The New York herald., 1921-02-17
Our Flexible Bank System.

OuT TtGAlDic oaiih SyoeSAh'
Measures taken to curb imitation
have until now failed TO make an ap-
preciable dent in the mass OF credit
and currency outstanding. although
the reserves of the Federal Reserve
banks have been enhanced by the
addition of gold imported from
abroad. The report of the Comp
troller of the Currency for February,
however, indicates that the banking
sy stem is at last beginning to respond
to dedationary influences.
Metallic money on February / to-
tailed 81 100000, against S1,214,-
100000 the month before This in
crease was partly offset by n decline
from 81, 100000 to S1,T15,000,
in the paper money of all classes In
circulation. This included United
States notes, Treasury notes, bank
notes of various kinds, but excluded
Federal Reserve notes. In these two
classes of circulating money there was
net Increase of $4,000, 900, but the
per capita circulation of all kinds of
money, declined during January from
S5912 to sS57 10, or nearly 81 head,
the first appreciable recession in two
years.
The decline was wholly due to the
drop in the volume of Federal Re-
serve notes from S3.349. 100000 on
January l, 1921, to $3,104, 100000 on
February /. rejecting the gradual
liquidation of commercial and other
loans by business interests which
enabled member banks to decrease
their borrowings ut the Federal Re-
serve banks. This was followed by
the cancellation of currency printed
against such borrowings.
The whole world has had its at
tention focused on the Federal Re
serve system, expecting it to SHOW In
clear cut manner exactly how far
banking machinery could be subordi-
mated to the needs Of trade and in
dustry without entirely wiping out
banking as Il separate entity with an
influence Of its own. The demonstra-
ton has been even more clear cut and
convincing than had been anticipated.
Imitation after the armistice filed
the friends Of the system with mis-
givings. 1t was not exactly clear how
much of the paper money flood was
due to the urgent and legitimate call
of business, how much to the facile
machinery of the new banking sys-
tenn and how much to the mismanage-
ment Of that machinery.
Sceptics who after the armistice
watched the printing of Reserve
notes against no real need believed
the situation had entirely passed be-
yond the power Of the banking ma
chinery and that panic was inevi-
table. Others believed the system
strong enough to carry the load 1t
already had piled on its own shoul-
ders, and to proceed with legitimate
expansion along the. most conserva
tive and discriminating lines. The
Federal Reserve Board itself chose to
bring down its heel on all expansion.
no matter what its purpose.
Necessary liquidation has been
achieved. But between the actual
volume of credit and currency out
lstanding as the representative of high
prices and the volume that Is war
ranted by the actual price level
brought by liquidation there is a
vast vacuum representing nothing and
secured by nothing. As nature alb
hors vacuum and quickly eliminates
IL, so a sound banking system will
shold inflexibly to an abhorrence of q
vacuum In credit values and eliminate
II with all possible speed.
Critics do not agree on the princl.
pies underlying the present defiation
movement. But they do agree that
there has been deflation and that Fed
eral Reserve Board initiative brought
It about.