The copper era. (Clifton, Graham County, Ariz.) 1899-1911, 1910-09-23
National Bank Currency IneIaStiC Says
Expert.

Washington.-That our national
bank currency is inelastic is the con-
clusion reached by Alexander Dana
Noyes in an article just published by
the National Monetary commission
under the title, History of the
National Bank Currency"
The demand for currency naturally
increases with an increase in popula-
ton and business activity. 1t varies,
moreover, from season to season.
"The harvest months require more
currency than the early spingtime,
primarily because the hand-to-hand
use of currency for paying the wages
of the agricultural laborers is at its
maximum in the one period and at
its minimum in the other" The
ideal bank note system should pro-
vide automatically tor these changes
in demand. "a currency which is
inadequate for harvest uses will re-
suit in the sudden pulling down of
the reserve money of the city banks
and the consequent forced reduction
of their loan accounts. A currency
which is larger than is needed in the
period between harvests, and the
supply of which can not be reduced
through automatic retirement by its
issuers, will usually bring about a
needless accumula tion of unhealthy
speculation in the oversupplied city
markets, or expulsion of gold with
possibly awkward incidental cOnse
quences."
The history of national bank cur
rency, however, shows little connec-
ton between the demands of bust
ness and the volume of notes out
standing. 1t discloses rather rela-
ton between the outstanding note
circulation and the movement of the
public nebt, his, the writer contends,
is the natural result of the require
ment that government bond must be
deposited as security with the treas
ury by the issuing bank. The found
ers of the national bank system in
1864 were influenced primarily by the
necessity of obtaining a market for
government bonds and of providing
for the future cementing of the
union of the state.
Down to 1874 the increase of
national bank notes sollowed the
growth of the country's population.
wealth and trade. One reason for
this was that the amount of out
standing government bonds was so
banks had no difficulty in obtaining
the collateral necessary for new cir
culation. But after that year the
real defect of the system became
more and more apparent. In the re-
funding ofthe 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 de-
posted as security. Notes have not
been issued or retired in response to
the demands of trade but in accord
ance with the price of bonds. If the
priceUf government bonds was high,
the circulation would decrease, if
low. it would increase. THE result
has invariably been that circulation
once taken out by national bank or
government bond security, remains
outstanding in entire disregard of
the trade requirements of the mo-
ment."
"Under the present system, ba nix
note circulation not only does not ex-
pand and contract as trade activity
increases or diminishes, but is ex-
tremely apt TO move in exactly the
opposite direction from such trade
equirements." This fact mas been
shown repeatedly in the history of
our national bank currency. A
period of great prosperity normally
But this same prosperity is likely to
bring a surplus into the treasury.
The most natural outlet for this sur
plus is the paying off of the govern
ment debt. The reduction of the
amount of outstanding bonds draws
upon the security available for the
national bank note issues and the
circulation decreases, while business
activity increases. This is just what
happened after 1879.
Then the reserve happened, in 1898
came the panic followed by several
years of depression. Government
revenues fell off, until finally it be-
came necessary to sell new bonds
to protect the gold reserve. The
banks began to increase their hold
ings of bonds, which could now be OBJ
tanned at attractive figures. These
bonds naturally found their way into
the treasury in pledge of national
banks notes issued.
In the depression following the
panic of 1907 the inelasticity of our
system is again shown. At the end
of May, 1908, the circulation even
showed an increase of SS,31S,6l2 from
the unprecedented total reached at
the end of December, 1907. Though
there has been a slow and irregular