(1) the dominance of speculative influences in the New York money market; (2) the independent treasury system; (3) the lack of elasticity in our bank note issues; (4) the rigidity of our legal reserve requirements; (5) the absence of any one central authority, responsible for the custody and maintenance of the central reserves. We now proceed to the discussion of these

matters.

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Speculation and the New York Money Market. - As Table II shows, a large proportion of the loans of New York banks have not been based on commercial paper "; that is, on the notes and bills of exchange that arise in the ordinary course of business, but have been either time loans on collateral security or demand loans, nearly all of which are secured by collateral. Most of these collateral securities are the stocks and bonds of corpora

TABLE II

LOANS AND DISCOUNTS OF NEW YORK NATIONAL BANKS ON SPECIFIED DATES1

cions, and the loans, especially the demand or "call " loans, are used for the greater part in financing speculation in such securities. This system has been partly responsible for the excessive and useless expansion of speculation over and above the amount that is necessary to secure the best results for the economic interests of the country. Here we are concerned, however, with its effects on the money market.

The supply of call loans depends primarily on the amount of the surplus reserves of New York banks; that is, the excess of the reserves over and above the legal minimum percentage of

1 Compiled from Reports of the Comptroller of the Currency.

the amount of their deposits. If the weekly statement of the clearing house banks shows a relatively large surplus reserve, this means that the banks can safely expand their loans, and the knowledge of this fact has a stimulating effect on speculation. If, however, the surplus reserve is low, the banks are bound to restrict their loans of all kinds and to "call " some of their demand loans. When the reserve is below the legal limit, demand loans have to be called in large quantities in order to enable the banks to meet pressing demands for credit on the part of their regular customers. The precipitate calling of demand loans by some banks simply increases the demand for credit at other banks, which in turn have to curtail their loans. Such a condition of the money market leads to a depression in the price of speculative securities, which is increased by the forced sales of securities in order to obtain the money funds that had previously been lent on them; the fall in the prices of securities leads brokers to demand more margins" from the customers for whom they have bought securities, and it leads the banks to demand more securities as collateral for their outstanding loans. Under such conditions the interest rate on call loans has sometimes gone as high as 125 per cent, or even higher.1

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If the ruling prices of speculative securities have been higher than industrial conditions would warrant, such a disturbance of the money market is apt to be long continued, and might easily develop into a general financial crisis. The call loan market is essentially speculative, and it is unfortunate that the condition of the supply of credit for the normal commercial needs of the country should have been periodically unsettled on account of this fact. In no other great money center of the world

1 That is, the rate on what may be called marginal call loans, effected at the stock exchange by bankers' agents, or by individuals or corporations. Many banks continue to make call loans to their regular customers at such times at rates not exceeding 6 per cent. Under normal conditions the rate on call loans is lower than the rate on time loans. For the period 1901-1906 the bank rate on call loans averaged 3.3 per cent as against an average rate of about 4.5. per cent on time loans. Excessive variability is the chief characteristic of the call loan rate. Cf. W. A. Scott, "Rates on the New York Money Market," Journal of Political Economy, vol. xvi, pp. 273-298.

do call loans occupy the important place that they do in New York.

The Independent Treasury System. The United States government has for many years been to a very large extent its own banker. It has kept its own money in its own strong boxes, quite after the fashion of a medieval monarch. The strong boxes in this case have been, however, the vaults of the treasury in Washington and of nine subtreasuries located in important cities. Apart from the fact that the government revenue and the government expenditures are naturally not distributed evenly throughout the year, the government has the further difficulty that a close balance of revenues and expenditures for any given year must be wholly accidental. Even if the federal budget were carefully and scientifically constructed, as it is not, the public revenues would be liable to uncertain fluctuations, a result in part of the importance of customs receipts among them. The government, furthermore, receives a large part of its income in money, not in bank credit instruments. When a surplus accumulates in the government treasury, that much money is taken out of circulation. This reduces bank reserves, and contracts the amount of bank credit available. And it usually happens that the government revenues are largest when business is most prosperous, and when, consequently, maximum bank reserves are needed.

The government is permitted, however, by the national bank act of 1863 to deposit money in selected national banks. Some secretaries of the treasury have made little use of this privilege, but in recent years such deposits have become more common.

Until 1902 banks had always been required to deposit government bonds with the federal treasury as security for federal deposits, but in that year and again in 1906 Secretary Shaw offered to accept approved state and municipal bonds in lieu of a certain amount of government bonds, on condition that the latter should be immediately used as security for increased note issues. Subsequently the banks have also been permitted to use "prime commercial paper," endorsed by the banks, as collateral. In 1897 only 168 banks were government depositories. In 1914 there were 1584, which held on June 30 of that year about half of the $170,000,000 constituting the government's cash surplus at that date. Part of this increase is

attributable to the effect of a law enacted in 1907 allowing customs receipts to be deposited in banks. Prior to this deposits could only be made from the proceeds of internal revenue duties and miscellaneous receipts. In recent years the banks have been required to pay 2 per cent interest on government deposits.

The government has, on several occasions, come to the rescue of the banks by cash purchases of its own bonds. The decline in the market price of government bonds in periods of financial stringency makes the purchases relatively advantageous to the government. The periodic shifting of government deposits to localities where money is most needed, the temporary deposit of gold in New York banks equal in amount to their engagements of gold for transportation from Europe, and even the arbitrary withdrawal of government money from the banks when it was "not needed," in order that it might not be made the basis of speculative activities but kept until it "was needed," have been notable features of the recent relations of the treasury and the money market.

In favor of this system it may be said that a surplus in the government treasury constitutes a real cash reserve, the wise use of which by the Secretary of the Treasury might avert a serious crisis. But there are dangers in intrusting so much financial power to one man. If used without discretion it is bound to do more harm than good. Moreover, these treasury operations have not always been free from the suspicion of favoritism to certain banks. Then, too, the knowledge that the government surplus will, in time of necessity, be put at their disposal tends to encourage unsound banking by relieving the banks of the proper responsibility for the maintenance of their own reserves.

Finally, it should be noted, the use of the independent treasury system has prevented the government from securing for itself any large measure of the various economies and advantages that business firms find in keeping bank accounts.

The Movement of Money. The demand for loanable funds (rights to receive money on demand) varies locally, according to the business conditions that exist in different parts of the country. These differences make loans worth more in some localities than in others, and result in some shifting of bank credit. New York banks, for example, sometimes invest in "out of town" commercial paper when this is more profitable than employing their funds at home. More frequently, interior banks place loans in New York, either through their correspondent banks there, or by the purchase of securities from note brokers. This shifting of credit, however, is unimportant as

compared with the movement of money itself. Money is continually flowing from New York to the interior and from the interior to New York, according as it can be more profitably employed in bank reserves in one place or the other. Similar movements take place between the various cities of the country. This movement, it will be noted, is not one that is apt to disturb financial conditions. On the contrary, it tends to prevent extreme local fluctuations in money market conditions by leading to the expansion of credit where it is most needed, and similarly, to the contraction of credit where it is least needed.

There is another kind of money movement, however, which is not so fortunate in its effects upon the money market. This is the movement of money out of bank reserves into general circulation and out of general circulation into bank reserves. The amount of money needed as an actual hand-to-hand medium of exchange varies for different seasons and for different localities. The demand for money to serve as the basis of credit in bank reserves and the demand for money as an actual medium of exchange are different and competing demands. When more money is needed as a medium of exchange, reserves have to yield and credit has to be contracted.

The most important movement of this sort is in response to the annual demand for money to be used in "moving the crops." Harvest expenses are very largely wages, and these have to be paid in cash. Many farmers, moreover, insist on receiving money payments when they sell their crops. The cotton crop of the South and the grain crop of the West annually necessitate the conversion of bank deposits in those regions into money, and the negotiation of loans on the security of the crops, the proceeds of which are also largely taken in cash. The banks in these sections of the country in turn secure money from the banks in which they have deposits, and in large part this money is obtained directly and indirectly from the New York bank reserves. The movement of money from New York to the South and West usually commences in August of each year and continues through November, when the return movement sets in, continuing usually till February. Despite the fact that the New York bankers