The Richmond Virginian. (Richmond, Va.) 1910-1920, 1910-09-14
MONEY INELAsT|c
SAYS MR.. MOVES
Present Monetary System Impos-
sible TO Meet Needs Of Trade
Declares Expert.
SUGGESTS A SUBSTITUTE
Government Bonds Should Be
Made Basis for Bank Note
Issue.
SUGGESTS A SUBSTITUTE

WASHINGTON, d. e. Sept IA
That our national bank currency is
inelastic is the conclusion reached by
Alexander Dana Noyes in an article
just published by the National None
tary Commission under the title. His
tory of National Bank Currency
The demand for currency naturally
increases with an increase In popu-
lation and business activity. 1t va
ries, moreover, from season to season
THE harvest months require more cur
rency than the early springtiine, pri-
inarily because the hand -to-h hand use
of currency for paying the wages of
the agricultural laborers is at its maxi
mum in the one period and at it's
minimum in the other The ideal
banknote system should provide auto
matically tor these changes in de-
mand. "A currency which is made
qaate for harvest uses will result In
the sudden pulling down of the re-
serve money OF city banks and the
consequent forced reduction of their
loan accounts. A currency which is
larger than is needed in the period be-
tween harvests, and the supply OF
which cannot be reduced through auto
matte retirement by its issuers, will
usually bring about a needless accu-
mutation of reserve money in the cit
les, with one or both of two results
stimulation of unhealthy speculation
in the oversupplied city markets, or ex-
pulsion OF gold with possibly awkward
Incidental consequences.
The history of national bank cur
rency, however, shows little connee-
ton between the demands of business
and the volume of notes outstanding.
II discloses rather "a relation between
the outstanding note circulation and
the movement of the public debt This,
the writer contends, is the natural re-
suit OF the requirement that govern
ment bonds must be deposited as Sc
curity with the Treasury by the issu-
ing bank. The founders of the ma
tional bank system in 1854 We're in
Huenced primarily by the necessity of
obtaining a market for government
bonds and of providing for the future
cementing Of the union of the States.
Collateral ObtainabIe.
Down to 1874 the increase of ma
/ tional bank notes followed the growth
of the country's population, wealth
and trade. One reason for this was
that the amount of outstanding gov
ernmeDt bonds was SO large and chang
ed SO slowly that the banks had no
difficulty in obtaining the collateral
| necessary for new circulation, But
after that year the real defect of the
system became more and more ap-
parent. In the refunding operations
of the following decade the bonds
often commanded such high premiums
that banks were induced to withdraw
their circulation for the purpose of
realizing on the bonds deposited as Sc
curiiy. Notes have not been issued
or retired i'll response To the demands
of trade, but in accordance with the
price OF bonds. If the price OF gov
-
ton would decrease; il low, il would
increase. The result has invariably
been that circulation once taken out
by national bank on government
bond security remains outstanding in
entire disregard of the trade require
ments of the moment
Under the present system, bank
note circulation not only does not ex-
paud and contract as trade activity
increases or diminishes, but is ex-
tremely apt to move in exactly the
opposite direction from such trade re-
auirements This fact has been shown
repeatedly in the history of our ma
tional bank currency. A period of
great prosperity normally calls for an
increase in currency. But this same
prosperity is likely to bring sur
plus into the Treasury. The most
natural outlet for this surplus is the
PAYING VA "a tue government QtDl.
The reduction of the amount of out
standing bonds draws upon the se-
curity available for the national bank
note issues and the circulation de-
creases. while business activity in
creases. This is just what happened
after 1879, surplus revenues made il
possible TO reduce the interest bearing
debt from sl.Ts7, 64s, zoo at the close OF
the fiscal year 1879 10 sI.02i, ss2, $50 at
a. a - sfx
sss5,92s,S $50 at the end of 1892. Bank
note circulation fell from 1851, ss2, 00e
at the opening of 1883 to sl67.577.214
by July, 1891. The Increase of bust
ness in the same period is shown by
the rise In clearing house exchanges"
from S3e0T9, 900, 600 In 1883 to $685.
100000 In 1891.
Bond Sale Increasing,
Then the reverse happened. In 1899
came the panic, followed by several
years of depression. Government reve-
nues fell off. until finally IL became
necessary to sell new bonds to pro-
tect the gold reserve. The banks be-
gan to increase their holdings of bonds,
which could now be obtained at at
tractive figures, These bonds natu-
rally found their way into the Treas
ury in pledge of national bank notes
issued. The national bank note circu-
lation rose from STA, 404, 200 at the end
of 1892 to S235. $4,000 at the end of
1895. 1.-THE system. In other words.
after actually depriying a genuinely
active and rapidly expanding trade.
which could normally absorb more
currency, of a good part OF the very
notes which had previously been IN
existence, operated afterwards In n
similarly automatic way TO crowd the
channels of circulation with new bank
notes at time when trade was in a
state OF extreme depression, when 1t
did not need and could not use the
note circulation which II had possessed
already"
In the great expansion which be-
gan shortly after 1896 the volume OF
bank note cnrrei.cy. responded very.