Evening star., 1933-12-08
BY DIR. o. M. w. SPRAGUE,

Professor OF Banking and Finance, Harvard
Business School.
TN THE preceding article Of this series.
called attention to the slight I'M
mediate influence which the supply
i of money at times exerts upon the
level of prices. This point is con-
vincingly illustrated in recent expert
ence.
Between 1926 and 1888 the wholesale
price index of the Bureau OF Labor de-
clined from 100 to below 10. In June
1926, the stock of money in circulation
was estimated at $4,885 100000. BY
June of 1888 there had been an increase
to 100000. During the same
period there was an increase in the cash
reserves of the Federal Reserve banks
from 1880, ,000, 900 to $3,813, ,000, 900.
Evidently, If the supply of money.
whether in the hands of the people or
in Reserve banks, always exerted a
powerful direct influence on prices we
ought now to be enjoying far higher
price level than that of seven years ago.
Loans Slump Cuts Prices.
The actual decline in prices during
these years is reflected in, and was in
part brought about by, a very great
reduction in the loans and investments
of the banks of the country. In 1926
these loans and investments were In
excess of $4,000 ,000, 900. In 1888 they
were below $4,000, 100000.
What we need, and indeed what We
must have, If prices are to rise to any
thing approaching the 1926 level, is a
very great increase in the loans and In
vestments of the banks of the country,
with a consequent increase IN the
volume of deposits subject to check. In
other words, we must look to the Gre
alton Of conditions which may be ex-
pected to bring about this increase, II
we are to have rise IN prices through
the operation of normal business m
fluences.
Although cash reserves are quite am
pie to support greatly enlarged credit
structure, and indeed a credit structure
far greater than that Of 1925. the banks
of the country are not on that account
alone in position to make a large in
crease in loans and investments. This
is because full confidence in the banks
has not yet taken the place OF that
widespread lack of confidence in them
which compelled the closing OF all
banks at the beginning OF March OF
this year.
Reflects Business Conditions.
At this point it is perhaps appropri-
ate to point out that responsibility
for this lack of confidence, as well as
for the contraction in bank loans and
investments, does not rest exclusively
upon the bankers of the country. The
condition of banks reflects conditions
in the community which they serve.
A bad business situation is reflected
in a weakened banking position.
For the existing business situation
virtually every one who made business
decisions during the last IS years is
more or less responsible. The thou
sands of farmers who bid up the price
of land and incurred heavy burdens
of mortgage debts are in part respon-
sible. Industrialists who overexpanded
capacity share in the responsibility, as
do investment bankers, and even eco
nomists, who acclaimed the new era.
Heavy responsibility rests upon those
conducting the Federal Reserve Sys-
tenn for failure to effect needed re-
straint during the two years preced-
ing the collapse in 1929 Commercial
bankers throughout the country adopt
ed policies that were in accord with
those of their clients. In short, it is
not too much to say that we were all
miserable sinners, bankers, as a class,
no more and no less than the rest Of
the community.
Banks AbnormaIIy Liquid.
On account Of the persistent lack of
confidence, the banks find themselves
under the necessity Of keeping them
selves in an abnormally liquid condi-
ton. They are holding an excep-
tionally large amount of cash in pro-
portion to their liabilities and an ex-
ceptionally large proportion of liquid
loans and investments to their total
holdings of these assets.
But there is not enough liquid busi-
ness to provide the basis for the
employment of anything like the large
volume of deposits which the cash
reserves of the banks would support.
Moreover, business operations cannot be