Assume that the money supply meets difficulties in its expansion. Is there not at once an incentive to extend credit? The seller finds his customers unwilling to buy for cash, in amounts as great as before. In order to sell as much as before (assuming that the use of credit is known, to avoid trouble with historical origins), he extends credit,--which, when practiced generally, lightens the strain on the money supply.
I have so far said nothing of the case where there are stocks of the money metal to be got from outside markets. But if a country is expanding its trade, does not money come in? The quantity theorists would, indeed, admit this, in general, though their reason is a bad one, namely: that expanding trade lowers prices, and lower prices make the market attractive to foreign buyers, who then send in money for the goods. I shall later discuss this aspect of the theory.[314] For the present, I merely interject the question as to the probability of an expansion of trade when prices are falling. Increasing _stocks_ of particular goods may well mean lower prices for these goods and if they be articles of export the lower prices may well increase the export trade, and bring money in. But this increase in _stocks_ of articles of _export_ is very different from total _trade_ within the country; and lower prices in articles of export are very different from a generally lower price-level.[315]
Will expanding trade in a country increase credit? I come here to one of the striking features of Fisher's doctrine--a feature in which I think he is fundamentally true to the quantity theory. He finds no way in which expanding trade can directly increase credit. Expanding trade can increase credit, (a) only by changing the habits of the people, so as to alter the ratio, M to M´, or (b) by reducing the price-level, and so bringing in money from abroad, whence, as M is now increased, M´ rises proportionately. "An increase in the volume of trade in any one country, say the United States, ultimately increases the money in circulation (M). In no other way could there be avoided a depression in the price-level in the United States as compared with foreign countries. [He should say, from the standpoint of his theory, that increasing trade will cause a fall in the price-level, and so bring in more money.] _The increase in M brings about a proportionate increase in M´._[316] Besides this effect, the increase in trade undoubtedly has some effect in modifying the habits of the community with regard to the _proportion_ of check and cash transactions, and so tends somewhat to increase M´ relatively to M; as a country grows more commercial the need for the use of checks is more strikingly felt."[317] In a footnote to this paragraph, he defines the issue still more sharply. "This is very far from asserting as Laughlin does that 'The limit to the increase in legitimate credit operations is always expansible with the increase in the actual movement of goods'; see _Principles of Money_,[318] New York (Scribner), 1903, p. 82. We have seen, in Chapter IV, that deposit currency is proportional to the amount of money; a change in trade may indirectly, _i. e._, by changing the _habits_ of the community, influence the proportion, but, except for transition periods, it cannot influence it directly."[319]