The Birmingham age-herald., 1912-12-29
quentiy in commercial and dnar crises.
Tying Up Liquid Capital

i9AhS Up lIquiu 1dplIdl
 Now precisely this condition af things is produced when commercial banks purchase investment securities In excess of the amounts of their capital, surplus and genuine savings deposits. If they create demand obligations against such securities and their pay ment is demanded before such seeur- ities mature, there will be no funds to meet them, and no funds can be pro- cured unless such securities can be un- loaded on other banks at home or abroad. They cannot be unloaded on other banks at home because by hy- pothesis, as group. home banks are in the condition described and they can only be unloaded on banks in other countries at such q sacrifice as such banks decide to impose.
 The situation is entirely different when commercial banks create demand obligations against commercial paper only. Such paper represents current purchases and sales which, being offset against each other in the form of debits and credits on the banks books or In the form of issues of notes and their return in the payment of maturing paper, mako no demands which the banks are unable to meet.
 It is obvious that imitation may occur either in the note issues or in the
 
 and that 1t bears no relation to the magnitude of either or both. Provided they represent actual exchanges of goods both may be expended to any desired extent without imitation, but to the extent that they represent one sided transfers of goods, as they always dc when banks create demand obliga tions against investment securities. imitation is the result no matter how small is their naRpitnHn Df In, fiation is worse evil than slight in- fiatfon, but the quality and character of 1t is the same in both cases.
 When imitation occurs, forced liquida- tion is the only alternative. This takes the form of the forced sale of secur- ities by banks or their customers and the cutting down of loans which re- suits in forced sales of many other forms of property. If these forced sales are so great in magnitude that the markets cannot provide for them fail ures and settlements through bank ruptcy and other court proceedings fol- low, and such a condition Is likely to be accompanied by commercial crisis.
 Bank Note Imitation
 That imitation in varying degrees of magnitude, caused by the confusion of commercial and investment banking, characterizes the finances of the Unit ed States the greater part of the time will become evident to anyone who carefully follows current events in the financial world and analyses our cur renoy situation. In the first place our issues of national bank notes against government securities produce imitation to the extent that they are not repre- scented by hoarded money somewhere in the country. They have been brought into existence by no process of com merce and they are a demand obliga- tion of the banks which issue them. Whenever our hand-to-hand currency exceeds the current need for it, the banks are called upon to meet these obligations and, unless their reserves are sufficiently above the legal limit. forced liquidation becomes necessary.
 This condition of things does not necessarily and perhaps rarely, takes the form of the presentation of these notes for redemption. Being as good and as convenient as any other form of hand to- hand money of the same de- nominations they are likely to remain in circulation, but only at the expense of other forms of currency, most fre- quently of gold, which on account of the international demand for it is the most easily displaced. The forced liqui- dation really occasioned by them, there- extremely liquid, at other times, when the form of a demand for the payment of foreign credits. It may, however, take the form Of the request for the payment of any other demand obliga- tions which the banks have assumed.
 Our seasonal monetary stringencies and frequent high loan rates are cer- tain evidences of imitation. It is because banks are forced to take extraordinary measures to meet the demand obliga- tions they have assumed. and are fore ing liquidation on their customers that these phenomena occur. They would not be forced to take such measures if their