New-York tribune., 1922-06-25
when the Money supply Is Normal

When the Money supply II NoI""'
ouestion-I Try 90 speculate in bonds ana a
stocks on the same method - nas .,.-
., ,o-asy.s paper by clayton a Fcnhalc.
However there rs ono point that ~ ~.
clear 20 me Wii Yop tei M" VIZ. 49,.
Federal reserve ratio would pe no. .
q. In fol supply. - SPOKEN -N ~
,ie'e. and also when 70 is usht 20. IT,
Arswer-Mr. Penhale has furnished
the ,ubioined reply 20 your inquiry.
Previous 20 the formation or me F'u-
crsl Reserve Bank the ratio Of deposits
~ loans of the New York Clearing
uo,.e hanks was functional relative
"a the condition of money supply III
order more clearly 20 esta0Hsn lh's ~
la.ion. the normal Of this ratio was
astsbiisbed over 4 thirtten-year period
l1qOi.13. irclusivel. For all pfactloAi
-nv,osos this normal was a constant
iiOi9). Reviewing the. moVemeh, o.
the ratio deposits 20 loansl 70 'sls
normal and making q correction lo'
the mean seasonal variation we ~
sulting curve will be found 70 nave q
uniform relation 70 the high ana low
rosition Of the stock markct. Nne"
the curve (,he index OF money sup
nlv, ,s descending and passes through
normal. the stock market Us al OF near
i+s highest. on the other mana. "heh
.ho curve OF money supply Is ascend
irg and passes through the norman
Nre stocks are % be had at ABOUT
their lowest average price ara may pe
expccted % begin their advance q"
higher levels shortly.
"Tbe formations Of the Federal he-
serve Bank disarranged the above rcla-
ton and u was not until after several
years had passed that any attempt 70
,e.establish an index of money supply
Could no attempted The period 1918
'of. inclusive. was hardly sufficient 10
aFord a basis on which 20 establish
rornals by mathematical analysis IL
was possible. however. 10 anaiyze me
si4uation with mathematical methods,
using these results Ms basis for ap--
plying the best judgment as 20 what
rorstituted normal for the several
curves studied. No single curve moved
with the desired relation 70 STOCK
rrices. but IL was found that by com
lining two curves new and apparent
iv reliable index Of money supply was
.vailable. The curves combined we're
the reserve ratio for all Federal ke,
ser1.o hanks combined ratio % total
reserve TO deposits and Federal ke,
sorve note liabilities combined and
.bo ratio OF deposits % loans for all
,cnorfirc member banks. The combi-
nation was an average Of the two devl-
ations from normal after hotn curves
were expressed In units o. STANDARD
deviation relative 10 their own nor
nal By this method. one standard unit
,oualire a different number OF per cent
deyia'ions. each curve was given equal
weight in tho resulting curve. ne
normal for the reserve ratio was 4'
reduced from 30 per cent % original
lv determined through the change from
using net deposits TO tho use Of de
nosits' in reporting the ratiol. for
Tho ratio Of deposits 10 loans for AL
rcrorting member banks the normal
selected was lO41. and a seasonal cor
rcctior anplied determined from =
,4Ydv of the reports on all national
hanks 1oOl-l3j made by the Comp
.~ollo- OF tho Currency. While the
above normal for the reserve ratio was
selected. it must be remembered, ~
answer 70 the query IN the attached
letter. that the movement OF tho re-
cervo ratio relative to this normal rs
not IN itself measure OF money sup
rlv as was fhe case when the ratio oi
donositv 70 loans for New York Clear
IND, House banks was In use. The now
rorrs arc tentative. but probably VIII
change very little in The liFht oi OK
porionce. II 10 becomes apparent that
.ho reserve ratio norm IS TOO low ~
also will develop that the deposits 70
loans ratio norm IS TOO high, and tne
irdtx of tho two would therefore hard
Iy be apprcciably affected"
The author - the article 20 which
YOU refer has volunteered 20 answer
any other questions from Tribune read
ers about his theory of tho stock mar
lot