The Washington herald., 1920-02-26

dustriaI bonds instead Of gold in
payment of shipments of goods to
European countries.
parts where conditions were more
acute, because there was then no
method by which the general cash
position Of the entire banking system
could be averaged up, and thus made
stronger as a whole; neither could the
note circulation be readily adjusted to
conform to business needs. Under the
Federal Reserve System. however, the
gold reserves of the country in effect
constitute a general pool so that the
ootal gold stock virtually underlies
i the total credit structure. with
means provided for a shifting OF
reserves IL emergency requires it TO
points where most needed, PRODUCING
greater soundness OF the banking
system as an organic whole, anu
making a lower gold ratio absolute
ly safe. Also the note circulation,
based on commercial needs, is more
readily adjusted.
These improvements in the system
of course do not mean that the gol,l
ratio can be reduced indefinitely. nor
do they mean that the nature OF the
credit structure can be ignored. 1t is
my belief that the situation has reach
ed a condition where further expan-
sion should, IL possible. be Gvoi.ied In
view of the nonliquid nature of a large
volume of loans today.
! Under ordinary circumstances
when business was normal the loan
account revolved freely, since credit
was used to finance transactions
by which goods. were purchased and
/ held until sold. and then as COL
/ lections came in the proceeds were
Immediately applied to pay or the
loans which wepe thus promptly
Iself-liquidating. However. these
are not ordinary times. There have
been strikes and transportation diff
ficulties that have retarded turn
over; there have been great ship
ments of supplies to Europe on
which collections have not yet been
made. These and other factors
have necessitated the renewal or
many loans that would otherwise
have been paid and the credit in
volved released to stimulate another
cycle of production. The liquidity
of the credit structure has thus
been impaired and the amount of
productive work it can accomplish
impeded. This has produced, to cite
only one of many factors, a de-
mand for more credit, but as the
figures show, the gold basis will
not permit of much further credit
expansion.
Banks Must Aid Necessary Industry.
The question arises as to what
should be the attitude of the banks
in this situation. 1t should be
| taken as fundamental that there
must be no arbitrary contraction
in the volume of credit used To
finance business. and industry on
gagged in the production and dis
tribution of staple supplies and nc
cessities. To the contrary. every
stimulation should be given to in
crease productivity in these lines.
Among the basic reasons for the
worlds economic troubles today are
the tremendous shortages caused by
wars destruction and the running
down of the worlds industrial plants
during the stress of the conflict.
These basic causes must be cor
rected.
unfortunately the desperate COM
petitive conditions arising out OF
shortages in many lines of COM
modities have been used as a basis
of speculation in those goods, and
credit has been diverted to that
unproductive end. being tied up in
holding goods instead of producing
and distributing them. Again, the
situation has been further compli-
Gated by eNtravasant spending by
the public. which bid up prices Of
necessities already made abnormal
ly high by the drain levied upon
us because of Europe's hampered
productivity. Extravaganza aiso
stimulated unnecessary enterprises
and sn excess production of luxu-
ries. All OF this likewise sGded to
the strain OF credit.
ITO remedy the situation funda-
men. ally it would seem necessary
to begin al the starting poiLt OF
the trouble and stimulate the ur"-
duction of necessities. However.
since there is not enough credit
now available to finance the pro-
duction of necessities in the requir-
ed volumes and at the same time
finance extensive speculative move
ments and nonessential activities
without further initiating credit, the
duty rests upon the banks and bus
iness men to make such conserva-
tive use of the credit resources OF
the country as these conditions
obviously dictate.
Debate Credits in Luxuries.
Prudent banking at any time
tends to grant credits more con-
|fidently to concerns producing and
dealing in necessities. staples and
established products with a stabi-
lized market, rather than to con-
Germs dealing in luxuries and spe-
cialties. This is true because the
former should be least affected by
a business depression. remaining
better able to discharge their OBJ
legations at maturity and less liable
to require renewals of Ioans which
impair the liquidity of banking
credit. This rule of prudence Is
particularly applicable to existing
conditions. Probably one of the
causes of extravagant spending by
the public for 1uxuries has been
the advanced levels Of wages,
which have given people the con-
sciousness of an unusual supply OF
money in their pockets. However.
these high wages have not proved
as substantial as they seemed. since
the cost Of living has tended up
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