66 printing press, it is just possible that the conservatism of the financial world might put up an effective barrier. It is, of course, more likely that the usual consequences, artificial stimulation of business, and sham prosperity, would follow; but just as the Federal Reserve Board has carried on a policy of keeping the money-spending power" of America from rising in proportion to the stock of gold in that country, so it is conceivable that the Bank of England, and the commercial banks, by a severe limitation of credit, might restrict the consequences of governmental over-issue of paper money, at least if the inflation did not go too far. In this case ought we not to say that it is the total stock of means of payment, three-quarters of which is in the form of bank credit, that controls the level of prices? But let us take another and more likely contingency. Recently the dockers struck for higher wages; the employers conceded this after a slight resistance, and promptly raised their charges to meet the cost. Then the London tramway men struck, and their demands having been conceded, a rise in tram fares will no doubt follow. If the same happens all round, the rise in prices will cause a demand for loans that the banks will be unable to resist, even if they wished to. They will, let us say, allow Treasury bills to run off, in order to secure more legal tender. Is the Government going to insist on the Cunliffe limit? It is not likely that the chairmen of the Big Five will be called upon to come with candles and white robes to do penance before the Financial Secretary: it is more likely that they will be applauded for their efforts to keep a trade revival. A new competition between rising wages and rising prices like that of 1919-20 may set in. If the gold standard were in use, this vicious inflation would soon be stopped; in the absence of that safeguard, the best we can hope for is that the common sense of the Government and country will recognise in time whither the movement is leading, and will maintain a limitation of legal tender strict enough to check the inflation setting in from the side of commerce. In this case we may reasonably say that the supply of legal tender currency is the important factor in the situation. Mr. Keynes does well to stress the fact that a demand for legal tender springs up as a result of contracts already entered into, and so is a late feature in the trade cycle. To impose an absolute limit to the supply of legal tender might easily create a crisis; half a century ago crises due to inelasticity of money supply in a gold-using system had to be met by suspending the Bank Charter Act, i.e. by removing the rigid limit. Undoubtedly, if our currency system is to be regulated consciously, it must be in accordance with all the economic circumstances, and not by a simple fixed rule. At the same time we might remember that the gold standard did work, and fairly well, although it is much harder to get new supplies of gold in an emergency than to persuade Government to rescind a Treasury minute. Johannesburg, R. A. LEHFELDT THE TENTH ANNUAL REPORT OF THE FEDERAL RESERVE BOARD AMONG the many contrasts presented by the authorities respectively responsible for credit policy in this country and the United States, none is more marked than that between the reticence of the Bank of England and the communicativeness of the Federal Reserve Board. Either attitude has much to recommend it, but that of the Federal Reserve Board undoubtedly presents the greater advantages to the student of monetary theory. In this Report the Board takes the public more fully into its confidence than ever before. The Report deals ostensibly with the year 1923, but it refers freely to the proceedings of 1922 and preceding years. Anyone who has studied the weekly returns of the Federal Reserve Banks in recent years will be aware that the most striking movements have been those in the distribution of earning assets between rediscounts and open market assets. The fundamental difference between these two classes of assets is that the rediscounts are brought to the Federal Reserve Banks by the member banks on their own initiative, in order to maintain their statutory reserve proportions, whereas the others are composed of bank acceptances or Government securities bought on the initiative of the Federal Reserve Banks themselves. Every asset is balanced by a liability. When the Federal Reserve Banks buy open market assets, their liabilities, whether notes or deposits, are increased by an equal amount; this represents an increase in the cash resources of the member banks, and enables them either to diminish their rediscounts or to create more credit. On the other hand, when the Federal Reserve Banks sell open market assets, they curtail the cash resources of the member banks and drive them either to contract credit or to replenish their reserves by rediscounting. No. 134.-VOL. XXXIV. U 66 In 1922, as a result of a drastic contraction of credit and a great importation of gold, the earning assets of the Federal Reserve Banks had reached a low level. Some of the reserve banks, in order to assure themselves of sufficient earnings to meet their expenses and their dividend requirements, began to purchase considerable amounts of short-term Treasury securities." In July 1922 the rate for commercial paper in New York fell fractionally below the rediscount rate; this development (which, however, is not itself mentioned in the Report) was evidence that the rediscount rate had ceased to be effective. It became clear that open-market operations of individual reserve banks may not be reflected in changes in the demand for credit at these banks, but may influence the credit situation in the money centres where the purchases or sales are made." That is to say, if the Chicago reserve bank bought $1,000,000 of certificates of indebtedness in New York, it might pay for them by transferring $1,000,000 of gold to the New York reserve bank. The Chicago bank could then simply substitute earning assets for idle gold, while the New York bank would be saddled with the redundant gold and would find its control of credit weakened. It became evident that "open-market policy should be a system policy." The Board decided that open-market policy was to depend, like the rediscount rate itself, on the state of trade and on the general credit situation, and a committee of reserve bank officers was constituted to secure co-ordinated action. The effects of this decision have been manifest in the interesting changes in open-market assets which occurred in 1923. At the beginning of the year prices were rising, and there was some fear of an excessive credit expansion. The New York rediscount rate was raised in February from 4 to 4 per cent. So slight a rise (which only occurred in three out of the twelve reserve districts) was not likely by itself to have much influence. But concurrently with it came a systematic sale of open-market assets, which, for the system as a whole, fell from $712 millions to $270 millions at the minimum in the summer. The member banks were driven to make up the difference by rediscounting, and the rediscount rate thus reinforced became effective. Prices began to fall. In the autumn, when the danger of inflation had clearly passed and the seasonal stringency supervened, the banks began to increase their open-market assets again. The experience has been highly encouraging to those who hope for an enlightened management of credit with a view to the stabilisation of prices in the future. Credit conditions have been found (as so often) extremely sensitive. The danger of inflation was averted without any reaction worth mentioning. One or two industries have shown slight signs of slackening, but there have been none of the symptoms of a trade depression, and no general unemployment. The action of the reserve banks has been of the gentlest. To all appearance this successful regulation of credit is still continuing. The only circumstance that threatens it is the gradual shrinkage of the earning assets as a whole. If gold imports arrive (as they recently have) at the rate of $300,000,000 a year, the earning assets will eventually fall so low that the power of the reserve banks to control credit, even if they cut down their open-market assets to nothing, will be impaired. It is perhaps hardly necessary to add that this development, involving a depreciation of the dollar and thus facilitating the return of sterling to par, would be welcomed by many authorities in this country. But that is no concern of the Federal Reserve Board's. The concluding section of the Report is devoted to a discussion of the suggestion that credit "should be regulated with immediate reference to the price level, particularly in such manner as to avoid fluctuations of general prices." On this vital question the Report is very cautious. "The inter-relationship of prices and credit is too complex to admit of any simple. statement, still less of a formula of invariable application.” The price situation and the credit situation, while sometimes closely related, are nevertheless not related to one another as simple cause and effect; they are rather both to be regarded as the outcome of common causes.' To some advocates of price stabilisation this may be a little damping. But it is a grave mistake to claim too much for the index-number. A mechanical adherence to it is supported neither by practical experience nor by theory. "Credit administration must be cognisant of what is under way or in process in the movement of business before it is registered in the price index." It looks as if the Federal Reserve Board, in contrast with so many critics of the policy of stabilisation on this side of the Atlantic, had seen further into the practical problem of credit control than some of the theoretical supporters of that policy themselves. On the other hand, the Report contains, it must be confessed, traces of some of those time-honoured fallacies from which practical bankers seem to be quite incapable of emancipating themselves. An example is the idea, so often taken as axiomatic, that lending only becomes inflationary if it is for illegitimate purposes; "it is the non-productive use of credit that breeds unwarranted increase in the volume of credit." It may be very desirable for bankers to give a preference to bills and advances for the production and distribution of goods, but that is in itself no safeguard at all against inflation. Nor, for the matter of that, do finance bills, or advances for speculation in shares, in commodities, or in foreign exchange, or even advances to meet budget deficits, necessarily produce inflation, so long as the amount of credit created for all purposes, good, bad and indifferent, is kept within due bounds. The writers of the Report also suffer under the delusion that the imports of gold into America are the result of the international balance of payments. "It is to be expected and desired," they say, "that some portion of the gold which the tides of disorganised trade have brought us in the past ten years will eventually return to the countries whence it has come." Apparently they have not yet learnt that they receive all this gold simply because they offer a higher price for it than any other country can afford to pay. R. G. HAWTREY NOTE ON THE REAL RATIO OF INTERNATIONAL INTERCHANGE IN the ECONOMIC JOURNAL for December, Mr. Keynes restates his reasons for supposing that in the decade before the war the real ratio of international interchange was turning in favour of agricultural and against manufacturing countries, in such wise as to yield year by year a decreasing quantity of the products of the former to a given expenditure of effort in the latter. In Economica for February Sir William Beveridge gives his reasons for rejecting this view. In this controversy I do not intervene. My concern is with the second section of Mr. Keynes's article, in which, having admitted that after the war the ratio of interchange swung violently in England's favour, he proceeds-a raven not thus easily to be baulked of his croak-to draw disquieting inferences from this apparently encouraging fact. In brief, he suggests that "we are asking too much for our exports, and will have to ask less if we are to sell enough to pay for our necessary imports" in other words, that stable equilibrium in our trade can only be secured at the cost of a further reduction in real wages. I think this suggestion may correctly indicate the best policy which, in the circumstances, it is open to us to pursue; |
