The New York herald., 1921-03-07
Credit on a Gold Basis.

SIGQll OH O eOtd DooA5s
Besides measuring the stronger un-
derplnning OF our currency and credit
at the close Of 1920, the record Of our
gold imports and exports for last year
showing a net inward movement Of
s10GG12, 900 has 4 special significance
in another direction. 1t has often
been noted that credit has a tendency
to expand and contract in cycles or,
what might be more exact, In waves,
even when there seems TO be no ade-
quate reason for an interruption in
the general trend. The experience of
1920 appears to reinforce this theory.
In 1919 the exports and imports OF
gold reached 100000, Of which
only $4,000, 900 was imported, leaving
net outgo Of 5000, 100000 1t always
has been assumed that gold furni shed
the basis OF credit expansion at the
ratio Of about five TO one, and that
conversely loss Of one dollar or one
million dollars in gold meant an in
evitable contraction of five dollars or
five million dollars in credit or cur
rency. But nothing Of the kind hap
pened in 1910. At the end Of the year
the volume Of currency was larger
than ever. as reflected by the steady
increase in Federal Reserve notes,
which Mt $3,O57 900 900 at the end Of
1910 represented an increase Of $780,
100000 for the year.
In 1920 the adverse gold movement
continued in the first half of the year,
when exports exceeded imports by
S315,000,0O0. Still the gold contrac-
ton did not make itself felt in any
actual reduction in currency and
credit. AT the end Of the year Fed
eral Reserve notes stood at So, ,4O4 ,OOO,-
900, the highest figure on record.
But the inevitable was about to
happen The cycle of expansion had
run its course. and with the turn Of
the year Federal Reserve circulation,
and OF course credit, began to decrease
IN volume. The Federal Reserve
banks now have note circulation OF
SO, ,O0o,000,0Oo, contraction Of S367,-
100000 since Christmas. This con-
traction has come In spite Of the turn
Of the gold tide. which by the end
OF 1920 had wiped out the unfavor-
able gold balance Of s292 100000 for
the first half of the year and had
recorded a favorable balance OF $106,-
100000.
Gold imports still continue to offset
gold exports. Incoming consignments
Of the metal are being received at the
rate of three or four a month But
these imports are not, for the mo-
ment, furnishing the basis for the
/ theoretical expansion on basis OF
I Ave to one. All Of which naturally
! leads to the conclusion that the
cycle Of contraction has not yet been
completed.
In the three years 1915, 1916 and
1917 our net gold imports were more
than 81, ,0oO, 100000 but so far as their
influence on credit expansion in those
years was concerned they might as
well have been non-eXistent. There
was no expansion except that repre-
sented by the gold itself. Expan-
sion did not begin until early in 1918,
when the member banks in the Fed
eral Reserve system employed more
fully their discounting privileges at
the central banks. This began a
movement which did not end until the
volume Of Federal Reserve notes had
more than trebled from the S901 ,OO0,-
600 Mt the beginning of 1918 to the
I So, ,404 100000 at the end Of 1920.
The imitation movement OF the last
three years did not come as sur
prise. Neither did the present move
ment toward contraction arrive un-
heralded. Both followed the natural
repetitive tendencies of monetary phe-
nomena. In view Of these recent eN-
periences the ultimate influence OF the
steady gold imports should not be
overlooked in gauging the possible
span of current contraction.