El Paso herald. (El Paso, Tex.) 1901-1931, 1910-09-13
A Government Publication
Shows That It Expands
and Contracts at Wrong
Time Where Is Remedy?

washington II. ~ sept AS- 10
our national bank currency is inelastic
is the conclusion reached by Alexander
Dana Noyes in an article just published
by the national monetary commission
under the title, History of the Ma
tional Bank Currency"
The demand for currency naturally
increases with an increase IN popula-
ton and business activity. 1t varies.
moreover. from season to season Inc
harvest months require more currency
than the early Springtime, primarily
because the hand to hand use of cur
rency for paying the wages of the agri-
cultural laborers is at its maximum IN
the one period and at its minimum IN
the other" The ideal banknote sys-
tenn should provide automatically Tor
these changes in demand A currency
which is inadequate for harvest uses
will result in the sudden pulling down
of the reserve 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 or
which can not be reduced through au-
tomato retirement by its issuers, will
usually bring about a needless accu-
mutation Of reserve money in the cities,
with one or both of two results-stim-
ulation of unhealthy speculation in the
oversupplied city markets, or expulsion
of gold with possibly awkward Incl
dental consequences.
Under the present system, banknote
circulation not only does not expand
and contract as trade activity increas-
es or diminishes, but is extremely apt
ton from such trade requirements"
The fact has been shown repeatedly in
the history of our national bank cur
rency. A period of great prosperity
normally calls for an increase in cur
rency. But this same prosperity IS
likely to bring surplus into the treas
ury. The most natural outlet for this
surplus 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
banknote issues and the circulation de-
creaSes, while business activity in
creases. This is just what happened
after 1879. Surplus revenues made it
possible to reduce the interest bearing
debt from S1797643,7 700 at the close of
the fiscal year 1879 to S1,021,69 $50 at
the end of the fiscal year 1887 and
note circulation fell from 1851, 900
At the opening of 1883 to s167,577.214
by July, 1891. The increase of bust
ness in the same period is shown by
The rise in clearing house exchanges
from s36,O79, 0O0, 900 in 1883 to $50, 1885,
300. 600 in 1891.
Then the reverse happened, in 1898
came the panic followed by several
years of depression. Government reve-
lues fell off, until finally it became
necessary to sell new bonds to protect
he gold reserve. The banks began to
Increase their holdings of bonds, which
,ould now be obtained at attractive fig
Tres. These bonds naturally found
heir way into the treasury in pledge !
# national banknotes issued. The ma
ional banknote circulation rose from !
ia, 900 at the end of 1892 TO $685. !
63, coo at the end of 1896. The sys- !
EN-, in other words, after actually de- !
living a genuinely active and rapidly 4
expanding trade, which could normally !
.bSorb more currency of a good par, !
f the very notes which had previously /
zen in existence, operated afterwards /
n similarly automatic way to crowd /
he channels of circulation with new 4
anknotes at a time when trade was /
n a state of extreme depression, when /
t did not need and could not use the
ote circulation which it had possessed !
lready."
In the great expansion which began
hortly after 1886 the volume of bank
ote currency responded very tardily
o the demands of trade. The increase
f circulation was brought about some
yhat by accident; the Spanish war of
89S added S200,000,0O0 TO the govern
lent debt and thus gave the banks
basis for further note issues. The
nore liberal provisions Of the gold |
tandard act of March II, 1900. with
egard to note issue also contributed to
he increase of national bank currency
he amount of outstanding banknotes
ose from S246,277,233 at the end Of
S99 to $500. 7SS.690 at the end of the
iscal year 1907. This increase, how
yer, went on with practically no ref
renee to the seasonal changes in busi-
ess.
In the depression following the panic
f 1907 the inelasticity of our system
; again shown. At the end of May.
sos, the circulation even showed an
lcrease of S8.318,612 from the unpre-
edented total reached at the end of |
december, 1907. Though there has
cen slow and irregular contraction
lnce then, the total stood in May of
ne present year sS7,0OO,0OO above the
ighest level ever reached in that
lonth during any year prior to 1908.
AS a result Of this study the author
0ncludes that under the existing sys-
an of banknotes based upon govern
tent bonds, normal and automatic ex-
ansiOn and contraction of currency. in
7sponSe to needs Of trade. is flatlv
npossible." He sees mo remedy for
MS abnormal situation, except the
Institution of some other system for
lat which prescribes the United States
overnment bond as a basis for bank
ote issues"