New-York tribune., 1918-05-26

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serves in cash which practically
means in gold-held by the Federal
Reserve banks were $75S,Oo0, 900. On
February 81, 1918, the gross cash re-
serves had grown to 1888, 900, 900.
The law requires cash reserve of
35 per cent against deposits and 40
per cent against notes. There has,
of course. been an excess reserve in
cash held by the Federal Reserve
Bank as basis for future deposits
or future circulation, This excess
reserve on February 21, 1918, stood
at $795 100000, which was sufficient
to justify practically $4,000, 100000
additional in deposits or notes.
A Billion Dollar
Expansion
From past experience increases out
of the Federal Reserve Bank have
gone little less than so per cent to
circulation and little more than SO
per cent to deposits. On this basis
we face the opportunity of further
note issues of practically $1,000, 0,0OO,-
600, or $40 per capita, with the re-
suit that the money stock of the
country, which was 1886 in August
OF 1914, may easily be augmented to
practically $5S per capita, without
in anywise affecting the standards of
our financial system. Already an in
crease of 43 per cent in our currency
since the beginning Of the war has
doubled the average price of COM
modities. The initiation now made
possible through the operation of the
Federal Reserve Bank may bring
about a further increase Of SO per
cent in the present cost of living. In
other words, the man who received a
dollar for his produce in 1914 would
have to get So for the same article if
he is to hold even with the world.
The advance in the cost of living
has had, of course, an extraordinary
influence on interest rates, and the
price of bonds as we'll as of stocks.
Prime commercial paper in March
of 1914 commanded Az per cent; in
March of 1918 6 per cent; or, in
other words, the price of money has
gone up 33 per cent. In the same
time the average price of high class
bonds on the New York Stock Ex-
change declined from 90 to 1913, or
a shrinkage Of IA per cent, while
stocks had shrunk from 14O to
108.06, or a decline of % per cent.
Ii we apply the same theorum to the
results that will obtain when the full
work of the Federal Reserve Bank
in further initiation has been realized
it is evident that commercial paper
is due for further sharp rises, while
bonds and stocks are certain to fall.
The situation that will result
when this government has to go into
the market to buy further supplies,
at a cost of so per cent higher than
those at present, and must pay for
those supplies with money raised on
the market with prime commercial
paper commanding unprecedented in
terest, is so serious that the condi-
tions that may bring about such a
calamity are bound to receive the
most careful attention.
It is generally agreed that the in
creased production Of gold and the
remarkable advance in banking
whereby the credit Of the banks in.
cYeases five or six fold the power OF
the cash on deposit with them, nat
urally produce a steady increase ir
the cost Of living. In the nature o1
things, therefore, the price of com
r,odities would show a consistent
though moderately slow increase
The function of the Federal Reserve
Bank in centralizing the gold re
serves of the nation, as basis fol
| loans to banks, and as basis fol
note circulation, would also have .
sharp tendency in the same direc
ticn. This would take place ever
in normal times.
An added factor tending TOWARD
imitation is the adoption of trade
acceptances which are used as
means of converting dead book ac
counts into bank credit. To the ex
tent that trade acceptances produc'
this result, they are potent factor
in the continuous process of infia
l tion. All Of these influences com
bined, however, are insignificant ii
l comparison with the sudden initiation
3 brought about by the policy of tn
? government in permitting Libert.
4 loan bonds and government certifi
: Gates Of indebtedness to be used as {
/. basis Of rediscount at the Fedora
g Reserve Banks. Such use is funda