§ 5 (to Chapter XII, § 3) Method of Calculating M'V' for 1897-1908

Although New York clearings constitute two thirds of all clearings for the country, it cannot be imagined that the check transactions in and about New York form two thirds of the check transactions of the United States. We have already seen that the reported check deposits in New York on March 16, 1909, amounted to 239 millions. This figure, being for New York, is probably nearly complete and indicates, as we have seen, an estimated average for the daily deposits in New York City in 1909 of 306 millions. This gives 306 × 303 or 93 billions for New York City, for the entire year. Our estimate for the entire country was 364 billions, leaving 271 billions outside of New York City. Let us compare these estimated figures for checks deposited with the figures for clearings. The New York clearings in 1909 amounted to 104 billions and those outside New York, to 62 billions.

The New York clearings (104) thus exceed the New York check deposits (93), probably because the clearings on account of outside banks include clearings representing banking transactions as distinguished from commercial transactions, since New York City is the chief central reserve city. The New York City deposits were thus only 93/104 or about 90 per cent of the New York clearings. Outside of New York, on the other hand, the deposits far exceeded the clearings, being in the ratio 271/62 or 4.4. These ratios between check transactions and clearings, viz. .90 for New York and 4.4 for "outside," would indicate that the published figures for clearings should be weighted in the ratio of 4.4 to .9 or about 5 to 1. That is, on the basis of 1909 figures, five times the outside clearings plus once the New York clearings should be a good barometer of check transactions.

Of 1896, unfortunately, we lack the figures for New York City deposits. We have, however, figures for the deposits in New York state in both 1896 and 1909; and a study of these figures indicates that the ratio of weighting for 1896 should be something over 3 to 1. Not to put too fine a point upon it, we shall use the weighting 5 to 1 for all the years. The difference in the results between this system of 5 to 1 and a system of 3 to 1, or any intermediate system, will be small. but 5 to 1 is chosen because (1) the data for 1896 on which the number 3 is based are less certain than those for 1909, and (2) the New York clearings are not as good a representative of New York deposits as the outside clearings are of outside deposits; the New York clearings being somewhat vitiated by an element extraneous to New York and especially by the banking transactions connected with adjustments of bank reserves. We prefer, therefore, to give as much weight as possible to the "outside" clearings.

Having obtained our "barometer" of check transactions, viz. New York clearings plus five times outside clearings, we merely need to multiply this by the proper ratio in order to obtain the check transactions themselves. Absolute knowledge of this ratio of check transactions to the barometer exists only for 1896 and 1909, in which years we know the check transactions as well as the barometer. These ratios are .69 and .88. But we cannot err greatly in assuming that the intermediate years have intermediate ratios, varying regularly each year. The result is the following table:—

As already indicated, only the first and last figures in column (5) are independently calculated, the rest being interpolated.

The other figures in the table explain themselves. The last column gives the very important magnitude which we have called the velocity of circulation of bank deposits subject to check, or the "activity" of checkable accounts. The probable errors of the last column are believed to range between about 5 and 10 per cent.