posal for commercial credits a sum that would have allowed them to increase their loaning capacity to the extent of hundreds of millions of dollars. (Practical Problems in Banking and Currency, pp. 184, 204.)

Inelastic Currency. The amount of money needed in circulation is a variable quantity. It will depend on the condition of trade and the extent of commercial transactions. The actual amount of money in a country may be great, but it does not represent the volume of money that is used in circulation. Much of the actual money of the country is stored away in the government treasury; much of the money held by banks is bound up in the form of bank reserves, or again is tied up in bonds. Yet, ordinarily, trade is carried on, not to any great extent in actual money, but in credit, and it is the banks that supply the credits and the credit loans through which merchants transact business.

It is stated on good authority that 92 per cent of all the business that passes through banks is done by means of credit. This statement is substantiated by reference to the operations of the clearing houses of the country, in which the balances settled in actual cash sum up about 8 per cent of the total yearly clearings. (Cf. Practical Problems in Banking and Currency, p. 227.)

The actual amount of money in circulation in June, 1912,

It is with this amount of money or with that part of it which

is not tied up or used for other purposes, that the 8 per cent of cash business is carried on. The rest is done by credit.

This sum is fixed and cannot easily be changed. The gold and silver, the Treasury notes, and the United States notes are fixed and determined. The national bank notes item alone could be made elastic, made to expand and contract in response to commercial needs, because the banks are in intimate touch with commerce, and furnish the media for trade transactions. Yet, that very feature of elasticity is wanting in the bank The amount of the notes will gradually tend to become less. It depends on the amount of the bonds taken out by the banks. Each bank must invest a certain proportion of its capital in United States bonds. Now the bonds are limited in number and it has been the policy of the government in years past to pay off its debt by redemption of its bonds. "Since

notes.

the Civil War, more than two thirds of the debt has been paid," and the Treasury surplus is being used to buy up the bonds. When the public debt is wholly paid and the bonds have been all redeemed, some other basis must be found for note issue. (Practical Problems in Banking and Currency, p. 192.)

Moreover, the issue of notes secured by government bonds is open to the further objection that it is unwise to make the chief security for note circulation the security of the government. In case of war, the bonds representing the debt of a country are susceptible of violent depreciation. The United States bonds might fall very low. In the Boer war, the English Consols fell from 114 to 92. In the Civil War, the United States bonds could find no buyers, and the government had to organize the national bank system to create a market for them.

Again, contemporary history shows how the values of all American securities, bonds included, fluctuate upon the agitation of every important political movement, such as the silver question, or revision of the tariff. The security, therefore, which stands behind the note circulation and which appears to-day to be absolutely safe, may in time of danger prove to be very in

secure.

Besides, so close a relation between the perils of government and the general business of the country is surely to be deprecated, and ought not to exist." It is the opinion of many that the government ought to go out of the banking business, except in so far as it would regulate and supervise it. (Ib., p. 195.)

Moreover, the banks invest in bonds and issue notes against them, not out of any desire to help trade, but because of the profit to be gained by the transaction. The volume of circulation" is fixed by the profit to be made upon bond-investment and not regulated by commercial demand." (Ib., p. 193.) To quote Horace White: "The principal defect of our national bank system is the rigidity of its note circulation. In a broad sense, the volume of notes is regulated, not by the wants of trade, not by the amount or kind of commercial paper offered for discount, but by the market price of United States bonds." (Ib., p. 266.)

Yet, very little profit is gained by the banks from their notes. (Cf. Handy, Banking Systems of the World, p. 32.) And this fact that circulating notes are not profitable to the banks that issue them is undoubtedly one reason why the banks do not issue them in greater number.

In the first place, up to the year 1900, the issue of notes could be only 90 per cent of the value of the bonds. Hence, 10 per cent of the value of the bonds was forced to lie idle. That this had a marked effect on the issue of notes is manifest from the fact that since the withdrawal of the restriction by the law of 1900, there has been a remarkable increase in the amount of bank notes secured by bonds. Whereas, in 1900 the amount of such notes was 247 million dollars, it reached the sum of 710 million dollars in 1910. (Nat. Mon. Com., Doc. No. 570.)

Then, the market price of government bonds is high, and banks do not care to invest beyond what the law requires in such high-priced securities. As a matter of fact, some banks do not issue any notes at all, and many that do so take out the

smallest amount of bonds demanded by the law and issue notes to that amount.

At the beginning of the national bank system, bonds were a good investment, as their value was constantly increasing and they paid 5 or 6 per cent interest. The banks readily invested in them and the circulation of notes was large. Later, on the redemption of these bonds, the circulation fell away. It increased again upon the issue of new bonds. (The new 2 per cent bonds pay a tax of one half of 1 per cent yearly. The 3s pay a tax of 1 per cent, as did the old 55 and 6s.)

In the past, many banks drew their circulation down to the minimum required by law, “seeing more profit in selling the bonds at the premium they have commanded than in continuing circulation against them." (J. B. Forgan, in Practical Problems in Banking and Currency, p. 311.)

While the money circulation is thus rigidly fixed, the factors that create the demand for money are constantly growing or are subject to fluctuations. Among such factors are population, trade, and the seasonal demands for money incident to the moving of crops. It is evident that the circulating currency should be capable of expanding and contracting in pace with these factors.

Yet, the bank circulation does not move with population, nor with the great expansion of trade, for while both these factors have increased immensely in the past fifty years, there has been no correlative increase in note circulation. Every year a great strain is felt at crop-moving time, when immense sums of money are taken from the East to the South and West.

In 1906, $200,000,000 was sent from the East to the West and South during the crop season. It is stated that Wall Street banks ship 30 to 40 millions of cash to the West and South every fall. (Cf. Nat. Mon. Com., Doc. No. 588.)

Owing in great measure to the inexpansive nature of the circulating medium, this country has its periodic panics.

Commercial crises come about upon the refusal of banks to give bank credits to merchants, and the banks must refuse

to give these credits or make further loans whenever their reserves reach the limit fixed and defined by law. Hence the law, which was intended to safeguard the merchants, has the contrary effect.

Monetary crises were experienced in 1860, 1873, 1884, 1890, 1893, and 1907. The banks were unable to render aid to the merchants and to prevent the many failures that spread over the country. The banks were obliged, in order to save themselves and their reserves, to have recourse to clearing house certificates. These certificates were based upon the credit and the assets of the banks that issued them. "The amount of the certificates issued by the clearing house in 1893 in the principal cities was upward of seventy millions of dollars." (W. B. Dean, in Practical Problems in Banking and Currency, p. 196.) In New York City alone, during the crisis of 1893, the clearing house certificates amounted to $41,490,000. (Rep't Comptr. Cur.. 1909, p. 65.)

In the crisis of 1907, the total amount of clearing house certificates issued was $248,279,700. New York City's issue reached $101,060,000. (Ib.) During the same crisis of 1907, some of the railroads and fndividual corporations issued checks of larger or smaller denominations in making payments to their employees during the period of extreme stringency and while hoarding was still being practiced, and some of these checks passed current and acted as substitutes for currency for the time being." (Quotation in Rep't Compt. Cur., 1909, p. 64.) Just as the currency cannot expand in case of stringency, so also it is incapable of contracting in time of slack trade. When the demand for money has reached a low ebb, the currency accumulates in the vaults of the banks, and the banks are tempted to resort to every scheme to put their money out to interest, to "forced loans, inflated credits, cheap rates and other artificial methods to keep it employed and earning something." (Practical Problems in Banking and Currency, p. 310.)

To conclude, there is not in our currency that elasticity that would allow the expansion or the contraction of circulation as