The Monmouth inquirer., 1925-06-25
MAKING MONEY
FIT BUSINESS
When Times Are Active the Sup
ply IncreaSeS--ContraCtion Fol-
lows Seasonal and Periodic
SIaCkeninq.

New York. - Demonstration that
complete elasticity has been impaired
to the currency in the United States
by the Federal Reserve System de-
spite assertions to the contrary is giy-
en- in the American Bankers Associa-
ton Journal by W. Randolph Burgess,
assistant agent at the New York Fed
eral Reserve Bank.
sOf all the money in circulation in
the United States, Federal Reserve
notes now make up almost one-half,"
he says in part. ''In 1920 they were
10 per cent. The increase in curren-
cy which the war and high world
prices made necessary was provided
almost wholly by Federal Reserve
notes. Just as the increase was who'll
~ through Federal Reserve notes, so
again the decrease was altogether in
Federal Reserve notes. Reserve notes
In circulation decreased from $4,000
COZ, 900 in November, 1920, to $1,700,-
0O0, 900 IN March, 1925. Between the.
same dates other currency increased
from $500 GOO, 900 to $2,300,000, 600,
dne to an increase in gold certificates.
There are still some few who pro-
Once theoretical arguments to show
that for some reason the Federal Re-
serve note Is not elastic. These va
rious arguments raise interesting
questions, but they make little head
way against the facts, for the facts
show that the Federal Reserve note
hoe hoon oIasfin
How Currency Changes Volume
~The amount OF currency the coun-
try requires reflects changing prices,
wage levels, employment and volume
of trade. AS an example, retail trade
at Christmas time is always larger
than at other times. This results in a
considerable increase in the need for
hand to hand currency. Currency
Withdrawals and receipts at the Fed
eral Reserve Banks illustrate the way
this special demand was met. Prior
to Christmas there was paid out about
$500 ,000,O of currency, all of which
was returned to the bank within the
two or three weeks following Christ
mas.
~The mechanism is that when Fed
erd Reserve member banks need cur
rency for their customers they draw
it from the Reserve Bank. Member
banks can secure additional currency
by borrowing at the Reserve Bank.
Conversely, whenever currency in cir
culation becomes larger than is re-
CURED by business it begins to return
to the banks and they Immediately
utilize it to pay off Indebtedness at the
Reserve Banks, on which they are pay
ing interest.
tAThe Federal Reserve System has
made all types of currency, except ma
tional bank notes, elastic because all
except those notes can be issued in
amounts required and they all tend to
flow back to the Reserve Bank when
they are not required. There is an
other phase of currency elasticity. A
800 Federal Reserve note may repre-
sent only $40 in gold, because a gold
reserve OF only 40 per cent is required
against Federal Reserve notes. On
the other hand, $500 gold certificate
must represent 500 in gold. Thus
the Federal Reserve Banks can issue,
In response to commercial demand,
two and one-half times as many Fed
eral Reserve notes as gold certificates
before the reserve ratio reaches the
legal minimum
Secondary Stretch
"This secondary elasticity was IL
Illustrated during the war, when in re-
! Spouse to war demands Federal Re
serve notes were issued to the amount
of s3,4O5 100000. The Federal Re
serve System could have issued more
than $500, 100000 additional without
lowering the reserve against notes be
low 40 per cent, or the reserve against
deposits below 35 per cent. In any
emergency the power to issue these
notes increases by $50 per cent the
amount of cash which might be sup
piled to the country.
Federal Reserve currency has
proved itself flexible in war expan
sion and inpost- war reductions. Since
the establishment of the System the
currency has been responsive to the
seasonal and emergency needs OF
business. The Federal Reserve Act
obtained currency elasticity by plac
ing the country's reserve cash in instt
buttons not organized for profit, from
{ which currency might be withdrawn
or to which it might be returned il
response to the country's needs
/ While the existence of the Reserve
! System gives flexibility to almost al
forms OF currency. the Federal Re
serve notes. secured in part by com
mercial paper, provides a possible sec
+ ondary expansion in readiness for ar
emergency"