40. "A bank cannot earn dividends by keeping the funds of its depositors lying idle in its vaults. The great problem of banking is to find investments which will keep these funds liquid.” Is this an accurate statement of the essential problem of a commercial bank?

41. Would you say that a bank makes loans out of its reserves, or on the basis of its reserves?

42. State in your own words the purpose of a cash reserve, differentiating between ultimate and "till money" reserves.

43. What determines the amount of "till money" that is required by a bank?

44. "The more highly organized the banking system becomes, the

smaller the reserves that are required." Why?

45. Turn to the table on page 521 and ascertain the reserve ratio

in the national banks as a whole during the years there in question. How do you explain the fact that they are much below the minimum reserve requirements for the different classes of banks?

IV. THE COMMERCIAL BANKING SYSTEM AND THE SUPPLY OF

LIQUID CAPITAL

46. Turn to the chart on page 136 and indicate in what ways the

commercial banking system supports the other financial institutions which make up the financial structure of society. Indicate the probable effects upon each of these institutions of a failure of the commercial banking system to function in its customary way.

47. Show in what ways commercial banking is related to the investment or fixed-capital aspect of business enterprise. Without the commercial banking system, would it be possible for corporations to raise the volume of funds required for their operations?

48. "The outstanding feature of the commercial banking system is the ability to gather together a large portion of the monetary reserves of the nation and organize them in such a way as to multiply many times the volume of loanable funds." Of what significance is this fact?

49. Make a tentative statement of your views as to the probable relationship of the increased supply of currency that is created by the commercial banking system to the level of prices. State also what doubts or questions in connection with this problem occur to you.

REFERENCES FOR FURTHER STUDY

Agger, Eugene E.: Organized Banking, chap. vi.

Davenport, H. J.: The Economics of Enterprise, pp. 259-65. Dunbar, Charles F.: Chapters in the History and Theory of Banking, 3d edition, revised and enlarged by O. M. W. Sprague, chaps. iv and vii.

Fisher, Irving: The Purchasing Power of Money, pp. 33-47. Holdsworth, John Thom: Money and Banking, chap. xiv. Moulton, Harold G.: Principles of Money and Banking, Part II, pp. 94-123.

Phillips, Chester A.: Readings in Money and Banking, chap. xix. Scott, William A.: Money and Banking, pp. 116-21.

White, Horace: Money and Banking, Book III, chap. iii.

CHAPTER XXIII

COMMERCIAL BANKING AND THE EBB AND FLOW OF BUSINESS

In the chapters immediately preceding we have endeavored to reveal the nature of commercial banking operations and the general significance of the commercial banking system that has been gradually evolved. In all this discussion business conditions have been taken for granted; and the reader may well have assumed that the demands which business enterprises make upon the commercial banking system for fixed and working capital are constant in amount, except of course insofar as there is a gradual expansion in the volume of business and hence in the volume of funds required for its conduct. The truth is, however, that business is never stable and the demand for liquid capital is accordingly ever fluctuating. As one writer so well puts it: "In the real world of business, affairs are always undergoing a cumulative change, always passing through some phase of a business cycle into some other phase. . . . In fact, if not in theory, a state of change in business conditions is the only normal state."

There are two species of fluctuations in business activity, the one seasonal and the other cyclical. In this chapter we shall consider the relations of the commercial banking system to the varying needs of business as determined both by seasonal exigencies and by the phenomena of the larger cycles in the ebb and flow of industrial activity. We shall endeavor to ascertain the nature of the demands that are placed upon our banking institutions in the alternate periods of seasonal activity and dulness, prosperity and depression, and the efficiency with which these varying demands are fulfilled. So far as the banking phase of the problem is concerned, we shall in I Wesley C. Mitchell, Business Cycles, p. 86.

the present chapter consider the situation as it existed before the establishment of the Federal Reserve System; for only by disclosing the weaknesses in our banking organization before 1914 shall we be in a position to understand the purpose of the Federal Reserve System and to appraise its adaptability to the onerous requirements that are placed upon it.

I. SEASONAL VARIATIONS IN THE DEMAND FOR FUNDS

Within the course of a given year there are normally numerous ups and downs in business and trade and an accompanying tension and ease in the demand for loanable funds. The best means of indicating the nature and the causes of these seasonal fluctuations is to outline briefly the actual variations in the demand for funds that occur in some of our leading financial centers. These will be found to reflect pretty accurately the fluctuations of business as a whole.

The fluctuations in the demand for funds in the New York and Chicago money markets, which move very closely together, will best serve our purpose. In these markets there are normally five distinct seasonal movements, as follows: (1) from early January until the middle of February; (2) from the middle of February to the early part of April; (3) from the early part of April to about August first; (4) from August first to about October first; (5) from October first to the end of

the year.

The first movement is characterized by a slack demand for funds and by correspondingly low interest rates. This is attributable to the fact that the crop movement with its great demand for money in the West and South is past and has been followed by a heavy flow of cash from the country banks to the primary money markets. At the same time the demand for funds is relatively slight-partly because of a natural relaxation after the holiday season and the meeting of the large interest and principal payments on corporate securities that occurs on January 1. Business in general is characteristically

dull for an interval following the taking of annual inventories and pending the opening of the spring manufacturing and trading season.

The second seasonal movement, which is marked by a substantial increase in the demand for funds and by rising interest rates, is largely attributable to the monetary requirements of producers and manufacturers in preparation for the spring trade. This demand is supplemented, particularly in the latter part of the period, by the requirements of the agricultural regions in the South and Southwest, incident to the planting of crops. There are also temporary influences at work, such as the settlement of farm loan obligations on the first of March and the quarterly dividend and interest payments on the first of April.

The third important seasonal variation shows a weakening money market in April and May and a genuine depression in June and July. There is, however, a temporary increase in the demand for funds about the first of July incident to the large semiannual interest and dividend payments. This third period at its beginning reflects the declining demand for funds by the manufacturing and producing interests of the industrial centers; and in its later stages it reflects, also, the general plethora of currency that exists after crops have been planted and there has been a return of cash to Chicago and New York from the country districts.

The fourth season is generally referred to as the "cropmoving" period. The demand for funds in the country districts for the paying of farm labor, the storing of grain, and the moving of produce to the primary markets calls for an extensive outflow of funds from the financial centers to the interior. At the same time the demand from producing and manufacturing enterprise, which is making ready for the fall trade is very heavy in the industrial centers, thus bringing added pressure to bear on the New York and Chicago money markets.

The fifth and last seasonal period is less marked than any of the others. In brief, it may be said that it begins with a slight easing in the demand for funds, owing to the completion