business. The effect of such an increase in cash reserves would depend on various circumstances. In the case of some banks it would further establish the convertibility of their demand liabilities without affecting the magnitude of these liabilities. In the case of others, by increasing the lending power it would tend to decrease the the rate of discount and so the cost of conducting business in general. This diminution in the costs of competitive business, other factors remaining constant, would tend to lower prices of consumers' goods. The first and most obvious objection to our practice is found in the social loss involved in the idleness of pecuniary capital.

The waste involved in the idleness of public funds is less objectionable than the successive expansion and contraction of reserves which result from the receipt and disbursement of revenue. One phase of this movement may be illustrated by the simple case of a pension disbursement. On August 4 the Treasury drew pension checks amounting to $14,970,000 and distributed them throughout the country. About half of this sum was drawn upon the assistant treasurer at New York. Coming into the hands of country banks, cashed or deposited, these checks are mailed to New York correspondent banks for credit. In a few days this mass of checks is presented to the New York subtreasury through the clearing-house and an equivalent amount of money is transferred from the subtreasury to the banks, whose combined reserves, in the absence of countervailing debits, are increased $7,000,000. Without any alteration in the aggregate wealth of the country or even of New York City the lending power of New York banks is raised about $28,000,000. In order that this new source of profit may be utilized, since nothing in the situation operates immediately to stimulate the demand from commercial sources, the competition of banks in an effort to place their funds lowers the call-loan rate. This reduces the cost of carrying stocks and stimulates speculation for the rise in Wall Street.

To reverse the illustration, let us suppose that the collection of duties at the port of New York in a given week reaches the not uncommon sum of $10,000,000. This amount of money is drawn from local banks and trust companies and locked up in the subtreasury. In as far as the effect on reserves and lending power is concerned, it might quite as well have been sunk in New York harbor. The rate for call loans rises, stocks fall, or commercial paper which otherwise would have found a ready market remains unsold and the production and exchange of goods may be curtailed.

Unable to foresee these fluctuations in reserves and the consequent fluctuations in the lending power of his banker, the merchant is constrained to carry a much larger cash reserve (bank deposit) than would be carried otherwise, and the interest on this is the price he pays for this particular form of insurance, a charge that is ultimately shifted to the consumers of the goods he offers for sale or to the producer from whom he buys. By the same token each banker in a system which presupposes independence and the absence of any joint responsibility carries a large fund of capital devoted to no more productive purpose than as an insurance fund. This fund of ready money tends to be largest in times of stress when the needs of commerce are greatest. This added cost to the banker's business is paid in higher discount rates and tends to shift to the price of commodities.

The largest source of revenue is in the import duties, amounting in the fiscal year ending in 1910 to $333,683,445.03. About twothirds of these duties are paid into the subtreasury at New York, mainly from the banks of that city, and a corresponding large part of the disbursements are made from the sub treasury and pass to the local bank reserves. It happens that gold drawn for export is taken from the same group of banks. New York bank reserves stand in a peculiar relation therefore to our foreign trade. When imports of commodities are heavy the payment of duties tends to coincide with a rise in foreign exchange and with threatened or actual gold exports, causing a double drain of bank reserves. In this situation it would be suicidal for New York bankers to purchase time paper with the same liberality as can be practiced by the bankers of Chicago or St. Louis. In order to protect themselves against this double drain of funds they must lend a large portion of their funds on call for use in stock exchange speculation, or else adopt the alternative policy of excessive reserves. Our fiscal system therefore is one of the instruments that promotes excessive stock exchange speculation in this country.

71. TREASURY AID FOR SEASONAL STRINGENCY'

A. THE AUTUMN OF 1912

An interesting economic condition due to the heavy business demands upon the banks is again seen in the reduction of reserves and the renewed appeal to the national treasury for help. Practically

'From "Washington Notes" in Journal of Political Economy, XX (1912), 957.

since the end of August there has been very strong interest among bankers and the more foresighted business public with reference to bank conditions. It was early admitted that the large crop movement would necessitate the granting of extensive accommodation by the banks with corrresponding pressure on reserves. During the latter half of September the decline of reserves in the clearing-house cities had been very severe, and in several places the banks were forced close to the danger line. The consequence was a loud call for government aid. In deference to these demands, Secretary MacVeagh, who has had about $90,000,000 that might at a pinch have been deposited, had ordered an inquiry into the situation by officers of the Treasury Department. The outcome of this inquiry was an unofficial announcement at the opening of October that no Treasury deposits would be made, followed shortly thereafter by an equally unofficial statement of a plan for the limited relief of the national banks. This plan consisted in the placing with the banks of gold or gold funds equal to any amounts importation of which might be arranged for, such funds to be available as soon as provision should be made for the importations desired. This was practically a revival of the plan followed by Leslie M. Shaw when Secretary of the Treasury, whereby the banks were permitted to count as part of their reserves any importation of gold they might engage from abroad so soon as such arrangements had been entered into. The only difference between the original Shaw plan and the present undertaking of the Treasury is that the latter takes the government gold from the vaults and places it in the hands of the banks as soon as officials are assured that they are protected by a bona fide arrangement made by the bank in question with a foreign shipper.

B. THE AUTUMN OF 1913'

Toward the latter part of July symptoms of uneasiness began to reappear. There was much talk about the difficulty of moving the fall crops, and the annual apprehension on this score began to stalk about the country with more than usual vigor. It is a characteristic of our imperfect and unsatisfactory banking system that the very prosperity of the country becomes, at times, a menace, because of the apprehended inability of the banks to meet the seasonal demand for the large amounts of money required to move a bounteous harvest. Conditions were again becoming acute when the Secretary determined 'From Annual Report of Secretary of the Treasury, Finance, 1913, pp. 2-4.

to deposit from twenty-five millions to fifty millions of dollars of government funds in the national banks in those parts of the country where the necessity for funds to move crops existed. The Secretary announced that, as security for such deposits, high-class commercial paper would be accepted at 65 per cent of its face value, bearing the indorsement of the depository bank. This was an unprecedented step, because commercial paper had never before been accepted as security for government deposits. It was, however, a necessary and highly beneficial step, because it enabled the banks to obtain the required funds upon the pledge of available paper already in their vaults. If the banks had been obliged to secure these deposits with government bonds or other fixed investments, the relief would not have been effective, because many of the banks would have been compelled to use the deposits for the purchase of the bonds required by the Government as security.

In order to distribute intelligently the crop-moving deposits, three conventions of bankers were held at the Treasury Department in Washington during August, 1913, the first composed of bankers from the Southern and Southwestern states; the second composed of bankers from the Middle Western and Northwestern states; the third composed of bankers from the Pacific Coast and Rocky Mountain states. It was not necessary to extend aid to the Eastern states, although the Department was ready to do so if it had been required.

It was essential that the action of the Department should be non-partisan and non-political; the crops of Republicans, Democrats, Progressives, and all other classes of the people had to be moved, and the earnest desire of the Department was to have the benefits of this action diffused as widely and impartially as possible. The clearinghouse associations in each of the cities invited to participate in the conferences were asked, therefore, to name the delegates. A most interesting and intelligent body of men assembled in Washington and discussed with the Secretary and Assistant Secretary Williams (in charge of the fiscal bureaus) the needs of their several communities and sections. As a result, allotment of these funds was made upon the basis of the testimony of their several representatives, as follows:

Middle and Southwest...

Middle and Northwest..

Pacific Coast and Rocky Mountain..

Total...

$22,550,000

19,000,000

4,950,000

$46,500,000

The Department, having no machinery for the investigation of local credits, was obliged to rely upon the banks in the larger cities as instrumentalities for the distribution of government funds to the banks in the smaller communities. In the discussions at Washington, the representatives of the banks were urged to pass the government funds on to their country correspondents upon reasonable terms. The Secretary is gratified to be able to say that in most instances this was done on a basis that seemed fair to all concerned.

The effect of this action was highly beneficial. Confidence was restored. The readiness of the Government to meet every reasonable need of the banks for the legitimate purposes of crop-moving had the effect, so the Department is informed, of causing much hoarded money to be deposited in the banks. This increased their ability to take care of their customers, and caused a decided relaxation in the demands of country correspondents for accommodation, which, prior to the announcement of the Secretary, had been much greater than usual, because the small banks were attempting, very naturally, to impound all the funds they could get to make them safe against the anticipated stringency. The moment it became known that the Government stood ready to assist, the tension was relieved, business resumed a normal aspect, and the fall movement of crops, trade, and commerce proceeded upon an easier and safer basis than for many years past.

It is interesting to note that of the fifty million dollars which the Department offered to place in the banks for crop-moving purposes only $34,661,000 had been called for up to November 25, 1913. These funds will be gradually repaid to the Treasury beginning in January, 1914.

(b) Cyclical

72. THE PERIODICITY OF FLUCTUATIONS IN TRADE1

BY S. J. CHAPMAN

Everybody knows that production does not flow along uninterruptedly. It has its ups and downs. Periods of brisk business are followed by periods of stagnation. Some unsteadiness in trade we should naturally be prepared to find, for there are vicissitudes in all human affairs; but certain peculiarities characterize the broad

I

Adapted from Outlines of Political Economy, 1913, pp. 254-55. By permission of Longmans, Green, & Co.