OUR CURRENCY REFORM PROBLEM.

CONTENTS.

Inelasticity of national bank note currency, p. 56; its cause, p. 58; need for extra currency to handle the crops, p. 59; serious results of inelasticity, p. 60; contraction and inflation of the currency on account of its relation to the public debt, p. 61; danger of inflation in connection with the Panama Canal borrowing, p. 63; lessons from the experience of New England before the Civil War and of Canada, p. 65; artificial value of United States bonds and necessity of maintaining this value, p. 70; examination of the plans of reform proposed by the New York State Chamber of Commerce and the American Bankers' Association, p. 73; some objections answered, p. 75.

THE present is a fitting time for a review of our currency

situation, on account of the growing interest in the subject,

the gradual realization of the evils, and a somewhat general agreement as to the main lines of the remedy required. It is proposed in this paper to describe the present situation in the United States, to show the defects in our system, and to point out the lines along which remedy should and probably will come.

One of the most important qualities of a good monetary system is that its volume should automatically correspond to the demand for a medium of exchange. This demand is subject to wide fluctuations on account of the varying volume of business to be transacted. In addition to the extraordinary causes of business expansion or depression, there are the regular payments of salaries, bills, etc., coming usually on the first of each month, the quarterly payments of interest, dividends, etc., and most important of all in the United States, the regular seasonal changes involved in the harvesting and moving of the crops every fall and early winter.

The monetary system of the United States may be divided into three groups: gold and silver coin; gold and silver certificates; and credit money, the latter including the United States notes, the treasury notes of 1890, and the national bank notes. In round numbers we have in circulation about a billion dollars of each of these three kinds of money. Over long periods of time the volume

of gold will correspond to the need for money, through the flow of gold from nation to nation and between use in the arts and use as coin. But for the monthly, quarterly, and seasonal changes, and in emergencies, some other element of the currency must be depended upon to furnish elasticity. This is the function of credit money. Neither of our kinds of credit money, however, (leaving out of consideration the unimportant treasury notes of 1890) performs this function. The volume of United States notes is absolutely fixed by law. Indeed the government credit money has no good reason for existence, and our monetary system would be vastly improved by its elimination. This leaves. the responsibility for furnishing elasticity upon the national bank notes. Their failure to perform this function is the root of our currency problem.

Circulation of United States National Banks Chartered Banks of Canada

The inelasticity of our national bank circulation is a well known fact. The accompanying diagram shows the circulation outstanding at the end of each month for the past five years. No

further evidence on this point is necessary. The circulation of the chartered banks of Canada during the same period, shown also on the chart, offers a most significant comparison.1

Bank credit is issued in the two forms of notes and deposits. The latter furnish a circulating medium of almost perfect flexibility where circumstances are such as to make it available; that is, in the cities and commercial districts. Deposit currency is not available in the less thickly settled agricultural regions. It is from this part of the country that the demand for an elastic bank note currency comes.

A glance at our national banking system shows the cause of the inelasticity in the volume of bank notes. The present system was inaugurated at the time of the Civil War, the two chief purposes being to extend and improve the market for government bonds and to provide a safe national currency of uniform value. Of these purposes the first was the more important one in the minds of those who were responsible for the national finances during this critical period. The ten per cent. tax on the issue of state banks forced their notes out of existence and placed the power of note issue solely in the hands of the national banks. The requirement that United States bonds be deposited as security for notes issued had the desired effect of furnishing an artificial market for the national debt. Moreover, the bond security and other regulations have made our national bank currency uniform. and safe or, at any rate, safe as long as the Treasury remains solvent.

These purposes have been accomplished, however, at the expense of destroying the usefulness of the bank notes; that is, the element of elasticity has been legislated away. The circulation expands or contracts in response to changes in the laws or in the condition of the market for United States bonds, but in no case does the volume of notes bear any necessary relation to the need for credit currency. What little room for elasticity might have been left was removed by the Act of July 12, 1882, which limited the amount of notes that could be retired (by

This diagram is taken, with slight alterations, from Mr. Fowler's report on the currency bill before the House of Representatives last winter. Fifty-ninth Congress, Second session, House Report No. 5629.

deposit of lawful money with the Treasury) in any one month to $3,000,000. With this law on the statute books, every banker realizes that at a time when he may wish to retire his notes, the opportunity for retirement will be limited or entirely removed by the exhaustion of this $3,000,000 limit. In practice, therefore, no national bank takes out a larger volume of notes than it expects to be able to keep permanently in circulation. The average period of the circulation of a national bank note is about two years, by which time the note is usually worn out and must be replaced by a new one. The final result is that our national banking laws have merely added another element to the permanent circulation of the country, an element which is entirely devoid of elasticity and which performs no function that is not better performed by other kinds of money.

The results of this defect in our bank note currency upon the business of the country are serious. Every fall there is a demand for more currency to enable the country to harvest and move the crops. No statement of the exact amount needed for this purpose is possible. A rough estimate may be made, however, by studying the experience of Canada, whose seasonal demand for currency is of the same nature as our own, but whose banking system allows the volume of notes to expand and contract freely in response to the demand. The Canadian bank note circulation expands and contracts annually by about $15,000,000, a variation of about 30 per cent. of the minimum.1 It is possible to show roughly the relative magnitude of the crops in Canada and the United States.2 In 1901 the area devoted to the leading cereals (corn, wheat, oats, rye, barley, and buckwheat) was 176,881,331 acres in the United States, and 11,263,160 acres in Canada. The yield was 3,163,192,526 bushels and 262,034,012 bushels, respectively. The acreage in the United States was 15.7 times, and the yield 12 times, that of Canada. The addition of other less important crops does not materially alter these ratios, and we have also the important tobacco crop of the United States, about seventy-five times that of Canada, and the cotton crop, amounting to ten and a half million bales and valued at $418,000,000, to

'See diagram above.

2 See U. S. Statistical Abstract, 1905; Canada Year Book, 1905.

The total value of

which nothing in Canada corresponds. "field crops" in Canada in 1901 was $194,953,420. The value of the corresponding crops in the United States (with certain omissions) is estimated at $2,505,407,100, or about thirteen times the figure for Canada.

This result is, of course, only a rough approximation. However, we are not seeking a mathematically accurate result, but only a general basis for comparison of the currency needs of the two countries. The conclusion that the annual harvests of the United States are ten to fifteen times those of Canada is certainly a safe one. The Canadian circulation expands each fall by about $15,000,000. Assuming that the amount of extra currency needed is roughly proportional to the size of the crops, it follows that the United States ought to have at least $150,000,000 of extra currency every fall. Various writers have estimated this need at from $150,000,000 to $250,000,000,1 and the above calculation seems to justify these estimates.

We now have the situation before us. Every fall there goes out the cry for extra currency. At least $150,000,000 ought to be forthcoming to meet the need. But where is it to come from? As we have seen, no element of our monetary system possesses the necessary elasticity except bank deposits. But this is exactly the situation where deposits will not do. The need ought to be supplied by bank credit, but the credit must be in the form of notes, not deposits.

The only possible alternative follows. The extra business of the fall must be done with practically no increase of the country's currency. The crops must be handled by means of money taken from other parts of the country, whether they can spare it or not. During the period of easy money in the spring, the country banks habitually deposit part of their reserves in banks situated in the reserve cities. A large part of these sums eventually finds its way into the money markets of New York and other eastern cities, where a low rate of interest is paid to outside banks for such deposits. With the beginning of the harvest season, there

1 See N. Y. Bankers' Magazine, August, 1906, p. 296; Moody's Magazine, April, 1906, p. 525; Report on the Fowler Bill (59th Congress, 2d Session, House Report, No. 5629), pp. 4 and 5; etc.