for their refining and sometimes for their minting into coin.

These central markets serve as reservoirs and distributing agents for the currency and surplus loan funds of their respective countries, administer their reserves of specie and conduct their foreign exchanges. The facilities they have, and the methods they employ for the accomplishment of these tasks, will now be described.

2. The central reserves.-The central reserves held by the controlling institutions of these markets are subject to draft from bankers in the interior of their respective countries, from foreign bankers and from local customers, and those of the Associated Banks of New York are also subject to draft from the New York Sub-Treasury. They may be replenished from the same sources. The interior movement, as the ebb and flow between these institutions and the interior of the country may be called, depends upon the volume and the course of domestic commerce in all its branches, the foreign movement upon the volume and course of foreign commerce, and the local movement upon the volume and course of the commerce of the city in which the institutions in question are located. The movement between the Associated Banks and the sub-treasury in New York depends upon the relation between the receipts and expenditures of the government, and upon the discretion of the Secretary of the Treasury in the use of his power to deposit funds in the banks.

A knowledge of the volume and fluctuations of these various currency movements is essential to a proper administration of these reserves. In order to supply this knowledge, statistics of the shipments of currency to and from the Associated Banks, the interior, foreign countries and the sub-treasury are compiled and published in the financial journals of New York, and similar statistics relative to

England, France and Germany are published in the financial journals of those countries. They indicate that in some of their fluctuations these movements, especially the interior and the foreign, are regular and in a degree predictable, and in others erratic and unpredictable. In all four countries for example, the interior movement is subject to seasonal influences as is also, to a greater degree in some than in others, the foreign movement. The sub-treasury movement at New York is very erratic. Changes in trade and industrial conditions constitute elements of uncertainty in all the movements in all four countries.

The chief problem connected with the administration of these reserves is their adjustment to the varying demands upon them caused by these fluctuating movements. It is a problem not susceptible of a rule of thumb solution, but two points in connection with it are obvious. One is that the banks which administer these must, at all times, keep on hand larger amounts of cash than other banks. Being the ultimate sources of supply for their respective countries they cannot meet a deficit by drafts on other domestic institutions. For temporary purposes one market may draw upon another, but in the main and in the long run each must rely upon its own supply.

The second point is that these banks should keep a large part of their resources in a liquid form. To this end loans subject to call or maturing in short periods of time are best adapted. Such loans are available in all these centers, but in some they are more abundant and better fitted for this purpose than in others. In New York those most widely used are loans made to operators on the stock exchange subject to call, and secured by stock exchange collateral, and 30, 60 or 90 day loans secured in the same way. In the European centers bankers bills and high class commercial bills are more widely used.

3. Bank and market rates.-The rates charged on these loans and in discounting bills are the best barometers of money market conditions and serve to some extent as regulators of the reserves. On the European markets the official rate of discount of the central banks is known as the bank rate and the rates charged by other institutions for standard loans and discounts on the open market are known as market rates. On account of the absence of a central bank in New York only market rates are quoted.

In fixing these rates the state of the central reserves is the most important single factor. In New York the connection between the two is so close that the chief fluctuations of the rates are regularly the opposite of those of the reserves of the Associated Banks. The chart on p. 277* representing average conditions during the period 18961906, clearly indicates this.

On the European markets the connection is not quite so close, but it is none the less real. On account of the dominance there of central banks and other methods of control; rates do not so quickly and frequently respond to changes in the reserves, but the connection between the two is nevertheless vital. The reason for this connection is the same in all cases. It is the effect of changes in rates on the movements of currency and on the volume of loans and discounts. Loan funds, like ordinary merchandise, tend to seek the best markets. Consequently, when rates are raised at any of these centers, these funds are attracted thither, or any tendency to flow away is checked. On the other hand, within the market itself, borrowers will be deterred by the higher rates, the volume of loans diminished, and the percentage of reserves to deposits increased. Loan and

*In the cases of the rate curves an upward movement means a rise and a downward movement a fall, while in those of the reserve curves the opposite is true. See the figures at the left of the chart.

discount rates are thus regulated in accordance with the law of demand and supply like the prices of commodities

and bank reserves at the money market centers act as supply barometers.

In each market are various classes of loans, the rates on which differ in accordance with the length of the period of the loan and the character of the security on which it is based. In New York the market rates are classified under the three heads call loans, time loans and commercial paper. The call loans are secured by stock exchange collateral and are subject to payment on twenty-four hours'

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notice; time loans are also secured by stock exchange collateral and include 30, 60 and 90 day, 4, 5, 6, and 7 months' notes; and commercial paper is based on personal security consisting of a single or of two names and designated accordingly as single and double-name-paper. Ordinarily the rates on call loans are the lowest, those on time loans higher, and those on commercial paper highest.

The following diagram represents normal conditions in the period 1896-1906.

Within the time loan and commercial paper groups, the longer the period of the loan, the higher the rate. The explanation of these differences is the importance from the banker's standpoint of control over his resources. The call loan enables him to meet the demands of depositors and to take advantage of more favorable market conditions upon very short notice. The longer the period of the loan, the