lated competition, the manufacturer sells in a tariff protected market ruled by live-and-let-live follow-your-leader ethics. This policy of not cutting prices preserved the United States Steel Corporation, strangely enough, from dissolution at the hands of the Supreme Court in 1919, and now the collective control of prices is the authorized American manufacturing policy.

This collective control explains, in part, why farmers' prices change more violently than other prices. The gold price of cotton in 1921-22, as shown, fell 52 per cent., and wheat fell 58 per cent. in 1923-24, when the general level of gold prices for the crop year, including cotton and wheat, fell 37 per cent. in 1921-22, and the net fall in 1923-24 was 34 per cent. In 1924-25 cotton rose 35 per cent. above 1921-22, and wheat rose 38 per cent. above 1923-24, while the general level of all prices for the crop year, including cotton and wheat, rose only 3 per cent. over the preceding year 1923-24, and 9 per cent. over 1921-22.

The farmer has not obtained the power of collective control, and so is exposed to the danger of excessive crops and changes in the value of gold.

This collective control policy has been extended by law to the money and credit market. Indeed its most notable instance is the Federal Reserve System, which now controls the world value of gold. One-half of the world's monetary supply of gold is now owned by the twelve American Reserve Banks. This gold cannot be used directly by the 10,000 member banks as their individual gold reserves. The member banks' lawful reserves now consist almost entirely of demand deposits, that is, credit balances at the Federal Reserve banks. If hand-to-hand currency is needed by member banks, they get it, not in gold, but in the form of gold certificates or Federal Reserve notes issued by the Reserve banks and calling for gold on demand. These twelve banks act as a unit in handling their gold reserve. Under direction of central committees and the Federal Reserve Board they are not competing banks-they are a system and they exercise collective control of member banks.

This follow-your-leader policy in American finance is not limited to the twelve Reserve banks and the 10,000 member banks. It extends to the whole world. The impoverishment of

Europe, the need of paying to America nearly $1,000,000,000 annually in gold (or its equivalent) as interest and amortization of public and private debts, and the resultant Federal Reserve ownership of more than half the world's monetary gold, compel European central banks to follow the lead of the Federal Reserve system, which is now, in effect, the Central Bank of the World. Furthermore, member banks are prevented, by the working rules of the Reserve system, especially since 1921, from borrowing at the Reserve banks at low rates of interest and then re-lending to customers at higher rates of interest, except in cases of temporary emergency. This means that one member bank cannot steal its competitor's customers by easier loans or lower rates, but all member banks must act alike, charging similar rates of interest and each taking only its fair share of the common fund of reserve credit, whose volume in turn is controlled by the Federal Reserve banks acting in unison as a system.

Evidence of this control of the volume of credit is the fact that the impounded gold of the Reserve banks amounts, at present, to about eighty per cent. of their deposits and note liabilities, whereas, according to the law, the Reserve banks might legally expand both the notes and the member bank reserves up to the point where the gold would be only 40 and 35 per cent. respectively of the Reserve banks' outstanding notes and member banks deposits. That is, legally, they could double the present volume of notes and member bank reserves, if they so wished and occasion offered, thus practically doubling the present volume of commercial bank deposits and currency available for business and commerce, and still be on a legal gold basis. This, indeed, is what would happen if the member banks were allowed to compete with each other for business by expanding loans. And this is what did happen in 1919-20, when the Reserve banks themselves kept their re-discount rates down to four per cent. and expanded their Federal Reserve note issues and their loans to member banks to the legal limit. At that time the system did not attempt to control the expansion of loans by member banks, and the latter allowed prices to run up to 247 in May, 1920, in response to demands for loans by business customers.

This rise of prices was stopped and a deflation was produced in

1920, when the system took control by rapidly raising re-discount rates-the prices charged to member banks for the use of the impounded gold reserve-from four per cent. in 1919 to seven per cent. in 1920. As a consequence member banks raised their rates to business customers from the previous five per cent. up to eight per cent. on the best commercial paper, and to even higher rates on other loans, and curtailed their advances or refused to loan altogether. This brought into play the psychological factors which reduced the demand from the business community for loans. Then the level of prices fell from 247 to 138.

What happened, we can see, is that by raising the price-the re-discount rate-for the use as credit of its impounded gold, and by urging, counselling and demanding curtailment of loans by member banks, the Reserve system reduced the volume of credit in use, thereby raising the value of gold and lowering the world gold price level of commodities.

The reverse operation occurred in 1922. The price (re-discount rate) for the use of gold as a basis of credit was reduced rapidly to four per cent. in 1922, and subsequently during that year the value of gold fell eleven per cent. (72 to 63), and inversely prices rose fifteen per cent. (138 in January, 1922, to 159 in April, 1923). Since that time its power to exercise such control has been increasing by reason of an increased stock of gold, and at the same time, the Reserve system has learned a new method of control. It has learned not only how to control the price of credit, as in 1920, the commercial discount rate charged by member banks, --but also how to control the volume of credit in use. This was learned in 1923, and is the now well-known "open market operation". If, for example, a Federal Reserve bank buys $1,000,000 in Government securities from a broker, it pays that broker by a check drawn against its own impounded gold-a "cashier's check". The broker sells that check to a member bank,—that is, deposits it, receiving in exchange a commercial deposit credit, making an increase of $1,000,000 in the volume of checks which the broker can use as money. The member bank, in turn, presents the check to a Reserve bank. If the member bank is in debt to the Reserve bank, the check reduces the size of its debt and makes room for an additional loan of the same amount. If

not in debt, the member bank receives an additional credit reserve equal to $1,000,000.

This increase in its credit reserve raises the loaning limit of the system as a whole, on the average, tenfold, because member bank reserves are legally fixed at a minimum of seven, ten, or thirteen per cent., averaging about ten per cent. All the member banks of the system, taken as a whole, may therefore lawfully increase their loans to business customers by ten million dollars, owing to this increase of one million in Federal Reserve credit to a member bank. Thus the increased limit to which all the banks in the country can increase the supply of deposits to be used as money by business men is about ten times as much as the amount of Government securities which the Federal Reserve banks buy on the open market in exchange for their cashier checks drawn against their own impounded gold. One result of this increased supply of bank credit is to reduce the rates of discount charged to business men by member banks on their commercial loans-an "easy" money market.

On the other hand, if a Federal Reserve bank sells $1,000,000 of Government bonds to a broker, it receives from the broker a check to that amount on a member bank. When this is charged against the member bank's account at the Reserve bank, the result is a reduction of $1,000,000 in the member bank's credit reserve, or a reduction in the reserves of other banks upon which the particular bank draws for deposit at the Reserve bank. This reduces the limit of lending power for the system as a whole $10,000,000, or ten times as much as the amount of Government securities which a Federal Reserve bank sells on the open market. Then the member banks, in order to keep within their legal limits, must either contract the total of their commercial deposits (which serve as money) by the amount of $10,000,000, or else enlarge their reserve credit by borrowing $1,000,000 at the Reserve bank. Since the member banks cannot so suddenly contract their loans to business customers, this operation is known as "forcing the banks to borrow". One result, however, is to force the member banks to raise the rates of discount on loans to business customers -to create a "tight" money market.

So important were these open market operations discovered to

be that the Federal Reserve banks in 1922-23, approved by the Federal Reserve Board, took the initiative away from the individual Reserve banks which previously acted competitively, and concentrated it in the hands of an Open Market Investments Committee. Since then the open market operations have been conducted by a single committee representing the system as a whole. Thus controlling, as a unit, the open market buying and selling of securities, and consequently controlling, to an indefinite extent, the volume of reserves of member banks and, through them, the volume of commercial deposits which serve as the modern form of money, the Federal Reserve system controls to a greater or less extent, according to circumstances, the business situation and the price level.

Thus the Federal Reserve system has two instruments for controlling the value of gold. It can change the supply of credit by open market operations, and it can change the price of credit by changing its re-discount rate. While there are evident limits to the extent of this control, the two instruments have been used together effectively since 1922.

For, example, in the early part of 1922, the Reserve banks, not then acting in concert, bought $400,000,000 of Government securities in the open market, thus raising the legal limit of member bank deposit liabilities, for use by customers as money, approximately four billion dollars. This was accompanied by a lowering of discount rates, a general rise in prices during 1922 to April, 1923, from 138 to 159, and a fall in the value of gold from 72 to 63. On the other hand, beginning in the latter part of 1922, the Reserve banks, now beginning to act in concert, sold $400,000,000 of securities in the open market. This forced the member banks to restore their impaired reserves by borrowing from the Federal Reserve banks $500,000,000 in order to maintain the legal reserve of deposits in the Reserve banks against their customers' deposits. This, in turn, reduced the limit on their legal capacity to lend to the public about ten times as much, or four billion dollars. This, again, forced member banks to raise the interest rates on business loans. In this way, only a slight raise of the re-discount rate was needed, in 1923, to stop the inflation of commodity prices and the deflation of the value of gold. The inflation of prices and de