The Washington times., 1935-12-27
EASY MONEY
SEEN BASED0N
u. 5. DEBT
BY LEWIS HANEY
Professor Of Economics, New
York University

York University
One Of the most important
factors affecting securities and
business in general is the condi'
ton of the money market. The
extremely low money rates are
tending to drive all corporations
and individuals into buying securi-
ties and income-yielding property.
It is therefore important to under
stand the fundamental situation
in the money market.
The reason for "easy money"
that is generally given first is
large "excesS reserves" (Such
excess reserves, you will remem-
Der, arise when the member
banks of the Reserve System
have larger deposits with the
Reserve Banks than the law re-
QuireS. This means over 10 per
cent of their own depOSits.l
In my opinion, however, this is
O narrow and mechanical way Of
looking at conditions, and it is apt
to be misleading. 1t is apt to make
people feel that all that is needed
in order to control initiation is to
do something to excess bank re-
serves.
The whole financial situation
traces back to Government bor-
rowing and spending. Until the
budget Is balanced, and Govern
ment debt to finance New Deal
experiments quits accumulating,
the trend will be toward further
initiation, and excess bank reserves
will accumulate as a symptom
Of the general accumulation OF
unused balances.
We must not forget that the
"exceSS reserves" are a result.
They are the result of unSound
and uncertain conditions in fl
nance, investment and business.
In the first place, banks can find
relatively few sound business loans.
In the second place, banks find
it prudent to maintain large re-
serves against contingencies.
The result is that unused bal
ances of funds accumulate faster
than the additions to required
reserves.
This is part of the general situa-
ton. which includes the aCcumu-
lation of idle funds by corpora
tions and individuals.
The large increase in the idle
funds in banks at q time when
there is little commercial de-
mand for them, mas forced
banks to buy Government bonds
and notes. Then the Govern
ment spending of its credits has
given business still more funds,
thus preventing any recovery in
business loans made by the
banks.
Another danger in the talk
about excess reserves is the
tendency to consider them as real
reserves. Real reserves must be
cash or it's equivalent. But these
"eXceSs reserves" are created" d.
rectlv or indirectly out Of Govern
ment debt.
The problem is essentially one
of bank deposits, and the trouble
is % that these deposits are not
now tied to cash or productive
business loans, and (2) that they
may be increased indefinitely.
They do not represent new savings
by depoSitors. They are not off
set by deductions rom the &C.
counts of other depoSitors. They
are largely Government debt, and
debt not incurred for revenue-pro-
ducing purposes.
AS in the case of brokers'
loans in 1929, people are apt to
get the idea that they represent
capital"
Still another danger lies in the
idea that the Reserve Banks, the
member banks, and the Treasury,
are separate, and that bookkeep-
ing operations among the three
are important. But the Treasury
largely controls both Reserve
Banks and member banks. The
Reserve Banks have joined in ex-
tending credit to the Treasury and
their credit have partly become
member banks reserve deposits.
The member banks have become
intermediates and are handling
gold imports and credit currency
circulation for the Government.
This is different from condi-
tlons when the Reserve Banks
held the member banks gold, and
were not mere fiscal agents for
the Treasury.
Gold has been seized by the
Treasury. Deposits based on busi-
ness loans are very low. Deposits
based on Government debt are
enormous. Part of the latter be-
come "exceSs reserves" In one
way or another, it mostly comes
back to Government debt, and to
this extent the ultimate reserves
are boondoggling, relief" taxes,
and a mysterious and uncertain
hoard of gold and silver.
Until we know what is to be
done with that gold, and the
Administration balances it's
budget, we can hardly know
what these bank deposits and
excess reserves really mean.
Pittsburgh Produce
PITTSBURGH, Dec 81 GN.sN-
(All poultry butter and eggs, are whole