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of the fall manufacturing business and to the gradual passage of agricultural produce from producers to ultimate consumers. The date at which this easing of demand begins varies somewhat with climatic conditions in the different years, and also with the adequacy of transportation facilities. Typically speaking, however, it may be said that the peak of demand is reached about the first of October, that the western movement of cash falls off rapidly in November, and that by December a return flow of funds to the industrial centers has usually begun. Other factors bearing on the situation at this period are the normally low gold imports during December and the making of large deposits by the federal Treasury in the national banks of New York and Chicago during the months of October, November, and December. A stiffening demand for funds is to be noted after the middle of December, owing to the currency requirements of the holiday season and the payments of interest and principal on corporate and other indebtedness on the first of January. On the whole this last period is one of high interest rates and relatively tight money. Neither a distinctly upward nor a distinctly downward movement, it is rather a transitional period between the excessive demands of the crop-moving period and the season of mid-winter dulness.

Seasonal movements in St. Louis, New Orleans, San Francisco, and other centers differ only in time and in extent from those in New York and Chicago, the variations being attributable to differences in climatic and other local conditions.1

The chart on page 498 shows the monthly variations in reserves and in the ratio of reserves to deposits in the New York clearing-house banks between 1890 and 1908. It will be observed that reserves increase in every period of slack demand for loans and decrease in every period of active demand. The changes in the ratio of reserves to deposits are accompanied by changes in the rates of interest on loans.

Our currency supply has not been sufficiently elastic. The seasonal variations in the demand for funds in the primary See E. W. Kemmerer, Seasonal Variations in the Relative Demand for Money and Capital in the United States. (National Monetary Commission, 1910.)

markets require a certain amount of elasticity in the currency supply. To some extent such elasticity has been obtained by a process of shifting funds from one section of the country to another. As noted in chapter xxi, this is in considerable measure accomplished through the intermediation of commercial paper houses. But in periods of very active demand for money, particularly during the crop-moving season, which coincides with the period of producing and manufacturing goods for the RESERVES AND RATIOS OF RESERVES TO DEPOSITS OF THE NEW YORK CITY CLEARING-HOUSE BANKS, 1890-1908

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autumn and winter trade, the total supply of currency within the country must be substantially larger than at other times if the needs of business and trade are to be adequately met. Accordingly, we should be able to expand the total volume of currency as occasion demands. Similarly, it is regarded as important that when these great seasonal demands have passed we should be able to contract the volume of currency. What now can be said of the elasticity of our currency supply?

The chart on page 499 shows the average amount of gold coin and gold certificates, national bank notes, deposit currency

SEASONAL VARIATIONS OF VARIOUS KINDS OF MONEY AND OF DEPOSITS IN THE UNITED STATES, 1890-1908

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1,400

Months

Months as reflected in average clearings, and total money in the United States between 1897 and 1908. It will be seen that the gold supply does not increase or decrease in accordance with trade needs, the total supply depending upon: (1) bullion deposits at the United States mints and assay offices (dependent

upon gold production); (2) net imports and exports of gold in the settlement of foreign balances; and (3) receipts and disbursements of the United States Treasury. The general upward movement of the gold line reflects the cumulative supply of this metal.

The national bank note circulation is also very inelastic. The chart shows that the total supply gradually increases throughout each year; and that the fluctuations during the year do not coincide on the whole with the varying requirements of trade. The chief exception to this is to be noted in the autumn of the year, when there is typically a substantial increase. Kemmerer explains this by saying, "Apparently banks intending to increase their circulation postpone doing so until the crop-moving season approaches. There is no evidence of contraction, however, when the crop-moving demands are over the national bank note elasticity being (to use a rather inelegant expression) of the chewing gum variety."

The reason for the inelasticity of bank note currency is not difficult to find. As already explained, bank notes can be issued only when secured by United States government bonds. In the years under consideration the total supply of United States bonds available for use in this connection was about nine hundred millions and in the latter years of this period the total number thus being used was in the neighborhood of seven hundred millions. A restricted supply of United States government bonds would therefore at best prevent any very large increase in the total of bond secured currency. Of the total outstanding bonds not already serving as security for note issues, many were not in the market for sale and hence not available to the banks in case of need. This restricted supply of government bonds, moreover, tended to increase their price when demand for them was active and thereby to reduce the profits of the banks in thus employing their funds. Finally, because of the red tape involved in the issue of these notes, it required about three weeks for a bank located in the interior of the country to put them into circulation. After the bonds were purchased, it was necessary to send them to

the federal Treasury at Washington where the notes were printed, bearing the name of the bank which was to issue them. The notes were then sent to the bank for the signatures of the officers, after which they could be put into the channels of circulation. While this time element did not prevent the banks from making preparation for autumn monetary requirements, it nevertheless did prevent a very effective use of bank notes in cases of sudden emergency.

The heavy black line at the bottom of the chart, showing the total currency supply by months during the years in question, also indicates no appreciable seasonal elasticity. The reasons why the other forms of currency besides gold and national bank notes do not possess the necessary elasticity may be recalled from the discussion in chapters vi and vii above.

Deposit currency alone exhibits a high degree of seasonal elasticity. The line showing the average amount of clearings indicates a close adjustment of the supply of deposit currency to the varying requirements of trade. It expands when trade needs increase and declines when trade needs decline. An illustration of the way in which deposit currency gets into the channels of circulation and is in turn retired will serve to indicate its automatically elastic nature.

Let us assume that X, a dealer in grain, has bought 10,000 bushels of wheat which is stored in warehouses, awaiting movement to the primary grain markets. X borrows, say, $9,000 from the bank, giving his promissory note with the warehouse receipt as collateral. Thus the security back of the deposit currency that arises out of this loan is the identical wheat, the necessity for the marketing of which gave rise to the increased demand for currency. The needs of trade at once call forth and provide the security for the currency which is created. As the grain is sold, X receives funds which he places on deposit with his bank; and when the loan matures he pays it off (usually and in the main) by a check against his account made payable to the bank. Thus when the produce has been marketed and the loan paid off, the deposit currency is automatically reduced by the amount of the loan.

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