more. The circulation continued to increase, however, although the demand for it no longer existed, until, about the middle of January, it became $695,927,806.

Of course the usual effect on the price of bonds followed. The increased demand drove up the 2 per cent bonds as high as 110, and even at that price the amount available was regarded as too small. Accordingly the Secretary thought it necessary to adopt additional means to relieve the situation, and on November 17 he offered a loan of $50,000,000 in Panama Canal bonds under authority of the act of June 28, 1902, and $100,000,000 of 3 per cent certificates of indebtedness under the act of June 30, 1898. Of the bonds only $24,631,980 were taken by the public and $15,436,500 of the loan certificates. It is a little difficult to understand the reason for this action unless the Secretary hoped to sell the bonds and securities to people who were hoarding money. Of course the purchase of these securities by the banks, or by people who were not hoarding, simply reduced the circulation and would have made the situation worse. In order to avoid this, however, the Secretary transferred part of the purchase money to the banks. Therefore with one hand he was withdrawing money from circulation in payment of his bonds and with the other was restoring it by depositing it in the banks. The banks which purchased these securities were allowed to retain 90 per cent of the purchase price of the Panama bonds as a deposit and 75 per cent of that of the certificates.

In addition to these positive means of assistance undertaken by the Secretary of the Treasury, the Comptroller of the Currency, fearing that a revelation of their condition would add to the panic in a measure, decided to postpone the call on the national banks for a report in November. This action operated favorably, because the banks were putting themselves in shape to meet the call. The delay made them more cautious in making discounts and lowering their reserves. Evidence that this was the case is found in a statement of the Secretary himself that "the fact that a call had been made and a report submitted contributed another favorable factor to the situation immediately afterwards by enabling the banks to release a part of this accumulated cash to meet the pressing needs of their clients, with the knowledge that they would probably be able to fully reinstate their reserves before another call was made by the Comptroller."

91. THE NEED IN TIME OF CRISIS'

By J. LAURENCE LAUGHLIN

It will probably appear to many that the demand of the public for expanding issues of currency is of vital importance in a time of financial distress, such as that in the autumn of 1907. It is supposed that in a time of stringency the public will demand more circulation; and to support this view the events of the panic of 1907 have been drawn upon as proof. It is true, of course, that government or bank notes could not be had in most cities during the height of the panic of 1907, even in small sums; and as a consequence the clearing-house associations issued clearing-house notes (as distinct from clearinghouse loan certificates) for circulation among the public. Without doubt this inability to get cash for a small check on a bank or at a paying office made a deeper impression on the minds of the people than any other event during the panic. It was, as everyone must admit, a striking commentary on the inadequacy of our banking and monetary system that it was impossible for the banks to supply to employers of labor and for the small needs of every day a relatively small amount of currency having a general circulation. Yet, on the other hand, it is a fact that the total amounts of the clearing-house notes for the use of the public were not large, nor were they long outstanding. Moreover, as affecting the ability of the producing and trading firms to weather the stress of the panic, they had practically no influence whatever.

The power to expand their note issues (which are liabilities) could not have added to the cash reserves of the banks and thus have enlarged their power to aid needy borrowers. It is true, however, that an expansion of note issues would have aided the banks indirectly; it would have allowed them to satisfy the urgent demand of the public for a medium of exchange by passing out their notes, and thus would have enabled them to retain lawful money which could be used as reserves to support their loans and deposits.

The reserve city bank which can quickly increase its own notes can also supply the demands made upon it by country national banks and correspondents-provided the country bank wishes only currency for circulation in the neighborhood and not for its own reserves. Here, again, the new bank issues do not give the pivotal

'Adapted from "Banknotes and Lending Power," Journal of Political Economy, XVIII (1910), pp. 779-83.

aid which some suppose always comes from additional circulation. Not being lawful money they could not be used in reserves, and therefore would not-and could not-improve the lending power of the local country bank. They would, however, supply currency to the country bank which could be paid out, if urgently demanded, and thus indirectly protect reserves.

Another advantage in emergency bank notes, of course, is the opportunity they present to national banks having relations with state banks and trust companies. By issuing their own notes they may exchange them for lawful money held by banks outside the national system. In this way they can indirectly increase their lawful money, and consequently their power to lend.

But, primarily, the issue of bank notes is for circulation in the hands of the public and not for any serious advantage which they render in increasing the power of the banks to lend and stave off a panic. The real difficulty resides, not with the general public and the media of exchange-for checks are as good as ever as a medium of exchange if there are deposit accounts on which they can be drawn— but with the banks, with the power of the banks to expand their loans in a time of stress. This is the pivotal thing in any plan to relieve the distress of a financial panic.

92. BOND-SECURED NOTES AND CYCLICAL ELASTICITY1

Bank notes secured by bonds are open to several serious objections from the standpoint of elasticity. In the first place the bonds sell above par and bear a low rate of interest; and yet, in times of financial stringency, the rate of discount is sure to be high, and borrowers are in great need of loans. As against buying bonds bearing a low rate of interest in order to issue notes, there is the opportunity for the banks to loan such funds directly at the high market rate of discount. The situation, therefore, puts a premium upon the direct use of banking capital, as against the method of investment which leads to increasing the bank-note circulation. In those communities where bank notes are essential to making discounts this is a serious obstacle. In short, at the time or place of pressing demand under the existing system the supply of notes is not forthcoming.

On the other hand, if the country is suffering from business depression, if funds are accumulating in the banks, and if the market

• Adapted from Report of the Convention of Indianapolis Monetary Commission (1898), pp. 228-30.

rate of interest is low because there are few opportunities of profitably employing capital, then it would not be impossible to expect the banks to use superabundant funds in buying bonds of a low rate of interest. Therefore, at a time when the demand for loans is slight and the rate of discount low, it would be easy for the banks to invest in bonds and thereby obtain notes. In short, when there is no demand the supply is easily obtained. It needs no further comment, consequently, to see that such a system of note issues works at crosspurposes with the needs of the public. With a deposit of bonds for security of notes, there is no supply of notes at a time when most needed and an abundant supply of notes when least needed.

To give concrete examples, the financial panic of 1890 caused a fall in the prices of government bonds, and thereby increased the chances of profit on the circulation of national bank notes. As a result there was a net increase of $13,000,000 in their circulation in 1891 and of $8,000,000 in 1892. Now, in these two years, there was absolutely no demand for an increase in the circulating medium of this country; on the contrary, the Treasury Department in these years was injecting arbitrarily between $25,000,000 and $50,000,000 of silver paper money into the currency of the country, as a result of the Silver Purchase Act of 1890, and gold, in consequence, was being exported at a rate which alarmed business men and finally precipitated the panic of 1893.

"During 1893 the 4's of 1907 sold down to 113, and the banks added to their circulation $37,000,000. During the months of June, July, and August of that year there was a most urgent need for an expansion of the currency; but during these months the new national bank notes did not appear. Not until after the panic was over and money was piling up in all the financial centers a drug on the market-did the increase in the national bank note circulation take place. As a result of the panic, business being depressed, the interest rate on prime commercial paper during 1894, 1895, and 1896 was between 3 per cent and 4 per cent. The money supply of the country was in excess of its needs and gold was exported in large amounts. The Treasury, embarrassed by the withdrawals of gold, was forced to issue bonds in order to maintain the gold reserve. These bond issues forced down the prices of bonds, and thus increased the profit which banks could make upon new circulation. Therefore, considerable idle banking capital, which could be loaned barely at 3 per cent in business, was exchanged for government bonds and made the

basis for bank notes, so that in 1895 and 1896 there was a net addition to the bank note circulation of $32,000,000. Thus, the national bank note helped to embarrass the government by inflating the currency at a time when the government was doing its utmost to hinder inflation and prevent the exportation of gold to Europe."

Secondly, it should be noted that when the necessities of business urgently demand additional notes, even if the price of bonds should be such as to make the issue profitable, the delays incident to the purchase of bonds, the taking out of circulation upon them, etc., would make it impossible to obtain the currency until all need for it was practically past. Under such a system, therefore, banks must refuse to customers additional supplies of notes upon sudden demand even though the community in such circumstances has enlarged its currency need and an additional supply may, therefore, without additional strain on the bank, be kept in circulation. Under such circumstances, if notes are an essential to the borrower, rates for loans rise abnormally and crisis conditions are vastly intensified. Probably the best illustration of this delay in responding to demand was seen in the difficulty of obtaining currency during the summer of 1893, when it was practically impossible to secure a sufficient supply of a circulating medium of any sort. The New York banks held on June 1, 1893, a surplus of $21,000,000 in excess of their legal reserve. At that time the volume of national bank notes outstanding was about $177,000,000. By the first of August extraordinary demands for currency had drawn down the reserves $14,000,000 below the legal minimum and yet the outstanding notes were only about $5,000,000 more than on June 1. By September 1, however, when the reserves were but $1,500,000 below the minimum, and the urgency was past and currency once more comparatively abundant, the notes had begun to expand and had already reached $199,800,000, subsequently rising to $209,300,000 on November 1, notwithstanding the continued decrease in the demand for them.

93. INTEREST ON DEPOSITS AND BANK-NOTE INELASTICITY' By O. M. W. SPRAGUE

During periods of inactive trade the amount of bank notes sent to Washington for redemption invariably reaches large proportions. The city banks are chiefly responsible for this movement. Something like half the notes are sent in by the New York banks alone,

Adapted from "Proposals for Strengthening the National Banking System," Quarterly Journal of Economics, XXIV (1909-10), pp. 639-40.