to credit cards versus checking accounts): Who is doing the spending and buying, private versus government agencies: What constitutes money in the first place.
It is also a central 'problem' Keynes claimed in his theory of 'propensity to save' in which he ascribed unemployment to lack of demand for consumption due to too much saving and advocated government spending. This is discussed in Part III.

The Question Equations
He continues: "One way of looking at the matter is to talk in terms of the average velocity of money: that is, the rate at which money is used for spending."
What the economists have in mind with this is the idea that the shorter time one has between receipt of money -(say a dollar) and the time he spends it - the 'rate' - the more often in the course of a year that dollar may be used to finance an exchange in the market. Since the economists are trying to relate the total quantity of money to the level of prices, they believe that they must multiply the actual quantity of physical money tokens by the number of times they are used to relate that to the level of prices. Makes some sense.
Dr. Morgan writes an extensive narration of how this process might work with a money token passing from hand to hand repeatedly over the course of a year. For instance as an example, he writes: if "the value of all transactions in the economy (in a year) is $30,000 and, on average each of the dollar bills changed hands 30 times. This figure 30 is the transactions velocity."

From this he provides the standard equation one sees in every discussion of money velocity
"The quantity of money is M - times the transactions velocity of money, V, equals the average price of transactions, P times the number of transactions T."
Thus we immediately see a confusion of terms - velocity means speed but in the equation the V means number of times, not speed.

The equation is: M V(sub t)=P (sub t) T.

Now he adds "No new information is given us by this 'quantity equation'. It is only a tautological statement that the quantity of spending on transactions is necessarily equal to the quantity of receipts from those transactions."

In other English words the amount of money the seller receives equals the amount of money the buyer spends.
Obvious, no? but of what form is this money?

Next we get to the real rub, when Dr. Morgan adds: "There are no satisfactory figures for the total quantity of transactions in the United States economy? Oh? "But we do have careful estimates of the total goods and services produced." Really? What about all the transactions private individuals conduct with each other, and private companies conduct with themselves? What about all the goods and services whose production is not registered with the government? Lets move on.

The author tries to get around this issue as follows: "It has often seemed more convenient to compare the quantity of money with the total value of output in what we may call a quantity equation relating the income (rather than to transactions, as above.) The velocity of money, V(subt) now means the number of times an average dollar is spent for output ( or, we can say alternatively, accrues as income to someone producing that output): and the price level, P is the average price of the units of output, O:
The equation follows: M V(subt)=P (subt) O.

This produces a strange result in the author's next statement.
"The income velocity of money in our sample economy is 10 (as compared with the transactions velocity of 30) and the average price of the units of output is $2.50 (as compared with an average price of $2 for transactions.")
Next a 'kicker' "The 'average price' of output or of transactions is an artificial sort of thing".
As Spike Jones would say, 'ya don't say'. Let's continue.
"The income quantity equation is, like the other, a tautological statement. It tells us what must necessarily be true, that the quantity of spending on output is equal to - in fact identical with - the quantity of receipts from selling that output."

Obvious, QED -But not all 'output' is registered in government data and neither are all 'receipts' occasioned by a transfer of a dollar between its owners.
Next comes this: "Of course our equation tells us that an increase in the money supply, M, if there is no change in the income velocity of money V, leads to a proportionate rise in total spending on output." And "we can go on to conclude that if, for example, the volume of output does not change, then the increased spending will have its full effect on prices, which will rise in the same proportion as the quantity of money has increased. But these are arbitrary and barren ifs"

Wall, not exactly. What about relative changes in the perceived 'value' of a unit of 'money' versus the perceived 'value' of a unit of output? Quantity is not equal to 'value'.

The velocity of money and the size of money balances.
The author continues: "Total money expenditure for output, which we have just called MV is a basically important matter in an economy."

The line of reasoning is becoming more circuitous and convoluted. It is based on Lord Keynes's ideas about the demand for money - the spending of money versus the retaining it in the owner's accounts. The author's length narrative example of how an individual might receive his income over time (for instance weekly or monthly) versus how much and how fast he might spend it over the same time periods will result in different ratios of spending and keeping, hence different numerical values for 'velocity'. Again, it is the number of times a unit of money is used for transactions per year that influences the economists' conclusions.

The author writes "In summary up to this point: A change in the money supply (M) in an economy is not the same thing as a change in expenditure (M V). The difference between the two depends on the rate at which money is used for spending or on the 'velocity' of money. The velocity of money depends on the extent to which people want to hold money balances, as opposed to other forms of wealth."

Indeed, all this comes from Keynes' desire to increase 'demand' for money - that is, its rapid use rather than savings, in order to stimulate economic activity and reduce unemployment.

The Demand for Money
1. Money held as a means of payment for business transactions. The author considers reasons one would want to keep a quantity of 'money' on hand - to have ready cash to meet expected an unexpected needs to make payments. He describes some situations for this.
2. Money held as a store of value: the speculative or investment motive. He provides some reasons, but the economic situation today changes some of them.

Alternative uses of Assets - the Principle of Equal Advantage
Again some of the reasoning no longer applies, but his basic conclusion is that individuals and companies divide their money supply into two categories, held for expected or unexpected use for payments and held "hoarded' as 'idle money. He uses the term' Liquidity preference' and notes that the concept came from Lord Keynes. But, he further notes, that this 'division' is arbitrary as people continually decide on what uses they want for their money.

The Supply of Money and the Interest Rate - separately in short and long term.
The lengthy discussion is some what not relevant today due to changes in laws about interest rates on bank accounts and other factors.
The Supply of Money and Total Spending
In this section Dr. Morgan discusses 1 open market operations, and 2 Purchase of gold and 3 Government loan-financed expenditures and 4 Desire to hold cash instead of bonds Number 3 is the most relevant but his discussion is brief.
"The money supply might also be increased through government loan-financed expenditure: the government borrows from the banking system (which creates deposits: that is, money, in exchange for the government securities received) and spends that proceeds in currently produced goods and services."
This is a rather polite, and misleading, way to describe the reality. This is the crux of the budgetary - deficit, debt - situation today. Actually, the government (a) takes goods and services from the private sector and in exchange gives credit instruments into their banking accounts which flow back to the government in the form of taxes or bonds on the books of the banking system - or -(b) simply gives (via numerous varied welfare methods) credits or cash to those qualifying for such subsidies and that also flows back as a budget deficit and as debt on the ledgers of the banking system.

Total spending and prices.
Briefly, the author explains his view of the relationships between total spending and prices.


Chapter 10 -The Control of Money

This is another important chapter. Dr. Morgan describes how the govenment through the operations of the FED attempts to control the quantity of the money supply.

He begins with: "The money supply of the United States consists of currency plus checking accounts. By far the largest part is checking accounts: over nine-tenths of all payments are made by means of checks."
Today, we can substitute electronic transfers of money, but the idea, that currency forms only a tiny component of money is the same. Likewise his statement that by far the quantity of money in the banking system has shifted from individual's deposits to bank holdings of government securities.

Traditional Controls of the Quantity of Money
He considers that: "The problem of controlling the quantity of money is almost entirely the problem of controlling the quantity of checking accounts."
I believe this is no longer so true. And in the course of his narration and analysis in the chapter he shows that the former 'controls' have "diminished sharply since 1930". His conclusion is contained in the final section:

Regaining Control of the Money Supply
"New measures will eventually be evolved to regain for the Federal Reserve some degree of control over the volume of money. Our alarm over the lack of check reins on the quantity of money should be mitigated by our remembering that money, as we have seen, is not necessarily closely related to the volume of spending in an economy". ... "The death blow to Federal Reserve control of the quantity of money has come from its own policy, undertaken during wartime to assist Treasury financing of guaranteeing the price of government securities by standing ready to buy them at fixed prices. "

Well, my thought for years, now, is that the government even more lost control over the money supply, especially after 1971. It has not regained it. Since World War II, the Federal Reserve has been financing government expenditure on welfare by buying its securities and manipulating the interest rates.

Of course libertarians and some conservatives believe the government and FED should have no control over the money supply. They believe in 'free banking' also. But governments throughout history have attempted to control money as part of their control of society.


Part II. Value and Distribution - The Consumer, the Firm, and the Industry


Chapter 11- Demand and Price

Some of the discussion in this chapter is theoretical or abstract

1. Exchange Between One Seller and One Buyer
2. Exchange Between One Seller and Two Buyers
3. Exchange Between two Sellers and One Buyer
4 Exchange Among Several Buyers and Several Sellers

In my opinion, all of these example are theoretical.

Perfect and Imperfect Markets.
Definiton of 'product'
The Deterinants of Demand
The Estimating of Demand
Income and quantity demanded
Price and quantity demanded
Price when there are several sellers and several buyers


Chapter 12- Problems of the Firm

This chapter is about 'practical' economics - what the student of business needs to understand. But also would be of value to the politician who engages in legislation that greatly effects business.

Firms and Industries - Basic types of classification of business.
The Aim of the Firm -
"What does the firm try to do? We reason that its aim is to make as much profit as possible" And "The fear of loss is a more urgent motive than the hope for profit."
The motive of maximizing income and the 'profit system'.
"The desire for higher income exists not only in the 'capitalist' economy - or the private enterprise, or profit system - but in every economy"

One might wish that theis was taught to students today. But read this author's description - true when he wrote it and still true today but ignored..

"The essential difference between the incentives of a centrally directed economy and of a free enterprise economy is that in the latter the managers who make the decisions hope for their reward of income and prestige out of profits, the difference between costs and sales value of the goods they produce. In a centrally direced economy the managers hope for their reward of income and prestige from promotion, and perhaps bonuses, in the civil service. The first involves a competition for advantage in the 'market'; the second involves a competition for advancement in the bureaucracy."

The Function of the Manager - a standard description
Marginal Revenue and Marginal Cost
- The author gives critical analysis in this lengthy section.

Basic problems of the manager
- The author gives an interesting idea - the manager must decide if he wants to be the employer or an employee.

Urgent problems of the manager
- A lengthy section describing the usual daily issues managers must solve.

Difficulty of estimating cost and revenue
-"Few managers know exactly what their costs and revenues for given outputs will be."

Profit Maximizing
- "There are three concepts of 'profits' in current use: that in common speech and among small businesses; that used in the accounting of corporations; and that used by economists"

What a wonderful exposition. The author describes all three in detail. He shows that the economist's idea is different from that of the other two. Is this another instance in which theory does not match real practice?


Chapter 13 - Problems of Production: Physical Input and Physical Output
This is another chapter devoted to the practical interests of business people.


Chapter 14- Problems of Production: Money Costs and Money Returns

In this one the author differentiates between the physical and the 'money' aspects. The manager must take account of both, and especially of the money side.

Money Costs and Quantities of Resources.
Here the author introduces graphs to depict relationships between variables. And provides examples using money in tables. He differentiates between short and long term costs of inputs and profits from outputs.


Chapter 15 - Monopoly and Competition I

|The author describes business conditions in circumstnces of 'pure monopoly' and 'pure competition' and special cases.


Chapter 16 - Monopoly and Competition II

In this chapter he turns to 'monopolisic competition', then discusses 'Types of Behavior'


Chapter 17 - The Government and Monopoly

The author differentiates between large size enterprises and monopolistic enterprises, noting that not all large sizes are monopolies and there are monopolies among small enterprises. But the chapter is about the introduction of government into business with headings: Trust Busting. Sherman Act 1890 - Clayon Act 1914, Federal Trade Commission Act 1914, and resulting developments.


Chapter 18 - Distribution

The author begins with the classic discussion of 'supply and demand' and the resulting market price tending to the point when the two become equal. His topics include: The demand for a resource - and -The supply of a resource. - Then 'changes in Demand and Supply Conditions'.


Chapter 19- Wages; Collective Bargaining

Ineresting facts: he notes that in 1947 69% of all personal income came from wages and salaries of employees. Another 22% came from income of self-employed people. Compare that with today. So he discusses the factors influencing the price (wage) of labor - with discussion of 'demand for labor' and 'supply of labor'. Then he shifts to the topic: collective bargaining. This brings the subject to labor unions and strikes and lockouts. He also notes the political as well as economic aspects of this process. The chapter has much information on the history of the subject that is largely forgotten today.


Chapter 20 - Rents

Immediaely, the author differentiates between the common concept that 'rent' is a payment for the use of something. And the economists ' definition that 'rent' is any payment for something greater than the payment sufficient to pay the true cost. In other words - 'rent' is a surplus payment - something excessive. He does note that the use of 'rent' for payments originated in its use for the payment to land lords for use of their land (generally for agricultural purposes) But he does not mention its derivation from, the French. Rent was seen then as an excessive demand by rich land lords for such use by impoverished peasants who had no oher option.


Chapter 21 - Interest Rates


Chapter 22 - Profits


Chapter 23 - Distribution of Income in The United States


Chapter 24 -Taxation


Part III Income and Employment The Economy as a Whole

This section is in which the author shifts from economics as the central theme with political issues steming from that - to his focus on progressive public policy theory and desired results with economic theories used to justify the political actions.


Chapter 25 -The National Income

In this chapter the author discusses the complexity and difficulty in determing just what the 'national income' is - what should be counted or not counted - and how to value things.
He opens with this: "The purpose of production is the fulfillment of human wants."

Should the measure be made in terms of actual physical products (and services)? Nearly impossible to do. Or should the measure be calculated in the money value of the goods and services created? Also subject to distortions. He provides interesting tables depicting the values being used for 1948.
He mixes private and government spending. His basic concept is that Consumption plus savings plus taxes equals consumption plus investment plus government expenditure. And that 'savings' equals 'investment' plus government deficit. He comes to that conclusion by stating. "Whenever the expenditures of govenment run ahead of tax revenues, the government is to that extent running a deficit and must obtain the extra funds from borrowing."

I disagree, the government finances its deficit by creating more credit - that is money.

After much discussion and data he concludes the following: "The gross national product measure is most useful for studies of only a few years' duration in which depreciation can be neglected, for analyzing the causes of fluctuations in production and income, and for inquires into money-flows in the economy. The net national income concept is most useful in problems concerned with productivity; and personal disposable income for studying consumer spending."

Actually the concept, theory behind it, and the results are much more complex and subject to question than he describes. See GDP. by Diane Coyle.


Chapter 26 - Fluctuations in the Real National Income: The Problem in Index Numbers This is indeed a complex problem and Dr. Morgan offers much information about it.
He writes: "The change in the figures for national income from year to year is, therefore, due in part to change in the quantities of goods and services produced (or, as we say, a difference in real, or physical income), and in part to change in the prices of these goods and services." The solution involves creating indices based on a single year and then adjust the figures for other years according some measurement.
He does note that there is considerable criticism about the validity of the resulting Price Index.


Chapter 27 - Production and Employment

Dr. Morgan writes that: "This chapter is concerned with three problems: What have been the changes in past years in total production in the United States; what have been the causes of these changes; and what are the prospects for increased production in the future?" He provides a table depicting the national income from 1909 to 1949 in billions of dollars at current prices with a price index of 1946 as 100 and then the real net national income at 1946 prices - and then employment.Naturally the lines for net income in current prices and for real net income in1946 prices coincide. The graph shows that the line for current prices was far below (the greatest difference) the line for real net at 1946 prices in 1933. He notes that total production had three peaks in 1916, 1929 and 1944 and two troughs in 1921 and 1933.

Inerestingly he does not mention that recovery from the 1921 trough was rapid and without govenment intervention, while recovery from the 1933 trough with large government interention took years and was not really moving up until the beginning of the war effort in 1939.


Chapter 28 - Production and Prices

Dr. Morgan states flatly that "The level of total production and the rate of change of that level have a systematic relationship to the average price level of an economy". He provides another graphic representation of production and price levels from 1090 to1949. He notes the difference in changes in retail prices versus wholesale prices and claims several causes iincluding monopolistic and conventional pricing and the demand for retail goods being more stable than that for wholesale goods. He relates all this to the levels of unemployment and the demand for money. This last point indicates his acceptance of the Keynesian idea that money is itself a commodity (and idea not shared with Austrian School economic theory).


Chapter 29 - The Cost of Unemployment and the Aim of Full Employment

The 'cost' of unemployment includes less production and social costs. In this chapter the reader finds the overwhelming focus of economists these days on unemployment in response to the modern political demands. The discussion is full of remarks of 'we should have' or other political based opinions. Much thought is based on ideas about what people think of do in various circumstances. Such as: "Young people are discouraged from begininga period of apprenticeship .... ".


Chapter 30 - What Causes Changes in Employment?

The answer comes directly. "The maintenance of high employment and production requires policies on (1) total expenditure for goods and services, (2) the location of industry labor mobility, and, more important, the price level".

"Policies" of course means government activity. He divides his exposition into short sections on: "Total Expenditure:" and "The price level: inflation"


Chapter 31- The Sources of Expenditure

The author divides the discussion into lengthy sections on A Consumption Expenditure and B Investment Expenditure (In this section he devotes attention to the effect of interest rates) and C Government Expenditure (He notes the increasing level of government e4xpenditure since the early 1930's) But he does not discuss from where the govenment obtains what it exchanges with the private section to fund its expenditure.


Chapter 32 - Fluctuations in Production and Employment
A. The Earning and Spending of Income

Dr. Morgan employs the standard Keynesian theory in tables and charts that mix government 'expenditures' with private enterprise 'expenditures' as if they have a separate origin, when in realtiy government 'expenditures' are funded by a combination of extraction from private expenditures and creation of credit=debt. Taxes are shown as a separate category which obscurers the fact that they are a form of tribute from the private sector.
The basis of the method is true, that total income to its receivers comes from spending by their counterparty. So he is able to show together two graphs, one on Disposition of Income and the other on Sources of income. These show that 'government expenditure' is a 'source' of income, which of course it is, but it actually has been taken from the other 'source' namely 'consumption expenditure which is what he terms private expenditure.
He correctly describes this in the text. He correctly repeats the situation as: "that savings plus taxes always equals investment plus government expenditure - or Saving equals investment plus government expenditure minus taxes". What this is actually meaning is that government is paying for the goods and services it receives from the private sector with 'money' it takes back via taxes. Thus taxes is a substitute for simple tribute paid for by corvee labor and exapropriation of actual assets.

Next, he turns to: Determinates of the Level of Employment and provides current actual numbers of billions of dollars.

Fluctuations within a range of relatively high and relativesly low employment.
The whole point of this lengthy discussion is to attempt to link the amount of unemployment with the distribution of production - in terms of income and savings and the above categories in order to claim that government 'expenditure' can be manipulated to reduce unemployment. He asserts that: "No 'normal' level of unemployment equilibrium is implied by this reasoning. it is only that employment and production may persist within a range somewhere below full employment". Ergo, government needs to do something about that.

B. The Leverage Effect of Changes in Spending

Dr. Morgan writes: "Any change in expenditure for output is apt to have a magnified effect on incomes and employment." He means is that spending begets spending and the quantity of additional spending generated by some initial amount can be calculated as a ratio called leverage. He next discusses this.

The Multiplier Effect
"The effect of a change in spending on consumption expenditure is called the multiplier effect." This is central to Lord Keynes' concept termed 'the marginal propensity to consume'. This in tern supports Keynes' concept that when people save 'too much' that is have a low 'marginal propensiity to consume' (frequently because they are receiving interest for the money they withhold [horde] and don't spend). And this means that 'demand' created by the desire to consume 'spend' is too small resulting in unemployment so government must act even if it means issuing credit as well as holding interest rates to a minimum. And all of this concept requires refusal to believe Say's Law.

The author's argument continues for some pages. Among the concepts advanced is that a single increase as described above will generate a 'multiplier' change that dissapates over time. So he turns to "The multiplier effect of a continued injection of new expenditure." He provides graphs to depict this. His point is that continued - repeated - 'injections of spending are required, otherwise the effect wears off and conditions revert to the original level.

Of course we find out later that the 'injections are made by govenment. He next turns to:

The Acceleration Effect
- described as "Changes in the demand for goods relatively close to consmption may give rise to much larger changes in the demand for (and output of) the capital goods used in their production. This relationship is known as the acceleration effect" But, horror of horrors, he writes that: "As with the multiplier, we also have reason to believe that acceleration is not a reliable staff to lean on". He explains various causes of this, all related to insufficient increases in consumer expenditure - resulting in less elimination of unemployment - which again will mean more required government intervention

But why are we leaning on a staff? Because we want that government staff.

C. Business Cycle Experience

Now we arrive at this: "But since about the beginning of the nineteenth century, in western Europe, the United States, and some other developed economies, here have been recurring periods of good times and bad times of a different (meaning not medieval) source. These are the dreaded 'business cycles'.
Dr. Morgan describes the several financial crises of the 19th century and then devotes many pages to discussion of the 'Great Depression' of the1930's. The causes of each of these are controversial. His explanations are standard establishment opinions. Space and time prevents comment here.


Chapter 33 - Some Doubtful Analyses and Proposals

This is one of the most important chapters in the book, because here Dr. Morgan attempts to dismiss as "doubtful" the full range of 'classical economic theory' in favor of simply asserting that Keynes was correct.
In this chapter Dr. Morgan takes up the controversy between Keynes (and his followers) and Smith, Ricardo and Say in detail and claims that Keynes successfully refuted Say's Law. Further, he also strongly disputes the concept he assigns to a Professor Taussig (without reference footnotes) by terming it "the businessman's reasoning" as well as that of classical economists. This concept is that the problem during 'depression' is that wage rates are not falling along with prices for goods, services, and rents.

Of course he knows nothing about the economic history of western Europe since the 13th century during with each major deflationary period included a decline in ALL prices - labor as well as rents, food, fuel, materials and everything. And recovery came when ALL components of economic activity leveled out and gradually began increasing again. And all that happened without there being central banks or government manipulation. But of course in those days governments were not, and did not claim to be, responsible for ensuring 'full employment' at the same time as ensuring continued high wage rates. See Fischer below.

Professor Lawrence White describes Say's Law and Keynes's attack on it. {short description of image} Claim to have refuted Say's Law is central to Keynesian economics followed by Dr. Morgan.


Chapter 34 - Basic Problems of Employment


Chapter 35 - The Encouragement of Private Expenditure for Output


Chapter 36 - Fiscal Policy


Chapter 37 - The Price Level: Inflation


Part IV: International Economics


Chapter 38 - The Mechanics of International Trade


Chapter 39 - Aspects of International Economics and Issues of Policy


Part V: Economic Systems: Economic Evolution


Chapter 40 - Economic Systems: Economic Evolution



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Armen Alchian &William Allen - Exchange and Production

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Armen Alchian &William Allen - Universal Economics

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Thomas Sowell - Basic Economics

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Matthew D. Mitchell - Applied Mainline Economics

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Frederic Mishkin - The Economics of Money, Banking, and Financial Markets Fifth Edition

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Frederic Mishkin - The Economics of Money, Banking, and Financial Markets Ninth Edition

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Say's Law article in Wikipedia

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Ludwig von Mises - Lord Keynes and Say's Law

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Ludwig von Mises - The Theory of Money and Credit

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Ludwig von Mises - Human Action

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L. Randall Wray - Modern Money Theory

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Diane Coyle - GDP A Brief but Affectionate History

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John Steele Gordon - An Empire of Wealth

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Murray N. Rothbard - A History of Money and Banking in the United States

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Robert J. Gordon - The Rise and Fall of American Growth

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Frank Trentmann - Empire of Things: How we Bacame a World of Consumers, from the 15th Century to the 21st

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David Hackett Fischer - The Great Wave: Price Revolutions and the Rhythm of History

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Lawrence H. White - The Clash of Economic Ideas: TheGreat Policy Debates and Experiments of the Last Hundred Years

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Hunter Lewis - Where Keynes went wrong


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