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SEASONAL VARIATIONS OF VARIOUS KINDS OF MONEY AND OF DEPOSITS IN THE
UNITED STATES, 1890-1908

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1 Chart made from Kemmerer's chart, p. 146, and table, p. 161.

1,400

Months

year to year, as would be expected because of generally expanding business, but there is virtually no rise and fall according to the seasonal variations in the demands of trade. It is noteworthy, however, that the increase in circulation each year takes place largely in the fall and early winter. Apparently banks intending to increase their circulation postpone doing so until the crop-moving season approaches. There is no evidence of contraction, however, when the crop-moving demands are over, the national bank note elasticity being (to use a rather inelegant expression) of the chewing-gum variety.

Deposit currency exhibits a high degree of seasonal elasticity, expanding and contracting in accordance with variations in trade demands. It is the only truly elastic element among our media of exchange. In some cities, like New York and Chicago, the general movement of the curves for the circulation of deposit currency follows fairly closely those for the relative demand for loanable capital. In other cities, like St. Louis and San Francisco, while the parallelism is not so close, there is, however, a tendency for the general seasonal swing of the deposit currency circulation and of the relative demand for moneyed capital to be similar.

68. INELASTICITY OF CURRENCY FOR SEASONAL NEEDS1

The autumn of each year makes more apparent the urgent necessity of some additional facility or means by which the demand for crop-moving funds can be supplied to the people without derangement of all the business and financial affairs of the country.

As has been so often said, there is no flexibility or elasticity in our currency. The necessity for this is always most acutely felt in the late summer and early autumn, or at the crop-moving time. The two ways in which the demand for funds then manifests itself are in a demand for an increase of deposits requiring more reserve money and for cash or currency to make cash payments. This latter demand has to be largely met by money which would otherwise be available for reserve. The withdrawal of this reserve money reduces the reserves when they should increase, and after it is no longer needed for cash payments the money returns to reserves and tends to inflate loan credits and induce speculation.

The real solution of the problem is to enable the banks to supply for the cash transactions bank notes not available for reserves, and

Report of Comptroller of the Currency, 1906, p. 67.

which therefore do not contract loans when paid out and do not inflate them when they return.

Consider for the moment the supply of crop-moving funds, which is the really critical point in this question. When the harvests first begin in the South and Southwest, the banks at once feel two demands: first, for loans to the people who must provide funds to buy the products of the farm and plantation; second, for currency to pay the wages of labor and to pay for such products as must be paid for in actual cash, and not by a transfer of credits by check. This demand for loans to be kept on deposit makes more reserve money necessary for the banks to hold, and at the same time they must supply more currency for cash transactions. It would seem, therefore, perfectly axiomatic to anyone that the best way to meet the situation would be to keep in the banks all the money which can properly be used for reserve and to supply for cash transactions currency which will answer all necessary requirements, be just as safe, just as convenient, and just as good in every way, but which is not available as bank reserves. This can be done simply, easily, and automatically by the proper use of the right kind of bank notes, and in no other way.

69. THE TREASURY AND THE BANKS: HISTORICAL

SUMMARY'

BY DAVID KINLEY

1. The policy of the government with reference to the safekeeping of its funds has been variable. For the first few years after the adoption of the Constitution, before the subject attracted serious public attention, there was no specific place for the custody of the public money, and it was left largely in the hands of collecting and disbursing officers.

2. During the existence of the first and second United States banks, that is, from 1796 to 1811, and from 1816 to 1833, the date of the "removal of the deposits," the public money was kept mainly in these institutions and their branches. Nevertheless, even during these periods some state banks were employed.

3. In the interim between 1811 and 1816 the public money was kept mainly in the state-chartered banks. These banks were also used between 1833 and 1846, the date of the establishment of the independent treasury.

Adapted from The Independent Treasury of the United States and Its Relation to the Banks of the Country, pp. 323-30. (National Monetary Commission, 1910.)

4. Beginning with 1847, immediately after the establishment of the independent treasury, the public money was kept in the Treasury and subtreasuries, and no banks were used until after the establishment of the present national banking system in 1863. Since that time the depositary banks have supplemented the use of the subtreasuries as places for the keeping of the public money.

5.. In the past one hundred and twenty years, therefore, there were only seventeen, 1847-1864, in which the government did not use depositary banks for keeping the public money.

6. The evidence therefore shows that there has been, uniformly, a strong tendency for the government, throughout its history, to use banks.

7. The causes of this tendency are shown to have been the greater convenience in the management of the public money, the desire of the Secretary and the public that government fiscal operations should interfere as little as possible with the monetary circulation and with business conditions, the necessities of the government, and pressure from banking and other interests.

8. Under the influence and pressure described, first the Secretary of the Treasury, and later Congress, have given way, and virtually abandoned the policy of independence in the keeping and management of public money which was established by the act of August, 1846. Congress authorized the use of national banks in which to deposit receipts from internal revenue. With some vacillations the extent of the use of the banks as depositaries for these receipts has steadily increased. By recent legislation receipts from customs may also be deposited in the banks. Under the first interpretation of the law permitting these deposits they could accrue only as the collecting officers placed the money received by them in the banks and not from the transfer of government receipts once deposited in the treasuries. By later practice the latter method of deposit has also been adopted and is claimed by some to be legal. Under present practice and legislation, therefore, the Secretary of the Treasury has a free hand to put any and all receipts of public money in the depositary banks. The independence of the Treasury depends entirely upon the will of the Secretary.

9. A further departure from the policy of independence is shown by the course of opinion and legislation concerning security for deposits. Under the law as passed public deposits were to be secured by United States bonds and otherwise. This was understood to mean

United States bonds in addition to a personal bond. Eight years ago the phrase was differently interpreted, and banks were permitted to secure deposits on the basis of other than United States bonds as security. The practice thus established was legalized between two and three years ago.

10. At first the banks which obtained public money on deposit were expected to keep a reserve against it, as provided by the law of their being. Some seven or eight years ago this practice was broken and the banks allowed to hold public deposits without protecting them by a reserve. The practice thus initiated was also later made legal.

II. Finally, with all these changes, the amount of public money deposited with banks has steadily increased, until at one time in recent years only a comparatively small working balance was kept in hand by the Treasury itself.

70. RESULTS OF THE ISOLATION OF PUBLIC FUNDS1

BY MURRAY S. WILDMAN

Since our federal revenue is so largely derived from indirect taxation, the streams rise and fall with the course of certain lines of trade and rarely coincide with disbursements over any considerable period. Owing to this uncertainty in the rate of income, there is nearly always a surplus and, normally, the excess of income over outgo determines the magnitude of the treasury hoard and the amount of the circulating medium of the country condemned to idleness.

These sums are significant from the point of view of their absolute magnitude and also from that of their variability. In all cases they consist of money capable of use as bank reserves. It is true that national banks may not count bank notes as part of their reserves, but since such notes are used as reserve by state and private banks the distinction may be ignored. It may be said also that the cash reserve of banks is made up of the surplus circulation of the country. So long as there is a deficiency of money for the needs of trade it will not be deposited, or if deposited will not remain in the hands of the bank. It follows that this entire sum, if not held by the Treasury, would be added to the bank reserves, eliminating exports of gold, and would increase the cash holdings of all institutions doing a banking

I

Adapted from "The Independent Treasury and the Banks," Annals of the American Academy of Political and Social Science, XXXVI (1910), 576–81.

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