lay an added burden upon every customer. The bank's assets, no matter how good, are dead in so far as being available for purposes of relief of a situation which ought, without difficulty, to be corrected. They cannot discount their paper without causing comment and criticism, and they cannot encroach upon their reserves. The resort to a bond secured note is expensive and far from speedy, and so in more than one instance the country in the midst of unprecedented prosperity has stood in the shadow of disaster because of needed banking relief. It is because of this fact that there is the demand that the banks, the properly organized agencies for caring for the needs of business, be granted the power to provide a credit currency which is not only possessed of the quality of safety, but adds to it the no less important quality of being responsive to the requirements of our highly developed and complex business world.

Such a bank-note system we do not have, and until we are possessed of it we must look for high rates of interest when we least should have them, and recurring periods of uncertainty and doubt. The stopping of one undertaking here and another there will mark our business and financial career. It cannot be otherwise.

In conclusion, permit me to quote as embodying the truth of the whole matter a single sentence from the work of a distinguished writer on political economy whose authority is recognized on two continents: "First assure the permanence of the standard, then remove all shadow of doubt as to the immediate convertibility of the media of exchange into that standard, and the expansion and contraction of the media of exchange, the currency, can be with confidence left to take care of itself." I cannot believe that the plan which is offered for legislative sanction fails in any of these respects.

INFLUENCE OF THE INCREASING GOLD SUPPLY UPON PRICES AND THE RATE OF INTEREST

ADDRESS DELIVERED BY JOSEPH FRENCH JOHNSON, DEAN OF THE NEW YORK UNIVERSITY SCHOOL OF COMMERCE ACCOUNTS AND FINANCE, BEFORE THE PENNSYLVANIA BANKERS' ASSOCIATION, AT WILKESBARRE, JUNE, 1905. GOLD is the most interesting of all the metals. Everybody wants as much of it as he can get, and all men are concerned in its scarcity and its abundance. Any change in its value in one way or another affects the welfare of every man and woman in the civilized world. It is on this account that gold is called a precious metal. Gold derives its unique position among metal from its use as money. It is to-day almost a universal standard of prices and values. Everywhere men measure their wealth in gold, and unconsciously take it for granted that their riches are increasing in proportion as their power to get gold increases. Because gold is used as the standard of prices the average man thinks it is stable in value. All other things may rise or fall in value, but not gold--that, he thinks, is immovable.

A very little clear thinking, however, soon convinces one that with respect to its value or exchange power gold is no exception among the metals. Its value depends upon its abundance in relation to the demand for it. Any great increase in its supply must. sooner or later force down its value. The reason why the average man fails to see this truth is because gold, being itself the standard of prices, has no price. Men think of an ounce of gold as being always worth $20.67, that being the amount of money into which it is coined at the mint. Now, then, can it be true, people ask, that gold changes in value when you can always sell it for the same amount of money? When the prices of things in general decline, people think it is because their values are falling. If prices in general are rising people speak of a rise in values. The truth of the matter, namely, that these changes indicate changes in the value of gold, never occurs to the practical man of affairs unless he gives especial thought to the money question.

It is unnecessary to develop any fundamental principles with regard to the nature or value of money. We have before us a concrete question: What is likely to be the effect of the increasing supply of gold upon prices and the rate of interest? The facts

which have suggested this topic are doubtless familiar to all of you. During the last ten years the output of the world's gold mines has been increasing at an unprecedented rate. In 1890 it amounted to $119,000,000; in 1895, to $200,000,000; by 1899 it had increased to $307,000,000 per annum, and in 1904, according to the estimate of our director of the mint, it amounted to over $350,000,000. When we consider that during the first fifty years of the nineteenth century the total output of both gold and silver was less than two billion dollars, while the output of gold alone in that period was only $800,000,000, or about $16,000,000 per annum, whereas in the last fourteen years the output of gold has amounted to nearly three and one-half billion dollars, it is not surprising that very grave questions arise in the minds of thoughtful men with regard to the probable future of the value of gold, and with regard to the effect upon human welfare which changes in the amount of gold will exert. Can the world absorb $350,000,000 of new gold, or must its value fall in order that a place may be made for it in the markets? If its value does fall, we know that prices must rise. How will this rise of prices be brought about? Will it be steady and gradual, or will it be sudden and spasmodic? What effect will it have on the business enterprises of men? Will it lead to speculation and panic? Will it have any influence on the rate of interest? In order to bring out my answers to these questions in an intelligible, if not logical, order, I propose to consider the subject from three different points of view. First, how does an increasing supply of gold tend to affect prices? Second, does it have any relation to the rate of interest and the money market? Third, what are the conditions which govern the production of gold, and do these conditions now warrant an expectation of a continued large increase of the supply?

In order to avoid confusion, it is necessary to have clear ideas as to the meaning of the words we use. Unfortunately the word money is often employed in different senses. In my opinion, in its scientific and proper use it means the standard of prices, that valuable thing which men use as a medium of exchange or means of payment, everyone being willing to accept it. In its popular use, however, this idea is confused with various forms of credit. Most people think of the greenback, silver dollar, and bank note as

money. These things are not money in any proper sense of the word. They are all promises to pay money. They are representatives of money. They possess, as it were, the power of attorney for money, and so are able in the business world to do almost everything that money itself can do. Again, you bankers use the word in a peculiar sense. When you speak of money as being scarce or "tight" you do not mean that there is less gold or currency than before; you mean merely that your lending power is exhausted; that the ratio between your reserves and your liabilities is near the danger point. Money when used in this sense in the financial world is really equivalent to loanable funds or capital. In what I have to say I shall endeavor to use the word money in what I have defined as the scientific sense. To cover the popular usage of the term, I shall use the word currency, which may properly enough include all generally acceptable media of exchange, such as gold, greenbacks, silver dollars, bank notes; and when I have in mind what is sometimes called bankers' money I shall speak of loanable funds.

In discussing the probable effects of the new gold upon prices, we must first consider the part which credit plays in the making of prices. Some writers have put forth the view that credit in the modern world is of such great consequence that mere changes in the volume of gold cannot produce any great changes in the prices of goods. In my opinion, this view of the subject is a mistaken one. Credit is merely an auxiliary of gold. It increases the efficiency of gold just as rapid-fire guns increase the efficiency of the battleship. The more extended our credit system, the greater the number of exchanges that can be mediated by an ounce of gold. A dollar in a bank will do five times as much buying as a dollar in the street. Modern credit, instead of lessening the importance of each ounce of gold in the world, has greatly increased it, for every ounce of gold can now be made the basis for credit transactions much exceeding in volume the value of gold.

I do not mean to imply that the present general use of credit as a medium of exchange can be ignored, or that it does not complicate matters. It has given rise to an important new demand for gold; namely, to serve as a basis for credit, or as a banking reserve. Banks do not voluntarily carry more gold, or reserve, than they deem adequate to meet their demand liabilities. But a proportion

of reserves to liability which is considered adequate at one time is not adequate at another. The basis of credit is confidence, and when confidence is lacking, or is threatened, the banker everywhere increases the hoard of his reserve, thus preventing gold from having any effect whatever upon prices. But when the situation changes, and hope takes the place of distrust, then the bankers' reserve, through the agency of credit, becomes a quick and powerful stimulus to prices. We need not expect, therefore, a steady and gradual advance of prices to result from the present outpour of gold. We may expect spasmodic upheavals of the price level, and then periods of depression. So long as we use so sensitive an instrument as credit in trade, no matter how greatly the world's supply of gold is augmented, we need not look for a steady or orderly upward movement in the prices of goods.

Let us consider a concrete case. Let us suppose that the supply of money in the United States has been greatly increased during a certain month by an influx of gold from the mines of Alaska, California, and Colorado. Most of the miners will make the natural and reasonable disposition of their money; each will spend more or less for the satisfaction of his present wants; will keep a certain sum for the satisfaction of future wants; and will either lend the balance or deposit it in a bank. That portion which is spent will constitute a new demand for certain classes of goods, and will tend to raise their prices. That portion which is loaned will be expended by the borrowers in the purchase of goods and payment of wages, and will tend to advance both prices and wages.

Let us suppose that the banking reserves of the country are increased $50,000,000 by the deposits of these miners. Will this money lie idle and so have no effect on prices? Certainly not. It will be the most potent part of the new supply. Bankers are the last people in the world to look with complacence upon a hoard of idle money. Their dividends depend upon their power to make a dollar do twofold or fourfold work. The banks that receive this $50,000,000 of new money will not rest till they have found borrowers, even though they are obliged to lower their rate of discount. This $50,000,000 may be made the basis for an expansion of bank credit to the amount of $200,000,000, or even $300,000,000, and the borrowers of this credit will buy goods and labor. Thus this new